• 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%

Unmodified report
From the information in the disclosure notes it is apparent that the company is not a going concern. However it is not clear on which basis the financial statements have been prepared. They may have been prepared:

• On the going concern basis: or
• On an alternative basis.

An unmodified auditor’s report means that:

• The accounts give a true and fair view
• They have been prepared in accordance with statute

If the accounts have been prepared on a going concern basis, an unmodified opinion would not be appropriate as this does not reflect the true position of the company. The results would be misleading as the readers would make assumptions about the company’s ability to continue, which are clearly not the case. In addition to the inappropriate basis of preparation, disclosure is inadequate as the notes to the accounts do not highlight the significant problems the company is facing. In this respect they are not properly prepared.
If the accounts have been prepared on an alternative basis an unmodified opinion would still not be valid. This is due to the inadequacy of disclosure. The going concern assumption is a fundamental principle. Readers of accounts assume the company is viable unless it is clearly stated otherwise. In this case even though the basis of preparation is correct the lack of disclosure means that they are not properly prepared.          (5 marks)

Alternative opinions
The ‘except for’ or disclaimer of opinion would not be appropriate irrespective of the basis of preparation as the issue is not one of uncertainty. The company has liquidated assets and we are told that the company has ceased to trade in October.

If the financial statements have been prepared on a going concern basis an adverse opinion should be expressed. This would be due to a material and pervasive misstatement as a result of the basis of preparation. For example assets and liabilities are likely to be misclassified as non-current, when they should be classified as current. The opinion would be adverse as the misstatement is pervasive to the overall true and fair view.

If the accounts have been prepared on an alternative basis reflecting that the company is not a going concern, for example the break-up basis, provided that this has been applied correctly the auditor would agree with this treatment. However a qualified ‘except for’ auditor’s opinion should be issued on the grounds of a material misstatement in respect of the adequacy of the disclosure regarding the basis of preparation.    (5 marks)

(i) Leasing of equipment and specialist staff. As Citilink Airlines leases its equipment and the most specialised of its staff from another airline, there is a risk that its equipment and/or pilots could be withdrawn leaving it unable to operate.
(ii) Conditions of exclusive right. The MOA requires Citilink Airlines’ aircraft engines be overhauled biannually. There is a risk that Citilink Airlines will be unable to meet this condition, if the lessor company does not agree to regular overhaul or that it will be too expensive for Citilink Airlines to meet this requirement and it could lose the right to operate, or its exclusivity, opening it up to competition. There may be other conditions which Citilink Airlines has to meet, such as the two weekly flights being a minimum.
(iii) Necessary service suspension. As Citilink Airlines is required to overhaul its engines every two years, there will be a significant period every two years where Citilink Airlines will either have to incur the cost of leasing other planes (assuming this is possible) or will have to suspend services. The cost of leasing other planes might be prohibitively expensive or the disruption to service might mean that conditions relating to the right to operate might not be met. As Citilink Airlines only has one plane, service would also be interrupted if there was an emergency relating to the plane, such as fire or a crash.
(iv) Age of aircraft. The aircraft being leased is old. This raises operational risks (it may not always be able to fly due to necessary maintenance), finance risks (it may require regular repair) and compliance risks (it may not meet environmental or safety standards, now or in the future).
(v) High proportion of expensive seats. The plane leased by Citilink Airlines has a high proportion of unrequired expensive seats and therefore insufficient (overbooked) cheaper seats. Although Citilink Airlines can appease customers by upgrading them, this means the airline is operating well below capacity.
(vi) Cargo. The flight route results in the airline carrying a large amount of horticultural produce. This raises various risks – that Citilink Airlines might be liable to passengers if their cargo degrades in transit, that the airline might be liable for any breaches of law by its passengers (for example, if prohibited items are transferred into or from each country. Many countries prohibit the importation of animals or meat products or plants).
(vii) On-board services. Customers are currently dissatisfied with the food provision on the flight and there is a risk that food prepared in Accra may become less appealing and even dangerous when served on a Johannesburg to Accra flight (when it has been prepared a substantial time earlier, given a six hour flight, at least an hour’s turnaround time, and time for getting to the airline in the first place). If the food makes customers ill, Citilink Airlines might be faced with compensation claims.
(viii) Pricing. There is a complex system of pricing and a large number of sales agents, and Citilink Airlines is at risk of operating at a sales value less than required to cover costs (for example, if too many of the cheapest tickets are sold).
(ix) Safety. The airline industry has stringent safety conditions and Citilink Airlines may face customer boycott or difficulty in recruiting staff if safety requirements are not met.
(x) Fuel. The aircraft cannot fly without fuel, which can be a scarce or high-cost resource. If fuel prices escalate due to world conditions, the company might not be able to meet the costs of operating.       (Any 5 points) 

