Tutorial Q A Abfa 3114 t1 t14 For Guide Only Tutors Copy Pa

ABFA 3114 Principles Of Auditing Tutorial Questions Tutorial 1 Introduction to Auditing Question 1 Why is the studying of auditing different
nt from studying other accounting topics? How might understanding auditing concepts prove useful for consultants, business managers, and so forth? Studying of auditing is learning the tools for auditing, its framework of analytical and logical skills to evaluate the evidence. Auditing emphasizes learning a framework of analytical and logical skills to evaluate the relevance and reliability of the systems and processes responsible for financial information, as well as the information itself. Accounting focuses on learning the rules, techniques, and computations (for Accountants) required in preparing financial statements where it refers to statement of comprehensive income (formally income statement) and statement of financial position (formally balance sheet), cash flow statement etc. Understanding auditing concepts can improve the decision making ability of consultants, business managers and accountants by providing a framework for evaluating the usefulness and reliability of information. The credibility of auditor is valued with confidence as compared to managements assertions as they are more independent.
NOTE: The proposed answers serve as GUIDE ONLY and is not a model answer or the only manner of answering the questions. The objective of the proposed guide is to assist the student to appreciate the method of answering the questions and to appreciate the GUIDE extended. Kindly encourage students to UNDERSTAND the questions when explaining the PROPOSED ANSWERS. PLEASE DO NOT JUST READ OR WRITE THE ANSWER ON THE BOARD WITHOUT EXPLAINING If there is MISTAKE kindly highlight with proposed ANSWER & revert to lcng@mail.tarc.edu.my THANKS A LOT
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ABFA 3114 Principles Of Auditing Tutorial Questions Tutorial 1 Introduction to Auditing Question 2 Why is independence such an important standard for auditors? How does independence relate to the agency relationship between owners and managers? Independence is an important standard for auditors. If an auditor is not independent of the client, users may lose confidence in the auditors ability to report truthfully on the financial statements, and the auditors work loses its value. From an agency perspective, if the principal (owner) knows that the auditor is not independent, the owner will not trust the auditors work. Thus, the agent will not hire the auditor because the auditors report will not be effective in reducing information risk from the perspective of the owner. Question 3 Explain to your brother, in language that a layman can understand, describing an audit, with particular emphasis on its nature and purposes. Audit.The objective of an audit is to enable the auditor to express an opinion on whether the financial statements are prepared and presented, in all material respects, in accordance with an identified financial reporting framework in a true and fair view. Nature & Purpose of audit (i) The external audit has a long history that derives largely from the separation of the ownership and management of assets. Those who own assets wish to ensure that those to whom they have entrusted control are using those assets wisely. This is known as the stewardship function. (ii) The requirement for an independent audit helps to ensure that financial statements are free of bias and manipulation for the benefit of users of financial information.
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ABFA 3114 Principles Of Auditing Tutorial Questions Tutorial 1 Introduction to Auditing (iii) Companies are owned by shareholders but they are managed by directors (in very small companies, owners and managers are the same, but many such companies are not subject to statutory audit requirements). (iv) The requirement for a statutory audit is a public interest issue: the public is invited to invest in enterprises, it is in the interests of the capital markets (and society as a whole) that those investing do so in the knowledge that they will be provided with true and fair information about the enterprise. This should result in the efficient allocation of capital as investors are able to make rational decisions on the basis of transparent financial information. (v) The requirement for an audit can help prevent investors from being defrauded, although there is no guarantee of this because the external audit has inherent limitations. Reducing the possibility of false information being provided by managers to owners is achieved by the requirement for external auditors to be independent of the managers upon whose financial statements they are reporting. (vi) The purpose of the external audit under International Standards on Auditing is for the auditor to obtain sufficient appropriate audit evidence on which to base the audit opinion. This opinion is to the effect that the financial statements give a true and fair view (or present fairly in all material respects) of the position, performance (and cash flows) of the entity. This opinion is prepared for the benefit of shareholders.
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ABFA 3114 Principles Of Auditing Tutorial Questions Tutorial 1 Introduction to Auditing Question 4 John has just incorporated a private limited company. He was recently been told that, in compliance with the Companies Act 1965, his has to get an audit done on his companys accounts. He is now seeking your advice on some of his concerns. Explain to John the following. (a) The differences of auditing and accounting. Accounting is the recording, classifying and summarizing of transactions in a systematic manner for the purpose of providing financial information for decision making. Auditing is a process of reviewing the transactions and balances of accounting records to project a true and fair view of the financial position of the company. (b) State and explain the type of audit that he needs to do in compliance with Companies Act, 1965. State and explain the type of audit that he needs to do in compliance with Companies Act, 1965. Financial Statement Audits. A financial statement audit is conducted to determine whether the overall financial statements are prepared according to the acceptable accounting principles. (c) The scope and frequency of this audit. The financial statement audit covers the audit on balance sheet, income statement, statement of changes in shareholders equity and cash flow statement together with the accounting policies and explanatory notes to the financial statements. It will be conducted once a year.
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ABFA 3114 Principles Of Auditing Tutorial Questions Tutorial 1 Introduction to Auditing (d) Explain the rationale of making this audit mandatory for companies. The reason for making audit compulsory for the companies due to the existence of agency relationship between the shareholders (owners) and directors (agents). To ensure that the financial statements are drawn accurately, they employ auditors to check its reliability of financial statements. The job of external auditors is to report whether the financial statements show True & Fair view. By having this independence check the shareholders gain confidence in terms of money is being handled properly. (e) FOUR (4) benefits of auditing to Mr. Alexs company. Disputes between management and shareholders may be more easily settled by involving third party such as auditor to verify the transactions. Major changes in ownership may be facilitated if the past a/c contain an unqualified audit report To enhance the loan application- Unqualified audit report will create creditability in the financial statement for the assessment of loan application. To improve efficiency of the operation of business-- employees take care to make fewer errors in performing accounting functions and less likely to misappropriate company assets. Hence, company records are more reliable, reduces losses from embezzlements and fraudulent reporting. By serving as a basis for preparation of tax returns. By establishing and/or improving internal control systems or control procedures--auditors suggestions for the improvement of internal control, assessments of business risks, improvement of performance measures, and achievement of greater operational efficiencies. By providing a review of many aspects of the organisation's activities and procedures.
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ABFA 3114 Principles Of Auditing Tutorial Questions Tutorial 1 Introduction to Auditing Major changes in ownership may be facilitated if the past accouns contain an unqualified audit report. By providing a review of many aspects of the organizations activities and procedures. Question 5 Audit can be categorised into: (a) Financial Statement Audit is conducted to determine whether the overall financial statements are prepared according to the acceptable accounting principles Compliance audits involve checking whether the organization follows the specific laws, regulations, specific procedures set by the authority. For example, a compliance audit for a listed company may focus on whether the company follows the stock market ruling and pays the appropriate taxes. Operation audit is conducted on the operating procedures and process of the organization to determine whether it is operating in effective and efficient manner. At the end of the operational audit, auditor will recommend how to improve effectiveness and efficiency of the whole organizations operation system.
(b)
(c)
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ABFA 3114 Principles Of Auditing Tutorial Questions Tutorial 1 Introduction to Auditing Question 6 The differences and similarities between internal and external auditor Internal Audit Scope (S) It covers all areas including operation and finance functions Approach (A) It uses risk based approach, assess risk, evaluation on control system, test on operations of system, makes recommendations for improvement. Responsibility ( R) It advises and makes recommendations on internal control and corporate governance matters. Objectives (O) It advises how to protect organization against loss due to weak internal control Legal (L) It is not a legal requirement, but recommended to have internal audit department for a good corporate governance practice. External Audit It covers mainly Financial statements. It uses risk based approach, test on transactions that form the basis of the final financial statement It forms opinion on financial statements.
