Question 1

Aseda Manufacturer Ltd (Aseda) is one of the established business in the

manufacturing sector. The company has received different awards over the past
decade. Aseda’s year-end was 30 September 2020.The audit of Aseda is nearly
complete and the financial statements and the audit report are due to be signed in
a few days. However, the following additional information on two material events
has just been presented to the auditor on 3 December 2020.

Event 1
This event occurred on 10 November, 2020. Production at the Aluta factory was
halted for one day when a truck carrying dye used in colouring the fabric on
mattresses reversed into a metal pylon, crashing the vehicle and causing a dye to
spread across the factory premises and into a local river. The Environmental
Protection Agency (EPA) of Ghana is currently considering whether the release of
the dye was in breach of environmental legislation. The company’s insurers have
not yet commented on the event.

Event 2
This event occurred on 19 October, 2020.The springs in a new type of mattress have
been found to be defective making the mattress unsafe for use. There have been
no sales of this mattress as it was due to be marketed in the next few weeks. The
company’s insurers estimate that inventory worth GH¢600,000 has been affected.
The insurers also estimate that the mattresses are now only worth GH¢100,000. No
claim can be made against the supplier of springs as this company is in liquidation
with no prospect of any amounts being paid to third parties. The insurers will not
pay Aseda for the fall in value of the inventory as the company was underinsured.
All of this inventory was in the finished goods store at the end of the year and no
movements of inventory have been recorded post year-end.

Required:
a) For each of the two events above:
i) Explain the reporting implication of the issues in accordance with IAS 10: Events
after the Reporting Period. (4
marks) ii) Explain the auditors’ responsibility and the audit procedures that should
be carried
out in accordance with ISA 560: Subsequent Events. (12 marks)

b) Assume that the date is now 10 December 2020, the financial statements and
the audit report have just been signed, and the Annual General Meeting is to
take place on 10 January 2021. The Environmental Agency has issued a report
on 28 December 2020 stating that Aseda is in breach of environmental legislation
and a fine of GH¢800,000 will now be levied on the company. The amount is
material to the financial statements.

Required:
Explain the additional audit work the auditor should carry out in respect of this fine.
(4 marks)

(Total: 20 marks)
Suggested Solution
a) Reporting Implication Event 1
• This is event after reporting period because the release of dye occurred
after 30th September, 2020 which is the report date.
• There is no indicative of conditions existing after the end of the reporting
period since it could not be foreseen at the end of the reporting period.
• In this case, no adjustment to the financial statements appears to be
necessary. However, the investigation by the Environmental Agency could
result in a legal claim against the company for illegal pollution so as a
material event it will need disclosure in the financial statements.

Event 2
• This is event after reporting period because the problem with the mattress
was realised after 30th September, 2020.
• The problem with the inventory of mattress provides additional evidence
of conditions existing at the end of the reporting period as the inventory
was in existence and the faulty springs were included in the inventory at
this time.
• The value of the inventory is overstated and should be reduced to the
lower of cost and net realisable value in accordance with IAS 2 Inventories.
An adjustment for this decrease in value must be made in the financial
statements. The mattresses should therefore be valued at GH¢ 100,000
being the net realisable value.

(4 marks)

ii) Auditors Responsibility

The decrease in value of inventory and released of the dye took place after the end
of the reporting period but before the financial statements and the audit report were
signed. The auditor has an active duty to design and perform audit procedures to
obtain sufficient and appropriate evidence of all events up to date of the auditor’s
report that require adjustment or disclosure in the financial statements are:
• Identified
• Are suitably reported in the financial statements

Event 1
• As with event 1, the event takes place before the signing of the audit report,
therefore the auditors have a duty to identify material events affecting the
financial statements.
• The event is after the reporting period but represent new conditions arising and
therefore will qualify to be non-adjusting event. If the impact on the financial
statements is material, the auditor should ensure that management has made
adequate disclosure.
• Where disclosure is not made and the auditor considers disclosure is necessary
the auditor should inform the management to make the disclosure.
• When management refused, auditor should modify the audit opinion on the
grounds that the Financial Statements did not disclose all the information
required after informing those charge with governance.
• Alternatively, if the auditor considers that the release of dye and subsequent fine
will affect Aseda Manufacturer Limited’s ability to continue as a going concern,
draw the members’ attention to this in the material uncertainty relating to going
concern paragraph of the audit report where appropriate disclosure has been
made by management to that effect.

Audit procedures will include:

• Obtain any documentation on the event, for example board minutes to determine
the extent of the damage,
• obtain copies of environmental legislation and possibly interim reports from the
Environmental Agency to determine the extent of the damage.
• Inquire of the directors whether they will disclose the event in the financial
statements.
• If the directors plan to make disclosure of the event, ensure that disclosure
appears appropriate.
• If the directors do not plan to make any disclosure, consider whether disclosure
is necessary and inform the directors accordingly.

Event 2 Auditor’s Responsibility

• Also, with event 2, the event takes place before the signing of the audit report,
therefore the auditors have a duty to identify material events affecting the
financial statements.
• The event is after the reporting period but represent a conditions existed and
therefore will qualify to be adjusting event. the auditor should ensure that
management has made the necessarily adjustment to the financial statements.
• Where adjustment is not made and the auditor considers adjustment to be
necessary, the auditor should inform the management to make it.
• When management refuse, auditor should modify the audit opinion on the
grounds that the Financial Statements is misstatement after informing those
charge with governance.
 Audit procedures will include:
• Obtain documentation from the insurers confirming their estimate of the value
of the mattresses and that no further insurance claim can be made for the loss
in value.
• Contact solicitors/administrators of the spring supplier to confirm no refund can
be expected for the defective springs.
• Obtain the amended financial statements and ensure that the directors have
included GH¢ 100,000 as at the end of the reporting period and that the year-
end value of inventory has been decreased to GH¢ 100,000 on the statement of
financial position, statement of financial position note and the statement of
comprehensive income.
• Review inventory lists to ensure that the defective springs were not used in any
other mattresses and that further adjustments are not required to any other
inventory.
• Obtain an additional management representation point confirming the accuracy
of the amounts written-off and confirming that no other items of inventory are
affected.
• Finally, assessing the effect on the audit opinion after the decision of the directors
regarding the inventory value is known. A qualified opinion may be required
where appropriate adjustments are not made to the financial statements.
(12 marks)

b) Additional Audit Work

The notification of a fine has taken place after the audit report has been
signed. Audit procedures will include:
• Discuss the matter with the directors to determine their course of action.
• Where the directors decide to amend the disclosure in the financial statements,
audit the amendment and then re-draft and re-date the audit report as
appropriate.
• Where the directors decide not to amend the disclosure in the financial
statements, the auditor can consider other methods of contacting the members.
For example, the auditor can speak in the upcoming general meeting to inform
the members of the event.
• Other options such as resignation seem inappropriate due to the proximity of the
annual general meeting (AGM). Resignation would allow the auditor to ask the
directors to convene an extraordinary general meeting, but this could not take
place before the AGM so the auditor should speak at the AGM instead.
(4 marks)
Lecture 8 Audit Reporting
QUESTION 2
The International Audit and Assurance Standards Board (ISAAB) issued ISA 706
(Revised), Emphasis of Matter Paragraphs and Other Matter Paragraphs in the
Independent Auditor’s Report as part of the modification of the auditor’s report but
not necessarily a modification of the audit opinion. You are the manager responsible
for the audit of DDEP PLC, a listed company specialising in the provision of domestic
funding to local companies. The company was licensed by Bank of Ghana and has
been operating for over a decade. The reporting year is 31 March 2022. The
Engagement Partner is contemplating whether to report an issue as an emphasis of
matter or other matter. One of the Audit Associate is of the view that the Emphasis
of a matter is a substitute for a modified opinion, other disclosures in the financial
statements and going concern disclosures in the financial statements.
Required:
Prepare a report to the Engagement Partner addressing the following concerns; ai)
explanation of emphasis of matter paragraph and the concerns of the associate
(10 marks)
aii) four grounds it can be used in audit reporting (4 marks)
bi) explanation of other matter paragraph and (5 marks)
bii) the four grounds it can be used in audit reporting (4 marks)
(2 marks)
(25 marks)
Suggested Solution REPORT
To: Engagement Partner
From: Audit Manager Date: 27/02/2024 Subject: Emphasis of matter
paragraph and Other mater paragraph and address of concern of the
associate

Introduction
Following the request for me to address the concerns of the explanation of emphasis
of matter paragraph, other matter paragraph and the concern of the associate, I
furnish as follows.

