CPA
Intermediate Leval
Auditing and Assurance December 2021
Suggested solutions

1. Nature of the Information:
   • Consider the nature of the information being used as audit evidence. Information from external sources, such as bank statements or third-party confirmations, may be more reliable than internal documentation.
2. Source of Information:
   • Evaluate the source of the information. Information obtained directly from independent external sources is generally more reliable than that from internal sources, especially if there are concerns about bias or manipulation.
3. Effectiveness of Internal Controls:
   • Assess the effectiveness of the client's internal controls. Reliable internal controls enhance the reliability of audit evidence. Weak or ineffective controls may require additional corroboration.
4. Objectivity of Evidence:
   • Consider the objectivity of the evidence. Evidence that is objective, factual, and verifiable is generally more reliable. Subjective or oral evidence may require additional scrutiny.
5. Timeliness of Information:
   • Assess the timeliness of the information. More recent evidence is often more relevant and reliable than outdated information. Consider whether the evidence covers the period under audit.
6. Consistency of Information:
   • Check for consistency in the information. Consistent evidence obtained from different sources or methods increases reliability. Inconsistencies may require further investigation.
7. Documentary Evidence:
   • Prefer documentary evidence over oral evidence. Documents provide a tangible and verifiable record of transactions and events, contributing to the reliability of the audit evidence.
8. Independence of Providers:
   • Consider the independence of information providers. Information obtained from independent third parties is generally more reliable than information provided by parties with a vested interest.
9. Relevance to Audit Objectives:
   • Ensure that the evidence is relevant to the audit objectives. Irrelevant or immaterial evidence may not contribute significantly to the auditor's conclusions.
10. Management Representations:
    • Exercise caution when relying solely on management representations. Corroborate management-provided information with other forms of evidence to enhance reliability.

1. Complexity of Data:
   • Assess the complexity and volume of the data involved in the audit. Computer audit software is particularly beneficial when dealing with large datasets or complex financial information that may be challenging to analyze manually.
2. Repetitive Procedures:
   • Evaluate whether there are repetitive audit procedures that can be automated using computer audit software. Automation can increase efficiency and reduce the risk of errors in performing routine tasks.
3. Data Accuracy and Consistency:
   • Consider the need for accurate and consistent data analysis. Computer audit software can enhance the accuracy and reliability of audit procedures, especially when performing calculations or reconciliations.
4. Integration with Client Systems:
   • Assess the compatibility and integration capabilities of computer audit software with the client's information systems. Seamless integration facilitates data extraction and analysis.
5. Time and Resource Efficiency:
   • Evaluate the potential time and resource savings that can be achieved through the use of computer audit software. Automated procedures can expedite the audit process and allow auditors to focus on higher-value tasks.
6. Training and Familiarity:
   • Consider the level of training and familiarity that audit team members have with the selected computer audit software. Adequate training ensures that the software is used effectively and efficiently.
7. Cost-Benefit Analysis:
   • Conduct a cost-benefit analysis to determine whether the investment in computer audit software aligns with the expected benefits in terms of audit efficiency, effectiveness, and overall audit quality.
8. Risk Assessment:
   • Perform a risk assessment to identify potential risks associated with the use of computer audit software. This includes considering the risk of software errors, data security, and the need for manual overrides or interventions.
9. Customization and Flexibility:
   • Assess the customization and flexibility features of computer audit software. The software should be adaptable to the specific needs and requirements of the audit engagement.
10. Regulatory Compliance:
    • Ensure that the use of computer audit software complies with relevant regulatory requirements and standards. This includes considerations related to data privacy, confidentiality, and auditing standards.

