CPA
Intermediate Leval
Auditing and Assurance November 2019
Suggested solutions

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Advantages of outsourcing internal audit function.

1.Lingo ltd will have a fresh set of experience and exposure from outside the organization that are objective and unbiased

2.Skills and experience:-outsourced audit firms already have staff with specialist skills, so Lingo Ltd will provide services as desired.

3. Cost & time efficiency:- More cost and time efficient, freeing up internal resources. Outsourced internal auditing typically spends less time increasing efficiency and effectiveness. In addition, the costs for the internal audit service will be agreed in advance. This will ensure that Lingo limited can budget accordingly.

4. Staffing:- If Lingo Limited outsources, there will be no need to spend money in recruiting further staff as Professional audit staff members will be provided.

5. Flexibility:- Lingo Limited's internal audit services allow complete flexibility if the internal audit service is outsourced. Employees may be asked to adjust to the workload and business requirements. This will ensure that additional staff will be readily available when needed.


6. Immediate solution:- Since the retail sector will be operational, outsourcing can immediately provide the number of employees required.

7. Lingo ltd management will attribute more attention on external experts, especially where there are sensitive issues that internal auditors may be reluctant to address

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Characteristics of audit investigations.

1. Systematic process.

2. Three-party relationship.

3. Subject matter.

4. Evidence.

5. Established criteria.

6. Opinion.

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Reasons why audit investigations is conducted.

1. Independent Opinion

Audit inspections are useful for obtaining an independent opinion from the auditors on the state of affairs of the business. If the accounts are audited by an independent auditor, it will be essential that the auditor's report be truthful and fair in all respects.

2. Verification of Books

Audit controls help verify books of accounts, which helps keep records up-to-date at all times.

3. Detection and Prevention of Errors

These errors, whether intentional or not, are discovered during the audit process and their existence prevents them from occurring in the future. Nobody will try to cheat or cheat because the accounts will be audited and therefore for fear of being discovered.

4. Detection and Prevention of Frauds

Like errors, fraud is discovered through audit investigations, and its presence reduces future malpractices and wrongdoings.

5. Insurance Claims

An investigation may be conducted for claims under the insurance policy covering the losses.

6. Taxation

The object of the investigation may be the tax justification. To determine the income tax , an investigation can be made by the income tax department.

7. Business shatdown

If a business is forcibly dismantled, an investigation will be conducted to determine the amount of compensation due.

8. Credit Purpose

Sometimes a bank or client wants to grant a loan to a business. So an investigation is made on his behalf to determine the financial position of the firm.

9. Auditor's negligence

If there is a charge of negligence against the auditor, then an investigation may be conducted on behalf of the company or any person.

10. Purchase of shares

If a client wants to buy shares of a company, he can investigate through an auditor who can understand the actual situation of the company on his behalf.

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Steps auditor should take to confirm unrecorded liabilities.

The purpose of researching unrecorded liabilities is to discover liabilities that may have been omitted from recorded liabilities at year-end (completeness). A typical program includes the following:

1. Obtain and reconcile financial statements to identify discrepancies that may impact completeness, availability or valuation.

2. Perform an analysis of internal controls to assess their likely effectiveness in preventing and detecting the occurrence of such misstatements.

3. Checking supplier invoices and statements towards the end of the year.

4. Inspect a sample of pre and post year-end goods received notes (GRNs) to ensure completeness and agree that the purchase is recorded in the correct period’s purchase day books.

5. Check year-end bank statements for payments that may indicate unrecorded liabilities.

6. Issue out circulations to obtain direct confirmation of balances from suppliers where supplier statements are not available.

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Levels of assurance to include in the bank's request.

1. Reasonable assurance and limited assurance.

2. Risk assurance and reduction assurance.

3. Sufficient assurance and appropriate assurance.

4. Professional assurance and compliance assurance.

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Procedures to be adopted to examine the cash flow forecast.

1. Review the terms of the surety and loan agreements and determine if there are any violations.

2. Analysis and discussion of the entity's latest available interim financial statements.

3. Analyze and discuss cash flow, earnings, and other relevant forecasts with management.

4. Confirm the existence, legality, and enforceability of agreements with related parties and third parties to provide or maintain financial support and assess the financial capacity of such parties to provide additional funding.

5. Consult with the entity's legal counsel about the existence of litigation and claims, as well as the reasonableness of management's assessment of their outcome and estimate of the financial impact.

6. Consult the minutes of the general meeting of shareholders, the board of directors and important committees as a reference for financing questions.

7. Review correspondence with suppliers for evidence of payment issues that may affect the company's ability to obtain supply or credit.

8. Review customer communications for evidence of any disputes that may affect debt collection and affect future sales.

9. Review subsequent events to identify those that mitigate or otherwise affect the entity's ability to continue as a going concern.

10. Get a written statement from management about their future plans and how they plan to resolve current issues.

11. Check correspondence with the bank for signs that a loan or bank overdraft may be withdrawn.

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Meaning of unqualified opinion.

An unqualified opinion is considered as a clean report. This is the type of report that auditors usually give. It is also the type of report that most companies expect to receive.
The unqualified opinion contains no negative commentary of any kind and does not include any disclaimer regarding the conditions or the audit process.
This type of report indicates that the auditors are satisfied with the company's financial reports. The auditors believe that the company operates in accordance with management principles and applicable laws. The company, auditors, investors and the public believe that there is no material misstatement in the report.

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Matters that should be included in unqualified report.

1. A title.

2. Addressee as required by appointment.

3. The opinions section contains opinions on the financial statements and references to the applicable financial reporting framework used to prepare the financial statements.

