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Advanced Leval
Advanvced Auditing and Assurance April 2022
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Advanvced Auditing and Assurance
Revision Kit

QUESTION 1(a)

Q The regulatory body for professional accountants in your country has approached you to draft professional standards of practice in conduct and reporting on attestation engagements. These are engagements in which a professional accountant reports on the reliability of information, usually of a financial nature, presented one party to another to assist the latter make inferences on the former.

Required:

With reference to International Standards on Auditing (ISAs) and any other acceptable standards of global practice, prepare a proposal paper on the required standards of professional practice.
A

Solution


Title:

Proposal Paper on Professional Standards of Practice in Conduct and Reporting on Attestation Engagements

Introduction:

The purpose of this proposal is to outline the required standards of professional practice for conducting and reporting on attestation engagements. These engagements involve a professional accountant assessing and reporting on the reliability of information, typically of a financial nature, provided by one party to assist another in making inferences. The proposed standards are based on the principles and guidelines established in the International Standards on Auditing (ISAs) and other acceptable standards of global practice.

Scope of Attestation Engagements:

The proposed standards should clarify the scope of attestation engagements and provide clear definitions of the different types of attestation engagements, including financial statements attestation, compliance attestation, and other assurance engagements.

Independence and Objectivity:

Professional accountants conducting attestation engagements must adhere to strict principles of independence and objectivity. They should be free from any conflicts of interest that could compromise their impartiality and should refrain from any action that may impair their judgment and objectivity.

Professional Competence and Due Care:

The proposed standards should emphasize the importance of maintaining professional competence and due care in all aspects of attestation engagements. Accountants should possess the necessary skills, knowledge, and experience to perform these engagements effectively and diligently.

Engagement Acceptance and Planning:

Before accepting an attestation engagement, the accountant should assess whether they have the requisite expertise and resources to perform the engagement with competence. Proper planning should be carried out to ensure that the engagement is executed efficiently and effectively.

Evidence and Documentation:

The accountant must obtain sufficient and appropriate evidence to support their conclusions and opinions in the attestation report. All significant findings, procedures, and conclusions should be documented in a comprehensive and organized manner.

Reporting:

The attestation report should be clear, accurate, and transparent, providing a balanced assessment of the subject matter. It should include a statement on the accountant's independence and compliance with professional standards. Depending on the type of engagement, the report may contain different levels of assurance, such as reasonable assurance or limited assurance.

Communication with Engaging Parties:

Professional accountants should maintain open and effective communication with the parties engaging their services. They should address any concerns or inquiries promptly and professionally.

Quality Control:

An effective system of quality control should be established within the accounting firm to ensure that attestation engagements are performed in accordance with the proposed standards and regulatory requirements.

Compliance with Legal and Regulatory Requirements:

The proposed standards should remind accountants of their obligation to comply with all applicable legal and regulatory requirements in the conduct and reporting of attestation engagements.

Monitoring and Review:

The regulatory body may conduct periodic reviews and monitoring of the accounting firms' attestation engagements to ensure compliance with the proposed standards.

Conclusion:

The proposed standards for professional practice in conduct and reporting on attestation engagements aim to uphold the integrity, objectivity, and reliability of the accountant's work. By adhering to these standards, professional accountants can maintain public trust and confidence in their attestation reports. Regular updates and improvements to the standards should be considered to align with any changes in the global financial landscape and to address emerging challenges in the profession.

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QUESTION 1(b)

Q In the context of international regulation of the auditing profession, discuss the role of the International Forum of Independent Audit Regulators (IFIAR).
A

Solution


➦ The International Forum of Independent Audit Regulators (IFIAR) plays a crucial role in the international regulation of the auditing profession. IFIAR was established in 2006 to enhance cooperation among independent audit regulatory bodies around the world. It is a global organization composed of independent audit regulators from various countries and jurisdictions. IFIAR's primary objective is to promote audit quality and investor protection through effective regulation and oversight of the auditing profession.

Key Functions and Roles of IFIAR:

➧ Facilitating Information Exchange:

IFIAR serves as a platform for its member organizations to exchange information and share experiences related to audit regulation and oversight. By facilitating the exchange of best practices, challenges, and insights, IFIAR enhances the effectiveness of its members' regulatory efforts.

➧ Setting Global Standards and Practices:

IFIAR actively participates in the development of international auditing standards and practices. It collaborates with standard-setting organizations such as the International Auditing and Assurance Standards Board (IAASB) and the International Ethics Standards Board for Accountants (IESBA) to influence the creation of robust and globally consistent auditing standards.

➧ Promoting Audit Quality:

IFIAR places a strong emphasis on promoting audit quality across jurisdictions. It encourages its members to establish and enforce rigorous standards for audit firms and professionals. By conducting inspections and assessments of audit firms, IFIAR helps identify areas for improvement and encourages remedial actions to enhance audit quality.

