AAA-April-2023
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CPA
Advanced Leval
Advanvced Auditing and Assurance April 2023
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Advanvced Auditing and Assurance
Revision Kit

QUESTION 1(a)

Q As the partner in charge of the internal quality review and control envisaged by International Standard on Quality Management (ISQCM) 1, you are required to prepare a brief for training the engagement team in your firm.

Required:

In light of the above statement:

(i) Explain the difference between “assurance” and “non-assurance” services as provided by external auditors.
(ii) Describe the work of the partner charged with the responsibility of driving the quality agenda in external audits.
(iii) Discuss FOUR principaltenets of ISQM 1.
A

Solution


(i) Difference between "assurance" and "non-assurance" services:

Assurance services:

Assurance services are professional services provided by external auditors that enhance the reliability and credibility of information for decision-making purposes. These services are typically focused on evaluating and providing an opinion on the reliability of financial statements, internal controls, or other aspects of an organization's operations.

Characteristics of assurance services are:

➧ Independence: Assurance engagements require the auditor to maintain independence from the entity being audited to ensure objectivity and impartiality.

➧ Evidence-based: Assurance services involve obtaining and evaluating evidence to provide a reasonable level of assurance regarding the subject matter under review. This evidence may include examination, verification, or other procedures deemed appropriate by the auditor.

➧ Professional judgment: Auditors exercise professional judgment to assess the evidence gathered and form an opinion or conclusion about the subject matter. This judgment is based on the auditor's expertise, knowledge of auditing standards, and professional skepticism.

➧ Reporting: The results of assurance engagements are communicated through reports that provide users with an opinion, conclusion, or other form of assurance on the subject matter being examined. These reports are typically addressed to the intended users and may include specific findings or recommendations.

Non-assurance services:

Non-assurance services, also known as consulting or advisory services, refer to a broader range of services provided by auditors that do not involve providing assurance on the subject matter. These services are typically advisory in nature and may include tax consulting, internal control reviews, due diligence, risk management, and other advisory or compliance-related engagements.

Characteristics of non-assurance services are:

➧ No assurance opinion: Unlike assurance services, non-assurance services do not involve providing an opinion, conclusion, or assurance on the subject matter. The focus is on providing advice, recommendations, or information to assist the client in making informed decisions.

➧ Scope flexibility: Non-assurance services have a broader scope and can be tailored to the specific needs of the client. The auditor and the client agree on the objectives, scope, and nature of the services to be provided, which can vary based on the client's requirements.

➧ Expertise utilization: Non-assurance services may leverage the auditor's expertise in a particular field to provide specialized advice or insights. The auditor's knowledge and experience can be used to address specific client needs, solve complex problems, or support decision-making processes.

➧ Potential for familiarity threat: Non-assurance services carry a higher risk of familiarity threat, where the auditor's objectivity and independence may be compromised due to a close or long-standing relationship with the client. Safeguards need to be in place to address these threats and maintain the auditor's independence and objectivity.

(ii) Work of the partner driving the quality agenda in external audits:

The partner responsible for driving the quality agenda in external audits plays a crucial role in ensuring that audit engagements meet the required standards and deliver high-quality results.

Their responsibilities include:

➧ Quality control policies and procedures: The partner establishes and maintains effective quality control policies and procedures within the firm to ensure compliance with professional standards, laws, and regulations. This involves developing methodologies, tools, and templates to guide the audit process and ensure consistent application of auditing standards.

➧ Risk assessment and planning: The partner oversees the risk assessment and planning process for each audit engagement. They work closely with the engagement team to identify and assess the risks associated with the client's business, industry, and internal control environment. The partner provides guidance on the audit strategy, scope, and objectives to address the identified risks effectively.

➧ Resource allocation and supervision: The partner is responsible for allocating appropriate resources to each audit engagement, including staffing, technology, and training. They ensure that the engagement team has the necessary skills, knowledge, and experience to perform the audit effectively. The partner also supervises and reviews the work of the engagement team to ensure compliance with professional standards and firm policies.

