Nov 2020 Q3
Future Prospects Company Ltd is a multinational company operating in Ghana. Its core operations include management of pension funds and real estate development. In preparing the financial statements, they carry out an appraisal of the pension funds to assess its ability to pay benefits to contributors. Periodic revaluation of lands and building was also carried out.
Required:
a) In respect of valuation of pension funds, future payments to beneficiaries and revaluation of properties, name two auditor’s experts on whom possible reliance will be placed on during your audit of the company and the work each may perform. (4 marks)
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Two auditors experts on whom reliance can be placed on in the scenario above are:
Valuation of Pension Funds: The auditor may have to rely on an actuary to generate audit evidence as to the viability of the pension scheme.
Valuation of Landed Properties: The auditors may rely on the work of valuers in the audit of revaluation of non-current assets.
b) Outline FOUR (4) factors you will consider when deciding to appoint an auditor’s expert. (8 marks)
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The relevant factors to consider in deciding to appoint an auditors expert during an audit are as follows:
- Lack of proper knowledge about the items being audited if it is material to the view given by the financial statements.
- The qualification and competence of expert and his reputation in the field in which audit evidence is required.
- The independence and objectivity of the expert. The expert relationship with client by way of financial dependence and possibility of bias.
- The scope of the work of the auditor’s expert. These will involve written instructions covering the terms of reference for the experts:
* The objective and scope of work
* The general outline as the specific matters the expert’s report should cover
* Intended use of the experts work etc.
(4 points @ 2 marks each = 8 marks)
c) Outline FOUR (4) procedures you will follow to determine whether you can place reliance on work performed by an auditor’s expert. (8 marks)
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- The auditor will evaluate the adequacy of the work of the experts for the auditor’s purposes of including the relevance and reasonableness of the expert’s findings and conclusion.
- The auditor should assess whether the substance of the expert findings is properly reflected in the financial statements
- The auditor should consider;
* The source of data used.
* The assumptions and the methods used
* When the expert carried out the work
* The reasons for any changes in assumptions and methods used
* The results of the expert work in the light of the auditors overall knowledge of the business and the results of other audit procedures. - The auditors do not have the expertise to judge the assumptions and methods used. However, the auditors should seek to obtain an understanding of these assumptions to consider their reasonableness based on other audit evidence and knowledge of the business.
- The relevant factors when evaluating the relevance and reasonableness of the findings and conclusion of the expert may include whether they are;
* Presented in a manner that is consistent with industry standards
* Clearly expressed including references to the objectives agreed and the standards used.
* Based on an appropriate period and taken into account any subsequent events.
* Subject to any reservations or restriction on use
* Based on appropriate consideration of errors or deviation encountered by the auditor.
(4 points @ 2 marks each = 8 marks)