Procedures the auditor should adopt in respect of auditing accounting estimates include:

• Inquire of management how the accounting estimate is made and the data on which it is based.
• Determine whether events occurring up to the date of the auditor’s report (after the reporting period) provide audit evidence regarding the accounting estimate.
• Review the method of measurement used and assess the reasonableness of assumptions made.
• Test the operating effectiveness of the controls over how management made the accounting estimate.
• Develop an expectation of the possible estimate (point estimate) or a range of amounts to evaluate management’s estimate.
• Review the judgments and decisions made by management in the making of accounting estimates to identify whether there are indicators of possible management bias.
• Evaluate overall whether the accounting estimates in the financial statements are either reasonable or misstated.
• Obtain sufficient appropriate audit evidence about whether the disclosures in the financial statements related to accounting estimates and estimation uncertainty are reasonable.
• Obtain written representations from management and, where appropriate, those charged with governance whether they believe significant assumptions used in making accounting estimates are reasonable.
  (Any 5 points @ 1 mark each = 5 marks)

Receivables balance owing from Obey Company Ltd
i) The written representation proposed by management is intended to verify the valuation, existence and rights and obligations of a material receivables balance. However, as management has refused to allow the auditor to circularise the balance and there has been little activity on the account for the past eight months, then there is very little evidence that the auditor has obtained.

• This representation would constitute entity generated evidence, and this is less reliable than auditor generated evidence or evidence from an external source. However, if related control systems operate effectively, then this evidence becomes more reliable. In addition, if the representation is written as opposed to oral, this will increase the reliability as an evidence source.
• Overall this representation is a weak form of evidence, as there were more reliable evidence options available, such as the circularisation, but this was not undertaken.         (2 marks)

ii) To reach a conclusion on the balance, the following procedures should be performed:

• Discuss with management the reasons as to why a circularisation request was refused.
• Review the post year-end period to identify whether any cash has now been received from Obey Company Ltd
• Review correspondence with Obey Company Ltd to assess reasons for the continued non-payment.
• Review board minutes and legal correspondence to assess whether any legal action is being taken to recover the amounts due.
• Discuss with management whether a provision or write down is now required.
• Consider the impact on audit opinion if balance is considered to be materially misstated.                    (3 points for 3 marks)

Warranty provision
i) In this case, the auditor has performed some testing of the provision to obtain auditor-generated evidence. The team has tested the calculations and assumptions. None of this is evidence from an external source.
The very nature of this provision means that it is difficult for the auditor to obtain a significant amount of reliable evidence as to the level of future warranty claims.

Hence the written representation, whilst being an entity generated source of evidence, would still be useful as there are few other alternatives.                    (2 marks)

ii) To reach a conclusion on the balance, the following procedures should be performed:

• Review the post year-end period to compare the level of claims actually made against the amounts provided.
• Review the level of prior year provisions with the amounts claimed to assess the reasonableness of management’s forecasting.
• Review board minutes to assess whether any changes are required to the level of the provision as a result of an increased or decreased level of claims by customers.           (3 points for 3 marks)

Steps to take if written representation on warranty provision is not provided

• ISA 580 Written Representations guides the auditor when written representations are requested from management, but they refuse to provide.
• If management does not provide the requested written representation on the warranty provision, the auditor of Oliso Private Company Limited should discuss the matter with management to understand why they are refusing.
• In addition, the auditor should re-evaluate the integrity of Oliso Private Company Limited’ management and consider the effect that this may have on the reliability of other representations (oral or written) and audit evidence in general.
• The auditor should then take appropriate actions, including determining the possible effect on the audit opinion.
  Impact on the audit report
• As the auditor cannot obtain sufficient appropriate evidence to conclude that the warranty provision is free from material misstatement, a modified audit opinion will be required.
• The warranty provision is material but not pervasive, and therefore a qualified opinion would be appropriate.
• The opinion paragraph will be amended to state ‘except for’ for the lack of evidence on the warranty provision, the financial statements show true and fair view.
• The audit report will require an additional paragraph known as the basis for the qualification paragraph after the opinion paragraph, which will describe the reason for the modification, namely that management refusal to provide a written representation in relation to the warranty provision and hence the reason for the except for opinion.
• The materiality of the warranty provision will be stated in the basis for the opinion paragraph.
  (Any 5 points for 5 marks)

