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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 Discuss the above scenario from an audit perspective and indicate the action (s) you would take.
A

Solution


On the shifting of production from town x to town y, where the financial statements of the town x included unamortised cost of plant and the factory in town x was on leasehold.
Audit procedures on the unamortized cost and on the lease contract should be performed.

The procedures to be performed on unamortised cost;
➫ Examine each contract for a financial instrument and specify the costs involved.
➫ Examine the company's computation of amortized costs.
➫ Verify the accurate accounting and classification in the financial statement by doing an independent amortized cost calculation.

The procedure to be performed on leasehold property include;
➫ A copy of the leasing agreement should be obtained by the auditor.
➫ The lease property should be examined by the auditor.
➫ Verify the classification of the lease to ensure accuracy.
➫ Obtain a copy of the client's work, then verify the accuracy of the calculations.

The procedure to be performed On the dividend per share;
➫ To establish the amount to be paid as dividends, the auditor should examine the financial statements and review the board minutes.

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QUESTION 1(b)

Q Draft the sections of the auditor's report that would be modified with respect to these items assuming that there were no other challenges
A

Solution


(i). The directors' report is an illustration of additional information seen in documents with audited financial statements.

(ii). The auditor should read the other information to be able to identify any material inconsistencies with the audited financial statement.

(iii). When the information in external sources conflicts with the information in the financial statements that have been audited, there is a material contradiction.

(iv). If the auditor finds a significant discrepancy in the directors report, he or she should decide whether the audited financial statements or the directors report needs to be changed.

(v). If an amendment is necessary on the financial statements and the management refuses to make the amendment ,the auditor shall express a qualified or adverse opinion on the financial statements.

(vi). If the management refuses to make the necessary changes to the information;

➫ Communicate it to those charged with governance
➫ keep the auditor's report confidential
➫ Include other matters paragraph in the auditor's report describing the material inconsistency.
➫ Consider withdrawing from the engagement.

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QUESTION 2(a)

Q Discuss six ethical and other professional issues raised in the above scenario and recommend any actions that should be taken.
A

Solution


1. It will be necessary to conduct background checks in order to understand the management, the nature of the business, and the revenue stream.

2. Given that the audit of a financial services firm is a relatively specialized area, the competence of the audit firm should be assessed. The IESBA code of ethics for professional accountants states that self-interest poses a threat to professional competence and due care if the engagement team cannot develop the abilities required to successfully carry out the engagement; hence, this becomes an ethical issue.

3. From an ethical standpoint, Tripple P associate should think about whether it is suitable to be designated as Buru Ltd's auditors.According to the IASB rules, a professional accountant in public practice must consider any potential threat to conformity with fundamental principles before initiating a new client relationship.

4. To make sure that anti - money laundering regulations are followed, Tripple p Associates must carry out client due diligence activities. Given the heavily regulated nature of Buru Ltd's industry, this is extremely crucial.

5. To learn more about the reasons for the resignation and to find out if there are any other factors that should be taken into account when considering whether to accept the audit appointment, Triple P Associates should get permission to contact the prior audit firm. If the position is taken without having full awareness of all pertinent information, a threat to professional competence and due care arises .

6. It looks that Buru Ltd may lack integrity as a result of its prior inquiry by the financial services regulator. Integrity threats may also result from improper financial reporting or dubious actions by the company's management. The triple P Associates ought to learn more about this subject, for instance by reading news articles or getting in touch with the financial services authority. Additionally, the resignation of the previous auditors following a dispute raises concerns about management integrity.Additionally, there might be moral problems. For instance, the previous auditors' resignation may have been caused by management intimidating them about a problem with their financial reporting.

7. Before accepting the client, the audit firm could implement a protection such obtaining a pledge to strengthen the company's control environment.

8. Concern is also raised by the managing director's remarks on insufficient controls, which suggest that the audit would involve a high degree of risk. Although this alone does not indicate that the audit should not be undertaken, Triple P Associates should take this into account when deciding whether to accept a client. The audit fee and associated risk should be weighed carefully by Tripple P Associates.

