Advantages

• Skills and experience
  International & Co is likely to have a large pool of staff available to provide the internal audit service to Proper Banking Limited. In addition, the audit firm is likely to have staff with specialist skills already available.
• Flexibility
  If the internal audit department is outsourced, Proper Banking Limited will have total flexibility in its internal audit service. Staff can be requested from International & Co to suit the company’s workloads and requirements. This will ensure that, when required, extra staff is readily available for as long or short a period as needed.
• Staffing
  Proper Banking Limited (PBL) wishes to expand its internal audit department in terms of size and specialist skills. If they outsource, then there will be no need to spend money in recruiting further staff as International & Co will provide the staff members.
• Immediate solution
  As the current internal audit department is small, then outsourcing can provide the number of staff needed straight away.
• Cost control and management
  Outsourcing can be an efficient means to control the costs of internal audit as any associated costs such as training will be eliminated as International & Co will train its own employees. In addition, the costs for the internal audit service will be agreed in advance. This will ensure that Proper Banking Limited can budget accordingly.

Disadvantages

• Confidentiality
  Knowledge of company systems and confidential data will be available to International & Co. Although the engagement letter would provide confidentiality clauses, this may not stop breaches of confidentiality.
• Loss of Control
  Proper Banking Limited currently has more control over the activities of its internal audit department; however, once outsourced it will need to discuss areas of work and timings well in advance with International & Co.
• Knowledge of company
  International & Co will allocate available staff members to work on the internal audit assignment; this may mean that each visit the staff members are different and hence they may not fully understand the systems of Proper Banking Limited. This will decrease the quality of the services provided and increase the time spent by Proper Banking Limited’s employees in explaining the system to the auditors.
• Existing internal audit department
  Proper Banking Limited has an existing internal audit department; if they cannot be redeployed elsewhere in the company, then they may need to be made redundant and this could be costly for Proper Banking Limited. Staff may oppose the outsourcing if it results in redundancies.
• Increased costs
  As well as the cost of potential redundancies, the internal audit fee charged by International & Co may over a period of time increase, proving to be very expensive.
• Loss of in-house skills
  If the current internal audit team is not deployed elsewhere in the company, valuable internal audit knowledge and experience may be lost. If Proper Banking Limited then decided at a future date to bring the service back in-house, this might prove to be too difficult.

International & Co
Advantages

• Additional fees for International & Co
  The audit firm will benefit from the internal audit service being outsourced as this will generate additional fee income. However, the firm will need to monitor the fees to ensure that they do not represent too high a percentage of their total fee income. As a public interest company, fee income should not represent more than 15% of gross practice income for two consecutive years.

Disadvantages

• Independence: If International & Co provides both external audit and internal audit services, there may be a self-review threat especially where the internal audit work is relied upon by the external audit team. The firm would need to take steps to ensure that separate teams are put in place as well as additional safeguards.

• Section 133 (a) confers upon the auditor the right of access to the records, books, of accounts and vouchers of the company. Books include minutes books of general meetings as well as meetings of the board.
• This right has been conferred upon the auditor to enable him to express an opinion on financial statement which are derived from the records, books of accounts and vouchers. Under the 5th schedule of the companies’ code 1963, Act 179, auditor has a duty to report whether the company’s balance sheet and profit and loss account are in agreement with books of accounts and return.
• In the present case, auditors have been denied the access to minute books. The auditors need minutes books of the meetings of the board and shareholders to verify/vouch transactions and decisions.
• Such a denial constitute a limitation on scope of audit. He may extend audit procedures and express a qualified opinion or disclaimer of opinion in his audit report.

Disqualification of an auditor. In order to ensure the independence of the auditor Section 270 and 296 of the companies’ code contain grounds for disqualification of an auditor of a public and private company respectively. According to the section a person who is a partner or who is in the employment of an officer or employee of the company is not qualified for being appointed as the auditor.
In the given case, Yaw Manu has been appointed as an auditor of Level Ltd in the annual general meeting. Subsequently, he has become a partner of Kwaku Assenso who is the Finance manager (employee) of Level Ltd. This is one of the grounds for disqualification. Therefore, Yaw Manu shall be deemed to have vacated office automatically.
The ethical issues that could be raised in the above scenario are:

• Independence
• Self Review
• Confidentiality
• Conflict of interest
• Objectivity
• Collusion

An assurance engagement is one in which a practitioner expresses a conclusion designed to enhance the degree of confidence of the intended users other than the responsible party about the subject matter information (that is, the outcome of the evaluation or measurement of a subject matter against criteria).

