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CPA
Advanced Leval
Advanvced Auditing and Assurance November 2018
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Advanvced Auditing and Assurance
Revision Kit

QUESTION 1(a)

Q Distinguish between "forensic accounting" and "forensic audit'
A

Solution


Forensic Accounting:

➢ Specialized area of accounting.
➢ Investigates financial fraud and misconduct.
➢ Analyzes financial records and transactions.
➢ Provides litigation support.
➢ Focuses on uncovering financial irregularities, embezzlement, and money laundering.
➢ Assists in criminal investigations, civil litigation, insurance claims, and financial disputes.
➢ Applies accounting, auditing, and investigative skills.
➢ Quantifies losses and presents evidence in legal proceedings.

Forensic Audit:

➢ Type of audit conducted for investigative purposes.
➢ Examines financial records, transactions, and documentation.
➢ Aims to identify fraud, misappropriation of assets, and financial irregularities.
➢ Focuses on financial statements, accounting systems, internal controls, and supporting documentation.
➢ Collects evidence for potential legal action or dispute resolution.
➢ Conducted in response to suspected financial misconduct.
➢ May be performed by forensic accountants or auditors with specialized forensic skills.
➢ Complements other forensic accounting services.

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QUESTION 1(b)

Q Describe challenges that an auditor might encounter in carrying out an audit in an e-commerce environment.
A

Solution


➧ Lack of Physical Documentation: In traditional audits, auditors rely on physical documents such as invoices, receipts, and paper trails. In an e-commerce environment, much of the documentation is electronic, which can make it challenging to trace and authenticate transactions. Auditors must adapt to the digital environment and ensure the integrity and reliability of electronic records.

➧ Data Security and Privacy: E-commerce platforms deal with sensitive customer data, including personal and financial information. Auditors must ensure that the e-commerce company has robust data security measures in place to protect customer data and comply with relevant privacy regulations. They may need to assess the effectiveness of encryption, access controls, data storage, and handling of customer information.

➧ Transaction Volume and Complexity: E-commerce platforms can handle a large volume of transactions, making it challenging to examine every transaction individually. Auditors need to develop sampling techniques and analytical procedures to effectively test the completeness, accuracy, and validity of transactions within the available time frame.

➧ Inventory and Stock Management: In e-commerce, inventory management and stock valuation can be complex due to factors like drop-shipping, third-party fulfillment, and virtual inventory. Auditors must assess the accuracy of inventory records, including the existence and valuation of inventory items, and ensure that appropriate controls are in place to prevent inventory fraud or misstatement.

➧ Revenue Recognition: E-commerce companies often employ various revenue recognition models, such as subscription services, digital downloads, or bundled packages. Auditors need to understand the company's revenue recognition policies, assess the appropriateness of the chosen method, and verify that revenues are recognized in accordance with accounting standards.

➧ Compliance with Tax Regulations: E-commerce transactions may involve customers and suppliers from different jurisdictions, leading to complex tax implications. Auditors must assess whether the company complies with applicable tax regulations, including proper tax reporting, collection, and remittance. They may need to consider cross-border tax issues, value-added tax (VAT), and sales tax compliance.

➧ Technology and IT Controls: E-commerce relies heavily on technology infrastructure and systems, including e-commerce platforms, payment gateways, and inventory management systems. Auditors must understand the company's IT environment, assess the effectiveness of IT controls, and evaluate the integrity and security of the systems supporting e-commerce operations.

➧ Rapid Technological Changes: E-commerce is a dynamic field, with new technologies, platforms, and business models constantly emerging. Auditors need to stay abreast of technological advancements, understand their impact on financial reporting, and assess the e-commerce company's ability to adapt to changes while maintaining effective internal controls.

➧ Complex Supply Chains: E-commerce companies often have intricate supply chains involving multiple suppliers, distributors, and fulfillment centers. Auditors may face challenges in assessing the completeness and accuracy of supply chain records, verifying the ownership and valuation of inventory at different stages, and evaluating the company's control environment over the supply chain operations.