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QUESTION 2(b)

Q Analyse the above scenario and prepare detailed notes to guide you in your discussions with the finance director.
A

Solution


Teaming and lading fraud

➫ It is a technique for hiding information by postponing the recording of cash received. This is a technique used to steal money that starts by creating a false entry for a transaction that is then cancelled by another entry, and so on until the fraud is found.

Detection of teaming a lading

➫ The auditor needs to carefully review all transactions made at the specified branch, especially the pay in slips for deposited funds. Where the actual banked checks are listed with the debtors' names next to the amounts, the bank will typically supply the originals.
➫ In order to remove any doubt, the author will confirm all cash, examine investments and securities, and carry out the audit checks required. Debtors circularization in order to confirm the amount of their current debts.
➫ Any flaws found during the review examination of the internal check system will be noted in particular by the auditor, who will then notify the client. Additionally, the auditor must emphasize the significance of constantly maintaining and reviewing the internal control system.

Detailed notes to guide in discussion with the finance director
➫ At the impacted branch, fraud has been occurring. It could have been ongoing for a very long time.
The fraud was not discovered by the auditor despite their tests. The following serve as the foundation for the auditors view as the finance director intends to discuss the situation.

1. Responsibility for the prevention and detection of frauds
Due to their contractual obligations to the company, management is responsible for the financial statement.If they create and keep an effective internal control system, they are typically considered to have fulfilled their obligations. Despite the fact that it occasionally reveals frauds, an audit should not be relied upon to do so. The company's assets must be protected by the management.

2. Why the auditor are interested in the prevention and detection of frauds
Fraud usually indicates that.
➫ The system of internal controls is not working as planned, therefore less reliance should be placed on the controls.
➫ No proper accounting records are kept.
➫ A true and fair picture is not presented by the financial statements. The auditor will prudently design and carry out his audit with the expectation of detecting major misstatements.

3. The auditor has to prove that:
➫ He did not miss any significant misstatements that a reasonably qualified auditor should have been able to spot. Although the materiality of the fraud must be determined, it appears for all intents and purposes that this fraud is material, and the auditor is therefore required to demonstrate that it was such a clever fraud scheme that the audit procedure used could not have detected it.
4. The audit approach:
➫ The auditor is not expected to carry out the specialized processes intended to detect fraud until his concerns are raised. Only routine audit procedures with appropriate professional skepticism are expected of him. Having failed to detect material but not pervasive fraud, the auditors unqualified report may now appear in appropriate. Therefore, the auditor must decide if it is necessary to issue a new report or withdraw the initial one.

5. Future relationship with the client
➫ The auditors are unlikely to be found guilty of carelessness if a lawsuit is filed against them. However, if the fraud has been ongoing for a significant amount of time, the auditor's competence is seriously questioned. The auditors' likelihood of leaving this customer is high.

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QUESTION 3(a)

Q With reference to the above scenario and introducing other relevant information as may be applicable, discuss four issues that an audit firm should consider before accepting to audit DD Electronics.
A

Solution


1. current laws and regulations that apply to the client.

2. Current business trends, such as social, technological, and economic variables, that are relevant and affecting the client.

3. Changes to the client's management, organizational structure, and operations.

4. Related parties complications.

5. Developing changes in technology, service kinds, production processes, or distribution channels.

6. Financial difficulties or accounting issues that are facing the firm currently or in the future

7. vulnerability of the entity's financial statements to a major fraud or error-related misrepresentation.

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QUESTION 3b(i)

Q Describe four broad objectives of analytical procedures.
A

Solution


(i) To plan the timing of the audit test

(ii) To develope audit expectations

(iii). To ascertain the type of audit test and procedures that will be performed

(iv) To establish the scope of the audit tests

(v). To assess the credibility of financial statements

(vi) To identify areas that need additional audit testing

(vii). To determine whether assumptions and projections are reasonable.

