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CPA
Intermediate Leval
Auditing and Assurance April 2023
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Audit and assurance
Revision Kit

QUESTION 1(a)

Q Your firm has been engaged in auditing small entities for the last five years. In a recent development, your firm has been appointed to conduct an audit on a large entity, which is the first assignment of such magnitude. You are required to undertake an interim audit and a final audit of the large entity.

Required:
(i) Explain the objective of an external audit.

(ii) Highlight five audit procedures you could undertake during the interim audit of the large entity.

(iii) Describe five audit procedures you would undertake during the final audit of the large entity.

(iv) Present two drawbacks of conducting an interim audit
A

Solution


(i) Objective of External Audit


An external audit, also known as an independent audit, is a systematic examination of an entity's financial statements, records, and operations by an external auditor. The primary objective of an external audit is to express an opinion on the fairness and reliability of the financial statements prepared by the management of the entity. The external audit serves various stakeholders, including shareholders, creditors, regulators, and the general public, by providing an independent and objective assessment of the financial information presented by the entity.

Key Objectives:


  1. Expressing an Opinion on Financial Statements: The external auditor aims to provide assurance regarding the accuracy and completeness of the financial statements. This opinion is crucial for stakeholders who rely on the financial information to make informed decisions about the entity.
  2. Compliance with Accounting Standards and Regulations: The auditor assesses whether the financial statements comply with relevant accounting standards, legal requirements, and regulatory frameworks. This helps ensure that the financial information is presented in accordance with established guidelines.

(ii) Interim Audit Procedures for a Large Entity


During the interim audit of a large entity, auditors perform various procedures to obtain sufficient and appropriate audit evidence. The interim audit is conducted before the end of the financial reporting period, allowing auditors to address significant risk areas and potentially identify issues early on.


Key Audit Procedures:


  1. Risk Assessment:
    • Conduct a thorough risk assessment to identify and understand major business risks and internal control systems.
    • Review the entity's strategic plans, management's risk assessments, and industry benchmarks.
  2. Materiality Determination:
    • Determine materiality levels for financial statement components to guide the audit scope and procedures.
  3. Analytical Procedures:
    • Perform analytical procedures to identify unusual trends, fluctuations, or relationships in financial data.
    • Compare current financial data with prior periods and industry benchmarks.
  4. Testing of Controls:
    • Evaluate the effectiveness of internal controls in place for key financial processes.
  5. Substantive Testing:
    • Perform substantive procedures on account balances and transactions to detect material misstatements.
  6. Review of Significant Contracts:
    • Examine significant contracts and agreements for any unusual terms or risks.
  7. Communication with Management:
    • Engage in discussions with management to gain insights into significant changes and developments.
  8. Update of Audit Documentation:
    • Ensure that audit documentation is comprehensive and up-to-date with the latest information.
  9. Review of Events After the Interim Period:
    • Assess events occurring after the interim period that may have an impact on the financial statements.
  10. Review of Accounting Estimates:
    • Evaluate the reasonableness of significant accounting estimates made by management.

(iii) Final Audit Procedures for a Large Entity


During the final audit of a large entity, auditors perform detailed procedures to conclude on the fairness and reliability of the financial statements.


Key Audit Procedures:


  1. Substantive Testing:

    Conduct detailed substantive testing on account balances, transactions, and disclosures to detect any material misstatements. This may include substantive analytical procedures and substantive tests of details.

  2. Confirmation of Account Balances:

    Obtain external confirmations for significant account balances, especially those related to loans, receivables, and payables, to verify their existence and accuracy.

  3. Audit of Contingencies:

    Evaluate the adequacy of disclosure and accounting for contingencies, such as legal disputes or warranty obligations.

  4. Review of Related Party Transactions:

    Examine transactions with related parties to ensure they are appropriately disclosed and accounted for in accordance with accounting standards.

  5. Asset Impairment Testing:

    Assess the carrying amounts of assets for impairment, especially for goodwill and long-lived assets.

  6. Review of Financial Disclosures:

    Verify the accuracy and completeness of financial statement disclosures, including footnotes and supplementary information.

  7. Evaluation of Going Concern:

    Assess the entity's ability to continue as a going concern, considering any significant uncertainties or events that may cast doubt on its future viability.

  8. Final Analytical Procedures:

    Perform final analytical procedures to assess the overall reasonableness of financial information and to identify any potential issues or inconsistencies.