➧ Enhancing Regulatory Cooperation:

IFIAR fosters cooperation among its member regulators, encouraging joint inspections and coordination in cases where multinational audit firms operate across borders. This collaborative approach helps ensure consistent and effective regulation of auditing practices in a globalized economy.

➧ Advocating for Investor Protection:

IFIAR recognizes the critical role of auditors in providing assurance to investors and other stakeholders. It advocates for strong and independent audit regulation to safeguard investor interests and maintain confidence in financial reporting.

➧ Monitoring Emerging Risks:

IFIAR keeps a close eye on emerging risks and trends in the auditing profession. It conducts surveys and research to identify potential challenges, such as technological advancements, and promotes responses to address these issues proactively.

➧ Influencing Policy and Regulatory Developments:

IFIAR engages with policymakers and standard-setting bodies to provide input on regulatory developments and advocate for the interests of its member organizations. This involvement ensures that the voice of independent audit regulators is heard in discussions that impact the auditing profession globally.

➧ Capacity Building and Training:

IFIAR supports capacity-building initiatives for its member organizations to strengthen their regulatory capabilities. This includes organizing training programs, workshops, and conferences to enhance the skills and knowledge of audit regulators.

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QUESTION 2(a)

Q During the last year's audit of Mila General Stores (MGS), a large retail chain of shops, you observe that
commissions amount to about 25% of total sales, which is higher than in previous years. Further investigation reveals that the sector in which the shop operates on average has larger sales commissions than MGS with significant variation in rates depending on the product sold.
At the time a sale is made, the sales person records his commission rate and the total amount of the commission on the office copy of the sales invoice. When sales are keyed into the computer, a debit to sales commission expense account and a credit to accrued sales commission account are also recorded. As part of recording the sales and sales commission expense, the accounts receivable clerk verifies the prices, quantities, commission rates and all calculations on the sales invoices. Both the accounts receivable and the sales persons' commission master files are updated when the sales and sales commission are recorded. On the 15th day after the end of each month, the sales person is paid for the preceding month's sales commission.

Required:

(i) An audit program to verify sales commission expense, assuming that no audit tests have been conducted in any audit area to this point.
(ii) An audit program to verify accrued sales commission at the end of the year, assuming that the tests you designed in (a) (i) above resulted in no significant misstatements.
A

Solution


(i) Audit Program to Verify Sales Commission Expense:

➧ Understand the Commission System:

a. Interview management to gain an understanding of the commission system, commission rates, and variations based on products sold.
b. Review the commission policies and procedures documentation.

➧ Identify Key Controls:

a. Identify key controls related to recording and processing sales commissions.
b. Assess the effectiveness of these controls, including segregation of duties.

➧ Test Controls (if applicable):

a. If there are key controls related to sales commission recording, perform tests of controls to ensure their effectiveness.

➧ Select a Sample of Sales Invoices:

a. Randomly select a sample of sales invoices for the audit period.
b. Ensure the sample includes a representative mix of products and commission rates.

➧ Verify Commission Rates and Amounts:

a. Review the sales invoices and verify that commission rates and amounts are accurately recorded.
b. Compare commission rates to the sector's average and assess any significant deviations.

➧ Review Commission Master Files:

a. Compare the commission master files to the commission rates recorded on the sales invoices.
b. Investigate and reconcile any discrepancies found.

➧ Recalculate Commission Expense:

a. Recalculate the commission expense for the audit period based on the verified commission rates and sales amounts.
b. Compare the recalculated expense to the recorded sales commission expense in the financial statements.

➧ Analytical Procedures:

a. Perform analytical procedures to assess the reasonableness of the commission expense, comparing it to previous years and industry benchmarks.

➧ Substantive Testing of Sales Commission Expense:

a. Select a sample of sales commission transactions and trace them back to supporting documents and approvals.
b. Verify the accuracy of debit and credit entries to the sales commission expense and accrued sales commission accounts.

➧ Evaluate and Document Results:

a. Assess the findings of the audit procedures and evaluate the impact on the financial statements.
b. Document the audit work performed and the conclusions reached.

(ii) Audit Program to Verify Accrued Sales Commission at the End of the Year:

➧ Understand the Accrual Process:

a. Review the process of accruing sales commissions at the end of the year.
b. Identify who is responsible for the accrual and the methods used.

➧ Review Commission Accrual Policies:

a. Review the commission accrual policies and procedures documentation.
b. Ensure compliance with relevant accounting standards.

➧ Confirm Accrued Sales Commissions:

a. Obtain a confirmation from the accounts payable department about the amounts accrued for sales commissions.
b. Verify the confirmation with the general ledger balances.

➧ Vouch Accruals to Supporting Documents:

a. Vouch a sample of accrued sales commission entries back to the supporting documents, such as sales invoices or commission reports.

➧ Analytical Procedures:

a. Perform analytical procedures to assess the reasonableness of the accrued sales commission balance.
b. Compare the accrued amount to previous years and consider any significant changes.

