Question

Question 3
a) Modern Day Gospel Fellowship is a non-denominational charity organisation established in 2001. The charity’s aim is to provide support to children from disadvantaged backgrounds. The support comes in two folds i.e. academic such as scholarships and related academic activities and sports such as tennis, swimming and football. The aim is to provide total well-being to humanity.
Modern Day Gospel Fellowship has detailed constitution which explains how the charity’s income can be spent. The constitution also notes that the administration expenditure cannot exceed 6% of annual income.
The charity’s income is derived wholly from voluntary donations which includes:
• Cash collected from public donations by volunteers.
• Cheques sent to the charity’s head office.
• Donation from generous individuals. Some of these donations have specific clauses attached to them indicating that the initial amount donated (capital) cannot be spent. However, the income (interest) from the donation can only be spent on specific activities, for example, provision of sport equipment and scholarships.
• The rules regarding the taxation of charities in the country where Modern Day Gospel Fellowship is based are complicated, with only certain expenditure being allowable for taxation purposes and donations of capitals being treated as income in some situations.

You are required to:
i. Identify areas of inherent risk in Modern Day Gospel Fellowship and explain the effect of each of this risk on the audit approach.
                                5 marks
ii. Explain why the control environment may be weak at Modern Day Gospel Fellowship.
3 marks

b) You work in a reputable audit firm and you are currently reviewing the working papers of several audit assignments recently curried out by your audit firm. Each of the audit engagement is nearing completion, but certain matters have recently come to light which may affect your audit opinion on each of the assignments. In each case, the year-end of the company is 30 August 2019.
i. Mimie Company (Profit before tax Ghc 750,000)
On 6 September 2019 a letter was received informing the company that a customer, who owed the company Ghc 150,000 as at the year-end had been declared bankrupt on 30 August. At the time of the audit it was expected that unsecured creditors, such as Mimie, would receive nothing in respect of this dept. The directors refuse to change the financial statements to provide for the loss, on the grounds that the notification was received by the statement of financial position date.
Total debts shown in the statement of financial position amounted to Ghc 2,375,000.                   3 marks
ii. Kokuvi Company (Profit before tax Ghc 2,500,000)
On 20 July 2019 a customer sued the company for personal damages arising from a defect in one of its products. Shortly before the year-end, the company made an out-of-court settlement with the customer of Ghc 50,000, although this agreement is not reflected in the financial statements. Further, the matter subsequently became known to the press and was extensively reported. The company’s legal advisers have now been informed that further claims have been received following the publicity, although they are unable to replace a figure on the potential liability arising. The company has referred to the claims in a note to the financial statements stating that no provision has been made because the claims are not expected to be material.
3 marks
iii. Baaba Na Company (profit before tax Ghc 1,250,000)
The audit work revealed that a trade investment stated in the statement of financial position at Ghc 2,500,000 has suffered a permanent fall in value of Ghc 1,500,000. The company has refused to put an impairment charge through for it on the grounds that other investments (not held for resale) have risen in value and are stated at amount considerably below their realisable values.
3 marks
iv. Achah Martin (profit before tax Ghc 500,000)
This client is a furniture company, currently manufacturing for the local market using local materials and some of its own workforce. The labour cost has been included in the cost of a non-current asset in the statement of financial position at a value of Ghc 50,000. During the audit it was discovered that the direct labour cost records for the early parts of the year have been accidently destroyed.
3 marks
You are required to:
Discuss each of the cases outlined above, referring to materiality considerations and, where appropriate, relevant accounting principles and appropriate accounting standards, explaining the audit reporting implications in each case.
                   Total: 20 marks

Answer 1

A) It has been often observed that Inherent risks are high in the case of non profit organizations. They generally result in misstatement of financial statements to report certain results in order to continue recieving grants.

Areas of inherent risk in Modern Day Gospel Fellowship are as follows:-

a) Funds misuse:-

Modern Day Gospel fellowship exist for a specific purpose with a defined mission. Even though their board is responsible for making sure that the organization is focused about the goal given, there could be a mere possiblity of misuse of of funds that can result in donator to withdraw its donations. Some of them may demand repayment of the expended funds, which may result in refusal of funds in future.

b) Tax Liabilities :-

It has been stated that the rules regarding the taxation of charities in the country where Modern Day Gospel Fellowship is based are complicated and this might lead to errors in reporting a true and fair position of the gospel. These organisations. in order to minimise costs, hire minimum financial experts, which results in inaccurate reporting.

