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SOLUTION - ASSURANCE & AUDIT PRACTICE MAY 2009 QUESTION 1 a) i.

Peer review is another independent firm of auditors carrying out a review on a practicing firm. The profession as a whole establishes panels of experts to review and report on practices and procedures of a firm of auditors. ii. The main objective of Peer review exercise is to improve the quality and performance audit work generally. Besides the review should consider whether the firm under review was sufficiently independent of its clients.

b)

International Auditing Standards sets out requirement for auditing firms in relation to quality control. i. The cost of engaging quality control staff. Quality control requirements will be difficult for a small partnership or a sole practitioner to implement because the expenses of employing a specific quality control staff will be proportionally greater for a small audit firm as the work of such a staff will be far too small making the idea not cost effective and punitive for small audit firms. Besides there is no one to carry out such an independent review of quality control procedure in the small firm. Small firms may have difficulty recruiting quality staff and in training them. Smaller audit firms are likely to audit smaller companies which may not have audit committees to ensure quality control. Large firms have some form of assistance from audit committees in ensuring independent and other ethical requirements are met.

ii. iii.

c)

As the smaller firms still have to meet quality control requirements there should be a way out for them. i. The small firm can engage an independent quality consultant to promote quality and carrying out independent reviews. This may be expensive but the small firm can negotiate the cost to its favour. Smaller audit firms can control together and form an affiliation of like firms which can perform reciprocal services such as reviews in order to keep quality control requirement without incurring too much cost.

ii.

Matters to be considered o Review of the whole report to ensure that the projections are not at variance with the rest of the business plan.

o o Profit Forecast a)

Check additions and computations in the projections to ensure that they are accurate and reliable. Carry out a sensitivity analysis on the projections to asses the margin of error and the likelihood of the company not meeting the bank conditions.

Consider the nature of the assumptions made in compiling the profit, relating to turnover and margins and determine whether they are reasonable. In the light of the nature of business and previous trading of the company. Ensure that the accounting policies used in the projection; i. ii. are in line with policies used in previous reporting information. are reasonable and correctly applied.

b)

Any amount included in terms of expenditure should be verified to comparable historical cost. Cash Forecast (a) (b) (c) d) The cash forecast should be checked to ensure that it correlates to projections in the profit forecast Timing should be reviewed to ensure that they are reasonable. Any capital expenditure should be verified to quotations or other reasonable sources eg. suppliers proforma invoices. Strengthening the ability of the external auditor to request changes in control systems. o Ensuring that there is minimal duplication of work where internal auditors are involved by discussing the audit plan with the external auditor through audit committee. Review going concern issues and ensuring that appropriate disclosures are made. Acting as a forum for resolving problems between the directors and the external auditors. Reviewing draft financial statements before presentation to the auditors and the executive board. Ensuring that the directors statements on internal controls are reviewed by the audit committee.

o o o o

o o

Providing an opportunity to discuss the terms, scope and approach of external audit work including co-ordination of audit effort of internal audit. Review the performance of the external auditors and exercise final approval on appointment or discharge of the auditors.

QUESTION 2 (a) The reply should point out that, (i) The accounts are prepared and audited under the requirements of the Companies Code and may therefore not be suitable for the purpose of a potential investor who intends to acquire a substantial interest rather than a small shareholding. (ii) The audit report expresses to the members an opinion on the truth and fairness of the Financial Statements; that is not an acquisition or investigation report for which it cannot be a substitute. (iii) In preparing the financial statements management has included estimates which the auditor has accepted in the context of the overall financial position shown by the Financial Statements; event may turn out differently.

(iv)The views of management in certain judgemental areas and in regard to appropriate accounting policies may not coincide with views of a potential investor. (v) Although the Statutory Financial Statement may contain much information of use to the potential investor they are only one part of the information which any investor contemplating a substantial investment in the company should have. (vi)The investors should be in possession of detailed and up-to-date financial information available to management. This could be satisfactorily obtained by the investors carrying out their own investigations to assess suitability of the investment and inherent risk. (b) The factors to be considered in determining the degree of reliance on internal control are; (i) Assessment of adequacy of system designed and implemented by management. (ii) That controls exist and are being operated effectively unless compliance test reveals otherwise. (iii) There are controls which prevent or detect particular specified errors or omission.

