Question

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

Answer 1

Answer to Part A:

1. It has been often observed that Inherent risks are high in the case of not-for-profit organizations. They often indulge in misstatement of financial statements to report certain results in order to continue receiving grants. Areas of inherent risk in Modern Day Gospel Fellowship are as follows: a. Misuse Of Funds Modern Day Gospel Fellowship exist for a specific purpose with a defined mission. Even though their board is responsible for ensuring that the organization stays focused on its mission, there is a possibility of improper use of these funds that can cause the donator to withdraw their donations. Some may even demand repayment of the expended funds, and might refuse to provide 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, employ personnel with minimum financial expertise and they usually don't have enough staff to segregate duties. This often leads to inaccurate reporting. 2. The control environment may be weak at Modern Day Gospel Fellowship because of the following reasons: a. Lacking integrity because of a weaker structure of responsibility and authority. Regularly reviewing organizational processes might not be possible in the case of Modern Day Gospel Fellowship b. A weaker risk assessment structure system. It is very important for any organization to have a proper structure to identify, analyse and respond to risks in the most efficient manner. c. Lacking Qualified staff is another major reason of a weaker control environment. Organizations like Modern Day Gospel Fellowship look for ways to minimise fixed expenditure as much as possible because of which they either look for volunteers to work and manage operations on an occasional basis or they tend to higher personnel with less expertise.

Answer to Part B:

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.	As per IAS 8, which deals with the event occur after balance sheet but before approval. As per the scenario, the debtors were lying on the balance sheet date on the year ended August. Letter confirming 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 financial statements. Here, if the directors refuse to show the above adjustment and disclosure in books of accounts then it may lead to qualified IAR for the year ended disclosing the material misstatement which is evident and not also that the financial statement is not as per the 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 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 outflow 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 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.	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 justification in the same. The auditor is required to issue Qualified report 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.	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 fire, 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 qualified opinion as the financial statement is not as per GAAP.