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CPA
Intermediate Leval
Auditing and Assurance May 2019
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Audit and assurance
Revision Kit

QUESTION 1a

Q Explain three types of control that Usonga Ltd. could put in place to reduce the risk of the above fraud recurring. For each control, describe how it would mitigate the risk. (12 marks)
A

Solution


Types of control that Usonga Ltd. could put in place to reduce the risk of the above fraud recurring and how each control would mitigate the risk.

1. All new employees should only be set up by payroll upon receipt of a new employee form, and any additions to the system should be authorized by the payroll manager. An edit report should be generated and reviewed by HR.

- It is doubtful that payroll personnel would take the chance of creating fictitious new employees because the payroll manager would have to approve all new hires. Any employees without an authorized entry form would also be found during a subsequent inspection by the HR department.

2. HR should initiate the process of establishing a new registrar by asking the new employee to complete a registration form that will be approved by the manager and HR. This request should be sent to the payroll office that should be assigned to the employee:

- This control introduces separation of roles because both the HR and payroll departments are involved in the hiring process. The payroll supervisor could not set up ghost employees without collaborating with an HR employee.

3. The number of employees in each department of Usonga Ltd should be counted;

- This should be compared to the number of employees on the payroll system:

- If there are additional employees on the payroll system, this would reveal that. It can then be looked into more thoroughly.

4. Personal verification should be done by Human Resources (HR) and recorded in the employee file of each new employee on the payroll:

- This should reduce the risk of ghost employees being set up, as in order to be set up on the system, a fictitious set of identification would be required, which would be an onerous process.

5. A senior accountable authority who is not involved in the processing of payments should approve all bank transfer requests. They should spot-check payments against supporting documents, such as employee identification cards and records.

- By adding an additional layer of task separation, this would lower the possibility of fraud. Also, spot inspections of employee ID cards and records would validate the accuracy of payments.

6. HR should analyze the exception report generated by the payroll system, which will identify any employees who have the same bank account name or number:

- This help in preventing numerous fraudulent payments to the same employees by identifying the same bank account name or number.

7. If possible, related employees should not be allowed to participate in the interaction process to avoid violating the separation of responsibilities and control over significant changes. HR should periodically review job descriptions for related employees.

- This should reduce the risk of collusion and fraud by the employees involved.

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QUESTION 1b

Q Describe four procedures which you would perform to assess whether Usonga Ltd. is a going concern. (8 marks)
A

Solution


Procedures which you would perform to assess whether Usonga Ltd is a going concern.

➪ Get the cash flow forecast for Usonga Ltd. and examine the cash inflows and outflows. Determine whether the assumptions are reasonable, then discuss about the results with the management to determine whether the company will generate enough cash flow to pay its obligations when they become due.

➪ Inquire from Usonga Ltd.'s attorneys whether there are any pending lawsuits or claims; if so, evaluate their materiality and potential effects on the company's ability to continue as a going concern.

➪ Examining post-balance sheet events to assess their influence. Examine the post-year-end board minutes to find any further issues that can point to the company's financial difficulties.

➪ Conduct an audit test in light of recent events to find any elements that could point to or reduce the danger of a going concern that is inappropriate.

➪ Examine whether any extra disclosures should be provided in the financial statements regarding material uncertainty regarding going concern, as required by IAS 1 Presentation of Financial Statements.

➪ Get a formal statement from Usonga Limited attesting to the directors' view that the company is a going concern.

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QUESTION 2a

Q (a) Describe three responsibilities of an auditor in the audit of general purpose financial statements. (6 marks)
A

Solution


Responsibilities of an auditor in the audit of general purpose financial statements.

The auditor has the responsibility of;

1. They form and express an opinion on the general financial information of the companies they review.

2. Examining a company's books of accounts to see if they accurately and fairly depict the state of the business.

3. Ensuring that the financial statements are subjected to the necessary tests to see whether there are any serious misstatements

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QUESTION 2b

Q Explain three key elements of an assurance engagement. (6 marks)
A

Solution


Key Elements of an assurance engagement.

(1). 3 Parties (User, Preparer, Reviewer).