Explanation of Emphasis of Matter Paragraph (706)

An ‘emphasis of matter’ paragraph is used to draw the reader’s attention to a matter
disclosed in the financial statements which is fundamental to an understanding
of those financial statements. When an auditor's report contains an emphasis of
matter paragraph, the opinion is not modified. It can therefore only be used where
the auditor has obtained sufficient appropriate audit evidence that the matter is not
materially misstated in the financial statements. (If the matter is materially misstated,
a modified opinion is required. Although the opinion is not modified, there is an item
in the financial statements, properly presented or disclosed, that the auditor wishes
to bring to the attention of users because it is fundamental to an understanding of
the financial statements.
The Concerns of the Associate
the Audit Associate is of the view that the Emphasis of a matter is a substitute for a
modified opinion, other disclosures in the financial statements and going concern
disclosures in the financial statements. I disagree with the opinion of the associate on
the basis of the following
• modified opinion is issued where there is either misstatement in the financial
statements that is either material or both material and pervasive of which
management refused to make the necessary amendments to correct the issue.
However, When an auditor's report contains an emphasis of matter paragraph,
the opinion is not modified. Emphasis matter paragraph is only used where
the auditor has obtained sufficient appropriate audit evidence that the matter
is not materially misstated in the financial statements. If the matter is
materially misstated, a modified opinion is required.
• going concern disclosures in the financial statements: This disclosure
is included in the financial statements whiles emphasis of matter is included in
the audit report to draw attention to a matter disclosed in the financial
statements which is fundamental to an understanding of those financial
statements. Emphasis of matter is not included in the financial statements in a
first place. When there is going concern disclosures in the financial statements
in relation to matter that are likely to cast doubt on the entity’s ability to
operate for foreseeable period and the use of going concern assumption is
appropriate, the auditor will rather include material uncertain relation to going
concern in the audit report and not emphasis of matter paragraph.
• Other disclosures in the financial statements: This disclosure is included
in the financial statements whiles emphasis of matter is included in the audit
report. Emphasis of matter may be used to draw users on some of these other
disclosures to the financial statement that is fundamental to the understanding
of the users of the financial statements
• Conclusion: emphasis of matter is used differently and it is not used as a
substitute for a modified opinion, other disclosures in the financial statements
and going concern disclosures in the financial statements.

Examples of when an EoM should be used include:

• Where there is an uncertainty relating to the future outcome of exceptional
litigation or regulatory action.
• A significant subsequent event that occurs between the date of the financial
statements and the date of the auditor’s report.
• Where the entity has adopted a new IFRS early and that has had a pervasive
effect on the financial statements.
• To draw attention to a major catastrophe
• When a financial reporting framework prescribed by law or regulation would
be unacceptable but for the fact that it is prescribed by law or regulation.
Other Matters
Other matters‟ as defined by ISA 706 (revised) relate to matters other than those
presented or disclosed in the financial statements. An Other Matter (OM) paragraph
has in common with the EoM the fact that it does not modify the auditor‟ s opinion.
However, whereas the EoM refers to a matter within the financial statements and
OM refers to information that is rightly not present in the financial statements, but
which is so important for users‟ understanding of them that it needs to be highlighted
in the auditor’s report.

Examples of situations include:

• when the prior year financial statements were audited by a previous auditor,
so this is the first-year audit for the current auditor
• Another example is when the prior year financial statements were not audited,
so this is the first-year audit for the current auditor
• When the auditor is reporting on a set of financial statements prepared using
different frameworks, e.g. both IFRS and GAAP. Example: Imagine a
company listed on the stock exchange in the US, which uses GAAP for its
regulatory filings. However, it also has significant operations in Europe, where
IFRS is the required standard. The company might prepare a set of financial
statements under both frameworks. In such a situation, the auditor might need
to include an "Other Matter" paragraph in the audit report, explaining that:
The financial statements prepared under IFRS have been audited in
accordance with IFRS, and Separate financial statements prepared under GAAP
are also available, but the auditor is only expressing an opinion on one of these
frameworks in the report (or potentially both but with explanations).
• Where local law or custom allows the auditor to elaborate on his responsibilities
in his report (relevant to users’ understanding of the auditor’s responsibilities
or auditor's report).
• Any restriction on the distribution of the auditor‟ s report
• When the auditor‟ s opinion on prior period financial statements differs from
what previous auditor th opinion expressed on those prior period financial
statements.

QUESTION 3
Nkwa Hia PLC is a public interest entity that was listed on the Ghana Stock Exchange
after a decade of incorporation. The company is located at the Airport residential area
and it intends to raise GHS 1,000,000 on the Ghana Stock Exchange. One of the
strategies is to improve on their annual report. As a partner of your audit firm, you
have been presented with an extract from the draft chairman’s statement which will
be published in the annual report alongside the financial statements for the year under
review to help with the fund raising exercise on the Ghana Stock Exchange.
Extract from chairman’s statement
The company’s results for the year are extremely positive. Our year on year revenue
growth is 5.9% and our profit growth is even stronger at 13.4%. All our revenue
streams have performed well, especially the printing division, and we are looking
forward to exciting and sustained growth levels again next year. As you can see from
our auditor’s report, the auditors agree that our results are strong and a sound basis
for taking the company to an even greater place next year.

We have also made significant progress with our social and environmental aims of
reducing our carbon footprint and encouraging re-use and recycling across our
divisions. We are proud to announce that we have now moved all our printed products
to recycled paper. To help with your review of the information, you also have the
following analysis of the results for the year.

Year ended 31 March 2021 Year ended 31 March 2020

Other Printing Total Other Printing Total
divisions division divisions dividend

$ million $ million $ million $ million $million

$million
Revenue 95 13 108 93 9 102
Profit before tax 7.9 1.4 9.3 7.5 0.7 8.2
A file note from the audit supervisor states that at least three of the publications Nkwa
Hia PLC sells are not prepared on recycled paper. The printing division is highly
probable to be sold immediately after this reporting year.
Required:
a. In line with ISA 720 (Revised) The Auditor’s Responsibilities Relating to Other
Information, explain the auditor’s responsibilities in relation to the other
information presented with the audited financial statements and comment on the
matters arising from the extract from the chairman’s statement; and (15 marks)

b. Provided that no changes are made to the chairman’s statement, describe the
implications for the completion of the audit and the auditor’s report. (10 marks)
Suggested Solution

a. Auditor’s responsibility for other information presented with the financial

statements
• ISA 720 (Revised) The Auditor’s Responsibilities Relating to Other
Information requires the auditor to read other information, defined as financial
or nonfinancial information (other than financial statements and the auditor’s
report thereon), included in an entity’s annual report.
 • The purpose of reading the other information is to consider whether there is a
material inconsistency between the other information and the financial
statements or between the other information and the auditor’s knowledge
obtained in the audit. If the auditor identifies that a material inconsistency
appears to exist, or becomes aware that the other information appears to be
materially misstated, the auditor should discuss the matter with management
and, if necessary, perform other procedures to conclude whether:
A material misstatement of the other information exists;
A material misstatement of the financial statements exists; or
The auditor’s understanding of the entity and its environment needs to
be updated.
• The auditor does not audit the other information and does not express an
opinion covering the other information.

Matters identified from the chairman’s statement

• In this case, the chairman’s statement refers to strong growth in the year, in
particular the Printing division and suggests that the growth will continue. In
the current year, the Printing division represented 12% of revenue and 15%
of profit before tax and is a material component of the company. As the Printing
division will be disposed of early in the next financial period, it will not continue
to form part of the basis for revenue or growth, and the chairman’s statement
could be considered misleading. Further, as a result of the disposal, on a like
for like basis it is more likely that the financial statements for the year ended
31 March 20X6 will include a reduction in revenue rather than growth.
• In addition, the remainder of the business has experienced a lower level of
growth in revenue and profits in the period than the Printing division. Revenue
growth of continuing business is 2% compared to 44% in the Printing division.
Profit growth of the ongoing business is 5% compared to 100% for the Printing
division.
• ISA 720 states that a misstatement of the other information exists when the
other information is incorrectly stated or otherwise misleading, including
because it omits or obscures information necessary for a proper understanding
of a matter disclosed in the other information. In the case of the chairman’s
statement regarding growth of the company, it could be argued that the way
the information is presented obscures the understanding of the growth and
profitability of the ongoing business. As mentioned above, this would be
considered very misleading.
• The chairman has also made inappropriate reference to the view of the auditor,
implying that the auditor’s report validates this assertion. The statement also
appears to inappropriately pre-empt that the auditor’s report will provide an
unmodified opinion which based on the assessment above may not be the case
 given the material misstatement and lack of disclosures. This is inappropriate
and all reference to the auditor’s report should be removed.
• In addition, there is also an issue arising with respect to the use of recycled
paper. The chairman’s statement in this case is inconsistent with the knowledge
obtained during the audit. Whether the auditor considers this to be material
would be a matter of judgement, depending on how many publications there
are in total and the proportion using non-recycled paper and whether the issue
may be material by nature rather than by size. This could be the case if it is
perceived that there is a deliberate misrepresentation of facts which may be
misleading to the users of the financial statements.

b. Implications for completion of the audit or action auditor need to take

• The auditor should discuss with management and the chairman the information
in the statement which appears inaccurate or inconsistent. In particular, this
should focus on a discussion of the misleading growth analysis given that the
Printing division will not be contributing to company performance once it is
sold.
• In the case of the chairman’s statement being inconsistent with the knowledge
obtained during, the auditor should seek further information to support the file
note regarding publications not using recycled paper. The names of those
publications should be obtained, and a discussion held with the production
manager to confirm the auditor’s understanding.
• Following these investigations and discussions, the auditor should then request
that any information which is inaccurate, inappropriate or inconsistent is
removed or amended in the chairman’s report.
• If management refuse to make the changes then the auditor’s request should
be escalated to those charged with governance. If the issue remains
unresolved then the auditor should take appropriate action, including
• Considering the implications for the auditor’s report and communicating with
those charged with governance about how the auditor plans to address the
issues in the auditor’s report; or
• Withdrawing from the engagement, where withdrawal is possible under
applicable law or regulation.