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QUESTION 3b(ii)

Q Describe two factors that influence the extent to which an auditor will use the results of analytical procedures to reduce detailed tests in meeting audit objectives
A

Solution


(i). Internal Control Systems Strength

(ii). Accuracy of the results that can be predicted by ARP

(iii). The involved item's materiality.

(v) The inherent risk assessment .

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QUESTION 4(a)

Q Summarise two control measures that might be put in place to deal with each of the issues noted above.
A

Solution


1. Illegal sale of fuel by drivers.
Fuel is purchased in bulk and distributed to drivers at the beginning of each voyage from the company's own fuel station located in its yard. Fuel purchases from drivers are not necessary.

Controls
➫ Fuel locking System: Only authorized employees are allowed to fuel
➫ Fuel to be allocated according to distance covered and monitored through recording biginning and end milage
➫ Alarm systems that keep track of fuel tank drops.

2. Sale of clients goods by unscrupulous drivers and conductors.

Controls
➫ System for tracking stock movement - records opening, issue, sales, and closing balance.
➫ Educating staff on integrity, the consequences of theft, and building an integrity culture.
➫ Punishing those found culpable, i.e., salary slush, to serve as an example

3. Carriage of unauthorised cargo by drivers and conductors.

Controls
➫ Writting on the doors or body Carriage of unauthorized cargo or persons is not allowed.
➫ Mounting cctv cameras at the back of the track.

4. Claims by crew for amounts apparently spent to repair vehicles for breakdowns on the road.

Controls
➫ vehicles to be inspected regularly to minimise breakdowns.
➫ limiting the amount that drivers can claim for expenses incurred for mechanical repairs.

5. Escalating labour costs relating to cargo loading and offloading especially for loose cargo.

Controls
➫ Invest in loading and unloading equipments.
➫ Find cheap local labor alternatives.

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QUESTION 4(b)

Q Discuss the objective of a review engagement contrasting the level of assurance provided with that of an audit of financial statements.
A

Solution


Objective of a review engagement

The objective of a review of financial statements is to enable an auditor to state whether, on the basis of procedures which do not provide all the evidence that would be required in an audit, anything has come to the auditor’s attention that causes the auditor to believe that the financial statements are not prepared, in all material respects, in accordance with an identified financial reporting framework (negative assurance).

Review engagement Statutory Audit
1. The practitioners opinion is expressed in a negative form The auditor opinion is expressed in positive form
2. Limited assurance Reasonable assurance
3. It is voluntary it is a legal requirement
4. The level of engagement risk is higher The level of engagement risk is lower

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QUESTION 4(c)

Q Discuss three reasons why the identification of related parties and material related party transactions could be difficult for auditors.
A

Solution


Reasons why the identification of related parties and material related party transactions could be difficult for auditors.

(i). Transactions with related parties may not be conducted on standard commercial terms.even though, prima facie, the price stated may be in line with that of similar arm’s length transactions making it difficult to be detected.

(ii). Related party transactions may be challenging to detect because the entity's related parties may interact through a wide-ranging and intricate web of connections that is occasionally set up to obscure control over the entity.

(iii). The directors Maybe be relactant to disclose to the auditors the existence of related parties or transactions.

(iv). No Accouting system is capable of Separatly identifying related party transactions from ordinary transaction

(v). The related party fransactions May be Concealed in whole, or in part from auditors on fraudulent purposes.

(vi). The ability of the entity's information systems to recognize and document related party relationships and transactions may be limited.

(vii). Finding out exactly Who or what is related to an entity can be challenging.

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QUESTION 5(a)

Q As the internal auditor for Mwanza Hotels Ltd., recommend seven key performance indicators (KPls) which could be used to monitor the hotel's social and environmental performance and for each KPI, outline the nature of evidence that should be available to provide assurance on its accuracy.
A

Solution


1. Revenue per available room (RevPAR)
Based on your income from all reservations, this measurement is used to examine the average revenue for a specific time period (often presented as a daily average). You multiply the average daily rate by the occupancy rate in order to calculate this KPI or divide the total revenue per night by the number of available rooms.
RevPAR establishes a pricing metric for the amount of revenue being produced per room. A solid occupancy rate and a high ADR are often indicators of a high RevPAR.