It provides opinion on financial statements whether they present True & Fair view. It is a legal requirement for all the registered companies to have an audit on their financial statement
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ABFA 3114 Principles Of Auditing Tutorial Questions Tutorial 1 Introduction to Auditing Give two examples of work done by an internal auditor The focus of internal audit now is on adding value to an organization through improvements in controlling risk and looking at all types of risk and control. It functions by, amongst other things, examining, evaluating and reporting to management and the directors on the adequacy and effectiveness of components of the accounting and internal control systems Question 7 a. Explain the terms "reasonable assurance" and "true and fair view". Reasonable assurance means that auditor obtains certain degree of comfort towards the financial statements that do not contain material misstatement. True. Information is factual and conforms to the reality, not false. In addition the information must conform to the required standards and laws. And, the accounts have also been correctly extracted from the books and records. Fair. Information is free from discrimination and bias and in compliance with expected standards and rules. The accounts should reflect the commercial substance of the company's underlying transactions. Fairness depends on the following factors:
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ABFA 3114 Principles Of Auditing Tutorial Questions Tutorial 1 Introduction to Auditing

b. Briefly explain FOUR (4) reasons why financial statements audit can
only provides reasonable assurance on the true and fairness of the financial statements. Use of sampling testing. Auditors use samples to test the transactions because it is impossible for auditor to check every transaction. When applying sampling, there is always a risk of taking the wrong samples. Hence, auditor may express inappropriate opinion. Inherent limitations of internal control. Even though the entity has a tight internal control system, there is always a possibility of employee collusion, management overrides the control system or human errors. Audit evidence is persuasive, not conclusive. Persuasive means giving evidence to believe; whereas, conclusive means 100% correct or wrong. Use of auditor judgment. Auditors often use professional judgment to make decision where there is always a risk that the judgment may be inappropriate. Question 8 The purpose of an external audit and its role are not well understood. You have been asked to write some materials dealing with these issues in the audit of large companies. Required: Draft an explanation dealing with the purpose of an external audit and its role in the audit of large companies. (10 marks) The purpose of an external audit is to enable the auditor to express an opinion on whether the financial statements are prepared and presented, in all material respects, in accordance with an identified financial reporting framework in a true and fair view..External auditors such as Ernst & Young, KPMG, PriceWaterhouse, Delloite, Horwarth and so on are external parties who conduct auditing services for both public and private companies
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ABFA 3114 Principles Of Auditing Tutorial Questions Tutorial 1 Introduction to Auditing The role of external audit To provide the stakeholders with an unbiased and independent evalutaion of all the financial records. 2. To appraise the risk management strategy, management control frameworks and governance procedures. 3. To underwrite the credibility of the financial reports so that users can be assured that what they are reading is what they think they are reading. The assurance that accounting standards have been adhered to, and that statutory and professional rules have been complied with, give reader's confidence that the reports are a 'true and fair' representation of the affairs of the business. 4. The external auditor must choose whether to rely on the effectiveness of the bank's internal control system. For this reason, the external auditors have to conduct an evaluation of the internal control system in order to assess the extent to which they can rely on the system in determining the nature, timing and scope of their own audit procedures. 5. To obtain reasonable assurance that financial statements are free of material misstatement by gather sufficient and appropriate audit evidence. 6. Auditors also examine, on a test basis, underlying transactions and records supporting financial statement balances and disclosures. 7. An auditor assesses the accounting principles used and significant estimates made by management and evaluates the overall financial statement presentation. 8. In some countries, external auditors are required by the supervisory authorities to provide a specific assessment of the scope, adequacy and effectiveness of a internal control system including the internal audit system. 9. To blow the whistle to the relevant authority if the client involves in the illegal activities.
1.
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ABFA 3114 Principles Of Auditing Tutorial Questions Tutorial 1 Introduction to Auditing Question 9 Explain two (2) reasons why a financial statements audit is necessary to a limited company (5 marks) Two reasons why financial statements audit are necessary: i. This is required by the Companies Act to protect the interest of the shareholders and creditors. ii. Directors are required to fulfil their stewardship by financial reporting but they may manipulate the report, therefore needs an independent audit to verify the report.
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ABFA 3114 Principles Of Auditing Tutorial Questions Tutorial 2 Regulatory Framework & Professional Ethics Question 1 Who is permitted to act as the auditor of company under the Companies Act 1965? Under section 9(1) of the Act, a person is prohibited from acting or accepting an appointment as the auditor of a company if he is: (a) Indebted to the company or its related company in an amount exceeding RM 2,500. (b) An officer of the company. (c) A partner, employer or employee of an officer of the company. (d) A partner, employee of an employee of an officer of the company. (e) A shareholder of a corporation whose employee is an officer of the company, or (f) Responsible for or if he is the partner, employer or employee of a person responsible for keeping the members register or the register of debenture-holders of the company. Question 2 For professional accountants in public practice, what are the circumstances that are likely to pose a conflict of interest with the client? Conflict of interest often arises in situation when a professional accountant in public practice competes directly with the client or is in business relationship with a major competitor of the client. Conflict of interest is also likely to arise when a professional accountant performs services for clients who are in dispute with each other or whose interests are in conflict. Question 3 For each of the following situations, discuss whether it creates a threat to professional independence. What safeguards would you suggest? (a) Heng, a sole proprietor in public practice, plans to establish a separate department that will provide internal audit services to her audit clients.
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ABFA 3114 Principles Of Auditing Tutorial Questions Tutorial 2 Regulatory Framework & Professional Ethics Heng is a sole proprietor and this means he shall not have large capital base to reject clients nor does he has adequate staff force to rotate or assign. By providing additional service, Heng shall not be independent and may jeopardize his ethics as a qualified accountant. Provision of internal audit services to audit clients may create self-review and self-interest threats. Heng must ensure that the safeguards suggested in the code of ethics are applied to reduce such threats to an acceptably low level. Under the by-laws, provision of internal audit services to clients which are listed entities is prohibited. (b) Salleh & Co has been the auditors of JBC Bhd since the incorporation of the company in 1988. The company is now listed in Bursa Malaysia. For the past ten years, Mr Salleh has been the engagement partner for the audit of JBC Bhd. The act clearly indicates a 5 + 2 window period Association with an audit client for a long period of time is likely to give rise to familiarity threat. For financial statement audit clients that are listed entities, the IFAC Code stipulates that the engagement partner and the quality control reviewer should be rotated after serving in either capacity for a pre-defined period. In Malaysia, the accounting bodies have specified the period as not more than five years. In addition, such a person rotating after the five year period should not participate in the audit engagement until a further cooling off period of two years.
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ABFA 3114 Principles Of Auditing Tutorial Questions Tutorial 2 Regulatory Framework & Professional Ethics (c) SafeMore Mart has traditionally been presenting the members of the audit team with New Year hampers. This year,because of the good company performance, each audit member is given a hamper worth RM 150 Acceptance of gifts are not encouraged in real situation and every companies have their respective internal policy that defines the amount which is acceptable and the manner of acceptance. Gifts and actions of hospitability from clients may create self interest or intimidation threat to objectivity. Unless the value of gift and hospitability is clearly insignificant, a professional accountant in public practice should not accept such gifts or hospitality. In this case, the audit team members should not accept the hamper. Question 4 (a) Briefly explain FIVE (5) statutory rights granted by Companies Act, 1965 to external auditor to enable them to carry out their duties effectively.
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ABFA 3114 Principles Of Auditing Tutorial Questions Tutorial 2 Regulatory Framework & Professional Ethics Access to records Information explanations and A right of access at all times to the books, accounts and vouchers of the company A right to require from the company's officers such information and explanations as they think necessary for the performance of their duties as auditors A right to attend any general meetings of the company and to receive all notices of and communications relating to such meetings which any member of the company is entitled to receive A right to be heard at general meetings which they attend on any part of the business that concerns them as auditors A right to receive a copy of any written resolution proposed A right to give notice in writing requiring that a general meeting be held for the purpose of laying the accounts and reports before the company (if elective resolution dispensing with laying of accounts in force)
Attendance at/notices of general meetings
Right to speak general meetings
at
Rights in relation to written resolutions Right to require laying of accounts
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ABFA 3114 Principles Of Auditing Tutorial Questions Tutorial 2 Regulatory Framework & Professional Ethics
(b) Briefly explain FIVE (5) statutory duties of external auditors under
Companies Act,1965. To report the shareholders/directors on whether the financial statements show true and fair view and have been properly prepared, in all material respect, in accordance with legislation and applicable accounting standards. To consider whether the information in the management report is consistent with the audited financial statement To give various details required by legislation in their report. Common details are directors transactions & emoluments. To form opinion on the financial statements whether they are presented in true and fair view. To report on any violation of law or the companys constitution. To make a statement of circumstance when they cease to hold office for any reason.
(c)
Briefly explain FIVE (5) statutory duties of company director under Companies Act, 1965. Ensuring proper accounting records are kept. Directors are required to design the accounting system and keep all the accounting records of the companies in a proper manner. Taking reasonable steps to safeguard the assets of the company and prevent and detect fraud and errors. Directors are responsible for designing an effective internal control system to protect the companies assets from any possibility of fraud and error. Preparing financial statements that give true and fair view. Though, directors may delegate the preparation of financial statements to accountant, they are still responsible for ensuring the financial statements are drawn up in accordance with the standards and regulation.
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Tutorial 2 Regulatory Framework & Professional Ethics Adopting good accounting policies and establish adequate internal control. Directors are responsible for compliance to the best practice of accounting standards and effective internal control system. File in annual return of the company to Companies Commission of Malaysia (CCM). Directors are responsible for preparing an annual return to the regulators. Question 5 Briefly describe FIVE (5) ethical principles that govern the behaviour of an auditor. The Fundamental Principles Integrity (I) Members should behave with integrity in all professional, business and personal financial relationships. Integrity implies not merely honesty but fair dealing and truthfulness. Objectivity (0) Members should strive for objectivity in all professional and business judgements, (objectivity is the state of mind which has regard to all considerations relevant to the task in hand but no other, it presupposes intellectual honesty). Members should not accept or perform work which they are not competent to undertake unless they obtain such advice and assistance as will enable them competently to carry out the work.
Professional Competence (C)
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ABFA 3114 Principles Of Auditing Tutorial Questions The Fundamental Principles Confidentiality Members should carry out their professional work with confidentiality. Information obtained in a business relationship should not disclose outside the firm unless there is a proper and specific authority or duty to disclose. Members should behave with courtesy and consideration towards all with whom they come into contact during the course of performing their work.