Implications for the auditor’s report

• If the other information remains uncorrected the auditor would use the Other
Information section of the auditor’s report to draw the users’ attention to the
misstatements in the chairman’s statement. This paragraph would include:
A statement that management is responsible for the other information;
A statement that the auditor’s opinion does not cover the other
information and, accordingly, that the auditor does not express (or will
not express) an audit opinion or any form of assurance conclusion
thereon;
 A description of the auditor’s responsibilities relating to reading,
considering and reporting on other information as required by this ISA;
and
A statement that describes the uncorrected material misstatement of
the other information.
• As the inconsistency is in the chairman’s statement rather than the audited
financial statement the audit opinion is not modified as a result.

QUESTION 4

You are the manager responsible for the audit of Alpha Ltd, a listed company
specialising in the manufacture and installation of sound-proof partitions for domestic
and industrial buildings. You are currently reviewing the draft auditor’s report on the
company’s financial statements for the year ended 31 March 2022. Extracts from the
draft auditor’s report are shown below:

Independent auditor’s report to the shareholders and directors of Alpha Ltd Basis for
opinion
We conducted our audit of Alpha Ltd (the Company) in accordance with International
Standards on Auditing (ISAs). Our responsibilities under those standards are further
described in the auditor’s responsibilities for the audit of the financial statements
section of our report. We are independent of the Company in accordance with the
ethical requirements which are relevant to our audit of the financial statements in the
jurisdiction in which the Company operates, and we have fulfilled our other ethical
responsibilities in accordance with these requirements. We believe that the audit
evidence we have obtained is sufficient and appropriate to provide a basis for our
opinion.

Opinion
We have audited the financial statements of Alpha Ltd, which comprises of the
statement of financial position as at 31 March 2022, and the statement of
comprehensive income, statement of changes in equity and statement of cash flows
for the year then ended, and notes to the financial statements, including a summary
of significant accounting policies. In our opinion, the accompanying financial
statements present fairly, in all material respects, the financial position of the
Company as at 31 March 2022, and of its financial performance and its cash flows for
the year then ended in accordance with International Financial Reporting Standards.

Material uncertainty regarding going concern

The Company is financed by a long-term loan from its bankers which is due for
redemption in August 2022. At the date of this auditor’s report, the Company is in the
process of renegotiating the loan but has not yet reached a final agreement with its
bankers. It is our view that the loan finance is essential to the continued survival of
the Company and that at the time of reporting, therefore, the absence of a finalised
agreement represents a material uncertainty regarding going concern. The financial
statements have been prepared on a going concern basis but do not make any
reference to the loan redemption or the ongoing negotiations with the bank. As the
external auditor therefore, we are fulfilling our duty by bringing the matter to the
attention of users of the financial statements.

Other information
The Company’s principal activity is the manufacture and installation of sound-proof
partitions for domestic and industrial buildings. The Company therefore engages in
longterm contracts which are incomplete at the reporting date and which are material
to its revenue figure. The installation process is complex and significant judgement is
applied in assessing the percentage of completeness which is applied to calculate the
revenue for the year. The significance of this judgement requires us to disclose the
issue as other information which is relevant to the users of the financial statements.

Required:
Comment on the issues raised in the extract from the draft auditor’s report for the
year ended 31 March 2022.
(Note: You are NOT required to re-draft the extracts from the auditor’s
report.)

(10 marks)
Suggested Solution

Presentation and structure of auditor’s report extract

The structure and format of the auditor’s report is prescribed by ISA 700: Forming
an Opinion and Reporting on Financial Statements. The auditor’s report
should be addressed solely to the shareholders of the reporting entity and the title
should not include any reference to the directors of Alpha LTD. In addition, the first
two paragraphs are presented in the incorrect order, the Opinion paragraph should
precede the Basis for Opinion paragraph.

No Paragraph in the Opinion Paragraph

The audit opinion should clearly separate the description of the financial statements
audited from the expression of the opinion. Without a paragraph break, the
information appears jumbled, and readers might find it difficult to identify where the
factual description of the financial statements ends and the auditor's actual opinion
begins. In the correct format, the first part provides details about what was audited—
like the statement of financial position, the statement of comprehensive income,
changes in equity, cash flows, and notes to the financial statements. This sets the
context. The second part (the opinion) is where the auditor makes their assessment
based on the audit work performed.

Reference to ethical code

ISA 700 requires that in the Basis for Opinion paragraph, the auditor should identify
the relevant ethical code, naming the IESBA International Code of Ethics for
Professional Accountants. The draft auditor’s report does not specifically refer to
the ethical code which has been applied during the audit and is therefore not in
compliance with the requirements of ISA 700.

Material uncertainty regarding going concern

ISA 570: Going Concern provides guidance on how an auditor should report
uncertainties regarding going concern in the auditor’s report. According to ISA 570,
if adequate disclosure about the material uncertainty is not made in the financial
statements, the auditor should express a qualified opinion or adverse opinion as
appropriate. The use of a ‘material uncertainty regarding going concern’ paragraph in
the draft auditor’s report extract is therefore incorrect. This paragraph should only be
used when adequate disclosure has been made by the directors in the financial
statements and would include a cross reference to this disclosure. Given that this
disclosure has not been made, this is therefore not appropriate in this case.

In this case, therefore, the absence of any disclosure in the financial statements in
relation to the uncertainties regarding going concern is grounds for a modification of
the auditor’s opinion. The modification is due to a material misstatement in relation
to the absence of this key disclosure. If, in the auditor’s professional judgement, the
impact of this non-disclosure on the financial statements is material but not pervasive,
a qualified ‘except for’ opinion should be issued. In this case, the opinion paragraph
should be headed ‘qualified opinion’ and this should be followed immediately by a
‘basis for qualified opinion’ paragraph. If, on the other hand, the auditor believes that
the impact on the financial statements of the nondisclosure is both material and
pervasive, an adverse opinion should be given. The opinion paragraph should then be
headed ‘adverse opinion’ and should be followed immediately by a ‘basis for adverse
opinion’ paragraph.
In addition, details of the uncertainty regarding going concern should be given in the
basis for qualified or adverse opinion paragraph.
Long-term contracts
The use of the ‘other information’ section in this context is inappropriate. This section
should be used to describe the auditor’s responsibilities for ‘other information’ (e.g.
the rest of the annual report, including the management report) and the outcome of
fulfilling those responsibilities.
The disclosure regarding long-term contracts is more in line with the requirements of
ISA 701: Communicating Key Audit Matters in the Independent Auditor’s
Report, where key audit matters are those which in the auditor’s professional
judgement were of most significance to the audit. In determining which matters to
report, the auditor should take into account areas of significant auditor attention in
performing the audit, including:
• Areas of higher assessed risk of material misstatement, or significant risks
identified in accordance with ISA 315 (Revised): Identifying and Assessing
the Risks of Material Misstatement through Understanding the Entity
and Its Environment.
• Significant auditor judgements relating to areas in the financial statements which
involved significant management judgement, including accounting estimates
which have been identified as having high estimation uncertainty.
• The effect on the audit of significant events or transactions which occurred during
the period.

