MARCH 2024 PROFESSIONAL EXAMINATIONS

ADVANCED AUDIT & ASSURANCE (PAPER 3.2)

CHIEF EXAMINER’S REPORT, QUESTIONS AND MARKING SCHEME

STANDARD OF THE PAPER

The standard of the paper was comparable to that of previous diets. The questions
covered every aspect of the syllabus and the marks allocation was in line with the
syllabus weightings. The amount of work required to answer each question were
commensurate with marks allotted to the questions.

PERFORMANCE OF CANDIDATES
Candidates performance was above average. Performance in March 2024 is 59.23%
compared to that of November 2023 of 52.97%.
There was no sign of copying by candidates. There were a few instances where
candidates recorded wrong question numbers for answers provided. In some
instances, some candidates did not write question numbers for answers provided.

NOTABLE STRENGTHS AND WEAKNESSES OF CANDIDATES

Candidates had shown strengths in areas that regularly feature in the examinations
and straight forward questions.

Candidates, however, showed weaknesses in the following:

 Some candidates wrote across the margins.
 Some wrote wrong question numbers for answers provided. Some did not write
the questions numbers.
 Some candidates handwriting was so bad that it took one a lot of time to make up
what had been written. Some candidates did not read over their work to correct
sentences to make them easy to understand.
 There were signs of inadequate preparation on the part of some candidates.
 The ability to relate answers to relevant information in the scenario.
 The application of relevant standards to answers
 A good number of candidates over elaborated on answers without considering
marks allotted to the question.

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QUESTION ONE

a) You are an audit manager of Afari & Partners and have been assigned to the audit of Jericho
Plant Company Ltd (Jericho Plant), which has been an audit client for 6 years and
specialises in manufacturing fertilizers in Ghana.

The company was introduced to the firm by Mr. Lartey 6 years ago when he was a
Commissioner at the Ghana Revenue Authority (GRA). Mr. Lartey is not a member of the
Institute of Chartered Accountants, Ghana. However, since his retirement from GRA, last
year, he joined the firm as a tax partner to provide tax consultancy services. He has good
relations with the client as his daughter is married to the son of the CEO for Jericho Plant.

Mr. Andani who has been the audit engagement partner for Jericho Plant for the past 6
years and has recently been rotated off the audit engagement. The current audit partner, Mr.
Nti, has suggested that in order to maintain a close relationship with Jericho Plant, Mr.
Lartey should undertake the role of an engagement quality reviewer this year. In addition,
Jericho Plant has requested that Mr. Andani assist them by attending their audit committee
meetings, as a non-executive director has recently left the company.

Jericho Plant has also asked Mr. Lartey and the other partners at Afari & Partners to help
them in recruiting a new non-executive director.

Fees paid by Jericho Plant forms 35% of the firm’s total fee income (both audit and non-
audit fees) and the partners have anticipated that the fees for this year would be greater than
last year. Since joining as a tax partner, Mr. Lartey has been aggressive in generating
revenue for the tax department and does not keep records of his work. He argues that the
most important issue is for the firm to generate revenue which he does. Some of the clients
have complained about the cash collected by Mr. Lartey as part of his consultancy services.

The audit manager for Jericho Plant last year has just announced that he is leaving Afari &
Partners to join Jericho Plant as the financial controller.

Required:
Using the information above:
i) Evaluate FOUR (4) ethical threats which may affect the independence of Afari & Partners;
(6 marks)
ii) For each threat, advise on how it might be mitigated to an acceptable level. (4 marks)

b) Ayesu & Associates, a reputable auditing firm, was approached by Kumanji Ltd to conduct
an annual financial audit for the fiscal year ending December 31, 2023. Below is the audit
engagement letter.

Re: Engagement Letter for the Audit of Financial Statements of Kumanji Ltd

We are pleased to confirm the terms of our engagement for the audit of your financial
statements for the year ended December 31, 2023. This letter will serve as our agreement
with Kumanji Ltd and outlines the scope of our services, responsibilities, and fee structure.
Please review this letter carefully and let us know if you have any questions or concerns.

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Audit Period: The audit will cover the financial statements of Kumanji Ltd for the fiscal
year beginning January 1, 2023, and ending on March 31, 2023.

Audit Fees: Our fee structure will be based on a fixed fee of GH¢5,000 for the audit,
payable in two instalments. The first instalment of GH¢2,500 will be due at the
commencement of the audit, and the remaining GH¢2,500 will be due upon completion of
the audit.

Timeline for Reporting: We will deliver the audit report and financial statements to you
within two months after the conclusion of our fieldwork.

Conflicts of Interest: We do not anticipate any conflicts of interest that may affect our
independence or objectivity during the audit. If any conflicts arise, we will address them
promptly.

Audit Scope: We will perform audit procedures in accordance with Generally Accepted
Auditing Standards (GAAS) to obtain reasonable assurance about whether the financial
statements are free from material misstatement. Specific audit procedures will be
determined during the audit process.

Contingency Plan: We do not have a contingency plan in place for unexpected disruptions
or events that may affect the audit process.

Please acknowledge your agreement to the terms outlined in this letter by signing and
returning a copy to us at your earliest convenience. If you have any questions or require
clarification on any aspect of this engagement, do not hesitate to contact us.

We look forward to working with you and providing high-quality audit services to Kumanji
Ltd. Thank you for entrusting us with this important engagement.