(iv)Relation of controls to audit objective where the preliminary evaluation indicates that there are controls which meet the audit objectives the auditors should design and carry out compliance test to rely on them. (v) Materiality of Accounts Balances 3

If compliance test reveals no material error in the accounts balance then the auditor can rely on the Internal Control. Where the auditors obtain reasonable assurance by means of compliance test that the controls are effective in ensuring the completeness and accuracy of accounting records and validity of entries therein he may rely on the internal control. (vi)Auditor assessment of control risk. Where assessment of control risk indicates that there is significant absence of material errors in the internal control systems the auditor may rely on the system of internal control.

QUESTION 3 (a) (i) (ii) (iii) (iv) Ways by which Mr. Ayi Quaye can deal with corporate computer fraud. Define and document companys fraud policy addressing the companys expectations from employees, customers, suppliers and stakeholders. Evaluate the effectiveness of existing policies, procedures and controls. Identify existing and future fraud risk exposures and alert management on the existence of possible frauds. Assist the company in the development of effective Human Resource Policies, Statements and Procedures for the recruitment of new personnel and orienting existing human resource. Research, evaluate and recommend monitoring tools to proactively detect and prevent fraud exposures. Training should be provided for directors and senior management on how to identify, deal and monitor fraud risks and fraudulent activities. Training should be provided to companys employees on how to identify, communicate and deal with fraudulent activities. Perform periodic review to ensure that established anti-fraud policies and procedures are being effectively enforced. Relevant Controls Over-In-house System Development. (1) (2) Approval of the system development by the Chief Executive or his representative. Segregation of duties for system design, programming, operating and supervision.

(v) (vi) (vii) (viii)

(b)

(3)

Controls to ensure that the systems will incorporate proper controls to ensure that the objective of the system development, including flexibility and adaptability to meet future needs will be met. Control of the implementation and monitoring to ensure that the development will be completed within the allotted time and that costs incurred are within the approved budget. Prevention of unauthorized access to the computers and programs

(4)

(5) (6) (7) (8) (9) (10)

Comparison of production programs to controlled copies. Documentation of all phases of the development. Control of program testing to ensure the prevention and detection of errors during program execution. Use of user and operator manual setting out procedures for job scheduling and training and supervision of staff. Control of the file conversion to ensure that all the basic records in the system are accurately transferred to the new system. Control of the change over including parallel running to ensure that the system operated as designed.

(c)

Under the Companies Code, 1963, Act 179 the legal requirements that should be confirmed by the auditor in an unqualified audit report are: (1) (2) Whether in their opinion they have received all the information and explanations they require for the purposes of their audit. Whether in their opinion proper books of account have been kept by the company so far as appears from their examination of those books and proper returns adequate for the purposes of their audit have been received from branches not visited by them. Whether in their opinion the companys balance sheet and, unless it is framed as a consolidated profit and loss account, the profit and loss accounts dealt with by the report are in agreement with the books of account and returns. Whether in their opinion the said accounts have been properly prepared in accordance with the provisions of the code in the manner so required as to give a true and fair view: (a) in the case of the balance sheet of the state of the companys affairs at the end of its financial year; and (b) in the case of the profit and loss account of the profit or loss of the company for its financial year. 5

(3)

(4)

(5)

In the case of a holding company preparing group accounts whether in their opinion the group accounts have been properly prepared in accordance with the provisions of the Code and give a true and fair view of the state of the companys affairs and the profit or loss of the company and its subsidiaries so far as concerns the interest of the company.

(d)

e commerce is electronic commerce in the form of electronic shopping, banking, entertainment, education and financial networks on the internet. It is any business transaction that can be executed, electronically processed and settled in digital cash, essentially eliminating the need for paper document. Four (4) risk factors among others associated with e commerce are (i) (ii) (iii) Unauthorised surveillance/interception during transmission. Transmission failures Data Security: Loss of data integrity, lack of legal guidance, lack of transaction completeness.

QUESTION 4 (a) The following audit procedures are suggested (i) (ii) (iii) (iv) Review the client system of recording claims and the procedure for bringing these to the attention of the management board. Discuss the arrangement for instructing solicitors with the official responsible for legal matters. Examine the minutes of the Board of Directors and or executive or other relevant committee for reference to possible claims. Examine bills rendered by solicitors and the correspondence with them in which regard the solicitors should be requested to furnish bills or estimated charges to date, or confirm that they have no unbilled changes. Obtain a list of matters referred to solicitors from the appropriate directors or officials with estimates of possible ultimate liabilities. Obtain written assurance from the appropriate director or official that he is not aware of any matters referred to solicitors other than those disclosed.