  9. Review of Internal Controls:

    Evaluate the effectiveness of internal controls over financial reporting and consider their impact on the audit procedures performed.

  10. Final Communication with Management:

    Engage in final discussions with management to address any remaining issues, obtain representations, and ensure clarity on financial statement presentation.


(iv) Drawbacks of Conducting an Interim Audit for a Large Entity


While interim audits offer advantages, there are certain drawbacks associated with conducting them for large entities.


Key Drawbacks:


  1. Insufficient Information:

    Interim audits may lack access to complete and finalized year-end data, leading to potential inaccuracies in the assessment of financial information.

  2. Limited Subsequent Events Review:

    Interim audits may not capture events occurring after the interim period, potentially missing critical information that could impact financial statements.

  3. Incomplete Annual Activities:

    Large entities often have complex year-end processes and activities that may not be fully executed during the interim period, affecting the audit's comprehensiveness.

  4. Changes in Accounting Policies:

    Interim audits may not account for changes in accounting policies or estimates made by the entity later in the fiscal year.

  5. Risk of Inadequate Fraud Detection:

    Fraud risks may not be fully identified during interim audits, as some fraudulent activities might only become apparent in the final stages of the fiscal year.

  6. Challenges in Substantive Testing:

    Performing substantive testing on incomplete data may pose challenges, potentially leading to an incomplete evaluation of account balances and transactions.

  7. Changes in External Environment:

    Interim audits might not adequately consider changes in the external environment that could impact the entity's financial position and performance.

  8. Timing Issues:

    Interim audits may face timing constraints, limiting the depth of audit procedures and the auditor's ability to address emerging issues effectively.

  9. Difficulty in Assessing Management Intentions:

    Understanding management's intentions and plans for the remainder of the fiscal year can be challenging during the interim period.

  10. Potential Need for Adjustments:

    Interim audit findings may necessitate adjustments, and the additional work required to address these adjustments could impact the efficiency of the audit process.

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QUESTION 1(b)

Q Highlight three shortcomings of using standardised audit programs.
A

Solution


Shortcomings of Using Standardized Audit Programs


While standardized audit programs offer consistency and efficiency, they come with certain drawbacks that may impact the effectiveness of the audit process.

Key Shortcomings:


  1. Rigidity:

    Standardized audit programs can be rigid and may not easily adapt to the unique characteristics and risks of each audited entity.

  2. Generic Approach:

    Standardized programs often take a generic approach, potentially overlooking industry-specific nuances and complexities that require specialized audit procedures.

  3. Reduced Flexibility:

    There is limited flexibility in deviating from standardized procedures, hindering the auditor's ability to respond to unexpected circumstances or emerging risks.

  4. Overemphasis on Documentation:

    Standardized programs may prioritize documentation at the expense of critical thinking, leading to a checklist mentality and potentially missing key audit issues.

  5. One-Size-Fits-All:

    Not all entities are the same, and a one-size-fits-all approach may not be suitable for entities with diverse operations, structures, or accounting practices.

  6. Misses Emerging Risks:

    Standardized programs may not be designed to identify and address emerging risks or issues that have evolved since the creation of the audit program.

  7. Client-Specific Considerations:

    Standardized programs may not adequately consider client-specific considerations, such as changes in management, internal controls, or significant events impacting the entity.

  8. Stifles Professional Judgment:

    Overreliance on standardized programs can stifle the exercise of professional judgment by auditors, limiting their ability to tailor procedures based on unique circumstances.

  9. Training Dependency:

    Auditors may become overly dependent on standardized programs, potentially leading to a lack of understanding of the underlying audit concepts and objectives.

  10. Not Adaptive to Technology Changes:

    Standardized programs may struggle to adapt to rapid changes in technology, limiting the auditor's ability to leverage technological advancements in the audit process.




