Audit Question

–    Upon the completion of the audit of Lovejoy Company Ltd, the Engagement Partner reviewed the audit working papers and came across the following;

·        There was material inconsistency between the financial information and other information in documents containing the financial statements and the auditor’s report thereon. The material inconsistency has been traced to the financial information but management has refused to effect any change when requested to do so.

·        Stocks worth GH¢5 million were valued at cost in the financial statements. The review of the post balance sheet events indicated that not all the stocks could be sold in the normal course of business. Some were damaged and some have become obsolete and slow moving. The total assets of the company is GH¢20 million. If the stocks were valued at net realizable value, the value would have reduced by GH¢2.0 million. The Directors have refused to allow the stocks to be valued at lower of cost and net realizable value and valued all the stocks at cost.

·        Management refused to allow auditors to carry out circularization of debtors. The receivables figure was material in the financial statements. In addition, the auditors have not received a reply to the letter of enquiry sent to the company’s solicitors in respect of a major litigation affecting the company. The auditors assessed that the effect of the two items is both material and pervasive.

·        Subsequent events indicated that a major debtor has become insolvent. The amount involved was material. The directors refused to recognize the provision for a write- off of the amount.

Required:

i) For each of the items, recommend the type of audit opinion to be issued.

ii) Consider what action the auditors should take in view of management refusal to accept the recommendations and/or allowed the auditor to carry out the necessary audit procedures.

b.     Blue Insurance Company Ltd. has appointed Lovejoy and Betty and Co., a firm of chartered accountants, as its new auditors to audit its financial statements for the year 2012. You were engaged as Senior audit assistant of the firm since last year.

The audit manager has assigned the checking of the opening balances schedule to the audit team over which you are the team leader. The following are the items on the schedule:

o  Property and Equipment – 50 million

o  Computer Hardware – 2 million

o  Computer Software – 3 million

o  Accounts Receivable – 10 million

o  Accounts Payable – 8 million

At the briefing meeting, the audit manager asked your team to prepare audit procedures for the audit of the opening balances.

Required: Outline the audit procedures that should be used to verify the opening balances of Blue Insurance Company Ltd

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