QUESTION 1

(a) Priscilla Publications (Priscilla) is a long-established publishing company. In the last two
years, it has made significant losses as a result of its investment in technology and in
particular, the high-tech environment of e-commerce. This investment and the company’s
sound future prospects have led to a good Stock Exchange rating since they are generally
seen as leading edge in this field, with good preliminary sales and strong feedback on the
ease of use and marketability of their web site.
Priscilla’s investments have been funded through use of their reserves built up over many
years. However, two weeks ago, Priscilla’s shares were suspended, having fallen by 90%
on rumours that reserves had been significantly overstated and that they were no longer
financially viable. Your firm, as the auditors, has come in for significant criticism and is
being accused of negligence. Your firm is also being threatened with legal action in relation
to the lack of due care in preparation of the financial statements.
Required:
Explain the legal position of your firm, the requirements for due care and the steps and
procedures the firm could have taken to prevent such a situation occurring.
(10 marks)

(b)Papa Nii and Papa Nana who just qualified as Professional Accountants have decided to
enter into professional practice under a firm name Nana Nii & Associates. These two have
been trainee accountants of an Audit and Assurance firm for three years before qualifying.
For their first engagement, the CEO of Mberdane Ltd. has nominated Nana Nii & Associates
for appointment as auditors of his company though Mberdane Ltd was a former client of
their former firm, Papa Nii and Papa Nana were never on the engagement team of Mberdane
Ltd.
As beginners Papa Nii and Papa Nana have intended to follow best practice as required by
ISQC 1 “Quality control for firms that perform audits and reviews of financial statements,
and other assurance related services”. However they are not clear of the matters that they
have to consider in their acceptance decision according to the standard. They have
approached you, a senior partner of their former firm for advice.
Required:
Advise Papa Nii and Papa Nana on the matters that they may have to consider in relation to
the acceptance decision on their nomination. (10 marks)
(Total: 20 marks)

QUESTION 2
Ashanti Toys is a prestigious toy retailer trading from a single city centre location. The accounts
and administration offices are above the shop. The company is the wholly-owned subsidiary
of a major department store chain. Ashanti Toys is headed by its dynamic managing director,
Bob Green, aged 70.
At Bob Green’s insistence, your firm, as local to Ashanti Toys, has recently been appointed as
the auditor. Ashanti Toys is now the only group company not to be audited by the group
auditors.

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The following matters have come to light during the preliminary discussions with Bob Green
and those members of his staff to whom he has allowed you access:
(1)The parent company wishes Ashanti Toys to develop operations in a number of out-of-town
shopping centres. Bob Green regards this as unacceptable because it would destroy the
goodwill and prestige built up over 150 years of quality retailing.
(2)The company has approximately 30,000 lines of inventory. Contrary to group accounting
instructions, no physical count is planned for the year end. The company intends to rely on
the continuous inventory system which commenced operation in March 2018.
Two major problems have occurred with the system to date. Firstly, a trainee failed to enter all
the inventory lines before the system went live. Secondly, due to a dispute with the software
house, there has been no maintenance service for five months.
(1)Bob Green has just returned from a toy fair at which he placed an order for 50,000 dolls
produced by a little known student co-operative led by his only granddaughter. The chief
buyer is said to be fuming over the incident.
(2)In the year to 31 January 2018, Bob Green received a bonus of ₵2m, but you were unable
to obtain any information in respect of the calculation and authorisation of the bonus. No
other director of Ashanti Toys received a bonus in that year and the next highest paid
director received a total emoluments package of ₵300,000.
(3)There is a dispute with a major supplier over the credit facilities offered to Ashanti Toys.
The supplier manufactures and supplies 30% of the Ashanti Toys’ purchases and claims that
Ashanti Toys has continually exceeded its credit period and that its accounting staff are
impatient and incompetent.
(4)The company’s overdraft limit of ₵2.5m is due for renegotiation in April 2018.