➧ Subsequent Events Review:

a. Ensure that any commission adjustments made after the year-end are appropriately reflected in the accrual.

➧ Evaluate and Document Results:

a. Assess the findings of the audit procedures and determine if the accrued sales commission balance is fairly stated.
b. Document the audit work performed and the conclusions reached.

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QUESTION 2(b)

Q You are a newly appointed internal auditor of Zito Ltd., a company that is currently experiencing financial
difficulties. As a condition for obtaining bank loans, the company management has agreed to maintain certain liquidity ratios, asset to liquidity ratios and gross profit margins.
The draft financial statements for the current period appear to show that the company has not succeeded in complying with some of the set targets. The profit figures are significantly affected the calculation of bad debts and depreciation charges. There has been a suggestion to the effect that these could be changed in order to meet the bank's lending conditions.
You are informed that there is a real danger that if the hank withdraws its funding, the company would become insolvent and thus will have to cease trading. The Chief Accountant has asked you to sign certain internal records that have been altered in order to show the bank that the set targets have been met.

Required:

Analyse the above scenario and explain the courses of action that you would take.
A

Solution


➦ As an internal auditor of Zito Ltd., I am bound by professional ethics and integrity to maintain objectivity, independence, and confidentiality in my role. The situation described raises serious ethical and legal concerns.

Action I would take:

➧ Review the Evidence:

I would carefully review all the available evidence, including the draft financial statements, loan conditions, liquidity ratios, asset to liquidity ratios, gross profit margins, and any other relevant documentation.

➧ Understand the Concerns:

I would seek to understand the reasons behind the company's financial difficulties and the factors that led to non-compliance with the set targets. It is essential to identify the root causes and assess the implications of the potential misrepresentations.

➧ Consult with Management and the Chief Accountant:

I would have a candid conversation with management and the Chief Accountant to understand their perspectives, concerns, and reasons for proposing alterations to the financial records. I would express my commitment to maintaining the integrity of the company's financial reporting and ethical standards.

➧ Report to the Board or Audit Committee:

If I find evidence of misrepresentation or manipulation of financial records, I would report my findings directly to the Board of Directors or the Audit Committee. Transparency and accountability are critical in such situations, and the appropriate governing body should be informed.

➧ Seek Legal Advice:

Given the severity of the situation, I would seek legal advice to understand the potential legal ramifications of the proposed alterations and the implications for the company, shareholders, and other stakeholders.

➧ Consider Whistleblowing:

If I encounter resistance from management or believe that my concerns are not adequately addressed, I may consider engaging in a protected whistleblowing process. Whistleblowing channels may include reporting to external authorities or regulatory bodies if internal channels are not effective.

➧ Recommend Remedial Actions:

I would propose remedial actions to address the company's financial difficulties in a legal and ethical manner. This may involve improving operational efficiency, cost-cutting measures, renegotiating loan terms with the bank, or exploring alternative sources of funding.

➧ Enhance Internal Controls:

I would review and strengthen internal controls to ensure accurate financial reporting and compliance with loan conditions. Robust internal controls are essential for maintaining the company's financial health and reputation.

➧ Advise on Transparency and Honesty:

I would advise management on the importance of transparency, honesty, and accurate financial reporting. Emphasizing the consequences of misrepresentations can help build a culture of ethical conduct within the organization.

➧ Seek External Assistance:

If necessary, I may seek assistance from external auditors or consultants to conduct an independent review of the financial statements and internal controls.

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QUESTION 3(a)

Q The following information relates to Vitenge Supplies Ltd.:
1. At monthly intervals, the purchases ledger clerk of the company, Anna Mbole, lists the ledger balances.
She then compares them with the file of suppliers' statements. Those statements that agree with the list of the balances are extracted and placed in the file. Those that do not agree with the listed balances are left in the original file.
2. Anna Mbole then prepares a list of the payments for all the suppliers who have sent the statements as
follows:
(i) Where the statement agrees with the balance, the statement is attached to the list.
(ii) Where the statement disagrees with the balance, Anne Mbole computes a round sum amount
(which is slightly less than the balance on the ledger) and enters this amount on the list of the payments. She then leaves the statement in the file.
3. The list of the payments is then passed to Peter Dawa the assistant accountant, who writes out the
cheques. The cheques, lists and the statements are then sent to Lucia Kawa, the Finance Director, who signs them after checking against the statements (where these are attached) and the list of balances.
4. The cheques are then passed to the Managing Director, William Sinai, the other signatory, who signs
the cheques and sends them back to Peter Dawa, who then posts them to the parties concerned.
5. The auditors of the company have previously made comments regarding the poor quality of the
accounting controls.

Required:

(i) Isolate the areas which could have attracted adverse comments from the auditors.
(ii) Design a programme for the substantive tests which would provide reassurance that the cheque
payments are not made improperly to creditors.
(iii) Describe the controls to be instituted over the custody and authorisation of the cheque payments.
A

Solution


(i) Areas Attracting Adverse Comments from Auditors:

➧ Lack of Reconciliation:

The purchases ledger clerk, Anna Mbole, only extracts supplier statements that agree with the listed balances, leaving those that disagree in the original file. This process lacks proper reconciliation between supplier statements and ledger balances, potentially leading to discrepancies and errors in the financial records.