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QUESTION 1(c)

Q Evaluate three benefits of an audit committee in a not-for-profit organisation (NGO)
A

Solution


Benefits of an Audit Committee in a Not-for-Profit Organization (NGO)


  1. Financial Integrity and Accountability:
    • Fraud Prevention: An audit committee helps deter and prevent financial fraud by overseeing internal controls and ensuring compliance with relevant regulations.
    • Financial Reporting: Ensures accurate and transparent financial reporting, promoting trust among donors, stakeholders, and the public.
  2. Risk Management:
    • Identification and Mitigation of Risks: The committee assists in identifying potential financial risks and works to develop strategies for their mitigation, safeguarding the organization's resources.
  3. Independent Oversight:
    • Objectivity: The audit committee provides an independent perspective, reducing the likelihood of conflicts of interest and ensuring unbiased scrutiny of financial processes and statements.
    • External Audit Oversight: Collaborates with external auditors to enhance the credibility of financial statements and ensures that the audit process is thorough and effective.
  4. Compliance:
    • Regulatory Compliance: Helps the organization stay compliant with relevant laws and regulations by monitoring changes in the regulatory environment and advising on necessary adjustments to policies and procedures.
  5. Enhanced Governance:
    • Board Accountability: Reinforces accountability within the board of directors by providing a specialized body focused on financial matters, separating the oversight of finances from general governance responsibilities.
    • Effectiveness of Controls: Assesses and improves the effectiveness of internal controls and financial management policies.
  6. Stakeholder Confidence:
    • Donor Confidence: The presence of an audit committee can boost donor and stakeholder confidence in the organization's financial management practices, encouraging continued support.
    • Transparency: Demonstrates a commitment to transparency, which is crucial for maintaining trust among various stakeholders.
  7. Strategic Decision-Making:
    • Financial Planning: Contributes to strategic financial planning by providing insights into the financial health of the organization, enabling informed decision-making for long-term sustainability.
    • Resource Allocation: Assists in prioritizing and allocating resources effectively, aligning financial strategies with the organization's mission and goals.
  8. Continuous Improvement:
    • Best Practices: Encourages the adoption of best practices in financial management, leading to continuous improvement and efficiency gains over time.
    • Learning and Development: Supports ongoing learning and development for board members and staff in financial matters.
    9.

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QUESTION 2(a)

Q Analyse three categories of financial statements assertions that may be used by the auditor to test the financial statements of a company
A

Solution


Categories of Financial Statement Assertions


1. Assertions about Classes of Transactions and Events:


  • Occurrence:

    Transactions and events that have been recorded have occurred and pertain to the entity.

  • Completeness:

    All transactions and events that should have been recorded are included in the financial statements.

  • Accuracy:

    Amounts and other data relating to recorded transactions and events have been recorded appropriately.

  • Cutoff:

    Transactions and events have been recorded in the correct accounting period.

2. Assertions about Account Balances at the Period-End:


  • Existence:

    Assets, liabilities, and equity interests exist at a given date.

  • Rights and Obligations:

    The entity holds or controls the rights to assets, and liabilities are the obligations of the entity.

  • Completeness:

    All assets, liabilities, and equity interests that should be included in the financial statements are included.

  • Valuation and Allocation:

    Assets, liabilities, and equity interests are included in the financial statements at appropriate amounts and any resulting valuation or allocation adjustments are appropriately recorded.

3. Assertions about Presentation and Disclosure:


  • Occurrence and Rights and Obligations:

    Disclosed events, transactions, and other matters have occurred and pertain to the entity.

  • Completeness:

    All disclosures that should be included in the financial statements have been included.

  • Classification and Understandability:

    Financial information is appropriately presented and described, and disclosures are clearly expressed.

  • Accuracy and Valuation:

    Financial information is disclosed fairly and at appropriate amounts.

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QUESTION 2(b)

Q International Standards on Auditing 500, "Audit Evidence", permits an auditor to place reliance on information produced by a management's expert in the course of audit work.

Required:
Propose six factors that the auditor might consider before relying on the work of a management's expert.
A

Solution


Factors to Consider Before Relying on Management's Expert


1. Expert's Qualifications and Independence:


  • Assess the qualifications, expertise, and independence of the management's expert.
  • Ensure that the expert has the necessary skills and experience relevant to the subject matter under consideration.
  • Evaluate any potential conflicts of interest that could compromise the expert's independence.

2. Nature and Scope of the Expert's Work:


  • Understand the specific nature and scope of the work performed by the management's expert.
  • Determine whether the expert's work is consistent with the audit objectives and is relevant to the financial statements being audited.

3. Objectivity and Impartiality:


  • Evaluate the objectivity and impartiality of the management's expert.
  • Consider whether the expert has any bias or conflicts that could impact the reliability of their work.

4. Reputation and Past Performance:


  • Assess the reputation and past performance of the management's expert.
  • Consider whether the expert has a history of providing reliable and accurate information.