Professional Behaviour (B)
Question 6 a. Explain to the audit manager what is meant by independence and suggest ways in which the auditor can try and ensure his independence is maintained. Definition of independence Independence means a state of mind that involves objectivity in mind and in appearance and absence of any significant conflict of interest. Ways to maintain independence Undue dependence on an audit client for dependence on Income. Recurring fees paid by one client or group of connected clients should not exceed 15% of the gross practice income- (10% for public companies). Family and other personal relationship A family or other close relationship may pose a threat to independence and safeguards should be in place to preserve independence. Auditor should ensure personal relationship do not affect their objectivity
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ABFA 3114 Principles Of Auditing Tutorial Questions Tutorial 2 Regulatory Framework & Professional Ethics Beneficial interests in shares and other investment .An auditor should ensure that it does not have as an audit client a company in which any partner or anyone closely connected with a partner holds shares or has a beneficial interest in shares. Loans. An auditor or anyone closely connected with it should not make or accept loans to or guarantee from an audit client. This also applies to a partner in practice or spouse or minor child. Goods & services- hospitality. Goods and services should not be accepted by an auditor or by anyone closely connected with it unless the value of any benefit is modest. Provision of other services. There is no objection in practice to the provision of other services to audit clients, but care must be taken not to perform management functions or to make management decision. Overdue fees. The existence of significant overdue fees can be a threat to objectivity. Litigation. Objectivity may be threatened (or appear to be) where there is actual or threatened litigation between auditor and clients. Associated firm influence outside the practice. Pressure may arise from outside the practice form associated practices or organization. Auditor should not perform management functions or take executive decision. Auditors involvement is only advisory.
b. Conclude on whether you think your relationship prevents you from assisting on the audit. Since the audit staffs sister is the finance director of the audit client, he/she should not involve in this audit engagement to maintain the independence of the audit firm. Should he/she involves in the audit engagement, the objectivity of the audit firm will be impaired. He/she should also need to inform the audit partner about his/her personal relationship with the audit client.
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ABFA 3114 Principles Of Auditing Tutorial Questions Tutorial 2 Regulatory Framework & Professional Ethics c. State whether you think the outcome should be in each of the situation. (i) One of the audit partners is a personal friend of one of the chief accountant of Ponters. The chief accountant is not a director of the company and the audit partner is not responsible for Ponters work. Since the audit partner and accountant are friends and both of them are not directly involved in the auditing process, their closed relationship does not realy impair the independence of the auditor. However, both parties must maintain confidentiality of information and professional due care. (ii) The audit fee receivables from Ticko is RM150,000; the total fee income of the audit firm is RM700,000. The audit fee derived from a single company Ticko constitutes about 21% of the total fee income of the audit firm. This percentage has exceeded the guideline of 15%. The independence and objectivity can be affected due to the fear of lossing the audit income. To reduce the threat, auditor should increase its clientale in order to dilute the percentage of relying on a single client or do not provide non audit services to reduce the fee income. (iii) The audit senior in charge of the audit of Goldies Bank has a personal loan from the Bank of RM5,000 on which he is paying the market interest rate. An auditor or anyone closely connected with it should not make or accept loans to/from audit client. Having a personal loan with the audit client will affect the audit staff objectivity and independence.
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ABFA 3114 Principles Of Auditing Tutorial Questions As such the audit senior should settle all the outstanding personal debt before commencement of audit.
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ABFA 3114 Principles Of Auditing Tutorial Questions Tutorial 2 Regulatory Framework & Professional Ethics (iv) One of the partners is responsible for two audits, H and J. H has recently tendered with J for a supply of materials over a number of years. J has asked the audit partner to advise on this matter. Since the same audit partner is auditing both company H & J, he/she should uphold the principle of confidentiality of information. The audit partner should not advise and release confidential information about H to J without the respective clients consent. Question 7 a. Explain the terms error and fraud Errors are unintentional misstatements or ommissions of amounts or disclosure, for example an incorrect accounting estimate due to oversight or misinterpretation of facts. Fraud is an intention act by one or more individuals among management, employees or third parties involving the use of deception to obtain unjust or illegal advantage. In relation to financial audits, fraud can be classified as fraudulent financial reporting and misappropriation of assets. b. Explain the terms fraudulent financial reporting and misappropriate of assets Fradulent financial reporting invloves intentional misstatements, including omissions of amounts or disclosures in financial statements, to deceive financial statement users. Misappropriation of assets involves the theft of an entitys assets and is often perperated by employees in relatively small and immaterial amounts. However, it can also involve management who are usually more capable of concealing misappropriations in ways that are difficult to detect.
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ABFA 3114 Principles Of Auditing Tutorial Questions Tutorial 2 Regulatory Framework & Professional Ethics Question 8 Comment on the responsibilities of external auditor with regard to the detection of fraud above. 1. External Auditor is to ASSESS the risk that fraud or error may cause the financial statements to contain material misstatement. 2. The objective of an audit is to report on the truth and fairness of the financial information but not purposely to detect fraud and errors. However, in the course of conducting audit if the auditor discovers the fraud and material misstatements affecting the financial statements, auditor should investigate further.
3. Auditor must perform the auditing with an attitude of professional
scepticism i.e.it requires that the auditor objectively evaluate audit evidence. This means the auditor should constantly maintain a critical and questioning mind in assessing the validity of audit evidence he accumulates during the audit process. 4. An attitude of professional scepticism is necessary for the auditor to identify circumstances that increase the risk of a material misstatement resulting from fraud or error, and suspicious circumstances that indicate that the financial statements are materially misstated. If the auditor suspected that there might be a material misstatement due to fraud or error, the auditor would be more sensitive to the selection and type of evidence examined.
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ABFA 3114 Principles Of Auditing Tutorial Questions Tutorial 3 Auditors Report Question 1 For each of the following independent situations, indicate the reason fro and the type of auditors report that you would issue. Assume that each item is significant. (a) You are auditing Diverse Carbon, a manufacturer of chemical products, for the year ended 30 September 2006. The company is a defendant in a lawsuit involving breach of contract. The legal counsel of the company indicates that the company is likely to be liable, but the company does not want to disclose this information in the financial statements. Considering that this case is material as indicated on the question, the disagreement shall lead to auditors writing the report as Qualified with the disagreement due to the breach of contract. This situation suggests that the client has determined that the uncertainty is probable but the amount of damages cannot be estimated. This approach is not in accordance with approved accounting standard because of inadequate disclosure. The auditor should issue a qualified or adverse audit report depending on the materiality of the potential settlement. (b) During your audit of STB Enterprises, the controller refuses to allow you to confirm accounts receivable because he is concerned about complaints from the customers. You are unable to satisfy yourself about accounts receivable by other audit procedures. Since this is material, the auditor shall have to issue qualified or disclaimer depending on the materiality and its pervasiveness. If the auditor is satisfied that the controller's motivation for not sending confirmation is appropriate, the auditor should issue a qualified audit report for a scope limitation due to a lack of evidence on the accounts receivable balance.
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ABFA 3114 Principles Of Auditing Tutorial Questions Tutorial 3 Auditors Report (c) On 31 July 2006, Takeda Toy Manufacturing hired your firm to audit the companys financial statements for the year ended 30 June 2006. you are unable to observe the clients inventory on 30 June 2006. however, you were able to satisfy yourself about the inventory balance using other auditing procedures. If the auditor did not observe the physical stock take but was able to verify the inventory balance using alternative audit procedures, a standard unqualified audit report can be issued. The alternative audit procedures would normally include a physical count subsequent to year-end and a reconciliation to the 30 June 2006 balance.
(d) One month after the year end date, a major customer of ZK Bhd
declared bankruptcy. The directors agreed with you the ZK would not be able to recover the amount from the customer, but insisted that the amount should only be written off in the next financial year: You are expected to issue your auditors report two months after the year-end date. This is a clear disagreement with the auditor with regards to the treatment of ZK. The amount should be written off as the account is no longer recoverable. This is an adjusting subsequent event and the debtors balance should be written off. The auditor should issue a qualified or adverse audit report if the client refuses to amend the financial statements. The type of modified report depends on the materiality.
(e) Included in ASN Bhds investments is an unquoted investment in KJ
Sdn Bhd, which is under liquidation. The directors of ASN have not provided for the investment in KJ and do not intend to do so until the final report of the liquidators is obtained. Provision should be made for the investment since the investee company is under liquidation. The amount is likely to be worthless. If the client refuses to provide for the impairment, it is a non compliance with
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ABFA 3114 Principles Of Auditing Tutorial Questions accounting standard. The disagreement would ordinarily lead to a qualified or adverse audit report depending on the materiality of the issue. Tutorial 3 Auditors Report (f) You are the auditor of Ping Pong Bhd for the year ended 31 December 2006. due to technical problems with the computer and changes in personnel, the members register of the company has not been updated. The problem was not resolved at the time you completed your audit. Students may see this scenario as either limitation of scope of disagreement, depending at point of argument. If limitation of scope is chosen, then the answer should be qualified audit report or disclaimer. However, if it is disagreement then auditor would issue an adverse opinion on the registers stating that the register of the company have not been properly kept, but issue unqualified opinion on the financial statements, accounting and other records of the company.
(g) During the audit of Brannon Bakery Equipment, you found that a
material amount of inventory had been excluded from the inventory amount shown in the years financial statements. After discussing this problem with the directors, you become convinced that it was an unintentional oversight. If the auditor is satisfied that the misstatement is an unintentional oversight, the error should be corrected in the year end financial statements. The auditor should be alert for similar errors that may occur in other account items. Assuming that the error is properly accounted for, the auditor should issue a standard unqualified audit report.