➧ Unique Industry Considerations: Different e-commerce sectors (e.g., retail, digital services, marketplace platforms) have specific industry considerations. Auditors should be familiar with the nuances of the particular e-commerce industry and understand the associated risks, revenue models, cost structures, and regulatory requirements that may impact the audit approach.

➧ Cybersecurity Risks: E-commerce platforms are vulnerable to cybersecurity threats, including hacking, data breaches, and system intrusions. Auditors must evaluate the effectiveness of cybersecurity controls and assess the company's preparedness in mitigating cyber risks. This includes examining measures such as network security, access controls, system monitoring, and incident response procedures.

➧ Online Advertising and Marketing: E-commerce businesses heavily rely on digital marketing and advertising strategies to drive traffic and sales. Auditors may encounter challenges in assessing the effectiveness of marketing expenditures, evaluating the accuracy of reported metrics (such as website traffic or conversion rates), and verifying the legitimacy of online marketing campaigns.

➧ International Operations: E-commerce companies frequently engage in cross-border transactions, operating in multiple countries and dealing with diverse regulatory environments. Auditors may need to navigate international accounting standards, taxation regulations, and legal requirements to ensure compliance. They should also consider foreign currency transactions, exchange rate fluctuations, and potential transfer pricing issues.

➧ Third-Party Service Providers: E-commerce businesses often rely on third-party service providers for various functions, including payment processing, order fulfillment, and customer support. Auditors must assess the company's relationships with these service providers, understand the extent of their involvement, and evaluate the associated risks, such as data security, contractual compliance, and service level agreements.

➧ Digital Payment Systems: E-commerce transactions often involve a variety of digital payment methods, such as credit cards, digital wallets, and cryptocurrency. Auditors need to understand the payment systems utilized by the e-commerce company and evaluate the effectiveness of internal controls related to payment processing, authorization, and reconciliation.

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QUESTION 1(c)

Q Argue cases for and against the use of global corporate governance standards.
A

Solution


Arguments for the use of global corporate governance standards:

➧ Enhanced Investor Confidence: Global corporate governance standards can improve investor confidence by providing a consistent framework for corporate governance practices across countries. Standardized guidelines can help investors assess the governance practices of companies operating in different jurisdictions, leading to increased transparency and accountability.

➧ Harmonized Practices: Global standards can promote harmonization of corporate governance practices, fostering a level playing field for businesses across borders. This can facilitate cross-border investments, mergers, and acquisitions, as well as promote fair competition and reduce regulatory arbitrage.

➧ Improved Corporate Performance: Effective governance practices can positively impact the performance of companies. Global standards provide guidelines on issues such as board composition, risk management, and disclosure requirements, which can help companies enhance their decision-making processes, risk oversight, and strategic planning.

➧ Mitigation of Risks: Standardized corporate governance standards can help mitigate risks associated with fraud, corruption, and unethical practices. By establishing clear expectations and guidelines, global standards can encourage companies to implement robust internal controls, ethical behavior, and risk management mechanisms.

Arguments against the use of global corporate governance standards:

➧ Cultural and Jurisdictional Differences: Implementing a single set of global corporate governance standards may not account for cultural, social, and legal variations across countries. Different jurisdictions have distinct legal frameworks, business practices, and societal norms, making it challenging to impose a one-size-fits-all approach to governance.

➧ Loss of National Sovereignty: Critics argue that the adoption of global corporate governance standards may undermine national sovereignty by limiting a country's ability to develop governance frameworks that are tailored to its unique needs and context. Governments should have the flexibility to set governance rules that reflect their specific economic, social, and political conditions.

➧ Compliance Burden for Small and Medium-sized Enterprises (SMEs): Global standards may disproportionately burden smaller companies, particularly SMEs, which may lack the resources and expertise to comply with complex governance requirements. This can hinder their ability to compete, grow, and innovate, creating barriers to entry and stifling entrepreneurship.