➫ The intended user - the person who wants the report for a specific purpose.(Shareholders,employees e.t.c)

➫ The responsible party - the person who provides the subject matter.(Managenent)

➫ The Practitioner - the person who reviews the subject matter and provides assurance.(Qualified auditor)

(2). The Subject Matter.

➫ The material provided by the responsible party, which needs assurance on.

(3). Criteria to judge reliability and accuracy (e.g.IAS, IFRS,ISA).

➫ This is so the subject matter can be assessed.

(4). Sufficient, appropriate Evidence to make an opinion.

➫ In order to provide confidence, the practitioner needs to obtain sufficient and appropriate evidence.

(5). A written report.

➫This is given to the intended user and the responsible party from the practitioner

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QUESTION 2c

Q Differentiate between the two audit conclusions above. (4 marks)
A

Solution


➪ In the first conclusion, users are being informed by the auditor that the financial statements do not provide a true and fair view from his perspective as an auditor.
➪ The second one, he advises users that he is unable to provide an opinion on financial statements since he was unable to get sufficient and appropriate audit evidence .

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QUESTION 2d

Q Outline four safeguards that an audit firm could implement to address potential conflicts of interest when auditing two competing clients. (4 marks)
A

Solution


Safeguards than an audit firm would implement to address potential conflicts of interest when auditing two competing clients.

➪ Both firms should be notified that the same audit firm would be acting as auditors for each of them, and if necessary, consent should be obtained from each.

➪ Procedures to prevent access to information, such as strict physical separation between two groups, confidentiality, and secure information transfer.

➪ The use of separate engagement team - once an employee has worked on one audit, then they would be prevented from being on the audit of the competitor for a period of time.

➪ Advising one or both clients, if need be, to seek additional independent advice.

➪ Provide all team members with a clear understanding of security and confidentiality. These instructions can be included in the attendance checklist.

➪ Having confidentiality agreements signed by company employees and partners of the firm.

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QUESTION 3a(i)

Q Describe two situations where an auditor might need to rely on the work of an expert. (2 marks)
A

Solution


Situations where an auditor might need to rely on the work of an expert.

➫ Valuation of land and certain assets such as real estate, machinery, works of art, and gems

➫ The measurement of work completed and to be completed, that is, work in progress in contracts for the purpose of value recognition.

➫ Legal advice on how to understand contracts,policies, laws, and regulations.

➫ Items that determine the physical properties of assets, such as materials used in concrete, mineral and petroleum, and the main equipment of plants and machinery.

➫ Calculation of quantities using specialized methods, such as actuarial valuation.

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QUESTION 3a(ii)

Q Explain three factors taken into consideration by an auditor when placing reliance on the work of an expert.(6 marks)
A

Solution


ISA 620 Using the Work of an Auditor's Expert states that the auditor should obtain sufficient and appropriate evidence that the work of the expert is adequate for the purpose of the audit.

In making this assessment the external auditor must assess the expert's:

➫ The roles and responsibilities of the auditor and the expert. ➫ The materiality of the subject matter being examined in relation to the available financial information as a whole.

➫ The nature, timing and extent of communication between the two parties. ➫ The subject matter's nature and intricacy, as well as its potential for inaccuracy.

➫ Professional qualification, licence or membership of an appropriate professional body.

➫ Experience and reputation in the field in which the auditor is seeking advice.

➫ The objectivity of the expert - If he works for the client or is tied to the client in any way, this may be compromised.

➫ The auditor's knowledge and experience with previous work undertaken by the expert.

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QUESTION 3b

Q (b) Examine four contents of working papers in circumstances where the auditor has used analytical procedures as substantive tests in carrying out his audit engagement. (4 marks)
A

Solution


Contents of working papers in circumstances where the auditor has used analytical procedures as a substantive tests'in carrying out his audit engagement.

