SOLUTION ADVANCED AUDIT AND PROFESSIONAL ETHICS MAY...
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SOLUTION ADVANCED AUDIT AND PROFESSIONAL ETHICS MAY 2011
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QUESTION 1
(a) Professional Competence and Due Care- involves:
i. Maintaining professional knowledge and skill at the level required to ensure that a
client receives competent professional services based on current developments in
practice, legislation and techniques; and
Competent professional services require the exercise of sound judgment in
applying professional knowledge and skill in the performance of such service.
Professional competence may be divided into two separate phases:
(a) Attainment of professional competence such as knowledge of the technical
skills for the particular client’s(Oil and Gas) industry by attendance at
seminars for all level of client on the assignment; and
(b) Maintenance of professional competence by attending Continuing
Professional Development (CPD) courses to ensure you maintain and update
your technical knowledge in the relevant client’s industry.
CPD enables a professional accountant to develop and maintain the
capabilities to perform competently within the professional environment.
ii. Acting diligently and in accordance with applicable technical and professional
standards (in particular IFRS and ISAs)
(a) Diligence encompasses the responsibility to act in accordance with the
requirements of an assignment, carefully, thoroughly and on a timely basis.
This must include all staff on the assignment.
(b) It also involves responding in a timely manner to client requests.
iii. A professional accountant shall take reasonable steps to ensure that those working
under the professional accountant’s authority in a professional capacity have
appropriate training and supervision.
iv. Where appropriate, a professional accountant shall make client’s employers or
other users of accountant’s professional services aware of limitations inherent in
the services.
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(b) A professional accountant in public practice who is asked to replace another professional
accountant in public practice, or who is considering tendering for an engagement
currently held by another professional accountant in public practice.
1. Shall determine whether there are any reasons, professional or otherwise, for not
accepting the engagement, such as circumstances that create threats to compliance
with the fundamental principles of Code of Ethics for professional Accountants –
Integrity
Objectivity
Professional Competence and Due Care
Confidentiality
Professional Behaviour
That cannot be eliminated or reduced to an acceptable level by the application of
safeguards.
2. Shall evaluate the significance of any threats.
Depending on the nature of the engagement, this may require direct communication with
the existing accountant to establish the facts and circumstances regarding the proposed
changes so that the professional accountant in public practice can decide whether it
would be appropriate to accept the engagement. For example, the apparent reasons for the
change in appointment may not fully reflect the facts and may indicate disagreements
with the existing accountant that may influence the decision to accept the appointment.
3. Shall apply safeguards when necessary to eliminate any threats or reduce them to an
acceptable level. Example of such safeguards includes.
When replying to requests to submit tenders, stating in the tender that, before
accepting the engagement, contact with the existing accountant will be requested
so that enquiries may be made as to whether there are any professional or other
reasons why the appointment should be accepted.
Asking the existing accountant to provide known information or any facts or
circumstances that, in the existing accountant’s opinion, the proposed accountant
needs to be aware of before deciding whether to accept the engagement; or
Obtaining necessary information from other sources.
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4. Shall decline the engagement when the threats cannot be eliminated or reduced to an
acceptable level through the application of safeguards, a professional accountant in
public practice , unless there is satisfaction as to necessary facts by other means
5. If the proposed accountant is unable to communicate with eth existing accountant, the
proposed or the permission to existing accountant to communicate freely with him is
denied by the client, the proposed accountant shall take reasonable steps to obtain
information about any possible threats by other means, such as through inquiries of
third parties or background investigations of senior management or those charged
with governance of clients.
ISA 315 requires that auditors consider the entity’s process for assessing it own business
risk, and the impact that might have on the audit in terms of material misstatement.
i. Explain the difference and the link business risk and audit risk;
ii. Assess the impact of eight business risk issues and the audit risk and
iii. For each risk issue in (ii) above, discuss the impact it could have on the audit and
thus the audit approach you might have to adopt.
(i.) To achieve its main objective of increasing shareholder value, entities have to
undertake a number of business transactions. In each business transaction a
business undertakes, there are chances that it might gain or lose, and business risk
is a measure of chances a business faces in whether it would make a gain or loss.
Business risk is thus risk that something would go wrong in the day –today operations of a
business.
Audit risk is the risk that the auditor will arrive at an appropriate audit opinion.
Each business risk factor has one or more financial statement implications and thus lead to
one or more audit risk.
ISA 315 requirement that auditors consider the entity’s process for assessing its own business
risks, and the impact that might have on the audit in terms of material misstatement mean
that for every principal business risk factor the business faces, the auditor should identify
financial statement implication(s) and decide on the impact that could have on the auditors
opinion.