2.The control environment may be weak at Modern Day Gospel because of following reasons:-

a) Lacking integrity because of weaker structure of responsibility and authority.It won't be possible in regularly reviewing the process Modern Day Gospel.

b) A weaker risk assessment structure system. It is very important for any organization to have a proper structure to identify, analyse the most efficient manner.

c) Lacking qualified staff is one more reason of weak control environment. Organization like Modern Day Gospel for ways to minimise fixed expenditure as much as possible because of which they look for volunteersto work.

B)

Situation	Explaination and material consideration
i. Mimie Company (Prot before tax Ghc 750,000) On 6 September 2019 a letter was received informing the company that a customer, who owed the company Ghc 150,000 as at the yearend had been declared bankrupt on 30 August. At the time of the audit, it was expected that unsecured creditors, such as Mimie, would receive nothing in respect of this dept. The directors refuse to change the nancial statements to provide for the loss, on the grounds that the notication was received by the statement of nancial position date. Total debts shown in the statement of nancial position amounted to Ghc 2,375,000.	As per IAS 8 which deals with the event occurafter balance sheet but before approval. As per the scenario, the debtors were lying on the balance sheet date on the year ended August. Letter conrming the bankruptcy of one of the debtors leads to its non-recoverable hence assets need to be reduced. Thus as per IAS 8, it is the adjusting event which needs to be adjusted in the financial statement and disclosure for the same is required to be made in the notes to nancial statements. Here, if the directors refuse to show the above adjustment and disclosure in books of accounts then it may lead to qualied IAR for the year ended disclosing the material misstatement which is evident and not also that the finanancial statement is not as per the finanancial GAAP.
ii. Kokuvi Company (Prot before tax Ghc 2,500,000) On 20 July 2019 a customer sued the company for personal damages arising from a defect in one of its products. Shortly before the year-end, the company made an out-of-court settlement with the customer of Ghc 50,000,although this agreement is not reected in the financial statements. Further, the matter subsequently became known to the press and was extensively reported. The company’s legal advisers have now been informed that further claims have been received following the publicity, although they are unable to replace a gure on the potential liability arising. The company has referred to the claims in a note to the nancial statements stating that no provision has been made becausethe claims are not expected to be material.	Here, as per the situation, the company act of disclosure of the further claims as contingent liabilities are justied because as per the legal advisor it is stated that the further claims are unable to catch any potential liability arisen, hence provision is not made and simply disclosure for the same is rejected. Here Auditor determines the possibilities of legal cases led against the company on the basis of those dues after media interference, if they don't hold any possible outcome and outow of economic bent then showing in contingent liability is appropriate action otherwise if the management decision is not suitable then may recommend for provision against such liability. Accordingly as per the situation on the satisfaction of financial statement presentation issue Unqualied report.
iii. Baaba Na Company (prot before tax Ghc 1,250,000) The audit work revealed that a trade investment stated in the statement of financial position at Ghc 2,500,000 has suffered a permanent fall in value of Ghc 1,500,000. The company has refused to put an impairment charge In this case, the Investment shall be valued at fair value, permanently decline and the same shall be valued at 1500000 Ghc. Mere the other investments not declined will not be held suitable justication in the same. The auditor is required to answer through for it on the grounds that other investments (not held for resale) have risen in value and are stated at amount considerably below their realisable values.	In this case, the Investment shall be valued at fair value, permanently decline and the same shall be valued at 1500000 Ghc. Mere the other investments not declined will not be held suitable justication in the same. The auditor is required to issue qualified report.
iv. Achah Martin (prot before tax Ghc 500,000)This client is a furniture company, currently manufacturing for the local market using local materials and some of its own workforce. The labour cost has been included in the cost of a noncurrent asset in the statement of nancial position at a value of Ghc 50,000. During the audit it was discovered that the direct labour cost records for the early parts of the year have been accidently destroyed.	As per IAS 16, where cost has incurred for the generation of an asset , then such cost shall form part of the asset. But in the current situation, the labour forces inated in the generation asset is destroyed by re, hence no asset is generated actually, hence labour charges shall be charged to P and L instead of Capitalising the same against the generation of furniture which is destroyed. Hence, here auditor will recommend to charge such expenses in the income statement rather than capitalise the same. Here Auditor may report qualied opinion as the financial statement is not as per GAAP.