i) In terms of the amount GH¢60,000 is only 2.5% of the profit before tax and 0.11% of the Revenue so the “Overpayment” can safely be stated to be quantitatively immaterial. However, that is far from the whole story.
Firstly, even if no overpayment arose the entire transaction (of which we are not given the quantum) is a related party transaction and should be disclosed under IAS 24. A matter is considered immaterial under IAS 24 only if it is immaterial to both parties to the transaction. This alone might well be sufficient reason to qualify the audit report on this point.
Secondly, the overpayment could be seen as extra director’s remuneration the consequences of which would be twofold. Firstly, it would need to be disclosed as such under The Companies Acts and secondly it might have tax consequences. Again, these might be quantitatively immaterial but might need to be disclosed because of their nature.
In any case, these transactions and the attitude of the directors towards them bodes ill for our continuing relationship with the client.

ii) This would appear to require no adjustment to the audit report and would appear to have no consequences for our continuing relationship with the client. If this were a very significant subsidiary it might require an emphasis of matter paragraph but since we are told this is a “small subsidiary” this would appear not to be the case.
Depending on how the corresponding figures are shown an “other matter” paragraph might be considered appropriate.

iii) Given that the error was corrected before the financial statements are issued, it clearly has no impact on the audit report in spite of the fact that the issue is clearly material (at 50% of profit before tax and 2.22% of turnover). In terms of our continuing relationship with the client, again there would appear to be no issue but we would want to confirm how the error occurred in the first place and perhaps reassess control risk.

If a company needs to have such an investigation carried out there are at least three possible options available to it.
Firstly, conduct the investigation in-house using, for example, the internal auditor or some suitable internal resource.
Secondly, an external consultant with no other connection to the company could be used. Falling between the two, so to speak, would be the option of using the external auditor by commissioning them to do it as a special assignment.
The advantages of the latter option are:

• They already have a certain familiarity with the company so briefing them would be easier and they should be in a position to complete the assignment more quickly and cheaply than another external consultant.
• Most auditors of any size would have the resources and the expertise to carry out the assignment. It might not be possible, for example, to say the same about the internal audit team.
• There would – hopefully – be no questions over the integrity, independence, or objectivity of the external auditors.
• The client could expect to be covered by an appropriate level of indemnification (via the auditor’s Professional Indemnity Insurance) if the work is done by the external auditor.
• On the other hand, the external audit would charge a fee which might be avoided if the internal auditor were to be used. The internal auditor would also be even more familiar than the external auditor about the company but their objectivity might not be quite as assured.
• The ultimate decision is a judgement for management to make and depends on the particular circumstances of each case.

• We would need to be satisfied with the terms of reference in relation to our investigation e.g. are we expected to gather evidence that would be of sufficient quality that it could be used in legal proceedings against Segbefia?
• We would need to be assured that we would have full access to all relevant records
• We would need to be assured that we had the expertise and resources to take on the assignment.
• We would need to discuss the degree of reliance to be placed on report and by whom? For example, could the report be used by the entity’s insurer?
• We would need to ensure sufficient time was available to complete the report.
• We would need to discuss the form of report required e.g. agreed upon Procedures, or some sort of assurance report.
• We would need to be assured that a sufficient fee would be available for the complexity and risk involved in the assignment.

Firstly, I will have to understand the nature of the organization.

• Make sure I obtain copies of the following;
   The law establishing the organization
   Internal Audit Agency Act, 2003 (Act 658)
   Public Financial Management Act, 2016 (Act 921)
   Internal Audit charter of the organization
   Risk Assessment Profile of the organization
   Strategic Plan of the Organization
   Organization Chart
   Corporate Profile
   Write-up on all the Heads of Department
   Previous Internal audit reports
   Previous External audit reports
• Second, plan how the work will be done by holding a meeting with the members and the internal auditor to discuss and review the following:
   Internal audit charter
   The risk of the organization
   Internal Audit Plan and Budget for the year
• Hold meetings to discuss internal audit and external audit reports. Ensuing that internal audit work is done in line with plan and ensure that recommendations by internal and external auditors are discussed with management and implemented.
• Ensuring that internal audit department is adequately resourced, with personnel and equipment, to perform creditably.
• Supervise meetings in a coordinated manner to ensure that members participate effectively to the benefit of the organization.
• Ensure that internal audit personnel are given periodic and adequate training.
• Ensure the independence of internal audit personnel in the performance of its work.
• Ensure implementation of any recommendation contained in
   Internal audit report
   Parliament’s decision on the Auditor-General’s report
   Auditor-General’s Management Letter
   The report of an internal monitoring unit in the organization particularly in relation to financial matters.
• Ensure reports are made annually on implementation of recommendations to the Minister, Parliament, and Office of the president and the Auditor-General within six months after the end of each financial year.
• Review the activities of the year to ensure that the organizations risks are adequately attended to.
  And any other relevant point.

