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

QUESTION 1(a)

Q Analyse two types of threats that might arise from an audit firm accepting to undertake non-audit related services to its client. (4 marks)
A

Solution


Types of threats that might arise from an audit firm accepting to understate non-audit related services to its clients.

1. Familiarity threat .
This arises if the auditor or audit firm accepts work in a client company with close family members and relatives, making the auditor's independence compromised.

2. Self review threats.
This is a threat that arises from auditors reviewing their own work or the work done by others in their firm. It may be more difficult to evaluate without bias one's own work or that of one's firm than the work of someone else or of some other firm.

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QUESTION 1(b)

Q In the context of the Companies Act, outline four statutory rights of an auditor.(4 marks)
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Solution


Four statutory rights of an auditor.

(i). Right to remuneration.

(ii). Right to access the books of accounts, vouchers and financial statement of the entity being audited

(iii). Right to visit branches and subsidiaries if any

(iv). Right to obtain notice and attend the AGM.

(v). Right to make a statement of AGM.

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QUESTION 1(c)

Q Explain the term "negative assurance" as used in auditing.
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Solution


Meaning of Negative Assurance as used in Auditing.

This is an auditor's declaration that certain facts are considered to be true since there is no proof to the contrary, or an auditor's written declaration that an audit turned up no evidence of fraud.

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QUESTION 1(d)

Q With reference to an audito€s report, discuss five matters that should be included in the "auditor's responsibilities for the audit of the financial statements" paragraph. (10 marks)
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Solution


Matters that should be included in the auditor's responsibilities for the audit of the financial statements" paragraph.

(i). Indicate whether accounting standards were used to prepare the financial statement that was under audit.

(ii). The planning of the audit and the auditor strategy for obtaining a reasonable level of assurance that financial statements are free from material misstatements.

(iii). To indicate whether or not he received all required financial statement explanations and details on the audit.

(iv). Matters for which to provide an opinion on the financial statements in light of the management's activities.

(v). Methods for acquiring adequate and pertinent evidence to support opinion-forming.

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QUESTION 2a(i)

Q Explain four reasons why an auditor should discuss the contents of the letter of representation with the directors of a client at an early stage in the audit. (8 marks)
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Solution


Reasons why an auditor should discus the content of the letter of representation with the directors of a client at an early stage of an audit.

(i). To reduce the possibility of misunderstandings between the auditor and the client.

(ii). Clarifies the scope of the auditor's obligations and liabilities.

(iii). To let the client know about additional services the auditing firm can offer

(iv). To confirm in writing any verbal agreement.

(v). To eliminate any implied contracts.

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QUESTION 2a(ii)

Q Analyse three responsibilities of an auditor on receipt of written representations from management. (6 marks)
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Solution


Responsibilities of an auditor on a receipt of written representations form management.

1. Plan for the audit
2. Ascertain if there are enough resources to carry out the audit e.g. staff.
3. Communicate with the outgoing auditor, if any, for ethical clearance.

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QUESTION 2(b)

Q Outline three audit objectives sought by an auditor when examining a client's investments in stocks and shares. (6 marks)
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Solution


Audit objectives sought by an auditor when examining clients investments in stocks and shares.

➫ To verify that the stocks and shares have been issued in accordance with the regulations.

➫ To determine if the shares have been issued for non-cash consideration

➫ Ensure if the fair value has been received.

➫ To establish the terms of issue of the shares and terms for the purchase of investment in stocks.

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QUESTION 3(a)

Q Describe the process that an auditing firm should undertake to assess whether pre-conditions for an audit are present when accepting an audit assignment, (4 marks)
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Solution


Process that an auditing firm should undertake to assess whether pre-conditions for an audit are present when accepting an audit assignment.

1.Check to see if the financial reporting framework that will be used in the financial statement preparation is appropriate.

2. Obtain management agreement that they acknowledge and understand their responsibility.

3. Perform ethical clearance, i.e., contact outgoing auditors, if any.

4. Evaluation of the client's reputation

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QUESTION 3(b)

Q Identify three main areas, other than audit risk, which should be included within the audit strategy document for an audit of a client and for each area, provide a relevant example. (6 marks)
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Solution


Main areas that should be included within the audit strategy document for an audit of a client and give an example in each.

1. Elements of financial statement like assets, liabilities,income and expenses.

2. Summary of terms of engagement, e.g., nature and scope of work to be done

3. Staffing arrangement such as audit managers, audit assistants

4. Audit risk - compiles a list of all those areas with inherent risks

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QUESTION 3c(i)

Q Describe the procedures the auditor should undertake to confirm opening balances for a new audit engagement. (3 marks)
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Solution


Describe the procedures the auditor should undertake to confirm opening balances for a new audit engagement.

1. If opening balances don't contain material misstatements that may affect current periods financial statements.

2. Prior periods closing balances have been correctly brought forward to current period.

3. Appropriate accounting policies are appropriately applied.

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QUESTION 3c(ii)

Q Explain the impact on the audit report if the auditor is unable to confirm the opening balances or if the opening balances contain misstatements. (3 marks)
A

Solution


Impact on the audit report if the auditor is unable to confirm the opening balance contain misstatements.

After establishing the materiality of the misstatements, the auditor should offer a qualified opinion or disclaimer of opinion if they are unable to assert whether the opening balances contain misstatements.

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QUESTION 3(d)

Q Citing two areas and with relevant examples in each case, explain the purpose of a value for money audit. (4 marks)
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Solution


The purpose of value for money is to determine.