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ABFA 3114 Principles Of Auditing Tutorial Questions Tutorial 3 Auditors Report Question 2 a) Briefly explain what is an audit report. (2 marks) Audit report is the principal channel of communication between the auditor and the user of the financial statements. Audit report is the review and evaluation report resulted from the test of control and substantive procedures that auditor has performed. Before issuing an audit report, auditor should assess the types of audit reports to be issued. State FIVE (5) users of the audit reports.(5 marks) Potential investors- To evaluate the performance of company before investing. Shareholders of a company- To know the profitability of the company they owned. Employees of a company- To know the performance of company. Bankers- To evaluate the credit worthiness of the borrower before lending. Suppliers- To evaluate the liquidity of the company before supplying goods.
b)
Explain any FIVE (5) types of audit reports (10 marks) Unmodified report. This report is a standard good report that does not require any change/modification on certain issues. A standard unqualified auditor's report contains the standard wording in terms of format and contents in compliance with the requirements under the auditing standard and the provisions of the Companies Act, 1965 and/or other statutory requirements Modified unqualified report. This report has an emphasis of matter paragraph. A modified unqualified report contains an unqualified opinion but the wording of the report is modified normally by the inclusion of an additional explanatory paragraph that highlights or makes reference to a matter such as going concern uncertainty.
c)
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ABFA 3114 Principles Of Auditing Tutorial Questions Tutorial 3 Auditors Report Except for report. This report is a qualified audit report with limitation of scope or disagreement but the effect of misstatement on financial statement only material but not pervasive. Adverse report. This report is a qualified audit report with disagreement and the effect of misstatement on financial statement is material and pervasive. Disclaimer of opinion report. This report is a qualified report with limitation of scope and the effect of misstatement on financial statement is material and pervasive.
d) Identify and describe the features/elements in audit reports. (8 marks) ISA 700 Forming an Opinion and Reporting on Financial Statements indicates the basic elements that will ordinarily be included in the audit report. The basic elements of an auditors report include the followings:N Audit report Reason for that element/feature o element/feature 1 Title of independent To identify this as an audit report and auditor distinguish it from other reports on financial statements that might be issued by others, directors, etc 2 3 Addressee Introductory paragraph To identify the person(s) who may use or rely on the report. It states that when an audit was conducted and identifies which financial statements are covered by the auditors report.
Managements To explain the responsibility of management responsibility for the for the preparation of financial statements in financial statements accordance with the applicable financial reporting framework
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N o
ABFA 3114 Principles Of Auditing Tutorial Questions Audit report Reason for that element/feature element/feature Auditors responsibility To state that the auditors responsibility is to express an opinion on the financial statements based on the audit To explain the scope of the audit so that the standards of the auditors work is clear and other factors such as limitation of audit testing is known
Auditors Opinion paragraph referring to the financial reporting framework followed and expressing the auditors opinion.
To provide the auditors opinion on the financial statements in terms of true and fair view, to assure the reader that the audit has been carried out in accordance with established principles and practices
Other reporting responsibility Auditors signature This is normally the signature of the audit firm as the firm assumes responsibility for the audit, not the individual engagement partner. Date of the report To inform the reader that the auditor has considered effects of transactions that the auditor became aware of on the financial statements up to that date. This is normally the city where the auditor responsible for the audit is located so he/she can be contacted, if necessary.
Auditors address
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N o
ABFA 3114 Principles Of Auditing Tutorial Questions Audit report Reason for that element/feature element/feature
Tutorial 3 Auditors Report State TWO (2) reasons why auditors report should be dated appropriately (3 marks) i. The date of auditors report should be appropriate because it indicates to the users that the last day of auditors responsibility in reviewing significant post balance sheet events.. ii. The date should not be dated before the date of directors reports.
e)
f) Three important statements of facts in the introductory paragraph of an audit report are: It states that when an audit was conducted and identifies which financial statements are covered by the auditors report. It contains a statement that the financial statements are the responsibility of management. It stresses that the auditors responsibility is to express an opinion on the financial statements. Question 3 a. Limitation of scope means auditor does not have full information when conducting an audit. In other words, auditor faces some limitations to access all the necessary information (evidence) to support his audit opinion. For example, lack of accounting records that have been destroyed or lack of explanation from directors. b. Disclaimer of opinion means the auditor does not provide any opinion on the financial statements because the financial statements are material and pervasive misstatement. c. Pervasive. An item is said pervasive means that the item seriously affects ALL the areas of the whole financial statements. The users view on the financial statements will be affected.
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ABFA 3114 Principles Of Auditing Tutorial Questions Tutorial 3 Auditors Report d. Disagreement means auditor does not agree with the management about matters such as accounting treatment or disclosure in the financial statements such as provision of bad debt, depreciation etc. e. Except for means ...................... a certain item. Except that particular item, the rest of the items are true and fair. f. Emphasis of matter means auditor wishes to highlight certain issues to the users attention provided that the directors have disclosed all the information. Question 4 i. Due to a major lawsuit, the client may not be able to continue as a going concern and this has been disclosed properly in the financial statements and the auditor is satisfied that there were no material misstatements in the financial statements. (3 marks) Type of auditors report to be issued is unqualified audit report with emphasis of matter because the financial statements have been properly disclosed and no material misstatement. In auditing the property, plant and equipment, you are of the opinion that these assets may be materially overstated. Your client refused to allow you to verify whether the asset balances were in fact overstated. (3 marks) Type of auditors report to be issued is qualified except for audit report because of limitation of scope and material misstatement. The management refused to permit the auditor to confirm material account payables. The auditor had used an alternative procedures to verify the balance and is satisfied that the overall financial statements are fairly stated. (3 marks)
i.
ii.
ii. iii.
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ABFA 3114 Principles Of Auditing Tutorial Questions Tutorial 3 Auditors Report iii. Type of auditors report to be issued is unqualified audit report because the auditor has obtained alternative procedures to overcome the limitation of scope and the financial statements are fairly stated. iv. Due to circumstances beyond control, the auditor is not satisfied with the balance of a significant item in the financial statements by any auditing procedures. Apart from that, the auditor is of the opinion that the financial statements as a whole show a true and fair view. (3 marks)
iv. Type of auditors report to be issued is qualified except for audit report because of limitation of scope and the effect is material which affect an item only but the financial statements as a whole show a true and fair view. v. The client has decided not to comply with a particular approved accounting standard because compliance would render the financial statements not giving a true and fair view. The auditor concurs with the non compliance and adequate disclosure has been made in a note to the financial statements. (3 marks) Type of auditors report to be issued is modified unqualified emphasis of matter because the financial statements show true and fair view. Auditor needs to highlight the non compliance with accounting standards. There is a major inadequacy in the entitys computerised accounting system that prevents the auditor from applying necessary procedures. The auditor is of the opinion that the effect is material and pervasive. (3 marks)
v.
vi.
vi. Type of auditors report to be issued is disclaimer of opinion because of limitation of scope that prevent auditor to apply neccesary audit procedures and the effect is material and pervasive.
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ABFA 3114 Principles Of Auditing Tutorial Questions Tutorial 3 Auditors Report vii. You are of the opinion that your clients financial statements are free from material misstatements. However, you wish to bring to the users attention on a pending legal cases against the client. (3 marks)
vii. Type of auditors report to be issued is modified unqualified emphasis of matter because the overall FS is true and fair. Auditors just wish to highlight the issues to the users attention without affecting opinion. viii. There are restrictions on the scope of the audit due to the circumstances of the engagement. You however had successfully overcome this by performing alternative procedures and concluded that the financial statements present a T&F view.
viii. Type of auditors report to be issued is unqualified opinion because auditors manage to overcome the problems by conducting alternative procedures. ix. A complete audit with satisfactory results. Financial statements are truly and fairly presented, but the auditor believes that it is important to highlight a significant related party transaction.
ix. Type of auditors report to be issued is unqualified report with explanatory paragraph (Emphasis of matter) because the financial statements present True &Fair. x. There is a possibility that the client may not be able to continue its operations. There is inadequate disclosure made in the FS, which the auditor believes the FS are so materially misstated as a whole. Type of auditors report to be issued is adverse opinion because disagreement on the inadequacy of disclosure and effects are material and pervasive.
x.
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ABFA 3114 Principles Of Auditing Tutorial Questions Tutorial 3 Auditors Report xi. The client changes its depreciation method, which has a material effect on the FS. The auditor does not concur with the changes. Other than that the overall financial statements reflect a true and fair view in accordance with the Company Act.
xi. Type of auditors report to be issued is qualified except for because disagreement on the change in the depreciation methid and effects are material only because overall financial statements reflect true and fair view. xii. Management refuses to permit the auditor to confirm material receivables and the auditor has concluded that his is unable to satisfy himself that the overall financial statements present true and fair view.
xii. Type of auditors report to be issued is disclaimer of opinion because of limitation of scope where the management refuses the auditor to send confirmation to the receivables, the effect is material and pervasive that overall financial statements are misleading. Question 5 a. Describe any Four (4) matters that an auditor should report in the auditors report, as required by the Companies Act, 1965 on the accounts presented at the annual general meeting of a company. (8 marks) i. ii. iii. iv. v. Whether or not the financial statements are true and fair. Whether or not the financial statements have been properly prepared in accordance with the Companies Act 1965. Whether the financial statements are in accordance with the applicable accounting standards. Whether the accounting and other records are properly kept in accordance with the Companies Act, 1965. Whether the auditor has not received sufficient information or explanations necessary for his auditing.
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ABFA 3114 Principles Of Auditing Tutorial Questions Tutorial 3 Auditors Report b. Explain why the auditor does not use the term auditors certificate for the title of the auditor report. (4 marks) In the auditors report, auditor merely giving his opinion and provide reasonable assurance that the financial statements audited do not contain material misstatement. Auditor cannot certifies or provide absolute assurance because there are inherent limitation in an audit that affect auditors ability to detect material misstatements. c. List the Five (5) conditions that have to be met before a standard unqualified auditors report can be issued. (5 marks). i. Auditors has obtained without restriction all information and explanation he required. ii. Financial statements have been prepared in accordance with the approved accounting standard and present a true and fair view. iii. Adequate disclosure of all matters to present a true and fair view of the financial statements. iv. All reporting duties under Company Act have been satisfied. v. There are no circumstances requiring additional explanatory or modification of wording of the annual report.