5. Statement that the auditor is independent of the audited entity in accordance with the professional ethics requirements relating to auditing, and has fulfilled the other professional ethics responsibilities of the public accountant in accordance with those requirements.

6.For an audit of the complete set of general financial statements of a public entity, the names of the engagement partners are disclosed, except in rare circumstances where such disclosure could reasonably result in a significant threat to personal safety.

7 The auditor's signature.

8 The auditor's address.

9. The date of the auditor's report

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Meaning of "test data".

Data testing involves auditors submitting "dummy data" into a client's system to ensure that the system handles it correctly and prevents or detects and corrects misstatements and anomalies. The purpose is to test the operation of application commands within the system.

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Uses of test data when auditing in a computerized environment.

1. To test the security of a system, such as a payroll system, by entering a dummy password.

2.To test and check internal program controls and any deviations in the application process.

3. To test if programmed controls are working effectively.

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Distinction between "tolerable error" and "expected error"

Tolerable error is the maximum error in the population that the auditor is willing to accept.
For testing of controls, the auditor is willing to accept a maximum deviation rate of and still believes that the control is operating at a satisfactory level based on the initial control risk assessment.
For substantive tests, it is the maximum amount that the account can be misstated, whereby the auditor can still conclude that the account is fairly stated.

Expected error is the error rate that auditors expect to exist in the population.
For tests of controls, this is the expected population deviation rate.
For substantive tests this is the expected misstatement.

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Meaning of inherent risk.

The inherent risk is that the sensitivity of assertions about a class of transactions, account balances, or disclosures of misstatements, alone or in combination with other misstatements, may be material before any relevant controls are considered.

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Factors that can result in increase in inherent risk of a business.

1. Pressures on management or directors which might predispose them to misstate financial statements such as targets e.t.c

2. Management competence and experience.

3. The integrity of managers or directors.

4. Factors affecting the industry (competition,political e.t.c)

5. The diversity and complexity of the entity, such as its technology, capital structure, geographical spread, e.t.c.

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International Standard on Auditing (ISA) 560-Subsequent events.

Financial statements may be affected by certain events that occur after the date of the financial statements.

Distinction between "adjusting events" and "non-adjusting events" with examples.

Adjusting events-These are events that provide additional evidence relating to conditions existing at the reporting date. Such events provide new information about the items included in the financial statements and hence the financial statements should be adjusted to reflect the new information
Examples include:
1.Amounts received or receivable in respect of insurance claims
2. Allowances for damaged inventory
3. Agreement of a tax liability.
4. The determination of the purchase or sale price of non-current assets purchased or sold before the year-end.
5 Discovery of errors and so on.

Non-adjusting event- These events relate to conditions occurring after the closing date. If material, it should be disclosed in the notes to the financial statements, explaining the possible impact of the event. Therefore, such events do not affect the current period statement of financial position or income statement items.
Examples of non-adjusting events include:
1. Issue of new share or loan capital.
2. Losses of non-current assets or inventory as a result of a catastrophic event
3. Changes in the composition of the group such as mergers, acquisitions and reconstructions.
4. Purchases and sales of significant non-current assets.
5. Strikes

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Relationship between "going concern" and "non-adjusting event.".

Both affect the fortunes of the business after the publication of its financial statements, and the recognition that the business continues to be a going concern brings with it the recognition that events occurring after the balance sheet date are non-adjusting.

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Advice with reasons and actions to be taken.

1. The issue affected the value of the inventory and was therefore an adjustment event. Management should adjust it to reflect the actual figure as of that date.

2. Issue of shares is a non-adjusting event because it does not relate to conditions in place at the end of the reporting period.

3. This information is obtained after the end of the year but provides further evidence of the net realizable value of the inventory at the end of the year and is therefore an adjusting event. Therefore, the directors have to modify the financial statements by writing down the inventory.

4.The receivable was an issue that was in existence at the year's end; therefore, it is an adjusting event. The event must be adjusted or recognized in the financial statements.

5.The purchase of an asset is a non-adjusting event, and no action is to be taken unless it is material.

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Objectives of public sector auditing.

1. Strengthen the effectiveness of institutions within the constitutional arrangement that exercise general supervisory and corrective functions over government and those responsible for the administration of public-funded activities.

2.Promote accountability and transparency, encouraging continuous improvement and enhanced confidence in the appropriate use of public funds and assets and the performance of public administration.

3. Provide independent, objective and reliable information to target users. conclusions or opinions based on sufficient and appropriate evidence relating to public entities.

4. Drive costs by providing knowledge, comprehensive analysis, and informed recommendations for improvement.

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Reasons to review internal control system prior to undertaking verifications of transactions.

1. Determine the reliability of an entity's financial information.

2. Confirm the economic,effective, and efficient nature of its operations.

3. Determine compliance with applicable laws and regulations.

4. Access risk exposures

5. Commitment to the level of confidence in the work of internal auditors.

6. Examine amount of substantive tests.

7. Examine complexity of the system.

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1 This is a business relationship that compromises the independence of the auditor. If the auditing firm (or its member) establishes a business relationship with the client (e.g. joint venture, marketing agreement), this leads to self-interest as the auditor will be interested in the client's successful operations . Also, it is unprofessional for partners to use inside information for personal gain as indicated above.

2. Non-compliance with the code of ethics regarding independence. Assuming management responsibilities for assurance clients can pose a threat to independence. This is management threat. A firm should not assume management responsibility for an assurance engagement or for an audit client.
3.Non-compliance with an independent code of ethics. The responsibility for the design, implementation and maintenance of internal controls is the responsibility of management, which creates threats to management

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