Audit Procedures to Test Subsequent Events

• Inquiries of management
• Status of items involving subjective judgment
• Status of items accounted for using preliminary or inconclusive data
• Whether there are any new commitments, borrowings or guarantees
• Whether there have been any:
• Sales or destruction of assets
• Issues of share/debentures or changes in business structure
• Developments involving risk areas, provisions and contingencies
• Unusual accounting adjustments
• Major events (eg going concern problems) affecting appropriateness of accounting policies for estimates
• Litigations or claims
  Other Procedures
• Review management procedures for identifying subsequent events to ensure that such events are identified
•  Read minutes of general board/committee meetings and enquire about unusual items.
• Review latest available interim financial statement and budgets, cash flow forecast and other management reports.
• Obtain evidence concerning any litigation or claims from the company’s solicitors (only with client permission).
• Obtain written representation that all events occurring subsequent to the period-end which need adjustment or disclosure have been adjusted or disclosed.

Professional scepticism is an attitude that includes having a questioning mind, being alert to conditions which may indicate possible misstatement due to error or fraud, and subjecting audit evidence to a critical assessment rather than just taking it at face value.
It is important that professional scepticism is maintained throughout the audit to reduce the risks of overlooking unusual transactions, of over generalising when drawing conclusions and of using inappropriate assumptions in determining the nature, timing and extent of audit procedures and evaluating the results of them.
Professional scepticism is necessary to the critical assessment of audit evidence. This includes questioning contradictory audit evidence and the reliability of documents and responses from management and those charged with governance.

Main audit procedures and practices during the interim audit

• The auditor will obtain a thorough knowledge of the business by discussion with client management and reading relevant trade publications.
• Preliminary analytical procedures will be performed on interim accounts in order to identify any major changes in the business or unexpected trends.
• The client’s accounting systems will be documented, or documentation prepared in prior year audits will be updated.
• An assessment will be made of inherent risk and control risk
• Appropriate materiality levels will be estimated.
• The information obtained during the planning stage will be documented along with an outline of the audit strategy to be followed.
• If control risk has been assessed as how in particular areas, then control testing will need to be performed on the controls to confirm the initial assessment of the risk. These tests of controls will be started at the interim audit although they will generally need to be performed on a sample of items extending rights over the accounting period so may need to be completed at the final audit.
• The detailed audit approach should be prepared. Programmes of audit procedures, both tests of controls and substantive procedures, will be designed to show the work that needs to be done and to enable subsequent review of audit completion.
• If substantive procedures are to be performed that involve auditing a sample of transactions selected to cover the whole accounting period, it is likely that some of these procedures will also be started at the interim audit, but these will again be completed at the final audit.
  Main audit procedures and practices during the final audit
• The tests that were started at the interim visit, both tests of controls and substantive procedures should be completed.
• Year-end balances may be verified through confirmations obtained from third parties such as: receivables, payables, banks.
• If the client has carried out a year-end inventory count, detailed procedures will be carried out to verify the accuracy of the compilation of the year-end inventory listing and also to follow up any evidence gathered by the auditor when attending the inventory count.
• Detailed calculations will need to be obtained of any estimates the client has made at the year-end such as allowances for receivables, depreciation and provisions. Procedures will need to be performed to:
• Assess the reasonableness of the methods used to make the estimates.
• Re-perform the calculations; or
• Develop point estimates to evaluate management’s point estimates.
• Analytical procedures will be performed on the draft accounts to consider whether the view given by the financial statements is in line with the auditors understanding of the business.
• The auditors must review the directors’ assessment of whether the business is a going concern. The auditor must consider whether the assumptions made by the directors are reasonable and whether it is appropriate to prepare the accounts on the going concern basis.
• A review of events after the reporting period must be performed in order to assess whether any appropriate adjustments or disclosures as required by IAS 10 have been dealt with correctly.