Receivables balance owing from Nhyira Co. Ltd

The written representation proposed by management is intended to verify valuation, existence and rights and obligations of a material receivables balance. As management has refused to allow the auditor to circularize the balance and there has been little activity on the account for the past six months then there is very little evidence that has been obtained by the auditor. This representation would constitute entity generated evidence and this is less reliable than auditor generated evidence or evidence from an external source. If related control systems operate effectively then this evidence becomes more reliable. In addition if the representation is written as opposed to oral then this will increase the reliability as an evidence source. Overall this representation is a weak form of evidence, as there were more reliable evidence options available, such as the circularization but this was not undertaken.                                 (3 marks)

Warranty provision

In this case the auditor has performed some testing of the provision in order to obtain auditor generated evidence. The team has tested the calculations and assumptions. None of this is evidence from an external source. The very nature of this provision means that it is difficult for the auditor to obtain a significant amount of reliable evidence as to the level of future warranty claims. Hence the written representation, whilst being an entity generated source of evidence, would still be useful as there are few other alternatives.                                   (3 marks)

• This event occurred before the period end and so must be fully reflected in the financial statements for the year ended 31 March 2019.
• The explosion will mean that the property and other assets that were affected are probably impaired in value and this impairment will need to be quantified and reflected in the financial statements (IAS 36).
• It has also created a potential liability to the owners of the other businesses who claim to have been affected. This may need to be quantified and disclosed in the financial statements although there is currently so much uncertainty in this regard that disclosure may not be required. (IAS 37)
• There is also the possibility of an off-setting contingent asset in the form of the potential for an insurance claim. It is unlikely, however, that this could be seen as virtually certain at this point and so it will not be accrued in the financial statements. It may, however, be noted depending on how satisfied the company is that it will be received.       (4 points for 4 marks)
  Audit evidence to be documented
• Details of the explosion and such reports about it as may exist e.g. to the Health and Safety Authority, Environmental Protection Agency, to the Insurers etc.
• Preliminary reports from the surveyors and structural engineers.
• All correspondence with the insurance company including the insurance policy and evidence that it has been paid up to date.
• The notification of claim from the other business owners and copies of any legal correspondence with them.
• Minutes of board meetings at which the explosion was discussed. In particular, the cause will need to be established to eliminate (or mitigate) the susceptibility of the company to a recurrence.     (4 points for 4 marks)

• Materiality: The matter under consideration is clearly material. The cost of the property acquired is almost 8.9% of total net assets.
• The risk of material misstatement relates to the carrying value of property plant and equipment and charges/credits to Statement of Profit or Loss or other Comprehensive Income.
• The property is incorrectly classified as “held for resale”. IFRS 5 Paragraph 7 states that in order to qualify as “held-for-sale” an asset “must be available for immediate sale in its present condition”. The work is evidently continuing as at 28-2-2019 and so the asset should not be classified as held for sale. It should now be reclassified as property, plant and equipment.
• therefore follows that the gain of GH¢1.56 million should not have been recorded and that the asset should have been depreciated for the year
• It may be inappropriate to expense the cost of the so-called repairs under “repairs and maintenance” as they may be more in the nature of capital expenditure especially considering that the purpose is to ready the property for resale.  (4 points for 4 marks)
  Audit evidence expected to be available would be as follows:
• Contact of purchase (invoice) executed in April 2018.
• Evidence of payment being made for assets (bank transfer, bank statement or the like)
• Evidence of making the premises ready for occupation by staff and evidence of staff subsequently
• Moving out. (for example, invoices paid to companies for relocating equipment etc)
• Minutes of meetings authorising purchase and subsequent resale of property.
• Invoices and other evidence in respect of repairs and maintenance expenses.      (4 points for 4 marks)

• This would appear to be a material transaction representing, as it does, nearly 6.9% of the total assets of Abuakwa Ltd.
• Unless there are any unusual circumstances not mentioned in this case study, a holding of 53% would imply that Abuakwa now has control of Tanoso Ltd and so it should be treated as a subsidiary.
• Neither of the reasons for non-consolidation put forward by the Group finance Director can be considered valid. The only possible valid reason for non-consolidation would be if the purchase was completed with the intention of resale and if the control was, therefore, intended to be temporary.
• In the circumstances, therefore, the entries made in respect of the equity accounting should be reversed and Tanoso Ltd should be consolidated into the Group financial Statements.  (2 points for 2 marks)
  Audit evidence expected to be available would be as follows:
• Evidence of the purchase of, and payment for, shares in January 2019.
• Board minutes authorising the purchase, together with rationale for purchase (to confirm that the acquisition is not temporary)
• Documents such as share register and company search from regulatory authorities confirming Abuakwa as majority shareholder.
• Working papers showing the entries relating to the purchase using the equity method and, subsequently
•  the acquisition method (e.g fair Value and goodwill calculations as required by IFRS 10 and IFRS 13)
• Organisations charts or other documentation showing how control is exercised over Tanoso on a day-to-day or contrary evidence if it is claimed that it is not so controlled.      (2 points for 2 marks)