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ABFA 3114 Principles Of Auditing Tutorial Questions Tutorial 3 Auditors Report Question 6 i. Briefly explain the terms reasonable assurance and material misstatements. (3 marks) a. Reasonable assurance is high level of assurance but it is not certainly 100% guarantee the financial statements are free from mistakes. b. Material misstatements can be defined as significant mistakes that would affect the users decision. ii. Briefly explain an objective for including each of the above terms in the scope paragraph of auditors report. (4 marks) a. The objective of reasonable assurance is that audit cannot be expected to completely eliminate the possibility that a material misstatement will exist in the financial statements. b. The objective of material misstatement is that auditors are responsible to search for significant misstatements, not minor mistakes that do not affect the users decision. Question 7 a. Explain the importance of auditors adopting a conventional and uniform wording in auditors report. (2 marks) This is to avoid confusion to the readers and prevent misunderstanding in the message being communicated to the users of FS.
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ABFA 3114 Principles Of Auditing Tutorial Questions Tutorial 3 Auditors Report b. Briefly explain THREE (3) circumstances that may give rise to a disagreement with the management of the company. (6 marks) Non compliance with Company Act or other legislation No compliance with approved accounting standards Disagreement with the facts or amounts included in the FS Inadequate disclosure. c. Type of audit report on disagreement with effect of : i. Immaterial- standard unqualified. ii. Material but not pervasive- qualified except for iii. Material & pervasive- qualify adverse opinion
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ABFA 3114 Principles Of Auditing Tutorial Questions Tutorial 4 Accounting & Internal Control System Question 1 What are the managements incentives for establishing and maintaining strong internal control? What are the auditors main concerns with internal control? Within an organisation, internal control provides a way to meet managements stewardship or agency responsibilities. Management also needs a sound internal control system that generates reliable information for decision-making purposes. ISA 315 requires the auditor to obtain an understanding of the entitys environment including its internal control to assess the risks of material misstatements in the financial statements so as to plan an efficient and effective audit. The internal control that is relevant to the entity's ability to initiate, record, process, summarise, and report financial data consistent with management's assertions are the auditor's main concern. The auditor needs assurances about the reliability of the data generated within the entity's internal control system in terms of how it affects the true and fair view of the financial statements and how well the assets and records of the entity are safeguarded.
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ABFA 3114 Principles Of Auditing Tutorial Questions Tutorial 4 Accounting & Internal Control System Question 2 Describe the five components of internal control. Internal control structure is composed of five components: 1. Control environment: The control environment sets the tone of the organisation, influencing the control consciousness of its people. It is the foundation of all other components of internal control, providing discipline and structure. 2. The entitys risk assessment process: The process for identifying and responding to business risks and the results thereof. For financial reporting purposes, the entitys risk assessment process includes how management identifies risks relevant to the preparation of financial statements that are fairly presented in conformity with generally accepted accounting principles, estimates their significance, assesses the likelihood of their occurrence, and decides upon actions to manage them. 3. The Entitys Information System and Related Business Processes Relevant to Financial Reporting, and Communication: The information system relevant to financial reporting objectives, which includes the accounting system, consists of the procedures, whether automated or manual, and records established to initiate, record, process, and report entity transactions and to maintain accountability for the related assets, liabilities, and equity. Communication involves providing an understanding of individual roles and responsibilities pertaining to internal control over financial reporting. 4. Control Procedures: Control procedures are the policies and procedures that help ensure that management directives are carried out, for example, that necessary actions are taken to address risks to achievement of the entity's objectives. Control procedures, whether automated or manual, have various objectives and are applied at various organisational and functional levels.
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ABFA 3114 Principles Of Auditing Tutorial Questions Tutorial 4 Accounting & Internal Control System 5. Monitoring of Controls: It is a process to assess the quality of internal control performance over time. It involves assessing the design and operation of controls on a timely basis and taking necessary corrective actions.
Question 3 a. Define internal control Internal control is design and effected by an entitys board of directors, management, and other personnel that is designed to provide reasonable assurance about the achievement of the entitys objectives in the following categories: (1) reliability of financial reporting, (2) effectiveness and efficiency of operations, and (3) compliance with applicable laws and regulations. b. For what purpose should an auditors understanding of the internal control components be used in an audit? In planning an audit, the auditor should obtain an understanding of each of the components of internal control sufficient to plan the audit by performing procedures to understand the design of controls relevant to the preparation of financial statements and whether they have been placed in operation. c. Why may an auditor assess control risk at the maximum level for one or more assertions embodied in an account balance? An auditor may set control risk at the maximum level for some or all assertions because the auditor believes controls are unlikely to pertain to an assertion, or are unlikely to be effective, or because evaluating their effectiveness would be inefficient.
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ABFA 3114 Principles Of Auditing Tutorial Questions Tutorial 4 Accounting & Internal Control System d. What are the auditors documentation requirement concerning an entitys accounting and internal control systems and the assessed level of control risk? An auditor should document the understanding of the internal control components obtained to plan the audit. The auditor should also document the basis of the auditor's conclusion about the assessed level of control risk. If control risk is assessed at the maximum level, the auditor should document that conclusion but is not required to document the basis of that conclusion. However, if the assessed level of control risk is below the maximum level, the auditor should document the basis of the conclusion that the effectiveness of the design and operation of internal controls supports that assessed level. Question 4 Briefly explain the following control procedures: (i) Segregation of duties Assigning different people the responsibilities of authorising transactions, recording transactions, and maintaining custody of assets. Segregation of duties is intended to reduce the opportunities to allow any person to be in a position to both perpetrate and conceal errors or fraud in the normal course of the persons duties. (ii) Physical controls -The physical security of assets, including adequate safeguards such as secured facilities over access to assets and records. -This concerns custody of assets and involves procedures designed to limit access to authorised personnel only. Controls are important in the case of valuable and moveable assets. Example: only supervisor can access the inventory.
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ABFA 3114 Principles Of Auditing Tutorial Questions Tutorial 4 Accounting & Internal Control System (iii) Authorization and approval Seeking a higher authority to approve is one of the control activities. All transactions should require authorization or approval by an appropriate person. The limits of approval should be clearly specified. Example: Sales invoices need to be authorized. (v) Arithmetical and accounting Adopting appropriate accounting standards and ensuring sequential numbering of source documents. Example includes official receipts must all be accounted for even when it is cancelled. (vi) Supervision All actions by all levels of staff should be supervised. The responsibility for supervision should be clearly laid down and communicated to the person being supervised. Example: Bank reconciliation must be checked by supervisor. Question 5 You have to illustrate your answer, preferably by using transaction related to either fixed assets or cash and bank balances. No one person should be responsible for the recording and processing of a complete transaction. Functions which for a given transaction should be separated into:- initiation, authorization , execution, custody and recording. The following is an example of segregation of duty in a cash system. Cash received from a customer should be handled by cashier by accepting the cash and issuance of an official reciept. The cash should be kept by another person who is in charge of the custody of asset.
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ABFA 3114 Principles Of Auditing Tutorial Questions Tutorial 4 Accounting & Internal Control System The account officer will be recording all the cash transactions in the cash day book and ledger. Or The following is the segregation of duty in the purchase of an asset. The initiation function should be segregated from final approval function to avoid unauthorized or unnecessary purchase. The asset records function should be segregated from the general ledger function. The asset records function should be segregated from the custodial function. If a periodic physical asset is taken, the individual responsible for the inventory should be independent of the custodial and record keeping functions. Question 6 Explain FIVE (5) reasons why control risk will never be assessed at zero level. i. There is always a potential for human error due to carelessness, mistakes of judgment and misinterpretation of instructions eventhough how good the internal control system is. Thus, there is always a control risk. There is possibility that a person responsible for exercising an internal control could abuse his power by overriding the internal control. Therefore, control risk will not assessed as zero level. Fraudulent collusion to circumvent internal controls can happen both within the company and outside the company.
ii.
iii.
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ABFA 3114 Principles Of Auditing Tutorial Questions Tutorial 4 Accounting & Internal Control System iv. Auditors are required to assess the internal control system to determine its reliability and design the audit procedures. If control risk is set at zero, auditor could not able to test the internal control system. Company will give normally give priority to implement internal controls that are routine and recurring transactions. In fact, more controls must be in place for non routine transactions that are normally high risk.
v.
Question 7 Discuss the shortcoming of this system and suggest ways of improving the system. Explain why any system of internal control can provide an entity with only reasonable assurance that the entitys financial reporting objectives will be achieved. Shortcomings of Sticky Bar Chocolates system i. There is no check that the expenses claimed by the salesmen weere actually expended. ii. iii. There is no check that the expenses were properly incurred by the salemen in carrying out their duties. The deputy cheif accountant could easily perpetrate a fraud either alone or in collusion with a salesman.
Improvement i. Each salesman should complete a weekly log showing calls made and miledge covered. The logs and the expense claims should be submitted to the sales maanger who should check and sign the log before passing it to the deputy chief accountant.
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ii.
ABFA 3114 Principles Of Auditing Tutorial Questions At intervals a member of the accounts staff should verify that claimed mileage is consistent with the mileage shown in the cars recorder.
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ABFA 3114 Principles Of Auditing Tutorial Questions Tutorial 4 Accounting & Internal Control System iii. The directors should verify that complete and signed documentation is attached to tand is consistent with the cheque presented to them. They should cancel the presented documents to prevent double claims.