Positive Effects
In view of the tremendous savings being achieved as a result of removal of ghost names, it is believed that out-sourcing government payroll will inure to the benefit of the government. Additionally, the government can achieve the following:

• Reduction in cost of preparing the payroll as there will not be the need to engage more people and sophisticated software programme to work on the payroll.
• Payroll will be prepared by specialist which will not have been the case with the staff of government department.
• Service company may provide the government a comfort zone by giving indemnity in event of problems arising.
• It will help the government to focus on its core services of offering social services to the public.
• It may reduce payroll fraud.

Negative Effects

• Staff may be laid off as not all the employees may be maintained. This may result in redundancy which may cost the government.
• Ghost names may still persist as dismissals and terminations may not be advised promptly
• If Government fails, it may have to pay redundancy cost for dismissals and workers may go to court.

• Understand the transaction by examining all the contracts and identify potential risks
• Evaluate all the controls at the user entity that relate to the service organization and determine whether that gives the auditor sufficient understanding to provide a basis for assessing risks of material misstatement from the side of the government
  If the auditor concludes that this is insufficient, he must carry out one of the following activities:
• Obtain Type 1 or Type 2 report from service organization (if Available)
• Contact the service organization to get specific information (with permission)
• Visit the service organization and perform procedures to obtain information (with permission)
• Use another auditor to perform procedures at the service organization (with permission)

• The meaning of Professional scepticism
• The importance of professional scepticism
• What can firms do to enhance awareness of professional scepticism’s importance?
• At what stage of the audit is professional scepticism necessary?
• How does this relate to fraud?
• Where else is professional scepticism important, other than fraud.
• How can professional scepticism be evidenced?

Discussion
In February 2012 the IAASB issued a Q & A paper on Professional Scepticism. Professional scepticism is a crucial aspect of audit, defined in ISA 00. The Paper can be summarised by the following points.

What is professional scepticism?
It is hard to define, but is fundamentally a mind-set’ which is linked to the ethical principles of objectivity and independence. It means ‘being alert’ to evidence that contradicts evidence already obtained, or which cast doubts on the reliability of documents or explanations provided, or which may indicate fraud.

Why is professional scepticism important in audits?
It is part of the auditor’s skill set’, and is part of professional judgement. It affects decisions about: the procedures to be performed; the sufficiency & appropriateness of evidence obtained; the validity of management’s financial reporting judgements; and the conclusions draw based on audit evidence.

What can firms do to enhance awareness of professional scepticism’s importance?
It is a matter of education, training and experience, as well as the culture of the firm. At a firm-wide level, this means establishing policies and procedures, promoting a quality-oriented culture, and establishing training and CPD schemes.
At an engagement level, this means that the partner must communicate the importance of quality, and that the audit team is able to raise concerns without fear of reprisals’

At what stage of the audit is professional scepticism necessary?
Throughout the audit! E.g. at engagement acceptance, when considering the integrity of management and owners.

How does this relate to fraud?
The fact that fraud involves deception and concealment makes professional scepticism particularly important in relation to it. ISA 240 emphasises professional scepticism, particularly in the form of ‘an on-going questioning’ of whether there has been a fraud: There are also areas where there is a required presumption that there is a risk of fraud; revenue recognition, risks of management override of controls as a result of fraud, and accounting estimates.

Where else is professional scepticism important, other than fraud?
 Significant or judgemental areas, such as;
 Accounting estimates (e.g. are assumptions reasonable?)
 Going concern (e.g. are management’s plans really feasible?)
 Related party relationship & transactions (e.g. transactions outside the normal course of business – misappropriation of assets?)
 Law & regulations (e.g. where non-compliance may call into question going concern)
How can this be evidenced?
Audit documentation should enable an experienced auditor understand significant decisions made during the audit and any conclusions drawn. As the auditor should be professionally sceptical when making these decisions the documentation would provide evidence of this example it should document the discussions the auditors have about possible non-compliance with laws & regulations, or possible management bias in relation to accounting estimates.

The scenario fits Money Laundering activity.

• Musah is given huge cash to buy his goods by his brother
• Musah’s brother does not have bank account in Ghana
• The proceeds of the transaction is not paid to his brother in Ghana, but paid into his account in foreign country.
• Though we are not sure how his brother get his money, the modus oprandi, fit money laundering.

