The audit opinion will be a qualified opinion. The issue at stake is material but not pervasive. Management is in disagreement with the auditor in the adoption of lower of cost and net realisable value in the valuation of inventories.

INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF YAWA COMPANY LIMITED FOR THE YEAR ENDED 31ST DECEMBER 2017
Report on the audit of the financial statements

Qualified opinion
We have audited the financial statements of Yawa company limited which comprise the statement of financial position as at 31st December, 2017 and the statement of comprehension income, statement of changes in equity and statement of cash flows for the year then ended and notes to the financial statements, including a summary of significant accounting policies.
In our opinion, except for the matter stated in the basis of qualified opinion, the accompanying financial statements give a true and fair of the financial position of Yawa company limited as at 31st December 2017 and of its financial performance and its cash flow for the year then ended in accordance with International Financial Reporting Standards (IFRSs) and in the manner required by the companies Act 1963, Act 179.       (4 marks)

Management Responsibility
The Board of Directors are responsible for the preparation and fair presentation of the financial statements in accordance with the International Financial Reporting Standards and in the manner required by the companies Act 1963, Act 179 and for such internal control the board of Directors determines is necessary to enable the preparation of financial statements that are free from material misstatements whether due to fraud or error.
In preparing the financial statements the Board of Directors is responsible for assessing the company’s ability to continue as a going concern, disclosing as applicable, matter related to going concern and using the going concern basis of accounting unless the Board of Directors either intend to liquidate the company or the cease operations, or have no realistic alternative but to do so. The Board of Directors is also responsible for overseeing the company’s financial reporting process.   (2 marks)

Auditor’s Responsibilities for the audit of the financial statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatements, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance but is not a guarantee that an audit conducted in accordance with ISA, s will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if individually or in the aggregate they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.
As part of an audit in accordance with ISAs, we exercised professional judgement and maintained professionalism throughout the audit.    (2 marks)

• Financial due diligence (a review of the financial position and obligations of a target to identify such matters as covenants and contingent obligations)
• Operational and IT due diligence (extent of operational and IT risks, including quality of system, associated with a target business).
• People due diligence (key staff positions under the new structure, contract termination costs and cost of integration).
• Regulatory due diligence (review of the target’s level of compliance with relevant regulation)
• Environmental due diligence (environmental. Health and safety and social issues in a target)

• Structure, including how the target is owned and constituted and what changes will be necessary.
• Financial health, based on a detailed examination of past financial statements and an analysis of the existing asset base.
• Credibility of the owners, directors and senior managers, including validation of the career histories of all the main players in the business.
• Future potential, reflected in the strengths of its products or services and the probability of earnings growth over the medium to long term
• Assessment of the risk to the acquiring business, in terms of their markets, strategy and likely future events.
• The business plan, in terms of how realistic it is, how solid the assumptions used are and how well it conveys the potential.

Mandatory roles and responsibilities of Audit Committees
The audit committee shall ensure that the head of the covered entity.

• Pursues the implementation of recommendation contained in.
  a. Internal Audit reports
  b. Parliament decisions on the Auditor-Generals report
  c. Auditor-General management letter
  d. The report on internal monitoring unit in the covered entity particularly in relation to financial matters raised; and
  e. Any other report the principal account holder shall require.
• Prepares an annual statement showing the status of implementation of recommendations contained in:
  a. Internal audit reports
  b. Parliament’s decision on the auditor – General’s report.
  c. Auditor- General’s management letter
  d. The report of internal monitoring unit the covered entity concerned particularly in relation to financial matters raised
  e. Any other report the minister shall require
• An annual statement required under the above shall;
  a. Indicate the remedial action taken or proposed to be taken to avoid or minimise the recurrence of an undesirable feature in the accounts and operations of a covered entity.
  b. Indicate the period for the completion of the remedial action: and
  c. Be endorsed by the relevant sector minister and forwarded to the minister of finance, parliament and the office of the president and the Auditor-General within six months after the end of each financial year.

Advisory Roles and Responsibilities.

