SOLUTION ADVANCED AUDIT AND PROFESSIONAL ETHICS MAY...

SOLUTION ADVANCED AUDIT AND PROFESSIONAL ETHICS MAY 2011

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QUESTION 1

(a) Professional Competence and Due Care- involves:

i. Maintaining professional knowledge and skill at the level required to ensure that a

client receives competent professional services based on current developments in

practice, legislation and techniques; and

Competent professional services require the exercise of sound judgment in

applying professional knowledge and skill in the performance of such service.

Professional competence may be divided into two separate phases:

(a) Attainment of professional competence such as knowledge of the technical

skills for the particular client’s(Oil and Gas) industry by attendance at

seminars for all level of client on the assignment; and

(b) Maintenance of professional competence by attending Continuing

Professional Development (CPD) courses to ensure you maintain and update

your technical knowledge in the relevant client’s industry.

CPD enables a professional accountant to develop and maintain the

capabilities to perform competently within the professional environment.

ii. Acting diligently and in accordance with applicable technical and professional

standards (in particular IFRS and ISAs)

(a) Diligence encompasses the responsibility to act in accordance with the

requirements of an assignment, carefully, thoroughly and on a timely basis.

This must include all staff on the assignment.

(b) It also involves responding in a timely manner to client requests.

iii. A professional accountant shall take reasonable steps to ensure that those working

under the professional accountant’s authority in a professional capacity have

appropriate training and supervision.

iv. Where appropriate, a professional accountant shall make client’s employers or

other users of accountant’s professional services aware of limitations inherent in

the services.


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(b) A professional accountant in public practice who is asked to replace another professional

accountant in public practice, or who is considering tendering for an engagement

currently held by another professional accountant in public practice.

1. Shall determine whether there are any reasons, professional or otherwise, for not

accepting the engagement, such as circumstances that create threats to compliance

with the fundamental principles of Code of Ethics for professional Accountants –

Integrity

Objectivity

Professional Competence and Due Care

Confidentiality

Professional Behaviour

That cannot be eliminated or reduced to an acceptable level by the application of

safeguards.

2. Shall evaluate the significance of any threats.

Depending on the nature of the engagement, this may require direct communication with

the existing accountant to establish the facts and circumstances regarding the proposed

changes so that the professional accountant in public practice can decide whether it

would be appropriate to accept the engagement. For example, the apparent reasons for the

change in appointment may not fully reflect the facts and may indicate disagreements

with the existing accountant that may influence the decision to accept the appointment.

3. Shall apply safeguards when necessary to eliminate any threats or reduce them to an

acceptable level. Example of such safeguards includes.

When replying to requests to submit tenders, stating in the tender that, before

accepting the engagement, contact with the existing accountant will be requested

so that enquiries may be made as to whether there are any professional or other

reasons why the appointment should be accepted.

Asking the existing accountant to provide known information or any facts or

circumstances that, in the existing accountant’s opinion, the proposed accountant

needs to be aware of before deciding whether to accept the engagement; or

Obtaining necessary information from other sources.


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4. Shall decline the engagement when the threats cannot be eliminated or reduced to an

acceptable level through the application of safeguards, a professional accountant in

public practice , unless there is satisfaction as to necessary facts by other means

5. If the proposed accountant is unable to communicate with eth existing accountant, the

proposed or the permission to existing accountant to communicate freely with him is

denied by the client, the proposed accountant shall take reasonable steps to obtain

information about any possible threats by other means, such as through inquiries of

third parties or background investigations of senior management or those charged

with governance of clients.

ISA 315 requires that auditors consider the entity’s process for assessing it own business

risk, and the impact that might have on the audit in terms of material misstatement.

i. Explain the difference and the link business risk and audit risk;

ii. Assess the impact of eight business risk issues and the audit risk and

iii. For each risk issue in (ii) above, discuss the impact it could have on the audit and

thus the audit approach you might have to adopt.

(i.) To achieve its main objective of increasing shareholder value, entities have to

undertake a number of business transactions. In each business transaction a

business undertakes, there are chances that it might gain or lose, and business risk

is a measure of chances a business faces in whether it would make a gain or loss.

Business risk is thus risk that something would go wrong in the day –today operations of a

business.

Audit risk is the risk that the auditor will arrive at an appropriate audit opinion.

Each business risk factor has one or more financial statement implications and thus lead to

one or more audit risk.

ISA 315 requirement that auditors consider the entity’s process for assessing its own business

risks, and the impact that might have on the audit in terms of material misstatement mean

that for every principal business risk factor the business faces, the auditor should identify

financial statement implication(s) and decide on the impact that could have on the auditors

opinion.