The extract from the draft auditor’s report states that significant judgement is applied
in assessing the percentage of completeness of material long-term contracts and that
this percentage is then applied in calculating the revenue for the year. This is a matter
of high risk requiring significant auditor attention and given that Alpha Ltd is a listed
entity, it would be appropriate for this to be disclosed in the KAM section of the
auditor’s report. The KAM section of the auditor’s report should begin with an
introductory paragraph explaining what a KAM is. The KAM section should then explain
why this matter is considered to be a KAM due to the significant judgement involved
in assessing the percentage completeness of the long-term contracts and the high
risk of material misstatement associated with this judgement process. The KAM
section should also include an explanation of how the KAM was addressed by the
audit process. In this case, this might include, for example, an evaluation of the
controls designed and implemented by Alpha Ltd to monitor the progress of and the
amounts owing on service and construction contracts; a review of the financial
performance of key contracts against budgets and historical trends; and challenging
management’s estimates and judgements in respect of the progress to date on the
contracts.
(10 marks)
Question 5
You have recently been appointed as an audit trainee after passing the level 1 of the
professional examination of the Institute of Chartered Accountant-Ghana. Your
manager is presenting to the Engagement Partner regarding the opinion of the
financial statements of a recently audited client. Your manager has tasked you to
research into the responsibilities of an external auditor for auditing a historical
financial statements in line with ISA 700 (Revised) Forming an Opinion and Reporting
on Financial Statements.
Required:
State five responsibilities of an auditor in line with the above standard; (5 marks)

Suggested Solution
a. five responsibilities of an auditor in line with the above standard
• To Obtain reasonable assurance about whether the financial statements as a
whole are free from material misstatement, whether due to fraud or error; and
• Issue an auditor’s report that includes the auditor’s opinion. (Ref: Para. A46)
• To provide reasonable assurance which is a high level of assurance, but is not
a guarantee that an audit conducted in accordance with ISAs will always detect
a material misstatement when it exists; and misstatements can arise from
fraud or error,
• To exercises professional judgment and maintains professional skepticism
throughout the audit as part of an audit in accordance with ISAs,
• To identify and assess the risks of material misstatement of the financial
statements, whether due to fraud or error;
• To design and perform audit procedures responsive to those risks;
• To obtain audit evidence that is sufficient and appropriate to provide a basis
for the auditor’s opinion.
• To obtain an understanding of internal control relevant to the audit in order to
design audit procedures that are appropriate in the circumstances, but not for
the purpose of expressing an opinion on the effectiveness of the entity’s
internal control. In circumstances when the auditor also has a responsibility to
express an opinion on the effectiveness of internal control in conjunction with
the audit of the financial statements, the auditor shall omit the phrase that the
auditor’s consideration of internal control is not for the purpose of expressing
an opinion on the effectiveness of the entity’s internal control.

• Evaluate the appropriateness of accounting policies used and the

reasonableness of accounting estimates and related disclosures made by
management.
• Conclude on the appropriateness of management‟ s use of the going concern
basis of accounting and, based on the audit evidence obtained, whether a
material uncertainty exists related to events or conditions that may cast
significant doubt on the Company‟ s ability to continue as a going concern. If
we conclude that a material uncertainty exists, we are required to draw
attention in our auditor‟ s report to the related disclosures in the financial
statements or, if such disclosures are inadequate, to modify our opinion. Our
conclusions are based on the audit evidence obtained up to the date of our
auditor‟ s report. However, future events or conditions may cause the
Company to cease to continue as a going concern.
• Evaluate the overall presentation, structure and content of the financial
statements, including the disclosures, and whether the financial statements
 represent the underlying transactions and events in a manner that achieves
fair presentation.
(These points are in line with ISA 700)

QUESTION 6
The audit of Anidaso PLC’s financial statements for the year ended 31st December
2023 is nearing completion and the auditor’s report is due to be signed next week.
Anidaso PLC manufactures parts and components for the aviation industry. The
company listed entity on the Ghana Stock Exchange and is a subsidiary of a
Company listed on a foreign Stock Exchange. The company is under pressure
from the Ghana Stock Exchange to comply with IFRS S1 General Requirements
for Disclosure of Sustainability-related Financial Information. The parent company
has sent a notice that that the foreign stock exchange will not accept consolidated
financial statements in addition to the component financial statements that do not
comply with IFRS S1. The engagement partner sent you an e-mail as below;

To: Audit Senior Manager

From: Engagement Partner
Subject: Review of annual report
Status: Urgent

Hello Mr. Kafui,

Greetings to you and the entire audit team.

As you are aware we are about to finalise audited financial statements of Anidaso
PLC. Due to consolidation requirements, the Directors have prepared a draft
annual report which contained the following disclosures to comply with IFRS S1.
• the governance processes, controls and procedures the entity uses to monitor,
manage and oversee sustainability-related risks and opportunities;
• the entity’s strategy for managing sustainability-related risks and opportunities;
• the processes the entity uses to identify, assess, prioritise and monitor
sustainability-related risks and opportunities; and
• the entity’s performance in relation to sustainability-related risks and
opportunities, including progress towards any targets the entity has set or is
required to meet by law or regulation.

In the outlook section of the chairman’s report contained a statement the revenue
of the company has grew significantly by 10% over the last year. Therefore, a
result of the formalization and lunch of Commercial Papers in Ghana, the company
will issue GHS 500 million.

The draft revenue are as follows;

2023 2022
GHS GHS
Revenue 1,600,000 1,500,000
All audit adjustments have been mutually agreed with the clients. Your review of
the board minutes signed by the Chairman confirmed that the company is yet to
comply with IFRS S1 when the regulator raised issue about compliance with the
standards. The Chairman stated that the auditor’s report is unmodified with
respect to the annual report.
Required:
a. In line with ISA 720 (Revised) The Auditor’s Responsibilities Relating to Other
Information, explain the auditor’s responsibilities in relation to the other
information presented with the audited financial statements and comment on
the matters arising from the extract from the chairman’s statement; and (12
marks)
b. Provided that no changes are made to the chairman’s statement, describe the
implications for the completion of the audit and the auditor’s report. (8 marks)

Question 7
Webco.com Ghana Limited is a website design company whose year end was 31
December, 2020. The audit is almost complete and the financial statements are due
to be signed shortly. Revenue for the year is GHS 18 million and profit before tax is
GHS 5 million. A key customer, with a receivables balance at the year end of GHS
500,000, has just notified Webco.com Ghana Limited that they are experiencing cash
flow difficulties as their operation in the hotel business was hugely affected by the
Corona Virus -19 Pandemic officially announced on the 12th March, 2020 in Ghana.
The customer is unable to make any payments for the foreseeable future. The finance
director has notified the auditor that he will write this balance off as an irrecoverable
debt in the 2021 financial statements.

Materialities
5000,000/5,000,000 x 100% = 10% on PBT

Required:
a. Explain whether or not the 2020 financial statements require amendment (7
marks)
b. Describe audit procedures which should be performed in order to form a conclusion
on any required amendment (3 marks)

c. The following additional issues have arisen during the course of the audit of
Webco.com Ghana Limited.
i. Depreciation has been calculated on the total of land and buildings. In
previous years it has only been charged on buildings. Total depreciation is
GHS 1.2 m and the element charged to land only is GHS 500,000.
(5 marks)
ii. Webco.com Ghana Limited main competitor has filed a lawsuit for GHS
600,000 against them alleging a breach of copyright; this case is ongoing
 and will not be resolved prior to the audit report being signed. The matter
is correctly disclosed as a contingent liability. (5 marks)
Required: Describe the impact of the auditor’s report
(Total: 20 marks)
Suggested Solution
a. Explain whether or not the 2020 financial statements require amendment
• The bad debt balance of GHS 500,000 is material to the financial statements,
constituting 10% of the profit before tax (500,000/5,000,000 x 100%) and
2.8% of the revenue balance (500,000/18,000,000 x 100%). This means that
any misstatement resulting from unrecognized bad debt of GHS 500,000 will
significantly impact the economic decisions of the financial statement users.

• The customer notified management about their financial challenges and the
difficulty they anticipate in making future payments. Importantly, this
notification occurred after the reporting date of December 31, 2020. According
to International Accounting Standard 10 (IAS 10), this event qualifies as an
adjusting event, providing evidence of conditions that existed at the end of the
reporting period.

• The bad debt amount of GHS 500,000 was already part of Webco.com's
accounts receivable balance at the end of the reporting period on December
31, 2020. Therefore, the condition of this event already existed before the
reporting date.

• These events require an adjustment to the financial statements to reflect their

effects accurately. Therefore, the bad debt needs to be recognized in the
financial statements for the year 2020.

• The decision by management to recognize the bad debt in the 2021 financial
statements would result in a material overstatement in the accounts receivable
balance and the profit for the year 2020.

• Hence, it is necessary to make adjustments to the financial statements for the

year 2020 to reduce the profit for 2020 by GHS 500,000 and the accounts
receivable balance by GHS 500,000.

