CPA
Intermediate Leval
Auditing and Assurance November 2020
Suggested solutions

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Distinguish between a positive confirmation and negative confirmation.

➧ Positive Confirmation - Here the responding party of the circular must respond...... to the request whether or not they agree with the stated balance or information. This may be suitable for checking related party balances..
➧ Negative confirmation -Where the respondent is only required to respond to a question if they do not agree with the balance or information reported, this may be appropriate where time is limited or if the reported difference can be investigated and delt with..

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Circumstances where external confirmation might be used by the auditor to obtain audit evidence.

1. Accounts Payable - To check balances and accounts payable information.......

2. Company Attorney's Circular - This confirms any contingent liability.

3. Circularization of banks. - Auditors can obtain confirmation of bank details by sending a standard bank letter to all banks with which the client is affiliated.

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Matters that should be documented when developing an audit plan.

➧ The materiality levels set.

➧Details of planning decisions, including identified weaknesses in the system...... that require further work.

➧ The most important customer contract details such as Finance Director, Internal Audit Manager, etc.

➧Clients background information..

➧ Risk assessment.

➧A record of all client changes since the last audit.

➧The Job Timetable lists dates and schedules for testing work.

➧A summary of the terms and conditions of the contract governing the nature and scope of the audit work.

➧ Staffing requirements.

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Factors which could affect the form and the content of audit working papers.

1. The nature and conditions of customer accounting systems and internal control systems; If the client's system is vulnerable, the auditor does not rely on it and...... performs extensive physical testing. This means that more investigative reports are available for identified risks of material misstatement.

2. Importance of audit evidence obtained. The level of certification required also determines the scope of working papers required.

3. The nature of the order, i. e. Initial audits carry a higher risk of discovery than regular audits. This means more workpapers will be retrieved.

4. The Nature of the Steps Performed. If more steps are performed, more work may be required.

5. The higher the risk identified, the more audit procedures need to be performed and therefore the more dossiers required.

6. Specific Audit Methods Used

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Matters that might be taken into consideration by an auditor when developing the overall audit strategy.

➧ Characteristics of the engagement - Auditors should consider the financial reporting...... frameworks used by clients, industry-specific reporting requirements, etc.

➧ Purpose of reporting such as timing of audit , Nature of communication , the timing of company debriefing meetings with management and those responsible for corporate governance.

➧ Internal control system and accounting system. This is for auditors to determine if they are system dependent.

➧ The nature, timing and extent of the resources required for the audit.

➧ Significant factors such as information obtained from tentative order activity and other orders.

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Motivates for fraudulent financial reporting by the management of an entity.

➧ Weak Controls - Weak internal controls contribute to increased fraud within an...... organization.

➧ Mastery of one individual - Here, the top management level is ruled by her one person.

➧ Material transactions with related parties. These are transactions committed by parties within your organization.

➧ A complex organizational structure that seems unjustified.Organization can be complicated and cannot be justified at times.

➧ Large amounts of cash available - These occur when there is a lot of cash in the company that does not bank frequently or lack a bank account.

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Other areas where forensic accounting and auditing might be applied.

➧ Resolving disputes -like Marital Dispute, Shareholder Dispute, Partner Dispute etc.......

➧ Matrimonial disputes -If a couple whose assets include an interest in a company or partnership is divorcing, they hire a forensic accountant to assess the company so they can come to an agreement..

➧ Insurance claims- Amount of Economic Loss Suffered to Determine Compensation Amount..

➧ Negligence claims -If an accountant is accused of negligence, a forensic accountant may be engaged to inspect the work performed and certify that it meets the required standards..

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Approaches used in performance auditing in the public sector.

➧ A system-oriented approach that examines the proper functioning of management systems.......

➧ A result-oriented approach to assess whether the predefined goals have been achieved as intended.

➧ Problem Oriented Approach - Investigate and analyze the root cause of a specific problem.

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Distinguish between test of control and substantive tests.

Control Tests - Tests to determine if a system is trustworthy. Auditors rely on systems when they are strong.......

A substantive test - is the examination of details of transactions and account balances to establish the validity, accuracy, completeness and reliability of the information contained in financial records. The nature of an entity procedure depends on the nature of the system. If the system is strong, we will perform a limited substantive review, and if the system is weak, we will perform a full substantive review.