• Providing advice on sound, transparent and reliable financial management;
• Ensuring the risk management process is comprehensive and effective;
• Helping achieve organizational-wide strong and effective internal controls in the covered entity
• Reviewing corporate policies relating to compliance with laws, regulations, ethnics, conflict of interest, investigation of misconduct and fraud.
• Reviewing current and pending corporate governance-related litigation or regulatory proceedings to which the covered entity is a party.
• Ensuring the internal auditor access to the audit committee and encouraging communications beyond scheduled committee meetings.
• Reviewing internal audit plans, internal audit charters, risk (including fiscal risk) assessment reports.
• Ensuring the development, approval and update of the code of conduct. The committee should also ensure that all employees receive the code of conduct understand it and obtain appropriate training regarding it.
• Follow up on significant issues investigations and disciplinary actions.
• Collaboration with the internal audit agency to initiate investigation into matters involving fraud or misuse of public funds by the principal spending officer.
• Reviewing audit reports for assurance on efficiency, effectiveness and economy in the administration of programmes and operations of the covered entity.

Governance Processes
The objectives of the governance processes are the following:

• To ensure that the organization is able to achieve its mission
• To ensure the right strategic direction of the organization
• To ensure that the operation of the entity will be carried out in compliance with the laws and regulations and internal systems and procedures
• To ensure the stability and growth of the entity
• To protect the interest of the stakeholders
• To prevent fraud and other malfeasance in the entity
• To safeguard the assets of the entity and help to preserve the environment
• To ensure effective organizational performance and accountability
• To ensure smooth information flow and proper risk management
• To co-ordinate the activities and communication of information among the board,
• To establish and monitor whether controls and standards are working.
  Audit work
• Evaluation of the design, implementation and effectiveness of organization’s ethics-related objectives, programmes and activities
• Assessing whether the information technology governance of the organization supports the organization strategies and objectives

Risk management
Objectives to be assessed in risk management are ensuring that:

• risk procedures are in place
• Strategies are in place and are working effectively.
• Reliability and integrity of financial and operational information
• Effectiveness and efficiency of operations
• Safeguarding assets
• Compliance with the Laws, regulations, and contracts
  Audit work:
• Identifying and evaluating significant exposure to risk management and control system.
• Monitor and evaluate the effectiveness of the organization’s risk management system
• Suggest improvement of the risk management systems.

• In view of the uncertainties in recognising and measuring environmental liabilities, typically relating to the timing of clean up, the technology available or possible new legislation, the auditor needs to exercise particular care in assessing the risk of a material misstatement or omission in the financial statements.
• Where environmental matters may be a significant source of risk, an internal control system would not be effective unless it covered items giving rise to environmental risk.
• Whilst management is responsible for all internal controls to safeguard the shareholders’ investment and the company’s assets, the auditor is only concerned with those environmental controls that are considered relevant to the audit of the financial statements.
• Auditors carry out their work recognising that non-compliance with laws or regulations may materially affect the financial statements. In view of the growing body of environment law, the auditor needs to obtain a general understanding of these laws and regulations relevant to the business, including those that are specific to an industry sector.
• There are a number of difficulties in recognising and measuring the financial effects of environmental matters in the financial statements, all of which may have implications for the auditor.
• Where management engages an expert to provide technical advice to assist in developing estimates and disclosures in the financial statements relating to environmental matters, the auditor should consider the adequacy of such work, as well as the expert’s competence and objectivity.
• The auditors should also consider any going concern issues that could arise on account of environmental challenges.      (Any 3 points)

* Planning the audit
* Performing Substantive Procedures
* Carrying a review and reporting

• During the Planning stage, the auditor needs to obtain knowledge of the business to determine how the company’s operation impact the environment and the nature of laws and regulations which the company has to comply with in its operations.
  The auditor will have to carry out inherent risk assessment to determine which environmental factors can translate into material misstatement in the financial statements and can affect the going concern of the entity.
• During Substantive procedures, the auditor will gather appropriate and sufficient evidence to ensure the correct treatment of the following in the financial statements;
  *Provisions- for site restoration, fines and compensation
  *Contingent liabilities in relation to pending legal action
  *Asset values- issues that may impact on impairment or purchase goodwill and products.
  *Capital/Revenue expenditure- cost of cleanup or meeting legal standards
  *Development cost-new products
  *Going concern issues
• At the review stage of the audit, the auditor will take into account environmental issues to determine whether management use of going concern basis is reasonable and acceptable to determine the type of opinion to issue.