➧ Inflexibility and Lack of Innovation: A uniform set of global governance standards may discourage experimentation and innovation in governance practices. Different approaches and experiments at the national or regional level could yield valuable insights and alternative governance models that may not be accommodated under a standardized global framework.

➧ Enforcement Challenges: Implementing and enforcing global corporate governance standards can be challenging, especially in jurisdictions with weak legal systems, inadequate regulatory oversight, or limited resources. Enforcing compliance with global standards may require substantial coordination, capacity-building, and monitoring mechanisms at the international level.

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QUESTION 2(a)

Q The framework for assurance engagements does not permit an auditor to give an absolute level of assurance.

With reference to the above statement. suggest reasons why it is not possible to give an absolute level of assurance,
A

Solution


➧ Inherent Limitations of Auditing: Auditing is based on sampling and testing procedures, which means auditors examine a subset of transactions, balances, or processes rather than the entire population. The inherent nature of sampling introduces the risk that material misstatements or irregularities may go undetected. As a result, auditors can provide reasonable, but not absolute, assurance that the financial statements are free from material misstatement.

➧ Use of Professional Judgment: The auditor's assessment of the financial statements involves the exercise of professional judgment and relies on the available evidence. However, judgment is subjective and influenced by factors such as the auditor's expertise, the nature of the evidence obtained, and the complexity of the subject matter. Different auditors might reach different conclusions, highlighting the limitations of achieving absolute assurance.

➧ Risk of Undetectable Fraud or Error: While auditors design procedures to detect material misstatements resulting from fraud or error, it is impossible to eliminate the risk entirely. Fraudulent activities can involve deliberate concealment, collusion, or override of controls, making it difficult for auditors to identify all instances of fraud. Similarly, errors or misstatements can occur due to mistakes, misinterpretations, or complex accounting estimates, which may not be easily detected through audit procedures.

➧ Reliance on Representations and Third Parties: Auditors rely on representations made by management, third-party confirmations, and other external sources of information. While auditors may perform procedures to verify the accuracy and reliability of these representations, there is always a risk that the information provided is incomplete, inaccurate, or intentionally misleading. The reliance on external parties introduces inherent limitations to providing absolute assurance.

➧ Time Constraints and Cost Considerations: Audits are conducted within a limited timeframe and budget. Due to practical constraints, auditors may not be able to examine every transaction or detail comprehensively. As a result, they must rely on sampling techniques and risk-based approaches to focus their efforts. The limitations imposed by time and cost factors prevent auditors from providing absolute assurance.

➧ Future Uncertainty: Financial statements represent historical information, and auditors provide assurance based on the information available at the time of the audit. However, future events and conditions can impact the accuracy and reliability of financial statements. The dynamic and evolving nature of business environments introduces an element of uncertainty, making it impossible to provide absolute assurance regarding future outcomes.

➧ Possibility of Collusion: There is a risk that management may collude with the auditor, intentionally providing misleading information or suppressing evidence of fraud or errors. Collusion can undermine the effectiveness of audit procedures and compromise the auditor's ability to obtain sufficient and appropriate evidence. The existence of collusion can make it difficult for the auditor to provide absolute assurance as the evidence may be intentionally manipulated or withheld.

➧ Insufficiency and Appropriateness of Evidence: Auditors rely on evidence to form their conclusions and provide assurance. However, the evidence available to auditors is often more persuasive than conclusive. It is based on professional judgment, sampling, and testing procedures, which are designed to provide a reasonable level of assurance but not absolute certainty. The auditor's conclusions are based on what is probable and reasonable, considering the limitations of the evidence obtained.

➧ Selective Testing: Auditors use sampling procedures to assess the reliability and accuracy of financial statements. Due to time and resource constraints, it is not feasible to examine each and every item in a population. Instead, auditors apply audit procedures to a sample of transactions or balances. While sampling can provide reasonable assurance, it introduces the risk that material misstatements or irregularities may exist in the items not included in the sample. The use of selective testing affects the level of assurance that can be provided.