1. Evidence of Compliance:
   • Detailed audit working papers serve as evidence that the audit was planned and performed in accordance with auditing standards. They provide documentation of the auditor's compliance with professional requirements.
2. Support for Audit Opinion:
   • Working papers support the basis for the auditor's opinion on the financial statements. They document the procedures performed, evidence obtained, and conclusions reached during the audit, reinforcing the credibility of the audit opinion.
3. Facilitation of Supervision and Review:
   • Detailed working papers facilitate supervision and review by senior members of the audit team or external reviewers. They provide a comprehensive record of the audit process, making it easier for others to understand the nature and extent of audit procedures.
4. Continuity and Succession Planning:
   • Working papers contribute to continuity and succession planning within the audit firm. They enable new team members or successor auditors to understand the client's business, risks, and prior audit procedures, ensuring a seamless transition.
5. Documentation of Professional Judgment:
   • Auditors exercise professional judgment throughout the audit process. Detailed working papers provide a record of the factors considered, judgments made, and conclusions reached. This documentation is essential for accountability and quality control.
6. Legal and Regulatory Compliance:
   • Working papers serve as documentation for legal and regulatory compliance. In the event of inquiries, investigations, or legal challenges, detailed working papers provide the necessary support and evidence of the auditor's due diligence.
7. Enhancement of Audit Quality:
   • Detailed working papers contribute to the overall quality of the audit. They enable the auditor to demonstrate a systematic and disciplined approach, ensuring that audit procedures are well-planned, executed, and documented.
8. Communication with Stakeholders:
   • Working papers serve as a means of communication with stakeholders, including clients, regulators, and external auditors. They provide transparency into the audit process and allow stakeholders to understand the basis for the auditor's findings and opinions.
9. Historical Record for Future Audits:
   • Detailed working papers create a historical record for future audits. They provide a reference point for subsequent audit engagements, enabling auditors to build on prior knowledge, identify trends, and assess changes in the client's business environment.

• Fraudulent Financial Reporting: Manipulating financial statements to deceive stakeholders about a company's financial performance.
• Asset Misappropriation: Illegally misusing or stealing an entity's assets, such as embezzlement, theft of cash, or inventory fraud.
• Bribery and Corruption: Offering, giving, receiving, or soliciting something of value to influence the actions of an official or another person within the organization.
• Procurement Fraud: Manipulating the procurement process for personal gain, such as bid rigging, kickbacks, or accepting bribes in exchange for awarding contracts.
• Payroll Fraud: Falsifying payroll records, creating ghost employees, or manipulating time and attendance to embezzle funds from the organization.
• Expense Reimbursement Fraud: Submitting false or inflated expense claims for personal expenses not related to the business, leading to unauthorized reimbursements.
• Money Laundering: Concealing the origins of illegally obtained money through a series of transactions designed to make the funds appear legitimate.

It is essential for professionals, especially those in the field of accounting and auditing, to be aware of these fraudulent activities to prevent, detect, and address them effectively.

• Clearly defining the responsibilities of the auditor and the entity.
• Documenting the terms of the audit engagement to avoid misunderstandings.
• Confirming the auditor's compliance with relevant ethical requirements.
• Setting expectations regarding the scope and nature of the audit work.
• Establishing a basis for agreement on the audit fee and any other terms.
• Enhancing communication between the auditor and the entity's management.
• Providing a basis for the auditor's understanding of the terms of engagement.

(ii) Contents of an Audit Engagement Letter

An audit engagement letter typically includes the following key contents:

• Objective and Scope: Clearly state the objective and scope of the audit engagement, including the financial statements to be audited and any specific reporting requirements.
• Responsibilities of Management: Outline the responsibilities of management, such as providing access to information, ensuring accuracy of records, and making relevant personnel available to the auditor.
• Responsibilities of the Auditor: Specify the responsibilities of the auditor, including conducting the audit in accordance with applicable auditing standards, obtaining sufficient audit evidence, and expressing an opinion on the financial statements.
• Identification of Applicable Financial Reporting Framework: Clearly identify the financial reporting framework under which the financial statements will be prepared and audited.
• Reference to Applicable Laws and Regulations: Reference relevant laws and regulations, as well as any special considerations that may impact the audit.
• Expected Form and Content of Reports: Specify the expected form and content of the auditor's reports, including any specific reporting requirements or additional communications.
• Basis for Fees: Detail the basis for the determination of fees, including any additional fees for services beyond the agreed-upon scope of the audit.
• Other Agreed-Upon Terms: Include any other agreed-upon terms and conditions relevant to the audit engagement.
• Confirmation of Terms: Request a written acknowledgment or acceptance of the terms by the management of the entity.

Strategic Aspects of Audit Planning:

Strategic aspects focus on the overarching considerations that shape the audit approach and methodology:

• Risk Assessment: Identifying and assessing risks that may impact the financial statements, requiring a strategic approach to determine the audit's overall risk response.
• Audit Objectives: Defining clear audit objectives aligned with the entity's goals, ensuring that the audit adds value by addressing key strategic concerns.
• Materiality: Establishing materiality thresholds to guide the auditor's focus on significant issues that may affect the decision-making of financial statement users.
• Industry and Regulatory Considerations: Considering industry-specific nuances and regulatory requirements that influence the audit strategy and approach.
• Client Relationship: Building a strong working relationship with the client's management and gaining an understanding of the client's strategic goals and challenges.
• Overall Audit Plan: Developing a comprehensive plan that outlines the scope, timing, and resource allocation for the entire audit engagement.

