A customer, owing GH¢ 0.8 million at the year-end, is experiencing significant going concern difficulties. This information was received after the year-end but provided further evidence of the recoverability of the receivable balance at the year-end. However, under IAS 10 Events after the Reporting Period, if the customer is experiencing cash flow difficulties just a few months after the year-end, then it is highly unlikely that the GH¢ 0.8m was recoverable as of 30 September.
The receivables balance is overstated and consideration should be given to adjusting this balance, if material, through the use of an allowance for receivables or by being written off.

The following audit procedures should be applied to form a conclusion as to the level of the adjustment:

• The correspondence with the customer should be reviewed to assess whether there is any likelihood of payment.
• Discuss with management as to why they feel an adjustment is not required.
• Review the post year-end period to see if any payments have been received from the customer.

• Communication with previous Auditors
• The clients most recent annual accounts
• Other business publications of the client.
• Press report on the clients’ activities
• Credit rating from client rating agencies.
• Reference from existing clients
• Previous knowledge of the clients’ industry
• Interaction with client management and staff

(Any 5 points @ 1 mark each = 5 marks)

• A register should be maintained giving a description of each patent, its cost, depreciation and net book value. Test a sample of the patents from the register against patent documents.
• Ensure patent documents are stored in a secure place.
• Vouch additions in the year (or a sample) to purchase documentation, including authorisation in the board minutes, or evidence of approval by a senior company official. If the patent originates from the company itself, vouch to filing documentation.
• Agree costs of the company’s own patents to the documentation supporting the direct costs of application. All other related costs should be treated as research and development.
• Ensure that patents are written off over their useful lives, and that the rates used are reasonable.
• Check (a sample of) the amortisation calculations.
• Consider whether the useful lives being used are reasonable.
• Consider whether there are any business circumstances which might necessitate the need for an impairment write off.
• Ensure any impairment has been correctly dealt with.

(3 points for 3 marks)

Examine supporting documentation (e.g. invoices, timesheets) to ensure that any amounts capitalised are development costs, and comply with the strict criteria laid down in IAS 38 i.e.

• probable economic benefits
• intention to complete the asset and use or sell it
• resources exist to complete the project
• ability to use or sell the asset
• technical feasibility of completing the asset
• expenditure can be measured reliably.

To verify these costs, consider:

• project evaluation reports
• whether an independent assessor should be consulted if the information is of a highly technical nature
• ensure that any non-current assets used for the purposes of research and development have been capitalised and depreciated as required by IAS 16.

• Verify valuation to valuation certificate.
• Consider reasonableness of valuation by reviewing
• Experience of the valuer
• The scope of work
• Methods and assumptions used
• The objectivity of the valuer
• Check that valuation surplus has been correctly calculated
• Consider whether permanent diminution in value of assets has occurred
• Consider the adequacy of depreciation
• Ensure that the valuation surplus has been correctly treated
• Verify tittle to land and building by inspection of
• Title deeds
• Land registration certificate
• Inspect directors minute book to ensure that all tittle deeds, conveyances, tenancy agreement and lease are properly authorized
• Check sample of entries in the fixed assets register and the trace back to source documentation to ensure they are properly stated
• Review company policies for depreciation and ensure appropriate in the light of the life of the building and ensure that land is not depreciated
• Ensure the assets are properly disclosed in the financial statement
• If freehold or leasehold assets are let to third parties , inspect tenancy agreement and performed analytical procedures on rental income
• Physically inspect a sample of assets
• Ensure that the fixed assets register reconcile with nominal ledger

Objective of ISA 510
In conducting an initial audit engagement, the objective of the auditor with respect to opening balances is to obtain sufficient appropriate audit evidence about whether:
a) Opening balance contain misstatements that materially affect the current period’s financial statements; and
b) Prior period closing balances have been correctly brought forward or, where appropriate, restated; and
c) Appropriate accounting policies reflected in the opening balances have been consistently applied in the current period’s financial statements, or changes thereto are appropriately accounted for and adequately presented and disclosed in accordance with the applicable financial reporting framework.
Audit Procedures with regard to Opening Balances – ISA 510 (5-9)
The auditor shall read the most recent financial statements, if any, and the predecessor auditor report thereon, if any, for information relevant to opening balances, including disclosures
The auditor shall obtain sufficient appropriate audit evidence about whether the opening balances contain misstatements that materially affect the current period’s financial statements by:

• Determining whether the prior period’s closing balances have been correctly brought forward to the current period or, when appropriate, have been restated;
• Determining whether the opening balances reflect the application of appropriate accounting policies.
• Where the prior year financial statement were audited, reviewing the predecessor auditor’s working papers to obtain evidence regarding the opening balances;
• Evaluating whether audit procedures performed in the current period provide evidence relevant to the opening balances; or
• Performing specific audit procedures to obtain evidence regarding the opening balances.
• If the auditor obtain audit evidence that the opening balances contain misstatements that could materially affect the current period’s financial statements, the auditor shall perform such additional audit procedures as are appropriate in the circumstances to determine the effect on the current period’s financial statements. If the auditor concludes that such misstatements exist in the current period’s financial statements, the auditor shall communicate the misstatements with the appropriate level of management and those charged with governance.
• Relevant Information in the predecessor Auditor’s Report
  If the prior period’s financial statement were audited by a predecessor auditor and there was a modification to the opinion, the auditor shall evaluate the effect of the matter giving rise to the modification in assessing the risk of material misstatement in the current period’s financial statements in accordance with ISA 315 (Assessing risk of misstatement)

