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Question 1

The expectation gap can be described in general terms as the gap that exists between what the
public especially users of financial statements, believe auditors do or ought to do and what the
auditors actually do.

Such a gap usually surfaces n the unexpected failure of a company.

Various elements of this gap have been identified as:

(a) A standard gap where the public perceives auditing standards as different from what
they actually are.

(b) A performance gap where auditors perform below existing standards.

(c) A liability gap, which the public does not know to whom an auditor is legally

Potential ways of closing the gap include:

(a) Understanding financial statements and audit report. Communication between the
auditing profession and users of the financial statements could be improved to reduce the
false and unrealistic expectations in the users of financial statements. This will help them
to appreciate the conventions on which accounts are prepared, the inevitable degree of
estimation and judegement involved on the test nature of audit work. The most signicant
effort in this area is the Auditing Standard, which requires auditors report to define the
responsibilities of the auditor and the directors in relation to the financial statement.

(b) Fraud – many members of the public believe the main objective of an audit is to
discover fraud. Once again the profession should attempt to explain the nature of an
audit and the limitations of an audit to users so that they become aware the auditors
responsibility is to have a reasonable expectation of detecting material fraud in certain
circumstance but not to search and discover all kinds of fraud.

(c) Control of the profession. The professional bodies are being asked by governments
and regulators to supplement a regime of practice quality control inspection to reassure
the public of quality audit work. Internal Auditing Standards and Ethical requirements
should influence food practice.

(B) The process of accepting audit engagement involve the following:

(1) Considering whether the auditor is properly nominated.

(2) Considering whether the auditor is legally qualified to audit the prospective

(3) Considering whether the firm is capable of auditing the prospective client

(4) Deciding whether there are treats to independence such as self interest treat or
other conflicts of interest.

(5) Deciding whether the audit will be commercially rewarding taking into
account the risk factor and the expertise and skills needed to carry out the audit.

(6) Communicating with any outgoing auditor if any to find out if there are any
reasons why the engagement should not be accepted.

(7) Meeting and discussing with the client the scope of the audit and other
services that the client will require.

(8) Send a letter of engagement detailing the terms of the engagement and the
nature of the audit, and the respective responsibilities of the director and the

Question 2

(a) (1) Auditors remuneration include the fees and any expense allowances paid to
or payable to the auditor.

(2) The remuneration is fixed by an ordinary resolution of the company or in such

manner as the company by ordinary resolution may determine.

(3) The remuneration of the auditors appointed by the directors may be fixed by the
directors for the period ending at the next Annual General Meeting.

(4) The remuneration of the auditors appointed by the registrar may be fixed by the
registrar for the period ending at the next Annual General Meeting.
(b) (i)
(1) Audit risk s the risk that the auditor will express a wrong opinion on the
financial statements. He pay quality his opinion when the financial
statements give a true and fair view or conversely that he may issue an
unqualified opinion when the financial statement do not give a time and
fair view.

(2) Audit risk is considered to be a function of Inherent Risk, Control Risk

and Detection Risk.

(3) Inherent is the susceptibility of account on balance or class of transactions
that could be material individually or when aggregated with misstatements
in other balances or classes in the absence of rotated internal controls.

(4) Control risk is the risk that misstatements that could occur in an account
balance or class of transactions that could be material …….. when
aggregated with misstatements in other balances or classes will net be
prevented or detected on timely bases by the systems of internal control.


(1) Systems-based audit is the audit approach which uses the client’s systems
of internal control as the foundation on which the audit is planned and

(2) Under the approach the auditor assesses the adequacy of the control design
and the operating effectiveness to decide the level or degree of reliance to
the placed on the controls to reduce the detailed checking of transactions
and balances.

(3) The approach involves the following stages:

(i) Obtaining background knowledge and planning.

(ii) Reviewing the accounting system and internal controls.

(iii) Obtaining audit evidence through detailed substantive procedures.

(iv) Reviewing the financial statements; and

(v) Reporting findings.