Required:
In accordance with ISA 210: Agreeing the terms of audit engagements, discuss FIVE (5)
issues with the engagement letter. (10 marks)

(Total: 20 marks)

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QUESTION TWO

a) You are in charge of the audit of Tatule Technologies, a software development company.
The company has been involved in the development of several web applications in use by
the Government of Ghana as part of its E-government agenda.

As part of the audit planning, you had a meeting with the audit team and the audit seniors
presented the following as their estimation of materiality.
Possible Planning
Amount Percentage materiality
(GH¢) Applied (GH¢)
Revenue 54,950,847.00 1.50% 824,262.71
Gross Profit 12,961,376.00 2.00% 259,227.52
Income after tax 427,175.00 10.00% 42,717.50
Total Asset 25,221,161.00 3.00% 756,634.83
Total Equity 9,388,000.00 5.00% 469,400.00

They were unable to provide reasons behind their estimation and explained that these
applied percentages are based on the typical materiality thresholds.

Required:
As the Team Lead, advise your team members on other factors to consider when evaluating
materiality. Your discussion should also cover the need for performance materiality.
(10 marks)

b) ISA 300: Planning an Audit of Financial Statements requires auditors to plan the audit
so that the audit work will be performed in an effective manner. Planning an audit involves
establishing the overall audit strategy for the engagement and developing an audit plan.

Required:
Discuss FOUR (4) specific matters ISA 300: Planning an Audit of Financial Statements
requires the auditor to consider when establishing the audit strategy. (10 marks)

(Total: 20 marks)

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QUESTION THREE

You are the senior manager responsible for the audit of Addin Expert, a listed company.
This company has been performing very well since incorporation until it was affected by
the Government of Ghana Domestic Debt Exchange. The Board decided to sell a division
of the company.

You are in the process of completing the audit of the financial statements for the year
ended 31 March 2023. The auditor’s report is due to be signed in the next few days. The
company’s authorised nature of business is the publication of trade and scientific journals.

Below is the draft financial statements extract of Addin Expert for the years ended March:
2023 2022
GH¢’million GH¢’million
Revenue 108.00 102.00
Profit before tax 9.30 8.20
Total assets 150.00 149.00

In reviewing the audit working papers, the following issues were identified:
Sale of division
Addin Expert is at the advanced stage of negotiations to sell its scientific publishing
division to a competitor. This division contributed revenue of GH¢13 million and profit
before tax of GH¢1.4 million during the year ended 31 March 2023. The draft sale
agreement which is due to be finalised by 1 August 2023 shows an agreed sale price after
costs of disposal of GH¢42 million. The division is a separate cash generating unit of
Addin Expert. None of the assets of the division are held under a revaluation policy and
depreciation is charged on a straight-line basis over the determined useful life of the assets.
The Finance Director of Addin Expert has not made any disclosures with respect to the
upcoming sale in the financial statements for the year ended 31 March 2023 as he
considers it to be part of next year’s accounting transactions. However, the division has
been written down from its current carrying amount of GH¢45 million to its estimated
value in use of GH¢41 million in the financial statements for the year ended 31 March
2023.
First time adoption of IFRS 16: Leases
Addin Expert operates from leased premises and additionally holds leases for printing
equipment for journals. These leases are material to the financial statements. The company
has adopted IFRS 16 for the first time for the year ended 31 March 2023 and has adjusted
the opening balances and equity without restating comparatives as permitted by IFRS 16.
There is, however, no reference in the financial statements to the change in policy or the
reasons for making the change to accounting policies. The adjustments have already been
checked by the audit team and deemed appropriate.
Required:
i) Evaluate the matters relevant at the completion stage of the audit and recommend further
actions necessary before the auditor’s report can be signed. (17 marks)
ii) Assess the impact on the auditor’s report if no adjustments are made to the financial
statements. (3 marks)

(Total: 20 marks)

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QUESTION FOUR

a) Accurate reporting especially with respect to Auditor-General’s report submitted to Public

Accounts Committee, is very critical to public trust in findings on the use of public funds.
Reports full of errors and inaccuracies could question the integrity of the observations and
findings made by the Auditor-General. Quality control measures should therefore be given
priority before reports are submitted to stakeholders.

Required:
Discuss FIVE (5) Quality Control procedures or policies that the Auditor-General should
consider in the Performance of Audit. (10 marks)

b) You have just been elevated to Audit Senior position in charge of first level audits. Your
first assignment is to audit a civil society organisation (CSO) whose objective is to protect
the environment. The CSO has been in operation for the past 10 years and operates with
donations from foreign bodies. Particular interests of the foreign bodies are forestry and
river bodies and they lay emphasis on performance.

Required:
Your engagement partner wants you to study the operations of the CSO and brief him on
performance audit before the commencement of the audit work. Your work should be
extensive enough to cover, the meaning, objectives, underlying principles and audit
approach. (10 marks)

(Total: 20 marks)

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QUESTION FIVE

a) The new Companies Act of Ghana 2019, Act 992, requires auditor rotation for all
companies every six years with a cooling period of six years. This has generated debate
amongst members of the practice society. Empirical studies have questioned the effects of
auditor rotation and have raised doubt about its benefits.