➧ Quality review and feedback: The partner conducts regular quality reviews of audit engagements to evaluate the adequacy of the audit work performed and the conclusions reached. They provide feedback and guidance to the engagement team, highlighting areas for improvement and ensuring that any identified deficiencies are addressed promptly.

➧ Continuous improvement: The partner promotes a culture of continuous improvement by facilitating knowledge sharing, conducting training programs, and staying up-to-date with changes in auditing standards and regulatory requirements. They encourage innovation and the adoption of best practices to enhance the quality and effectiveness of the audit process.

(iii) Four principal tenets of ISQM 1:

ISQM 1 (International Standard on Quality Management 1) sets out the requirements for firms to establish and maintain a system of quality management for their audit and assurance practices.

The four principal tenets of ISQM 1 are:

➧ Leadership responsibilities for quality: This tenet emphasizes the importance of firm leadership in promoting a culture of quality within the organization. Firm leaders are responsible for establishing quality objectives, defining roles and responsibilities, and ensuring that appropriate resources are allocated to achieve those objectives. They are also accountable for setting the tone at the top and fostering a commitment to quality throughout the firm.

➧ Relevant ethical requirements: This tenet highlights the need for firms to establish and implement policies and procedures to ensure compliance with relevant ethical requirements. These requirements include independence, integrity, objectivity, confidentiality, and professional behavior. Firms must establish safeguards to address threats to independence and objectivity and ensure that the ethical requirements are consistently applied across all audit engagements.

➧ Acceptance and continuance of client relationships and specific engagements: This tenet focuses on the firm's responsibilities in accepting and continuing client relationships and specific audit engagements. Firms must establish policies and procedures to assess the integrity and reputation of prospective clients and evaluate the firm's ability to meet the requirements of the engagement. Ongoing monitoring of client relationships and engagements is also necessary to identify any changes that may affect the firm's ability to provide high-quality services.

➧ Engagement performance: This tenet emphasizes the need for firms to perform high-quality audit engagements. It requires firms to establish policies and procedures to ensure that audit engagements are performed in accordance with relevant auditing standards. This includes planning, conducting appropriate risk assessments, obtaining sufficient and appropriate audit evidence, and forming conclusions based on the audit findings. The firm must also document the audit work performed and retain the necessary records to support the conclusions reached

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QUESTION 1(b)

Q Describe the following audits and their relevance in modern audit practice:

(i) Environmental audit.
(ii) Forensic audits.
A

Solution


(i) Environmental Audit:

An environmental audit is a comprehensive examination and evaluation of an organization's activities, practices, and processes to assess their impact on the environment. It involves reviewing environmental policies, procedures, and compliance with applicable environmental laws and regulations. The purpose of an environmental audit is to identify potential environmental risks, evaluate the effectiveness of environmental management systems, and suggest improvements to minimize adverse environmental impacts.

Relevance in modern audit practice:

In recent years, environmental concerns and sustainability have gained significant importance globally. As a result, environmental audits have become increasingly relevant in modern audit practice due to the following reasons:

➧ Compliance: Environmental regulations and laws have become more stringent. Companies need to ensure compliance with these regulations to avoid penalties, fines, and reputational damage. Environmental audits help identify areas of non-compliance and enable organizations to take corrective actions.

➧ Risk Management: Environmental risks, such as pollution, waste generation, and resource depletion, can have significant financial, legal, and reputational consequences. Auditing environmental practices helps identify and mitigate these risks, protecting the organization from potential liabilities.

➧ Stakeholder Expectations: Customers, investors, and other stakeholders are placing greater emphasis on environmental sustainability. Conducting environmental audits demonstrates an organization's commitment to environmental responsibility and can enhance its reputation and stakeholder trust.

➧ Cost Savings: Identifying inefficiencies and opportunities for improvement in environmental practices can lead to cost savings. Environmental audits help organizations identify areas where resource conservation, waste reduction, and energy efficiency measures can be implemented to reduce operational costs.