Required:
Identify and explain the potentially high risk areas of the audit. (Total: 20 marks)

QUESTION 3
You have been asked to carry out an investigation by the management of Dominic Co. One of
the company’s subsidiaries, Accra Engineering Co, has been making losses for the past year.
Dominic’s management is concerned about the accuracy of Accra Engineering’s most recent
quarter’s management accounts.
The summarised income statements for the last three quarters are as follows:
31 March 31 December
Quarter to 30 June 2018
2018 2017
GH₵000 GH₵000 GH₵000
Revenue 429 334 343

Opening inventory 180 163 203

Materials 318 235 240
Direct wages 62 54 74

560 452 517

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 Less: Closing inventory (162) (180) (163)

Cost of goods sold 398 272 354

Gross profit 31 62 (11)

Less: Overheads (63) (75) (82)

Net loss (32) (13) (93)

Gross profit (%) 7.2% 18.6% (3.2)%

Materials (% of revenue) 74.1% 70.0% 70.0%
Labour (% of revenue) 14.5% 16.2% 21.6%
Dominic’s management board believes that the high material consumption as a percentage of
revenue for the quarter to 30 June 2018 is due to one or more of the following factors:
(1) under-counting or under-valuation of closing inventory;
(2) excessive consumption or wastage of materials;
(3) material being stolen by employees or other individuals.
Accra Engineering has a small number of large customers and manufactures its products to
each customer’s specification. The selling price of the product is determined by:
(1) estimating the cost of materials;
(2) estimating the labour cost;
(3) adding a mark-up to cover overheads and provide a normal profit.
The estimated costs are not compared with actual costs. Although it is possible to analyse
purchase invoices for materials between customers’ orders this analysis has not been done.
A physical inventory count is carried out at the end of each quarter. Items of inventory are
entered on inventory sheets and valued manually. The company does not maintain perpetual
inventory records and a full physical count is to be carried out at the financial year end, 30
September 2018.
The direct labour cost included in the inventory valuation is small and should be assumed to
be constant at the end of each quarter. Historically, the cost of materials consumed has been
about 70% of revenue.
The management accounts to 31 March 2018 are to be assumed to be correct.
Required:
(a) Identify and describe the matters that you should consider and the procedures you should
carry out in order to plan an investigation of Accra Engineering Co’s losses. (10 marks)
(b) (i) Explain the matters you should consider to determine whether closing inventory at 30
June 2018 is undervalued; and
(ii) Describe the tests you should plan to perform to quantify the amount of any
undervaluation. (8 marks)
(c) (i) Identify and explain the possible reasons for the apparent high materials consumption in
the quarter ended 30 June 2018; and

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 (ii) Describe the tests you should plan to perform to determine whether materials
consumption, as shown in the management accounts, is correct.
(7 marks)
(Total: 25 marks)

QUESTION 4
(a) Dr. Kofi Mensah has been appointed the Municipal Chief Executive (MCE) of Kyekyewere
Municipal Assembly. He has assumed duty early last month and has carried out
familiarisation tour of all the departments of the Assembly.
You are the Internal Auditor of the Assembly and has worked there for the past two years.
During your turn of briefing the MCE, you mentioned to him that the Internal Audit Agency
(IAA) exists as an apex oversight body of internal audit units working within MDAs and
MMDAs. It was established by the Internal Audit Agency Act (2003) with the object to co-
ordinate, facilitate and provide quality assurance for internal audit activities within the
MDAs and MMDAs.
At the end of your briefing the MCE requested for more information on the IAA especially
its functions. You were pleased with the MCE and formerly welcomed him to the Assembly.
Required:
Communicate to the MCE in the appropriate form detailing out the functions of the Internal
Audit Agency according to the Internal Audit Agency Act (2003).
(Total: 10 marks)

(b)The Auditor General’s 2011 Report expressed grave frustration about what it considered to
be the widespread misuse of government funds. In 2011 alone, Ghana was estimated to have
lost approximately GH¢173,174,541 as a result of financial irregularities.
The Auditor General expressed his frustration in the following terms:
“The cataloguing of financial irregularities in my Report on MDAs and Other Agencies has
become an annual ritual that seems to have no effect because affected MDAs are not seen
to be taking any effective action to address the basic problems of lack of monitoring and
supervision and non-adherence to legislation put in place to provide effective financial
management of public resources. This situation has not changed, it keeps recurring year
after year to date”.
Required:
Critically examine the Auditor General’s frustration by assessing the possible causes and
recommend solutions to overcome the problem.
(10 marks)
(Total: 20 marks)

QUESTION 5
In recent years, many commentators have been placing increasing emphasis on the importance
of the environment. Perhaps as a consequence of this, companies have begun to recognise their
environmental responsibilities and environmental issues now often have important

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implications for companies. Such implications cannot be ignored by company auditors. The
profession needs to show an awareness of the possible impact of environmental issues on
clients’ financial statements.

