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Institute of Chartered
Accountants – Ghana (ICAG)
Paper 3.2
Advanced Audit and Assurance
Final Mock Exam 1
Question paper
Time allowed
3 hours
Instructions:
All five questions in this exam are compulsory and must be attempted.
DO NOT OPEN THIS PAPER UNTIL YOU ARE READY TO START UNDER
EXAMINATION CONDITIONS
ii
Advanced Audit and Assurance
The Institute of Chartered Accountants – Ghana
First edition 2015
ISBN 9781 4727 2843 2
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Published by
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©
The Institute of Chartered Accountants –
Ghana 2015
Final Mock Exam 1: Questions
ALL FIVE questions are compulsory and MUST be
attempted
Question 1
(a)
You are a manager in Son & Co, responsible for the audit of the Jones Group (the Group), which is
listed. The Group's main activity is steel manufacturing and it comprises a parent company and five
subsidiaries. Son & Co currently audits all components of the Group.
You are working on the audit of the Group's financial statements for the year ended 30 June 20X2.
This morning the audit engagement partner left a note for you:
'Hello,
The audit senior has provided you with the draft consolidated financial statements and accompanying
notes which summarise the key audit findings and some background information.
At the planning stage, materiality was initially determined to be GHS900,000, and was calculated
based on the assumption that the Jones Group is a high risk client due to its listed status. During the
audit, a number of issues arose which meant that we needed to revise the materiality level for the
financial statements as a whole. The revised level of materiality is now determined to be
GHS700,000. One of the audit juniors was unsure as to why the materiality level had been revised.
There are two matters you need to deal with:
(4 marks)
(i)
Explain why auditors may need to reassess materiality as the audit progresses.
(ii)
Assess the implications of the key audit findings for the completion of the audit. Your
assessment must consider whether the key audit findings indicate a risk of material
misstatement. Where the key audit findings refer to audit evidence, you must also consider the
adequacy of the audit evidence obtained, but you do not need to recommend further specific
procedures.
(16 marks)
Thank you'
The Group's draft consolidated financial statements, with notes referenced to key audit findings, are
shown below:
DRAFT CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOME
Notes
Revenue
Cost of sales
Gross profit
Operating expenses
Operating profit
Share of profit of associate
Finance costs
Profit before tax
Taxation
Profit for the year
Other comprehensive income/expense for the year,
net of tax:
Gains on property revaluation
Actuarial losses on defined benefit plan
Other comprehensive income/expense
Total comprehensive income for the year
1
2
3
4
30 June 20X2
Draft
GHS'000
98,795
(75,250)
23,545
(14,900)
8,645
1,010
(380)
9,275
(3,200)
6,075
30 June 20X1
Actual
GHS'000
103,100
(74,560)
28,540
(17,500)
11,040
900
(340)
11,600
(3,500)
8,100
800
(1,100)
(300)
5,775
–
(200)
(200)
7,900
1
2
Final Mock Exam 1: Questions
Notes. Key audit findings – Statement of profit or loss and other comprehensive income
1
Revenue has been stable for all components of the Group with the exception of one subsidiary,
Geeta Co, which has recognised a 25% decrease in revenue.
2
Operating expenses for the year to June 20X2 is shown net of a profit on a property disposal of
GHS2m. Our evidence includes agreeing the cash receipts to bank statement and sale
documentation, and we have confirmed that the property has been removed from the noncurrent asset register. The audit junior noted when reviewing the sale document, that there is
an option to repurchase the property in five years time, but did not discuss the matter with
management.
3
The property revaluation relates to the Group's head office. The audit team have not obtained
evidence on the revaluation, as the gain was immaterial based on the initial calculation of
materiality.
4
The actuarial loss is attributed to an unexpected stock market crash. The Group's pension plan
is managed by Sanj Co – a firm of independent fund managers who maintain the necessary
accounting records relating to the plan. Sanj Co has supplied written representation as to the
value of the defined benefit plan's assets and liabilities at 30 June 20X2. No other audit work
has been performed other than to agree the figure from the financial statements to supporting
documentation supplied by Sanj Co.
DRAFT CONSOLIDATED STATEMENT OF FINANCIAL POSITION
Notes
ASSETS
Non-current assets
Property, plant and equipment
Goodwill
Investment in associate
Assets classified as held for sale
5
6
7
Current assets
Inventory
Receivables
Cash and cash equivalents
Total assets
EQUITY AND LIABILITIES
Equity
Share capital
Revaluation reserve
Retained earnings
Non-controlling interest
Total equity
Non-current liabilities
Defined benefit pension plan
Long-term borrowings
Deferred tax
Total non-current liabilities
Current liabilities
Trade and other payables
Provisions
Total current liabilities
Total liabilities
Total equity and liabilities
8
9
30 June 20X2
Draft
GHS'000
30 June 20X1
Actual
GHS'000
81,800
5,350
4,230
7,800
99,180
76,300
5,350
4,230
–
85,880
8,600
8,540
2,100
19,240
118,420
8,000
7,800
2,420
18,220
104,100
12,500
3,300
33,600
4,350
53,750
12,500
2,500
29,400
4,000
48,400
10,820
43,000
1,950
55,770
9,250
35,000
1,350
45,600
6,200
2,700
8,900
64,670
118,420
7,300
2,800
10,100
55,700
104,100
Notes. Key audit findings – Statement of financial position
5
The goodwill relates to each of the subsidiaries in the Group. Management has confirmed in
writing that goodwill is stated correctly, and our other audit procedure was to arithmetically
Final Mock Exam 1: Questions
check the impairment review conducted by management.
