QUESTION 1 (a)

You work for a firm of auditors which has seven offices throughout Ghana. The firm’s largest client in terms of fee income is Prosperity Ltd, a company which has grown steadily through a mixture of organic growth and acquisition of companies in the same industry sector. Your firm has acted for this client since its incorporation ten years ago and, in addition to the statutory audit, provides a range of non-audit services, including tax planning (for the company and its individual directors) and consultancy work in respect of Prosperity Ltd’s acquisition policy. Earlier this yea, the finance director of Prosperity Ltd retired and was succeeded by a former member of your firm’s staff who had managed the audit of Prosperity Ltd for the preceding four years.

Required: Discuss the ethical and professional issues raised by the situation described above and identify the measures which should be implemented by your firm in order to mitigate any threats to objectivity which might arise. (10 marks) (b)

Set out the implications for audit firms and their clients if the provision of all non-audit services to audit clients is banned and mandatory periodic rotation of audit firms is introduced. (6 marks)

(c)

The Managing Director of Adepa Ltd has approached your firm and requested a second opinion on the audit report which its current auditors are proposing to give on the financial statements for the year ending 31 December 2012. The proposed audit report expresses an adverse opinion due to the disagreement over the accounting policies adopted in the financial statements.

Required: Identify the ethical issues that may arise for your firm and state, with reasons, how your firm should deal with the request. (4 marks) (Total: 20 marks)

QUESTION 2 You have been approached by the management of Manifesto Ltd with a view to your firm accepting appointment as the company’s external auditor for the year ending 28 February 2012. Manifesto Ltd is an automobile parts distribution company that operates from twelve branches located throughout Ghana. The company’s revenue for the year ended 28 February 2011 was GH¢35 million, profit before tax was GH¢2 million and total assets was GH¢20 million. The company’s current auditors were notified at the last AGM in July 2011 that they would not be reappointed for the forthcoming year. The reason given for this by Mr. Kyei, the company’s Managing ICAGP4.20513

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Director, is the discovery in June 2011 of a fraud carried out by the manager at one of the company’s branches. His investigations to date indicate that during the course of the last financial year, the manager diverted approximately GH¢35,000 of company funds into his own bank account by raising purchase invoices on fictitious supplier accounts. Mr. Kyei has told you that he is considering taking action against auditors for the recovery of the losses arising from the non-discovery of the fraud and would like to know possible reasons why the outgoing auditors did not discover the fraud. He is also interested to know what the effect of the fraud on the company’s financial statements might be and what impact, if any, it will have on your audit work and audit report for the year ending 28 February 2012. Finally, Mr. Kyei has asked you to carry out additional assurance work to establish the full extent of the fraud carried out. Required: (a)

State, with reason, the general matters to be considered and the procedures to be performed prior to your firm accepting appointment as auditors to Manifesto Ltd for the year ending 28 February 2012. You are not required to refer to the fraud in your answer. (8 marks)

(b)

(i)

Identify the reasons why the outgoing auditor might not have discovered the fraud: and

(ii)

Discuss the effect that the fraud might have on the financial statements for the company and the effect it should have on your audit work and audit report for the year ending 28 February 2012. (6 marks)

(c)

Outline the main areas to which you would direct your attention in order to establish the full extent of the fraud and the loss to the company, explaining why you would consider those areas. (6 marks) (Total: 20 marks)

QUESTION 3 Your firm has recently been appointed auditor of Lusco Ltd (Lusco). The company operated a chain of 30 retail stores, selling luxury Italian ladies’ clothing and accessories. The company operates a central warehouse from which it supplies all 30 stores with inventory. The company sources its inventory from a small number of major fashion wholesalers based in Italy. The majority of inventory items are previous year’s designs, which the wholesalers supply to Lusco at discounted prices. All transactions are conducted in cedis and payment is due in full on arrival of the goods in Ghana. ICAGP4.20513