Required:
Discuss. (Total: 15 marks)

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SUGGESTED SOLUTIONS

QUESTION 1
(a) The audit firm has statutory responsibilities under company law including a duty to report
on whether financial statements show a ‘true and fair view’ or ‘present fairly’ the financial
position. If the firm is shown to be negligent in this process, they could be subject to various
types of action (civil and/or criminal).
In the specific case of Priscilla, the problems relate to investments from reserves and the
collapse in share price resulting from the ‘rumours’ of a lack of reserves and lack of financial
viability. The suspension of the Priscilla shares allows time to investigate the true position
and deal with fact rather than rumour.
During the audit of Priscilla, the firm would have considered the company's' ability to
continue as a going concern and would have examined the financial statements for material
misstatement. This would include consideration of the level of reserves. Therefore if there
are substantiated problems, the firm would have been expected to identify the situation. The
audit process should have been carried out with a due level of skill, care and diligence and
with regard to the required professional standards. If the firm can demonstrate that the audit
was performed in accordance with professional standards, then it will be difficult to
demonstrate negligence. However, if the firm had any suspicions of problems with the
company’s financial position, it should have fully pursued this to establish the facts and, if
it has not done so, could be accused of negligence.
The question does not identify the possible source of legal action. There is a possibility of
liability in tort, under which a third party could sue the firm for damages. However, such a
third party would have to prove that:
 the auditors owe a duty of care to the third party
 that appropriate standards of care have been breached, and
 that the third party has suffered loss as a direct result of this breach of standards.
A duty of care exists where the auditors knew (or reasonably should have foreseen at the
time of auditing the financial statements) that those financial statements might be relied on
for that particular purpose and that it would be reasonable for such reliance to be placed for
that purpose.
To avoid successful allegations of negligence, there are a number of key mechanisms that
the auditors of Priscilla should have followed:
 Ensure that evidence is available to demonstrate that best practice procedures were being
followed, including effective quality control and supervision of work undertaken on the
client.
 Effective planning of assignments, including the assignment of staff with the appropriate
skills and training, as well as effective direction of resources during the assignment.
 The use of appropriate audit programmes and checklists to ensure appropriate focus and
effective documentation and capture of evidence.
Review of business and audit risks. This may have indicated a longer term viability problem,
with both the heavy investment in e-commerce and the reliance on reserves in making this
investment being important business risks that should have been managed.
 Regular technical training and updating of all staff and proper briefing.

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  Supervision of audit work, including review of working papers.
 Monitoring of quality control procedures.
 Final review of the financial statements.
 Professional indemnity insurance would provide an insurance protection should the
company be faced with successful legal action.

(b)The standard, ISQC 1 provides three main issues to be considered for acceptance of
nomination. These are the integrity of the client, the competence of the firm and ethical
requirements. The matters to consider on the integrity of a client include the following:
 The identity and business reputation of the client’s principal owners, key management,
related parties and those charged with governance.
 The nature of the client’s operations, including its business practices
 Information concerning the attitude of the client’s principal owners, key management, and
those charged with governance towards matters such as aggressive interpretation of
accounting standards / internal control environment
 Whether the client is aggressive with fixing and maintaining the firm’s fees as low as
possible
 Any indication of an inappropriate limitation on the scope of work
 Any indication that the client might be involved in money laundering or other criminal
activities
 The reasons for the proposed appointment of the firm and non-reappointment of the
previous firm.
 The matters to consider on the competence of the audit firm include:
 Knowledge of the relevant industry by the firm’s personnel
 Experience with relevant regulatory or reporting requirements
 Personnel with the necessary capabilities and competence
 Availability of experts if needed
 Ability to complete the engagement within the reporting time.
 The ethical issues border on the need for the firm to consider whether acceptance of the
nomination will create any conflict of interest or other ethical issues. The firm must also
ensure that the previous auditors have been properly removed in accordance with the law.

