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

QUESTION 1a(i)

Q Explain the matters that you would consider and the evidence you would expect to find in respect of the carrying value of the cost of investment of D Ltd. in the financial statements of Bingo Ltd.

A

Solution

(i). Attend a closing meeting with the auditors and management of the company

(ii). Risk assessment of the company's Performance level

(iii).Review of the components auditors overall audit strategy

(iv). Reviewing the figures taken into consolidation and ensuring they have been accurately extracted from the financial statements.

(v). Provision for unrealized profits as a result of intercompany transactions

(vi). Investigating the treatment of any component which have different financial year from the rest of the activities.

(vii). Fair value adjustments required for assets and liabilities held by components

(viii). Write-off of intercompany balances and transactions

(ix). Evaluating the classification of the components of the group to identify if correctly classified and treated correctly

(x). Goodwill calculations and its impairment review

More info

QUESTION 1a(ii)

Q Outline the principal audit procedures to be performed on the consolidation schedule of the Bingo Group.

A

Solution

(i). Recalculation of all consolidation adjustments, including goodwill, elimination of pre-acquisition profits, elimination of intergroup balances, fair value adjustments and accounting policy adjustments.

(ii). Cross check costs on all consolidation schedules.

(iii). Reference whether the accounting policies are adopted consistently with the audited consolidated accounts of previous years.

(iv). Agree on the correct extraction of individual company figures by reference to the company's individual audited financial statements.

(v). Review information required by the group financial statements, such as related party transactions and minority interests.

(vi). Check that the figures included in the consolidation have been correctly extracted from the financial statements

(vii). Verify the opening and closing of group reserves and agree to reconcile items with the group financial statements.

(viii). Gather evidence of specific consolidation adjustments applicable to IFRS requirements

(ix). Assess the classification of the group components, for example whether the group components have been correctly identified and treated as associates, subsidiaries or joint ventures

More info

QUESTION 1b

Q Discuss two advantages and two disadvantages of conducting a joint audit of Shanzu Ltd.

A

Solution

Advantages of conducting Joint Audit of Shanzu Ltd
1.This will allow the company to benefit from the technical expertise of more than one company

2. Retains knowledge and understanding of group operations, minimizing disruption when an audit firm changes

Disadvantages of conducting Joint Audit of Shanzu Ltd
1. Each joint auditor will be responsible for the other's shortcoming. This is because the joint auditors both share liabilities.
2. The two firms may have different auditing methods and not be easily compatible. Issues can also arise when deciding which firms method to use, such as calculating significance, sample size, etc.

More info

QUESTION 2a

Q Discuss three reasons why it might not be possible to provide a high level of assurance over the stated key performance indicators

A

Solution

(i). When the value of donated drugs is compared to income, a percentage results is obtained. But getting an accurate assessment of donated products can be challenging.

(ii). Donated goods may not be separately recorded in inventory movement records

(iii). The number of serious accidents is also difficult to quantify because what constitutes a serious accident is subjective.

(iv). The value of the involvement in local charities is also not defined. If the donation is pure cash, it should be easy to verify using normal auditing procedures for verification of cash payments.

More info

QUESTION 2b

Q Describe three procedures you would use to verify the number of serious accidents in the year ending 31 December 2019.

A

Solution

(i). Review the accident log book and identify the total number of accidents that occured during the year.

(ii). Review the board minutes of the meeting dealing with the increase in serious accidents.

(iii).Review HR records to determine time off for identified serious incidents.

(iv). Review communications with employees regarding accidents

(v). Identify from the manager the definition of a serious incident and explain exactly what criteria must be met to meet this definition.

More info

QUESTION 2c

Q Explain the matters you would consider to determine whether capitalised development costs are appropriately recognised.

A

Solution

1. The expenditure should be separately identifiable with all development projects.

2. Availability of clearly defined project that indicate expenditure on development cost is incurred.

3. It is anticipated that project revenues will exceed costs.

4. The project's anticipated benefits will outweigh its development cost

5. Because capitalized development accounts for 7% of total assets, it is material.

6. The project is technically feasible.

More info

QUESTION 2d

Q Describe the evidence you would seek to support the assertion that development costs are technically feasible.

A

Solution

(i). Examine the findings of the products' scientific testing.

(ii). Find out if the relevant regulatory agency has issued any licenses required for ongoing development and commercial production.

(iii). Discuss any negative test findings to decide what remedial action needs to be performed.

