Question

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

Dr Cletus Agyenim Boateng, Dr Emmanuel T. Asare and Mr Augustine Addo

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.

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.

Answer 1

Situation	Explanation and Material Consideration.
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	Here, In this Situation as per IAS 8 deals with the event occur after balancesheet but before approval. As per scenario, the debtors were lying on balancesheet date on year ended August. Letter confirmaing 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 need to be adjusted in the financial statment and disclosure for the same is requied to be made in the notes to financial statements. Here, if the directors refuses to shown the above adjustment and disclosure in books of accounts then it may lead to qualified IAR for the year ended disclosing the material misstament which is evident and not also that the financial statment is not as pe rthe financial GAAP.
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.	Here, as per the situation, the company act of disclosure of the further claims as contingent liabilities are justified because as per the legal advisor it is stated that the further claims are unable to catch any potential liablity arisen , hence provison is not made and simply disclosure for the same is reflected. Here Auditor determine the possibilities of legal cases filed agianst the company on the basis of those dues afer media interferene, if they dont hold any possible outcome and outflow of economic benfit then showing in contingent liabilitiy is appropriate action otherwise if the management decision is not suitable then may recommend for provision against such liability. Accordingly as per the sitaution on satisfaction of financial stament presentation issue Unqualified report.
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.	Here, Investment shall be valued at fair value , permananetly decline and same shall be valued at 1500000Ghc. Mere the other investments not declined will not be held suitable justifcation in the same. Auditor is require to issue Qualified reprot in respect of the same as financial are not prepared as per GAAP.
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.	Here, as per IAS 16 where cost has incurred for generation of 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 fire, hence no asset is generated actaully, hence labour charges shall be charged to P and L instead of Capitalising the same against generation of furniture which is destroyed. Hence , here auditor will recommedn to charge such expenses in income statement rather than capitalsie the same. Here Auditor may report qualified opinion as financial statemnet is not as per GAAP.