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QUESTION 2
New client
Inherent risk is increased by the lack of cumulative audit knowledge and experience which
means that the new auditors are not aware of misstatements in prior years.
It is possible that the group auditors would have been appointed had they been locally
represented. In insisting on a local firm, the managing director may well have been asserting
his independence from the parent company. He may think he is owed a favour in this respect
– which may colour initial relationships with the auditors.
The business
As a prestigious toy retailer, business risk is not unduly high. However, revenue will be
seasonal and there is a high risk of inventory obsolescence when toys are no longer
fashionable.
Management
Inherent risk is increased because the financial statements are subject to the dominant
influence of Bob Green. There may be management bias to overstate results, for example,
to:
 justify the parent company’s retention of the company
 justify the ₵2m bonus or a repeat of it
 empire build this location and prevent out-of-town development
 increase the purchase consideration if the parent company decides to sell Ashanti
Toys.
Bob Green is in a position to override controls and abuse his authority. This will lead to
high control risk as suggested by:
 his undermining of the buyer’s authority in ordering 50,000 dolls
 the lack of information about his bonus
 a lack of compliance with parent company’s directives (to develop operations out-of-
town and conduct a year-end inventory count).
Limitation of scope
Bob Green may attempt to dominate the conduct of the audit and seek to limit access to
staff and accounting records. There is a risk that some disclosable transactions may not
be identified. The known purchase of the 50,000 dolls may be a related party transaction
but there may be other such transactions.
Staff
There is a high risk of misstatements and even irregularities arising due to:
 lack of training and supervision of trainees
 poor morale (as Bob Green appears to consistently undermine the authority of others).
Going concern
There may be some doubts about the appropriateness of the going concern basis of
accounting. In particular:
 if Bob Green retires, he may not be replaced

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  proceeding with the out-of-town development may impact on goodwill
 consistently exceeding the major supplier’s credit limit may indicate cash flow
problems
 if supplies are subsequently withheld, another supplier may not be found
 if the bank does not renew the overdraft, continued trading may depend on the
support of the parent company.
Inventories
Specific risks include:
 obsolescence of toys which lose their popularity
 understatement of inventory quantities due to omissions on changeover
 misstatement of inventory quantities due to the lack of system maintenance
 possible overvaluation (e.g. of the 50,000 dolls).

QUESTION 3
(a) Prior to commencement of the investigation
Tutorial note: The phrase ‘matters … and … procedures’ is used to encourage candidates
to think more widely than just ‘considerations’ or just ‘actions. A possible structure for
this answer could be under two separate headings: ‘matters’ and ‘procedures’. However,
many matters could be phrased as procedures (and vice versa). For example, a matter
would be ‘the terms of reference’ and the procedure ‘to obtain and clarify the TOR’.
Candidates should note that a tabular/columnar answer is NOT appropriate as any
attempt to match matters and procedures is likely to result in repetition of the same point
(differently phrased).
 Discuss the assignment with Dominic’s management to determine the purpose, nature
and scope of the investigation. In particular, discuss whether any irregularity
(theft/fraud) is suspected and, if so, whether evidence gathered will be used:
 in criminal proceedings;
 in support of an insurance claim.
 Obtain clarification of terms of reference (TOR) in writing from Dominic’s
management.
 The TOR should give the investigating team full access to any aspect of Accra
Engineering’s operations relevant to their investigation.
 Investigation will involve consideration of:
 possible understatement of inventory value at 30 June 2018;
 high material consumption for the quarter ended 30 June 2018.
 Determine the level of experience of staff required for the investigation and the
number of staff of each grade.