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(ii.)
Business risk issues identifiable in the
preamble
Impact on Audit and Audit Approach
1. Relatively new business started in March
2008.
There are no historical records for
comparison in analytical procedure-more test
of transactions.
2. Oil and Gas industry is new in Ghana. There are no local industry records for
comparison in analytical procedure-more test
of transactions.
3. Large decrease (over 80%) in turnover. Needs to assess the applicability of Going-
concern.
4. Yearend accounts receivable balance was
about 76% (2008: only 23% ) of annual sales
Receivability of account receivable is in
great doubt due to large increase.
5. All Accounts receivable owed by the one
customer, Stated-owned enterprise
Sated-owned enterprises have no regular
patterns of payment, recoverability is
doubtful.
6. Disputes with the clients over invoicing
errors
Accuracy of sales and valuation of receivable
must be given attention.
7. The accountant only assumed the position
in September 2009.
Accuracy of financial statements is doubtful.
8. He was third accountant since the
company started its operations in April 2008
High staff turnover in finance department-
accuracy, completeness and validity of
accounts.
9. The immediate supervisor of the
accountant is the Regional Accountant –
Africa, based in Johannesburg, South Africa.
Same as above.
10. Many intra-group transactions with other
Accelero Group companies in other parts of
the world.
Related party transactions may not be at
arm’s length.
11. The financial statement of the company
for 2008 was audited by the local office of a
big four international audit firm in 2008.
Our firm is new to the client and may lack
experience in the Oils & Gas industry-
knowledge of clients business and industry.
12. There is a strict deadline for completing
the audit for consolidation by a group auditor
in the UK.
Strict audit deadline also means strict
deadline for completing accounting entries,
accuracy, and completeness of accounting
financial statements.
13. The financial statements will be
consolidated into a group FS in the UK-
IFRS.
Accountant’s (and our own staff) experience
in IFRS.
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QUESTION 2
(a)
A. Financial indicators
1. Net liabilities or net current liability position.
2. Fixed-term borrowings approaching maturity realistic prospects of renewal or
repayment, or excessive reliance on short-term borrowings.
3. Major debt repayment falling due where refinancing is necessary to the entity’s
continued existence.
4. Major restructuring of debt.
5. Indications of withdrawal of financial support by leaders.
6. Negative operating cash flows indicated by historical or prospective financial
statements.
7. Adverse key financial ratios.
8. Substantial operating losses or significant deterioration in the value assets used to
generating cash flow.
9. Arrears or discontinuance of dividends.
10. Inability to pay suppliers on due dates.
11. Inability to comply with terms of loan agreements.
12. Change from credit to cash-on-delivery transactions with suppliers.
13. Inability to obtain financing for essential new product development or other essential
investments.
14. Substantial sales of non-current assets not included to be replaced.
B Operating indication
1. Loss of key management without replacement.
2. Loss of a major market, franchises, license, or principal supplier.
3. Labour difficulties or shortages of important supplies.
C Other indications
1. Non-compliance with capital or other statutory requirements.
2. Pending legal proceedings against the entity that may, if successful, result in
judgments that could not be met.
3. Changes in legislation or government policy.
(b) Management representation is usually obtained on general, specific matters and also on
matters material to the financial statements, both unsolicited and in response to specific
questions.
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Especially on matter where other sufficient appropriate audit evidence cannot reasonably
be expected to exist. (ISA 580)
1. Whether the amount owed to Boafo Yena Bank, when taken out, ensure that the
technical insolvency situation of the company is reversed.
2. Obtain legal opinion on whether the wording of the comfort letter makes it sufficient
to remove the going-concern problem.
3. Confirm the authenticity of the letter from the directors of Boafo Yena Bank.
4. Confirm from minutes of director’s meetings that they have accepted the letter from
Boafo Yena Bank and have note its intended use as a solution for the going concern
problem.
5. Confirm from its latest annual financial statements, latest industry and other sources
whether Boafo Yena Bank has the financial strength to support the company as it has
said in the letter.
6. Review minutes of director’s meetings for other plans they have for resolving the
going-concern as a whole and the part this letter plays in the whole scheme of things.
7. Review the other plans and request for evidence of where director’s hope to obtain
the financial and other resources to implement the other plans apart from Boafo Yena
Bank.