(ii) Forensic Audits:

Forensic audits are specialized audits that focus on investigating financial irregularities, fraud, or suspected misconduct within an organization. These audits employ investigative techniques, including data analysis, interviews, and forensic accounting, to uncover evidence of fraudulent activities, financial misstatements, or other unethical practices.

Relevance in modern audit practice:

Forensic audits have gained relevance in modern audit practice due to the following factors:

➧ Fraud Detection and Prevention: Financial fraud and misconduct can cause significant financial losses and damage to an organization's reputation. Forensic audits play a crucial role in detecting and preventing fraudulent activities by identifying suspicious transactions, examining financial records, and conducting in-depth investigations.

➧ Legal and Regulatory Compliance: Compliance with laws and regulations is a critical aspect of corporate governance. Forensic audits help ensure compliance with legal and regulatory requirements, especially in areas such as anti-money laundering (AML), corruption, and bribery.

➧ Litigation Support: In legal disputes, forensic audits provide valuable support by examining financial evidence, calculating damages, and providing expert testimony. They help establish facts and strengthen the legal position of the organization during litigation or arbitration proceedings.

➧ Risk Management: Forensic audits contribute to risk management by identifying vulnerabilities in internal controls and financial processes. They provide recommendations to strengthen controls and prevent future instances of fraud or misconduct.

➧ Reputation Protection: Effective forensic audits demonstrate an organization's commitment to integrity and transparency. By proactively investigating and addressing financial irregularities, organizations can protect their reputation and build trust with stakeholders.

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QUESTION 2(a)

Q You are responsible for the audit of Spheres Ltd. and are currently reviewing the working papers of the audit for the year ended 31 December 2022. In the working papers dealing with payroll, the audit junior has commented as follows:

“A number of new employees have been added to the company’s payroll during the year, with combined payments of Sh.1.35 million being made to them. There does not appear to be any authorisation for these additions. When I questioned the payroll supervisor who made the additions, he said that no authorisation was needed because the new employees were hired on a temporary basis. Conversely, when making enquiries about the staffing levels from the management, it was stated that no new employees have been taken on this year. Other than the tests of controls planned, no other audit work has been performed”.

Required:

(i) Explain the meaning of the term “professional skepticism”.
(ii) In relation to the audit of Spheres Ltd.’s payroll, recommend further actions that should be taken by the auditor.
A

Solution


(i) Meaning of "professional skepticism":

Professional skepticism refers to an attitude of critical questioning and a questioning mind that auditors must maintain throughout the audit process. It involves a mindset of not accepting information or explanations at face value and instead exercising a cautious and inquisitive approach. Professional skepticism requires auditors to approach the audit with a mindset that recognizes the possibility of material misstatement due to error or fraud, and to diligently seek and evaluate evidence to corroborate or challenge the information provided.

Professional skepticism involves the following key elements:

➧ Questioning Mindset: Auditors should have an attitude of questioning the information, assumptions, and representations provided by management or others involved in the audit process. They should not assume that everything is accurate or as presented.

➧ Critical Assessment: Auditors should critically evaluate the evidence obtained, including the reliability and relevance of the information, and consider alternative explanations or possibilities.

➧ Alertness to Fraud Risk: Auditors should be alert to the possibility of fraud and exercise professional skepticism in evaluating the potential for fraudulent activities or misstatements.

(ii) Further actions to be taken by the auditor in relation to the audit of Spheres Ltd.'s payroll:

Based on the information provided in the working papers, the auditor should consider the following further actions:

➧ Obtain supporting evidence: The auditor should examine the documentation supporting the additions to the payroll, such as employment contracts, offer letters, or other relevant records. This will help determine the validity and authorization of the new employees' payments.

➧ Verify the existence of new employees: The auditor should independently verify the existence of the new employees by reviewing personnel files, attendance records, or any other relevant sources. This will help confirm if the new employees were actually hired and performing services for the company.

➧ Assess the reason for lack of authorization: The auditor should investigate why there is no apparent authorization for the additions to the payroll. This may involve interviewing relevant personnel, such as the payroll supervisor, to understand their rationale and to determine if proper procedures were followed.