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(ii.)

Business risk issues identifiable in the

preamble

Impact on Audit and Audit Approach

1. Relatively new business started in March

2008.

There are no historical records for

comparison in analytical procedure-more test

of transactions.

2. Oil and Gas industry is new in Ghana. There are no local industry records for

comparison in analytical procedure-more test

of transactions.

3. Large decrease (over 80%) in turnover. Needs to assess the applicability of Going-

concern.

4. Yearend accounts receivable balance was

about 76% (2008: only 23% ) of annual sales

Receivability of account receivable is in

great doubt due to large increase.

5. All Accounts receivable owed by the one

customer, Stated-owned enterprise

Sated-owned enterprises have no regular

patterns of payment, recoverability is

doubtful.

6. Disputes with the clients over invoicing

errors

Accuracy of sales and valuation of receivable

must be given attention.

7. The accountant only assumed the position

in September 2009.

Accuracy of financial statements is doubtful.

8. He was third accountant since the

company started its operations in April 2008

High staff turnover in finance department-

accuracy, completeness and validity of

accounts.

9. The immediate supervisor of the

accountant is the Regional Accountant –

Africa, based in Johannesburg, South Africa.

Same as above.

10. Many intra-group transactions with other

Accelero Group companies in other parts of

the world.

Related party transactions may not be at

arm’s length.

11. The financial statement of the company

for 2008 was audited by the local office of a

big four international audit firm in 2008.

Our firm is new to the client and may lack

experience in the Oils & Gas industry-

knowledge of clients business and industry.

12. There is a strict deadline for completing

the audit for consolidation by a group auditor

in the UK.

Strict audit deadline also means strict

deadline for completing accounting entries,

accuracy, and completeness of accounting

financial statements.

13. The financial statements will be

consolidated into a group FS in the UK-

IFRS.

Accountant’s (and our own staff) experience

in IFRS.


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QUESTION 2

(a)

A. Financial indicators

1. Net liabilities or net current liability position.

2. Fixed-term borrowings approaching maturity realistic prospects of renewal or

repayment, or excessive reliance on short-term borrowings.

3. Major debt repayment falling due where refinancing is necessary to the entity’s

continued existence.

4. Major restructuring of debt.

5. Indications of withdrawal of financial support by leaders.

6. Negative operating cash flows indicated by historical or prospective financial

statements.

7. Adverse key financial ratios.

8. Substantial operating losses or significant deterioration in the value assets used to

generating cash flow.

9. Arrears or discontinuance of dividends.

10. Inability to pay suppliers on due dates.

11. Inability to comply with terms of loan agreements.

12. Change from credit to cash-on-delivery transactions with suppliers.

13. Inability to obtain financing for essential new product development or other essential

investments.

14. Substantial sales of non-current assets not included to be replaced.

B Operating indication

1. Loss of key management without replacement.

2. Loss of a major market, franchises, license, or principal supplier.

3. Labour difficulties or shortages of important supplies.

C Other indications

1. Non-compliance with capital or other statutory requirements.

2. Pending legal proceedings against the entity that may, if successful, result in

judgments that could not be met.

3. Changes in legislation or government policy.

(b) Management representation is usually obtained on general, specific matters and also on

matters material to the financial statements, both unsolicited and in response to specific

questions.


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Especially on matter where other sufficient appropriate audit evidence cannot reasonably

be expected to exist. (ISA 580)

1. Whether the amount owed to Boafo Yena Bank, when taken out, ensure that the

technical insolvency situation of the company is reversed.

2. Obtain legal opinion on whether the wording of the comfort letter makes it sufficient

to remove the going-concern problem.

3. Confirm the authenticity of the letter from the directors of Boafo Yena Bank.

4. Confirm from minutes of director’s meetings that they have accepted the letter from

Boafo Yena Bank and have note its intended use as a solution for the going concern

problem.

5. Confirm from its latest annual financial statements, latest industry and other sources

whether Boafo Yena Bank has the financial strength to support the company as it has

said in the letter.

6. Review minutes of director’s meetings for other plans they have for resolving the

going-concern as a whole and the part this letter plays in the whole scheme of things.

7. Review the other plans and request for evidence of where director’s hope to obtain

the financial and other resources to implement the other plans apart from Boafo Yena

Bank.

