Question

Morning Delight Company manufactures cereals and operates five factories, six warehouses and five distribution depots in major cities in Ghana. The audit for the year ended 31 December 2019 is almost complete and the financial statements and auditor’s report are due to be signed shortly. Profit before taxation is Ghc 11.6 million. The following events have occurred subsequent to the year-end and no amendments or disclosure have been made in the financial statements.
Event 1 – Fire Outbreak
On 2 February 2020, a fire occurred at the largest of the distribution depots. The fire resulted in extensive damage to 41% of the company’s vehicles used for dispatching goods to costumers, however, there was no significant delays to customers’ deliveries. The company estimated the level of damage to the vehicles to be in excess of Ghc108,000. Only a minimal level of inventory, approximately Ghc 42,000, was damaged. Secure Insurance company, the insurers of Morning Delight Company has started to investigate the fire to assess the likelihood and the level of payment, however, there are concerns that the fire was started deliberately, and if it is true, it will invalidate any insurance cover.
              4 marks Event 2 – Inventory
On 22 February 2020, it was discovered that a large batch of Morning Delight Company’s new cereal brand ‘Anopayede’ held in inventory at the year-end was defective, as the cereal contained too much sugars. To date no sales of this new cereal have been made. The cost of the defective batch of inventory is Ghc 1,500,000 and the defects cannot be corrected. However, the scrapped cereal can be utilized as a raw material as an alternative cereal brand at a value Ghc 84,000.
            4 marks
Based on the two subsequent events above you are required to:
i. Explain whether the financial statements require amendment, and
ii. Describe audit procedures which should now be performed in order to form a conclusion on any required amendments.

b) You are the manager in charge of the audit of Nananom Company, a public limited liability company which manufactures specialist equipment and costumes for use in Kumahwood and Nafftti films in Ghana. Audited revenue is Ghc 100 million with profit before tax of Ghc 6.25 million.
Audit work up to but not including, the obtaining of written representations has been completed. A review of the audit file has disclosed the following outstanding point:

Kumahwood
Nananom Company is facing a potential legal claim from the Kumahwood company in respect of a defective equipment that was supplied for one of their films. Kumahwood sustains that the equipment built was not robust enough, while the directors of Nananom argue that the specification was not sufficiently detailed. Nananom were of the view that using such sophisticated equipment under conditions that require heavy falls, may render them not in the best of working conditions after a couple of films produced. However, this is what Kumahwood expected.
Solicitors are unable to determine liability at the present time. Kumahwood has therefore slapped a claim for Ghc 3.33 million being the cost of a replacement equipment and lost production time on Nananom. The directors’ opinion is that the
claim is not justified.            4 marks Depreciation
Depreciation of specialist production equipment has been included in the financial statements at the amount of 12% per annum using the reducing balance method. The treatment is consistent with prior accounting periods (which received an unmodified auditor’s report) and other companies in the same industry. Sales of old equipment show negligible profit or loss on sale. The audit senior, who is new to the audit, feels that depreciation is being undercharged in the financial statements.
        4 marks


You are required to:
i. Discuss whether or not a paragraph is required in the written representation for each of the above matters.
      c) A suggested format for the written representation has been sent by the auditors to the directors of Nananom. The directors have stated that they will not sign the written representation this year on the grounds that they believe the additional evidence that it provides is not required by the auditor.

You are required to:
i. Discuss the action the auditor may take as a result of the decision made by the directors, not to sign the written representation.

Answer 1

a)

i. IAS 10 - Events occurring after the end of reporting period

The events are classified as

1. adusting events - Events that give proof of conditions existing at the end of reporting period date

2. non-adjusting events - Events that are based on conditions that is triggered after the end of the reporting period.

Adjusting events are information relevant to the assets and liabilities/ income and expenses or cash flows recognised at the end of reporting period.

On the contrary non-adjusting events since they occurred after the reporting date need not be reflected in the financial statements at the end of reporting period. However, the information can be a part of the disclosure about significant happenings after the reporting period. The potential loss/ gain amount if determinable should also be disclosed. This will help the user of the financial statments to assess its impact on the cash flows of the company.

In the events described in question,

Event 1 - The fire in the godown is a non-adjusting event since it ocurred by accident. As the event did not have a major impact on the business activitiy, disclosure must be made for the loss of vehicles damaged to the tune of GHC 108000/- approximately, in fire. The inventory damage of GHC 42000/- need not be disclosed as the same is not significant as per materiality concept.

Event 2 - Since there was no sale during the reporting period, the company had no idea of the defect in its inventory. The latent defect (cereal contained too much sugar) was detected after the reporting period, hence, the same is a non-adjusting event and no adjustment is required in the financial statements of the reporting period. A disclosure of potential loss of GHC1,500,000/- need to be made. The insurance claim being inconclusive the claim amount receivable need not be disclosed.

ii. The auditor will have to document the process followed to identify the findings or issues that are inconsistent. The audit records to be retained include, procedures performed in response to the information, and records documenting third party consultations, if any.

Answer 2

Research the concept of Continuous Auditing and its implications for independent auditors. Further analyze the hurdles for the implementation of continuous auditing in Fiji.

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