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QUESTION 2(b)

Q The International Standard on Auditing (ISA) 220: Quality Control for an Audit of Financial Statements provides that audits should be conducted in a manner that ensures the correct opinion is arrived at with due regard to time and other resource constraints. The engagement partner should be satisfied that the engagement team has the appropriate competence and capabilities.

Required:

Evaluate the importance of each of the following qualities in selecting an effective engagement team:

(i) Independence.
(ii) Scope of the assignment.
(iii) Complexity of the assignment.
(v) Duration of the assignment.
(v) Client expectations and requests.
A

Solution


(i) Independence:

Independence is crucial in maintaining the integrity and objectivity of the audit process. An effective engagement team should possess independence both in appearance and in fact. This ensures that the team can exercise professional judgment and skepticism without any bias or undue influence. Independence helps build trust in the audit opinion and enhances the credibility of the financial statements.

(ii) Scope of the Assignment:

The scope of the assignment refers to the specific objectives, areas, or components of the audit that need to be covered. Selecting an engagement team with relevant expertise and experience in the areas covered by the scope is essential. Having a team with the appropriate knowledge and skills ensures that they can effectively address the audit risks, understand the industry-specific nuances, and perform the necessary procedures to achieve the audit objectives.

(iii) Complexity of the Assignment:

The complexity of an audit assignment can vary based on factors such as the nature of the client's business, the industry in which it operates, and the accounting and reporting requirements involved. Assigning an engagement team with the necessary technical expertise and experience in dealing with complex audit matters is crucial. Complex assignments require individuals who can navigate intricate financial transactions, accounting estimates, and specialized areas of reporting, ensuring the audit work is conducted effectively and accurately.

(iv) Duration of the Assignment:

The duration of an audit assignment refers to the time available to complete the audit procedures and issue the audit opinion. Timeliness is essential in meeting reporting deadlines and providing stakeholders with timely information. The engagement team should be capable of working within the time constraints without compromising the quality of their work. Adequate planning, coordination, and allocation of resources within the team are essential to ensure that the audit is completed efficiently and within the required timeframe.

(v) Client Expectations and Requests:

Client expectations and requests can influence the selection of an effective engagement team. Understanding the client's specific needs, industry dynamics, and organizational culture is important for establishing effective communication and collaboration. The engagement team should be capable of addressing client expectations, managing client relationships, and responding to specific requests while maintaining independence and adhering to professional standards.

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QUESTION 3(a)

Q You are the audit manager responsible for the audit of Kampuni Kubwa (KK) Ltd., a manufacturing company listed on the securities exchange. You are assigning staff to the final audit of KK Ltd. for the year ended 30 September 2017.
You are aware of the following matters:
Janice Tuli, the assistant manager assigned to the interim audit of KK Ltd. recently discovered that some senior managers in the company have been defrauding the organisation. She has since received some threatening e-mails and calls from the managers.
Alex Baricho, an audit senior has been auditing KK Ltd. for the last three years. He has confided in you that his father owns 2,000 shares in KK Ltd.

Required:

Analyse the ethical threats raised by the above matters.
A

Solution


Ethical Threats:

➧ Self-Interest Threat:

➢ Alex Baricho's familial shareholding in KK Ltd.
➢ Potential conflict of interest due to personal or family interest.
➢ Risk of bias or compromised objectivity in conducting the audit.

➧ Familiarity Threat:

➢ Alex Baricho's three-year tenure auditing KK Ltd.
➢ Long-standing relationship with the client.
➢ Risk of becoming too sympathetic or overly trusting of the client, potentially compromising professional skepticism and independence.

➧ Intimidation Threat:

➢ Janice Tuli's discovery of fraud committed by senior managers.
➢ Receipt of threatening emails and calls from the managers.
➢ Risk of intimidation impacting independence and objectivity.
➢ Potential reluctance to report the fraud or fully cooperate with audit procedures.

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QUESTION 3b

Q You are the audit manager of Tausi Ltd. You are conducting a review of the financial statements and notice some transactions with the pension fund of the employees. There is no disclosure in the accounts about any related party transactions.