➧ Arbitrary Adjustments:

In cases where the supplier statements disagree with the ledger balances, Anna Mbole computes a round sum amount (slightly less than the balance on the ledger) and enters this amount on the list of payments. This arbitrary adjustment raises concerns about the accuracy and integrity of the payment process.

➧ Lack of Independent Review:

The Finance Director, Lucia Kawa, checks the payments against the statements (where attached) and the list of balances. However, there is no evidence of an independent review by someone not involved in the payment process, increasing the risk of unauthorized or incorrect payments.

(ii) Substantive Test Programme for Cheque Payments:

➧ Select a Sample of Payments:

Select a sample of cheque payments made during the period under review. The sample should include both payments with attached supplier statements and payments with arbitrary adjustments.

➧ Reconciliation Test:

For payments with attached statements, reconcile the payment amount to the corresponding statement to verify the accuracy of the amount paid.

➧ Review of Arbitrary Adjustments:

For payments with arbitrary adjustments, investigate the reasons behind these adjustments and ensure they are adequately supported and authorized. Verify if the adjusted amounts are reasonable and accurately recorded.

➧ Confirmation from Suppliers:

Send confirmations to a sample of suppliers to verify the accuracy of their outstanding balances and confirm that they received the correct payments.

➧ Review of Approval Signatures:

Examine the cheque payments for proper authorization and signatures from both the Finance Director and the Managing Director. Ensure that all payments have appropriate approval in accordance with the company's authorization policy.

➧ Review of Supporting Documentation:

Inspect the supporting documentation for the cheque payments, such as invoices, purchase orders, and goods received notes. Verify that the payments are supported by legitimate business transactions.

(iii) Controls Over Custody and Authorization of Cheque Payments:

➧ Segregation of Duties:

Implement a segregation of duties so that the purchasing, payment preparation, approval, and signing functions are performed by different individuals. This reduces the risk of unauthorized payments and enhances control over the payment process.

➧ Reconciliation and Verification:

Establish a formal process of reconciling supplier statements with the ledger balances to identify and resolve discrepancies promptly. Ensure that adjustments, if necessary, are properly supported and authorized.

➧ Independent Review:

Introduce an independent review of the payment process by someone not involved in the payment preparation or approval. This person should verify the accuracy and legitimacy of payments before they are released.

➧ Dual Authorization:

Implement a dual authorization process for cheque payments, requiring both the Finance Director and the Managing Director's signatures. This dual approval enhances the control over payments and prevents fraudulent disbursements.

➧ Regular Internal Audits:

Conduct regular internal audits of the payment process to assess the effectiveness of controls and identify any weaknesses or potential areas of improvement.

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QUESTION 3(b)

Q Discuss the procedures and nature of reporting adopted auditors when engaged in compilation engagements of the prospective clients.
A

Solution


➦ When auditors are engaged in compilation engagements of prospective clients, they follow specific procedures and provide appropriate reporting to ensure transparency and professionalism. A compilation engagement involves the preparation of financial statements based on information provided by the client without conducting an audit or review. The objective is to present the financial information in the form of financial statements.

Procedures in Compilation Engagements:

➧ Understanding the Terms of Engagement:

The auditor and the prospective client should agree on the terms of the engagement, including the nature and scope of the services to be provided, the responsibilities of both parties, and the expected deliverables.

➧ Obtaining Client Information:

The auditor obtains financial information and records from the prospective client. This information may include trial balances, accounting records, bank statements, and other relevant documents.

➧ Compilation of Financial Statements:

Based on the information provided, the auditor prepares the financial statements in the required format, following the applicable accounting principles and financial reporting standards.

➧ Application of Accounting Expertise:

The auditor uses their accounting expertise to classify and present the financial information appropriately. This may involve adjustments for errors, omissions, or inconsistencies found in the provided data.

➧ Inquiring About Information:

The auditor may inquire with the client about specific transactions or significant changes in financial information to ensure accuracy and completeness.

➧ Noting Limitations:

The auditor includes a statement in the compilation engagement report about the limitations of the engagement. It clarifies that no assurance is provided on the accuracy or reliability of the financial information and that the engagement does not constitute an audit or review.

Nature of Reporting in Compilation Engagements:

➧ Compilation Engagement Report:

The auditor issues a formal written report known as the "Compilation Engagement Report." This report is addressed to the client and provides an overview of the procedures performed and the nature of the compilation engagement. It clarifies the responsibilities of the auditor and the client and the limitations of the engagement.

➧ Restricted Use Statement:

The compilation engagement report includes a "restricted use statement" informing readers that the financial statements are intended solely for the use of management and that they may not be suitable for third-party use without the auditor's consent.