• The anti-money laundering laws and regulations require auditors to report suspicious transactions and activities to the Financial Intelligence Centre. However, the code of ethics requires the auditors to maintain confidentiality in client relationships. This can result in ethical conflicts namely duty to report to the authorities and duty of confidentiality to the client. This conflict may be particularly sharp where an auditor suspects the client of money laundering.
• Under the anti-money laundering, there is a requirement to report even a suspicion of money laundering which would likely conflict with the auditor’s duty of confidentiality to the client.
• The situation is further complicated by the need to avoid “tipping off” the client that the auditors suspect to be engaged in money laundering which could make it very difficult for an auditor to decide whether they have a duty to report their suspicions as it would be hard to gather evidence of money laundering without “tipping the client off”.
• If such an ethical conflict cannot be resolved, then the auditor may consider obtaining professional advice from the ICAG or from legal advisors. This can generally be done without breaching the fundamental principle of confidentiality if the matter is discussed anonymously with the ICAG, or under legal privilege with a legal adviser.
• The ethical rules also make provision for exceptions under the confidentiality where the auditor can disclose information when required by the law, in this case the anti-money laundering law.     (Any 4 points)

• Appointment of a money laundering officer (MLRO) and implementation of internal reporting procedures.
• Train individuals to ensure they are aware of the relevant legislation, know how to recognize and deal with potential money laundering, how to report suspicions to the MLRO.
• Establish internal procedures appropraiate to forestall and prevent money laundering, and make relevant individuals aware of the procedures.
• Verify the identity of new and existing clients and maintain evidence of identification that is customer due diligence measures
•  Maintain records of client identification and any transactions undertaken for or with the client.
• Report suspicions of money laundering to the Financial Intelligence Centre. (FIC)

Quality control procedures relevant to an audit engagement ISA220 requires firms to implement quality control procedures over individual audit engagements. The procedures include.

• Leadership Responsibilities;
  The engagement partner is required to set an example with regards to the importance of quality. The engagement partner shall take responsibility for the overall quality on each audit engagement to which that partner is assigned.
• Ethical Requirements
  Throughout the engagement, the engagement partners shall remain alert through observation and making enquiries as necessary, for evidence of non-compliance with relevant ethnical requirements by members of the engagement team.
• Acceptance/ continuance of clients relationships and specific engagements
  The partner is required to ensure that the requirements of ISQC1 in respect of acceptance and continuing with the audit are followed. If the engagement partner obtains information that would have caused him to decline the audit in the first place he should communicate that information to the firm so that swift action may be taken. He must document conclusions reached about accepting and continuing the audit.
• Assignment of engagement Terms.
  The assignment of engagement terms is an important matter in ensuring the quality of an individual assignment. This responsibility is given to the audit engagement partner. He must ensure that the team is appropriately qualified and experienced as a unit. He should ensure that he assigns staff of sufficient capabilities, competence and time to individual assignments so that he will be able to issue an appropriate report.
• Engagement Performance
  Engagement performance involve several factors such as Direction. The partner directs the audit. He is required by other auditing standards to hold a meeting with the audit team and to perform an engagement quality control review to address the threat of self review.        (Any 4 points)

• The most obvious areas of problems for small firms are when multiples of people are required to carry out quality control procedures, therefore review and consultation. The firm may lack the human resources to carry out reviews and consultations, particularly at the experienced level. It may be necessary to come to agreements with other firms to provide a forum for such reviews and discussions.
• In addition, there may be problems with initial and ongoing training or with particular specialist knowledge if the firm does not have a lot of staff. Again, entering into agreements with other firms to pool resources in such cases may help with these problems.

• The appointment will have to be defined very clearly in the letter of engagement. The company will have to confirm a detailed description of the limits of FFAF’s responsibility for the preparation of the bookkeeping records and the audit of the financial statements. The terms of the engagement should make it clear that the audit firm will take no direct part in the preparation of financial statements.
  The responsibility for selecting accounting policies and making significant accounting estimates and judgements should remain with company’s management.
• The company’s management should agree that it will accept full responsibility for all matters of judgement, including the preparation of journal entries. Audit firm staff will only undertake work of a routine and mechanical nature.
• The audit firm should ensure that the staff members responsible for the work undertaken have nothing to do with the audit itself. They will have had no prior connection to the company because this is a new audit. The supervision of the bookkeeping work might also be made the responsibility of a different partner from the person responsible for the audit.
•  The bookkeeping staff should not be granted access to audit working papers. The audit staff should treat them with no more trust and familiarity than they would other members of the company’s staff.
• Any assertions made by the bookkeeping staff should be subject to the same degree of checking as would be the case if made by a direct employee of the company.
• The company should be asked to agree in writing that it will appoint the bookkeeping staff appointed by the audit firm in the event of the firm being removed from office. The only proviso might be that the individual employees’ performance must be deemed satisfactory by the company.        (Any 5 points)