5. Quality of the Expert's Work:


  • Review the quality and completeness of the expert's work.
  • Evaluate the methods, assumptions, and data used by the expert to ensure they are reasonable and appropriate.

6. Consistency with Other Audit Evidence:


  • Consider whether the results of the expert's work are consistent with other audit evidence obtained during the audit.
  • Evaluate any discrepancies or inconsistencies and seek explanations.

7. Communication and Cooperation:


  • Ensure effective communication and cooperation between the auditor and the management's expert.
  • Verify that the auditor has access to relevant information and documentation supporting the expert's findings.

8. Documentation and Traceability:


  • Ensure that the management's expert provides clear documentation of their work.
  • Verify the traceability of the expert's conclusions back to the underlying data and assumptions.

9. Legal and Regulatory Compliance:


  • Ensure that the expert's work complies with relevant legal and regulatory requirements.
  • Confirm that the expert's findings are in accordance with applicable accounting and auditing standards.

10. Management's Responsibilities:


  • Clarify the responsibilities of both management and the auditor in relation to the expert's work.
  • Ensure that management understands their role in providing necessary information and support.

11. Contingencies and Limitations:


  • Assess any contingencies or limitations associated with the expert's work.
  • Consider the potential impact of these contingencies or limitations on the reliability of the expert's findings.

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QUESTION 2(c)

Q Your organisation is in the process of computerising the internal audit function. The management has proposed installation of a Generalised Audit Software (GAS) to replace the manual procedures.

Required:
Evaluate five functionalities that are supported by a Generalised Audit Software
A

Solution


Functionality Evaluation of Generalized Audit Software (GAS)


1. Data Extraction and Analysis:


  • Functionality: GAS allows auditors to extract large volumes of data from diverse sources, including databases, spreadsheets, and other electronic files.
  • Benefits: Enables auditors to analyze entire datasets efficiently, facilitating the identification of patterns, anomalies, and trends.

2. Automated Testing and Sampling:


  • Functionality: Automation of audit tests, including predefined tests for common risks, allowing auditors to perform testing on a larger scale.
  • Benefits: Streamlines the testing process, increases efficiency, and allows for broader coverage of audit procedures.

3. Continuous Monitoring:


  • Functionality: Provides the capability to continuously monitor key controls and transactions in real-time.
  • Benefits: Enhances the ability to detect and address issues promptly, reducing the risk of fraud and errors.

4. Exception Reporting:


  • Functionality: Generates automatic alerts and reports for irregularities or exceptions in the data.
  • Benefits: Enables auditors to focus on high-risk areas and promptly address anomalies identified by the system.

5. Simulation and Scenario Analysis:


  • Functionality: Allows auditors to simulate different scenarios and assess the impact on financial outcomes.
  • Benefits: Enhances risk assessment and aids in understanding the potential consequences of various business decisions.

6. Customizable Reporting:


  • Functionality: Provides flexibility in creating customized reports tailored to specific audit requirements.
  • Benefits: Allows auditors to present information in a format that is clear, concise, and relevant to stakeholders.

7. Integration with Other Systems:


  • Functionality: Supports integration with other enterprise systems, such as ERP and financial software.
  • Benefits: Facilitates a seamless flow of data, reduces data entry errors, and enhances overall efficiency.


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QUESTION 3(a)

Q You have been appointed to lead your engagement team in auditing a new client. During the planning of the audit, the team emphasised on the need to understand the internal control system maintained by the client.

Required:
(i) Describe four components of the internal control system that would be of interest to your team.

(ii) Identify two limitations of internal control systems.
A

Solution


Components of the Internal Control System of Interest to the Audit Team


(i) Components of the Internal Control System:


  • Control Environment:
    • Assessment of the overall control environment, including management's commitment to integrity and ethical values.
    • Evaluation of the organization's risk management philosophy and processes.
  • Risk Assessment:
    • Understanding how the entity identifies and assesses risks that may impact financial reporting.
    • Evaluation of management's risk assessment process and how it informs the development of control activities.
  • Control Activities:
    • Examination of specific control activities implemented to mitigate identified risks.
    • Assessment of the design and operating effectiveness of control activities, including segregation of duties, authorizations, and reconciliations.
  • Information and Communication:
    • Understanding how information is communicated across the organization, both internally and externally.
    • Evaluation of the information systems and technology controls supporting financial reporting.
  • Monitoring:
    • Assessment of the entity's ongoing monitoring processes to identify and correct deficiencies in internal controls.
    • Understanding how internal audit functions and other monitoring mechanisms operate.