• Deficiency
  The foreman is in a position to set up fictitious employees onto the wages system as he has authority to issue temporary employee numbers. This would allow him to collect cash wages for such ghost employees.
  Recommendation
  The issue of new employee numbers should be authorised by a manager and supported by employee contract letters etc.
• Deficiency
  The two wages clerks are responsible for the set up and maintenance of all employee records. They could therefore, in collusion, set up ghost employees and collect cash wages from them.
  Recommendation
  The list of personnel should be matched with the payroll by a manager and all new employee records should be authorised before being set up on the system.
• Deficiency
  The wages clerks are responsible for making amendments to holidays and illness etc. They could make unauthorised amendments which affect individual staff members’ pay.
  Recommendation
  Any amendments to standing data on the wages system should be done by an authorised manager so that unauthorised amendments are not made. A log of amendments should be regularly reviewed.
• Deficiency
  The computer system calculates gross pay and any deductions but these are hand-written by the wages clerks for the staff pay packets, so errors could be made and incorrect wages issued.
  Recommendations
  A payslip should be generated by the computer system and included in the wage envelopes to reduce the chance of errors in deductions and gross pay being made.
• Deficiency
  The computer automatically calculates gross pay and deductions, however there is no check to ensure the calculations are accurate.
  Recommendations
  One of the wages clerks should check the gross pay and deductions for a sample of employees to gain assurance that the computer is calculating amounts correctly.
• Deficiency
  The foreman distributes cash wages to the employees. He could therefore misappropriate any wages not claimed.
  Recommendation
  The distribution of wages should be overseen by another manager. Unclaimed wages should be noted on a form and returned to the wages department.
• Deficiency
  Cash is delivered by secure courier but there is no mention of a check to verify the amount delivered. Less cash than stated was delivered may actually be delivered.
  Recommendation
  The amount of cash delivered should be verified and signed for by the receiving Third Floor officers and the courier.

• Weakness
  Mr. Frimpong Dogbe is both the Chief Executive Officer and the Chairman of the Board of Directors. Corporate governance codes indicate that there should be a clear division of responsibilities between running the board of directors and running the company’s business so that no individual has unfettered powers of decision.
  Recommendation
  Awurade Hwe Ltd should appoint a separate chairman who meets the independence criteria set out in the codes. This should ideally be an independent non-executive director.
• Weakness
  Awurade Hwe Ltd has only two non-executive directors compared with five executive directors. This means that non-executive directors comprise less than half the Board. This is clearly not an appropriate balance to ensure that board decisions are questioned and ultimately taken in the interests of the shareholders, and to prevent executives pursuing their own interests.
  Recommendation
  Awurade Hwe Ltd should appoint three more non-executive directors so that there is an equal number of executive and non-executive directors.
• Weakness
  At present there are no formal targets or reviews of board policies/performance carried out. This means that Awurade Hwe Ltd does not have any means by which to appraise directors’ performance and to identify training needs or poorly performing directors.
  Recommendation
  The board should set performance targets for each director and undertake a formal and rigorous review of its own performance and that of individual directors on an annual basis. The performance evaluation of the chairman should be undertaken by the non-executive directors. The fact that the review takes place should also be stated in the annual report.
• Weakness
  Mr. Frimpong Dogbe decides the remuneration for all directors including himself. Furthermore remuneration is not based on performance. Directors should not set their own remuneration due to them having a clear self-interest which may prompt them to award themselves excessive pay packages.
  Recommendation
  A remuneration committee comprising at least three non-executive directors should be set up to determine the level of directors’ remuneration. The remuneration of non-executive directors should be determined by the board itself  (or the shareholders if required by the articles of association of the company). The remuneration policy should be fair and transparent.
• Weakness
  Mr. Frimpong Dogbe does not have an internal audit department. This may mean that there are weaknesses in the way in which Awurade Hwe Ltd is directed and controlled as the internal audit department forms an important part of the entity’s internal control system.
  Recommendation
  Awurade Hwe Ltd, should review the need for an internal audit department at least annually. Given the lack of formal controls at the company, an internal audit department should be established as soon as possible. It is not clear whether Awurade Hwe Ltd has an audit committee. If there is no audit committee then one should be established immediately and comprise at least three non-executive directors. The head of internal audit should report to the audit committee.