• Identification of fraud risk factor. The ISA requires that irrespective of whether the reporting framework established related party requirements, the auditor is required to obtain an understanding of related party relationships and transactions sufficient to be able to recognise fraud risk factors arising from related party relationships and transactions that are relevant to the identification and assessment of the risks of material misstatement due to fraud.
• Determine compliance with the applicable reporting framework. Where the applicable financial reporting framework establishes related party requirements to obtain sufficient appropriate evidence about whether related party relationships and transactions have been appropriately identified, accounted for and disclosed in the financial statements in accordance with the reporting framework.
• To aid risk assessment. As part of the risk assessment procedures required by ISA 315, the auditor must carry out procedures to obtain information relevant to identifying risks associated with related parties and their transactions.
• To determine appropriate risk responses. Responses to the risk: As part of the ISA 330 requirements that auditors respond to assessment risks, the auditors must design and perform further procedures to obtain sufficient appropriate audit evidence about the assessed risk of material misstatements associated with related party relationships and transactions.
• To discover management awareness of related parties or bias. In many cases the financial statements must include related party disclosures but management may be ignorant of the requirements or may be biased and these may increase the risk of fraud and risk of misstatement of financial statements. Identification of related party transactions may enable the auditors to assess the significance of the risks and the appropriate opinion to issue.
• To obtain written representations. Identification of related party relationships and transaction will enable the auditor to demand written representations from the management that they have disclosed to the auditor the identity of the entity’s related parties and all related party relationships and transaction of which they are aware of and they have appropriately accounted for and disclosed such relationships and transactions in accordance with the requirements of the reporting framework.
• To draw the right conclusion and form the right opinion- with audit conclusion and reporting, identification of related party relationships and transaction together with the accompanying risk assessment and risk response will enable the auditor to draw the right conclusions and determine the appropriate opinion to issue.   (Any 4 points)

In total, Black Gold Ltd’s profit for the year has increased by 88% which appears at odds with the revenue figure, which has only increased by 9% from the previous year. This may indicate that revenue has been inflated or incorrect cut–off applied, especially given the fact that the directors of the company have described the year as ‘challenging’. In response, the auditor should examine the revenue recognition policy of the company and adopt procedures that would certify the revenue figure. The cost of sales and the expenses should be examined.

Revenue has increased by 9% but Cost of Sales has fallen by 7%. It should be expected that an increase in revenue would be matched by a corresponding increase in cost of sales. Again this may indicate incorrect allocation of revenue in order for the bank to look favourably on the company and increase its overdraft facility. It could also be an error in the valuation of closing stock and classification of purchases items. The auditor’s responsibility should be to check on the completeness and accuracy of the revenue amount, the classification of purchases – ensuring proper distinction between capital purchases and purchase of goods, and correct valuation of closing stock.

The gross profit has increased by 28% and this is significant. The auditor should focus on the revenue and cost of sales figures to establish the reasons for the increase.

Administration expenses have fallen in comparison to the previous year (decrease of 16%) which is unusual given that revenue has increased by 9%. An increase in costs to be in line with the increase in the revenue figure should be expected. This could indicate that expenses may be understated through incorrect cut-off or incorrectly capitalising expenditure which should be written off to the statement of profit or loss for the year. The auditor should check the administrative expenses for completeness and correct classification.

A similar issue applies to selling and distribution costs which have fallen by 8% – they have not increased as expected in line with revenue. There could be legitimate reasons for the change but this area needs to be investigated further during the audit fieldwork stage.

Interest payable has stayed in line with the previous year – increase of 2%. This figure can be verified easily during the audit by inspecting bank statements and other relevant documentation from the bank.

WORKINGS: (Amounts are in GH¢’000)
1. Change in Profit: 3,358 / 1,784 – 1 = 88%
2. Change in Revenue: 10,410 / 9,528 – 1 = 9%
3. Change in Cost of Sales: 4,752 / 5,110 – 1 = -7%
4. Change in Gross Profit: 5,658 / 4,418 – 1 = 28%
5. Change in Administration Expenses: 1,334 / 1,596 – 1 = – 16%
6. Change in Selling and Distribution Expenses: 846 / 920 – 1 = -8%
7. Change in Interest Payable: 120 / 118 – 1 = 2%