(ii) Rotational testing: It is bringing special audit emphasis to bear on an

item or an area of the clients business. It is of two types viz, rotation of audit
emphasis and visit rotation.

(iii) Rotation of audit emphasis: The auditor checks the internal controls
in all areas of the business while selecting one transaction cycle for in depth
testing e.g. sales or purchases in turns over a number of years. So while all the
areas are not given that ……… treatment in one year all the areas receive that
treatment over a number of years.

(2) Visit Rotation: Where the client has many branches or factories the
auditor will not be able to visit all of them in one year. He will visit them in turns
or rotation so that while not visiting all of them in one year he would have visited
all of them over a number of years.

Question 3

(a) The inherent limitations of internal controls are:

(1) Management’s usual requirement that a control be cost-effective, that is, the cost
of a control procedure not being disproportionate to the potential loss due to fraud
or error.

(2) The fact that most controls tend to be directed at anticipated types of transactions
and not at unusual types of transactions.

(3) The potential for human error due to carelessness, distraction, mistakes of
judgement or misunderstanding of instructions.

(4) The possibility of circumvention of controls through collusion with parties outside
the entity or with employees of the entity, for example, lack of segregation of
duties between computer programmers and operators.

(5) The possibility that a person responsible for exercising control could abuse that
responsibility, e.g. a member of management overriding a control.

(6) The possibility that procedures may become inadequate due to changes in
conditions and compliance with procedures may deteriorate.

(b) Use of analytical Procedures at the planning stage.

(1) The auditor uses analytical procedures at the planning stage to assist in
understanding the clients business. For example, an unusual fall in sales or gross
profit which was not anticipated may alert the auditor that the client operations
are not going on well.

(2) Use of analytical procedures at the planning stage helps the auditor to highlight
potentially high risk areas. For example if based on interim or draft financial
statements, the auditor discovers that turnover has increased, but distribution ….
Have fallen, there is the possibility of a misstatement in these areas.

(3) Analytical procedures at the planning stage should assist in determining the
nature, timing and extent of appropriate substantive procedures to be carried
having highlighted the potential high risk areas.

(4) The mechanics of using analytical procedures at the planning stage would be to
maintain a running schedule of key ratios and compare these with ratios disclosed
by the interim/draft accounts. Examples of key ratios include gross profit margin,

operating profit margin, assets turn over, liquidity measures, return on capital
employed and external economic/industry indicators.

(c) Adverse opinion

(1) When the auditor disagrees with the management with respect to the preparation
of the financial statements, e.g. wrong choice of accounting policies or failure to
disclose material information, the auditor will require that the matter be corrected.

(2) If management refuses to rectify the situation the auditor cannot issue an
unqualified opinion.

(3) He will assess the effect of the disagreement on the view by the financial
statements which could be material or fundamental.

(4) When the effect of the disagreement is fundamental it means the financial
statements as a whole have been rendered totally misleading.

(5) Under these circumstances the auditor will issue an “adverse opinion” by stating
that in …… “in our opinion the financial statements do not give a true and fair

The objective of control over fixed assets are:

(a) To ensure all acquisitions are properly authorised;

(i) To safeguard the assets;

(ii) To ensure all assets are properly recorded;

(iii) To ensure assets are written off over their useful lives;

(iv) To ensure profits and losses on disposal are properly accounted for.

(b) The main aspects of an internal control system for fixed assets are as follows:

(i) Devolved powers of authorization for acquisitions.

(ii) Physical security of assets and all assets identified.

(iii) Asset registers recording date of acquisition, cost, depreciation rate and

(iv) Checks that the assets on the register are still held and that the assets held
are in the register.

(v) Checks on the condition of assets and regular review of useful lives and
depreciation rates

(vi) Authorization of disposals and write-offs.

(vii) Division of duties between purchase, recording and disposal of assets.

(viii) Regular maintenance of assets

(ix) Formal policy for the treatment of capital and revenue expenditure.

Assuming that the audit was undertaken in the previous year, the auditor can concentrate his
work on additions to buildings:

(i) Check that balance brought forward for cost and accumulated depreciation
agree with the previous year’s file.

