ADVANCED AUDITING & ASSURANCE MAY 2019 - CPA SOLUTION|REVISION KITS|KASNEB

QUESTION 1(a)

Q Describe three auditing challenges that are associated with cloud computing environments.

A

Solution

(i). Security.
(ii). Password Security.
(iii). Cost Management.
(iv). Lack of expertise.
(v). Internet Connectivity.
(vi). Loss of audit trail
(vii). Control or Governance.
(viii). Compliance.
(ix). Multiple Cloud Management.

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QUESTION 1(b)

Q Evaluate two key differences between "financial audits" and "forensic audits"

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Solution

Financial audits	Forensic Audits
1. The objective is to enable the auditor express an opinion on truth and fairness of financial statements	1. The objective is to determine the corrective of the account and whether fraud has taken place
2. The period covered is for that financial year under audit	2. There is no such limitations in terms of period. Accounts will be examined in details from prior years.
3. The techniques used are substantive test, risk assessment and compliance procedures covering all the areas of financial statement	3. The techniques used is to analyse past trends vouching, ration analysis and in-depth testing of the specific area under examination

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QUESTION 1(c)

Q Discuss the procedures involved in applying forensic auditing in fraud investigations

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Solution

1. Accepting the investigation - The forensic accountant must first decide if their business have the expertise and experience required to take on the assignment.

2. Planning the investigation - The investigation team needs to thoughtfully examine what they are expected to accomplish and schedule their work properly.

3. Gathering evidence - The investigator must comprehend the precise type of fraud that has been carried out, how it was performed, who the perpetrator is, and the mechanics of the scam in order to compile detailed evidence.

4. Reporting - The investigator is required to submit a report outlining their findings, including a summary of the evidence and a calculation of the loss incurred as a result of the fraud.

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QUESTION 2a

Q Discuss the implications of the matter described above on the completion of the audit and on the auditor's report, recommending any further actions which would be taken by the auditor

A

Solution

1. To establish familiarity with the predetermined performance measures and the justification for the metrics that are being reported on, the auditor should begin by getting to know the entity.

2. The issue suggests that the rise in profit is one of the major key performance indicators, thus the auditor should carry out analytical review procedures to assess the patterns and determine the consistency of the data.

3. Discussions about those in charge of the reporting process should be held by the auditor with management and other pertinent parties.

4. The auditor should use sampling to verify the performance data from the source document.

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QUESTION 2b(i)

Q Describe the aspects of a client's business which should be considered in order to gain an understanding of the client company and its operating environment

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Solution

(i). General economic factors which include; Economic activity, interest rates, the availability of finance, foreign exchange rates, the level of taxation, tariffs, and trade restrictions are only a few examples of general economic aspects.

(ii). Industry important conditions affecting the clients business encompassing markets, competitions, business risk, product technology changes, operations that are contracting or growing, significant industry ratios, operating statistics, etc.

(iii). Ownership and administration of the organization, including its related parties and shareholders.

(iv). corporate structure, organization structure, management philosophy and strategic plan etc.

(v). The entity's business - this covers the nature of the business, important suppliers, markets, major expense categories, and products.

(vi). The regulatory environment and requirement - This covers taxation, measurement, and disclosure concerns specific to the firm, as well as laws and legislation that have a substantial impact on the entity.

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QUESTION 2b(ii)

Q Recommend the procedures that an auditor should perform in order to gain business understanding of an entity.

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Solution

1. Review of the internal audit reports and discussion with internal audit personnel

2. Discussion with the stuff members in the entity such as directors, senior and junior employees

3. Discussion with professional and experienced outsiders like economists and suppliers

4. Have discussions with former auditors, attorneys, and other consultants who have worked for the entity or in the sector.

5. A physical visit to the entity's premises facilities

6. Reading entities documentation such as the minutes, directors report, marketing plans, promotional strats, prior years annual reports

7. customers reviews.

8. Reading documentation related to the industry, such as press releases, trade journals, newspapers.

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QUESTION 3(a)

Q (i) Analyse four system deficiencies.

(ii) Recommend a control to address each of the deficiencies described in a (i) above.

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Solution

1. Requisition form do not require authorization and no reference to the current inventory levels of the material being requested.

2. No update on suppliers lists which was last updated 24 months ago which the staff uses to raise sequentially numbered purchase orders.

3. Purchases invoices are sent directly to the purchases ledger clerk who stores them in amanual file for a week and they are not authorized by a responsible officer

4. The invoice is input into the system after 60 days and this is when the actual payment is done.

(ii) Recommend a control to address each of the deficiencies described in a (i) above.

1. A re-order level and quantity should be set ,Every order needs to be approved by a responsible individual with clearly defined authority levels.

2. A list of prequalified suppliers should exist and oftenly updated ,All orders should be made from the authorized suppliers.

3. All purchases invoices must be authorized by a responsible officer whose authority limit is specified.
The purchases invoices should be allocated numbers to avoid them going astray

4. Recording of the invoices should be done once authorized
Once the invoice is processed it should be stamped to avoid it being used again to process another payment.

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QUESTION 3(b)

Q Identify four corporate governance weaknesses faced by Deluxe Tea Holdings Ltd. and for each weakness, provide a recommendation to address it.