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 The availability of suitable staff may affect the proposed start of the investigation.
Alternatively, the timing of other assignments may have to be rescheduled to allow
this investigation to be started immediately.
 Dominic’s management will presumably want the investigation completed before the
next inventory count (at 30 September 2018) to know if the findings have any
implications for the conduct of the count and the determination of year-end inventory.
 The investigation may have been commissioned to give credence to the period-end’s
financial statements. The investigation may therefore be of the nature of a limited
audit.
 Produce a budget of expected hours, grades of staff and costs. Agree the anticipated
investigative fee with Dominic’s management.
 The depth of the investigation will depend on matters such as:
 the extent of reliance expected to be placed on the investigation report;
 whether the report is for Dominic’s internal use only or is it likely to be circulated to
bankers and/or shareholders.
 The type of assurance (e.g. ‘negative’, reasonable) is likely to have a bearing on:
 any caveats in the report;
 the level of risk/potential liability for any errors in conclusions given in the final
report;
 the level of necessary detailed testing required (even if an audit is not requested).
 An engagement letter must be drafted and Dominic’s management must agree to its
terms in writing before any investigative work can begin. The letter of engagement
should include:
 details of work to be carried out;
 likely timescale;
 basis of determining fee;
 the reliance that can be placed on the final report and results of the investigation;
 the extent of responsibilities agreed;
 any indemnity agreed;
 the information to be supplied as a basis for the investigation; and
 any areas specifically excluded.
 Assess the appropriateness of an exclusion clause; for example: ‘CONFIDENTIAL –
this report has been prepared for the private use of Dominic only and on condition that
it must not be disclosed to any other person without the written consent of the
preparing accountant’.

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(b) (i) Inventory undervaluation – matters to consider
Physical inventory count
 Inventory will be undervalued at 30 June 2018 if all inventory is not counted. The
investigation should consider the adequacy of quarterly physical count procedures. For
example, whether or not:
 all items are marked when counted;
 management carries out test checks;
 inventory sheets are pre-numbered and prepared in ink;
 a complete set of inventory sheets is available covering all categories of inventory;
 Accra Engineering’s management uses the inventory sheets to produce the inventory
value.
Tutorial note: Inventory will not be undervalued if it does not exist (e.g. because it has been
stolen). Theft would be reflected in higher than normal materials consumption (see (d)).
Cut-off
 Inventory will be undervalued at 30 June 2018 if:
 any goods set aside for sale in July were excluded from the count;
 a liability was recognised at 30 June 2018 for goods that were excluded from inventory
(e.g. in transit from the supplier);
 production did not cease during the physical count and raw materials being transferred
between warehouse and production were omitted from inventory.
Scrap materials
 Inventory will be undervalued if any scrap from materials used in production that has a
value (egg because it can be recycled) is excluded. Inventory may be undervalued
compared with the previous quarter if there is any change in Accra’s scrap/wastage
policy (e.g. if previously it was valued in inventory but now it is excluded).
 If production problems increased wastage in the last period this would account for the
lower value of inventory and higher materials consumption.
(ii) Tests to quantify the amount of any undervaluation
Tutorial note: Any tests directed at quantifying an overstatement and/or instead of
understatement will not be awarded credit.
Physical count
 Inspect the warehouse/factory areas to identify high value inventory items and confirm
their inclusion on the inventory sheets at 30 June 2018 (or otherwise vouch to a
delivery note raised after that date).
 Recast all additions and recalculate all extensions on the inventory sheets to confirm
that there have been no omissions, transposition errors or other computational
discrepancies that would account for an undervaluation.