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Test of control that an auditor might carry our in the course of his audit assignment.

➧ Inventory and work - in-progress management. To ensure that all product movements in and out of our stores are properly authorized and recorded.......

➧ Asset Management - This is to ensure that your organization's assets are protected.

➧ Management of the wage system - To ensure that employees are paid only for work done.

➧ Managing Bank Balances and Check Payments to Prevent and Detect Fraud and Errors Related to Bank Balances

➧ Management of Purchases and Accounts Payable - To ensure that goods are ordered under proper authority.

➧ Sales and accounts receivable management - To ensure that only highly rated products are delivered to customers and customer orders are fulfilled.

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Matters that might be taken into consideration when reviewing the work performed by audit assistant in an audit engagement.

➧ An understanding of the audit firm's quality control procedures to ensure that the...... objectives of the statutory audit are achieved.

➧ Ability to exercise professional judgment. An opportunity to express an opinion on the financial statements and industry knowledge

➧ Understand the ethical and legal requirements that apply to auditors..

➧ Auditors experience in similar audit assignments .

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Factors that could influence your decision on whether to perform tests manually or with CAATS.

➧ Practicality of Manual Testing

➧ Cost Effectiveness of Using CAATs......

➧ Availability of Testing Time

➧ Availability of Testing Client Computer Facilities

➧ Level of Testing Experience and Expertise in Using a Specific CAAT

➧ Level Content of testing provided by CAAT for internal audit clients and how much confidence external auditors have in this work.

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➧ I disagree as audits are subject to inherent limitations and only reasonable assurances are provided by auditors.

➧I agree with him because every limited liability company must appoint an auditor to audit its financial statements.......

➧ He may also use the audited financial statements to make a stock purchase decision, as auditors provide a true and fair view of the financial statements.

➧ I disagree because the auditor is unaware that James uses audited financial statements to purchase stock.

➧ I disagree- Auditors may not be able to detect material misstatements due to unavoidable risks.

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Mechanisms that management of an audit firm could use to ensure compliance with the professional ethics by members of staff.

➧ If they have internal policies that reflect the ethical requirements.......

➧ Ensure that employees follow auditing standards when auditing financial statements.

➧ The existence of policies and procedures to monitor and, if necessary, manage dependence on income received from individual clients.

➧ Implementation of quality control procedures. This is to minimize the risks associated with testing.

➧ Second Partner Review - Here, an independent partner of the audit firm who did not participate in the review reviews Working Papers and draws independent conclusions that determines whether he agrees with the conclusion of the responsible partner.

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Aspects of financial statements that the auditor should evaluate.

➧ Income Statement – ​​The auditor performs procedures to verify the occurrence,...... completeness and accuracy of information relating to the balances of income statement items

. ➧ Balance Sheet - The auditor should comment on the items included in the financial statements.

➧ Equity items included in the financial statements should be evaluated to ensure they are included at fair value.

➧Cash Flow Statement - Accountants need to assess the movement of a company's cash and cash equivalents.

➧Notes on Financial Statements - All disclosures and transactions that have occurred that show the balance of items in the financial statements should be evaluated.

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Audit assertions you would test in the conduct of office furniture and equipment.

➧ Rights and Obligations - The auditor must examine the title deed to verify ownership.......

➧ Completeness - Auditors must examine the fixed asset register to determine what office furniture is included and trace assets back to the general ledger to ensure completeness .

➧ Accuracy - Auditors must ensure that office furniture and fixtures are disclosed for fair and reasonable amounts.

➧ Existence - The auditor must assess whether the office furniture exists on the balance sheet date.

➧ Valuations - Auditors must review past cumulative costs, depreciation, revaluations, additions and disposals of office furniture and equipment.

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Reasons why directors might decide not to correct material misstatement in the financial statements.

➧ A document other than a copy is not available when the document is expected to exist in its original form.......

➧ The figures do not meet the expectations generated by the analytical review procedure.

➧ Unusual discrepancy between entity record and acknowledgment.

➧ Unsupported or unauthorized funds or transactions. Directors may engage in fraudulent transactions that result in their inability to correct material misstatements.

➧ Directors fail to address identified deficiencies in the system.

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