➧ Review management's response: The auditor should follow up with management regarding the conflicting statements about new employees. Request additional explanation or clarification to resolve the inconsistency between the payroll supervisor's explanation and management's statement.

➧ Perform substantive tests: Given the potential irregularities and conflicting information, the auditor should expand substantive testing procedures related to payroll. This may include reviewing payroll transactions, analyzing payroll expenses, and comparing employee details with supporting documentation.

➧ Consider fraud risks: The auditor should consider the possibility of fraudulent activities, such as ghost employees or unauthorized payments. This may involve examining the payroll system controls, segregation of duties, and performing data analytics to identify any unusual patterns or anomalies.

➧ Document findings and conclusions: The auditor should thoroughly document all findings, responses from management, and the actions taken. This documentation is crucial for supporting the audit conclusions and providing evidence of the auditor's due diligence.

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QUESTION 2(b)

Q You are the manager responsible for the audit of four audit clients of M & Associates, a firm of CPAs. The year end in each case is 31 December 2022. You are currently reviewing the audit working paper files and the audit seniors’ recommendations for the auditors’ reports.

Required:

For each of the cases below, comment on the appropriateness or otherwise of the proposition of the audit senior regarding the auditors’ reports. Where you disagree, indicate what audit modification (if any) should be given instead.

Details are as follows:

1. C Ltd. is experiencing going concern problems as noted during this year’s audit. Unless it secures the prospected loan from the bank to finance a contract already won, C Ltd. will likely not continue operating in the foreseeable future. No disclosure of the going concern problems has been made. The audit senior has suggested that, due to the seriousness of the situation, the audit opinion must at least be qualified ‘except for’.

2. P Ltd. has changed its accounting policy on premises from cost model to revaluation model. No disclosure of this change has been given in the financial statements. The carrying amount of the premises in the statement of financial position as at 31 December 2022 is the same as at 31 December 2021. The premises figure is material in the context of the financial statements. The audit senior is satisfied with the carrying value of the premises in the statement of financial position. The audit senior has concluded that a qualification is not required but suggests that attention should be drawn to the change by way of an emphasis of matter paragraph.

3. The directors’ report of AC Ltd. states that the company’s revenue has grown from 1.2 % to 4% in the last one year. However, analytical review procedures showed that revenues had only grown by 1.65%. The audit senior is satisfied that the revenue figures are correct. The audit senior has noted that an unmodified opinion should be given as the audit opinion does not extend to the directors’ report.
A

Solution


  1. C Ltd. - Going Concern Issue:
    • Audit Senior's Proposition: Qualify the audit opinion as 'except for' due to going concern problems.
    • Appropriateness: Appropriate, as going concern problems are significant uncertainties that must be addressed.
    • Recommended Audit Modification: Include an "Emphasis of Matter" paragraph to draw attention to the going concern issue and its potential impact on the financial statements. The opinion paragraph remains unmodified.
  2. P Ltd. - Change in Accounting Policy:
    • Audit Senior's Proposition: Use an "emphasis of matter" paragraph to highlight the change in accounting policy.
    • Appropriateness: Not appropriate, as the change in accounting policy is material and requires a more comprehensive response.
    • Recommended Audit Modification: Provide a "Qualified Opinion" explaining the nature of the change in accounting policy and the failure to disclose it properly in the financial statements. Express a reservation about the financial statements due to the lack of appropriate disclosure.
  3. AC Ltd. - Misstatement in Directors' Report:
    • Audit Senior's Proposition: Issue an unmodified opinion, as the misstatement in the directors' report does not affect the financial statements.
    • Appropriateness: Not appropriate, as the auditors' responsibility extends to other information included in the annual report, such as the directors' report.
    • Recommended Audit Modification: Provide a "Qualified Opinion" stating that the financial statements are fairly presented but the directors' report contains a material misstatement regarding revenue growth. Clearly outline the discrepancy between reported and audited revenue figures in the audit report.