6
The associate is a 30% holding in James Co, purchased to provide investment income. The
audit team have not obtained evidence regarding the associate as there is no movement in the
amount recognised in the statement of financial position.
7
The assets held for sale relate to a trading division of one of the subsidiaries, which represents
one third of that subsidiary's net assets. The sale of the division was announced in May 20X2,
and is expected to be complete by 31 December 20X2. Audit evidence obtained includes a
review of the sales agreement and confirmation from the buyer, obtained in July 20X2, that the
sale will take place.
8
Two of the Group's subsidiaries are partly owned by shareholders external to the Group.
9
A loan of GHS8m was taken out in October 20X1, carrying an interest rate of 2%, payable
annually in arrears. The terms of the loan have been confirmed to documentation provided by
the bank.
Required
Respond to the note from the audit engagement partner.
(20 marks)
Note. The split of the mark allocation is shown within the partner's note.
Question 2
You are an audit manager in Comp & Co, a firm of Chartered Certified Accountants. You have recently been
made responsible for reviewing invoices raised to clients and for monitoring your firm's credit control
procedures. Several matters came to light during your most recent review of client invoice files.
Winston Co, a large private company, has not paid an invoice from Comp & Co dated 5 June 20X7 for work
in respect of the financial statement audit for the year ended 28 February 20X7. A file note dated 30
November 20X7 states that Winston Co is suffering poor cash flows and is unable to pay the balance. This
is the only piece of information in the file you are reviewing relating to the invoice. You are aware that the
final audit work for the year ended 28 February 20X8, which has not yet been invoiced, is nearly complete
and the auditor's report is due to be issued imminently.
Trevor Co, a private company whose business is the manufacture of industrial machinery, has paid all
invoices relating to the recently completed audit planning for the year ended 31 May 20X8. However, in the
invoice file you notice an invoice received by your firm from Trevor Co. The invoice is addressed to Julia
Carr, the manager responsible for the audit of Trevor Co. The invoice relates to the rental of an area in Trevor
Co's empty warehouse, with the following comment handwritten on the invoice: 'rental space being used for
storage of Ms Carr's speedboat for six months – she is our auditor, so only charge a nominal sum of
GHS100'. When asked about the invoice, Julia Carr said that the invoice should have been sent to her
private address. You are aware that Trevor Co sometimes uses the empty warehouse for rental income,
though this is not the main trading income of the company.
In the 'miscellaneous invoices raised' file, an invoice dated last week has been raised to Computer Supply
Co, not a client of your firm. The comment box on the invoice contains the note: 'referral fee for
recommending Computer Supply Co to several audit clients regarding the supply of bespoke accounting
software'.
Required
Identify and discuss the ethical and other professional issues raised by the invoice file review, and
recommend what action, if any, Comp & Co should now take in respect of:
(a)
(b)
(c)
Winston Co
Trevor Co
Computer Supply Co
(9 marks)
(6 marks)
(5 marks)
(Total = 20 marks)
3
4
Final Mock Exam 1: Questions
Question 3
You are the manager responsible for the audit of Orneriac, a limited liability company, which mainly provides
national cargo services with a small fleet of aircraft. The draft accounts for the year ended 30 September
20X8 show profit before taxation of GHS2.7m (20X7 – GHS2.2m) and total assets of GHS10.4m (20X7 –
GHS9.8m).
The following issues are outstanding and have been left for your attention.
(a)
(b)
(c)
The sale of a cargo carrier to Cad, a private limited company, during the year resulted in a loss on
disposal of GHS400,000. The aircraft cost GHS1.2m when it was purchased in September 20W9
and was being depreciated on a straight-line basis over 20 years. The minutes of the board meeting
at which the sale was approved record that Orneriac's finance director, Frederic Bounder, has a 30%
equity interest in Cad.
(7 marks)
As well as cargo carriers, Orneriac owns two light aircraft which were purchased in 20X5 to provide
business passenger flights to a small island under a three year service contract. It is now known that
the contract will not be renewed when it expires at the end of March 20X9. The aircraft, which cost
GHS450,000 each, are being depreciated over fifteen years.