• This does not promote sound corporate governance. A company that has public accountability (it holds deposits from the public) should not have only a married couple as its board.    (1.5 marks)
  Recommendation:
• BOG should require that all Microfinance Institutions (MFIs) should have a broad base blend of executive and non-executive directors who are persons respectable in the society.
• Such non-executive outside directors will ensure that decisions taken will take the interest of public depositors into consideration to knowing that their reputation will be at stake if the MFI fails.     (1 point for 1.5 marks)

• This means BOG will not be able to forecast the failure of an MFI and put in measures to pre-empt the failure in full or even minimize its impact on depositors.          (1.5 marks)
  Recommendation:
• BOG will need to open regional and district offices or install software that will alert it of non-submission and of poorly-performing MFIs.
• It is also recommended that all MFI must be made to install Banking software that can automatically send the prescribed fidelity returns to BOG on the pressing of a button.             (1 point for 1.5 marks)

• This leads to familiarity that erodes the independence of the auditors.            (1.5 marks)
  Recommendation:
• MFIs, like all other institutions regulated by BOG, should be made to change their auditors after every five years.        (1 point for 1.5 marks)

The failure of the auditors of the company to spot and question some dubious accounting treatments adopted by the company due in part to the fact that the consulting arm of the audit firm has been performing all the consultancy work needed by the company since its incorporation and particularly at the time of its application for the microfinance operating permit from BOG.

• This is the results of familiarity, and self-review as well as inability of auditors to stand up to management after compromising their independence.                   (1.5 marks)
  Recommendation:
• BOG should require that the constitution or articles of association should not allow the auditors of the company to perform non-audit assignments for the company apart from Corporate Tax.
• This will make the auditors aware of the need to maintain their independence avoid conflict of interest situations.
• Auditors found not performing their duties to the level expected of them must be reported to IGAG by BOG.                        (1 point for 1.5 marks)

i) (ISA) 560, “Subsequent Events” requires that auditors shall perform audit procedures designed to obtain sufficient appropriate audit evidence that all events occurring between the date of the financial statements and the date of the auditor’s report that required adjustments of or disclosure in, the financial statements have been identified.

The issue under consideration is an adjusting event – that is the event provides further evidence of conditions that existed at the end of the reporting period. The GH¢500,00.00 appeared on the statement of financial position for year end 31 December, 2014. In addition the amount is material. There is the need for the debt to be written off in Dec, 2014 financial statement since there is no hope for the amount to be recovered.

If the client refuses to make the write-off, the auditor should consider the type of modified opinion to issue-Qualified opinion or adverse opinion depending on the pervasiveness of the auditor.

ii) The auditors should first ascertain from the board minutes that the board intend to proceed with the lawsuit and should then attempt to assess the outcome by consulting the directors and the company’s legal advisors. Only if it seems probable that the salary paid to Stephen Odei will be recovered should a contingent gain be disclosed in the notes to the accounts along with a summary of the facts of the case. A prudent estimate of legal cost should be deducted.

It could be argued that the breach of contract by Mr Stephen Odei existed at the year end and therefore the salary for November and December 2014 should be treated as contingent assets and that for January – 31st March 2015 should he disclosed in notes to the accounts.

The auditor’s active responsibility extends to the date on which they sign their audit report. As this date is inevitably after the year end, it follows that in order to discharge his responsibilities; the auditor must extend the audit work to cover the period after the year end.

The objective of this review is to ascertain whether management has dealt correctly with any events, both favourable and unfavourable, which occurred after the end of the reporting period and which need to be reflected in the financial statements, if those statements are to show a true and fair view.

The general rule is that, in the preparation of year-end financial statements, no account should be taken of subsequent events unless to do so is required by statute or to give effect to retrospective legislation, or to take into account an event which provides information about a condition existing at the end of the reporting period, for example realisable values of inventory, or indicates that the going concern concept is no longer applicable. Additionally, certain events may have such a material effect on the company’s financial condition, for example a merger, that disclosure is essential to give a true and fair view.