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Most of the company’s sales are conducted by cash, cheque, or credit card. In order to remain competitive with other major high street retailers, the company offers a return policy to its customers which allow goods to be returned to the store for any reason with a full refund offered. Goods returned under this policy are then sold in bulk through the trade, sometimes at less than their original cost to Lusco. The company’s employees include monthly paid head office staff and store managers and a weekly paid core number of other store staff. In addition, the company employs a number of casual staff in peak periods. Permanent staff are paid by weekly/monthly direct bank transfer, and casual staff in cash. Lusco’s Managing Director, aged 60, is also the company’s main shareholder. He adopts a very handson approach to the business; he is involved in all major decisions and rarely delegates. He is known for his lavish lifestyle and in order to finance this, he seeks each year to grow the business and improve upon the previous year’s profitability. The company has recently acquired new offices adjacent to its central warehouse. The purchase was financed by large bank borrowing under term loans, which call for annual repayments. Required: (a)

Describe the different elements of audit risk and explain why the auditor needs to consider risk when conducting an audit. (4 marks)

(b)

Identify, from the circumstances outlined above, five (5) factors which indicate high audit risk in respect of the audit of Lusco Ltd and, for each factor identified, explain why it contributes to high audit risk. (10 marks)

(c)

Outline six (6) internal controls which Lusco Ltd should put in place to ensure the complete recording of sales and safe custody of cash. (6 marks) (Total: 20 marks)

QUESTION 4 Your firm is the auditor of Delux Hotels Ltd, which owns and manages a chain of hotels. The hotel systems are run on networked computers and the accounting function is centralised at head office which is responsible, amongst other matters, for capital expenditure. The following significant points have been identified during the audit. (1)

Room lettings – corporate customer Staff have granted discounts in excess of authorized levels in 40% of the transactions examined.

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Formal credit limits are set for about 50% of corporate customers with credit accounts, and audit tests indicated that about 20% of customers with formal credit limits have exceeded those limits for more than six months. (2)

Property, plant and equipment Company policy, which was to obtain three quotes for capital expenditure in excess of GH¢5,000, was not adhered to on two occasions.

(3)

Computer system File servers holding business-critical data and systems are not sited in secure locations.

The changing of password is at the discretion of staff members. Required: (a)

Set out, in a manner suitable for inclusion in a report to management, the possible consequences arising from the deficiencies identified above and the recommendations to remedy those deficiencies. Your recommendations should clearly describe how the control procedures should operate. Note: A covering letter is not required.

(b)

(15 marks)

When communicating audit matters to those charged with governance, describe the attributes required for such communications to be effective. (5 marks) (Total: 20 marks)

QUESTION 5 Described below are situations that have arisen in three audit clients of your firm. Coast Corporate Engine Parts Ltd (CCEP) CCEP manufactures engine parts. Revenue for the year ended 31 December 2012 was GHC200 million, and net profit was GHC17 million. Ghana Revenue Authority has launched an enquiry that is still underway. It is not possible to ascertain at this stage if a tax liability will arise in this company. The directors have disclosed the enquiry in a note to the accounts. They have also indicated a willingness to make any further disclosures that you recommend. A tax specialist had advised you that the possible range of outcomes in respect of additional tax liabilities is between a zero liability to a GHC20 million liability but, because of the complexity of the issues, she is unable to forecast the outcome.

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Prime Volunteers Ltd - charity Prime Volunteers Ltd has accrued GHC170,000 for the purchase of a freehold property and recorded this liability within accruals in payables falling due within one year, and a corresponding expense in building costs in the income statement. The charity has not yet identified a property to purchase and has not entered into a contract to purchase a property. The draft financial statements for the year to 31 March 2013 currently show an excess of income over expenditure of GHC700. The trustees of the charity refuse to adjust the financial statements because they believe disclosure of a large surplus would inhibit their ability to raise funds in the future. Worldwide Ltd Worldwide exports a significant amount of its products and has a major distribution centre in an overseas country, which is at war with a neighbouring country. Due to the imposition of travel restrictions it was not possible for your firm to attend the year end inventory count. The inventory at the overseas distribution centre at 31 March 2013 represented 60% of Worldwide Ltd’s inventory.

Required: (a)

Explain the reasons and benefits to auditors of (i)

completing a disclosure checklist

(ii)

carrying out final analytical procedures

when they are conducting financial checks on the financial statements (4 marks) (b)

In respect of CCEP, set out the matters you would consider as part of a going concern review. (6 marks)

(c)

For each of the companies, i.

CCEP

ii.

Prime Volunteers Ltd

iii.

Worldwide Ltd

reach a conclusion on whether or not you would modify the audit report. Give reason for each conclusion and describe the effect on each audit report. (10 marks) (Total: 20 marks)

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