• The auditor is required to communicate this to management to ensure that all

necessary adjustments are made to the financial statements for the year 2020.

b. Describe audit procedures which should be performed in order to form a conclusion

on any required amendment
• Discuss with Web.com's management regarding the accounts receivable
balance, including the balance of the Key customer included in the accounts
 receivables. Inquire about the reasons for their inclusion of the Key Customer’s
balance in the receivables and their decision to recognize the bad debt in the
2021 year.
• Obtain written representation from the management of Web.com to confirm
the accounts receivable balance figure, their decision to defer recognition of
the key customer's balance until the 2021 financial statements and reason for
the deviations from the application of IAS 10 standard in their presentation.
• Review the correspondence between this key customer and Web.com's
management to obtain evidence of the decisions made regarding the
customer’s debt
• Review management minutes to confirm the decision taken by management
regarding the balance of the Key Customer and the recognition of this balance
in Web.com's financial statements, as well as any possible reasons for such
decisions.
• Send a circular to the customer to confirm the balance of GHS 500,000 and
also confirm the customer’s inability to make any future payments.
• If the financial statement is amended, auditor should carry out review on the
amendment to check the accuracy of the adjustment made by management.

c. Describe the impact of the auditor’s report

Depreciation of building and Land

• Land is not considered a depreciable asset and, therefore, should not have
depreciation computed and charged to the financial statements.
• It is an error for Web.com's management to charge depreciation on the land
owned. This has resulted in a reduction of profit by GHS 500,000 and a
decrease in the carrying value of the non-current asset by GHS 500,000, which
constitutes material misstatements in the financial statements.
• Depreciation of the land is material to the financial statements since it
represents 10% of the profit before tax (500,000/5,000,000 x 100%).
Consequently, an adjustment must be made to the financial statements of
Web.com as this constitutes a material misstatement.
• The auditors are required to communicate this matter to management to
prompt the necessary adjustments.
• If management agrees to make the adjustments, the auditor's report will not
be modified.
• If management fails to adjust the financial statements, the auditor should
communicate the matter to those charged with governance.
• If the adjustments are not made, the auditor will issue a qualified opinion since
the misstatement is material but not pervasive.

Lawsuit
 • The liability arising from the outcome lawsuit appears to be material, as it
represents 12% of the profit before tax (600,000/5,000,000 x 100%).
• The outcome of the lawsuit is not probable, and therefore, there is no
expectation of utilizing economic benefits to settle any liability for the current
year under audit. As per ISA 37 (Provisions, Contingent Liabilities, and
Contingent Assets), since the outcome is not probable, no provision is required
to be recognized in the financial statements.
• Consequently, the financial statements are fairly presented, including the
disclosure of this liability as a contingent liability since the outcome appears
possible but not probable.
• This situation does not necessitate a modification of the audit opinion. However,
auditors are required to include an emphasis of matter paragraph in their audit
report to draw users' attention to the note highlighting the lawsuit.
• According to ISA 706, an emphasis of matter is used to draw the reader’s
attention to a matter disclosed in the financial statements that is fundamental
to understanding those financial statements when the opinion is not modified.
• Nevertheless, if the lawsuit raises doubts about Web.com's ability to continue
for a foreseeable period, an emphasis of matter paragraph is not required.
Instead, a material uncertainty relating to concern should be included in the
audit report to draw users' attention to this matter and management's plan for
addressing it.

QUESTION 8
PTG Group of companies is a multi-national company with its head office located in
Ghana. PTG Group Companies has several subsidiaries spread across many countries.
The audit of the consolidated financial statement is near and Your audit firm P Square
Accountancy firm has been offer an appointment for the audit the consolidated
financial statement of PTG Group of companies
Required
i. Discuss the challenges that P Square is likely to face with the audit of PTG consolidated
financial statement
ii. Outline the procedure P Square should perform before accepting the audit of PTG
consolidated financial statement
iii. What is significant component and explain the factors P square should consider in
relying on the work of a significant component auditor.
iv. Describe five ways P Square can get involve in the work of a component (5 marks)
v. What is the different between joint audit and shared audit
vi. Discuss the reason why joint audit maybe necessary and outline the bases of arguing
against joint audit arrangements

Suggested Solution
i. Possible Problems with Group Audits
The organisation and planning of a group audit is usually more complex than the
planning of the audit of a single company, for the following reasons:
• Groups may include a large number of companies.
• Some group companies may be foreign subsidiaries that report in their own
currency.
• Some companies in the group may have a different year-end accounting date from
other companies.

ii. Before accepting appointment as group auditor, the audit firm should
ensure that all the procedures
• is competent to perform the engagement
• has the capabilities (including the necessary resources) to do so
• can comply with the relevant ethical requirements,
• there are no conflicts of interest on the part of the firm
• has considered the integrity of the client and does not have information
which would lead it to conclude that the client lacks integrity.
• professional clearance has been obtained from the previous auditors of
the new client
• appropriate anti-money laundering (client identification) procedures are
performed to ensure that the client is not involve in any anti- Money
Laundering activity
• that they have a ‘reasonable expectation’ of obtaining sufficient
appropriate audit evidence about the consolidation process and the
financial information of components to reduce audit risk to an acceptable
level by obtaining an understanding of the group and its components and
their environment sufficient to determine:
components that are significant to the group
whether the significant components will be audited by others, and
whether as group auditor will be able to be sufficiently involved in
the audit of significant components to obtain sufficient appropriate
evidence about them.
iii. Definition of Significant Component
Significant components are those that: are of individual significance to the
group (i.e. individually material in a group context), or have been identified
as likely to include significant risks of material misstatement of the group
financial statements.

Factors to consider before relying on the work of a component auditor:

Ethical requirement: Whether the component auditor understands
and will comply with the ethical requirements that are relevant to
the group audit (in particular that he is independent).
The component auditor’s professional competence.
 Whether the group engagement team will be able to be involved in
the work of the component auditor to the extent necessary to
obtain sufficient appropriate audit evidence.

iv. Involvement of the Group Auditor in the Work Performed by Component

Auditors
The group auditor get involve in the work of the component auditor through;
meeting with component management or/and auditors to obtain an
understanding of the component
reviewing the component auditor’s overall audit strategy and audit plan
performing risk assessment procedures at the component
participating in closing/other key meetings between component
auditors/ management
reviewing relevant parts of the component auditor’s documentation. ✓
designing and/or performing further audit procedures

v. The difference between Joint Audit and a Shared Audit

A joint audit involves two (or more) audit firms being appointed to audit
the financial statements of an entity. The joint audit provides a joint
opinion on the financial statements of the company.

The joint audit should not be confused with a shared audit. Whilst
shared audits also involve more than one auditor, the overall responsibility
for signing the shared audit report lies with a single firm. Joint audit
requires the signature of multiple firms on the joint audit report.

vi. Reasons for Appointing Joint Auditors

The reasons why joint auditors might be appointed include the following issues:
The client company may be so large that it requires the services of
more than one firm of auditors.
After the acquisition of a large subsidiary, using joint auditors may
help the transition process.
Joint auditors may provide a higher level of technical expertise
than either audit firm could provide individually.
It has been suggested that two medium-sized accountancy firms might
‘join forces’ and tender for the audit of a company for which the
auditors would normally be one of the ‘Big 4’ accountancy firms.
This is possibly a way in which medium-sized firms might try to ‘break
the monopoly’ of the Big 4 on large company audits.
 Disadvantages of Joint Audits
Possible disadvantages of joint audits include the following:
The extra cost to the client. It is likely to cost more to use two
accountancy firms than to use one.
Where each Auditor prefer to use different method or strategy:
Possible inconsistencies between the two joint auditors in the audit
methods that they use. If so, there may be problems in reaching
agreement on whose audit method to use.
Agreeing the division of work: The possible difficulty the two firms
may have in agreeing the division of work.
Claim against the auditors : If there is a claim against the auditors
for negligence in the conduct of the audit, there may be some difficulty
in identifying which of the joint auditors is potentially liable.
difficult to work well together (appointing the lead firm): The
two firms may find it difficult to work well together, and each firm may
try to become the leading firm in the joint audit.

QUESTION 9
You led a team of auditors from the Auditor-Generals’ Department to audit the
Financial Statements of Ministry of Defence. You have just completed the audit and
about to report your findings.
Required:
i) Explain the factors you will take into account to determine that the financial
statements have been properly prepared in accordance with compliance
framework. (6 marks)
ii) Explain the difference between fair presentation framework and compliance
framework. (4 marks)

Suggested Solution
i. Factors to consider for compliance with a compliance framework
• Accounting Policies: The entity must select and apply acceptable,
reasonable, and appropriate accounting policies that are correctly applied and
adequately disclosed in the financial statements.
• Compliance with IPSAS: The entity should comply with International Public
Sector Accounting Standards (IPSAS), ensuring their financial reporting aligns
with globally accepted public sector accounting principles.
• Compliance with Laws and Regulations: The financial statements must
fully comply with all relevant laws and regulations governing the entity, ensuring
legal and regulatory adherence in their preparation.

ii.

Fair Presentation Framework:

Financial statements must give a true and fair view in accordance with the relevant
financial reporting standards (e.g., IPSAS or local standards). This ensures
transparency and accuracy in reflecting the financial position.