➧ No Assurance Statement:

The report explicitly states that the auditor provides no assurance on the accuracy, completeness, or reliability of the financial information presented in the compiled financial statements.

➧ Disclaimer of Opinion:

The auditor's report disclaims any form of opinion or conclusion on the financial statements. It makes it clear that the engagement does not constitute an audit or review.

➧ Management's Responsibility Statement:

The report may include a statement clarifying that management is responsible for the accuracy and completeness of the financial information provided.

➧ Date of the Report:

The compilation engagement report includes the date on which the auditor completed the engagement and prepared the financial statements.

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QUESTION 4(a)

Q Jamaa Manufacturing Ltd. is planning to install an automated sales accounting system. The company's management has requested for your advice on certain matters relating to the proposed sales accounting system.

Required:

Describe the controls that should be incorporated in the new system before it:
(i) Issues an order confirmation to a customer.
(ii) Raises a dispatch note and authorises dispatch of goods to the customer.
A

Solution


(i) Controls before Issuing an Order Confirmation to a Customer:

➧ Sales Order Approval:

Implement a formal sales order approval process that requires authorized personnel to review and approve customer orders before issuing order confirmations. This ensures that orders are valid, accurately captured, and in line with the company's policies.

➧ Credit Limit Check:

Incorporate a credit limit check mechanism to verify if the customer's credit limit allows for the order value. This control prevents orders from being processed for customers who have exceeded their credit limits.

➧ Product Availability Check:

Integrate the system with inventory management to perform real-time product availability checks. This control ensures that orders can be fulfilled promptly, reducing the risk of backorders and customer dissatisfaction.

➧ Customer Master Data Validation:

Ensure that the system validates customer master data, including contact details and billing/shipping addresses, to avoid errors in order confirmations.

➧ Document Numbering and Sequencing:

Implement a robust document numbering and sequencing system to prevent duplication or gaps in order confirmation numbers. This control enhances traceability and prevents potential fraud.

(ii) Controls before Raising a Dispatch Note and Authorizing Dispatch of Goods:

➧ Goods Verification:

Incorporate a goods verification process to ensure that the goods being dispatched match the details in the order confirmation. This control helps prevent shipping errors and customer complaints.

➧ Approved Dispatch Authorization:

Introduce a formal dispatch authorization process that requires authorized personnel to review and approve the dispatch of goods. This control ensures that dispatches are in line with the customer's order and have undergone proper verification.

➧ Shipping Document Control:

Implement measures to safeguard dispatch notes and shipping documents to prevent unauthorized access or modifications.

➧ Segregation of Duties:

Segregate the responsibilities for creating dispatch notes, authorizing dispatch, and releasing goods for shipment to prevent collusion and fraud.

➧ Delivery Tracking and Confirmation:

Integrate a delivery tracking mechanism to confirm the successful delivery of goods to customers. This control ensures that goods reach the intended recipients and provides evidence of delivery.

➧ Document Retention and Archiving:

Establish a document retention policy to store dispatch notes and related records for an appropriate period to facilitate audits and inquiries.

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QUESTION 4(b)

Q Describe the controls which should be exercised over:

(i) Changing customer details including adding new customers, amending their details and deleting customers.
(ii) Changing customer credit limits.
(iii) Changing the selling prices of products.
A

Solution


(i) Controls Over Changing Customer Details:

Changing customer details, including adding new customers, amending their details, and deleting customers, is a critical function that requires strong controls to maintain data integrity and prevent unauthorized changes.

Some controls to be exercised include:

➧ User Access and Authorization:

Limit access to customer data to authorized personnel only. Implement role-based access control, ensuring that only relevant employees can add, modify, or delete customer records. Regularly review and update user access permissions based on job responsibilities.

➧ Segregation of Duties:

Separate the responsibilities of creating, modifying, and deleting customer records. Different individuals should be responsible for each function to reduce the risk of fraudulent activities.

➧ Approval and Verification:

Require approvals from supervisors or management for adding new customers, making significant changes to customer details, or deleting customer records. Implement a dual-control process for critical changes to ensure accuracy and prevent unauthorized alterations.

➧ Audit Trail and Logging:

Maintain an audit trail that captures all changes made to customer records, including who made the changes and when. Logging changes provide transparency and accountability.

➧ Data Validation:

Implement data validation checks to ensure the accuracy and completeness of customer information. Validate customer details against relevant documents or databases to prevent errors or fraudulent entries.

(ii) Controls Over Changing Customer Credit Limits:

Changing customer credit limits is essential to manage credit risk effectively. Appropriate controls should be exercised to ensure that changes to credit limits are authorized and properly monitored.

Key controls include:

➧ Credit Limit Review:

Regularly review and update customer credit limits based on their creditworthiness and payment history. Establish clear criteria for credit limit adjustments and ensure proper documentation for these decisions.