Required:

With reference to the above statement, suggest six procedures that an auditor might carry out in order to establish if the pension fund is a related party.
A

Solution


➧ Review the Pension Plan Document: Obtain and review the pension plan document to understand its structure, participants, and any specific provisions related to related party transactions. This document may provide insights into whether the pension fund qualifies as a related party and any disclosure requirements.

➧ Examine Pension Contributions: Review the company's financial records and supporting documentation to identify the transactions related to pension contributions. Analyze the amounts, timing, and terms of the contributions made to the pension fund.

➧ Assess Board or Committee Membership: Identify the individuals who serve on the company's board of directors or any relevant committees responsible for overseeing the pension fund. Determine if any of these individuals have a significant influence or control over the pension fund, indicating a related party relationship.

➧ Evaluate Control or Influence Over Pension Fund: Assess whether the company or its management has the ability to exercise control or exert significant influence over the pension fund. This may include reviewing any contractual agreements, voting rights, or other mechanisms that enable the company to direct the activities or decisions of the pension fund.

➧ Analyze Financial Interests: Investigate whether the company or its management has any financial interests in the pension fund beyond the normal contributions. This can involve examining loans, guarantees, investments, or any other financial transactions between the company and the pension fund.

➧ Request Confirmations and Inquiries: Send confirmation requests directly to the pension fund administrators or trustees. Seek information about the relationship between the pension fund and the company, including any significant transactions or related party arrangements. Conduct inquiries with the management, pension fund administrators, or relevant personnel to gain additional insights into the nature of the relationship.

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QUESTION 3(c)

Q You are the audit manager assigned to the audit of Njema Ltd., the parent company of a group. As part of your work, in relation to the consolidated accounts, you are reviewing the work of the auditors who audit the accounts Of the subsidiaries

Required:

In the context of the above scenario, discuss five matters you should examine before relying on accounts not audited by you.
A

Solution


➧ Competence and Independence of Subsidiary Auditors: Assess the competence, qualifications, and independence of the auditors responsible for auditing the subsidiary accounts. Review their professional credentials, experience, and reputation in the auditing field. Ensure they possess the necessary expertise to conduct a thorough and reliable audit.

➧ Audit Firm's Reputation and Quality Control: Evaluate the reputation and quality control processes of the audit firm engaged to audit the subsidiary accounts. Consider their compliance with professional standards, adherence to ethical guidelines, and track record of providing reliable and accurate audit opinions. Review the firm's internal quality control procedures and any findings from external regulatory inspections or peer reviews.

➧ Materiality and Significance of Subsidiary Accounts: Assess the materiality and significance of the subsidiary accounts to the consolidated financial statements. Identify any subsidiaries that are deemed material based on their size, nature of operations, or potential impact on the consolidated financial statements. Consider allocating more scrutiny to those subsidiaries and their respective auditors.

➧ Audit Scope and Methodology: Understand the audit scope and methodology adopted by the subsidiary auditors. Evaluate whether their audit procedures are consistent with generally accepted auditing standards and whether they have appropriately assessed and addressed the relevant audit risks. Review the extent of their testing, including their sampling methods, substantive procedures, and internal control evaluations.

➧ Communication and Coordination: Establish effective communication channels with the auditors of the subsidiaries. Seek clarification on any significant findings, issues, or limitations encountered during their audits. Exchange information about key audit matters, significant estimates, and accounting policies. Discuss any identified intercompany transactions or related party relationships that may impact the consolidation process.

➧ Consistency of Accounting Policies: Assess the consistency of accounting policies applied by the subsidiary auditors in comparison to the parent company's policies. Review the significant accounting policies of each subsidiary and ensure they are aligned with the parent company's policies, or if there are material differences, evaluate the impact on the consolidated financial statements. Inconsistent accounting policies may require adjustments or disclosure in the consolidated accounts.