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Cut-off
 Ascertain the last delivery notes and despatch notes recorded prior to counting and
trace to purchase/sales invoices to confirm that an accurate cut-off has been applied
in determining the results for the quarter to 30 June 2018 and the inventory balance at
that date.
 Trace any large value purchases in June to the 30 June inventory sheets. If not on the
inventory sheets inquire of management whether they are included in production (or
sold). Verify by tracing to production records, goods despatch notes, etc.
Analytical procedures
 Compare large volume/high value items on inventory sheets at 31 March with those
at 30 June to identify any that might have been omitted (or substantially decreased).
Inquire of management if any items so identified have been completely used in
production (but not replaced), scrapped or excluded from the count (e.g. if obsolete).
Any inventory excluded should be counted and quantified.
 Compare inventory categories for 30 June against previous quarters. Inventory value
at 30 June is 10% less than at 31 March, though revenue is 28% higher. An increase
in inventory might have been expected to support increased revenue if there is a
general increase in trading activity. (Alternatively, a decrease in inventory may reflect
difficulties in obtaining supplies/maintaining inventory levels if demand has
increased).
Scrap materials
 Make inquiries of Accra Engineering’s warehouse and production officials regarding
the company’s scrap/wastage policy and any records that are kept.
 Review production records on a month-on-month basis and discuss with the factory
manager whether any production problems have increased wastage in the quarter to
30 June 2018.
Pricing test
 Raw materials – select a sample of high value items from the 31 March 2018 inventory
valuation and confirm that any unit price reductions as shown by the 30 June 2018
valuation are appropriate (e.g. vouch lower unit price to recent purchase invoices or
write down to net realisable value).
 WIP and finished goods – agree a sample of unit prices to costing records (e.g. batch
costings). Recalculate unit prices on a sample basis and vouch make-up to
invoices/payroll records, etc.

(c) (i) High materials consumption – matters to consider

Tutorial note: Materials consumption has increased from 70% of revenue to 74.1%.
There could be valid business reasons for this (e.g. there could be an abnormally
high level of wastage) or misstatements that result in overstatement of materials.

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 Cut-off
 Raw material purchases: Materials consumption will be overstated if goods
delivered after the quarter-end have been included (incorrectly) in purchases to 30
June 2018 although excluded (correctly) from the June count.
 Revenue: Materials consumption will be overstated as a percentage of revenue if
revenue is understated (e.g. if goods sold before 30 June 2018 are recorded in the
next quarter).

Losses
 Materials consumption will be higher than normal if there is an abnormally high
level of raw materials scrapped or wasted during the production process. This could
be due to inferior quality raw materials or technical problems with the
manufacturing process.
 Materials consumption will also be overstated if raw materials recorded as being
used in production are stolen.
Obsolete or redundant inventory
 Materials consumption will appear higher if inventory at 30 June 2018 is lower.
For example, if slow-moving, damaged or obsolete inventory identified at the count
was excluded or written-down (although included in the previous quarter’s
inventory valuation).
Individual contracts
 Materials consumption will be higher if the increase in revenue is attributable to a
small number of large contracts for which substantial discounts have been
negotiated.
 Materials consumption will be higher if the cost of materials on customers’
specifications has been underestimated in the determination of selling prices.
Purchasing
 Materials consumed will increase if Accra Engineering has changed to a more
expensive supplier in the quarter to 30 June 2018.
(ii) High materials consumption – tests
Cut-off
 Purchases: Select a sample of invoices included in purchases to 30 June 2018
and match to goods received notes to confirm receipt at 30 June 2018 and hence
inclusion in inventory at that date.
 Revenue: Inspect despatch notes raised on or shortly before 30 June 2018 and
trace goods sold to invoices raised on or before 30 June 2018.
Scrap
 Inquire of production/factory and warehouse officials the reasons for scrap and
wastage and how normal levels are determined.
 Inspect records of materials wastage and confirm the authorisation for scrapping
materials and/or reissuing replacement materials to the production process.

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  Physically inspect scrap, if any, to confirm that its condition renders it unsuitable
for manufacture (and hence confirm its exclusion from inventory at 30 June
2018).
 Review credit notes received after 30 June 2018 to identify materials returned
(e.g. of inferior quality).
Obsolete or redundant inventory
 Inspect the inventory sheets at 30 June 2018 for goods identified as obsolete,
damaged, etc. and compare with the level (and value) of the same items
identified at the previous quarter’s count.
Individual contracts
 Compare discounts given on new contracts with normal discount levels and
confirm the authority of the person approving discounts.
 Calculate actual material cost as a percentage of revenue on individual major
contracts and compare with the 70% benchmark.
Tests of controls
 Purchases: Inspect goods received notes to confirm that raw materials are being
checked for quality and quantity upon receipt. Inspect invoices recorded to
confirm that goods have been received (as evidenced by a goods received note).
 Review goods returns recorded on pre-numbered goods return notes and confirm
matched to subsequent credit notes received.
 Observe gate controls and other physical security over inventory and review the
segregation of duties that seek to prevent or detect theft of inventory.
 Revenue: Review goods despatch notes and confirm matching to sales invoices
that have been raised promptly and recorded on a timely basis.
 Sales returns: Review credit notes for authorisation and matching to goods
returns notes.