(c.) i. Opinion
In our opinion the financial statements give a true and fair view of the financial position of PSK
Insurance Company Limited as of 31st December, and of its financial statements performance
and its cash flow for the year ended in accordance with International Financial Standards.
i. ISA 560.6 The auditor shall perform procedures designed to obtain appropriate sufficient
evidence that all events occurring between the date of the financial statements and the
date of the auditor’s report that require adjustment of (Adjustment events – that were in
existence before end of year and for which events after the date of the financial
statements have made clear.), disclosure in (Disclosure events, those that occurred only
after the date of financial statements), the financial statements have been identified. The
ISA recommends that these procedures be performed as close as possible to the date of
the audit report.
1. Enquire of management on the status of items involving subjective judgement or
accounted for using preliminary data including the following:
New commitment, borrowing, or guarantees.
Sales or destruction of assets.
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Issues of shares or changes in business structure.
Developments involving risk areas, provisions, and contingencies
Unusual accounting adjustments.
Major events (e.g. going concern problems) affecting the appropriateness of
accounting policies for estimates.
2. Consider the procedure management uses to identify subsequent events.
3. Read minutes of general board/ committee meetings.
4. Read minutes of minutes of management meetings
5. Review latest accounting records (management accounts) and financial information.
6. When any issues are identified, determine that they are properly reflected as required.
7. Require that managements includes in the written management representation that all
events occurring subsequent to date of the financial statement which require adjustment
or disclosure have been adjusted or disclosed.
QUESTION 3
(a.)
(i.) & (ii.)
CONTROL AUDIT TEST
1.The data centre must have the two identical
servers – Test (for developers/programmers)
and Production (actual business)
environment/servers
Servers must have controlled environment
with automatic fire detectors with automatic
fire detectors, fire extinguishers,
uninterrupted power supply (UPS) and
controlled entrance.
Visit the server room/data centre and observe
the conditions, availability of identical
Test/Production environments and request
access to the Test environment for the online
test.
2. Transaction confidentiality and integrity of
the website itself by means of firewalls.
Perform a penetration test of trying to enter
the website without use of a password.
3. Protection of information from viruses by
the use of updated antivirus protection.
Determine whether a strong antivirus is in
use and that it is always updated.
4. Use of intrusion detection technology. Determine whether there is a limit to a
number of time an unauthorized password is
allowed before being cut off and that the
incident is recorded for the attention of
system security manager.
5. Continous update and enhancement of
system software.
Check that the system used is the latest
version from the supplier’s website.
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6. A back up and re-start system to ensure
that any process that is in progress that is in
progress when there is a system failure can be
continued and brought to a successful end
when the system is restored.
Check that resetting system by means of
power cut, etc and check that any transaction
which is uncompleted is re-set and no partly
completed transactions are recorded.
7. Security of the standing data (e.g. prices of
items for sale) on the website.
Determine whether an authorized user can
change sensitive standing data likes prices,
item codes, tec.
8. Strict logical separation of the e-commerce
website from information on the internal
communication system (intranet) of the
company to ensure information for internal
distribution does not get into public domain.
Determine whether a user on the e-
commerce site could be extract information
from intranet.
9. Authentication of credit cards. Determine whether an invalid (self generated
) credit card number or any other bank
card(not credit/debit)number can be used to
generate a transaction on site.
10. Authentication of cardholder, using the
personal code (PIN) verification
Determine whether a credit card can be used
without the need to input the PIN.
11. Authentication of merchant (authorized
seller the cardholder is buying from)
Determine if all transactions on the website
result in a credit/debit to the company by
using a credit card to input transactions.
(b)
i. Audit approach to be used will indicate that the candidate knows the basic
distinction between fraud and error in an information system.
Fraud is the intentional use of deception to obtain an unjust or illegal
financial advantage in the system, and
Error is unintentional mistake in the system.
If it is fraud, we would expect that certain cards (of fraudsters0 would be used or
the system repeatedly; while
If it is error, the customers would not aware of the error and would have the
correct prices of items and correct total cost charged to their account.
ii. Audit tests;
Use test data to input transaction in the test environment to determine if:
1. Prices of items can be manipulated on the system by users.
2. Quantity of items ordered multiplied by system price is displayed correctly on
the system.
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3. Totals cost of items ordered is calculated correctly on the system.
4. Correct total cost is debited to cardholder’s account before transaction is
terminated on the system.
5. System can identify and reject invalid credit and/or debit cards/card numbers.
6. System is able to record cardholder designated address for the correct
quantities of all items debit to their account to be dispatched to their
addresses.
7. System posts correct debited to cardholders’ account as accredit to the sales
account.
8. Credit card account of the company is also credited with the cost of items
ordered.