Required:
Discuss THREE (3) arguments in favour and TWO (2) arguments against audit firm
rotation. (10 marks)

b) You are a partner for one of the big four auditing firms. Your client, People Bank Ghana,
has disclosed to you their plan to phase out most of its manual processes and move all their
operations online. As part of this plan, several of their branches will be closed down and
customers are expected to adopt one of their many e-banking platforms. The Board is not
clear on how to implement a full IT based system and has asked you for guidance. As part
of your preparation, you saw the need to implement Control Objectives for Information and
Related Technologies (COBIT) framework.

Required:
Describe to the board what COBIT is and explain its purpose in relation to their pending
decision. (5 marks)

c) Apenteng Manufacturing Company is a medium-sized manufacturing firm that

manufactures electronic components. The company has been experiencing declining
profitability and increased operational inefficiencies. Your firm has been engaged as
auditors to audit the company's financial statements for the year ending December 31, 2023.

As part of the audit, you noticed several flaws in the internal controls. During the exit
meeting with the Finance Director, he indicated that he does not think these are issues that
can be described as deficiencies. He promised that he would ensure that every issue is
resolved and so you do not have to include them in the management letter.

Required:
In accordance with ISA 265: Communicating deficiencies in internal control to those
charged with governance and management

i) Explain the term deficiency to the Finance Director. (2 marks)

ii) Justify to the Finance Director, the need to include the issues in the management letter.
(3 marks)

(Total: 20 marks)

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SUGGESTED SOLUTION

QUESTION ONE
a)
i) Ethical Threats
 Familiarity Threat of independent review partner: The proposed engagement
quality reviewer’s daughter is married to the son of the CEO for Jericho Plant. Also,
he has long standing relationship with the company.

 Attending Audit committee meeting: The company has requested that Mr.
Andani assist them by attending their audit committee meetings, as a non-
executive director. This exposes the firm to self-interest threat as the firm may be
perceived as performing management roles of the company and also threatens the
objectivity of the firm.

 Assistance to Recruiting a non-executive director: This represents a self-interest

threat as the audit firm cannot undertake the recruitment of senior management,
especially non-executive directors who have a key responsibility of appointing the
audit firm.

 Fees (35% of total income): This exposes the firm to self-interest threat as the fees
from the company makes up significant portion of the firm’s income.

 Professional Behaviour: Mr. Lartey has been aggressive in generating revenue for
the tax department and does not document his work. The approach adopted has
led to complaints from some clients. A professional accountant shall comply with
the principle of professional behaviour, which requires an accountant to comply
with relevant laws and regulations and avoid any conduct that the accountant
knows or should know might discredit the profession. A professional accountant
shall not knowingly engage in any business, occupation or activity that impairs or
might impair the integrity, objectivity or good reputation of the profession, and as
a result would be incompatible with the fundamental principles. His approach
might discredit the accounting profession.

 Professional Competence: Mr. Lartey has been recommended as the engagement

quality reviewer. an engagement quality reviewer must have competence,
independence, integrity, and objectivity. He is not a member of ICAG. Although
the question does not state his qualification, not being a professional accountant
indicates that his level of competence may be below that which is required for an
engagement quality reviewer.

 The audit manager is leaving the firm to become the financial controller at Jericho
Plant. This represents a self-interest and familiarity threat as the audit manager is
familiar with the audit plan which is to be adopted at firm and he may also have
commenced work on this year’s audit.
(Any 4 points @ 1.5 marks each = 6 marks)

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 Managing the Risk of the threat
 Mr. Lartey should not serve as the engagement quality reviewer. Similarly, Mr.
Andani cannot serve as the engagement quality reviewer because he is too familiar
with the client. The firm can consult a professional outside the firm to serve in the
position.
 Mr. Lartey should be trained on the ethical principles of the auditing professions
and admonished to follow ethical principles in raising revenue for the firm.
 The firm can assist the client to undertake roles such as reviewing a shortlist of
candidates. However, they must ensure that they are not seen to undertake
management decisions and so must not make the final decision on who is
appointed.
 A new audit manager should be appointed to Jericho Plant Company Limited and
any work already undertaken by the previous manager should be independently
reviewed.
 In addition, it would be advisable to modify the audit plan so that the manager
would not be overly familiar with the approach to be adopted.
(Any 4 points @ 1 mark each = 4 marks)

b) Issues with the engagement letter

 The audit period mentioned is incorrect, spanning only three months instead of a
full fiscal year. Financial statements are typically prepared over a period of 12
months. The client has indicated that the financial statement ends on 31 December
and so there is a mistake on the date ending 31 March instead.

 The objective of the audit not clearly spelt out and the scope indicates that the audit
will follow GAAS. GAAS is not applicable to Ghana. The audit needs to follow
ISAs instead.

 The letter failed to indicate the responsibilities of the auditor. To reduce the audit
expectation gap, ISA 210 recommends that the auditor’s responsibility is clearly
spelt out in the engagement letter.

 The letter failed to indicate the responsibilities of management. An audit in

accordance with ISAs is conducted on the premise that management has
acknowledged and understands that it has the responsibilities. The concept of an
independent audit requires that the auditor’s role does not involve taking
responsibility for the preparation of the financial statements or for the entity’s
related internal control, and that the auditor has a reasonable expectation of
obtaining the information necessary for the audit in so far as management is able
to provide or procure it. Accordingly, the premise is fundamental to the conduct
of an independent audit. To avoid misunderstanding, agreement is reached with
management that it acknowledges and understands that it has such
responsibilities as part of agreeing and recording the terms of the audit
engagement.

