WORKINGS: 
W1: 

Debt Outstanding @ 1/1/2018    = $5,000,000
Translation of loan into Cedis = ($1 x $5,000,000)/GH¢5.20
.                                                = GH¢26,000,000

Threshold Ratio =  Debt : Equity
.                           =      3 : 1
3 times equity = 3 x 1,435,000
.                       = 4,305,000

Computation of allowable Interest:
If 26,000,000 = 90,124
Therefore 4,305,000 = ?
=(4,305,000 x90,124)/26,000,000
=GH¢14,922.45

W2:

W3:
Foreign Exchange Loss:
Total foreign Exchange = 147,000
If 26,000,000 = 147,000
Therefore 4,305,000 = ?
Allowable Foreign Exchange = 4,305,000 x (147,000/26,000,000)
.                                               =24,339.81

.                                                                            GH¢
Total Foreign Exchange                                   147,000.00
Foreign Exchange Allowable                           24,339.81
Foreign Exchange unallowable                     122,660.19                                    (7 marks evenly spread using ticks)

                                                  MEMO
TO:                  Tax Manager
FROM:            Tax Intern
DATE:             7th July 2019
SUBJECT:       Tax Implication on Thin Capitalization Rules
INTRODUCTION
Following your request for me to provide the tax implication on the thin capitalization, I furnish as follows:
ISSUES
Kelkadadi ltd is a subsidiary of Danlerigu and any loan that is granted shall be subject to Thin capitalization rule which rules say that the debt secured should not be more than 3 times the equity of the entity.
In this particular situation, the debt exceeds the three times. Consequently, the interest paid or payable that exceeds the 3: 1 ratio shall be added to income and taxed and also the foreign exchange loss paid or payable.
Additionally, the total interest paid or payable attracts a withholding tax at the rate of 8%.

From W2 as attached, total interest of GH¢ 90,124.00 shall attract interest at 8% which is (90,124.00 * 8%) = GH¢7,209.92
Interest of GH¢75,201.55 shall be disallowed, meaning it should not be an allowable deduction out of GH¢90,124 with GH¢14,922.45 allowable. (2 marks)

Summary of Foreign Exchange Loss

From W3 as per the schedule attached, the total foreign exchange loss of GH¢147,000 only GH¢24,339.81 shall be allowable with GH¢122,660.19 not allowable for tax purpose.             (2 marks)
CONCLUSION
In conclusion, the attached schedule will aid your comprehension of the issues as stated above.
Thank you
Yours faithfully,                                                        (1 mark for structure of Memo)

It is the responsibility of management to ensure a client operation is conducted in accordance with laws and regulations. The following policies and procedures, among others may be implemented to assist management in the prevention and detection of non-compliance with laws and regulations.

• Monitor legal requirements and ensure that operating procedures are designed to meet these requirement.
• Institute and operate appropriate systems of internal control induding internal audit and an audit committee.
• Develop, publicise and follow a code of conduct
• Ensure employees are properly trained and understand the code of conduct
• Monitor compliance with the code of conduct and act appropriately to discipline employees who fail to comply with it
• Engage legal advisors to assist in monitoring legal requirements
  Maintain a register of significant laws with which the entity has to comply within its particulars industry, and a record of complaints.                      (1 mark each for any 5 valid point)

Responsibility of the Auditor
ISA 250.10 demands that auditors are to;

• Obtain sufficient appropriate evidence regarding compliance with the provisions of those laws and regulations generally recognised to have a direct effect on the determination of material amounts and disclosures in the financial statements
• Perform specified audit procedures to help identify instances of non-compliance with other laws and regulations that may have a material effect on the financial statements and
• Respond appropriately to non-compliance or suspected non-compliance with laws and regulations identified during the audit.
  As part of obtaining an understanding of the entity and its environment in accordance with ISA 315, ISA 250.12 requires the auditor to obtain a general understating of
• The legal and regulatory framework applicable to the entity and the industry or section in which the entity operates
• How the entity is complying with that framework.                   (1 mark each for any 5 valid point)

Sampson Quaye & Co. has a direct interest in the audit client, which is technically forbidden by the code of conduct. However, it is a requirement of any firm auditing the company that the shares be owned by the auditors. The interest is not material. The audit firm should safeguard against the risk by not voting on its own re-election as auditor. The firm should also strongly recommend to the company that it removes this requirement from its stature as it is at odds with ethical requirements for auditors.         (3 marks)

The audit firm has an indirect interest in the parent company of a company it has been invited to tender for by virtue of its provident fund scheme having invested in Standards Group.

This is no barrier to the audit firm tendering for the audit of Akroma Ltd. Should the audit frim win the tender and become the auditors for Akroma ltd. they should consider whether it is necessary to apply safeguards to mitigate against the risk to independence on the audit as a result of the indirect financial interest.