Compliance Framework:
The main requirement is to ensure the financial statements comply with laws and
regulations. It focuses on legal adherence rather than presenting a true and fair
view. As long as laws are followed, the statements are considered acceptable, even if
they don’t provide a fair view of the entity’s financial performance.

QUESTION 10
The Auditor-General has a responsibility to ensure that government business is being
performed in a manner which will bring development and benefits to the citizens.
Various aspects of the conduct of government business will engage the attention of
the Auditor-General, for example execution of contracts for the construction of a
regional hospital.
Required:
i) Briefly discuss what performance audit entails? (2 marks)
ii) In carrying out the performance audit, evaluate the THREE (3) main factors that the
Auditor-General will be concerned with in relation to the construction of the Greater
Accra Regional Hospital. (8 marks)
Suggested Solution
i) Performance audit involves systematic review of part or all of an organization’s
activities in relation to the efficient and effective use of resources. The purpose of
performance audit is to assess performance, identify areas for improvement, and
develop recommendations. (2
marks)

In this respect the three factors that the Auditor General will be concerned with in
carrying out performance audit on the construction of the regional hospital will be:
• Economy: The audit will be designed to check whether the resources used in the
construction were obtained at the least cost for best quality or the quantity of items used
was least expected under the circumstances.
• Efficiency: The measure of the relationship between input and output. Where output is
greater than the value of the input efficiency is achieved. However defining output for
social and other services is a very difficult task.
• Effectiveness: This deals with the ability to achieve the set targets. In the case of the
Regional hospital measuring effectiveness will involve whether the intended capacity and
facilities have been attained as well as the completion and commissioning of the hospital
for public use within the set time frame.
• Check whether the contract for the construction was awarded in line with the Public
Procurement Act.
(4 points well explained @ 2 marks each= 8 marks)
Question 11
Audit engagement rests on mutual understanding and respect between the auditor
and the auditee. The Auditor while not viewing the auditee as dishonest must also
have at the back of his mind that to err is human and must therefore not accept
evidence from the auditee without further cross-checking the facts. The attitude should
be that the auditor must have an enquiring mind. This is known as professional
skepticism; while trusting he must verify.
Required:
i) What FOUR (4) issues should be considered in Professional Skepticism assessment
during performance audit? (5 marks)
ii) State FIVE (5) circumstances that can hinder Professional Skepticism at the
engagement level. (5 marks)

Suggested Solution
Issues that should be considered in Professional Skepticism assessment.
• Assessing Fraud (Examples of fraud are: breach of trust, collusive awarding of
grants and contributions, collusive bidding or awarding on contracts,
dishonest/illegal acts, false representation, fraudulent concealment,
intentional misstatements, secret commissions, theft.)
• Assessing the integrity of management
• the accuracy of responses to inquiries and other information obtained from
management and those charged with governance
• risks or revising risk assessment as a result of identified material or
significantly inconsistent information
• Any estimate made by management
• (Any 4 points @ 1.25 marks each = 5 marks)

Impediments to the exercise of professional skepticism at the engagement level

may include, but are not limited to:
• Budget constraints, which may discourage the use of sufficiently experienced or
technically qualified resources, including experts, necessary for audits of entities
where technical expertise or specialized skills are needed for effective
understanding, assessment of and responses to risks and informed questioning of
management.
• Tight deadlines, which may negatively affect the behavior of those who perform
the work as well as those who direct, supervise and review. For example, external
time pressures may create restrictions to analyzing complex information effectively.
• Lack of cooperation or undue pressures imposed by management, which may
negatively affect the engagement team’s ability to resolve complex or contentious
issues.
• Insufficient understanding of the entity and its environment, its system of internal
control and the applicable financial reporting framework, which may constrain the
ability of the engagement team to make appropriate judgments and an informed
questioning of management’s assertions.
• Difficulties in obtaining access to records, facilities, certain employees, customers,
vendors or others, which may cause the engagement team to bias the selection of
 sources of audit evidence and seek audit evidence from sources that are more
easily accessible.
• Overreliance on automated tools and techniques, which may result in the
engagement team not critically assessing audit evidence.
(Any 5 points @ 1 marks each = 5 marks)

Question 12
For effective and efficient audit in the public sector, auditors will need to consider
the mix of competencies of the engagement team, ensuring that personnel
assigned to the engagement collectively can perform the assignment to a required
standard so as to achieve audit quality.
Required: As the Director of Audit (Ghana Audit Service):
i) Indicate FIVE (5) factors you will consider in terms of competence of personnel to
ensure quality in public sector audit. (5 marks)
ii) State FIVE (5) matters you will consider in directing the engagement team to
ensure quality control in the public sector audit. (5 marks)

Suggested Solution
i.
When considering the appropriate competence and capabilities expected of the
engagement team as a whole, the engagement partner may take into consideration
such matters as the teams’:
• Understanding of, and practical experience with, audit engagements of a similar
nature and complexity through appropriate training and participation.
• Understanding of professional standards and applicable legal and regulatory
requirements.
• Technical expertise, including expertise with relevant information technology and
specialized areas of accounting or auditing.
• Knowledge of relevant industries in which the client operates.
• Ability to apply professional judgment.
• Understanding of the firm’s quality management policies and procedures specific
to Public Sector Entities.
• Having skills that are necessary to discharge the terms of the audit mandate in a
particular jurisdiction. Such competence may include an understanding of the
applicable reporting arrangements, including reporting to the legislature or other
governing body or in the public interest.
• Having a wider scope of a public sector audit that may include, for example, some
aspects of performance auditing or a comprehensive assessment of compliance
with law, regulation or other authority and preventing and detecting fraud and
corruption.
(Any 5 points @ 1 mark each = 5 marks)

Direction of the engagement team involves informing the members of the engagement
team of matters such as:
• Their responsibilities, including the need to comply with relevant ethical requirements,
and to plan and perform an audit with professional skepticism.
• Responsibilities of respective partners where more than one partner is involved in the
conduct of an audit engagement.
• The objectives of the work to be performed.
 • The nature of the entity’s business.
• Risk-related issues.
• Problems that may arise.
• The detailed approach to the performance of the engagement.
• Discussion among members of the engagement team allows less experienced team
members to raise questions with more experienced team members so that appropriate
communication can occur within the engagement team

QUESTION 13
Governments, through Parliament levy and collect taxes from the Citizens of their
countries. The taxes collected must be used in providing services to the citizenry. The
tax payer must be assured that taxes paid are used and accounted for transparently.
Supreme Audit Institutions (SAI) are set up under their countries constitutions to carry
out audits of Public funds on behalf of the citizens. According to INTOSAI-P 12: The
Value and Benefits of Supreme Audit Institutions – making a difference to the lives of
citizens, the extent to which a SAI is able to make a difference to the lives of citizens
depends on the SAI:
i) Strengthening the accountability, transparency and integrity of government and
public sector entities;
ii) Being a model organisation through leading by example.
iii) Demonstrating ongoing relevance to citizens, Parliament and other stakeholders;
and
Required:
Discuss THREE (3) principles under each of the headings (i-iii). (10 marks)

Suggested Solution
a) The Principles are grouped under three main headings.
i) Strengthening the accountability, transparency and integrity of government and
public sector entities Principles:
• Safeguarding the independence of SAIs – ensuring that the operations of the SAI’s are
out of government control.
• Carrying out audits to ensure that government and public sector entities are held
accountable for their stewardship over, and use of, public resources.
• Enabling those charged with public sector governance to discharge their responsibilities
in responding to audit findings and recommendations and taking appropriate corrective
action (follow up)
• Reporting on audit results and thereby enabling the public to hold government and
public sector entities accountable.

ii) Being a model organization through leading by example Principle

• Ensuring appropriate transparency and accountability of SAI.
• Ensuring good governance of SAIs.
• Complying with the SAI’s Code of Ethics.
• Striving for service excellence and quality.
• Capacity building through promoting learning and knowledge sharing
iii) Demonstrating ongoing relevance to citizens, Parliament and other stakeholders
Principles
• Being responsive to changing environments and emerging risks.
• SAIs must be independent and have the rights (and obligations) to perform
their role.
• Communicating effectively with stakeholders, Audit reports should be made
available to the public.
• SAI must be effective by undertake audits of;
✓ financial and (where appropriate) non-financial information,
✓ performance audits
✓ compliance audits; and
✓ they should respond to the risks of financial impropriety, fraud and
corruption.
• SAI should be Trustworthy

Questions 14
D3 Evaluating evidence, Concluding and reporting on an engagement
You are the manager responsible for the audit of Group PLC, a listed company
specialising in the manufacture and installation of sound -proof partitions for domestic
and industrial buildings. The following matters came up during the audit of the
Company.

