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CPA
Intermediate Leval
Auditing and Assurance May 2018
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Audit and assurance
Revision Kit

QUESTION 1a

Q Describe the procedures you would apply in detecting fraud where employees create non-existent suppliers and then divert payments to themselves. (8 marks)
A

Solution


Procedures to help detect fraud where employees create non-existent suppliers and then divert payments to themselves.

1 Examine the goods received notes and compare them to the goods in the store.

2. Confirm whether or not there is a division of labor among employees.

3. Circularize suppliers.

4 Obtain bank statement and confirm receipts of the payments.

5 Examine the employees' lifestyles.

6. Reconcile the totals of each payables accounts with the control account.

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QUESTION 1b

Q Explain six main procedures which an auditor should perform when conducting a review engagement. (12 marks)
A

Solution


Review Engagement
➦ A review engagement is often referred to as a limited assurance or a negative engagement. Auditors undertake a review engagement after an accountant has completed an audit of a company's financial statements, therefore the auditor can only provide limited assurance on the financial statements' accuracy.

Procedures that an audit should perform when conducting a review engagement.

1. Understanding the entity's business and the industry in which it operates.

2. Identifying the entity's accounting principles and practices.

3. Inquiries about the entity's methods for documenting, classifying, and summarizing transactions, gathering information for financial statement disclosure, and compiling financial statements.

4. Inquiries about all material assertions in the financial accounts.

5. Analytical approaches aiming to uncover unusual correlations between particular components.

6. Representations from management on the accuracy of the financial statements

7. Inquiries about activities undertaken at shareholder, board of directors, committees of the board of directors, and other meetings that may have an impact on the financial statements.

8. Management responsibility to detect and prevent fraud

9. Ratios and relationships of recorded amounts

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QUESTION 2a

Q Discuss five challenges you might encounter while using the audit software. (10 marks)
A

Solution


Audit software.
➦ Audit software is any application that helps to improve and automate the audit process.Audit software is typically used to assist in the evaluation and testing of accounting systems. They are designed to collect evidence, run analytical tests, and evaluate internal controls.

Challenges you might encounter while using the audit software.

1. Security threats like viruses

2. High Initial cost.

3. Lead times are typically long, and planning must begin well in advance--not simply before the start of fieldwork, but possibly a year in advance.

4. Audit firms will need to hire IT experts along with accounting expertise.

5. Clients are very sceptical about the security of their data.

6. They are usually only cost effective if the client's accounting systems are integrated; otherwise, auditors would need separate software programs for each system.

7. High replacement cost.

8. High risk of corrupting the live system while testing whether it will work or not

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QUESTION 2b

Q Explain the following terms as used in contemporary audit:

(i). Cyber insurance. (2 marks) .

(ii). Social engineering (2 marks).

(iii). Data protection. (2 marks).

(iv). Remediation procedures. (2 marks).

(v). Forensic accounting. (2 marks)
A

Solution


(i). Cyber insurance
➫ Cyber insurance- is a insurance product that allows businesses to reduce the risk of cybercrime activities such as cyberattacks and data breaches.

(ii). Social engineering
➫ Social engineering encompasses any strategies aimed at convincing a target to reveal certain information or execute a specific activity for illicit reasons.

(iii). Data protection
➫ Data protection is the fair and proper use of information about people. It is part of the fundamental right to privacy, but on a more practical level, it is all about developing trust between people and organizations. It involves treating people fairly and freely, recognizing their right to autonomy over their own identity and interactions with others, and achieving a balance with society's larger objectives.

(iv). Remediation procedure
➫ Refers to post-mortem follow-up reviews conducted by the audit committee in order to identify what went wrong, ensure repair activities, and probe for other areas of vulnerability.

(v). Forensic Accounting
➫ Forensic accounting is the use of accounting knowledge to the investigation of fraud or embezzlement, as well as the analysis of financial data for use in judicial processes.

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QUESTION 3(a)

Q With reference to International Standard on Auditing (ISA) 580 "Written Representations", discuss the circumstances that might lead you to require management to confirm in writing the oral and implied representations. (8 marks)
A

Solution


ISA 580 written representations circumstances that may require management to confirm in writing oral and implied representations.