➧ Reliability of Financial Reporting: Evaluate the reliability of the financial reporting process and internal controls of the subsidiaries. Consider the effectiveness of their internal control systems in identifying and mitigating risks of material misstatement. Assess the existence and effectiveness of any internal audit function within the subsidiaries. This examination helps determine the extent to which reliance can be placed on the accounts audited by the subsidiary auditors.

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QUESTION 4(a)

Q You are the audit manager in charge of the audit of Vuka Mpaka Ltd., a limited liability company.

On I July 2000, Vuka Mpaka obtained the exclusive rights to operate car and passenger ferries across Ziwa Channel, for a period of twenty years. The company refurbished two ferries to service the route. The ferries do not meet the standards of the Environmental Regulation Authority. Each ferry makes an average of ten return crossings every day and has the capacity to carry 2,000 passengers and 400 vehicles per trip.

Vuka Mpaka Ltd. currently receives a subsidy from the local transport authority as an incentive to increase market awareness of the ferry service. The subsidy increases as the number of vehicles carried increases and is based on quarterly returns submitted to the authority.

The company employs fifty full-time crew members who are trained in daily operations, customer service as well as passenger safety in the event of personal accident or breakdown. The management of Vuka Mpaka Ltd. is planning to apply for a safety management certificate at the end of the year. This will require an audit of the ferries including a review of safëty documents and evidence that activities are performed in accordance with documented procedures. A safety management certificate, valid for five years, will be issued if no major non-conformities have been found.

Your firm has been asked to provide Vuka Mpaka Ltd. with a business risk assessment as a management assurance service.

Required:

Discuss business risks that Vuka Mpaka Ltd. might face.
A

Solution


➧ Regulatory and Compliance Risks: Vuka Mpaka Ltd. operates ferries that do not meet the standards of the Environmental Regulation Authority. This poses a risk of non-compliance with environmental regulations, which could result in fines, penalties, or even the suspension of operations. Additionally, the company's plan to apply for a safety management certificate presents a risk if they fail to meet the required safety standards or have major non-conformities identified during the audit.

➧ Operational Risks: As a ferry operator, Vuka Mpaka Ltd. faces various operational risks. These include breakdowns or accidents that could disrupt operations, affect passenger safety, and damage the company's reputation. The high frequency of ferry trips, carrying large numbers of passengers and vehicles, increases the potential for operational incidents and challenges in managing the safety and maintenance of the ferries.

➧ Financial Risks: Vuka Mpaka Ltd. relies on subsidies from the local transport authority, which are tied to the number of vehicles carried. A risk arises if the company fails to meet the required targets or faces a reduction in subsidy rates. Changes in fuel prices, maintenance costs, or unexpected repairs can also impact the company's financial performance and profitability.

➧ Competitive Risks: Operating in the transport industry, Vuka Mpaka Ltd. may face competition from other modes of transportation, such as road or air travel. Changes in customer preferences, the entry of new competitors, or the availability of alternative transportation options could pose risks to the company's market share and revenue.

➧ Safety and Reputation Risks: Ensuring passenger safety is crucial for Vuka Mpaka Ltd. Any accidents or safety incidents could lead to legal liabilities, damage the company's reputation, and result in a loss of customer trust. The company's plan to obtain a safety management certificate highlights the importance of maintaining a robust safety culture and complying with safety procedures.

➧ Market Risks: Vuka Mpaka Ltd. operates in a specific market - the Ziwa Channel ferry service. Changes in travel patterns, tourism trends, or shifts in the local economy could impact passenger demand and the company's revenue. Market fluctuations and external factors beyond the company's control could pose risks to its financial stability.

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QUESTION 4(b)

Q Describe the processes by which the risks identified in (a) above could be managed by Vuka Mpaka Ltd.
A

Solution


➧ Regulatory and Compliance Risks:

➢ Develop a comprehensive plan to bring the ferries up to the standards of the Environmental Regulation Authority. This may involve refurbishment, maintenance, or modifications to meet environmental requirements.
➢ Establish an environmental management system to ensure ongoing compliance with environmental regulations and standards.
➢ Assign a dedicated team or personnel responsible for monitoring and ensuring compliance with environmental requirements.