Internal controls, no matter how well designed and operated, can provide an entity with only reasonable assurance about achieving the entitys financial reporting objectives. The likelihood of achievement is affected by limitations inherent to internal control. These include the realities that human judgement in decision-making can be faulty and that breakdowns in internal control can occur because of human failures, such as simple errors or mistakes. Errors also may occur in the use of information produced by IT. For example, automated controls may be designed to report transactions over a specified amount for management review, but individuals responsible for conducting the review may not understand the purpose of such reports and, accordingly, may fail to review them or investigate unusual items. Additionally, controls can be circumvented by the collusion of two or more people or inappropriate management override of internal control. For example, management may enter into side agreements with customers that alter the terms and conditions of the entitys standard sales contracts, which may result in improper revenue recognition. Also, exception checks in a software program that are designed to identify and report transactions that exceed specified credit limits may be overridden or disabled. Further inherent limitations in any system of internal control include the possibility that procedures may become inadequate due to changes in conditions for example, in a company experiencing rapid growth in sales, existing control activities may be inadequate to cope with the volume of sales transactions. Additionally, there is an inherent weakness in any
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ABFA 3114 Principles Of Auditing Tutorial Questions Tutorial 4 Accounting & Internal Control System internal control system that is directed at routine transactions rather than non-routine transactions. For example, an accounting system which does not incorporate sufficient controls to properly identify and process transactions relating to the purchase of non-current assets, is inherently weak.
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ABFA 3114 Principles Of Auditing Tutorial Questions Tutorial 5 Audit Evidence & Audit Procedures Question 1 In a situation that uses inspection of records and documents as a type of evidence, distinguish between vouching and tracing in terms of the direction of testing and the assertions being tested. Vouching refers to first selecting an item for testing from the accounting journals or ledgers and then examining the underlying source document. Thus, the direction of testing is from the journals or ledgers back to the source documents. Vouching provides evidence that items included in the accounting journals or ledgers have occurred (are valid). Tracing refers to first selecting an accounting transaction (a source document) and then following it into the journal or ledger. The direction of testing in this case is from the source documents to the journals or ledgers and tests whether transactions that occurred are recorded (completeness) in the accounting records. Question 2 For each of the following audit procedures indicate whichy type of evidence is being gathered (1) inspection of records or documents, (2) examination of physical assets, (3) re-performance, (4) recalculation, (5) scanning, (6) inquiry, (7) observation, (8) confirmation, and (9) analytical procedures (a) Sending a written request to the entitys customers requesting that they report the amount owed to the entity. (b) Examining large sales invoices for a period of two days before and after year end to determine if sales are recorded in the proper period. (c) Agreeing the total of the accounts receivable subsidiary ledger to the accounts receivable general ledger account. (d) Discussing the adequacy of the provision for doubtful debts with the credit manager. (e) Comparing the current year gross profit percentage with the gross profit percentage for the last four years.
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ABFA 3114 Principles Of Auditing Tutorial Questions Tutorial 5 Audit Evidence & Audit Procedures (f) Examining a new factory equipment to ensure that this major acquisition was received. (g) Watching the entitys warehouse personnel count the raw materials inventory. (h) Performing test counts of the warehouse personnels count of raw material. (i) Obtaining a letter from the entitys solicitor indicating that there were no lawsuits in progress against the entity. (j) Tracing the prices used by the entitys billing program for pricing sales invoices to the entitys approved price list. (k) Review the general ledger for unusual adjusting entries. a. b. c. d. e. f. 8 1 3 6 9 2 g. h. i. j. k. 7 3 8 1&3 5
Question 3 (a) Briefly describe SEVEN (7) financial statements assertions made by the management. ACCA COVER i. Accuracy The recorded transactions should be accurate. ii. Completeness- There are no unrecorded assets, liabilities,transactions , events or undisclosed items which are material to the financial statements. Cut off- The financial statements should be properly cut off.
iii.
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ABFA 3114 Principles Of Auditing Tutorial Questions Tutorial 5 Audit Evidence & Audit Procedures iv. v. Allocation- A transaction or event is recorded at the proper amount and revenue or expense is allocated to the proper period. Classification/understandability- transactions have been recorded in the proper account. Understandability means the financial information is appropriately presented and described and disclosed clearly. Occurrence- transactions and events that have been recorded have been occurred and pertain to the entity. Valuation- assets, liabilities and equity are included in the financial statements at appropriate amounts and any resulting valuation or allocation adjustments are appropriately recorded. Existence- assets, liabilities and equity interest do exist. Rights and obligation-the entity holds or controls the rights to assets. Liabilities are the obligation of the entity. Name the appropriate financial statements assertion that matches with each of the following description. (i) Depreciation is provided for all assets with a limited useful life= Valuation. (ii) Assets, liabilities, transactions and events are not understated= Completeness. (iii) The entity owns the assets= Right & Obligation
vi. vii.
viii. ix. (b)
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ABFA 3114 Principles Of Auditing Tutorial Questions Tutorial 5 Audit Evidence & Audit Procedures Question 4 (a) List and define the eight audit objectives when auditing an account balance The following are the discussion of audit objectives i. Validity. It relates to the existence or occurrence assertion and is concerned with whether the transactions included in the financial statements are valid or existence. The auditors main concern is that the account balances are not overstated. ii. Ownership. It addresses whether the assets and liabilities belong to the entity and relates directly to managements assertions about rights and obligations. If the entity does not have rights to an asset or liability, it should not be included in the financial statements. Completeness. It relates to the management assertion of completeness and address whether all transactions are included in the accounts. Cut off. It relates to the completeness assertion and is concerned with the transactions included in the account are recorded in the proper accounting period. Accuracy. It relates to the valuation or allocation assertion and addresses proper accumulation of transactions and amounts. Classification. It relates to the presentation and disclosure assertion. It is important the at transactions be included in the correct account and that accounts be properly presented in the financial statements. Disclosure. It relates directly to the presentation and disclosure assertion and is concerned with that all financial statement
iii.
iv.
v. vi.
vii.
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ABFA 3114 Principles Of Auditing Tutorial Questions disclosures are made in accordance with approved accounting standards and regulations. viii.
ix.
Occurrence. It addresses whether the transactions do happen. Tutorial 5 Audit Evidence & Audit Procedures
(b) Explain the relationship of management assertions and audit objectives. Relationship between management assertions and their related audit objectives is as follow:_ Management Assertions Audit Objectives Existence Rights and obligations Occurrence Completeness Valuation Presentation and disclosure i. ii. iii. iv. v. Validity Ownership Validity Completeness and cut off Accuracy Classification and disclosure
The relationship of the audit objective, validity- is to verify the existence of an asset and the occurrence of a transaction. The relationship of the audit objective, ownership- is to verify the rights of an asset and obligation of a liability. The relationship of the audit objective, completeness and cut off- is to verify the completeness of the transactions and recording. The relationship of the audit objective, accuracy- is to ensure the valuation of an asset is appropriate. The relationship of the audit objective, classification and disclosure, is to ensure that the accounts are properly presented and disclose.
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ABFA 3114 Principles Of Auditing Tutorial Questions Tutorial 5 Audit Evidence & Audit Procedures Question 5 (a) Explain the following term audit evidence Audit evidence means the information obtained by the auditor in arriving at the conclusions on which the audit opinion is based. It is any information used by the auditor to determine whether the information being audited is stated in accordance with the established criteria. (b)Discuss the quality of the following types of audit evidence, giving two examples of each form of evidence:
i.
evidence originated by the auditor= more reliable as auditors reperform clients procedures to obtain an independent evidence. evidence created by third parties= more reliable as third party is independent from the client to confirm the amount such as bank confirmation, receivables confirmation. evidence created by the management of the client= less reliable because the evidences are subject to clients manipulation.
ii.
iii.
Question 6 Explain, with example, the following audit procedures to obtain audit evidence: i) Documentation inspection It involves examination of documentary evidence both internal and external sources such as examine the sales invoices a few days before the year end. Example, inspecting the land title to ascertain the ownership. It shall be more reliable if documents were generated by independent third party.
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ABFA 3114 Principles Of Auditing Tutorial Questions Tutorial 5 Audit Evidence & Audit Procedures ii) Observation Just watching how a procedure being performed. Observation can just confirm that the procedure took place. For example, auditor observed the segregation of duties between the person receiving payments from customers and the person recording those payments in the accounts receivable ledger. As done by auditors it shall be more reliable but cannot confirm ownership. iii) Confirmation This involves seeking confirmation from another source of details in clients accounting records such as obtain bank confirmation on the bank statement balance. Since evidence were produced by third party, it shall be more reliable.
iv)
Computation and re-performance It consists of checking the mathematic accuracy of source documents and accounting records such as casting the depreciation calculation. Re-perform the procedures or controls that were part of the entitys internal control system such as re-perform the bank reconciliation. As done by the auditors this form of evidence is more reliable than those from management.
v)
Physical examination Physical examination is the inspection or count by the auditor of a tangible assets. This type of evidence is mostly associated to inventory count, cash count, etc and is more reliable than that generated by management. However, it does not equate to ownership.
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ABFA 3114 Principles Of Auditing Tutorial Questions Question 5 Briefly differentiate internal and external documents. i).Internal source of documents such as reports generated from management/staff, i.e. client bank reconciliation statement, financial statements, cash flow statement, budget, and so on. The reliability of internal documents depends on how strong the internal control system effected in the organization and the integrity of the management. Auditor needs to gather different types of evidence to cross check against each other to ensure consistency of internal generated documents. ii).External source of documents such as invoices from suppliers, customer orders, bank statements and so on. These sources are considered as high reliable because they are generated from independent parties. Briefly explain TWO (2) factors each that may affect the reliability of internal and external documents. i)Reliability of internal documents is affected by (i) effectiveness of internal control system, and (ii) the integrity of management. ii)Reliability of external documents is affected by (i) whether the confirming party is related to the client. Reliability is higher if there is no relationship (100% independence) between the client and 3rd party; and (ii) whether the evidence collected by the auditors themselve without inference from the client. Reliability will be lesser if the external documents collected gone through the client. Briefly describe tha audit techniques of vouching and tracing and its audit objective.