Operational Aspects of Audit Planning:

Operational aspects involve the practical and detailed planning required to execute the audit plan effectively:

• Audit Procedures: Designing specific audit procedures to gather sufficient and appropriate audit evidence, ensuring a detailed and thorough examination of financial statement components.
• Resource Allocation: Allocating audit team members and resources based on the nature and complexity of audit areas, taking into account skill sets and expertise.
• Timeline and Milestones: Creating a timeline with clear milestones to manage the audit's progress, ensuring that key tasks are completed within the required timeframe.
• Documenting Workpapers: Developing and maintaining detailed workpapers to support the auditor's findings, conclusions, and compliance with auditing standards.
• Quality Control: Implementing quality control measures to review and ensure the accuracy and completeness of audit work, minimizing errors and enhancing overall audit quality.
• Communication: Establishing effective communication channels within the audit team and with the client to address issues, provide updates, and maintain transparency.
• Adjustments and Corrections: Addressing any adjustments or corrections identified during the audit process promptly, ensuring the accuracy of financial statements.

Attestation Engagements:

In attestation engagements, the auditor's report may differ in the following ways:

• Scope and Nature: The report may explicitly state that it is an attestation engagement, outlining the specific procedures performed and the subject matter being attested to.
• Criteria for Evaluation: The report may include information about the criteria used to evaluate the subject matter, such as applicable industry standards or regulatory requirements.
• Assurance Level: The report may express a level of assurance, which can vary from reasonable assurance to limited assurance, depending on the nature of the engagement and the auditor's procedures.
• Reference to Responsible Party: The report may identify the responsible party for the subject matter and provide assurance on whether the subject matter is free from material misstatement.

Direct Reporting Engagements:

In direct reporting engagements, the auditor's report may differ in the following ways:

• Standard Structure: The report may follow a standard structure based on the applicable financial reporting framework, such as International Financial Reporting Standards (IFRS) or Generally Accepted Accounting Principles (GAAP).
• Audit Opinion: The report will typically include the auditor's opinion on the fair presentation of the financial statements, expressing whether they are free from material misstatement.
• Responsibility: The report may include a section specifying the management's responsibility for the preparation and fair presentation of the financial statements.
• Reference to Auditing Standards: The report may reference specific auditing standards that the auditor followed during the engagement, ensuring compliance with professional standards.
• Consistency and Comparability: The report may address the consistency of the financial statements with prior periods and provide relevant comparative information.
• Emphasis of Matter or Other Matter Paragraphs: Additional paragraphs may be included to draw attention to specific matters, such as a change in accounting principles or significant uncertainties.

Ultimately, the form and content of the auditor's report will align with the unique characteristics and requirements of the engagement, providing stakeholders with the relevant information needed for their decision-making.

• Integrity and Professionalism: Assess the integrity and professionalism of the client's management and those charged with governance. Consider any indications of dishonesty, unethical behavior, or a lack of commitment to financial reporting standards.
• Ability to Comply with Ethical Requirements: Evaluate whether the client has a history of compliance with ethical requirements, including the integrity of management and the existence of any conflicts of interest that may impact the audit.
• Technical Competence and Capabilities: Consider the technical competence and capabilities of the audit firm, including the availability of skilled personnel with the necessary expertise to perform the audit effectively.
• Understanding of the Entity and its Environment: Gain a thorough understanding of the client's business, industry, and regulatory environment. Assess whether the auditor has the knowledge required to plan and perform the audit effectively.
• Financial Stability of the Client: Evaluate the financial stability of the client, including its ability to pay fees for the audit services. Consider any indications of financial distress that may impact the auditor's ability to recover fees.
• Independence and Objectivity: Confirm the independence and objectivity of the audit firm. Assess any threats to independence and take appropriate measures to mitigate or eliminate them.
• Acceptance and Continuance Decisions: Document the rationale for acceptance and continuance decisions, demonstrating the auditor's due diligence in evaluating the factors mentioned above.
• Legal and Regulatory Requirements: Ensure compliance with legal and regulatory requirements, including any specific requirements related to the acceptance and continuance of audit engagements.
• Communication with Previous Auditors: Communicate with the previous auditors, if applicable, to obtain relevant information about the client and assess any issues that may impact the decision to accept or continue the engagement.
• Consideration of Public Interest: Consider the public interest, especially in cases where the entity plays a significant role in the economy or where there is a high level of public reliance on the entity's financial statements.
• Monitoring and Quality Control Procedures: Ensure that the audit firm has effective monitoring and quality control procedures in place to assess the firm's overall performance and compliance with professional standards.
• Communication with Those Charged with Governance: Engage in communication with those charged with governance to understand their expectations and address any concerns they may have about the audit engagement.