(ii) Limitations of Internal Control Systems:


  • Human Error:
    • Internal controls are executed by individuals, and errors or mistakes in judgment can occur despite a well-designed system.
  • Circumvention by Management:
    • Management may intentionally override controls or manipulate the control environment for fraudulent activities.
  • New Technology Risks:
    • Rapid technological changes may outpace the development of effective controls, exposing the organization to new risks.
  • Collusion:
    • Collusion among employees may circumvent controls, especially if there is a lack of segregation of duties.
  • Cost vs. Benefit:
    • Implementing extensive controls may be costly, and organizations must balance the benefits of controls against the associated costs.
  • External Factors:
    • External events, such as economic downturns or natural disasters, can impact the effectiveness of internal controls.


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QUESTION 3(b)

Q Antony and Associates (CPA) have been the auditors of Bidii Logistics Company for the last two years. This company deals with shipping and movement of cargo within the East Africa region. The lead auditor in his review of the financial statements suspected fraudulent financial reporting overriding controls and immediately convened a meeting with his engagement team.

Required:
(i) Explain the meaning of "fraudulent financial reporting".

(ii) Discuss six techniques that the management of Bidii Logistics Company might have deployed to achieve fraudulent financial reporting.

(iii) Evaluate the importance of the meeting convened by the lead auditor with the engagement team.
A

Solution


Fraudulent Financial Reporting and Auditor's Meeting


(i) Meaning of "Fraudulent Financial Reporting":


Fraudulent financial reporting refers to the intentional misrepresentation or manipulation of financial statements by an entity's management. This involves the preparation and presentation of financial statements that contain false information, distort financial performance, and mislead stakeholders, including investors, creditors, and auditors.

(ii) Techniques for Achieving Fraudulent Financial Reporting:


  • Income Smoothing: Management may manipulate income to create a more consistent pattern, making the financial performance appear stable over time.
  • Channel Stuffing: In industries involving shipments, such as logistics, management may inflate sales and revenue by pushing more goods through the shipping process at the end of a reporting period.
  • Overstating Asset Values: Inflating the value of assets, such as the value of the cargo being shipped, can overstate the company's financial position.
  • Understating Liabilities: Management may intentionally underestimate liabilities, leading to an understated representation of the company's obligations.
  • Recording Fictitious Transactions: Creating fake transactions or inflating the value of actual transactions can contribute to fraudulent financial reporting.
  • Cookie Jar Reserves: Management might manipulate accounting reserves, such as setting aside excessive provisions during profitable years and later releasing them during less profitable periods to artificially boost earnings.
  • Improper Revenue Recognition: Recognizing revenue prematurely or inflating revenue through fictitious sales can distort the financial performance of the company.
  • Off-Balance Sheet Financing: Management may engage in off-balance sheet transactions to conceal debt and liabilities, providing a misleading picture of the company's financial health.
  • Asset Valuation Manipulation: Inflating the valuation of assets, such as inventory or investments, can lead to an overstatement of the company's net worth.
  • Window Dressing Financial Statements: Management may engage in cosmetic changes to financial statements, making them appear more favorable than the actual financial position and performance of the company.

(iii) Importance of the Meeting Convened by the Lead Auditor:


The meeting convened by the lead auditor with the engagement team is of critical importance for the following reasons:


  • Timely Identification of Fraud Risk: The lead auditor's suspicion indicates a potential risk of fraudulent financial reporting. The meeting allows the team to discuss and identify specific areas of concern, ensuring a timely response.
  • Coordination of Audit Procedures: The meeting facilitates the coordination of audit procedures aimed at investigating the suspected fraudulent activities. This ensures that the audit team is aligned in their approach to gather relevant evidence.
  • Enhanced Professional Skepticism: By discussing the suspicions and sharing insights, the engagement team can enhance their level of professional skepticism, which is crucial for uncovering fraudulent activities that may involve management override of controls.
  • Allocation of Resources: The meeting helps in allocating audit resources effectively to areas of higher risk. This ensures that the audit team focuses on key audit procedures and tests to address the identified risks.
  • Documentation and Reporting: The discussions during the meeting provide a basis for documenting the auditor's considerations and actions taken in response to the suspected fraudulent financial reporting. It also supports the reporting of findings to relevant stakeholders.