• A three party relationship – The three party are the intended user, the responsible party and the practitioner.
• A subject matter: This is the data to be evaluated that has been prepared by the responsible party. It can take many forms including financial performance (e.g. historical financial information, non-financial performance (e.g. key performance indicators), processes (e.g. internal control) and behavior (e.g. compliance with laws and regulations).
• Suitable criteria: The subject matter is evaluated or measured against criteria in order to reach opinion.
• Evidence: Sufficient appropriate evidence needs to be gathered to support the required level of assurance.
• An assurance report: A written report containing the practitioners’ opinion is issued to the intended user, in the form appropriated to a reasonable assurance engagement or a limited assurance engagement.

• Reasonable assurance engagement is where a high, but not absolute level of assurance is given. The object of a reasonable assurance engagement is a reduction in assurance engagement risk to an acceptably low level in the circumstances of the engagement as the basis for the assurance practitioner’s conclusion. The conclusion would usually be expressed in a positive form. In order to give reasonable assurance, a significant amount of testing and evaluation is required to support the conclusion.
  Limited assurance is a lower level of assurance. The nature, timing and extent of the procedures carried out by the practitioner in a limited assurance engagement would be limited compared with what is required in a reasonable assurance engagement. Nevertheless, the procedures performed should be planned to obtain a level of assurance which is meaningful in the practitioner’s professional judgment.
• For a limited assurance engagement the conclusion conveys whether, based on the procedures performed and evidence obtained, a matter (s) has come to the practitioner’s attention to cause the practitioner to believe the subject matter information is materially misstated. This would usually be expressed in a negative form of words.

The term ‘key audit matters’(KAM) is defined in ISA 701 as:
‘Those matters that, in the auditor’s professional judgment, were of most significance in the audit of the financial statements of the current period. Key audit matters are selected from matters communicated with those charged with governance.’

The objectives of ISA 701 are for the auditor to:

• determine those matters which are to be regarded as KAM; and
• communicate those matters in the auditor’s report.

The definition in paragraph 8 of ISA 701 states that KAM are selected from matters which are communicated with those charged with governance. Matters which are discussed with those charged with governance are then evaluated by the auditor who then determines those matters which required significant auditor attention during the course of the audit.

There are three matters which the ISA requires the auditor to take into account when making this determination:

• Areas which were considered to be susceptible to higher risks of material misstatement or which were deemed to be ‘significant risks’ in accordance with ISA 315 (Revised), Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and Its Environment.
• Significant auditor judgments in relation to areas of the financial statements that involved significant management judgment. This might include accounting estimates which have been identified by the auditor as having a high degree of estimation uncertainty.
• The effect on the audit of significant events or transactions that have taken place during the period. The auditor must determine which matters are of most significance in the audit of the financial statements and these will be regarded as KAM.

Once the auditor has determined which matters will be included as KAM, the auditor must ensure that each matter is appropriately described in the auditor’s report including a description of:

• Why the matter was determined to be one of most significance and therefore a key audit matter, and
• How the matter was addressed in the audit (which may include a description of the auditor’s approach, a brief overview of procedures performed with an indication of their outcome and any other key observations in respect of the matter).