➧ Operational Risks:

➢ Implement a rigorous maintenance program for the ferries, including regular inspections, preventive maintenance, and repairs to minimize breakdowns and accidents.
➢ Conduct regular training and drills for the crew members to enhance their skills in daily operations, customer service, and passenger safety.
➢ Develop and implement robust safety protocols, emergency response plans, and contingency measures to address accidents, breakdowns, and other operational incidents.
➢ Establish a reporting system to capture and analyze operational incidents, allowing for continuous improvement in safety and operational processes.

➧ Financial Risks:

➢ Diversify revenue sources beyond subsidies by exploring opportunities for increased passenger and vehicle traffic, partnerships with other businesses, or additional services.
➢ Develop financial contingency plans to address fluctuations in fuel prices, maintenance costs, and unexpected repairs.
➢ Regularly review and adjust pricing strategies based on market conditions and cost considerations.
➢ Maintain accurate financial records, conduct regular financial monitoring, and engage in effective budgeting and forecasting processes.

➧ Competitive Risks:

➢ Conduct market research and analysis to understand customer needs, preferences, and emerging trends.
➢ Differentiate the ferry service by focusing on safety, reliability, customer service, and convenience.
➢ Continuously monitor and evaluate competitors to identify potential threats and adjust business strategies accordingly.
➢ Invest in marketing and promotional activities to increase market awareness and attract new customers.
➧ Safety and Reputation Risks:

➢ Establish a safety management system that aligns with industry best practices and complies with regulatory requirements.
➢ Conduct regular safety audits and inspections to identify and address any non-conformities or potential safety risks.
➢ Maintain open lines of communication with passengers, addressing their safety concerns and providing transparent information about safety measures in place.
➢ Continuously monitor and respond to feedback, addressing any safety or service issues promptly.

➧ Market Risks:

➢ Stay informed about market trends, economic conditions, and changes in customer preferences.
➢ Develop a flexible business model that allows for quick adjustments to meet changing market demands.
➢ Explore opportunities for diversification, such as offering specialized services, partnering with other transportation providers, or targeting niche markets.
➢ Foster strong relationships with tourism boards, travel agencies, and local communities to promote the ferry service and attract customers.

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QUESTION 5(a)

Q You are the engagement partner of Kitabu Ltd, The financial statements for Kitabu Ltd. for the year ended 30th September 2017, show total assets of Sh.749 million and profit before tax ofSh.57.4 million.

Required:

Discuss the potential implications of the following matters on the audit report:

(i) The basis of accounting note states that financial statements have been prepared in compliance with International Financial Reporting Standards (IFRSs). However, the accounting policy note for development costs states that all development costs are expensed as incurred. Results of audit tests showed that of the Sh.25.9 million development costs expensed during the year, Sh.9.8 million should have been recognised as an asset, in accordance with International Accounting Standard (IAS) 38 "Intangible Assets"

(ii) The management of Kitabu Ltd. has informed you that, for the first time, the company's annual report is to be published on the company's website.
A

Solution


(i) Material Non-Compliance with IAS 38:

➢ The total development costs expensed during the year represent a significant portion (45%) of the reported profit.
➢ This highlights a material non-compliance with IAS 38, which requires the recognition of development costs meeting specific criteria as an asset.
➢ The financial statements do not comply with IFRS due to this non-compliance.

Qualified Opinion:

➢ Considering the materiality of the non-compliance, the audit opinion should be qualified.
➢ The qualification would draw attention to the departure from IFRS in the recognition of development costs as an expense rather than as an asset.
➢ The nature and impact of the non-compliance would be specified in the qualification.

Assertion of Compliance with IFRS:

➢ The management's assertion of compliance with IFRS in the financial statements should be either deleted or amended to reflect the actual non-compliance with IAS 38.
➢ This ensures accuracy and transparency in the presentation of the financial statements.