Expectation of the risk format
In Money Laundering,

• There’s placement of illegal funds into the financial system. Here huge cash is given to Musah to buy goods and sell outside Ghana.
• Layering-Passing the money through a number of transactions, selling the good outside the country which is engagement of economic activity
• Integration-Integrating the proceeds into legitimate economy by banking in other countries.

Actions to be taken by the auditor
The auditor is then exposed to money laundering activity

• The auditor has an obligation to know the source of the money being given by Musah’s brother.
• The auditor must perform due diligence on the customer and the brother to confirm the activity of the brother.
•  If the suspicion is confirmed, the matter should be reported to the authorities.
• The auditor should avoid tipping of the client during his investigation to confirm the suspicion.

Did the auditor properly consider the following points before planning the audit engagement:

• Matters, such as applicable cost accounting orders relevant to the industry, audit of cost account rules, cost accounting practices, economic situations, laws, government regulations, and technological vicissitudes, which affect the industry?
• Matters having impact on entity’s business such as organization, types of products and services?
• Approved suitable level of knowledge of clients business and accounting system by documenting into working papers.
• Had an introductory meeting with the client key official to have detailed knowledge of the business and industry. And has the major issues, if any pointed out in the meeting were properly recorded and communicated to the client well before time?
• Implement the audit planned in planning the nature timing and extend other audit procedures?
• Attained and documented proper understanding of the internal audit functions based upon the involvement and collaboration of the internal audit
• Acquire adequate knowledge of the internal control structure to plan the audit and reflect to place expected reliance on internal cost accounting controls and appraised the nature, time and level of tests of controls to be performed.
• In case it became necessary to have discussions to make significant decisions, whether the results of such discussions documented in the audit working papers? In case the work papers showed client’s information technological risks, the impact on audit and the engagement team’s valuation of whether to include Information Technology Audit specialist?
• Assessed the quality of the performance of audit team in planning?
• Signed all procedures called for in the audit programs?

• Acquiring an appropriate understanding of the nature of the client’s business, the complexity of its operations, the specific requirements of the engagement and the purpose, nature and scope of the work to be performed.
• Acquiring knowledge of relevant industries or subject matters.
• Possessing or obtaining experience with relevant regulatory or reporting requirements.
• Assigning sufficient staff with the necessary competencies.
• Using experts where necessary.
• Agreeing on a realistic time frame for the performance of the engagement.
• Complying with quality control policies and procedures designed to provide reasonable assurance that specific engagements are accepted only when they can be performed competently.

• Staff membership rates at Ablordey – self-interest threat
  Such a benefit could cause a self-interest threat to the audit, because the recipients may not want to lose their benefit, and therefore be biased in their audit work or not seek adjustments where there are material issues in the financial statements.
• Partner invited to sit on the board – familiarity threat
  If the partner were to sit on the board of directors, there is a risk that the partner could lose their audit objectivity as they may start identifying too closely with the company and its other directors. There is also a risk that the audit partner may start taking management responsibility at Ablordey Co.
• Assurance re insurance claim – advocacy threat
  Audit firms must always ensure that accepting other services does not impact on audit objectivity, whether due to the amount of fees relating to the service or as a result of the nature of the service itself.
• Conflict of interest
  Adjaye-Gyamfi &Co has been invited to tender for an audit which will involve Ablordey’s major competitor, Gyms Ltd. It can be appropriate for audit firms to audit competitors, but the clients involved might feel that there is a threat to client confidentiality and may prefer to seek other auditors in such a situation

Self-interest threat

• Auditors are not allowed to accept such benefits unless their value is trivial and inconsequential. In this case, the value of a reduced membership of a spa is unlikely to be trivial and inconsequential to audit staff members and therefore Adjaye-Gyamfi &Co should reject this offer.

Familiarity threat

• Auditors are prohibited by the Code of Ethics from acting as a director for their clients. You should explain this to the Managing Director and politely decline the invitation.

Advocacy threat

• The partners should discover more about the size and nature of this engagement to determine whether it will affect Independence. In particular they should determine whether such an engagement would put the firm in the position of advocating Ablordey’s position to the insurance firm, as this could cause an insurmountable barrier to independence. They should also monitor the level of fee income this would earn Adjaye-Gyamfi &Co from all work performed for Ablordey Co to ensure it does not cause a self-interest threat.

Conflict of Interest

• Adjaye-Gyamfi &Co should therefore disclose to Ablordey that they are in the process of tendering for the audit of a competitor. If either Ablordey Co or Gyms Ltd is unhappy with this situation then Adjaye-Gyamfi &Co will need to decide which audit they want to secure If Adjaye-Gyamfi & Co performs both audits, they must ensure that they use separate audit partners and teams and set up “Chinese walls” to maintain confidentiality.

• 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)