➧ Authorization and Approval:

Require authorization from a credit manager or another authorized individual before changing a customer's credit limit. Implement a dual-control process for significant credit limit adjustments.

➧ Credit Risk Assessment:

Conduct a thorough credit risk assessment before changing credit limits. Consider factors such as the customer's financial stability, credit history, payment patterns, and industry risk.

➧ Monitoring and Reporting:

Implement a system to monitor customer credit limits and flag any changes for review. Generate periodic reports to track credit limit adjustments and analyze trends in credit risk.

(iii) Controls Over Changing Selling Prices of Products:

Changing selling prices of products is a critical function that affects revenue and profitability. Robust controls are necessary to prevent errors and unauthorized price changes.

The Key controls include:

➧ Pricing Authority:

Designate specific individuals or departments responsible for setting and approving product prices. Ensure that only authorized personnel can change prices.

➧ Approval and Review:

Require approvals from management or pricing committees before implementing price changes. Implement a formal review process to assess the impact of price changes on profitability and competitiveness.

➧ Segregation of Duties:

Separate the responsibilities for setting prices, approving changes, and updating the system. Different individuals should be responsible for each function to reduce the risk of manipulation.

➧ Price Verification:

Implement a verification process to compare the approved prices with the system's updated prices before they become effective. This helps detect any discrepancies or unauthorized changes.

➧ Historical Price Tracking:

Maintain a historical record of price changes, including the effective dates and reasons for the adjustments. This information facilitates price audits and investigations if needed.

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QUESTION 4(c)

Q Describe:

(i) The credit control criteria that the automated sales accounting system should use to decide whether to prevent dispatches to customers.
(ii) The manual procedures which should be exercised before the system allows goods to be dispatched to a company where the computer's criteria rejects dispatch of the goods.
A

Solution


(i) Credit Control Criteria for Preventing Dispatches to Customers:

The automated sales accounting system should use specific credit control criteria to determine whether to prevent dispatches to customers who have reached or exceeded their credit limits. These criteria aim to mitigate credit risk and ensure that sales are made only to creditworthy customers. Some key credit control criteria include:

➧ Credit Limit Threshold:

Define the credit limit threshold for each customer based on their creditworthiness, payment history, and financial stability. The system should check whether the customer's outstanding balance exceeds the approved credit limit.

➧ Aging of Receivables:

Monitor the aging of receivables for each customer to identify any overdue payments. The system should consider the number of days a customer's outstanding invoices have been unpaid and trigger an alert if they exceed a predefined period.

➧ Days Sales Outstanding (DSO):

Calculate the DSO for each customer, which represents the average number of days it takes for them to pay their invoices. The system can compare the DSO with the company's credit terms and flag customers with extended payment periods.

➧ Payment History:

Analyze the customer's payment history to identify patterns of late or missed payments. The system should flag customers with a history of payment issues and restrict dispatches if needed.

➧ Credit Rating:

If available, incorporate credit rating information for customers from external credit agencies. Customers with lower credit ratings may require stricter credit control measures.

➧ Order Value vs. Credit Limit:

Assess whether the value of the new order will cause the customer to exceed their credit limit. The system should prevent dispatches for orders that would result in an over-limit situation.

➧ High-Risk Customers:

Identify customers with a high credit risk profile, such as those experiencing financial difficulties or with a history of bad debt. The system can trigger additional credit reviews and approvals for such customers.

➧ Alerting and Reporting:

Implement alert mechanisms to notify credit control personnel when customers approach or breach their credit limits. Generate periodic reports for management to review the credit exposure of key customers.

(ii) Manual Procedures for Dispatch Rejection due to Computer Criteria:

In cases where the automated sales accounting system rejects dispatches to a customer based on credit control criteria, manual procedures should be followed to ensure proper handling of the situation:

➧ Review and Confirmation:

The dispatch rejection alert should be reviewed by the credit control team. They should assess the reason for the rejection and validate the accuracy of the computer criteria.

➧ Contact the Customer:

If the rejection is deemed valid, the credit control team should contact the customer to discuss the credit situation and any outstanding payment issues.

➧ Resolution and Payment Plan:

Work with the customer to resolve any outstanding payment discrepancies or credit issues. If necessary, negotiate a payment plan to clear overdue balances and enable future dispatches.

➧ Management Approval:

If dispatch rejection results from a credit limit breach, the credit control team should seek approval from management to increase the credit limit or allow a one-time dispatch for a specific order.

➧ Document the Process:

Maintain clear records of the actions taken, communications with the customer, and any approvals obtained during the dispatch rejection resolution process.

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QUESTION 5(a)

Q Describe the circumstances that could lead to each of the following audit opinions and the implications of each opinion:

(i) Adverse opinion.
(ii) Emphasis of matter.
(iii) Disclaimer of opinion.
(iv) 'Except for' opinion.
A

Solution


(i) Adverse Opinion:

An adverse audit opinion is issued when the auditor concludes that the financial statements are materially misstated, and the misstatements are pervasive and significant. This means that the financial statements do not fairly present the financial position, results of operations, or cash flows in accordance with the applicable financial reporting framework (e.g.,International Financial Reporting Standards - IFRS, Generally Accepted Accounting Principles - GAAP).