QUESTION 4
(a) The appropriate form of communicating to a superior in an organisation is through a
Memorandum. The answer should therefore be set out in a Memorandum form.
MEMORANDUM
To: Municipal Chief Executive
From: Internal Auditor
Subject: Functions of the Internal Audit Agency
Date: 15th September 2015
____________________________________________________________
As requested during our interaction on your familiarisation tour of the Internal Audit
Department, the functions of the Internal Audit Agency (IAA) are detailed below.
The IAA is required to ensure that:

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 (1) The financial activities and operating information reported internally and externally
is accurate, reliable and timely.
(2) The financial activities of MDAs and MMDAs are in compliance with laws, policies,
plans, standards and procedures.
(3) National resources are adequately safeguarded.
(4) National resources are used economically, effectively and efficiently.
(5) Plans, goals and objectives of MDAs and MMDAs are achieved.
(6) Risks are adequately managed in the MDAs and MMDAs.
In addition to these, the IAA must:
(7 )Promote economy, efficiency and effectiveness in the administration of government
programmes and operations.
(8)Prepare plans to be approved by the Board for the development and maintenance of
an efficient internal audit for the MDAs and MMDAs.
(9)Facilitate the prevention and detection of fraud.
(10) Provide a means for keeping the MDAs and MMDAs fully and currently informed
about problems and deficiencies related to the administration of their programmes and
operations and the necessity for appropriate corrective action.
Finally, the IAA is required to monitor, undertake inspections and evaluate the internal
auditing of the MDAs and MMDAs. I shall be available for any further discussion when
necessary.
Thank you.
Signed.
Internal Auditor

(b)
 Failure on the part of the Auditor General itself: The constitution gives the Auditor
General power of disallowance and surcharges. So far it appears the auditor General has
not exercised this power effectively and therefore people found to have misappropriated
funds have not been made to refund such monies. The Auditor General must therefore
start exercising the powers entrusted to him to ensure recoveries of the amount
misappropriated in the public sector.
 Ineffectiveness of the work of Public Accounts Committee: The Public Account
Committee is required to ensure implementation of the recommendations in the Auditor
General’s report but after its public hearing on the audit report, it appears no concrete
action is taken to get offenders to make restitution to the State in respect of amounts
misused. This situation does not help to strengthen the Auditor General’s functions of
accountability to ensure proper use of public funds
 Ineffectiveness of the Audit Report Implementation Committee (ARIC): Audit
Report Implementation Committee are mandated under the audit service Act 2000 to
ensure that implementation of all audit report recommendations from both the Auditor
General and Internal auditor from this respective organisations. But the committee as
presently constituted by the act are dominated by internal members whose actions are

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 reported on in the reports. This internal members are reluctant to enforce the
recommendations which affect them and the external members have no means of forcing
them to do so. The composition of ARIC membership should be changed to bringing in
more independent external members who can enforce the implementation of the audit
report recommendations.
 Lack of linkage between the Auditor General’s office and the law enforcement
agencies: Currently there is no requirement for the Auditor General’s report to be
referred to the law enforcement agencies such as the police, EOCO for investigation to
be carried out and report made to the Attorney General’s office for prosecution of
offenders after the Public Accounts Committee has deliberated on the report. There is the
need to amend the Act to provide the needed linkage between the auditor General and
the law enforcement agencies to prosecute persons known to have miss used state funds.