(7 marks)
Deferred tax amounting to GHS570,000 as at 30 September 20X8 has been calculated relating to
accelerated capital allowances at a tax rate of 30% under the full provision method (IAS 12 Income
taxes). In a budget statement in October 20X8, the government announced an increase in the
corporation tax rate to 34%. The directors are proposing to adjust the draft accounts for the further
liability arising.
(6 marks)
Required
For each of the above points:
(i)
(ii)
Comment on the matters that you should consider
State the audit evidence that you should expect to find in undertaking your review of the audit
working papers and financial statements of Orneriac.
(Total = 20 marks)
Note. The mark allocation is shown against each of the three issues. Assume that it is 11 December 20X8.
Question 4
Jerome Co is a company which manufactures tractors and other machinery to be used in the agricultural
industry. You are Jerry Springfield, the manager responsible for the audit of Jerome Co, and you are
reviewing the audit working papers for the year ended 28 February 20X9. The draft financial statements
show revenue of GHS10.5m, profit before tax of GHS3.2m, and total assets of GHS45m.
The audit senior has left you the following note on the audit file, relating to assets recognised in the
statement of financial position for the first time this year.
Leases
In July 20X8, Jerome Co entered into five new finance leases of land and buildings. The leases have been
capitalised and the statement of financial position includes leased assets presented as tangible non-current
assets at a value of GHS3.6m, and a total finance lease payable of GHS3.2m presented as a payable falling
due after more than one year.
Financial assets
Non-current assets include financial assets recognised at GHS1.26m. A note to the financial statements
describes these financial assets as investments classified as at 'fair value', and the investments are described
in the note as 'held for trading'. The investments are all shares in listed companies. A gain of GHS350,000
has been recognised in net profit in respect of the revaluation of these investments.
Final Mock Exam 1: Questions
Required
(a)
In your review of the audit working papers, comment on the matters you should consider, and state
the audit evidence you should expect to find in respect of:
(i)
(ii)
(b)
(9 marks)
(6 marks)
The leases
The financial assets
You are aware that Jerome Co is seeking a listing in September 20X9. The listing rules in this
jurisdiction require that interim financial information is published half-way through the accounting
period, and that the information should be accompanied by a review report issued by the company's
independent auditor.
Explain the principal analytical procedures that should be used to gather evidence in a review of
interim financial information.
(5 marks)
(Total = 20 marks)
Question 5
(a)
You are the manager responsible for the audit of the Lance Group, which comprises a parent
company and six subsidiaries. The audit of all individual companies' financial statements is almost
complete, and you are currently carrying out the audit of the consolidated financial statements. One of
the subsidiaries, Poe Co, is audited by another firm, Portia & Co. Your firm has fulfilled the necessary
requirements of ISA 600 Special Considerations – Audits of Group Financial Statements (Including
the Work of Component Auditors) and is satisfied as to the competence and independence of Portia
& Co.
You have received from Portia & Co the draft audit report on Poe Co's financial statements, an extract
from which is shown below.
Basis for Qualified Opinion (extract)
The company is facing financial damages of GHS2m in respect of an ongoing court case, more fully
explained in Note 12 to the financial statements. Management has not recognised a provision but has
disclosed the situation as a contingent liability. Under International Financial Reporting Standards, a
provision should be made if there is an obligation as a result of a past event, a probable outflow of
economic benefit, and a reliable estimate can be made. Audit evidence concludes that these criteria
have been met, and it is our opinion that a provision of GHS2m should be recognised. Accordingly,
net profit and shareholders' equity would have been reduced by GHS2m if the provision had been
recognised.
Qualified Opinion (extract)
In our opinion, except for effects of the matter described in the Basis for Qualified Opinion paragraph,
the financial statements give a true and fair view of the financial position of Poe Co as at 31 March
20X1...
Note 12 to Poe Co's financial statements (extract)
The company is the subject of a court case concerning an alleged breach of planning regulations. The
plaintiff is claiming compensation of GHS2 million. The management of Poe Co, after seeking legal
advice, believe that there is only a 20% chance of a successful claim being made against the
company.
Figures extracted from the draft financial statements for the year ending 31 March 20X1 are as
follows.
Profit before tax
Total assets
Lance Group
GHSm
20
85
Poe Co
GHSm
4
20
5
6
Final Mock Exam 1: Questions
Required
Identify and explain the matters that should be considered, and actions that should be taken by the
group audit engagement team, in forming an opinion on the consolidated financial statements of the
Lance Group.
(11 marks)
(b)
A trainee accountant, Jo Castries, is assigned to your audit team. This is the first group audit that Jo
has worked on. Jo made the following comment regarding the group audit:
'I understand that in a group audit engagement, one of the requirements is to design and perform
audit procedures on the consolidation process. Please explain to me the principal audit procedures
that are performed on the consolidation process.'
Required
Respond to the trainee accountant's question.
Note. Assume it is 7 June 20X1.
(9 marks)
(Total = 20 marks)