(ii) The management of Kitabu Ltd. has informed you that, for the first time, the company's annual report is to be published on the company's website.

Distinction of Audited and Unaudited Information on the Website:

➢ To provide clarity to users of financial information, it should be made clear on the company's website which sections or information have been audited and which have not.
➢ This differentiation helps users identify the reliable and verified information.

Amendments for Synchronization:

➢ If the auditors' report in the hard copy financial statement refers to page numbers or sections that are not supported or present in the web-based version, appropriate amendments should be made.
➢ This ensures consistency and accuracy in cross-referencing between the different versions of the financial statements.

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QUESTION 5(b)

Q You are auditing the financial statements of Zebra Engineering Ltd. for the year ended 30th June 2017. The partner in charge of the audit instructs you to carry out a review of the company's activities since the financial year end.

Required:

Analyse audit procedures which you might carry out in order to identify any material post balance sheet events.
A

Solution


Inquiry and Discussion:

➢ Hold discussions with management and key personnel regarding any significant events, transactions, or developments that have occurred since the financial year end.
➢ Inquire about any material contracts, sales, purchases, or other business activities that have taken place after the balance sheet date.
➢ Obtain information on any subsequent events or changes in circumstances that may impact the financial statements.

Examination of Subsequent Transactions and Agreements:

➢ Review bank statements, invoices, contracts, and other relevant documents to identify any material transactions or agreements entered into after the balance sheet date.
➢ Verify the existence and nature of these transactions by communicating with third parties, such as suppliers, customers, or legal advisors, if necessary.
➢ Assess the financial impact of these transactions on the company's financial position, results of operations, and cash flows.

Review of Minutes and Board Resolutions:

➢ Examine minutes of board meetings, shareholder meetings, and other relevant meetings held after the balance sheet date to identify any significant decisions or resolutions that may have financial implications.
➢ Identify any subsequent events disclosed or discussed in these minutes that may require adjustment or disclosure in the financial statements.

Communication with Legal Counsel:

➢ Consult with the company's legal counsel to obtain information on any pending litigation, claims, or contingencies that have arisen or have been resolved since the financial year end.
➢ Evaluate the potential financial impact of these legal matters on the company's financial statements and consider the adequacy of any related disclosures.

Review of Subsequent Financial Information:

➢ Analyze subsequent financial information, such as interim financial statements, management accounts, or budgets, to assess any significant changes in the company's financial performance or financial position.
➢ Compare the actual results with the budgeted or forecasted figures to identify any material deviations that may require adjustment or disclosure.

Review of Subsequent Financing Activities:

➢ Examine loan agreements, bond issuances, or other financing arrangements entered into after the balance sheet date to identify any significant changes in the company's capital structure or debt obligations.
➢ Assess the terms, conditions, and covenants associated with these financing activities and consider their impact on the company's financial position and liquidity.

Examination of Inventory and Receivables:

➢ Evaluate the status of inventory and accounts receivable as of the balance sheet date to determine if any subsequent events have affected their valuation or collectability.
➢ Analyze sales or purchase orders, delivery confirmations, and customer or supplier correspondence to identify any significant changes or disputes that may impact the recorded balances.

Review of Market and Economic Conditions:

➢ Monitor market and economic conditions that may affect the company's operations, financial position, or cash flows after the balance sheet date.
➢ Consider factors such as changes in exchange rates, interest rates, commodity prices, or economic indicators that could impact the company's assets, liabilities, revenues, or expenses.

Communication with Industry Experts or Specialists:

➢ Consult with industry experts or specialists to obtain insights on any significant developments, trends, or events that may impact the company's financial statements after the balance sheet date.
➢ Seek their expertise to evaluate the potential financial impact of such events on the company's operations and financial position.

Review of External Information Sources:

➢ Monitor relevant external sources of information, such as regulatory filings, news articles, or industry reports, for any material events or disclosures related to the company that occurred subsequent to the balance sheet date.
➢ Assess the reliability and relevance of this information and determine its impact on the financial statements.

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CPA past papers with answers