Evidence:
RevPAR = average daily rate x occupancy rate or total revenue from night / total number of rooms available

2. Average daily rate (ADR)
This is one of the most important metrics for determining the average rate per occupied room . It allows you to look at the daily revenue average for each of your occupied rooms. Unoccupied rooms are always excluded from the ADR to avoid inaccurate statistics.
You will be able to gauge a significant aspect of your hotel's financial success with this KPI. Forecasting, pricing and promotion is another area where ADR is very important. This enables management to set flexible rates and arrange operations based on the seasons.

Evidence:
ADR = room revenue / number of rooms sold (occupied)

3. Occupancy rate
You can monitor the results daily, weekly, monthly, or yearly for occupancy rate. This statistic entails counting the overall number of rooms as well as the occupied and unoccupied ones.
To calculate the occupancy rate, divide the number of occupied rooms by the total number of available rooms and multiply the result by 100. This KPI is crucial for monitoring the daily performance of your hotel and provides you with a steady stream of data. If you see a pattern of low occupancy on particular days of the week, you can run specials to entice more reservations on these days, or you can streamline your staff if not all of them are required.

Evidence:
Occupancy rate = total number of occupied rooms / total number of available rooms x 100

4. Average length of stay (ALOS)
This is a measure used to determine the occupant’s length of stay by dividing the total number of occupied rooms by the number of bookings. It’s important to note that the occupied spaces are counted in terms of the number of nights the guests stay at the hotel.
The final score reflects the typical length of stay that guests have while visiting your hotel. A higher score often represents a better indicator than a lower score because it represents a higher overall expenditure.
The ability to use the data to determine pricing is a benefit of ALOS. If your ALOS is low, for instance, you can decide to raise your hotel charge for brief stays or provide greater bargains for longer stays. The length of stay has a significant impact on the hotel's revenue.

Evidence:
ALOS = total occupied room nights / number of bookings

5. Online reviews
It is imperative to read the evaluations online where Customers share their experiences with a hotel. Customers' star ratings can help hotels better understand how well they are doing and where they need to improve.
Hotels may improve customer satisfaction and thereby draw in more customers by paying attention to ratings and reviews.

Evidence:
Confirm strength of ratings.

6. Market penetration index (MPI)
MPI is a crucial statistic for evaluating KPIs. This compares the performance of your hotel to that of its industry rivals. A score of less than 100 indicates that you are performing poorly and below the industry standard. On the other hand, a score greater than 100 indicates that you are outperforming most of your rivals.

Evidence:
MPI = hotel occupancy % / market occupancy % x 100

7. RevPAR Room Type Index (ReRTI)
Due to the recent changes in the hospitality industry, a new metric has evolved to assist revenue managers in determining whether the sale of higher value rooms contributes proportionately to the inventory of each room type to the RevPAR.
ReRTI's primary goal is to identify the most lucrative room categories and determine whether or not promotions like free room upgrades might benefit or thwart a hotel. A room type contributes proportionally more than it should given the number of rooms you have of that type if it has a score higher than 1. If the score is less than 1, that room type is contributing proportionally less than anticipated.

Evidence:
RevPar Room Type Index = % total RevPAR x number of specific room type / % inventory x number of specific room type

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QUESTION 5(b)

Q Describe three objectives of a forensic investigation.
A

Solution


Objectives of a forensic investigation.

1. To aid in legal proceedings by expert witness testimony

2. It can also be used to estimate the financial or economic loss a company has sustained.

3. Forensic investigation can be used to assess financial information with the intention of identifying fraud.

4. Companies can be educated about fraud prevention strategies using forensic auditing as a foundation.

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