1. Economical
2. Efficiency.
3. Effectiveness.

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QUESTION 4(a)

Q Discuss the audit issues applicable in the above case, (6 marks)
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Solution


1. To reflect the correct amount of the intangible assets, the 4 million should be put aside from intangible assets.

2. Health care does not know how to follow laid-out procedures and policies because the project did not follow the proper procedures, i.e., it should have met the criteria for capitalization.

3. Overstatement of the profit that needs to be reduced.

4. The net assets have been overstated, which has a significant impact on the balance sheet figure and should be corrected by appropriately decreasing them.

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QUESTION 4b(i)

Q Explain the purpose of review engagements and how they differ from external audits. (4 marks)
A

Solution


Purpose of review engagements and how they differ from external audits.

The objective of a review engagement is to enable an auditor to state whether, on the basis of procedures which do not provide all the evidence that would be required in an audit, anything has come to the auditor’s attention that causes the auditor to believe that the financial statements are not prepared, in all material respects, in accordance with an identified financial reporting framework (negative assurance).

Review engagement differ from external audits in the sense that external audit are a legal requirement, and the scope of work is determined by the company's act while review engagement are not a legal requirement and the scope of work is not determine by company act.
A review engagement differs from an external audit in that the procedures undertaken are not nearly as comprehensive as those in an audit, with procedures such as analytical review and inquiry used extensively. In addition, the practitioner does not need to comply with ISAs, as these only relate to external audits.

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QUESTION 4b(ii)

Q Describe the level of assurance provided by external audits and review engagements. (4 marks)
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Solution


Level of assurance provided by external audits and review engagements.

Review engagements – The review engagement provides a limited level of assurance.The practitioner gathers sufficient evidence to be satisfied that the subject matter is plausible; the practitioner confirms that nothing has come to their attention that indicates that the subject matter contains material misstatements. i.e. negative assurance while,

External audit - provide a reasonable level of assurance and not absolute level of assurance on financial statements.It gives reassurance that there are no substantial misstatements and that the financial statements are true and fair in all material aspects.

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QUESTION 4(c)

Q Explain three ethical threats which might affect the independence of audit practitioners and for each threat, explain how it might be reduced to an acceptable level. (6 marks)
A

Solution


Ethical threats that might affect the independence of audit practitioners and for each threat explain how it might be reduced to an acceptable level.

(i). Familiarity threat - occurs when there is a close bond between the auditor and the client.
➫ The auditor should decline audit engagements where he is personally involved in order to minimize this threat.

(ii). Self-interest threat - The threat that the member will derive a financial or other benefit from its interest or relationship with the customer or any person associated with the customer.
➫The auditor should only stick to the audit and resist interests and relationships that expose him to this risk.

(iii). Self-review - occurs when auditor reviews work done by himself.
➫ The auditor should excersise professional behaviour and encourage fair review procedures to reduce this risk

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QUESTION 5(a)

Q With reference to International Standard on Auditing (ISA) 520 - "Analytical Procedures", explain four different types of analytical procedures available to the auditor, (8 marks)
A

Solution


Types of analytical procedures available to the auditor.

(i). Revenue and cost trend analysis - which involves the analysis of changes in revenue and expenditure account over time and whether they have remained consistent.

(ii). Regression analysis - Regression analysis is used by auditors to establish the relationship between two sets of variables. The dependence of one variable on another is necessary for this kind of analysis. With this, auditors can ascertain how one variable impacts the other over a predetermined time frame.

(iii). Industry comparison ratio analysis - TThis process involves the calculation of similar ratios for companies in the same industry to gauge whether their clients values are similar or higher than those of other companies.

(iv). Reasonableness testing - analysis of accounts that involves development of a model to form an expectation based on financial data, non-financial data or both.

(v). Variance analysis - which compares predicted budgeted values and actual values

(vi). Efficiency ratio analysis - involves comparing line items on a financial statement to assess them for concerns such as profitability,liquidity, and efficiency. Auditors calculate ratios and map them over an extended period.

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QUESTION 5(b)

Q With respect to information technology (IT) audits, explain the following terms: (i) Social media risk assessment. (2 marks)
(ii) Software licence review. (2 marks)
(iii) IT governance audit. (2 marks)
( iv) IT risk assessment audit, (2 marks)
A

Solution


Explaining the following terms.

(i). Social media risk assessment: This is the procedure for identifying risks using internet resources, evaluating their impact and likelihood, and creating plans for risk reduction.

(ii). Software license review: This is a subset of software asset management and a component of corporate risk management that the auditors have to check in order to determine if the software being used is legal and proper.

(iii). IT governance audit: This is an audit which aims to establish how IT interacts with management, the board of directors, and other stakeholders.

(iv)1. IT risk assessment audit: This is an audit that involves determining how to manage the risks associated with using IT in an organization.

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QUESTION 5(c)

Q Describe two types of errors that could arise from sampling risk. (4 marks)
A

Solution


Errors that could arise from sampling risk.

1. Sample frame error - A frame error that occurs when the wrong sub-population is used to select a sample.

2. Population specific error - A sampling error that occurs when researchers do not understand who they are supposed to survey.

3. Sample insuffiency errors - These errors occur because the actual respondents may not be representative of the entire sample.

4. Non-response error - Non-response occurs when you try to contact a part of your sample but they don't respond. This may occur because the potential respondent was not present during the time of contact or simply refused to respond.

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