A

Solution

Weakness	Recommendations
The board comprises of six executive and four non-executive directors	A non-executive director should make up at least half of the board to ensure balance.
The chairman and other non executive directors are former executive directors of the company	Only independent non-executives with the necessary qualifications and expertise should be appointed to the company's board.
The chairman who is non executive director sit on the audit committee as chair	The chairman should no longer serve as the audit committee's chairman.
All four members of the audit committee were previously involved in sales or production related roles	The company should hire independent non-executive directors who have at least relevant financial experience.
All directors have been members of the board for atleast for years	The shareholders should have the option to elect the directors again at least every three years.
The chairman has sole responsibility for liasing with the shareholders and answering any of their questions.	To ensure effective communication with the shareholders, all board members should be involved.
The company doesnt have an interval audit function	Create a department for internal auditing

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QUESTION 4a

Q In view of the above circumstance, discuss four matters that should be considered in forming your final audit opinion and the potential impact on the auditor's report.

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Solution

(i). Ask the management about their status assessment of the going concern of the business, and if they haven't done one, discuss the value of the assessment with them.

(ii). The management's action plans to mitigate issues with the going concern

(iii). Examine the debentures' and the loan agreement's terms to see whether any have been breached.

(iv). Analysis of the profitability, cash flows, and other pertinent forecasts

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QUESTION 4b(i)

Q Recommend five principal audit procedures that should be performed on the conditions attached to the grant received by Samia Foods Ltd.

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Solution

(i). Obtain the grant's supporting documentation to verify the grant's amount, the date it was paid out, and the conditions under which it was given.

(ii). Check the paperwork for any grant-related conditions.

(iii). Review the manufacturing plant's forecasts and budgets to determine how likely it is that it will continue to operate.

(iv). Verify the accounting treatment implemented by discussing it with the management using the draft financial statements, then recalculate the amounts recognized.

(v). Verify the amount of money received against the bank statement and the cash register.

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QUESTION 4b(ii)

Q Explain three factors that should be considered and the procedures that should be performed in deciding the extent of reliance to be placed on the work of the auditors of Lindi Ltd.

A

Solution

1. Ethical status - ie. the independence of the component auditor. The auditor should whether ethical rules and principles are found for the auditor to place reliance on the auditor of Lindi Ltd.

2. Qualification and professional competence - The auditor's qualification should be of standard so that the quality of work may be reliable.

3. Monitoring - there should be consideration of whether Lindi Ltd operates in a regulatory environment that actively oversees and monitors auditors.

4. Audit evidence - A determination should be made as to whether the group engagement will be able to participate in the component auditor's work to the degree required to gather audit evidence.

Procedures :

➫ Obtaining and reviewing the code of ethics followed by the audit firm in Lindi Ltd.

➫ Determine lindi Ltd's membership in a regulatory organization through dialogue.

➫ An overview of the auditing techniques employed could be provided through a questionnaire or check list.

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QUESTION 5a

Q Identify four principles of ethics that are applicable to internal auditors and for each principle, explain how an internal auditor could demonstrate adherence

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Solution

1. Integrity - the trust of internal Auditors is established by integrity and thus provides the basis for reliance on their judgement.

2. Confidentiality - Internal auditors respect the ownership and value of the information they receive, and they never reveal information without proper authorization unless they are required to do so by law or by professional obligation.

3. Objectivity - When gathering, analyzing, and communicating information about the activity or process under scrutiny, internal auditors demonstrate the highest level of professional objectivity. They should form conclusions based on a fair evaluation of all the pertinent facts without being excessively swayed by their own or others' interests.

4. Professional competence and due care - The internal auditors must properly organize and record their work, and they must make suggestions for improvement to the management so that they can take appropriate action.

5. Professional Behavior - Professional auditors should abide by all applicable laws and regulations and abstain from any conduct that discredits the profession.

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QUESTION 5b

Q As an audit consultant for Bawabu Ltd., describe six examination procedures that you would use to enable you express a professional view on the profit forecasts.

A

Solution

(i). Obtain enough knowledge of the industry to be able to assess whether all key PFI assumptions have been identified.

(ii). Examine whether all important implications of these assumptions have been taken into account.

(iii). Analyze the justification for relying on the entity's previous financial data.

(iv). Analyze the source of the data used to support the management's best estimate.

(v). Consider the time frame Covered by the PFI

(vi).Review the PFI preparers' competence.

(vii). Examine accounting policies for consistency with historical data.

(viii). Recalculation to confirm accuracy

(ix). Review B・O・D minutes

(x). Obtain Written representations from Management regarding the intended use of the PFI & Completness of its responsibilty for the information. .

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CPA
Advanced Leval
Advanvced Auditing and Assurance May 2019
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Advanced Taxation

Advanced Financial reporting & analysis

Advanced Financial Managemen

Advanced Management Accounting

Advanced Public finance

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Advanced Taxation

Advanced Financial reporting & analysis

Advanced Financial Managemen

Advanced Management Accounting

Advanced Public finance

Comments on:

CPA
Advanced Leval
Advanvced Auditing and Assurance May 2019
Suggested solutions