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 The letter failed to identify the underlying financial reporting framework for the
audit. In accordance with ISA 210 the auditor is required to determine whether the
financial reporting framework, to be applied in the preparation of the financial
statements, is acceptable. In some jurisdictions, law or regulation may prescribe
the financial reporting framework to be used in the preparation of general purpose
financial statements for certain types of entities. In the absence of indications to the
contrary, such a financial reporting framework is presumed to be acceptable for
general purpose financial statements prepared by such entities.

 ISA 210 requires reference to the expected form and content of any reports to be
issued by the auditor and a statement that there may be circumstances in which a
report may differ from its expected form and content. This is missing from the
letter.

 The fee structure is vague, specifying a fixed fee but not indicating the basis on
which the fees are computed.

 The timeline for reporting is unreasonably short, potentially causing delays and
difficulties in completing the audit.

 The contingency plan is not addressed, leaving the engagement vulnerable to

unforeseen disruptions.
(Any 5 points @ 2 marks each = 10 marks)

(Total: 20 marks)

EXAMINER’S COMMENTS
Question one was made up of two sub-questions a) and b).
The a) i) required candidates to evaluate four (4) ethical threats which may affect the
independence of Afari partners from a given scenario. Majority of the candidates were
able to attempt the question well. However, some few candidates gave explanation to
the various threats without relating them to the scenario.

The a) ii) part of the question required candidates to advise on how each of the threats
mentioned in part i) might be mitigated to an acceptable level. This was well
attempted by most candidates.

NB: Question 1a is made up of i) and ii) for which candidates were to answer
accordingly, however, some candidates put both together.

Sub-question b) required candidates to discuss five (5) issues with a given drafted
engagement letter in accordance with ISA 210.

Knowledge in ISA 210: Agreeing the terms of audit engagements is important to

answer this part of the question. Candidates were to criticise the draft engagement
letter. This had been well attempted by most candidates.

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QUESTION TWO

a) The materiality threshold presents a simplistic measure of the materiality of items

without considering important factors. Other factors to be considered include:
 The nature of the item involved: Some items in the financial statement are valued
more subjectively than others depending on their estimation. The more subjective
the item, the more flexible the auditor should be in assessing the materiality of
possible misstatements. The auditor will have to take a very different view on
materiality when considering a warranty provision (which is subjective estimate),
compared with the approach taken when auditing stated capital, which is capable
of precise measurement.

 The significance of the Item: some items may be insignificant in terms of their
monetary amount but may nevertheless be of particular interest to the users of the
financial statement. E.g. Bonus payment to directors.

 The impact of the items on the view presented by the financial statements: A
small and apparently insignificant error or omission may be material if, by
correcting it:
 A reported profit is converted into a reported loss, or
 The correction significantly alters the trend of profit (growth rate in
profits) over the past few financial years.
 The existence of statutory or regulatory reporting requirements that affect
materiality thresholds.

 The sensitivity of the circumstances surrounding the misstatement, for example,

the implications of misstatements involving fraud and possible illegal acts,
violations of contractual provisions, and conflicts of interest.

 The effects of misclassifications, for example, misclassification between operating

and non-operating income or recurring and non-recurring income items.

 The motivation of management with respect to the misstatement, for example,

 an indication of a possible pattern of bias by management when
developing accounting estimates or
 a misstatement precipitated by management's continued
unwillingness to correct weaknesses in the financial reporting process.

Performance Materiality represent the “the amount or amounts determined by

the auditor, based on the assessed level of risk at the financial statement level,
which is less than materiality for the financial statements as a whole. The amount
of performance materiality is considered necessary to reduce to an appropriately
low level the probability that the aggregate of uncorrected and undetected
misstatements is greater than materiality.”
4 points @ 2 marks each = 8 marks
explanation of performance materiality = 2 marks

Page 11 of 24
b) The audit strategy sets out in general terms how the audit is to be conducted and
sets the scope, timing and direction of the audit. The audit strategy then guides the
development of the audit plan, which contains the detailed responses to the
auditor’s risk assessment. ISA 300 requires the auditor to consider specific matters
when establishing the audit strategy and provides a list of typical matters to be
considered in its appendix. These matters are discussed below:

 Identify the characteristics of the engagement that define its scope: Some audit
engagements have specific characteristics that mean the audit has a wider scope
than the audit of other entities. For example, a group audit engagement or the audit
of a multinational company will both have wider scopes than an audit of a small,
owner-managed entity. Matters such as the ability to use the work of internal
auditors, the need to liaise with external service organisations, and the effect of IT
on audit procedures are also relevant. The scope is also affected by the applicable
financial reporting framework, the nature of the audited entity’s business and
whether it operates business segments, the business activities conducted, and the
availability of client personnel and data.

 Ascertain the reporting objectives of the engagement to plan the timing of the
audit and the nature of the communications required: Reporting requirements
will vary from audit to audit. For example, some entities have additional reporting
requirements to comply with corporate governance regulations or industry
requirements, and the auditor must understand these requirements from the start
of the audit. The nature of other communications that may be necessary during the
audit should be considered, such as liaison with component auditors, and
communications to management and to those charged with governance.

 Consider the factors that are significant in directing the audit team’s efforts in
the auditor’s professional judgment: The strategy must consider issues to do with
quality control, such as how resources are managed, directed and supervised,
when team briefing and debriefing meetings are expected to be held, how
engagement partner and manager reviews are expected to take place (for example,
on-site or off-site), and whether to complete engagement quality control reviews.