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QUESTION 3(a)

Q You are the manager in-charge of the audit of Maridadi Fashions Ltd., a private company dealing in the import and sale of fashion wear. The company plans to seek a public quotation for its shares and is required to prepare a prospectus which must incorporate a report by the auditors of the company.

The directors intend to include a profit forecast in the prospectus. You have been approached by the securities exchange to report on the bases and calculations for the forecast.

Required:

Explain the preliminary considerations that you would take into account before you accept responsibility for reporting on the profit forecast.
A

Solution


➧ Independence and Objectivity: As the auditor, it's crucial to ensure independence and objectivity when accepting the responsibility for reporting on the profit forecast. Any potential conflicts of interest or close relationships with the company's management should be assessed to ensure an unbiased opinion.

➧ Expertise and Competence: The audit team should possess the necessary expertise and competence to evaluate the profit forecast. This involves having a good understanding of the industry, the company's business model, and the relevant economic factors that may influence the forecast.

➧ Understanding the Forecast Basis: Before accepting responsibility, the auditor must thoroughly comprehend the assumptions, methods, and rationale used by the company's management to develop the profit forecast. This understanding will help in evaluating the reasonableness of the forecast.

➧ Assessment of Management's Integrity: The auditor should consider the integrity and track record of the company's management team. A history of accurate forecasts and transparent communication with stakeholders enhances credibility.

➧ Legal and Regulatory Compliance: The auditor must ensure that the profit forecast complies with all relevant laws, regulations, and accounting standards. Any discrepancies or non-compliance should be addressed before providing the report.

➧ Scope and Limitations: The auditor should clearly define the scope of work and set out any limitations of the audit. This ensures that stakeholders understand the extent of the auditor's responsibility and the level of assurance provided.

➧ Communication with the Securities Exchange: It's essential to communicate with the securities exchange and understand their requirements and expectations regarding the report on the profit forecast.

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QUESTION 3(b)

Q Discuss the specific audit proceduresthat you would perform to ensure that the profit forecast is not misleading.
A

Solution


➧ Evaluation of Forecast Assumptions: The auditor should critically assess the key assumptions underlying the profit forecast. This may include sales growth rates, cost projections, and other factors influencing the forecast. Assumptions should be reasonable, based on historical data, market trends, and economic conditions.

➧ Comparative Analysis: The auditor can perform a comparative analysis of the company's past performance against the forecasted figures to identify any significant deviations or trends that raise concerns.

➧ External Verification: Whenever possible, the auditor should seek external verification for significant forecast assumptions. This may involve obtaining third-party market research or expert opinions to validate the reasonableness of the projections.

➧ Sensitivity Analysis: Conducting sensitivity analysis helps identify the impact of changes in key assumptions on the forecasted profit. This allows the auditor to assess the forecast's vulnerability to different scenarios.

➧ Evaluation of Forecasting Methods: The auditor should review the forecasting methods and models used by the company's management. They should ensure these methods are appropriate, well-documented, and have a track record of accuracy.

➧ Consistency with Strategic Plans: The auditor should verify that the profit forecast aligns with the company's strategic plans and objectives. Any inconsistencies should be addressed and explained.

➧ Management's Involvement: The auditor should evaluate the level of management involvement in preparing the forecast. A higher level of management involvement often indicates a more robust and credible forecast.

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QUESTION 3(c)

Q Describe the mattersthat you would include in your report.
A

Solution


➧ Introduction: The report should introduce the company, the purpose of the forecast, and the scope of the auditor's work.

➧ Responsibility Statement: A statement clarifying that the responsibility for the profit forecast lies with the company's management, and the auditor's role is to provide an independent opinion.

➧ Basis of Opinion: The report should outline the procedures performed by the auditor and the basis of their opinion. This includes the evaluation of assumptions, verification methods, and any limitations encountered during the audit process.

➧ Opinion on Reasonableness: The auditor should express their opinion on the reasonableness of the profit forecast. This opinion can be qualified if there are significant concerns or limitations.