The factors that the partners will need to consider are the materiality of the interest to either party or the degree of control that the firm actually has over the financial interest.
In this case, the audit firm has no control over the financial interest. An independent provident fund scheme administrator is in control of the financial interest. In addition, the interest is unlikely to be substantial and is therefore immaterial to both parties. Only if the threat is significant should the interest be divested.

It is likely that this risk is already sufficiently minimal so as not to require safeguards. However, if the audit firm felt that it was necessary to apply safeguards, they could consider the following;

• Notifying the audit committee of the interest
• Requiring United Fund Ltd to dispose of the shares in Standard Group.        (3 marks)

Nenebi is at present a member of the assurance team and a member of his immediate family owns a direct financial interest in the audit client. This is unacceptable.
In order to mitigate the risk to independence that this threat possesses on the audit, the audit firm needs to apply one of two safeguards:

• Ensure that the connected person divests the shares
• Remove Nenebi from the management team
  Nenebi should be appraised that these are the options and removed from the team while a decision is taken whether to divest the shares. Nenebi’s wife appears to want to keep the shares in which case Nenebi should be removed from the team immediately.
  The firm should appraise the audit committee of Minimade Ltd. of what has happened and the actions they have taken. The partners should consider whether it is necessary to bring in an independent partner to review audit work. However, given that Nenebi’s involvement is subject to the review of the existing engagement partner and he was not connected with the shares while he was carrying out the work, a partner’s review is likely to be unnecessary in this case.              (4 marks)

The recent publication by the IAASB on audit quality, describes the factors that contribute to audit quality as contextual factors, input factors, output factors and key interaction factors.

Contextual factors determining audit quality include:

• Business practices and commercial law
• Laws and regulation relating to financial reporting
• The applicable financial reporting framework
• Information systems
• Corporate governance
• Financial reporting timetable
• Broader cultural factors
• Audit regulation\
• Litigation environment
• Attracting talent

Inputs into audit quality are factors which may contribute to a high quality audit and would include the following:

• Values, ethics and attitudes of auditors and the audit firm
• Knowledge, experience and time allocated to perform the audit.

Outputs from audit quality may flow from:

• The auditor
• The audit firm
• The entity
• Audit regulators

Key interactions with regard to audit quality include:

• Auditors and management, those charged with governance, users and regulators
• Management and those charged with governance, users and regulators
• Those charged with governance and regulators and users
• Regulators and users.

REPORT TO MANAGEMENT

The Directors

Bibini Co. Ltd

10 Wansema Lane, Somewhere City
15th September, 2015.

Dear Sirs,
Following our recent audit of your company, we are writing to advise you of various matters which came to our attention.
We have set below the areas of significant deficiency which we noted, together with our recommendations. These recommendations have already been discussed with the Managing Director and his comments have been included.
As the purpose of the audit is to form an opinion on the company’s financial statements, you will appreciate that our examination cannot necessarily be expected to disclose all shortcomings of the system and for this reason, the matters raised may not be the only ones which exist.

Deficiencies
Preparation of payroll and maintenance of personnel records.
Under your present system, just two members of staff are entirely and equally responsible for the maintenance of personnel records and preparation of the payroll. Furthermore, the only independent check of any nature on the payroll is that the chief accountant confirms that the amount of the wages cheque presented to him for signature agrees with the total of the net wages column in the payroll. This latter check does not involve any consideration of the reasonableness of the amount of the total net wages cheque or the monies being shown as due to individual employees.

Implications
It is a serious deficiency of your present system, that so much responsibility is vested in the hands of just two people. This situation is made worse by the fact that there is no clearly defined division of duties between the two of them. In our opinion, it would be far too easy for fraud to take place in this area (for example, by inserting the names of ghost employees into the personnel records and hence on to the payroll) and/or for clerical errors to go undetected.

Recommendations
i. A person other than the two clerks should be made responsible for maintaining the personnel records and for periodically (but on surprise basis) checking them against the details on the payroll.
ii. The two wages clerks should be allocated specific duties in relation to the preparation of the payroll, with each clerk independently reviewing the work of the other.
iii. When the payroll is presented in support of the cheque for signature to the chief accountant, he should be responsible for assessing the reasonableness of the overall charge for wages that week.

We should appreciate your comments as to how you propose to deal with the matters raised in this letter. If you require any further information or advice, please contact us.
We have prepared this letter for your use only. It should not be disclosed to a third party and we can assume no responsibility to any third party to whom it is disclosed without our written consent.
We would like to take this opportunity to thank you and your staff for your help and co-operation during the course of our audit.

Yours faithfully,
Broni and Co.