(i) Lease. Citilink Airlines must ensure that the terms of the contract with the international airline ensure that aircraft and staff cannot be withdrawn without reasonable notice, and that in the event of withdrawal, substitutes will be given.
(ii) Conditions. Citilink Airlines must ensure that all staff are aware of any conditions and the importance of meeting them. However, this risk must simply be accepted as there is little Citilink Airlines can do about conditions imposed on them by the governing body of their industry.
(iii) Service suspension. Citilink Airlines must have contingency plans for service suspension, such as ensuring their contract with the international airline ensures alternative aircraft will be made available to them in the event of maintenance or damage to the aircraft, or by making arrangements to lease from a different airline in the event of emergency. As a minimum, Citilink Airlines must ensure that the airline they lease from would give them financial compensation in the event of aircraft or staff not being available so that Citilink Airlines’s customers could be compensated.
(iv) Age of aircraft. Citilink Airlines should have plans in place to be able to lease/afford newer planes if required to by law. Again, this could be written into their contract with the airline. Citilink Airlines should manage cash flow and borrowing facilities so as to be able to afford ongoing maintenance when required.
(v) High proportion of expensive seats. Citilink Airlines should negotiate a reconfiguration of the plane with the lessor so that business and first class seating could be reduced and more economy seats made available. If this is not possible with the current lessor, Citilink Airlines should investigate leasing differently configured planes from another company. If it is not feasible to adjust the plane seating, Citilink Airlines should consider its pricing and on-board facilities policies to make business and first class seats more attractive to customers. As the seats are not being sold anyway, it is probable that a reduction in prices would increase overall revenue, although this might reduce potential profit.
(vi) Cargo. Citilink Airlines should publish a cargo policy to ensure that customers are aware of their legal obligations. They should ensure that staff are sufficiently trained to discuss the contents of baggage with customers and are aware what items Citilink Airlines should not carry. They should insure against lost and damaged cargo.
(vii) On-board services. Citilink Airlines should consider entering into a contract with a company in Johannesburg to provide food for the Johannesburg to Accra journey. Obviously they must not breach any existing contract with the Accra company and so in the meantime should review the type of food provided. For example, it might be safer to only offer cold food, for example sandwiches and cake until an Johannesburg contract can be set up. Even if a new contract is set up, it might still be best to offer cold food as there is less chance of health problems arising as a result of serving cold food rather than hot food.
(viii) Pricing. As discussed above, Citilink Airlines should review the pricing policy. They should also establish limits on how many of certain types of tickets (non-refundable/single etc) can be issued for one flight and they should institute a centralised system to ensure that each agent is aware when limits have been reached. As the agents must be linked to a similar system already (to be aware of whether tickets are available for sale) this should not be too difficult to achieve) .
(ix) Safety. The company should appoint a member of staff to be specifically responsible for safety operations (such as training, updating for legal requirements, educating passengers) and should ensure that staff are regularly appraised about safety issues.
(x) Fuel. The company could take out hedging contracts against the cost of fuel. Other than this, there is little they can do about this matter, and it is another risk that has to be accepted.        (Any 5 points)                      

Consultancy projects are one-off projects designed to address adhoc issues. It is playing an increasing role in the work of internal audit. Taking on this projects enables internal auditors to extend their skills and the organization to draw on the knowledge of internal auditors. However there are dangers in becoming too involved in consultancy projects.
The resultant dangers include:

• Internal audit staff may be diverted to consultancy projects, and the regular audit reviews may be inadequately resourced.
• By taking on consultancy projects and suggesting solutions, internal audit could be getting too much involved in operational concerns. There is a serious lack of independence if internal audit has to review solutions that internal audit staff have provided.
• Management is relying on internal audit to solve problems instead of having operational staff and managers solve or preferably prevent them. Certain steps can be taken in order to avoid these problems.

• The terms of reference of the internal audit department should draw a clear distinction between regular audit services and consultancy work.
• Enough resources for regular audit services should be guaranteed. Consultancy work should be separately resourced and additional resources obtained if necessary.
• If managers are concerned about improving controls, reviewing these improvements can legitimately be included in the work of internal audit.
• Regular audit reviews and consultancy projects can be undertaken by different staff.
• If consultancy work identifies serious control deficiencies, these must be incorporated into internal audit reviews.

An AC is mandated to:

• Ensure the implementation of the recommendations in all audit reports of every MDA and MMDA.
• Follow-up Auditor-General and Public Accounts Committee’s recommendations as well as recommendations in internal audit reports.
• An AC must ensure that the head of the MDA/MMDA:
• Pursues the review and implementation of matters in all audit reports as well as financial matters raised in the reports of internal Monitoring Units in the institution, body or organisation
• Annually prepares a statement showing the status of implementation of recommendations made in all audit reports as well as the Auditor-General’s reports which have been accepted by parliament and any other related directives of Parliament:
  The statement shows remedial actions taken or proposed to be taken to avoid or minimize the recurrence of undesirable features in the accounts and operations of the institution, body or organisation, and the time frame for action to be completed.
  The statement referred to above shall be endorsed by the relevant Minister and forwarded to Parliament, Office of the president, the Director-General of Internal Audit Agency (IAA) and the Auditor-general within six months after Parliamentary decisions on the Auditors General’s reports.
• In relation to internal audit, the AC shall: Review and advise on the strategic and annual internal audit plans; Monitor the performance of internal Audit Units against its annual internal audit plans and strategic plans; Monitor the implementation agreed audit recommendations.

According to the constitution of Ghana (1992) the Auditor General shall have access to all books, records, returns, and other documents relating or relevant to those accounts.
The Audit Service Act (2000) requires the Auditor General to express his opinion on whether the accounts presented by statutory corporation are fairly presented in line with;
*Applicable statutory provisions
*Stated accounting policies of the Government
*Generally accepted accounting standards

The Auditor General Reports on the following:
The profitability, liquidity, stability and solvency of the corporation and also the performance of the shares of the corporation on the capital markets, where relevant:
*Whether there was any delay in payment of government portion of any declared dividend, if any, into the Consolidated Fund
*Any significant cases of fraud or losses and the underlying causes
*Any internal control weakness noted
*The general corporate performance indicating
– Achievement against set targets and objectives
– Whether the finances of the body have been conducted with due regard to economy, efficiency and effectiveness
having regard to the resources utilised.

In this case, the Managing Director is wrong since the constitution provides that the Auditor general shall have access to all books, records, returns, and other documents relating or relevant to those accounts.
Secondly, by demanding the performance agreement, the Auditors wants to fulfil their role to ensure that general corporate performance are in agreement with set target and objectives.