➫ Where the audit determines that written representations are required to support other audit evidence relevant to the financial statements, the audit will obtain them.

➫ Where the representation refers to confirmation that management has fulfilled its responsibilities for the preparation of financial statements in line with the appropriate financial reporting framework.

➫ Where the information relates to validation that management has provided all necessary information and confirmation that transactions have been recorded and represented in financial statements.

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QUESTION 3(b)

Q Highlight the substantive procedures that might be performed by an auditor to verify the payroll. (8 marks)
A

Solution


Substantive procedures that might be performed by an auditor to verify the payroll.

1. Choose a random sample of new and departing employees, confirm their start and end dates, and compute that their first and last pay packages were correctly calculated and recorded. Also check on the completeness, occurrence, and accuracy.

2. Agree on the overall wages and salaries costs as reported by the payroll system to the general ledger and financial statements, completeness and presentation.

3. Cast the monthly payroll listings to ensure the accuracy of the payroll expense.

4. Recalculate the gross and net pay for a sample of employees and confirm the accuracy of the payroll records.

5. Recalculate statutory deductions to ensure that the correct deductions for this year have been included in the payroll expense accuracy.

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QUESTION 3(c)

Q In the context of public sector auditing, distinguish between "performance audits" and "compliance audits" (4 marks)
A

Solution


Distinguish between performance audits and compliance audit.

Performance audits
Ensures and advises management on the effectiveness of its operational activities.

Compliance audit
Is a thorough examination of an organization's adherence to regulatory rules. During a compliance audit, audit reports assess the strength and thoroughness of compliance preparations, security policies, user access controls, and risk management procedures.

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QUESTION 4(a)

Q Explain the internal control objectives in each of the following cases relating to credit sales:

(i). Credit approval. (2 marks) .

(ii). Receipt of sales order. (2 marks).

(iii). Invoicing of goods dispatched. (2 marks).

(iv). Entry into the debtor's ledger. (2 marks)
A

Solution


1. Credit approval
➫ A process that a company or individual must go through in order to be eligible for a loan or to pay for products and services over a longer period of time. It calculates creditworthiness.

2. Receipt of sales order
➫ Ensure that it is ready for implementation and that money does not end up in the wrong hands.
3. Invoicing of goods dispatched
➫ An accounting method to ask for cash and evidence of products released as per order.

4. Entry into the debtor's ledger
➫ The ledger was posted, and all amounts were accounted for.

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QUESTION 4(b)

Q Describe four audit risks arising from the issues above and the proposed auditor's response. (8 marks)
A

Solution


Audit risks arising from the following matter and the proposed auditor's response.

(i). The depreciation rates had been reviewed and adjusted resulting in an increase in asset lives and a reduction in depreciation amounts.
The risk of overstating profits: auditors should benchmark against industry players and advise clients accordingly.

(ii). Stock take across all the warehouses could not be undertaken due to lack of staff.
The risk of stock misappropriation, the auditors should perform analytical reviews and give guidance.

(iii). One of the warehouses caught fire and goods worth 50 million were damaged. A claim had been lodged with insurance company but the incident was still under investigation. The amount had however been included in the financial statements as expected income.
The risk of overstating revenues by including a non realized income, the auditors should conduct reviews and advise clients on how to recognize such unreleased money.

(iv). Bank reconciliation had not been completed even though there were material balances.
The risk of material misstatements due to unreconciled balances, the auditors should re-conduct or perform bank reconciliation.

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QUESTION 4(c)

Q Distinguish between "assurance engagements" and "non-assurance engagements" (4 marks)
A

Solution


Distinguish between assurance engagement and non-assurance engagements.

Assurance engagement - is an engagement in which a practitioner obtains sufficient appropriate evidence to express a conclusion designed to increase the degree of confidence of the intended users other than the responsible party in the outcome of a subject matter's evaluation or measurement against criteria.

Non-assurance engagement - Non-assurance engagements are those in which the practitioner does not offer an opinion that provides a level of assurance, whether negative or other. The practitioner does not provide any assurance to the intended users about the veracity of an assertion.

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QUESTION 5(a)

Q Describe three characteristics of a suitable criteria. (6 marks)
A

Solution


Characteristics of a suitable criteria used to evaluate a subject matter for the purpose of presentation and disclosure.

