Question

In: Economics

You are an audit supervisor of Samyantwi & Associate and you are planning the audit of...

You are an audit supervisor of Samyantwi & Associate and you are planning the audit of Franko Company, a listed company, for the year ending 31st March 2017. The company manufactures computer components and forecast profit before tax is GHS33.6m and total assets are GHS79.3m.
Franko Company distributes its products through wholesalers as well as via its own website. The website was upgraded during the year at a cost of GHS1.1m. Additionally, the company entered into a transaction in February to purchase a new warehouse which will cost GHS3.2m. Franko Company’s legal advisers are working to ensure that the legal process will be completed by the year end. The company issued GHS5m of irredeemable preference shares to finance the warehouse purchase.
The company has launched several new products this year and all but one of these new launches have been successful. Feedback on product Luge, launched four months ago, has been mixed, and the company has just received notice from one of their customers, Adanko Company, of intended legal action. They are alleging the product sold to them was faulty, resulting in a significant loss of information and an ongoing detrimental impact on profits. As a precaution, sales of the Luge product have been halted and a product recall has been initiated for any Luge products sold in the last four months.
The finance director is keen to announce the company’s financial results to the stock market earlier than the previous year and in order to facilitate this, he has asked if the audit could be completed in a shorter timescale. In addition, the company intends to propose a final dividend once the financial statements are finalized.
Franko Company’s finance director has informed the audit engagement partner that one of the company’s non-executive directors (NEDs) has just resigned, and he has enquired if the partners at Samyantwi & Associates can help Franko Company in recruiting a new NED. Specifically he has requested the Engagement Quality Control Reviewer, who was until last year the Audit Engagement Partner of Franko Company, to assist the company in this recruitment. Samyantwi & Associates also provides taxation services for Franko Company in the form of tax return preparation along with some tax planning advice. The Finance Director has recommended to the audit committee of Franko Company that this year’s audit fee should be based on the company’s profit before tax. At today’s date, 20% of last year’s audit fee is still outstanding and was due to be paid three months ago.
Required:
i. ii.
Identify and explain TEN ethical threats which may affect the independence of Samyantwi & Associates audit of Franko Company;
For each threat, suggest a safeguard to reduce the risk to an acceptable level.

Solutions

Expert Solution

RISK ARE AS FOLLOWS :

1.risk: Franko had being in th transaction of purchase of warehouse for $3-2 m and its mentioned that legal process will be completed by the end of the year.

response : discuss with management whether the warehouse purchased by the end or not. and for the confirmation check the docment of ownership.

2.risk :as the website had been upgraded , there is chances that the data may not be updated or may be inacuurate.

response :audit team should recheck the sysytem and its functionality and also whether the work is accurate or not.

3.risk: fianance team has asked the auditor to complete work before a week which may result in detection risk and also put lots of pressure on the team to do work before time .

response : audit should confirm about the preferable date, if it is to be reduced then ask for interim audit instead of final audit which can help auditors in reducing the detection risk and do the work hassle free.

4.risk : for the proper disclosure of accounts, the financed made in year through preferance shares must be categorised properly so that liability do not bounce high.

response : documents should be confirmed that preferance shares are under which category and also company had financed it fully under equity.

5.risk : fiance manager had resuced the depreciation rate by extending the uselful lives from 3 to four, but according to the accounting standards they must be revised annualy,otherwise if assets value increase genuinely then only it is applicalble.

responsse : discuss about the matter with the managers and also, check the reason behind the appreciation mentioned if any.

6.risk : by incrreasing the useful lies , manager is reducing the depreciation charge, which results in boosting profit margins or overvaluation.

response : mut talk to directtor about it, and check the proper reason behind the appreciation whether the asset replaced or anything else.

7.Franko has halted further sales of its new product Luge and a product recall has been initiated for the goods sold.

response : ask the director whether the cost reduction of these products will be mentioned in the books or not. if yes, then modify accordingly.

8.if there is issue with the quality of the luge productsor may be they are overvalued due to low quality then the cost.

response : testings or proper analysis should be made to find out actual cost of luge products and proper inventory check should be done.

9.financial team of Franko company have less time thus, giving chances to the certainity of occuring of financial issues or risk of errors in statement.

response : team of auditor must be ready to recheck the statement and to deal with high risk or error, of with spectism.

10.a customer of Franko company had announced that he is going to take legal action due to lack of information and profits because of luge products purchased by him.

responsse ; the case must be deal with the help of lawyers from the company side and the copy of that success must be attaached with the financial statement for more clearity.


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