The company has an accounting policy where if the installations is done in a new
building, there is an after installation services. However, the customer pays the full
amount which covers the installation and the after installation services at the time the
contract is concluded. Management then use judgment to split the amount into earned
revenue which revenue for the year under audit is significant.

Also, the Group caried out an annual impairment test on goodwill. The impairment was
GHS 100,000 and the total assets of the company was GHS 1,000,000. Also,
management used a complex assessment process with high judgment based on
difficult assumptions, which are likely to be affected by the unpredictable market
conditions of Ghana. There are no misstatements from the above transaction.

Required
a. Draft an extract audit report to the members of Group PLC in line with the
relevant auditing standard. (16 marks)
b. According to the definition of Public Interest Entities by the Institute of
Chartered Accountants, Ghana, list four entities that are public interest entities
which must apply key audit matter in their audit report (4 marks)
Suggested solution

Key Audit Matters

Key audit matters are those matters that, in our professional judgment, were of most
significance in our audit of the financial statements of the current period. These
matters were addressed in the context of our audit of the financial statements as a
whole, and in forming our opinion thereon, and we do not provide a separate opinion
on these matters.

Revenue Recognition - Installation and After Installation Services

The Group recognizes revenue from the sale of soundproof partitions and related after-
installation services in domestic and industrial buildings. The Group has an accounting
policy where the customer pays the full amount, covering both installation and after-
installation services at the time the contract is concluded. Management exercises
significant judgment to split the total contract amount into earned revenue. The
revenue for the year under audit is significant to the financial statement and the audit.
Also, the management use judgment in allocating revenue to each component of the
contract could materially impact the timing of revenue recognition.

How Our Audit Addressed the Key Audit Matter

Our audit procedures included, among others, assessing the design and
implementation of controls over the revenue recognition process. We evaluated the
appropriateness of management's judgment in determining the allocation of revenue
between installation and after-installation services. We also tested the split between
earned and unearned revenue by reviewing a sample of contracts and recalculating
the proportion allocated to installation services completed during the year. We
assessed whether the allocation of revenue was in line with the requirements of IFRS
15 Revenue from Contracts. We reviewed the methodology and assumptions applied
by management for allocating revenue between installation services and after-
installation services. We selected a sample of contracts, focusing on those that were
significant or unusual. For each sample, we reviewed the related documentation to
confirm that the allocation of revenue between installation and after-installation
services was appropriate. Additionally, we verified whether the portion of revenue
recognized in the current period corresponded to services that had been delivered by
year-end.

Goodwill – Impairment Assessment

The Group carried out an annual impairment test on goodwill in accordance with IAS
36 Impairment of Assets. The impairment charge for the year was GHS 100,000,
representing 10% of the total assets of the Group.
The impairment test was considered a key audit matter because of the complexity of
management's assessment process, which involves significant judgment and is based
on assumptions about future market conditions in Ghana. These assumptions include
future revenue growth and discount rates, which are highly judgmental and sensitive
to changes in market conditions.

How Our Audit Addressed the Key Audit Matter

We involved our internal valuation experts to assist us in evaluating the assumptions
and methodologies used by management in the impairment test, particularly those
relating to forecasted revenue growth, profit margins, and discount rates. We tested
the key assumptions by comparing them with externally available market data and
industry benchmarks. We also reviewed the adequacy of the disclosures related to the
impairment assessment, including the sensitivity of the impairment test to changes in
key assumptions. We involved our valuation experts to assist in evaluating the
reasonableness of the assumptions used by management, including future revenue
growth rates, profit margins, and discount rates. These assumptions were compared
with historical performance data and industry benchmarks to ensure they were not
overly optimistic or inconsistent with external market conditions.

QUESTION 15
IAS 24 Related Party Disclosures requires disclosures about transactions and
outstanding balances with an entity's related parties. The standard defines various
classes of entities and people as related parties and sets out the disclosures required
in respect of those parties, including the compensation of key management personnel.
On the other hand, ISA 550, which is mainly procedural, focus more on the
identification and assessment of risks of material misstatement associated with related
party relationships and transactions, and performing appropriate procedures to
respond to such risks. You are the audit manager with Expert & Associates, a firm of
Chartered Certified Accountants. You are currently supervising a Senior Associate who
is a member of your team in charge of auditing related party transactions. You
overheard the Senior Associate stating that to his friends in a conversation that the
audit of related party transactions generally carry with it some difficulties. He also
stated that it even difficult to know which evidence should be obtained that will be
sufficient and appropriate to support the audit report on the financial statements.
Required:
In respect of the audit of, and evaluation of audit evidence on related party
transactions;
i. State and explain five difficulties associated with the audit of related party
transactions, and (16 marks)
ii. the impact on the audit report for non-disclosure of related party transactions.
(4 marks)
(Total: 20 marks)
Suggested Solution
Eight Difficulties Associated with the Audit of Related Party Transactions
• Related Party Transactions May Be Concealed for Fraudulent
Purposes: Management may intentionally conceal related party transactions
to commit fraud or hide improper dealings. Such transactions might be
structured in ways that are designed to avoid detection by auditors. For
example, they may involve off-balance sheet entities or complex corporate
structures that obscure the true nature of the transactions. If related party
transactions are concealed, auditors face challenges in identifying these
transactions and assessing their impact on the financial statements.
• The Director May Be Reluctant to Disclose to the Auditor: Directors may
have personal or financial ties to related parties, which might create conflicts of
interest. This conflict may lead directors to withhold important information from
the auditor, especially if they believe that disclosing the transaction could raise
concerns about impropriety or poor governance. Reluctance to disclose
information can prevent auditors from obtaining sufficient and appropriate
evidence, leading to incomplete audit procedures.
• Materiality is a Difficult Concept to Apply to Related Party
Transactions: Materiality refers to the significance of an item in the context
of the financial statements. Applying materiality to related party transactions
can be challenging because even small transactions, if they involve conflicts of
interest or manipulation, could have a significant impact on decision-making.
Related party transactions, even when immaterial in monetary terms, may still
be significant because they could influence the financial health or integrity of
the business. Auditors may struggle to define an appropriate threshold for
materiality in such cases.
• Difficulty in Identifying Related Parties: Related parties may not always
be clearly identifiable due to complex corporate structures, subsidiaries, joint
ventures, or off-balance sheet entities. There may be hidden relationships that
management does not disclose, which makes it difficult for auditors to identify
all the related parties and related transactions.
• Related Party Transactions May Not Be Easy to Identify from the
Accounting System: Many accounting systems are not set up to automatically
identify and track related party transactions. When related party transactions
are not flagged or tracked separately, they can be difficult for auditors to
identify. Auditors may need to perform additional manual procedures or request
management to conduct detailed analyses to identify these transactions.
Without these extra steps, related party transactions can be missed, making it
challenging for auditors to verify their completeness and accuracy in the
financial statements.
• Lack of Documentation: Related party transactions may lack formal
documentation or agreements, making it difficult for auditors to assess the
validity and accuracy of the transactions. Without adequate documentation,
auditors face challenges in verifying that the transactions are legitimate and
properly accounted for in the financial statements.
 • Management Bias: There is a high risk of management bias or intentional
manipulation in related party transactions. Since these transactions often
involve close relationships with the company, management may manipulate
financial records to make it difficult to identify.
• Valuation of Transactions using Arm length standard: Related party
transactions often occur at prices or terms that differ from market conditions,
making it difficult for auditors to determine whether the transaction was
conducted at arm’s length. This creates complexities in verifying the accuracy
of the recorded amounts and ensuring the proper valuation of assets or
liabilities involved in the transactions.
• Intercompany Transactions: In groups of companies, transactions between
parent companies and subsidiaries or between sister companies can be
frequent, with complex terms and pricing arrangements. These intercompany
transactions may not always be straightforward, and tracking the flow of
transactions across multiple entities and reconciling balances can be difficult for
the auditor.