(v) (vi)

(b)

The following items should be identified and provided for inclusion in the financial statements. 6

(i)

Fixed Assets any assets which will not be used elsewhere in the company should be valued at scrap or realizable value. Any potential loss should be provided for. Factory Buildings should be valued at current market value with provision made for any depreciation or appreciation. Any potential loss should be provided for. Stocks and work in progress any stocks which will not be used elsewhere in the company should be valued at resale value and any possible losses on sale should be provided in full. Debtors Any uncollectible debts should be provided for in the cost of closure. Damage may be payable for breach of contract. This may normally arise when a contract cannot be completed. The cost of such damage and any legal fees should be provided for in the closure costs.

(ii) (iii)

(iv) (v)

(vi) (vii)

Redundancy Payments the company will certainly be liable for redundancy payments and these should be included in the provision. Run down cost The factory may incur such cost as security wages/salaries, electricity fuel lubricants should be included in the closure cost.

The general rules governing investigation and special engagements are: (i) (ii) (iii) (iv) (v) Obtain terms of reference or instruction from the client. Avoid being side tracked by issues which are not in the original terms of reference. Discuss them with the client for consideration where necessary. Preserve the working papers in case of legal suit or for future reference. Avoid the use of technical language/jargon in the report. The structure of the report i. ii. iii. iv. v. vi. vii. Introduction Terms of reference Executive summary Outline of the actual/conduct of the investigation and information obtained. Summary of finding of recommendation Conclusion Appendices 7

QUESTION 5 (a) Auditors should explain the basis of their opinion by including in their report: 1. 2. A statement as to their compliance or otherwise with Auditing Standards together with the reasons for any departure therefrom. Statement that the audit process includes (i) examining, on test basis, evidence relevant to the amount and disclosures in the financial statements. (ii) assessing the significant estimates and judgements made by the reporting entitys directors in preparing the financial statements. (iii) Considering whether the accounting policies are appropriate.

The Companies Code 1963, Act 179 requires the directors to prepare financial statements for each financial year which give true and fair view of the state of affairs of the company and of profit or loss of the company for that period. In preparing those financial statements the directors are required to: (i) (ii) (iii) Select suitable accounting policing and then apply them consistently. Make judgements and estimates that are reasonable and prudent. State whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in the financial statements Prepare the financial statements on the going concern basis unless it is inappropriate to presume that the company will continue in business if no separate statement on going concern is made by the directors.

(iv)

3.

Statement that they planned and performed the audit so as to obtain reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or other irregularity or error and that they have evaluated the overall presentation of the financial statements.

(b)

Principal matters to be considered by an auditor in forming an opinion on a companys financial statements: (i) Whether the company have completed all procedures necessary to meet auditing standards and to obtain all the information and explanation necessary for the audit. Whether the financial statement have been prepared in accordance with the applicable accounting requirements. Whether the financial statement prepared by the Directors, gives a true and fair view of the companys state of affairs. 8

(ii) (iii)

(c)

The following are matters with which the auditor implies satisfactory in an unqualified report. (i) (ii) (iii) Proper accounting records have been kept and proper returns adequate for the audit received from branches not visited. The financial statements are in agreement with the accounting record and returns. All information and explanation have been received as the auditor thinks necessary and he has had access at all times to the companys books, accounts and vouchers Details of directors emoluments and other benefits and particulars of higher paid employees have been correctly disclosed in the financial statements. Particulars of loans and other transactions in favour of directors and others in the company have been disclosed in the financial statements. The information given in the directors report is consistent with the financial statements.

(iv) (v) (vi) (d)

Reasons why an auditor may be uncertain are as follows: (a) The matter may be inherently uncertain (insufficient evidence is available because the matter can only reasonably be expected to be resolved at some future date. (b) Some limitation has been imposed on the scope of the auditors work and insufficient evidence is therefore available even though it does or could reasonably be expected to exist.

(e)

(i) (ii)

Going concern concept is the assumption that the enterprise will continue in operational existence for the foreseeable future. Two possible reasons for non-applicability of a going concern basis could include a combination of; 1. declining profitability 2. inability to re-finance loans as they fall due

(iii)

Four pointers to such a situation as in (ii) above are; a. b. c. d. e. f. Rapidly increasing costs which cannot be matched by increasing sales prices. Shortages of supplier Adverse movement in exchange rates. Business failure amongst customers or supplies Loan repayment falling due in the near future. Long term assets financed by short borrowing. 9