➧ Disclosure of Assumptions: The report should disclose the key assumptions made by the company's management in preparing the forecast. This allows stakeholders to understand the underlying factors influencing the projections.

➧ Risk Factors: The auditor may include a section highlighting potential risk factors that could affect the achievement of the forecast. This enhances the understanding of the forecast's uncertainties.

➧ Comparative Analysis: If relevant, the report can provide a comparative analysis of historical performance against the forecasted figures to identify trends and variations.

➧ Management's Representation: A statement confirming that management has provided the auditor with all necessary information and representations related to the profit forecast.

➧ Conclusion: The report should conclude with the auditor's overall opinion on the reliability and reasonableness of the profit forecast.

➧ Date and Signature: The report should be dated and signed by the lead auditor or the audit firm's authorized representative.

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QUESTION 4(a)

Q Lavenda Group has been a client of your Audit firm for several years. The group of companies specialises in production and sale of health food products. You are a senior audit manager responsible for the audit of the Lavenda Group. The group companies all have a financial year ended 31 December 2022. Your firm audits all components of the group with the exception of P Ltd. which was acquired during the year. You are currently planning the final audit of the consolidated financial statements. Information about several matters relevant to the group audit is given below. These matters are all potentially material to the consolidated financial statements. None of the companies in the group is listed.

Lavenda Ltd.

This is a non-trading parent company, which wholly owns three subsidiaries: D Ltd., S Ltd. and P Ltd. all of which are involved with the core manufacturing and marketing operations of the group. This year, the directors decided to diversify the group’s activities in order to reduce risk exposure. Non-controlling interests representing long-term investments have been made in two companies. In the consolidated statement of financial position, these investments are accounted for as associates, as Lavenda Ltd. is able to exert significant influence over the companies. As part of their remuneration, the directors of Lavenda Ltd. receive a bonus based on the profit before tax of the group. In April 2022, the group finance director resigned from office after a disagreement with the chief executive officer over changes to accounting estimates. A new group finance director is yet to be appointed.

D Ltd.

This company mills, blends, packages and distributes healthy flours and natural spices. During the year, the factory was extended by the self-construction of a new processing area, at a total cost of Sh.8 million which is material in the context of the company’s financial statements as well as the Group. A loan of Sh.8 million with an interest rate of 5% per annum had been taken out to finance the construction. The construction took 6 months to complete and the new processing area was ready for use on 1 August 2022. The processing area began to be used on 1 November 2022. The estimated useful life of the extended factory is 15 years.

S Ltd.

This company’s operations involve the manufacture and distribution of peanut butter and other bread spreads. S Ltd. is involved in a court case with a competitor, F Foods Ltd., which alleges that a design used in S Ltd. printed material copies one of F Foods Ltd.’s designs which are protected under copyright. A verbal confirmation was made from S Ltd. lawyers that a claim of Sh.2.5 million has been made against S Ltd., which is probable to be paid. S Ltd. has not made a provision.

P Ltd.

This company is a new and significant acquisition, purchased in June 2022. It is located in North Africa and has been purchased to supply peanuts and other ingredients for the goods produced by S Ltd. It is now supplying approximately half of the ingredients used in S Ltd. The country in which P Ltd. is situated has not adopted International Financial Reporting Standards, meaning that P Ltd.’s financial statements are prepared using local accounting rules. The company uses local currency to measure and present its financial statements. P Ltd. is audited by a small local firm, ABC & Co, also based in North Africa. Assume that Audit regulations in that country are not based on International Standards on Auditing.

Required:

Evaluate the principal audit risks to be considered in your planning of the final audit of the consolidated financial statements for the year ended 31 December 2022. (6 marks)
A

Solution


➧ Business Risk and Diversification: The decision of Lavenda Ltd. to diversify its activities to reduce risk exposure may introduce new business risks. These risks could impact the group's financial performance and should be carefully assessed.

➧ Management Override of Controls: Given that the directors of Lavenda Ltd. receive a bonus based on the group's profit before tax, there is a risk of management attempting to override controls or manipulate accounting estimates to achieve desired financial results.