Circumstances that could lead to an adverse opinion include:

➢ Material misstatements in the financial statements due to errors or fraud.
➢ Lack of compliance with accounting standards or regulatory requirements.
➢ Inadequate disclosure of significant accounting policies or transactions.
➢ Severe limitations on the scope of the audit due to lack of access to records or evidence.

Implications of an Adverse Opinion:

➢ A severe adverse opinion may result in a loss of confidence in the company's financial statements by stakeholders, including investors, creditors, and suppliers.
➢ The company's credit rating may be negatively affected, leading to increased borrowing costs.
➢ Legal actions or investigations may follow, particularly if misstatements were intentional or involved fraudulent activities.
➢ The company's reputation and credibility may suffer, impacting its ability to attract investors or conduct business effectively.

(ii) Emphasis of Matter:

An emphasis of matter is used when the auditor wants to draw the reader's attention to a specific matter in the financial statements that is appropriately presented but requires additional disclosure to provide better understanding.

Circumstances that could lead to an emphasis of matter include:

➢ Significant uncertainties that may affect the company's ability to continue as a going concern.
➢ Significant related-party transactions that require further explanation.
Adoption of a new accounting standard that has a material impact on the financial statements.

Implications of an Emphasis of Matter:

➢ The emphasis of matter draws attention to specific areas of concern, providing users of the financial statements with more context and clarity.
➢ It does not affect the overall opinion on the fairness of the financial statements but alerts readers to areas that may require closer scrutiny.

(iii) Disclaimer of Opinion:

A disclaimer of opinion is issued when the auditor is unable to obtain sufficient appropriate audit evidence to form an opinion on the financial statements as a whole. This situation may arise due to significant scope limitations or uncertainties that prevent the auditor from completing the audit.

Circumstances that could lead to a disclaimer of opinion include:

➢ Inadequate records or documentation to support significant transactions.
➢ Inability to confirm the accuracy of balances due to lack of cooperation from the company or its third parties.
➢ Scope limitations imposed by management or external factors beyond the auditor's control.

Implications of a Disclaimer of Opinion:

➢ A disclaimer of opinion indicates that the auditor could not reach a conclusion on the financial statements, and users cannot rely on the audited financial information.
➢ Stakeholders may view the company's financial statements with skepticism, leading to decreased investor confidence and potential difficulty in raising capital.
➢ The company may face regulatory scrutiny and potential legal consequences if the lack of audit opinion is due to non-compliance or fraudulent activities.

(iv) 'Except for' Opinion:

An 'except for' opinion is issued when the financial statements are fairly presented, except for specific matters described in the audit report. These matters are considered to be material, but not pervasive enough to result in an adverse opinion.

Circumstances that could lead to an 'except for' opinion include:

➢ Material misstatements in specific accounts or transactions that do not affect the financial statements as a whole.
➢ Non-compliance with specific accounting standards or regulations that are not pervasive throughout the financial statements.

Implications of an 'Except for' Opinion:

➢ The 'except for' opinion indicates that, overall, the financial statements are fairly presented, except for the identified matters.
➢ Stakeholders should pay attention to the areas of concern highlighted in the audit report but can generally rely on the financial information in the remaining parts of the statements.
➢ The company may need to address the specific matters raised by the auditor to enhance transparency and ensure compliance with accounting standards and regulations.

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QUESTION 5(b)

Q Discuss the factors that could influence an auditor's decision in the following matters:

(i) Whether to apply statistical or judgemental sampling technique.
(ii) Determining the size of the sample to be used for testing.
A

Solution


(i) Whether to Apply Statistical or Judgmental Sampling Technique:

➧ Nature of the Audit Objective: The auditor considers the nature of the audit objective and the specific audit assertion being tested. For certain types of tests, such as substantive testing, statistical sampling may be more appropriate to obtain a representative and quantifiable sample. On the other hand, for control testing or tests involving unique or complex transactions, judgmental sampling may be more suitable to gain deeper insights.

➧ Population Size and Homogeneity: The size and homogeneity of the population influence the choice of sampling technique. Statistical sampling is generally more appropriate for large, homogenous populations, where each item has an equal chance of being selected. For smaller, diverse populations, judgmental sampling may be more practical and cost-effective.

➧ Availability of Audit Data and Resources: The availability of reliable and complete data impacts the choice of sampling technique. Statistical sampling requires a well-organized data set that can be easily accessed and analyzed. If such data is not available, the auditor may opt for judgmental sampling, using their professional judgment to select relevant items.

➧ Tolerable Error Rate and Desired Confidence Level: The auditor considers the acceptable level of risk and precision required for the audit test. Statistical sampling provides a quantifiable measure of sampling risk, allowing the auditor to control the risk of incorrect conclusions within predetermined limits. Judgmental sampling may not provide such precise risk assessment.