(c.) i. Opinion

In our opinion the financial statements give a true and fair view of the financial position of PSK

Insurance Company Limited as of 31st December, and of its financial statements performance

and its cash flow for the year ended in accordance with International Financial Standards.

i. ISA 560.6 The auditor shall perform procedures designed to obtain appropriate sufficient

evidence that all events occurring between the date of the financial statements and the

date of the auditor’s report that require adjustment of (Adjustment events – that were in

existence before end of year and for which events after the date of the financial

statements have made clear.), disclosure in (Disclosure events, those that occurred only

after the date of financial statements), the financial statements have been identified. The

ISA recommends that these procedures be performed as close as possible to the date of

the audit report.

1. Enquire of management on the status of items involving subjective judgement or

accounted for using preliminary data including the following:

New commitment, borrowing, or guarantees.

Sales or destruction of assets.


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Issues of shares or changes in business structure.

Developments involving risk areas, provisions, and contingencies

Unusual accounting adjustments.

Major events (e.g. going concern problems) affecting the appropriateness of

accounting policies for estimates.

2. Consider the procedure management uses to identify subsequent events.

3. Read minutes of general board/ committee meetings.

4. Read minutes of minutes of management meetings

5. Review latest accounting records (management accounts) and financial information.

6. When any issues are identified, determine that they are properly reflected as required.

7. Require that managements includes in the written management representation that all

events occurring subsequent to date of the financial statement which require adjustment

or disclosure have been adjusted or disclosed.

QUESTION 3

(a.)

(i.) & (ii.)

CONTROL AUDIT TEST

1.The data centre must have the two identical

servers – Test (for developers/programmers)

and Production (actual business)

environment/servers

Servers must have controlled environment

with automatic fire detectors with automatic

fire detectors, fire extinguishers,

uninterrupted power supply (UPS) and

controlled entrance.

Visit the server room/data centre and observe

the conditions, availability of identical

Test/Production environments and request

access to the Test environment for the online

test.

2. Transaction confidentiality and integrity of

the website itself by means of firewalls.

Perform a penetration test of trying to enter

the website without use of a password.

3. Protection of information from viruses by

the use of updated antivirus protection.

Determine whether a strong antivirus is in

use and that it is always updated.

4. Use of intrusion detection technology. Determine whether there is a limit to a

number of time an unauthorized password is

allowed before being cut off and that the

incident is recorded for the attention of

system security manager.

5. Continous update and enhancement of

system software.

Check that the system used is the latest

version from the supplier’s website.


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6. A back up and re-start system to ensure

that any process that is in progress that is in

progress when there is a system failure can be

continued and brought to a successful end

when the system is restored.

Check that resetting system by means of

power cut, etc and check that any transaction

which is uncompleted is re-set and no partly

completed transactions are recorded.

7. Security of the standing data (e.g. prices of

items for sale) on the website.

Determine whether an authorized user can

change sensitive standing data likes prices,

item codes, tec.

8. Strict logical separation of the e-commerce

website from information on the internal

communication system (intranet) of the

company to ensure information for internal

distribution does not get into public domain.

Determine whether a user on the e-

commerce site could be extract information

from intranet.

9. Authentication of credit cards. Determine whether an invalid (self generated

) credit card number or any other bank

card(not credit/debit)number can be used to

generate a transaction on site.

10. Authentication of cardholder, using the

personal code (PIN) verification

Determine whether a credit card can be used

without the need to input the PIN.

11. Authentication of merchant (authorized

seller the cardholder is buying from)

Determine if all transactions on the website

result in a credit/debit to the company by

using a credit card to input transactions.

(b)

i. Audit approach to be used will indicate that the candidate knows the basic

distinction between fraud and error in an information system.

Fraud is the intentional use of deception to obtain an unjust or illegal

financial advantage in the system, and

Error is unintentional mistake in the system.

If it is fraud, we would expect that certain cards (of fraudsters0 would be used or

the system repeatedly; while

If it is error, the customers would not aware of the error and would have the

correct prices of items and correct total cost charged to their account.

ii. Audit tests;

Use test data to input transaction in the test environment to determine if:

1. Prices of items can be manipulated on the system by users.

2. Quantity of items ordered multiplied by system price is displayed correctly on

the system.


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3. Totals cost of items ordered is calculated correctly on the system.

4. Correct total cost is debited to cardholder’s account before transaction is

terminated on the system.

5. System can identify and reject invalid credit and/or debit cards/card numbers.

6. System is able to record cardholder designated address for the correct

quantities of all items debit to their account to be dispatched to their

addresses.

7. System posts correct debited to cardholders’ account as accredit to the sales

account.

8. Credit card account of the company is also credited with the cost of items

ordered.