1. Relevance: Relevant criteria lead to findings that aid decision-making by the intended consumers of the assurance report.

2 Completeness: Completeness criteria contributes relevant and important aspects that could alter the conclusions in the context of the engagement settings.Complete requirements include, when applicable, benchmarks for presentation and disclosure, or where it supports a fair description of operational systems and controls.

3. Reliability: Reliable criteria allow for reasonably consistent evaluation or measurement of the subject matter, including, if applicable, presentation and disclosure, when employed in similar circumstances by similarly trained practitioners.

4. Neutrality: Neutral criteria Contribute to objective conclusions.

5. Understandability: Understandable criteria contribute to conclusions that are clear, thorough, and not open to different interpretations

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QUESTION 5(b)

Q Explain the three components of the fraud triangle. (6 marks)
A

Solution


Components of fraud triangle.

1 Opportunity
When fraud goes undiscovered, the opportunities for fraud increase. auditors frequently point to internal structural variables like as internal controls or auditing procedures to discover fraud chances. Economic situations, such as a financial crisis, may also create more opportunities. For example, opportunity may be larger at a company that has just laid off staff, making it more difficult to maintain a segregation of roles, which is critical for fraud prevention. auditors look for chances by looking at regulatory scrutiny, which can impact the risk assessment of employees who are inclined to conduct fraud.
2. Motivation
The employee's attitude toward committing fraud. The following are some examples of factors that give incentives for fraud:
➫ Investor and analyst expectations
➫ Personal incentives
➫ Bonuses based on a financial metric

3. Rationalization
Refers to a person's rationale for committing fraud. Examples of popular rationalizations used by fraudsters include:
➫ A person may be envious of their management or employer and believe that committing fraud is a way of exacting revenge.
➫ Others are doing it - A negative tone at the top of the corporate hierarchy may cause an individual to follow in the footsteps of those higher up in the corporate hierarchy.

There are two aspects to rationalization
(i). The fraudster must conclude that the reward from the fraudulent behavior outweighs the possibility of detection.
(ii). The fraudster must justify his or her actions. Justification can be tied to work discontent or a sense of entitlement, or a current desire to make the victim whole in the future, or saving one's family, assets, or status. Rationalization can be detected by observing the fraudster's words or attitudes.

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QUESTION 5(c)

Q Discuss four reasons why an auditor might decide not to seek for re-election. (8 marks)
A

Solution


Reasons why an auditor might decide not to seek re-election.

1. Lack of integrity of client.
➫ The audit firm may perceive that management is not acting with integrity, for instance, if the financial accounts contain manipulated accounting or unproven suspected fraud.

2. Fee level.
➫ The audit firm may be unable to charge a high enough audit fee to the customer to pay the audit costs. In this case, the audit firm may decide not to run for re-election in order to avoid continuing with a loss-making audit contract and, as a result, to employ resources in a more financially advantageous manner.

3. Disagreement with the client.
➫ The audit firm and the client may have disagreed for a variety of reasons, such as accounting techniques utilized in the financial statements. A disagreement over a critical issue is likely to lead to a rupture in the professional relationship between auditor and client, which means that the audit firm may lose faith in management's competence. If the conflict is not resolved, the auditor will be hesitant to run for re-election.

4. Resources.
➫ The audit firm may discover that it does not have the resources to continue providing audit services to a customer. This could happen if the client company expands significantly, either financially or operationally, necessitating a larger audit team. The audit business may simply lack the experienced personnel required to expand the audit team.

5. Competence.
➫ The audit firm may perceive that it is no longer qualified to conduct audit services. This could arise if a client company expanded into a new and specialized business operation in which the audit firm had little or no experience. Because the audit company would be unable to perform a high-quality audit without developing or acquiring the requisite knowledge and abilities, it may opt not to run for re-election.

6. Fee payments.
➫ Due to a client's weak cash flow position, the audit company may have unpaid fees that cannot be fully collected. Alternatively, the client may be slow to pay, prompting the audit firm to pursue payment and perhaps harming the relationship between the two firms. In such instances, the audit firm may make a decision to cease acting for the client.

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