QUESTION 5
(a) Introduction
In many countries, legislation and regulation now encompasses environmental protection
as a response by law makers to increasing public pressure for environmental protection.
Such protection might include aspects such as water industry control, clean air, town and
country planning and pollution prevention and control.
Although there is widespread publicity relating to environmental issues concerning large
multinationals, the financial statements of small and medium-sized enterprises (SMEs)
are not exempt from the potential impact of such issues. The size of an entity has no
direct bearing on whether environmental matters are likely to be significant to its
operations. Small operations are, in principle, as likely to cause environmental damage
as large operations. The issues involved are relevant to entities of all sizes.
Increasing pressures on commercial activities to tackle environmental issues have arisen
from many sources, including:
 lobby groups (e.g. Greenpeace)
 financial institutions (e.g. banks are more cautious about risking their reputation by
paying insufficient attention to environmental issues in making lending decisions and
many now pursue so called ‘ethical investment policies’)
 supply chain greening (i.e. larger organisations implementing environmental
standards and expecting their suppliers to do likewise)
 government action (e.g. taxes on emissions and landfilling)
 the accounting, auditing and legal professions
Implications for businesses
The significance of environmental matters to the financial statements normally depends
on the nature of the reporting entity’s operations.
Some entities may incur environmental obligations as a direct result of their core business
(e.g. mining and extractive industries, chemical manufacturers and waste management
companies). For such organisations, compliance with environmental laws and regulations
should be central to the business.

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Other entities may be affected by market issues such as compliance of products with
environmental legislation and customer perception of environmental friendliness.
Examples here include those products containing chemicals or packaging which may
damage the environment.
Businesses may also be affected by the location of their operations (e.g. if they are
holding an interest in land or buildings that have been contaminated by previous
occupants, or if they are considering building on out of town ‘greenfield’ sites).
Organisations may incur the costs of clean-up operations even though they are not
responsible for environmental pollution.
Businesses may also be affected indirectly by environmental issues if they are dependent
on a major customer or supplier whose business is under threat from environmental
pressures. As it is a principle of corporate governance that management should maintain
a sound system of internal control (to safeguard the shareholders’ investment and the
company’s assets), a company exposed to significant environmental risks might be
expected to operate an environmental management system (EMS).
Why environmental issues cannot be ignored by auditors
The auditor’s duties with regard to the growing body of environmental laws and
regulations are the same as for any other laws and regulations where non-compliance
may materially affect the financial statements of their clients.
In particular, auditors must be alert to the possibility of the nature of a client’s business
having potentially harmful environmental impacts. As part of their assessment of risk
and internal controls, auditors will also require information concerning existing and
proposed regulations and fines or penalties incurred. For example, the auditor of a
company engaged in waste disposal must be familiar with the terms of licences under
which the company is permitted to dispose of hazardous substances.
Where an organisation has been subjected to an environmental audit, the statutory auditor
should review the findings of the environmental audit (e.g. as published in an
environmental performance report) and consider whether the risk of material
misstatement in the financial statements is increased.
Impact on the financial statements
At the financial statement level, environmental risks encompass:
 the risk of non-compliance with laws/regulations
 the risk of compliance costs arising
 the possible effects of customers’ views (as they may reject a company’s products
because of the environmental impact of those products).
Environmental issues may have a direct impact on the following:
 Provisions (e.g. for site restoration).
 Contingent liabilities (e.g. arising from pending legal action).
 Actual liabilities (e.g. fines and penalties imposed).
 Non-current asset values (e.g. property situated on or near a contaminated site).
 The valuation of inventories (where inventories may be slow-moving because of
public attitudes).

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 Capital or revenue expenditure on clean-up operations.
 Product redesign costs.
 Going concern, for example, where new or more stringent environmental legislation
(such as that on emissions) threatens product viability, or where the withdrawal of an
operating licence is ‘life threatening’ to the business.
Conclusion
Clearly, auditors cannot ignore the impact of environmental issues on the financial
statements of their audit clients. A ‘general awareness’ of the risks is, however, a
minimum requirement.
Where financial statements embody management assertions concerning environmental
matters (e.g. the existence of an environmental liability, the occurrence of environmental
expenditure, the valuation of an environmentally impaired asset, the completeness of
fines and penalties) the auditor must go much further in order to obtain sufficient
appropriate evidence to corroborate these matters.

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