The procedures that could be used to review the interim financial information include:
i. Reading last year’s audit and previous review files.
ii. Considering any significant risks that were identified in the prior year audit.
iii. Reading the most recent and comparable interim financial information.
iv. Considering materiality.
v. Considering the nature of any corrected or uncorrected misstatement in last year’s financial statements.
vi. Considering significant financial accounting and reporting matters of ongoing importance.
vii. Considering the results of any interim audit work for this year’s audit.
viii. Considering the work of internal audit.
ix. Asking management what their assessment is of the risk that the interim financial statements might be affected by fraud.

x. Asking management whether there have been any significant changes in business activity, and if so, what effect they have had.
xi. Asking management about any significant changes in internal controls and the potential effect on preparing the interim financial information.
xii. Asking how the interim financial information has been prepared and the reliability of the underlying accounting records.

The appropriate form of communicating to a superior in an organisation is through a Memorandum. The answer should therefore be set out in a Memorandum form.

MEMORANDUM
To:             Municipal Chief Executive
From:        Internal Auditor
Subject:     Functions of the Internal Audit Agency
Date:         15th September, 2015
___________________________________________________________________________
As requested during our interaction on your familiarisation tour of the Internal Audit Department, the functions of the Internal Audit Agency (IAA) are detailed below.

The IAA is required to ensure that:
1) The financial activities and operating information reported internally and externally is accurate, reliable and timely.
2) The financial activities of MDAs and MMDAs are in compliance with laws, policies, plans, standards and procedures.
3) National resources are adequately safeguarded.
4) National resources are used economically, effectively and efficiently.
5) Plans, goals and objectives of MDAs and MMDAs are achieved.
6) Risks are adequately managed in the MDAs and MMDAs.

In addition to these, the IAA must:
7) Promote economy, efficiency and effectiveness in the administration of government programmes and operations.
8) Prepare plans to be approved by the Board for the development and maintenance of an efficient internal audit for the MDAs and MMDAs.
9) Facilitate the prevention and detection of fraud.
10) Provide a means for keeping the MDAs and MMDAs fully and currently informed about problems and deficiencies related to the administration of their programmes and operations and the necessity for appropriate corrective action.

Finally, the IAA is required to monitor, undertake inspections and evaluate the internal auditing of the MDAs and MMDAs. I shall be available for any further discussion when necessary.

Thank you.
Signed.
Internal Auditor

(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.

REPORT ON ASSESSMENT OF THE NEED FOR INTERNAL AUDIT IN ADEPA LTD. TO THE SENIOR PARTNER.
In assessing the need for an internal audit function in Adepa Ltd., consideration should be given to the following factors:

• The cost of setting up an internal audit department versus the predicted benefits
• Predicted savings in external fees where work carried out by consultants will be carried out by the new internal audit department.
• The complexity and scale of the Adepa Ltd.’s activities and the systems supporting those activities especially with the current growth of the company and the desire to use the most modern technology in its activities
• The ability of existing managers and employees to carry out assignments that internal audit may be asked to carry out
• Management’s perceived need for assessing risk and internal control as demonstrated by the management of Adepa Ltd.
• Whether it will be more cost effective or desirable to outsource the work
• The pressure from external stakeholders to establish an internal audit department.

If the volume of internal audit work required is such that the price differential between employing an internal audit team and outsourcing the work is small, the company will need to consider that there are longer term benefits such as:

• Establishing an internal audit department will help maintain a group of highly skilled people which may help the business develop faster that it would otherwise have been
• Working in internal audit can be a route providing training for future senior executives because internal auditors are likely to obtain knowledge of many aspects of the business and liaise with personnel at all levels.

If management considers these factors, it will be in a position to take a decision on the establishment of an internal audit department.

Signed
Audit Manager.

The standard, ISQC 1 provides three main issues to be considered for acceptance of nomination. These are the integrity of the client, the competence of the firm and ethical requirements. The matters to consider on the integrity of a client include the following:

• The identity and business reputation of the client’s principal owners, key management, related parties and those charged with governance.
• The nature of the client’s operations, including its business practices
• Information concerning the attitude of the client’s principal owners, key management, and those charged with governance towards matters such as aggressive interpretation of accounting standards / internal control environment.
• Whether the client is aggressive with fixing and maintaining the firm’s fees as low as possible
• Any indication of an inappropriate limitation on the scope of work
• Any indication that the client might be involved in money laundering or other criminal activities
• The reasons for the proposed appointment of the firm and non-reappointment of the previous firm.

The matters to consider on the competence of the audit firm include:

• Knowledge of the relevant industry by the firm’s personnel
• Experience with relevant regulatory or reporting requirements
• Personnel with the necessary capabilities and competence
• Availability of experts if needed.
• Ability to complete the engagement within the reporting time.

The ethical issues border on the need for the firm to consider whether acceptance of the nomination will create any conflict of interest or other ethical issues. The firm must also ensure that the previous auditors have been properly removed in accordance with the law