 Consider the results of preliminary engagement activities and knowledge

gained on other engagements: This includes the initial assessments of materiality,
risks identified from preliminary activities such as fraud risks, significant events
that have occurred at the entity or in the industry in which it operates since the last
audit, and the results of previous audits that involved evaluating the operating
effectiveness of internal control, including the nature of identified deficiencies and
action taken to address them. The audit firm may also have performed other
services for the client that may be relevant in determining the audit strategy, for
example, reviews of business plans or cash flow forecasts.

 Ascertain the nature, timing and extent of resources necessary to perform the
engagement: One of the main objectives of developing the audit strategy is to

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 effectively allocate resources to the audit team, for example, the use of specialists
on particular areas of the audit, or building a team of highly experienced auditors
for a potentially high-risk audit engagement. If the audit is time pressured due to
a tight deadline, then more resources will need to be allocated to ensure that all
necessary audit work is completed and can be reviewed in time to meet the
deadline.
(Any 4 points @ 2.5 marks each = 10 marks)

(Total: 20 marks)

EXAMINER’S COMMENTS
This question was made up of two sub-questions, a) and b).
Sub-question a) required candidates, acting as Team Lead, to advise their team
members on other factors to consider when evaluating materiality. The candidates
were required to also cover the need for performance materiality in their discussion.
Majority of the candidates could not answer the question well. They demonstrated
weakness, regarding evaluating performance materiality. Those who attempted it did
not exhibit an understanding of performance materiality.

The b) part of the question required candidates to discuss four (4) specific matters ISA
300: planning an Audit of Financial statements, requires the auditor to consider
when establishing the audit strategy. This question was well attempted by most
candidates. They were able to discuss matters to consider when establishing the audit
strategy.

QUESTION THREE

a) Matters, further actions and auditor’s report implications

Sale of division
The company is at an advanced stage of negotiations with a competitor to sell its
scientific publishing division. Currently the finance director has not included any
reference to the sale in the financial statements for the year ended 31 March 2023.

The revenue of the scientific publishing division of GH¢13 million represents 12%
of total revenue and the profit of the division of GH¢1.4 million represents 15.1%
of profit before tax. The division is therefore material to the statement of profit or
loss. The assets of the division are also material, as they represent 27.3% of the
company’s total assets, based on their value in use which is recognised in the
financial statements.

According to IFRS 5, a disposal group of assets should be classified as held for

sale where management plans to sell the assets, and the sale is highly probable.
Conditions which indicate that a sale is highly probable are:

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 management is committed to a plan to sell
 the asset is available for immediate sale
 an active programme to locate a buyer is initiated
 the sale is highly probable, within 12 months of classification as held for sale
(subject to limited exceptions)
 the asset is being actively marketed for sale at a sales price reasonable in relation
to its fair value
 actions required to complete the plan indicate that it is unlikely that plan will be
significantly changed or withdrawn.

In respect of the scientific publishing division, management has decided to sell

the division and a buyer has been found. The advanced stage of negotiations
would suggest the sale is highly probable.

IFRS 5 requires specific disclosures in relation to assets held for sale and
discontinued operations, including that the assets are recognised as current assets
and the results of the discontinued operation are presented separately in the
statement of profit or loss and the statement of cash flows.

As a result, important disclosures are currently missing from the financial

statements which could mislead users with respect to the future revenue, profits,
assets and cash flows of the company. Failing to provide information about the
sale of the division could be seen as a significant omission from the financial
statements, especially given the materiality of the assets of the division to the
company’s assets as a whole.
There is therefore a material misstatement as the scientific publishing division
has not been classified as held for sale and its profit presented as a discontinued
operation and the necessary disclosures have not been made in the financial
statements.

IFRS 5 provides further guidance regarding the valuation of the assets held for
sale. Prior to classification as held for sale, the disposal group should be reviewed
for impairment in accordance with IAS 36: Impairment of Assets. This
impairment review would require the asset to be held at the lower of carrying
amount and recoverable amount where the recoverable amount is the higher of
value in use or fair value less costs of disposal.

In this case the recoverable amount would be GH¢42 million representing the fair
value less costs of disposal. Management has valued the disposal group based on
its value in use at GH¢41 million which means that assets and profit are currently
understated by GH¢1 million. This represents 10.7% of profit before tax and is
material to the profit for the year.

After classification as held for sale, non-current assets or disposal groups are
measured at the lower of carrying amount and fair value less costs which would
continue to be GH¢42 million. Depreciation ceases to be charged when an asset

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 is classified as held for sale.
(1 mark each for any 7 valid points)

Adoption of IFRS 16 and change in accounting policy

IAS 8: Accounting Policies, Changes in Accounting Estimates and Errors permits
a change in accounting policy where the change:
 is required by a standard or interpretation; or
 results in the financial statements providing reliable and more relevant
information about the effects of transactions, other events or conditions on the
entity’s financial position, financial performance, or cash flows.

Where the change in policy is due to the requirements of a new standard then the
method of applying the change set out in the new standard should be followed.
In this case, IFRS 16 permits a lessee to either apply IFRS 16 with full retrospective
effect or alternatively not restate comparative information but recognise the
cumulative effect of initially applying IFRS 16 as an adjustment to opening equity
at the date of initial application. Therefore, the accounting treatment by Addin
Expert is acceptable.