By carefully considering these factors, the auditor can make informed decisions regarding the acceptance or continuation of an audit engagement, ultimately contributing to the quality and effectiveness of the audit process.

• Continuous Operating Losses: Prolonged periods of operating losses may indicate financial distress and an inability to generate sufficient cash flows to sustain operations.
• Negative Net Worth: A company with a negative net worth may face challenges in meeting its obligations, potentially raising doubts about its ability to continue as a going concern.
• Working Capital Deficiency: Inability to meet short-term obligations due to a working capital deficiency may signal liquidity challenges and going concern uncertainties.
• Default on Loan Covenants: Breach of loan covenants or default on debt obligations may trigger financial difficulties and impact the company's ability to continue operations.
• Lack of Access to Capital: Difficulty in obtaining financing or a lack of access to credit markets may hinder the company's ability to fund its operations.
• Legal or Regulatory Issues: Pending legal or regulatory issues, such as lawsuits or regulatory non-compliance, may pose financial challenges and impact the company's ability to continue as a going concern.
• Loss of Key Customers or Suppliers: Significant loss of key customers or suppliers may disrupt the company's revenue stream or supply chain, affecting its ability to operate profitably.
• Significant Asset Impairments: Material impairments of assets may indicate a reduction in the company's ability to generate future cash flows, raising concerns about its going concern status.
• Management's Plans and Representations: If management's plans to mitigate going concern uncertainties are not feasible or if there is a lack of commitment from stakeholders, it may indicate increased risk.
• Significant Changes in Industry Conditions: Adverse changes in industry conditions that impact the company's competitiveness and profitability may contribute to going concern uncertainties.
• Global Economic Conditions: Broader economic challenges, such as a recession or financial crisis, may affect the company's financial stability and going concern status.
• Impact of the COVID-19 Pandemic: Specific to recent times, the ongoing impact of the COVID-19 pandemic may introduce uncertainties affecting the company's ability to continue as a going concern.

These indicators serve as red flags, prompting auditors to carefully assess the appropriateness of the going concern assumption and consider the need for additional disclosures or modifications in the financial statements.

1. Timely Issue Identification:

An interim audit allows for the early identification of accounting or financial reporting issues. By conducting audit procedures throughout the year, an interim audit can detect and address potential issues before year-end, reducing the risk of material misstatements. This proactive approach enhances the accuracy and reliability of the financial information provided to stakeholders, contributing to better decision-making.

2. Risk Mitigation and Assessment:

An interim audit provides an opportunity to assess and mitigate risks associated with the company's operations and financial reporting. Regardless of industry or market conditions, early identification and management of risks contribute to a more robust risk management framework. This is crucial in dynamic environments where business conditions can change rapidly, ensuring the company is well-prepared for challenges and uncertainties.

3. Improved Financial Planning:

Interim audit findings offer valuable insights into the company's financial performance and position throughout the year. This information is beneficial for improved financial planning and decision-making. With a clearer understanding of the company's financial health, the management can make informed decisions on investments, resource allocations, and strategic initiatives. This proactive financial management approach supports sustainable growth and success.

By considering an interim audit, the aim is to add value to the company by ensuring the reliability of financial information, mitigating risks, and supporting informed decision-making.

(b) Six Elements of Control Environment:

1. Management's Philosophy and Operating Style: Understanding the philosophy and operating style.
2. Integrity and Ethical Values: Assessing the integrity and ethical values upheld by management.
3. Organizational Structure: Examining the organizational structure and how authority and responsibility are assigned.
4. Commitment to Competence: Evaluating the commitment of the entity to attract, develop, and retain competent individuals.
5. Accountability and Responsibility: Analyzing how accountability and responsibility are defined and enforced within the organization.
6. Human Resource Policies and Practices: Reviewing human resource policies and practices to ensure they support the control environment.

(c) Six Factors Leading to Change in Inherent Risk:

1. Changes in Economic Conditions: Economic downturns or upturns affecting the business environment.
2. Technological Changes: Adoption of new technologies or changes in existing technologies impacting operations.
3. Regulatory Changes: Modifications in regulations affecting the industry or business operations.
4. Personnel Changes: Key changes in personnel, especially in key management positions.
5. Changes in Operations: Significant changes in the nature or scale of business operations.
6. Business Model Changes: Alterations in the fundamental business model of the entity.