(iv). Comparing anticipated and actual development expenses for each product being created

(v). Examine the board's minutes for any discussions of the year's product development that are pertinent.

More info

QUESTION 3a(i)

Q Describe how you would analyse inherent risks in planning for the audit of Dania Ltd.

A

Solution

(i). Take into consideration complex account such as those that require estimation

(ii). Consideration of the related party transactions and balances.

(iii). The unusual pressure on the management

(iv). To determine the reasons for huge turn over of staff

(iv). The management integrity on understanding the reasons why the production manager is receiving a substantial profit related bonus

More info

QUESTION 3a(ii)

Q On analysing draft accounts, you discover that profits have improved significantly due to a decline in provisions for doubtful debtors.
Discuss how this finding would affect your audit programme

A

Solution

(i). The auditor must be certain that all debts have received an adequate provision for doubtful debts.
(ii). Debit balance of profit and loss would increase as allowance for doubtful debts declined.
(iv). Auditors will perform audit procedures to obtain a detailed aged analysis of year-end accounts receivable and test analysis of certain balances
(v). The auditor to obtain an analysis of the provision for doubtful debts
(vi) This will affect the audit plan as auditors need to perform the above procedures

More info

QUESTION 3a(iii)

Q You also discover that non-current assets have been valued at prices that cannot be supported. In spite of this, the managing director is unwilling to engage an independent valuer.
Demonstrate, through a draft audit opinion, how you would reflect the above finding.

A

Solution

(i). Explain to the management the significance of routinely updating the valuations of revalued assets.

(ii). Check previous financial statements to ensure that the valuation of revalued assets is regularly updated.

(iii). Consider prices of the similar assets.

(iv). Circularize to the relevant parties to confirm the prices

(v). Take into consideration the impact of the revaluation on the non-current assets and if its extremely affecting the financial statements consider qualifying the audit report.

(vi). Review the minutes of the board to confirm discussion

More info

QUESTION 3b

Q Describe four audit procedures required in respect of accounting estimates.

A

Solution

(i). Evaluate the reasonableness and accuracy of management's assumptions and test whether the underlying data is complete, accurate and relevant.

(ii). By using management's assumptions, the auditors arrive at an estimate for comparison with what is reported in the financial statements.

(iii). Review subsequent events and transactions that occurred after the balance sheet date and before the date of the audit report.

(iV). Get documented management representation of the accounting projections, and then assess the suitability of the assumption's foundation,whether they are reasonable.

More info

QUESTION 4a

Q Describe three measures that an entity might put in place to prevent incidences of hacking of financial data in its computerised systems.

A

Solution

(i). Data encription and backup data - This will prevent physical access to sensitive data and renders that data obsolete incase it falls into the wrong hands.

(ii). Invest in cybersecurity insurance – As cybercriminals relentlessly continue to find more advanced ways to breach security defenses, even the most security-conscious companies are at risk of attack.

(iii). Create a work culture focused on safety. Employees can be the source of data breaches because they understand the everyday behaviors that can make the business vulnerable to cyberattacks.

More info

QUESTION 4b

Q Explain how a firm would address each of the five matters required to meet ISA 220 and ISQC I requirements.

A

Solution

1. Leadership responsibilities for qualities within the firm - The audit firm should set up policies and processes that will encourage an organizational culture that values excellence in engagement performance.

2. Relevant ethical standards In order to reasonably ensure that the audit firm and its personnel abide by the pertinent ethical requirements, including confidentiality, objectivity, integrity, and independence, policies and procedures should be established.

3. Acceptance and continuation of client relationships and particular engagements - The audit firm should establish policies and procedures for accepting client relationships and particular engagements that give it a reasonable level of assurance that it will only start or maintain those relationships and engagements.

4. Human resources - The audit firm should have rules and procedures in place to guarantee that it has an adequate number of employees who are qualified, capable, and committed to upholding ethical principles.

5. Engagement performance - To guarantee that engagement standards and applicable legal and regulatory requirements are met, the audit firm should establish rules and procedures. It should also ensure that the firm delivers reports that are appropriate given the circumstances. .

More info

QUESTION 4c

Q Summarise how each of the above factors may impact your opinion on the truth and fairness of financial statements and the reliability of the internal control system.

A

Solution

1. The purpose of controls over fixed assets is to ensure that they are properly maintained, adequately protected and properly recorded, depreciated where necessary. The absence of a fixed asset register means that the internal control system is weak and therefore unreliable, and auditors should discuss this issue with management through management letters and suggest ways to improve it.