However, the lack of disclosure of the change in accounting policy is not in

accordance with IAS 8 which requires the following disclosures in these
circumstances:
 the title of the standard or interpretation causing the change
 the nature of the change in accounting policy
 a description of the transitional provisions, including those that might have an
effect on future periods
 for the current period and each prior period presented, to the extent practicable,
the amount of the adjustment:
 for each financial statement line item affected, and
 for basic and diluted earnings per share (only if the entity is
applying IAS 33)
 the amount of the adjustment relating to periods before those presented, to the
extent practicable
 if retrospective application is impracticable, an explanation and description of
how the change in accounting policy was applied.

As these disclosures have not been made, there is an omission of disclosure which
is key to understanding the changes in deriving the lease balances in the financial
statements which is likely to be a material omission given that leased assets are
material to the financial statements.
(2.5 marks each for any 2 valid points well explained)
Further actions
 The auditor should request that management adjusts the financial statements to
recognise the discontinued operation and to separately disclose the assets held
for sale in accordance with IFRS 5 and to disclose the change in accounting policy
for leases as required by IAS 8.

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 In addition, the client should be requested to amend the carrying amount of the
assets to the recoverable amount of GH¢42 million in line with IFRS 5
requirements.
 If management refuses to adjust the financial statements, the auditor should
communicate the misstatements to those charged with governance. They should
repeat the request and inform them of the modifications that would be made to
the auditor’s report if the adjustments are not made.
 If management still refuses to amend the financial statements, the auditor should
request a written representation from management confirming their intent to
proceed without amending the financial statements and that they are aware of
the potential repercussions.
(2.5 marks each for any 2 valid points)

ii) Auditor’s report implications

If the adjustments are not made, then there is a material misstatement in the
financial statements. The matters above have resulted in an understatement of
assets and profits by GH¢1 million which in isolation is unlikely to be pervasive
as limited components of the financial statements are affected.

This would result in a qualified audit opinion in which the report would state
that ‘except for’ the material misstatement in relation to the valuation of the assets
held for sale the financial statements are fairly stated.

However, there are also several important disclosures omitted which would be
required for users to understand both the current financial position of the
company and its ability to generate future revenue and profits. As such, it would
be a matter of judgement as to whether the lack of disclosures in conjunction with
the material misstatement mentioned above have a pervasive impact on the
financial statements.

Depending on the auditor’s judgement on this issue, this may give rise to an
adverse opinion if the auditor considered the impact of these issues to result in
the financial statements being wholly misleading.

Depending on the opinion provided, a basis for qualified or adverse opinion

paragraph would be added underneath the opinion paragraph to describe and
quantify the effects of the misstatements.
1 mark each for any 3 valid points (3 marks)

(Total: 20 marks)

EXAMINER’S COMMENTS
This question is made up of two (2) scenarios with the following headings: Sale of
division and First time adoption of IFRS 16: Leases. Candidates were required to:
I. Evaluate the methods relevant at the completion stage of the audit and
recommend further actions necessary before the auditor’s report can be signed.

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II. Access the impact on the auditor’s report if no adjustments are made to the
financial statements.

SALE OF DIVISION
Candidates’ knowledge in IFRS 5 and IAS 36: impairment of Assets, is relevant in
answering this question. Knowledge of the concept of materiality and disclosure is
also important.

FIRST TIME ADOPTION OF IFRS 16: leases: Candidates knowledge in IAS 8:

Accounting Policies and IFRS 16: leases is relevant to answering this part of the
question.

FURTHER ACTIONS
This section required certain procedures that the auditor would perform before
signing the report. Knowledge in IFRS 5 and IAS 8 is relevant in answering this part
of the question.

AUDITOR’S REPORT IMPLICATION

This part required candidates to indicate the opinion the auditors will form if the
necessary adjustments and disclosures have not been made by management.
Candidates should be able to indicate whether the absence of the adjustments and
disclosures will lead to material misstatement or not in the financial statements.

Generally, the performance of the candidates in relation to this question was average.
Most candidates spent time calculating materiality and commenting on it which
attracted only a point.
The impact on auditor’s report section was poorly answered by most candidates.

QUESTION FOUR

a) The following Quality Control procedures or policies must be considered:

 Auditor-General should ensure appropriate policies, procedures and tools, such as
audit methodologies are in place for carrying out the range of work that is the
responsibility of the SAI, including work that is contracted out.

 Auditor-General should establish policies and procedures that encourage high

quality and discourage or prevent low quality. This includes creating an
environment that is stimulating, encourages proper use of professional judgement
and promotes quality improvements. All work carried out should be subject to
review as a means of contributing to quality and promoting learning and
personnel development.

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 Where difficult or contentious matters arise, Auditor-General should ensure that
appropriate resources (such as technical experts) are used to deal with such
matters.

 Auditor-General should ensure that applicable standards are followed in all work
carried out, and if any requirement in a standard is not followed, Auditor-General
should ensure the reasons are appropriately documented and approved.

 Auditor-General should ensure that any differences of opinion within the SAI are
clearly documented and resolved before a report is issued by the Auditor-General.

 Auditor-General should ensure appropriate quality control policies and

procedures are in place (such as supervision and review responsibilities and
engagement quality control reviews) for all work carried out (including financial
audits, performance audits, and compliance audits). Auditor-General should
recognize the importance of engagement quality control reviews for their work
and, where an engagement quality control review is carried out, matters raised
should be satisfactorily resolved before a report is issued by the Auditor-General.