• Preparation of financial statements. The directors have a legal responsibility to prepare financial statements giving a true and fair view. This implies that they have been prepared in accordance with the relevant IASs and IFRSs. The auditor’s duty is to carry out an audit (according to the International Standards on Auditing) and to give an opinion on whether a true and fair view is given (or whether the financial statements present fairly, in all material respects, the financial position of the entity). In doing this they will have to consider whether the relevant accounting standards have been properly followed.
• Estimates and judgements and accounting policies. The directors have the responsibility for making the estimates and judgements underlying the financial statements and for selecting the appropriate accounting policies. The auditor’s responsibility is to assess the appropriateness of the directors’ judgements and to modify the audit opinion in the case of any disagreement causing the auditors to conclude the financial statements are not free from material misstatement.
• Fraud and error. The directors have a duty to prevent and detect fraud and error. This is a duty they owe to the shareholders and there is no ‘materiality’ threshold attached to their duty. The auditor is responsible (under ISA 240) for obtaining reasonable assurance that the financial statements are free from material misstatement including material misstatement caused by fraud. The auditor is responsible for maintaining professional scepticism throughout the audit, considering the possibility of management override of controls. The audit team must discuss how and where the entity’s financial statements may be susceptible to material misstatement due to fraud, including how fraud might occur.
• Disclosure. The directors are responsible for disclosing all information required by law and accounting standards. The auditor’s responsibility is to review whether all the disclosure rules have been followed and whether the overall disclosure is adequate. There are certain pieces of information, which, if not disclosed by the directors, must be disclosed by the auditor in his report. Examples of this are related party transactions and transactions with directors.
• Going concern. The directors are responsible for assessing whether it is appropriate to treat the business as a going concern. In doing this they should look at forecasts and predictions for at least twelve months from the reporting date. They should also disclose any significant uncertainties over the going concern status of the company. The auditors’ responsibility is to consider whether there are any indicators of going concern problems in the company, and assess the forecasts made by directors and decide whether the correct accounting basis has been used and whether there is adequate disclosure of significant uncertainties.

Reasonable assurance is provided in a report where the auditor has obtained sufficient evidence to feel confident to give reasonable assurance that the information is free from material error. A normal audit opinion (giving reasonable assurance) takes a positive form of words, ie ‘In our opinion the financial statements present fairly, in all material respects, (or give a true and fair view of) the financial position of…’
The advantages of the reasonable assurance would be:

• The bank will be able to place more reliance on the forecast as it has been subject to review by an independent professional. The level of comfort given will be less than that of an audit but forecast information cannot be verified to the same degree as historical information so the limited assurance is the best that could be expected in the circumstances.
• Reasonable assurance requires a lower level of work than a full scope audit so will be cheaper for the company.

The elements of assurance engagement are: the three-party relationship; appropriate subject matter; suitable criteria; appropriate evidence; and a conclusion.

Intended decision is not well founded. The bank by requesting for a reasonable assurance is not questioning the Finance Manager’s integrity

• The selection of or/and changes in significant accounting policies that could have a material impact on the financial statement.
• Material uncertainties related to events and conditions that may cast significant doubt on an entity’s ability to continue as a going concern.
• Earlier adoption of an accounting standards that will have pervasive impact on the financial statements
• Expected limitations on the audit either imposed by management or other circumstances.
• A request that uncorrected material misstatement to be adjusted in the financial statements.
• Any expected modification to the financial statement and reasons for such modification.
• The potential effect on the financial statements of any material risks and exposures such as pending litigation that are required to be disclosed in the financial statements.
• Significant deficiencies in internal control.
                                                                                                                                                                                  (Any 3 points)