2. Organizations have an obligation to ensure that employees are qualified and able to do their job. Therefore, the auditor should not rely on their work because it implies a weak internal control system.

3. Organizations should present budgets against actual performance. This means internal controls are weak and unreliable

4. Accounting software has been in use for a decade, raising suspicions that sales and profits may have been misrepresented and the information could mislead users of financial statements.

5. An organization should have a clearly defined organizational structure that outlines the duties of each team member and the delegation of authority. Internal controls are therefore ineffective.

6. Due to the company's failure to produce monthly management accounts, the work for the audit was submitted late. The auditor won't be able to review every area due to time restrictions.

7.There is no physical inventory taken in which there is a high risk of the stock being out of date and the valuation of the stock being highly arbitrary.

Conclusion

A qualified opinion should be given because the internal control systems are ineffective and the auditor can't rely on them.

More info

QUESTION 5a

Q Explain why it is important for the auditors to discuss the contents of the letter of representation at an early stage of the audit.

A

Solution

(i). It gives directors time to think through the representations that will be expected of them, allowing them to ask questions about those areas in good time.

(ii). It will assist the auditor in planning & Control of the audit

(iii). It is good practice to keep the directors aware of the auditor's activities, which will improve the relationship between the two parties.

(iv). The directors may choose to give the auditor with additional audit evidence in lieu of the representation letter in certain cases after they are aware of the representations that must be made by them.

(v). It facilitates ending of the audit.

More info

QUESTION 5b

Q Discuss four challenges associated with value-for-money audits in the public sector.

A

Solution

i.They will cause the audit to become mechanical and less interesting if they are followed mechanically.

ii. The standard letter of representation may become too familiar to the client staff.

iii. Ineffective audit personnel may exploit this and conceal their shortcomings in the standard letter of representation.

More info

QUESTION 5c

Q Describe four audit matters of governance interest that the auditor should consider.

A

Solution

(i). The auditor's obligations with regard to the financial statement audit:- Organizations should be made aware by the auditor that the audit does not release management or those charged with governance of their obligations and that the auditor is only required to make and express an opinion on the financial statements provided by the management.

(ii). Organizing the audit's timing and scope which also includes disclosing the significant risks that the auditor discovered.

(iii). Situations that have an impact on the form and substance of the auditor's report may include important uncertainties and the requirement to emphasize on the matter in the audit report.

(iv). Other significant matters arising during the audit

More info

QUESTION 5d

Q Discuss two matters that influence the auditor's decision to communicate orally or in writing.

A

Solution

i. The size, operating structure, legal structure and communication process of the entity being audited

ii. The arrangement made with respect to periodic meetings or reporting of audit matters of governance interest

iii. The nature, sensitivity and significance of the audit matters of governance interest to be communicated

More info

CPA
Advanced Leval
Advanvced Auditing and Assurance November 2019
Suggested solutions

Solution

Solution

Solution

Solution

Solution

Solution

Solution

Solution

Solution

Solution

Solution

Solution

Solution

Solution

Solution

Solution

Solution

Solution

Comments on CPA past papers with answers:

Advanced Taxation

Advanced Financial reporting & analysis

Advanced Financial Managemen

Advanced Management Accounting

Advanced Public finance

Comments on:

CPA Advanced Leval Advanvced Auditing and Assurance November 2019 Suggested solutions

Solution

Revision Made Easy. 🚀

Solution

Revision Made Easy. 🚀

Solution

Revision Made Easy. 🚀

Solution

Revision Made Easy. 🚀

Solution

Revision Made Easy. 🚀

Solution

Revision Made Easy. 🚀

Solution

Revision Made Easy. 🚀

Solution

Revision Made Easy. 🚀

Solution

Revision Made Easy. 🚀

Solution

Revision Made Easy. 🚀

Solution

Revision Made Easy. 🚀

Solution

Revision Made Easy. 🚀

Solution

Revision Made Easy. 🚀

Solution

Revision Made Easy. 🚀

Solution

Revision Made Easy. 🚀

Solution

Revision Made Easy. 🚀

Solution

Revision Made Easy. 🚀

Solution

Revision Made Easy. 🚀

Comments on CPA past papers with answers:

Advanced Taxation

Advanced Financial reporting & analysis

Advanced Financial Managemen

Advanced Management Accounting

Advanced Public finance

Comments on:

CPA
Advanced Leval
Advanvced Auditing and Assurance November 2019
Suggested solutions