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ABFA 3114 Principles Of Auditing Tutorial Questions Tutorial 5 Audit Evidence & Audit Procedures Tracing (Completeness) Vouching (Occurrence)
Source documents
Ledger or journal
Tracing refers to first select a transaction and then following it into the journal or ledger. The direction is from source to ledger or journals. Testing this direction ensures that the transactions are completely recorded in the accounting records. For example, auditor selects a sample of shipping documents and traces to the sales invoices and to the sales journals. Then, auditor would have an evidence of completeness of sales. Vouching refers to first select an item from a the ledger or journals and then examining back the original source documents. The direction is from ledger / journals to source documents. This direction testing is to ensure the transaction is actually occurred or valid. For example, auditor select a sales transaction in sales ledger to vouch to customer sales order to ensure a genuine sales transaction.
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ABFA 3114 Principles Of Auditing Tutorial Questions Tutorial 6 Audit Evidence & Audit Procedures Question 1 Why is it necessary to obtain corroborating evidence for inquiry and for observation? Corroborating evidence is obtained for inquiry and for observation because these audit procedures typically are not from independent sources and therefore are not considered to be highly reliable. For example, the auditor might follow up the client's responses concerning the internal controls over the raw-material storeroom by conducting tests of the control procedures to verify their existence and effectiveness. Question 2 What are the purposes of using preliminary analytical procedures The purposes for using analytical procedures at the risk assessment stage of an audit are (1) to enhance the auditor's understanding of the entitys business and the transactions and events that have occurred since the last audit and (2) to identify areas that may represent risks relevant to the audit. Question 3 Inspection of records and documents relates to the auditors examination of entity accounting data and corroborating audit evidence. One issue that affects the reliability of documentary evidence is whether the documents are internal or external. Following are examples of documentary evidence: (a) Duplicate copies of sales invoices. (b) Purchase orders. (c) Bank statements. (d) Remittance advices from customers. (e) Suppliers invoices. (f) Materials requisition forms.
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ABFA 3114 Principles Of Auditing Tutorial Questions Tutorial 6 Audit Evidence & Audit Procedures (g) Overhead cost allocation sheets. (h) Shipping documents. (i) Suppliers statements. (j) Long term loan agreements Required: 1. Classify each document as internal or external evidence. 2. Classify each document as to its reliability (high, moderate or low) a. Type 1. Internal 2. 3. 4. 5. 6. 7. 8. 9. Internal External External External Internal Internal Internal External b. Reliability 1. High if internal control is excellent, moderate to low otherwise. 2. High if internal control is excellent, moderate to low otherwise. 3. High because it comes from an external party. 4. High to moderate because the document has been circulated to a party outside the entity. 5. High because it comes from an external party. 6. High if internal control is excellent, moderate to low otherwise. 7. High if internal control is excellent, moderate to low otherwise. 8. High if internal control is excellent, moderate to low otherwise. 9. High to moderate because the document has been circulated to a party outside the entity. 10. High because it comes from an external party.
10. External
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ABFA 3114 Principles Of Auditing Tutorial Questions Tutorial 6 Audit Evidence & Audit Procedures Question 4 (a) Auditors need to evaluate the reliability of audit evidence before relying on it. Briefly explain FOUR (4) general factors about the reliability of audit evidence. Evidence is reliable if the sources are independent such as third party confirmation- bank confirmation letter, receivables confirmation letter. Evidences collected by auditors themselves are more reliable than clients internal generated reports. Strong internal control system will produce more reliable evidence Qualified experts and skilful professionals are able to produce more reliable evidence than others. Objective evidence is better than subjective judgment Written documentation is more reliable than oral. Original document is more reliable than photocopy. (b) For each of the following situation, indicate, whether the first or second type of audit evidence is more reliable. Briefly indicate the rationale of your answer. Confirming the clients year end bank balance with the bank versus confirming the outcome of a lawsuit with the clients solicitors. Obtaining bank balance directly from the bank is more reliable as the bank is independent party. If the clients solicitor is related party, the reliability of the confirmation is lesser. Verifying copy of the sale invoice versus copy of the purchase invoice Both copies of sales invoice and purchase invoice are less reliable if the internal control system of the company is weak. However, in term of independence, purchase invoice issued by supplier is more reliable than sale invoice.
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ABFA 3114 Principles Of Auditing Tutorial Questions Tutorial 6 Audit Evidence & Audit Procedures Observing the clients year end physical inventory count versus seeking a written confirmation on the inventory held from storekeeper. Auditors direct observation on the physical inventory count is more reliable than obtain confirmation from the clients storekeeper. Question 5 Give 2 examples of audit evidence that an auditor can obtained on each of the following: Recorded amount in the general ledger of an acquisition of fixed asset = inspection of documents & analytical procedures. Existence of the fixed assets= Physical inspection & Confirmation Accuracy of depreciation charge of the year= Recalculation & reperformance Ownership of the fixed asset= Inspection of documents & confirmation Question 6 a.Describe FOUR (4) factors that may influence an auditors judgement as to what constitutes sufficient and appropriate audit evidence. Factor 1- Assessment of inherent risk. As inherent risk increases, then more audit evidence will be required to reduce detection risk. Factor 2- Materiality of the item. A decrease in materiality means that more audit evidence will be required to ensure that no material error has occurred.
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ABFA 3114 Principles Of Auditing Tutorial Questions Tutorial 6 Audit Evidence & Audit Procedures Factor 3- Nature of the accounting and control systems.Where the accounting and control systems are poor then more audit evidence is necessary as less reliance can be placed on those systems. Factor 4- Control risk. Determine the extent to which the directors have implemented a sound system of internal control; poor internal controls increase control risk, decreasing reliance that can be placed on those controls. Factor 5- Experience from previous audits. Good experience from previous audits will decrease the amount of evidence required as the auditor can place reliance on previous review of clients systems. Factor 6- Result of audit procedures. Where the results of different audit procedures agree with each other then overall less evidence is needed overall the evidence is more persuasive; however, where results are in conflict then more evidence is required. Factor 7- Quality of information available. Some sources of audit evidence are more reliable than others meaning less evidence is needed when relying on those sources for example, documentary evidence is more reliable than oral evidence. b. Audit evidence is said to be persuasive but not conclusive. (i) Explain the meaning of persuasive but not conclusive. It means persuaded not absolute assurance ie.100% guarantee true. (ii) Provide TWO (2) reasons to support the above statement. The reasons are because: 1.Auditors do not provide absolute assurance that the financial statements are free from materials misstatements. Auditors do not guarantee or certify the 100% accuracy of financial statement simply because they use sampling method to collect evidence. 2.Nature of audit evidence. Different source has different level of reliability. Auditors use professional judgment to determine the amount and type of audit evidence required.
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ABFA 3114 Principles Of Auditing Tutorial Questions Tutorial 6 Audit Evidence & Audit Procedures Question 7 Comment on the reliability of cash book, bank statement and bank confirmation: Bank statement and confirmation as external documents are more reliable than cash book as internal documents. If the internal control system of the company is strong, the reliability of internal generated cash books and documents will be reliable. Bank statements produced and sent by bank to clients office will be reliable if the internal control system is strong. However, if the internal control system is weak, the management of company may manipulate the statements. Bank confirmation is the most reliable documentary evidence. Bank confirmation that directly sent to auditors office without clients inference will be more reliable. Question 5 (a) (i) Analytical Procedures consist of evaluations of financial information made by a study of plausible relationships among both financial and nonfinancial data. Inquiry means to seek relevant information from sources, both financial and non-financial, either inside or outside the company being audited. Evidence may be obtained orally or in writing. Inspection is the physical review or examination of records, documents and tangible assets. It may include examination of records for evidence of controls in the form of a compliance test.
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ABFA 3114 Principles Of Auditing Tutorial Questions Tutorial 6 Audit Evidence & Audit Procedures Observation involves looking at a process or procedure as it is being performed to ensure that the process actually works as documented. Re-calculation means the checking of the mathematical accuracy of documents or records. (ii) Analytical Procedures = Review of sales income year on year to try to identify whether income has been under-stated, possibly by cash being taken prior to banking. There is no control over the opening of post so cash could be withdrawn by one assistant, and the deficit made up by a fraud on customers. Inquiry =Obtain statements from suppliers to check the completeness of liabilities at the end of the year. As there is no control over purchases, invoices could have been mis-placed resulting in a lower purchases and suppliers figure. Inspection = The assets of the company, namely cuddly toys in inventory at the end of the year, can be inspected to ensure all inventory is recorded and that the toys are saleable in their current condition. Observation = Procedures such as the opening of cash and recording of customer orders can be observed to ensure that the administrator is recording all orders in the sales day book and cash books. Re-calculation = Checking additions in the cash book to confirm that the total amount of cash recorded is accurate and can be included in the sales figure (cash receipts normally equal sales because there are no receivables).