 Auditor-General should ensure that procedures are in place for authorizing

reports to be issued. Some work of Auditor-General may have a high level of
complexity and importance that requires intensive quality control before a report
is issued.

 If Auditor-General are subject to specific procedures relating to rules of evidence

(such as Auditor-General with a judicial role), they should ensure that those
procedures are consistently followed.

 Auditor-General should aim for timely completion of audits and all other work,
recognizing that the value from the work of Auditor-General diminishes if the
work is not timely.

 Auditor-General should ensure timely documentation (such as audit work papers)

of all work performed.

 Auditor-General should ensure that all documentation (such as audit work papers)
is the property of the Auditor-General, regardless of whether the work has been
carried out by SAI personnel or contracted out.

 Auditor-General should ensure appropriate procedures are followed for verifying

findings to ensure those parties directly affected by the Auditor-General’s work
have an opportunity to provide comments prior to the work being finalized,
regardless of whether or not a report is made publicly available by the Auditor-
General.

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 Auditor-General should ensure that they retain all documentation for the periods
specified in laws, regulations, professional standards and guidelines.

 Auditor-General should balance the confidentiality of documentation with the

need for transparency and accountability.

 Auditor-General should establish transparent procedures for dealing with

information requests that are consistent with legislation in their jurisdiction.
(Any 5 points @ 2 marks each = 10 marks)

b) Performance audit
Meaning
Performance auditing is an independent, objective and reliable examination of
whether government undertakings, systems, operations, programmes, activities or
organisations are operating in accordance with the principles of economy,
efficiency and effectiveness and whether there is room for improvement.
(2 marks)

Audit approach
Performance auditing generally follows one of three approaches (or a combination
of these approaches):
 A result-oriented approach: This assesses whether the outcomes or output
objectives have been achieved as intended or whether programmes and services
are operating as intended.

 A problem-oriented approach: This examines and analyses the cause of particular

problems or deviations from the audit criteria of economy, efficiency and
effectiveness.

 A system-oriented approach: This examines the proper functioning of a

management system, such as a financial management system or a control system
and considers whether the system is functioning efficiently and effectively or
whether improvements can be made.
(3 marks)

Principles underpinning Performance audit

Performance audit intends to evaluate an organisation based on the principles of
economy, efficiency and effectiveness. These principles are briefly explained
below:
 The principle of economy means minimizing the costs of resources. The resources
used should be available in due time, in and of appropriate quantity and quality
and at the best price.
 The principle of efficiency means getting the most from the available resources. It
is concerned with the relationship between resources employed and outputs
delivered in terms of quantity, quality and timing.

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 The principle of effectiveness concerns meeting the objectives set and achieving
the intended results.

Performance audits often include an analysis of the conditions that are necessary
to ensure that the principles of economy, efficiency and effectiveness can be
upheld. These conditions may include good management practices and
procedures to ensure the correct and timely delivery of services. Where
appropriate, the impact of the regulatory or institutional framework on the
performance of the audited entity should also be taken into account.
(3 marks)
Objective
The main objective of performance auditing is constructively to promote
economical, effective and efficient governance. It also contributes to accountability
and transparency.

Performance auditing promotes accountability by assisting those with governance

and oversight responsibilities to improve performance. It does this by examining
whether decisions by the legislature or the executive are efficiently and effectively
prepared and implemented, and whether taxpayers or citizens have received value
for money.

It does not question the intentions and decisions of the legislature, but examines
whether any shortcomings in the laws and regulations or their way of
implementation have prevented the specified objectives from being achieved.

Performance auditing focuses on areas in which it can add value for citizens and
which have the greatest potential for improvement. It provides constructive
incentives for the responsible parties to take appropriate action.

Performance auditing promotes transparency by affording parliament, taxpayers

and other sources of finance, those targeted by government policies and the media
an insight into the management and outcomes of different government activities.

It thereby contributes in a direct way to providing useful information to the citizen,

while also serving as a basis for learning and improvements.

In performance auditing, SAIs are free to decide, within their mandate, what, when
and how to audit, and should not be restrained from publishing their findings.
(2 marks)

(Total: 20 marks)

EXAMINER’S COMMENTS
For the a) part of the question, candidates were to discuss five (5) quality control
procedures or policies that the Auditor General should consider in the performance
audit. Most of the candidates answered this part of the question well. However, a few

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could not explain their points well. Some deviated by writing on the techniques for
obtaining audit evidence.

Candidates performance in the b) was average. Most candidates offered shallow

explanations to the following:
Meaning: - this aspect of the requirement was not well explained by some of the
candidates.

Objective: most of the candidates were not able to bring out clearly the objectives of
performance audit. Some stated principles as objectives

Principles: a few candidates were able to state and explain this aspect of the
requirement. However, majority of them were confused. Some candidates wrote on
underlining principles of CSOs.

Approach: this aspect was poorly answered by most of the candidates.

QUESTION FIVE

a) Audit firm rotation

Argument in favour
 Familiarity: A long-term audit relationship creates to some extent familiar
relationship between the auditors and the client. This may weaken the professional
sceptism and independence of the auditors. Auditors may be more likely to
compromise to preserve the relationship.