➧ Impairment of Long-Term Investments: The non-controlling interests representing long-term investments made by Lavenda Ltd. in two companies could be at risk of impairment if those investees face financial difficulties or unfavorable market conditions.

➧ Capitalization and Depreciation of Self-Constructed Asset: The extension of the factory by D Ltd., involving a significant cost, may pose risks related to the capitalization and depreciation of the self-constructed asset. The appropriateness of the cost allocation and useful life estimates should be scrutinized.

➧ Legal and Litigation Risks: S Ltd.'s court case with F Foods Ltd. and the potential liability of Sh.2.5 million require careful consideration. The outcome of the court case and the adequacy of provisions should be assessed.

➧ Reliability of P Ltd.'s Financial Statements: The fact that P Ltd.'s financial statements are prepared using local accounting rules and audited by a small local firm may raise concerns about their reliability and compliance with international standards.

➧ Integration and Reliability of Acquired Subsidiary: As P Ltd. is a new and significant acquisition, the auditor should assess the integration of its financial information into the consolidated financial statements. This includes understanding the accounting policies used by P Ltd. and ensuring appropriate adjustments are made for consolidation purposes.

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QUESTION 4(b)

Q Describe the procedures that should be performed in deciding the extent of reliance to be placed on the work of ABC & Co.
A

Solution


➧ Evaluate ABC & Co.'s Independence: Assess the independence and objectivity of ABC & Co. to ensure that their work is conducted without bias or undue influence.

➧ Review ABC & Co.'s Audit Report: Obtain and review ABC & Co.'s audit report on P Ltd.'s financial statements to understand the scope of their work, the areas covered, and any qualifications or issues raised.

➧ Assess ABC & Co.'s Competence: Evaluate the qualifications, experience, and resources of ABC & Co. to determine if they have the necessary expertise to perform the audit effectively.

➧ Discuss with ABC & Co.: Hold discussions with the auditors of ABC & Co. to gain insights into their audit procedures, findings, and any significant matters related to P Ltd.

➧ Consider the Regulatory Environment: Understand the audit regulations and standards followed by ABC & Co. in their country and assess the level of alignment with international standards.

➧ Perform Additional Procedures: Where necessary, perform additional audit procedures on specific areas covered by ABC & Co. to ensure their work is reliable and provides sufficient evidence for consolidation.

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QUESTION 4(c)

Q Recommend the principal audit procedures that should be performed on the classification of non-controlling investments made by Lavenda Ltd.
A

Solution


➧ Obtain and Review Legal Agreements: Obtain and review the legal agreements and contracts related to the non-controlling investments made by Lavenda Ltd. Ensure that the terms and conditions governing the investments are appropriately accounted for and disclosed.

➧ Assess Significant Influence: Evaluate whether Lavenda Ltd. has significant influence over the investee companies. This assessment should consider the level of ownership, representation on the board, and participation in decision-making.

➧ Analyze Financial Statements of Investee Companies: Review the financial statements of the investee companies to understand their financial position, performance, and compliance with accounting standards.

➧ Evaluate Fair Value Measurement: Determine if the fair value measurement of the non-controlling investments is appropriately calculated and disclosed in the consolidated financial statements.

➧ Review Changes in Ownership: Assess any changes in ownership or acquisition of additional interests during the year and ensure the appropriate accounting treatment.

➧ Test Consolidation Procedures: Perform testing on the consolidation procedures used to combine the financial information of the investee companies into the consolidated financial statements.

➧ Disclosure Review: Ensure that all relevant disclosures regarding non-controlling investments are appropriately made in the consolidated financial statements in accordance with applicable accounting standards.

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QUESTION 5(a)

Q Your firm is the current auditor of Safi Limited, a renowned wholesale business. You have been asked to carry out audit checks on the cut off and verifying inventory quantities at the year end.

The company maintains the details of the inventory quantities on its computer. These inventory quantities are updated from the goods received notes and the sales invoices.

The company carries out the inventory count each month when all the fast moving and high value inventory is counted, and a third of the remaining inventory is counted in rotation so that all the items are counted at least four times a year.