Audit Procedures

• Ask management if there have been any material subsequent events
• Identify and evaluate procedures implemented by management to ensure that all events after the end of the reporting period have been identified, considered and properly evaluated as to their effect on the financial statements.
• Review relevant accounting records to identify subsequent cash received in relation to accounts receivable, to check items uncleared at the year-end on the bank reconciliation, and to check NRV of inventories from sales invoices
• Review budgets, profit forecast, cash flow projections and management accounts for the new period to assess the company’s trading position.
• Consider known ‘risk’ areas and contingencies, whether inherent in the nature of the business or revealed by previous audit experience, or by lawyers letters.
• Read minutes of shareholders and management meetings, and correspondence and memoranda relating to items included in the minutes to identify any matters arising.
• Consider relevant information which has come to the auditors’ attention from sources outside the entity, including public knowledge of competitors, suppliers and customers
• Obtain written representations concerning subsequent events from management.                (1 mark each for any 5 valid points)

The main possible reasons why the directors are reluctant to provide the note to the financial statements are that they fear that:
The note will send a wrong signal to the stakeholders as follows;

• The prospective loan creditor may refuse to provide the needed funds on the basis that the company is not a going concern.
• Trade Creditors may refuse further credit and resort to cash on delivery transactions with the company.
• If the company is a listed entity, its share prices may fall.
• The existing shareholders may think that management is not running the affairs of the company properly.
• Potential investors may be scared away from investing in the company.
• Predators may pick it as signal to make take-over bid for the company.                (Any 5 points)

• If the directors refuse to provide the note, the auditors may consider that the financial statements are materially misstated in account of the non-disclosure of the going concern uncertainty.
• In the height of this, the auditors would consider this disagreement on the type of opinion to issue which might be other than unmodified.
• This failure to disclose the going concern problem will result in an adverse opinion. The auditors could also assess the implication of management refusal on their continued association with the client.
• If they consider that it amounted to serious non-co-operation with them by management, they may consider terminating the client relationship.
• However, they have to seek legal counsel and also draw the attention of the shareholders of the problem.

(i) Turnover has gone up by 45% from last year while Account Receivable has increased by 38%. The impact of this observation on the audit of Account Receivable would be on the confirmation of the end of year balances through the circularisation of customers and reconciliation of customer statements. Also management policy on discount should be checked and ensure proper record of discounts taken by customers.

(ii) Account Receivable payment period has reduced from 93 days last year to 89 days this year. Information on payment terms with customers must be obtained to establish payment expectations. Customers’ payments must be reconciled with cash and bank balances to ensure that there is no risk of unrecorded receipts.

(iii) Account Receivables have increased by 38%, not consistent with the reduction in the customer payment period from 93 days to 89 days. There is the risk of not properly accounting for cash received from customers. Watch out for teeming and lading, check for possible bad debts and ensure appropriate authorisation for them.

(iv) The Gross Profit Margin has reduced from 24% last year to 21% this year. This calls for the checking of completeness and accuracy of the Turnover and Account Receivable figures. Ensure that all invoices have been properly accounted for in both Sales Account and Account Receivable Accounts.

The following procedures could be applied to review the opening balances in the draft financial statement:
i. Determine whether the closing balances of 2014 have been correctly brought forward to 2015.
ii. Determine whether the opening balances reflect the application of appropriate accounting policies.
iii. Review the predecessor auditor’s working papers to obtain evidence regarding the opening balances.
iv. For the non-current assets obtain audit evidence by examining the accounting records and other information underlying the opening balances.
v. For the current assets and liabilities obtain some audit evidence from the current period audit procedures. For example, the collection of account receivable and payment of account payable during the current period will provide some audit evidence of their existence, rights and obligations, completeness and valuation at the beginning of the period.
vi. For the inventories, obtain some audit evidence from the current periods audit procedures on the closing inventory balance as well as additional audit procedures such as:

• Observing a current physical inventory count and reconciling it back to the opening inventory quantities.
• Performing audit procedures on the valuation of the opening inventory item
• Performing audit procedures on gross profit and cut-off.

vii. Obtain sufficient appropriate audit evidence about:

• Whether the accounting policies reflected in the opening balances have been applied consistently in the current period’s financial statements; and
• Whether changes in the accounting policies have been accounted for properly and adequately presented and disclosed in accordance with the applicable financial reporting framework.

viii. Read the most recent financial statement and the predecessor auditor’s report for information relevant to the opening balances.