9. System performs reconciliations for quantities of all inventory items daily
showing:
Opening quantity xxx
Quantity ordered (xxx) @ selling price $yyy = $zzz
Closing quantity xxx
Quantity ordered would then be traced to individual orders in the period, and
totals in period will equal the sum of the individual item sales $zzz shown above
for all inventory items in the system.
10. There is regular physical stocktaking of inventory and actual quantities of
inventory are compared with system quantities and any differences can only
be corrected on the system by the appropriately designated official who has no
incompatible inventory duty after the appropriate approvals have been
obtained.
11. The system shows any errors in any of Tests 1 to 6, it could be errors on the
system that users could take advantage of (and so become fraud),
12. The system shows errors in Test 7 to 10 above, it would errors in processing
logic that may only lead to losses to company without any advantage to
customers, genuine errors in the system.
(c )
1. Recent reports of oils spill in other oilfields e.g. BP spill off the Gulf of Mexico in
Louisiana, USA, (and even in Ghana (in minor quantities, though) and the reports on
the effects on the coastal dwellers and their fishing and other means of economic
livelihood makes this a topical issue.
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2. Auditors have come to realize that we do not have to take the shareholders and
lenders of an enterprise into consideration in planning our audit but also to seek the
interests of other stakeholders.
The environment (impact of processes (primary)and of products (secondary)
Society (International, national and local and effect on the economy and
health)
Employees (their livelihood and personal safety while at work)
3. Social and environmental issues may present a risk to the company and thus to
shareholders investment which directors would need to mitigate as part of corporate
governance and risk management process.
4. Products of the company might fail to meet relevant standards or be harmful to user,
and substances discharged to environment either intentionally or by accident could be
above legally allowed limits and/ or cause harm to environment society.
5. This could lead to massive fines, compensation payments, bad publicity, boycotts,
loss of market share, etc which will affect shareholder’s investments.
6. Falling foul of law could led to fines, revocation of operation permits, etc. which will
affect shareholders investments.
7. Clearing of poor image, bad publicity could involve large fees which would affect
profit levels.
8. Strikes by employees, employee fatalities/accidents could lead to bad publicity, loss
of production and affect profit levels.
QUESTION 4
(a)
i.
1. Assessing the risks and identifying problems.
2. Planning and performing the audit effectively and efficiently.
3. The auditor makes judgments about matters throughout the course of the audit where
knowledge of the business is important, e.g.
4. Assessing inherent and control risks.
5. Considering business risk and management’s response thereto.
6. Developing the overall audit plan and audit programme.
7. Determining materiality level and assessing whether the materiality level chosen
remains appropriate.
8. Assessing audit evidence to establish its appropriateness and the validity of the
related financial statement assertions.
9. Evaluating accounting estimates and management representations.
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10. Identifying related parties and related party transactions.
11. Recognizing conflicting information e.g. contradictory representations.
12. Making informed enquiries and assessing the reasonableness of answers.
13. Considering the appropriate of accounting policies and financial statement
disclosures.
ii.
1. It avoids duplication of efforts.
2. It ensures that they are aware of each other’s plan to ensure they do not duplicate efforts.
3. It would ensure that the internal auditors would free to share their findings with the
external auditors if they so request.
4. It opens doors for open discussion between the heads for future fruitful discussions.
1. The work is performed by persons having adequate technical training and proficiency as
internal auditors.
2. The work of assistants is properly supervised, reviewed and documented.
3. Sufficient appropriate audit evidence is obtained to afford a reasonable basis for the
conclusions reached.
4. The conclusions reached are appropriate in the circumstance.
5. Any reports prepared by internal audit are consistent with the results of the work
performed.
6. Any expectations or unusual matters disclosed by internal are properly resolved.
7. Amendment to the external audit programme is required as a result of matters identified
by internal audit.
8. There is the need to test the work of internal audit to confirm its adequacy.
(b) 1 Share-based Payments
(i) Matters to consider
1. The share-based payment expense for the year is not individually material, it is only
2.5% of the tax; the related equity reserve is material to the statements of financial
position, 1.6% of total asset;
2. The nature of the shared-based payment must be determined;
3. The validation of the shares – if the company is public company, the valuation of ten
shares would be done by reference to the share price on the Ghana Stock Exchange
on the date of grant, otherwise a valuation must be done by an expert.
4. The terms of the share-based payment.
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5. The assumptions in terms of number of shares that will vest; and
6. The period of vesting.
(ii) Tests
1. Obtain a copy of the terms of the scheme and agree to details used in the calculation
of expense – number of related equity shares granted, the grant date, vesting date and
conditions attached to scheme.