9. System performs reconciliations for quantities of all inventory items daily

showing:

Opening quantity xxx

Quantity ordered (xxx) @ selling price $yyy = $zzz

Closing quantity xxx

Quantity ordered would then be traced to individual orders in the period, and

totals in period will equal the sum of the individual item sales $zzz shown above

for all inventory items in the system.

10. There is regular physical stocktaking of inventory and actual quantities of

inventory are compared with system quantities and any differences can only

be corrected on the system by the appropriately designated official who has no

incompatible inventory duty after the appropriate approvals have been

obtained.

11. The system shows any errors in any of Tests 1 to 6, it could be errors on the

system that users could take advantage of (and so become fraud),

12. The system shows errors in Test 7 to 10 above, it would errors in processing

logic that may only lead to losses to company without any advantage to

customers, genuine errors in the system.

(c )

1. Recent reports of oils spill in other oilfields e.g. BP spill off the Gulf of Mexico in

Louisiana, USA, (and even in Ghana (in minor quantities, though) and the reports on

the effects on the coastal dwellers and their fishing and other means of economic

livelihood makes this a topical issue.


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2. Auditors have come to realize that we do not have to take the shareholders and

lenders of an enterprise into consideration in planning our audit but also to seek the

interests of other stakeholders.

The environment (impact of processes (primary)and of products (secondary)

Society (International, national and local and effect on the economy and

health)

Employees (their livelihood and personal safety while at work)

3. Social and environmental issues may present a risk to the company and thus to

shareholders investment which directors would need to mitigate as part of corporate

governance and risk management process.

4. Products of the company might fail to meet relevant standards or be harmful to user,

and substances discharged to environment either intentionally or by accident could be

above legally allowed limits and/ or cause harm to environment society.

5. This could lead to massive fines, compensation payments, bad publicity, boycotts,

loss of market share, etc which will affect shareholder’s investments.

6. Falling foul of law could led to fines, revocation of operation permits, etc. which will

affect shareholders investments.

7. Clearing of poor image, bad publicity could involve large fees which would affect

profit levels.

8. Strikes by employees, employee fatalities/accidents could lead to bad publicity, loss

of production and affect profit levels.

QUESTION 4

(a)

i.

1. Assessing the risks and identifying problems.

2. Planning and performing the audit effectively and efficiently.

3. The auditor makes judgments about matters throughout the course of the audit where

knowledge of the business is important, e.g.

4. Assessing inherent and control risks.

5. Considering business risk and management’s response thereto.

6. Developing the overall audit plan and audit programme.

7. Determining materiality level and assessing whether the materiality level chosen

remains appropriate.

8. Assessing audit evidence to establish its appropriateness and the validity of the

related financial statement assertions.

9. Evaluating accounting estimates and management representations.


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10. Identifying related parties and related party transactions.

11. Recognizing conflicting information e.g. contradictory representations.

12. Making informed enquiries and assessing the reasonableness of answers.

13. Considering the appropriate of accounting policies and financial statement

disclosures.

ii.

1. It avoids duplication of efforts.

2. It ensures that they are aware of each other’s plan to ensure they do not duplicate efforts.

3. It would ensure that the internal auditors would free to share their findings with the

external auditors if they so request.

4. It opens doors for open discussion between the heads for future fruitful discussions.

1. The work is performed by persons having adequate technical training and proficiency as

internal auditors.

2. The work of assistants is properly supervised, reviewed and documented.

3. Sufficient appropriate audit evidence is obtained to afford a reasonable basis for the

conclusions reached.

4. The conclusions reached are appropriate in the circumstance.

5. Any reports prepared by internal audit are consistent with the results of the work

performed.

6. Any expectations or unusual matters disclosed by internal are properly resolved.

7. Amendment to the external audit programme is required as a result of matters identified

by internal audit.

8. There is the need to test the work of internal audit to confirm its adequacy.

(b) 1 Share-based Payments

(i) Matters to consider

1. The share-based payment expense for the year is not individually material, it is only

2.5% of the tax; the related equity reserve is material to the statements of financial

position, 1.6% of total asset;

2. The nature of the shared-based payment must be determined;

3. The validation of the shares – if the company is public company, the valuation of ten

shares would be done by reference to the share price on the Ghana Stock Exchange

on the date of grant, otherwise a valuation must be done by an expert.

4. The terms of the share-based payment.


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5. The assumptions in terms of number of shares that will vest; and

6. The period of vesting.

(ii) Tests

1. Obtain a copy of the terms of the scheme and agree to details used in the calculation

of expense – number of related equity shares granted, the grant date, vesting date and

conditions attached to scheme.