ii. Impact on the Audit Report for Non-Disclosure of Related Party

Transactions
• Modified Qualified or Adverse Opinion:
If the auditor concludes that the omission or non-disclosure of related party
transactions is material to the financial statements, the auditor may issue a
qualified opinion if the non-disclosure is material but not pervasive. If the
non-disclosure is both material and pervasive, the auditor may issue an
adverse opinion, stating that the financial statements do not present a true
and fair view.
• Basis of Qualified opinion or Basis of Adverse Opinion Paragraph:
When the auditor issues a qualified or adverse opinion, they must include
a Basis for Qualified Opinion or Basis for Adverse Opinion paragraph in
the audit report. This section provides a clear and specific explanation of why
the opinion has been modified and the nature of the problem. The Basis for
Qualified Opinion paragraph is included when the non-disclosure or omission
of related party transactions is material but not pervasive. It outlines the
specific issues causing the qualified opinion and how it impacts the financial
statements. The Basis for Adverse Opinion paragraph is used when the non-
disclosure is material and pervasive, meaning the issue affects the financial
statements so significantly that they do not give a true and fair view. The
paragraph details the reason for the adverse opinion and the extent of the
misstatement. This section ensures transparency in the audit report by
informing the users about the underlying reasons for the auditor’s decision to
modify the opinion.
QUESTION 16
Your client Jack Partners & Co which is a listed financial institution offering loans and
credit facilities to both commercial and retail customers. You have received an email
from the audit supervisor who is currently supervising interim testing on internal
controls in relation to the audit for the year ending 31 October 2021. The email gives
the following details for your consideration;
One of the audit team members, Janette Stott, has provisionally agreed to take out a
loan with Jack Partners & Co to finance the purchase of a domestic residence. The
loan will be secured on the property and the client’s business manager has promised
Janette that he will ensure that she gets ‘the very best deal which the bank can offer.
The payroll manager at Jack Partners & Co has asked the audit supervisor if it would
be possible for Abubaka & Co to provide a member of staff on secondment to work in
the payroll department. The payroll manager has struggled to recruit a new supervisor
for the organisation’s main payroll system and wants to assign a qualified member of
the audit firm’s staff for an initial period of six months.
Required:
Comment on the ethical and professional issues raised in respect of the audit of Jack
Partners & Co and recommend any actions to be taken by the audit firm. (10 marks)

Suggested Solution
a. Ethical and professional issues and actions to be taken by the audit firm
Loan to member of the audit team
• According to the IESBA Code of Ethics for Professional Accountants (the Code),
a loan to a member of the audit team may create a threat to the auditor’s
independence. If the loan is not made under normal lending procedures, and
terms and conditions, a self-interest threat would be created as a result of
Janette Stott’s financial interest in the audit client.
• The self interest threat arises because of the potential personal benefit derived
which may motivate the audit team member to behave in a manner aimed at
protecting that benefit. Such a threat would be so significant that no safeguards
could reduce the threat to an acceptable level. It follows therefore that the audit
team member should not accept such a loan or guarantee.
• The Code, however, also states that a loan from an audit client which is a bank
or similar institution to a member of the audit team which is made under normal
lending procedures, is acceptable. Examples of such loans include home
mortgages, car loans and credit card balances.
• It is possible therefore that the secured loan may be ethically acceptable and
the key issue is whether ‘the very best terms which the bank can offer’ fall
within Jack Partners & Co ’s normal lending procedures, and terms and
conditions. The bank’s standard lending terms and conditions should be
obtained and reviewed alongside the documentation for Janette Stott’s loan.
 • Ultimately, the audit engagement partner is responsible for ensuring that ethical
principles are not breached, so the partner should be involved with the
discussions. The matter should be discussed with Janette and the client’s
business manager in order to establish whether the loan is to be made under
the bank’s normal lending procedures.
• Janette should be advised of the outcome of the review and Jack Partners & Co
’s business manager should be advised of this decision, explaining the rationale
and ethical rules behind it.

Temporary staff assignment

• The Code states that the lending of staff to an audit client may create a self-
review threat to auditor independence.
• The self-review threat arises when an auditor reviews work which they
themselves have previously performed – for example, if the external auditor is
involved in the process of preparing the payroll figures for inclusion in the
financial statements and then audits them. As a result, there is a risk that the
auditor would not be sufficiently objective in performing the audit and may fail
to identify any shortcomings in their own work.
• In addition, there is a risk of the staff member assuming management
responsibilities if they are involved in making judgments and decisions which
are the remit of management.
• Such assistance can only therefore be given for a short period of time and the
audit firm’s staff must not assume management responsibilities and must not
be involved in any activities specifically prohibited.
• According to the Code, an audit firm cannot provide accounting and
bookkeeping services (including payroll) to an audit client which is a public
interest entity unless the services relate to matters which are collectively
immaterial to the financial statements.
• In this case Jack Partners & Co is a listed bank and is therefore a public interest
entity. The assignment of a qualified member of staff as a supervisor on the
client’s main payroll system is likely to be material to the financial statements
of a service industry client such as a bank and in addition, may also involve
management responsibilities.
• The audit manager should therefore discuss details of the proposed role of the
seconded member of staff with the payroll manager and other key client
contacts in order to establish the significance of the role and its materiality to
the financial statements.
• Assuming that the role is material, the audit manager should decline the
proposed staff assignment
QUESTION 17
Blue Rose Construction Ltd. A civil engineering company has a chartered accountant
as its Financial Controller. The company has completed its financial statements for
the year ended August 31, 2021 and has called in the auditors, Nii and Associates, to
begin the audit. On the Income Statement is an item Donation – GH¢80,000. The
notes to the accounts stated that Donation was composed of the items listed below:

Donation GH¢
Contribution to Peoples’ Alliance Party (PAP) (Political Party) 50,000
Fuel for use of the Financial Controller’s official vehicle for Political 20,000
Campaign
Contribution to Osu Children Homes 10,000

Investigation revealed that the Financial Controller is running for parliamentary

elections in his Constituency on the ticket of the Peoples’ Alliance Party (PAP).
Required:
I. Comment on the professional ethical implications of the Financial Controller’s
behaviour. (4 marks)
II. Describe the proper disclosure of the Donation in the financial statements
especially for tax purpose. (1 marks)

Suggested Solution
Professional ethical implications of the Financial Controller’s behaviour
• An accountant in public practice should not engage in any business, occupation
or activity that impairs or might impair integrity, objectivity or the good
reputation of the profession.
• the fundamental principles of the Code of Professional Ethics for professional
accountants require accountants to comply with the principles of integrity and
objectivity.
• The principle of integrity imposes an obligation on all accountants to be
straightforward and honest in professional and business relationship. Integrity
also implies fair dealing and truthfulness.
• The principle of objectivity imposes an obligation on all accountants not to allow
bias, conflict of interest or undue influence of others to override professional or
business judgments.
• The Financial Controller of Blue Rose Construction Ltd has behaved in
contravention of the fundamental principles of integrity and objectivity. He has
been dishonest in his business relationship for using his company’s assets for
his political purpose.
• There is also conflict of interest threat to objectivity as his political interest
conflicts with his business interest.
• The safeguard for this threat to objectivity is for him to withdraw from his
business relationship and pursue the political interest.
aii. Disclosure of Donation
The proper disclosure of the Donation should be:
Donation - GHC10,000

Note: The donation was a contribution to the Osu Children Home. (1 mark)

QUESTION 18
You have commenced the audit of Atika Ltd, a company involved in the importation
and sale of plumbing materials. As part of the audit, you have noticed the following:
1) Atika Ltd does not pay its suppliers in Germany through the bank. It relies mostly
on the black market for the transfer of funds to its suppliers.
2) Atika only sells its goods in Ghana.
3) On 25 March within the audit year, there was a cash deposit of US$2,500,000.00
into the forex account of Atika Ltd.
4) On 30 March the company transferred the following:
• US$499,999.99 to an unknown account in Cameroun
• US$399,999.99 to an unknown account in Kenya
• US$499,999.99 to an unknown account in Niger
• US$250,000.00 to the personal account of the Managing Director
• US$150,000.00 to an unknown company.

5) The company’s general ledger shows a revenue of GH¢1,560,000.00. The import

documentations show purchases of GH¢36,000,000.00. There is no evidence of
payment for the goods from Atika Ltd’s bank accounts.
6) The closing inventory amounted to GH¢2,145,200.00

The Audit Manager has raised the issue of money laundering considering the nature
of the transactions above.
Required: As the Partner on the engagement,
i) Explain to the team members the various stages of money laundering and show
how the above transactions confirms the client’s engagement in money
laundering. (6 marks)
ii) What are the obligations on the firm for money laundering? (4 marks)

Suggested Solution
i) The three stages of money laundering are as follows;
Placement: This is when the criminal places illegal cash in what appears to be
a legitimate business transaction. The deposit of US$ 2,500,000 into the forex
account of the company may suggest the placement of illegal proceeds into the
company.
Layering: In this stage, the funds move through several transactions or ‘layers’.
The transactions will be complex and may move the funds between different
countries to make the source of the illegal funds more difficult. The transfers on
the 30 March suggests the layering of the funds.

Integration: In this final stage, the funds are moved back into the economy to
convert them into a legitimate form. The purchase of goods suggests the
integration of the funds back into the economy.
(3 points @ 2 mark each = 6 marks)

ii) Obligations on firms regarding money laundering:

• Appoint a money laundering reporting officer whose responsibility is to receive
reports on suspected money laundering activities from other employees and report
them to the appropriate authorities.
• Establish procedures with the firm for reporting any suspicion of money laundering
by client companies.
• Training and educating staff in procedures for detecting and reporting suspicions of
money laundering activities.
• Put in place systems, controls and procedures to ensure that the firm is not used for
money laundering purposes.
(4 points @ 1 mark each = 4 marks)