 Public Perception of Independence: The mandatory rotation of auditors improves

the extent to which the public perceive the auditor-client relationship as
independent. This will on a whole improve public confidence in the quality of
audits.

 Fresh Perspective: Mandatory rotation is also argued to help auditors get a fresh
perspective on their clients' financial statements. After a cooling period of six years
required by the Company’s Act, the auditor can gain fresh insights on the
operations of the business.

 Ineffective Audit approach: After serving as auditors for a long time, the auditor's
approach become predictable and ineffective, so does the audit programs used to
evaluate a company's financial statements and internal controls. A new audit firm
will bring greater alertness and might be able to detect things in statements that
the previous auditor might have overlooked.

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 Peer level scrutiny: Mandatory rotation allows audit firm to scrutinize other firm’s
actual work instead of just evaluating their controls and compliance with
professional standards through the peer review program. An audit firm’s
awareness that another firm will follow it work and could very well detect its
errors and fraud will motivate that firm to do its best work to avoid
embarrassment. The successor firm is also motivated to do its best work because it
does not want negative publicity due to its inability to detect the previous firm’s
errors.
 Increase Competition among firms: Mandatory rotation will increase competition
between audit Firms. The frequency in which corporations would change auditors
within the rotation system would require audit firms to constantly improve
themselves to attract new clients. Rotation would require firm to better their
services in order to differentiate themselves from the competition.

 Economic Independence: Auditor rotation also prevents corporate management

from using termination of the engagement as a threat when an auditor disagrees
with its representations. If an auditor knows that in the next six years the firm is
required to rotate off the engagement, the auditor is not under as much pressure
to compromise his integrity and comply with the demands of management. A firm
cannot become too economically dependent on one client when every six years it
must terminate the relationship.
(Any 3 points @ 2 marks each = 6 marks)

Arguments against
 Ineffective audits in first years: There may be negative effects on audit quality
and effectiveness in the first years following a change. This is because, the new
auditors may take several years to familiarise themselves with their new client and
its procedures. There is some evidence to suggest that there may be a higher
instance of audit failures in the first years following a change of auditors.

 Increased Cost: There are substantial cost from changing auditors regularly, as
auditors attempts to familiarise himself with the new client. More management
time is also needed to assist the new auditor to learn about the client company, its
operations, and its systems.

 Lack of evidence of benefits: There is no evidence that compulsory rotation of

Auditors has a positive impact on auditor’s independence and audit quality.

 Domination by Big Fours: The market for auditing listed companies is dominated
by the “Big Four” accountancy firms. If this domination of the audit market
continues, it may be difficult to change auditors easily. The other large firms may
not have available resources to take other non-audit services that they already
provide.

 Short period for rotation: The required period of six years for the engagement is
not long enough. Since most modern businesses are large and complex, the six

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 years may not give an audit firm enough time to get a thorough understanding of
the company. Audits risks are reduced as the auditor becomes more familiar with
a company and understand the entity and its environment.
(Any 2 points @ 2 marks each = 4 marks)

b) COBIT is a globally accepted suite of tools that a client might use in order to ensure
that IT is working effectively. Collectively they provide a framework for
integrating industry standards and good practice in the development of IT
systems. It is an IT governance tool that harmonises standards from prominent
global sources into a critical resource for management control professionals and
auditors.
COBIT applies to enterprise-wide information systems, including personal
computers, minicomputers, mainframes and distributed processing environments.
COBIT support self-assessment of strategic organisational status, identification of
action to improve IT processes and monitoring of the performance of these IT
processes. COBIT provides a reference framework for management, users and
information systems audit as well as control and security practitioners.

The purpose of COBIT is to provide management and business process owners

with information technology (IT) governance model that helps in understanding
and managing the risks associated with IT. COBIT helps to bridge the gaps
between business risks, control needs and technical issues. It is a control model to
meet the needs of IT governance and ensure the integrity of information and
information system.
(5 marks)
Meaning 2 marks
Purpose 3 marks
c)
i) A deficiency is defined by ISA 265 as where:
 a control is designed, implemented or operated in such a way that it is unable to
prevent, or detect and correct, misstatements in the financial statements on a
timely basis, or
 a control necessary to prevent, or detect and correct, misstatements in the financial
statements on a timely basis is missing.
 A significant deficiency in internal control is one which merits the attention of
those charged with governance.
(2 marks)
ii) ISA 265 requires the auditor to:
 Communicate significant deficiencies identified during the audit to those charged
with governance in writing on a timely basis.
 Communicate any other deficiencies to an appropriate level of management.

JUSTIFICATION
 To document material matters which came to the auditors notice during the audit
 To afford management the opportunity to rectify matters which would otherwise
lead to audit report qualification.

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 To serve as a future reference in case of negligence action against the auditor
 To remind the auditor of areas that they may need special attention during such
an audit
(1 mark each for any 3 valid points)

(Total: 20 marks)

EXAMINER’S COMMENTS
Candidates performance in this question was generally good with the exception of the
b) part of the question (COBIT) which was not very well answered. The candidates
were able to make concrete arguments for audit rotation. Likewise, most candidates
were able to explain what deficiency is and justify why communicating same to those
charged with governance.

CONCLUSION
 Candidates must ensure that their handwriting is legible.
 Candidates must read over their work before submitting answer booklet.
 Candidates must study the relevant standards very well in order to apply them
where necessary in answering the questions
 Requirements must be made clear to make understanding easy to candidates.

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