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QUESTION 4(a)

Q Jenga Ltd. operates from fifteen separate depots providing plant and machinery hire service throughout the country.

The company offers hire services of a wide variety of tools and equipment to:

1. Builders and corporate customers on credit.

2. Members of the public on advance payment terms, including payment by cash.

In addition to the revenue generated from the hire of plant and machinery, the company also generates income from the sale of damaged or aged machinery and the hire of accessories and safety equipment.

Required:
(i) Explain the term "inherent risk".

(ii) Evaluate three factors that could suggest that there might be a high inherent risk applying to plant and machinery income as reported in the financial statement of Jenga Ltd
A

Solution


Inherent Risk and Evaluation for Jenga Ltd


(i) Explanation of "Inherent Risk":


Inherent risk is the susceptibility of an account balance or class of transactions to misstatement, before considering any related internal controls. It represents the level of risk that exists inherently in the absence of internal controls or mitigating factors. Inherent risk is influenced by the nature of the business, industry conditions, and the complexity of transactions.

(ii) Factors Suggesting High Inherent Risk for Plant and Machinery Income:


Several factors could suggest a high inherent risk related to the plant and machinery income reported in the financial statements of Jenga Ltd:


  • Diversity of Customers and Payment Terms: Jenga Ltd. deals with both credit customers (builders and corporate customers) and cash customers (members of the public). The diverse customer base and varying payment terms may introduce complexity and potential risks in recognizing revenue accurately.
  • Depot Operations: Operating from fifteen separate depots introduces operational complexity. Each depot may have unique challenges in managing plant and machinery hire services, leading to a higher risk of errors or misstatements in revenue recognition.
  • Sale of Damaged or Aged Machinery: The sale of damaged or aged machinery introduces additional complexity in revenue recognition. Determining the fair value of such assets and recognizing revenue appropriately may pose challenges and increase the risk of misstatement.
  • Accessory and Safety Equipment Hire: The revenue generated from the hire of accessories and safety equipment adds complexity to the revenue recognition process. Proper classification and valuation of these additional services may be challenging, leading to a higher inherent risk.
  • Advance Payment Terms for Public Customers: Members of the public paying in advance, including cash payments, may pose a higher risk of misappropriation or misstatement. Proper controls over cash receipts and accurate recording of cash transactions become critical to mitigate this risk.
  • Industry-specific Risks: The nature of the plant and machinery hire service industry, including the logistics and maintenance of equipment, may introduce industry-specific risks. These could include changes in demand, equipment depreciation, and technological advancements affecting the valuation of assets.

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QUESTION 4(b)

Q With reference to ISA 700 (Forming an Opinion and Reporting on Financial Statements); distinguish between an "adverse opinion" and a "disclaimer of opinion"
A

Solution


Distinguishing Adverse Opinion and Disclaimer of Opinion


Adverse Opinion:


An adverse opinion is issued by an auditor when the financial statements as a whole are materially misstated, and the misstatements are both pervasive and not confined to specific elements, accounts, or items. In other words, the auditor concludes that the overall presentation of the financial statements is not in accordance with the applicable financial reporting framework.

  • Key Characteristics:
    • Material misstatements exist that are pervasive throughout the financial statements.
    • The financial statements do not fairly present the financial position, results of operations, or cash flows in accordance with the applicable financial reporting framework.
    • The auditor concludes that the users of the financial statements cannot rely on the information provided.

Disclaimer of Opinion:


A disclaimer of opinion is issued when the auditor is unable to obtain sufficient appropriate audit evidence to form an opinion on the financial statements as a whole. This could result from limitations imposed by the entity or circumstances beyond the control of the auditor, preventing the auditor from expressing an opinion.


  • Key Characteristics:
    • The auditor is unable to obtain sufficient appropriate audit evidence to form an opinion on the financial statements as a whole.
    • The reasons for the disclaimer could include restrictions imposed by the entity, limitations in the scope of the audit, or circumstances beyond the auditor's control.
    • The auditor explicitly states that they do not express an opinion on the financial statements.