You attended the inventory count on the second Sunday of October 2022 and a further inventory count on the first Sunday of November 2022.

The company’s year-end was 31 October 2022 and the inventory quantities as at that date as shown by the computer had been used in the valuation of the inventory. No inventory was counted at the year end.

Required:

Describe the principal matters that you should have checked and the matters you should have recorded when you attended the company’s inventory count on the second Sunday of October 2022.
A

Solution


➧ Observation of the Count: Observe the physical counting of inventory and ensure it is being conducted accurately and in accordance with the company's procedures.

➧ Inventory Count Sheets: Review the inventory count sheets used to record the quantities of counted items. Check for completeness, accuracy, and proper segregation of inventory items.

➧ Identification of Slow-Moving and High-Value Items: Identify the slow-moving and high-value inventory items that are counted on a monthly basis to ensure they are adequately covered.

➧ Rotation of Inventory Count: Verify that a third of the remaining inventory has been counted during the rotation process to ensure all items are counted at least four times a year.

➧ Cutoff Procedures: Observe whether the cutoff procedures are being followed correctly, and the items included in the count are those that should be included in the inventory at the reporting date.

➧ Inventory Location: Ensure that the inventory is physically located in the correct storage areas and warehouses as per the company's records.

➧ Security Measures: Assess the security measures in place during the count to prevent any unauthorized access or removal of inventory.

➧ Documentation of Count Differences: Record any discrepancies noted during the count and inquire about the reasons for the differences.

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QUESTION 5(b)

Q (b) Explain the checks you will perform in confirming the sales and purchases cut offs have been correctly carried out at the year end. (4 marks)
A

Solution


➧ Sales Cut-Off: Examine sales invoices and delivery notes for transactions recorded just before and after the year-end to verify whether they are correctly included or excluded from sales for the current year.

➧ Purchases Cut-Off: Review purchase invoices, receiving reports, and goods received notes to ascertain the proper inclusion or exclusion of purchases made at or around the year-end.

➧ Analytical Procedures: Perform analytical procedures to identify any unusual trends or patterns in sales and purchases close to the year-end and investigate further if required.

➧ Confirmation: Obtain direct confirmations from selected customers and suppliers to verify the timing and amounts of sales and purchases transactions.

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QUESTION 5(c)

Q Discuss the work you will carry out to check that the book inventory records have been correctly updated from the inventory count.
A

Solution


➧ Comparing Count Sheets to Records: Cross-check the inventory count sheets obtained during the inventory count with the corresponding entries in the computerized inventory records to ensure accurate data entry.

➧ Trace Inventory Adjustments: Trace any adjustments made to the book inventory records after the count to verify that they are appropriately supported and authorized.

➧ Review Reconciliation: Review the reconciliation between the physical count quantities and the book quantities to identify and investigate any discrepancies.

➧ Testing Controls: Test the controls in place over inventory recording and updating processes to assess their effectiveness and reliability.

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QUESTION 5(d)

Q Summarise the work you will carry out to satisfy yourself that the inventory quantities used in the relation of the inventory at the year end is correct.
A

Solution


➧ Comparing to Physical Count: Compare the physical count quantities obtained during the inventory count to the quantities used in the valuation at the year-end to identify any significant differences.

➧ Tracing Pricing: Trace the pricing of individual items from the inventory records to supporting documentation (e.g., purchase invoices) to ensure accuracy.

➧ Review of Costing Methods: Review the company's inventory costing methods (e.g., FIFO, LIFO, average cost) and assess whether they have been applied consistently and in accordance with accounting policies.

➧ Testing for Obsolescence: Assess the need for any inventory write-downs or obsolescence provisions based on the physical condition and market value of the inventory.

➧ Review of Valuation Policies: Review the company's valuation policies to ensure they comply with applicable accounting standards and are consistently applied.

➧ Comparison to Previous Years: Compare the current year-end inventory quantities and valuation with those of the previous year to identify any significant variations and investigate the reasons for the changes.



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