(ii) Ensure that there is no evidence that the buildings are subject to a
mortgage or charge.

(iii) Check, by physical inspection that these has been no significant

deterioration of the buildings.

(iv) The documentation concerning the extension should be checked including:

(1) Board authorization for the work

(2) Purchase documents of additional land if appropriate.

(3) Invoices from builders, architects and surveyors and any legal costs.

(4) Certificate of completeness from surveyors.

(v) Physical inspect the extension and check the plans

(vi) Ensure that nor revenue expenditure (such as repair work) has been

(vii) Ensure that any government grants have been treated in accordance with
Ghana National Accounting Standards 18: Accounting for Government Grants
and Disclosure of Government Assistance.

(viii) Check the appropriate amount has been disclosed under “additions to
buildings” in the financial statements.

(ix) Check the accuracy of this year’s depreciation calculations.

Question 5

(a) Tests needed to audit salaries and wages

(1) Ascertain the client’s internal control procedures over salaries and wages.

(2) Test compliance to the procedures.

(3) Select a number of employees from the payroll for a number of months
and check as follows:

(a) With personal records/files.

(b) Salary and approved allowances

(4) Check the procedures for recording attendance and/or …. work as well as
overtime work authorization.

(5) Check detailed calculation for groups pay. (Basic salary plus all

(6) Check detailed calculations for both statutory and non statutory

(7) Reconcile gross pay, total deductions and net pay – global test.

Suggest you review solution to include a statement on the objects of the payroll

(8) Check the figures from the payroll to the payroll summary and the salaries
and wages journal.

(9) Check postings to the various nominal Accounts as well as the liability or
provision Accounts.

(10) Check cash book entries and check payment records for net pay to
employees and discharge off deductions to Internal beneficiaries eg IRS, SSNIT,
TUC, Welfare dues etc.

(11) Examined the underlined wages register and trace names therefrom to the

(12) Check whether both payee and payer sign the register when payment is

(13) Arrange to attend payout to confirm that internal control procedures

relating to payments are working satisfactorily.

(14) Compare the payroll from month to month and investigate any significant

(15) Compare actual payroll expenditure with budgeted figures for periods and
enquire into any significant differences.

(16) Also compare payroll figures for the period under review with previous
year’s levels and enquire into any variations noting conformity with expectations.

(17) Check the classification ….. and presentation of salaries and wages in the
financial statement.

(18) Check whether the amount stated in the financial statement is in

agreement with the Accounting records.

(19) Check whether salaries and allowances paid to executive directors

including the managing director are included in the amounts disclosed under
directors’ emoluments.

(20) Check for the omission of any unpaid employee entitlements at the close
of the year.

(b) State the contents of the Permanent Audit file.

The permanent audit file contains matters of continuously importance affecting the organization
and should be suitably kept and indexed.

Unlike the current audit file, the permanent audit file is required for more than one audit.

The contents should include the following:-

1. A copy of the letter of Engagement of the Auditor.

2. A copy of the Regulations of the company or in case of

partnership, the agreement (partnership deed).

3. A description of the company’s business.

4. The organizational chart showing management structure of the
company with specimen signatures attached.

5. A list of books and the places of which they are kept and the names
of the officials responsible for their maintenance.

6. Updated internal control questionnaires supported by flow charts.

7. Copies of documents of continually importance eg. lease, title

deeds, debenture deeds, share certificates etc.

8. Addresses of the registered office and all other premises.

9. An outline of organizational history, eg history of stated capital

and surpluses as well as important accounting ……

10. Correspondence on the company’s internal control matters.

11. The firm’s Internal audit and accounting instructions.

12. A list of company directors, their positions and where possible


13. A list of properties and investments owned by the company.

14. A list of insurance policies undertaken by the company.

15. Name and addresses of:

(i) Builders, (ii) Solicitors

(iii) Valuers (iv) Insurers etc.

16. Other documents containing information of continuing relevance to the audit