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QUESTION 4(c)

Q Highlight five threats to an external auditor's independence
A

Solution


Threats to External Auditor's Independence


  1. Self-Interest Threat:
    • Occurs when the auditor has a financial or other interest in the client that could compromise their objectivity and professional skepticism.
    • Examples include holding financial interests in the audit client, such as stocks or other investments.
  2. Self-Review Threat:
    • Arises when the auditor has previously been involved in activities that are subject to audit, leading to a potential conflict of interest.
    • For example, if the auditor was involved in designing or implementing the client's financial information systems.
  3. Advocacy Threat:
    • Occurs when the auditor promotes the client's interests or takes on an advocacy role, compromising their objectivity.
    • This can happen when the auditor becomes an advocate for the client's position or acts as a proponent of the client's views.
  4. Familiarity Threat:
    • Occurs when the auditor becomes too familiar or closely aligned with the client, leading to a potential lack of independence.
    • For instance, if the auditor has a long-standing relationship with key personnel of the client, it may impact their ability to maintain objectivity.
  5. Intimidation Threat:
    • Arises when the auditor feels threatened or pressured by the client, impacting their ability to act objectively and independently.
    • Threats could include threats of litigation, dismissal from the engagement, or other forms of coercion that influence the auditor's judgment.
    6.

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QUESTION 5(a)

Q Your audit firm was recently appointed the auditor of Jisifu Ltd. The company has a subsidiary based in western part of the country and its auditors had retired the previous year.

Required:
Assess four factors that would influence you in determining whether or not to send a separate engagement letter to the subsidiary.
A

Solution


Assessment of Factors for Separate Engagement Letter


When determining whether or not to send a separate engagement letter to the subsidiary of Jisifu Ltd, the following factors should be considered:

  • Nature and Materiality of Operations:
    • The extent to which the subsidiary's operations contribute to the overall operations and financial statements of Jisifu Ltd.
    • If the subsidiary is significant and has material transactions, a separate engagement letter may be warranted.
  • Legal and Regulatory Requirements:
    • Consideration of any legal or regulatory requirements that mandate separate communication or engagement letters for subsidiaries.
    • Compliance with local laws and regulations may necessitate a distinct engagement letter for the subsidiary.
  • Autonomy and Independence:
    • Assessment of the autonomy and independence of the subsidiary in terms of financial reporting and decision-making.
    • If the subsidiary operates relatively independently, a separate engagement letter may be appropriate to address its unique circumstances.
  • Financial Statement Users:
    • Identification of the primary users of the subsidiary's financial statements and their expectations.
    • If the subsidiary's financial statements are widely used or relied upon, a separate engagement letter may be necessary to communicate specific audit considerations.
  • Control and Reporting Structure:
    • Understanding the control and reporting structure within Jisifu Ltd., including how the subsidiary's financial information is consolidated.
    • If the subsidiary has a distinct reporting structure, a separate engagement letter may be beneficial to address reporting considerations.
  • Communication with Stakeholders:
    • Consideration of the need to communicate directly with the subsidiary's stakeholders, such as its board of directors or regulatory bodies.
    • If there are specific communication requirements, a separate engagement letter may facilitate clear communication with relevant parties.


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QUESTION 5(b)

Q You are the managing partner in Odhiambo and Associates (Certified Public Accountants). Wasali Ltd. has recently engaged your firm to provide tax consultation services to the company.

Required:
Using four elements of an assurance engagement, explain whether the above engagement qualifies to be an assurance engagement.
A

Solution


Assessment of Assurance Engagement for Wasali Ltd.


For an engagement to qualify as an assurance engagement, it typically involves the following elements:

  1. Three-Party Relationship:
    • The existence of a three-party relationship where the practitioner (Odhiambo and Associates), the responsible party (Wasali Ltd.), and the intended users are involved.
    • Assessment: Yes, as Odhiambo and Associates is engaged by Wasali Ltd. to provide tax consultation services, and the intended users may include regulatory authorities, stakeholders, or internal management.
  2. Subject Matter:
    • The presence of a subject matter, which in this case is tax consultation services, involving the application of expertise by the practitioner to enhance the credibility of the information provided by the responsible party.
    • Assessment: Yes, as tax consultation services involve the application of accounting and tax expertise to provide advice and enhance the credibility of tax-related information provided by Wasali Ltd.
  3. Criteria for Evaluation:
    • Establishment of criteria for the evaluation or measurement of the subject matter. The criteria serve as a benchmark against which the practitioner assesses the information provided by the responsible party.
    • Assessment: Yes, as tax regulations, accounting standards, and legal requirements serve as criteria against which the tax consultation services are evaluated to ensure compliance and accuracy.
  4. Expressing a Conclusion:
    • The practitioner expresses a conclusion, opinion, or limited assurance on the subject matter, contributing to the credibility and reliability of the information provided by the responsible party.
    • Assessment: Yes, as Odhiambo and Associates would likely provide a conclusion or opinion on the tax-related matters addressed in the consultation services, adding credibility to Wasali Ltd.'s tax-related information.