2. If fair valuation of the shares have been performed, obtain a copy of the valuation

report and;

Review the assumptions for reasonableness.

Consider the professional qualifications and reputation of the expert.

3. Discuss with management, the assumptions about the number of share that will

finally vest and consider the reasonableness in the light of:

Latest budgets and forecast:

Board minutes on the resolution authorizing the share-based payment.

Any subsequent events on that might affect the number of executives or the

likelihood of achieving any performance target.

4. Reperform the calculation of the expense for the tear and related equity reserve.

2. Liability in respect of Guarantee to customers

The framework defines a liability as:

A present obligation of the entity arising from past events, the settlement of which is expected to

result in an outflow from the entity of resources embodying economic benefits.

The framework goes further to specify also the recognition criteria that a liability must meet

before they are recognized in financial statements

A liability is recognized in the balance sheet when

1. It is probable that an outflow of resources embodying benefits will result from the

settlement of a present obligation and

2. The amount at which the settlement will take place can be measured reliably.

We need to ask ourselves if the Warranty meets the definition of a liability as stated above.

Is it a present obligation? The answer is no. there is no obligation to pay anybody now and the

need to pay anyone on the warranty is only in the future if (and only if) any of the conditions

stated in the warranty arises.


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The next issue is that of recognition. Even if the warranty meet the definition of a liability, we

would not be able to recognize it on the balance sheet because though it is probable that an

outflow of resources embodying economic benefits will result from the settlement of an

obligation that could arise from the warrant, the amount at which the settlement will take place

cannot be measured at all, let alone reliably. It is only when the warranty arises that it might be

possible to measure the amount.

In conclusion, therefore the guarantee cannot be recorded as a liability on the balance sheet.

(ii.) In 2009 it must be treated as a note in the financial statements in accordance with IAS 37

Provisions, Contingent liabilities and Contingent Assets.

QUESTION 5

(a.)

Memo

From: Yenoyie and Co. Chartered Accountants.

To: The directors of Strategic Investments Ghana Limited

Date: dd/mm/yyy

Subject: As follows –

(i.) Money laundering is a process by which criminals attempt to conceal the true origin and

the ownership of the proceeds of their criminal activity, allowing them to maintain

control over the proceeds and finally providing legitimate cover for their sources of

income

(ii.)

1. Secrecy over some transactions.

2. Transactions routed through several jurisdictions/countries.

3. Excessive use of wire transfers

4. High value deposits or withdrawals not characteristic of the client.

5. Large cash (currency) or convertible bearer instruments (cash cheques).

6. Repeated deposits just below monitoring thresholds on the same day.

7. Pattern of repeating a deposit by writing of the same amount to another financial

institution.


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(iii.)

1. Appoint a Money Launderer Reporting Officer in the firm.

2. Train audit personnel to ensure that they understand and are aware of the relevant

legislation and can recognize and deal with potential ML risk factors.

3. Verify the identity of new and existing clients and maintain the evidence of

identification.

4. Maintain records of all client transactions.

5. Report all suspicious transactions to the Serious Fraud Office.

(b.)

1. Conflict of interest – investigating issues on which the auditors will also perform

statutory audit.

2. Payments for additional assignments could lead to undue influence from

management.

3. Familiarity threat – auditor becomes too familiar with client personnel due of

frequent interactions.

4. Objectivity – any perceived threat to independence and thus objectivity will

undermine the credibility of the report, it must be considered and auditor must

reject the appointment.

5. Profession behaviour – fraud cases can be in public ye in the company or even

outside it and any lapses in the professionalism could do serious damage to the

audit firm or the profession as a whole.

6. Integrity – since the job would require seeking to unravel some fraudulent

activities, the auditor must be above reproach to be able to accept the

appointment.

7. Professional competence and Due Care – the assignment requires special skills

the auditor must consider that he/she can discharge the responsibilities expected

before taking up the assignment.

(ii.)

1. Report will normally identify the person who commissioned it/ compared with

management in all it cases of normal audit investigation.

2. Reference is made to the instruction given to the investigator and the specific

assignment he/she was asked to perform.

3. Full list of document/materials on which report is based.

4. Factual evidence obtained is stated in chronological (time) order.

5. Technical terms used in the report may need to be explained to ensure those

would read the report can understand the findings well.

6. The opinion must be presented clearly and unambiguous terms giving reasons for

opinions reached.

7. List of references to relevant standards/ technical literature e.g.

Accounting/Auditing standards.

8. Where required, any guilty party’s contribution to any loss sustained by the entity

must be quantified in monetary terms.

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