2. If fair valuation of the shares have been performed, obtain a copy of the valuation
report and;
Review the assumptions for reasonableness.
Consider the professional qualifications and reputation of the expert.
3. Discuss with management, the assumptions about the number of share that will
finally vest and consider the reasonableness in the light of:
Latest budgets and forecast:
Board minutes on the resolution authorizing the share-based payment.
Any subsequent events on that might affect the number of executives or the
likelihood of achieving any performance target.
4. Reperform the calculation of the expense for the tear and related equity reserve.
2. Liability in respect of Guarantee to customers
The framework defines a liability as:
A present obligation of the entity arising from past events, the settlement of which is expected to
result in an outflow from the entity of resources embodying economic benefits.
The framework goes further to specify also the recognition criteria that a liability must meet
before they are recognized in financial statements
A liability is recognized in the balance sheet when
1. It is probable that an outflow of resources embodying benefits will result from the
settlement of a present obligation and
2. The amount at which the settlement will take place can be measured reliably.
We need to ask ourselves if the Warranty meets the definition of a liability as stated above.
Is it a present obligation? The answer is no. there is no obligation to pay anybody now and the
need to pay anyone on the warranty is only in the future if (and only if) any of the conditions
stated in the warranty arises.
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The next issue is that of recognition. Even if the warranty meet the definition of a liability, we
would not be able to recognize it on the balance sheet because though it is probable that an
outflow of resources embodying economic benefits will result from the settlement of an
obligation that could arise from the warrant, the amount at which the settlement will take place
cannot be measured at all, let alone reliably. It is only when the warranty arises that it might be
possible to measure the amount.
In conclusion, therefore the guarantee cannot be recorded as a liability on the balance sheet.
(ii.) In 2009 it must be treated as a note in the financial statements in accordance with IAS 37
Provisions, Contingent liabilities and Contingent Assets.
QUESTION 5
(a.)
Memo
From: Yenoyie and Co. Chartered Accountants.
To: The directors of Strategic Investments Ghana Limited
Date: dd/mm/yyy
Subject: As follows –
(i.) Money laundering is a process by which criminals attempt to conceal the true origin and
the ownership of the proceeds of their criminal activity, allowing them to maintain
control over the proceeds and finally providing legitimate cover for their sources of
income
(ii.)
1. Secrecy over some transactions.
2. Transactions routed through several jurisdictions/countries.
3. Excessive use of wire transfers
4. High value deposits or withdrawals not characteristic of the client.
5. Large cash (currency) or convertible bearer instruments (cash cheques).
6. Repeated deposits just below monitoring thresholds on the same day.
7. Pattern of repeating a deposit by writing of the same amount to another financial
institution.
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(iii.)
1. Appoint a Money Launderer Reporting Officer in the firm.
2. Train audit personnel to ensure that they understand and are aware of the relevant
legislation and can recognize and deal with potential ML risk factors.
3. Verify the identity of new and existing clients and maintain the evidence of
identification.
4. Maintain records of all client transactions.
5. Report all suspicious transactions to the Serious Fraud Office.
(b.)
1. Conflict of interest – investigating issues on which the auditors will also perform
statutory audit.
2. Payments for additional assignments could lead to undue influence from
management.
3. Familiarity threat – auditor becomes too familiar with client personnel due of
frequent interactions.
4. Objectivity – any perceived threat to independence and thus objectivity will
undermine the credibility of the report, it must be considered and auditor must
reject the appointment.
5. Profession behaviour – fraud cases can be in public ye in the company or even
outside it and any lapses in the professionalism could do serious damage to the
audit firm or the profession as a whole.
6. Integrity – since the job would require seeking to unravel some fraudulent
activities, the auditor must be above reproach to be able to accept the
appointment.
7. Professional competence and Due Care – the assignment requires special skills
the auditor must consider that he/she can discharge the responsibilities expected
before taking up the assignment.
(ii.)
1. Report will normally identify the person who commissioned it/ compared with
management in all it cases of normal audit investigation.
2. Reference is made to the instruction given to the investigator and the specific
assignment he/she was asked to perform.
3. Full list of document/materials on which report is based.
4. Factual evidence obtained is stated in chronological (time) order.
5. Technical terms used in the report may need to be explained to ensure those
would read the report can understand the findings well.
6. The opinion must be presented clearly and unambiguous terms giving reasons for
opinions reached.
7. List of references to relevant standards/ technical literature e.g.
Accounting/Auditing standards.
8. Where required, any guilty party’s contribution to any loss sustained by the entity
must be quantified in monetary terms.