➧ Expertise and Experience: The auditor's familiarity and expertise with statistical techniques play a role in the decision-making process. If the auditor is well-versed in statistical methods and has the necessary tools, statistical sampling may be preferred. In the absence of such expertise, judgmental sampling may be more feasible.

(ii) Determining the Size of the Sample to be Used for Testing:

➧ Materiality: The materiality of the account balance or the assertion being tested influences the sample size. If the item is material, the auditor may choose a larger sample size to gain a higher level of confidence in the results.

➧ Desired Level of Assurance: The desired level of assurance also affects the sample size. A higher level of assurance requires a larger sample size to reduce sampling risk.

➧ Tolerable Error Rate: The auditor's judgment about the tolerable error rate (the maximum error they are willing to accept) influences the sample size. A lower tolerable error rate requires a larger sample size.

➧ Population Characteristics: The nature of the population being sampled affects the sample size. If the population has high variability or contains suspected misstatements, a larger sample may be necessary to capture these variations.

➧ Expected Error Rate: The auditor's expectation of the error rate in the population affects the sample size determination. If the auditor anticipates a higher error rate, they may need a larger sample to detect and quantify these errors accurately.

➧ Resource Constraints: Practical considerations, such as time, budget, and available resources, also impact the sample size. The auditor should balance the desired sample size with available resources to ensure an efficient and effective audit.

➧ Sampling Method: The choice between statistical and judgmental sampling methods also affects the sample size determination. Statistical sampling methods involve specific formulas and calculations to determine the appropriate sample size based on risk and confidence levels.

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QUESTION 5(c)

Q Explain the peculiar risks that an auditor faces when auditing and expressing an opinion on the following:
(i) Holding companies, subsidiaries and associates.
(ii) Related party transactions.
(iii) Branches and segments.
A

Solution


(i) Holding Companies, Subsidiaries, and Associates:

Peculiar Risks:

➧ Complex Group Structures: Auditing holding companies, subsidiaries, and associates can be challenging due to complex group structures. The interconnectedness of financial transactions and consolidation of financial statements across multiple entities can lead to increased audit complexity and the risk of misstatements.

➧ Lack of Independence: Auditors may face independence risks when auditing subsidiaries and associates, particularly if they have close relationships or financial interests with these entities. Independence issues can impact the auditor's objectivity and credibility.

➧ Intercompany Transactions: Holding companies and their subsidiaries often engage in significant intercompany transactions, which can raise the risk of errors, fraud, or improper accounting treatment. Auditors need to assess the fairness and accuracy of such transactions and their impact on the group's financial statements.

➧ Valuation of Investments: The valuation of investments in associates and subsidiaries requires special attention. The auditor must evaluate the appropriateness of the company's accounting policies, the impairment of investments, and the compliance with relevant accounting standards.

➧ Complex Consolidation Process: Consolidation of financial statements for group reporting introduces additional complexities. The auditor must ensure that the consolidation process is appropriately performed, and any eliminations or adjustments are accurately recorded.

(ii) Related Party Transactions:

Peculiar Risks:

➧ Identification and Disclosure: Related party transactions may not always be evident or fully disclosed in the financial statements. Auditors need to exercise due diligence to identify such transactions and ensure that they are adequately disclosed in accordance with accounting standards.

➧ Arm's Length Transactions: Auditors must assess whether related party transactions are conducted at arm's length and on commercial terms. There is a risk of inappropriate pricing, which could distort financial results and affect the company's financial position.

➧ Influence on Management: Related party transactions may be subject to management's influence or pressure, leading to potential bias in their treatment or disclosure. Auditors need to remain vigilant and exercise professional skepticism to ensure the transactions are appropriately accounted for.

➧ Materiality and Impact: Even seemingly immaterial related party transactions can have significant consequences, especially if they involve key management personnel or entities with significant influence over the company.

(iii) Branches and Segments:

Peculiar Risks:

➧ Geographical Dispersions: Companies with multiple branches or operating segments located in different regions may pose challenges in terms of logistics, communication, and access to information. Remote operations can lead to delays in obtaining relevant data and evidence.

➧ Segment Reporting: The identification and determination of operating segments for financial reporting purposes can be subjective and complex. The auditor must assess whether the company's segment reporting aligns with the applicable accounting standards.

➧ Intersegment Transactions: Transactions between different branches or segments can present risks of misclassification, understatement, or overstatement. Auditors need to verify the accuracy and completeness of these transactions to ensure proper consolidation and reporting.

➧ Performance Measurement: Evaluating the performance of individual branches or segments can be complicated due to different operational metrics, accounting policies, and management practices. The auditor must verify the consistency and reasonableness of performance indicators used by the company.

➧ Currency Translation: Companies operating in multiple currencies may face foreign exchange risks. The auditor should assess the company's translation policies and ensure compliance with relevant accounting standards.

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