• Existence
  Assets, liabilities and equity interests exist.
  Substantive procedures
  During the inventory count select a sample of assets recorded in the inventory records and agree to the warehouse to confirm the assets exist.
  Obtain a sample of pre year-end goods dispatch notes and agree that these finished goods are excluded from the inventory records.
• Rights and obligations
  The entity holds or controls the rights to assets, and liabilities are the obligations of the entity.
  Substantive procedures
  Confirm during the inventory count that any goods belonging to third parties are excluded from the inventory records and count.
  For year-end raw materials and finished goods confirm title belongs to the company by agreeing goods to a recent purchase invoice in the company name.
• Completeness
  All assets, liabilities and equity interests that should have been recorded have been recorded.
  Substantive procedures
  Obtain a copy of the inventory listing and agree the total to the general ledger and the financial statements.
  During the inventory count select a sample of goods physically present in the warehouse and confirm recorded in the inventory records.
• Valuation and allocation
  Assets, liabilities and equity interests are included in the financial statements at appropriate amounts and any resulting valuation or allocation adjustments are appropriately recorded.
  Substantive procedures
  Select a sample of goods in inventory at the year end, agree the cost per the records to a recent purchase invoice and ensure that the cost is correctly stated.
  Select a sample of year-end goods and review post year-end sales invoices to ascertain if net realisable value is above cost or if an adjustment is required.

Substantive procedures
Depreciation

• Review the reasonableness of the depreciation rates applied to the new capital expenditure and compare to industry averages.
• Review the capital expenditure plans of any plans by management to refurnish the restaurant facilities in less than 50 years which means the useful life is less than 50 years.
• Select a sample of building facilities and recalculate the depreciation charge to ensure that the non-current asset register is correct.
• Perform a proof in total calculation for the depreciation charged on the restaurant building facilities, discuss with management if significant fluctuations arise.
• Review the disclosure of the depreciation charges and policies in the draft financial statements.
  Food poisoning
• Review the correspondence from the customers claiming food poisoning to assess whether BDE Co has a present obligation as a result of a past event.
• Send an enquiry letter to the lawyers of BDE Co to obtain their view as to the probability of the claim being successful.
• Review board minutes to understand whether the directors believe that the claim will be successful or not.
• Review the post year-end period to assess whether any payments have been made to any of the claimants.
• Discuss with management as to whether they propose to include a contingent liability disclosure or not, consider the reasonableness of this.
• Obtain a written management representation confirming management’s view that the lawsuit is unlikely to be successful and hence no provision is required.
• Review the adequacy of any disclosures made in the financial statements for any material contingent liabilities.
                                                                                                                                                                                  (Any 3 points)

• Name of client – identifies the client being audited.
• Year-end date – identifies the year end to which the audit working papers relate.
• Subject – identifies the area of the financial statements that is being audited, the topic area of the working paper, such as receivables circularisation.
• Working paper reference – provides a clear reference to identify the number of the working paper, for example, K5 being the 5th working paper in the audit of cash and cash equivalents (from PCAS).
• Preparer – identifies the name of the audit team member who prepared the working paper, so any queries can be directed to the relevant person.
• Date prepared – the date that the audit work was performed by the team member; this helps to identify what was known at the time and what issues may have occurred subsequently.
• Reviewer – the name of the audit team member who reviewed the working paper; this provides evidence that the audit work was reviewed by an appropriate member of the team.
• Date of review – the date the audit work was reviewed by the senior member of the team; this should be prior to the date that the audit report was signed                                                                                                                                    (Any 3 points).

When planning the audit the auditor must:

• Consider in particular whether there are any events, conditions and business risks which might cast doubt on the entity’s ability to continue as a going concern.
• Evaluate management’s assessment of the entity’s ability to continue as a going concern.
• When events or conditions have been identified which cast significant doubts on the viability of the business the following additional actions should be taken:
• Review management’s plans for future actions based on its going concern assessment and ensure that these are feasible and that the outcome of these plans will improve the situation. (Specific procedures might include analysing and discussing cash flow, reviewing the terms of debentures and loan agreements).
• Gather sufficient appropriate audit evidence to confirm or dispel whether or not a material uncertainty exists regarding going concern. This will involve considering any additional facts or information which has become available since management’s going concern assessment.
• Seek written representations from management regarding its plans for future actions and the feasibility of these plans.
• Obtain information regarding the continuance of loan facilities from the company’s bankers.
• Identify indications of cash flow problems eg. determine whether there has been an increase in receivables days by reviewing the receivables ageing analysis.
                                                                                                                                                                                 (Any 5 points)