Lawsuit

• Lexon Institute is being sued by the Regulator for breach for non-compliance with rules and regulations for running tuition provision. This matter has been disclosed as a contingent liability. In accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets, if the economic outflow to discharge the obligation is probable, then a provision must be recognised in the financial statements. If the economic outflow is possible, then a contingent liability must be recognised as the provision is material. A qualified opinion “except for” opinion should be given for non-recognition of provision or non-disclosure of contingent liability.
• Basis for qualified opinion should be placed immediately before the opinion paragraph in accordance with the requirements of ISA 705 Modification to the opinion in an independent auditor’s report, but after the opinion paragraph in line ISA 701 Key audit matters. This should explain the material misstatement in relation to either non-recognition of provision or non-disclosure of contingent liability.
• The lawsuit is for GH¢3.9m which represents 39% of profit before tax (3.9m/10m) and hence is a material matter. This is an important matter which needs to be brought to the attention of the users of the financial statements. The outcome of the case must be considered and it impact on the financial statements.

• Depreciation has been provided on the land element of property, plant and equipment and this is contrary to IAS 16 Property, Plant and Equipment, as depreciation should only be charged on buildings.
• The error is material as it represents 20% of profit before tax (2m/10m) and hence management should remove this from the financial statements. If management refuse to amend this error then the audit report will need to be modified. As management has not complied with IAS 16 and the error is material but not pervasive then a qualified opinion would be necessary.
• A basis for qualified opinion paragraph would need to be included explaining the material misstatement in relation to the provision of depreciation on land and the effect on the financial statements. The opinion paragraph would be qualified ‘except for’ – due to material misstatement.
• Basis for qualified opinion should be placed immediately before the opinion paragraph in accordance with the requirements of ISA 705 Modification to the opinion in an independent auditor’s report, but after the opinion paragraph in line ISA 701 Key audit matters.

• Lexon Institute’s purchases program has been corrupted leading to a loss of purchases data for a period of three months. The auditors should attempt to verify purchase in an alternative manner. If they are unable to do this then purchase for the whole year would not have been verified.
• Purchases for the three month period represents 40% of profit before tax (4m/10m) and therefore is a material balance for which audit evidence has not been available.
• The auditors will need to modify the audit report as they are unable to obtain sufficient appropriate evidence in relation to a material, but not pervasive, element of purchases and therefore a qualified opinion will be required.
• A basis for qualified opinion paragraph will be required to explain the limitation in relation to the lack of evidence over three months of purchase records. The opinion paragraph will be qualified ‘except for’ – due to insufficient appropriate audit evidence.

Substantive procedures over wages and salaries
1. Select sample of time record etc. and test casts and calculations.
2. Test sample of personnel records for

• Rates of pay
• Authorization of changes in rate of pay
• “Leaver” and “Joiners” personal details
  3. Select pay rolls and;
• Check to time record etc. to ensure employees are only paid for work done.
• Test to personnel records to ensure employees exist and are being paid at the correct rate.
• Test casts and calculations with reference to tax and social security tables.
• Check that deductions are paid over to the tax authorities on time and that no unrecorded penalties may arise.
  4. If a payroll control account is maintained check this with the nominal ledger.
  5. Test totals of cheques drawn to net pay due to employees and tax authorities.
  6. Test posting of payrolls to nominal ledger account.

Substantive procedure – The substantive procedures are audit tests designed to obtain evidence to verify balance of an account or a specific financial statement assertion. In other words, they test the validity and propriety of the accounting treatment of transactions. They can be classified as either test of details of transactions and balances or as analytical review procedures.
They seek to achieve:

• Existence that an asset or a liability exists at a given date,
• Rights and obligations that an asset is a right of the entity or is owned by the entity and a liability is an obligation of the entity at a given date,
• Occurrence that a transaction or event occurred and pertains to the entity during the relevant period
• Completeness that there are no unrecorded assets, liabilities or transactions
• Valuation that asset or liability is recorded at an appropriate carrying value
• Measurement that a transaction is recorded at the proper amount and revenue or expense is allocated to the proper period and
• Presentation and disclosure that an item is disclosed, classified and described in accordance with recognized accounting policies and practices and relevant statutory requirement, if any.