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QUESTION 5(c)

Q The financial accountant of Afiah Ltd. has provided you with the following breakdown of movements on the company's non-current assets for the year ended 31 December 2021:


Cost
Balance as at 1 January 2021
Additions
Revaluation
Disposals
Balance as at 31 December 2021
Accumulated depreciation
Balance as at 1 January 2021
Charge for the year
Disposals
Balance as at 31 December 2021
Net book value as at 31 December 2021		 Land
Sh."000"
320,000

48,000

368,000





368,000		 Equipment
Sh."000"
240,000
32,000

(12,000)
260,000

144,000
54,400
(10,000)
188,400
71,600		 Total
Sh."000
560,000
32,000
48,000
(12,000)
628,000

144,000
54,400
(10,000)
188,400
439,600


Additional information:
1. The company does not depreciate its land and you, the company's auditor, agree that this is appropriate.

2. Depreciation on equipment is charged at the rate of 20% per annum with full year's depreciation charged in the year of acquisition and none in the year of disposal.

3. This is the company's first time revaluing the land. The revaluation was carried out by a reputable firm of auctioneers and valuers, known to you.

4. The company maintains a non-current asset register.

Required:
(i) Describe four internal controls that could be present regarding the non-current asset register before you could place reliance on it as a source of audit evidence.

(ii) Assess four audit work procedures that could be carried out on the depreciation charge and on the accumulated depreciation balance.

(iii) Explain four tests that could be carried out to audit both the additions and the disposals of the equipment
A

Solution


Internal Controls and Audit Procedures for Non-Current Assets


(i) Internal Controls for Non-Current Asset Register:


Before placing reliance on the non-current asset register as a source of audit evidence, the following internal controls should be present:

  • Segregation of Duties: Ensure that the responsibilities for recording, authorizing additions/disposals, and reconciling the non-current asset register are segregated among different individuals to prevent errors or fraud.
  • Physical Verification: Implement a periodic physical verification process to compare the actual existence and condition of non-current assets with the recorded information in the register.
  • Authorization Procedures: Have documented authorization procedures for the addition or disposal of non-current assets to ensure that only approved transactions are recorded.
  • Reconciliation: Regularly reconcile the non-current asset register to supporting documentation, such as purchase invoices and disposal records, to identify and rectify discrepancies.
  • Asset Coding: Use a systematic and unique coding system for non-current assets to facilitate accurate recording, tracking, and identification during audits.

(ii) Audit Work Procedures on Depreciation and Accumulated Depreciation:


Audit work procedures on the depreciation charge and accumulated depreciation balance may include:


  • Review of Depreciation Policy: Understand and evaluate the client's depreciation policy to ensure it complies with accounting standards and is consistently applied.
  • Recalculation: Independently recalculate the depreciation charge using the appropriate rates and methods, comparing the results with the client's calculations.
  • Inspection of Supporting Documentation: Inspect supporting documentation for depreciation calculations, such as asset registers, to verify the accuracy of data used in the calculations.
  • Analytical Procedures: Perform analytical procedures by comparing the current year's depreciation expense with prior years and industry benchmarks to identify significant fluctuations or anomalies.
  • Testing Controls: Assess the effectiveness of internal controls over the depreciation process by testing the design and operating effectiveness of relevant controls.

(iii) Tests for Additions and Disposals of Equipment:


Tests to audit both additions and disposals of equipment may include:


  • Examination of Supporting Documents: Examine supporting documents for additions, such as purchase invoices and contracts, and for disposals, such as sales agreements or scrapping documentation.
  • Physical Verification: Physically verify a sample of newly added equipment to ensure that they exist and are in the stated condition.
  • Trace Transactions: Trace additions and disposals from the supporting documentation to the non-current asset register to verify accurate recording.
  • Review of Authorization: Review authorization procedures for additions and disposals to ensure compliance with the company's policies and procedures.
  • Reconciliation: Reconcile the non-current asset register with the general ledger and supporting documentation to identify and investigate any discrepancies.

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