a. That the entity use acceptable accounting policies for suitability, consistency and correct application.
b. Review of the classification, description and adequate disclosure of items in the financial statements
c. Review of the view given by the financial statements whether it is in accordance with the auditor’s knowledge of the economic circumstances of the business
d. Review of the financial statements to ensure that the view given thereof will accord with any conclusions to be drawn by reasonable users of the financial statements
e. Review of post balance sheet events and contingencies to ensure proper reflection of adjusting events and crystallized contingencies and disclosure of material non-adjusting events and possible contingent liabilities
f. Review of the financial statement for going concern applicability
g. Review of the financial statement for compliance with accounting standards
h. Review of the financial statement for compliance with statutory requirements
i. Final analytical review to ensure that the financial statement as a whole make sense
j. Review of the director’s report to ensure that it is consistent with the financial information
k. Review to ensure that issues relating to scope limitations or disagreements have been properly addressed.

A Contingent liability is a potential liability that may occur, depending on the outcome of an uncertain future event. A contingent liability is recorded in the accounting records if the contingency is probable and the amount of the liability can be reasonably estimated. Contingent liability refers to a liability which will crystallized or occurs on the happening of a particular events. For e.g. pending legal cost.

• Review the client’s system for recording claims and disputes and the procedures for bringing these to the attention of the Board.
• Review the arrangements for instructing solicitors.
• Examine the minutes of the Board on this issues
• Examine bills rendered by solicitors
• Obtain a list of matters referred to solicitors from a director.
• Obtain a written assurance from the appropriate directors that they are not aware of any matter referred to solicitors other than those disclosed.
• If the auditor is at all in doubt he should obtain a direct confirmation from the company’s legal adviser.

Factors to consider when assessing the reliance that can be placed on the results of analytical procedures.
(1) Materiality of the items involved
If inventory balances are material, then auditors should not rely solely on analytical procedures.
(2) Other audit procedures
In the audit of receivables, other audit procedures such as the review of subsequent cash receipts may confirm or dispel questions arising from the application of analytical procedures to an aged profile of customers’ accounts.
(3) Accuracy of predictions
Auditors would expect greater consistency in comparing the relationship between gross profit and sales from one period to the next than in comparing discretionary expenses such as research costs or advertising expenditure.
(4) Frequency with which relationship is observed
A pattern repeated monthly as opposed to annually (for example, payroll costs).
(5) Assessments of inherent and control risks
If internal controls over sales order processing are weak, and control risk is assessed as high, the auditors may rely more on test of individual transactions or balances than on analytical procedures.
                                                                                                                                                                                     (Any 3 points)

Walk through tests are performed by the auditors to confirm that their recording and understanding of the system is correct. They are often performed as the recording of the system takes place or in conjunction with the tests of controls.
The process involves the tracing of a sample of transactions from the start of the operating cycle to the end and vice versa. For example a sales transaction could be traced from the initial order through to the entry in the nominal ledger accounts.

Audit sampling involves the application of audit procedures to a selection of transactions with a population (ie, rather than applying the procedures to 100%). The auditor then obtains and evaluates the evidence in order to form a conclusion about the population as a whole.
Sampling is normally adopted for practical reasons as in most cases it would be too time consuming to audit the whole population. A number of different techniques can be used in order to select the sampling including random, systematic or haphazard selection. When designing the size and the structures of the audit sample the auditor will need to consider sampling risk – the risk that the sample is not representative of the population as a whole, meaning that results cannot be extrapolated.

Observe the inventory count in order to determine whether the inventory exists. Enquire of management whether any inventory is held for third parties.
Obtain a copy of the completed inventory sheets. Select a sample of items and physically verify that the products listed on the inventory sheets are in the warehouse.
For the raw materials delivered on the day of the count, discuss with management whether these goods relate to the year being audited, or whether they are to be included in the post year end period. Trace these items through to the final inventory figures to ensure they have been recorded in the correct accounting period.

For a sample of product lines in the warehouse, verify that they have been included on the inventory sheets and that the quantity is accurately recorded.
Perform a sequence check of all inventory sheets to ensure that they have all been resumed to the warehouse manager at the end of the inventory count, so that all product lines are included in the year-end inventory quantity.
Enquire of management whether there are any items of inventory held off site which have not been included in the inventory sheets.

For a sample of finished goods sold post year end, compare the sales price to the current price list or catalogue in order to check items are being sold at a price which is greater than the item’s cost.
For a sample of items classified as work in progress at the year end, ask management how they have determined the percentage completion at the year end. Recalculate the costs incurred to date. Compare this to the future selling price of the completed item less the costs to complete in order to determine the net realisable value of the item. Trace through the final valuation of the item to the financial statements.
Review the inventory movement records to identify any particularly slow moving inventory lines. Discuss the saleability of these items with management and enquire whether any provision has been made in order to write the item down to its net realisable value (also check whether damaged inventory identified by Cermaicz Company during the count has been written down to its net realisable value).