1. Ratios used for analysis.

2. Trends used and which financial periods have been considered.

3. Significant fluctuations in items.

4. Factors likely to have an effect on items in the accounts.

5. Budgeted and actual values

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QUESTION 3c(i)

Q Summarise two objectives of an internal control system over the company's non-current assets. (2 marks)
A

Solution


1. To ensure completeness and accuracy of records.

2. To safeguard the non-current assets of the firm.

3. To prevent and detect errors and frauds

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QUESTION 3c(ii)

Q (ii) Discuss three internal control procedures you would recommend to the company to safeguard its investments in non-current assets. (6 marks)
A

Solution


Internal control procedures to be recommended to the company to safeguard its investments in non-current assets.

1. Authorization and control - this should be done by responsible officers before employees' use or access non - current assets e.g. a vehicle,use of passwords to access compurters, plant and equipments

2. Physical control - limit accessibility of the company's assets only to authorized persons.

3. Personal controls- Making sure the personnel handling the non-current assets are competent, qualified, and honest, such as those qualified to operate a vehicle.

4. Investment controls - disposals and depreciation rates by impartial individuals at a suitable level within the organization who are not in charge of the assets or records on a daily basis;
- Insuring against disaster and having contingency plans

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QUESTION 4a

Q (i). Basis for opinion. (3 marks)

(ii). Key audit matters. (3 marks)
A

Solution


(i) Basis for opinion.

1. If the financial statements give a true and Fair view of the accounts

2. Materiality of financial statements and if they are persuasive or not.

3. Written opinion of the auditor regarding the financial statements that is based on the work done.

(ii) Key audit matters.

(1). Material subsequent events.

(2). Matters regarding going concern.

(3). Explanation of new legislation that has a major impact on the financial statements.

(4). Contingent liability that may affect the future of an entity

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QUESTION 4b

Q Citing two examples, explain the term "fraudulent financial reporting". (3 marks)
A

Solution


Explain the term fraudulent financial reporting and give two examples .

Deliberately misrepresenting a company's financial statements designed to give investors a false impression of the company's operations and performance. e.g

➫ Understating expenses increase earnings.

➫ Overstating revenue to increase reported sales and earnings

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QUESTION 4c

Q Discuss four circumstances which might cause an auditor to change his risk assessment of a client company. (8 marks)
A

Solution


Circumstances which might cause an auditor to change his risk assessment of a client company

When there are:

1. Changes in the scope of audit engagement.

2. Changes in the nature of client business.

3. changes in the clients company size

4. Changes in ownership of client company.

5. Changes in financial conditions of the clients company .

6. Changes in the international accounting standards

7. Changes in laws and regulations in industry under which the company operates.

8. Changes in management and directors of the clients company

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QUESTION 4b

Q Examine the importance of materiality assessment to an auditor. (3 marks)
A

Solution


Importance of materiality assessment to an auditor.

(i). It influences audit planning

(ii). Determines amount of audit evidence to be gathered.

(iii). It influences auditor's opinion

(iv). It influences the auditor's time

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QUESTION 5a

Q (a) Describe three components of an entity's internal control system. (6 marks)
A

Solution


Components of an entity's internal control system.

(i) Control environment - This is the directors' and management's general perspective and awareness of the ICS and its significance to the company.

(ii) Controls procedures - refers to the methods and guidelines that management establishes to fulfill the specific objectives and goals of the entity.

(iii) Risk assessment - This involves identifying risks, analyzing them and finding a way to manage them.

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QUESTION 5b(i)

Q (i) Explain the term "reasonable assurance" as used in auditing. (2 marks)
A

Solution


Reasonable assurance is a high but not absolute level of assurance . The auditors in his report reduces the assurance engagement risk to an acceptable low level as regards to the circumstances of the engagement.

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QUESTION 5b(ii)

Q (ii) The internal audit function of an entity should have an internal audit charter approved by the Board to govern its activities:

Required:

As an internal auditor of Zed Ltd., discuss six matters contained in an internal audit charter of an entity. (12 marks)
A

Solution


Matters contained in an internal audit charter of an entity.

1. Risk assessment and mitigation measures.

2. Reviewing of accounting and internal control system.

3. Financial and operating information of an entity.

4. Procedures of appraising audit activities.

5. Rules and regulations to be adhered to in the preparation of financial statistics.

6. Procedures of gathering and obtaining audit evidence.

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