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ABFA 3114 Principles Of Auditing Tutorial Questions Tutorial 6 Audit Evidence & Audit Procedures (b) Analytical procedures This method of collecting evidence will be useful in BearsWorld because it will help to identify unusual changes in income and expenditure. As BearsWorld is a relatively small company, monitoring gross profit will show relatively small changes in sales margin or purchasing costs. Decisions by Mr Kyto to amend margins can therefore be traced into the actual sales made. However, the technique may be limited in its application because it will not detect errors or omissions made consistently year on year. If either assistant is defrauding the company (for example by removing cash) each year, then analytical procedures will not detect this. Inquiry Inquiry evidence will be very useful in the audit of BearsWorld, especially where this is derived from third parties. Third party evidence is generally more reliable than client originated evidence as there is a decreased likelihood of bias. Suppliers can therefore be verified using supplier statement reconciliations. A review of any customer complaints file (if these letters are kept) will also help to identify any orders that have not been despatched. External inquiry evidence will be less useful in the audit of sales and receivables because goods are paid for prior to despatch there are no receivables. Internal evidence will be available from Mr Kyto and the assistant; however the lack of segregation of duties means that this will not be so reliable. Inspection Inspection of documents within BearsWorld will be useful, particularly regarding checking whether expenses are bona fide. All purchase invoices, for example, should be addressed to BearsWorld and relate to
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ABFA 3114 Principles Of Auditing Tutorial Questions purchases expected from that company e.g. cuddly toys for resale, office expenses etc. Tutorial 6 Audit Evidence & Audit Procedures Inspection of documents can take a long time; however, given the poor internal control system within BearsWorld, the auditor may have no choice but to use this method of gathering evidence. The fact that an invoice is addressed to the company does not confirm completeness of recording so inspection of the cash book for unusual payments verified by checking the purchase invoice will also be required. Additional substantive testing would also be required due to poor controls. Observation Observation may be useful because it will show how the assistants check documents. However, no information is provided on any internal controls within BearsWorld so simply viewing how documents are checked without any evidence of checking has limited benefit. Observation tests will be of limited usefulness because the assistants may act differently when an auditor is present. The same problem will apply to any observation checking carried out by Mr Kyto. Re-calculation Re-calculation evidence is very useful for checking additions on invoices, balancing of control accounts etc. This means that the arithmetical accuracy of the books and records in BearsWorld can be confirmed. The main weakness of re-calculation checking is that calculations can only be carried out on figures that have been recorded. If there are any omissions then checks cannot be carried out.
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ABFA 3114 Principles Of Auditing Tutorial Questions Tutorial 7 Audit Risk & Materiality Question 1 (a) i. Define audit risk Audit risk is the risk that the auditor may unknowingly fail to appropriately modify the auditor's opinion on financial statements that are materially misstated. iii. Describe its components of inherent risk, control risk and detection risk Inherent risk is the susceptibility of an assertion to material misstatement, assuming no related internal controls. Control risk is the risk that material misstatements that could occur will not be prevented or detected by the internal controls. Detection risk the risk that the auditor will not detect a material misstatement that exists in the financial statements. iii. Explain how these components are interrelated
Inherent risk and control risk differ from detection risk in that they exist independently of the audit of financial statements, whereas detection risk relates to the auditor's procedures and can be changed at the auditor's discretion. Detection risk has an inverse relationship to inherent and control risk. (b) i. Define materiality Materiality is the magnitude of an omission or misstatement of accounting information that, in the light of surrounding circumstances, makes it probable that the judgment of a reasonable person relying on the information would have been changed or influenced by the omission or misstatement. This concept recognizes that some matters, either individually or in the aggregate, are important for the fair presentation of financial statements in conformity with generally accepted accounting principles, while other matters are not.
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ABFA 3114 Principles Of Auditing Tutorial Questions Tutorial 7 Audit Risk & Materiality ii. Discuss the factors affecting its determination. Materiality is affected by the nature and amount of an item in relation to the nature and amount of items in the financial statements under examination, and the auditor's judgment as influenced by the auditor's perception of the needs of a reasonable person who will rely on the financial statements. A number of qualitative factors also affect materiality iii. Describe the relationship between materiality for planning purposes and materiality for evaluation purposes. The auditor's judgment about materiality for planning purposes may be different from materiality for evaluation purposes because the auditor, when planning an audit, cannot anticipate all of the circumstances that may ultimately influence judgment about materiality in evaluating the audit findings at the completion of the audit. If significantly lower materiality levels become appropriate in evaluating the audit findings, the auditor should re-evaluate the sufficiency of the audit procedures already performed Question 2 (a) State the audit risk model. Audit risk model can be expressed as the following: AR = IR x CR x DR where AR = Audit risk IR = Inherent risk CR = Control risk DR = Detection risk (b) Briefly explain audit risk and its three components. Define audit risk.
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ABFA 3114 Principles Of Auditing Tutorial Questions Tutorial 7 Audit Risk & Materiality This is the risk that the auditors express an inappropriate (wrong) audit opinion when the financial statements are materially misstated. Audit risk is a function of the risk of material misstatement (inherent risk and control risk) and the risk that the auditor will not detect such misstatement (detection risk). Describe its components of risk i. Inherent risk (IR) is the susceptibility of an assertion to material misstatement in the financial statements in the absence of internal controls. ii. Control risk (CR) is the risk that material misstatements will not be prevented, detected and corrected on a timely basis by an entitys internal control. iii. Detection risk (DR) is the risk that the auditors procedures will not detect a material misstatement that exists in an account balance or class of transactions. (c) Briefly explain the interrelationship of the components of audit risk. Detection risk has an inverse relationship to the risk of material misstatement arising from inherent risk and control risk. The higher the risk of material misstatement, the lower the acceptable detection risk. For example, if an entitys inherent risk and control risk are high, the auditor sets a lower level of detection risk in order to meet the planned level of audit risk. (d) Briefly explain the use of audit risk model in the conduct of an audit. The usage of the risk model is to assist the auditor in designing the audit procedures so to gather sufficient appropriate audit evidence in order to reduce the audit risk to an acceptable level.
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ABFA 3114 Principles Of Auditing Tutorial Questions Tutorial 7 Audit Risk & Materiality Using the risk model, the auditor is able to understand the inherent risk and control risk exist in the entity. Given a low level of audit risk and high assessments for inherent and control risk, the auditor would set detection risk as low. A low assessment for detection risk implies that the auditor will conduct more detailed examination of this account. (e) Explain the terms audit risk and audit business risk. i. Audit risk is the risk that the auditor gives an inappropriate audit opinion when the financial statements are material misstated. It is the risk that the auditor fails to appropriately modify his opinion on financial statements that are materially misstated. Audit business risk is the risk that the auditor may be sued by the client or account users and resulting damage of auditors reputation. Audit business risk can be reduced by avoiding engagement of client that lacks integrity or in the financial difficulty.
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Question 3 (a) Define the term Materiality Materiality can be defined in the following terms: Information is material if its omission or misstatement could influence the economic decisions of users taken on the basis of the financial statements.
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ABFA 3114 Principles Of Auditing Tutorial Questions Tutorial 7 Audit Risk & Materiality (b) What are the main factors that an auditor will consider when assessing whether or not an item is material? Main factors affecting its determination. i. Materiality is a relative rather than an absolute concept which means that when auditor assesses whether an item is material or otherwise, he needs to use his professional judgement to decide. ii. Types of bases used in evaluating a materiality such as turnover, net profit or equity. iii. Qualitative factors such as management attitude, staff motivation, companys reputation may also affect materiality. (c) When does the auditor consider materiality? Auditor needs to consider materiality when: i. Performing risk assessment procedures. ii. Determining the nature, extent and timing of further audit procedures based on the assessed risk. iii. Evaluating the effect of identified misstatements on the auditors report. (d) What is the relationship between materiality and the level of audit risk? The auditors assessment of materiality helps the auditor decide such questions as what items to examine and whether to use sampling and analytical procedures. This can enable the auditor to select procedures that can be expected to reduce audit risk to an acceptably low level. The relationship between materiality and audit risk is inversed (opposite), that is, the higher the materiality level, the lowever the audit risk and vice versa.
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ABFA 3114 Principles Of Auditing Tutorial Questions Tutorial 7 Audit Risk & Materiality Question 4 (a) Give TWO (2) examples of qualitative factors for assessing materiality. Management integrity and staff working morale. (b) Briefly explain the relationship of materiality and audit risk as well as their impact on audit evidence. There is an inverse relationship between the materiality and the level of audit risk- the higher the materiality level, the lower the audit risk, vice versa. When the audit risk is assessed as high, the materiality level will be set at low level. It means that the auditor needs to check more and gather more evidence in order to reduce the audit risk to the acceptable level. (c) After planning for specific audit procedures, the auditor determines that the audit risk has increased and therefore the acceptable materiality level should be lower. What should the auditor do to reduce the audit risk to an acceptably low level? During the process of carrying out audit, if auditor finds out the audit risk is higher than the initial planned, auditor need to: Reduce the level of assessed control risk, when this is possible, or Reduce the detection risk by modifying the nature, timing and extent of substantive procedures (ISA320) to gather more audit evidence.
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ABFA 3114 Principles Of Auditing Tutorial Questions Tutorial 7 Audit Risk & Materiality Question 5 For each of the following situations, explain how risk should be assessed and what effect that assessment will have on detection risk. a) Since TMM has experienced a slow sale, the liquidity of the company will be in pressure. The management would be pressurized by the chairman, Mr. Allan to meet the forecast result. As a result, the risk of overstatement of revenue is considered as high in order to meet the forecast earning. The financial director and financial controller are new employees. They may not know well the background of TMM. As a result they may not able to detect any misstatement or too weak to challenge the chairman if he has intention to overstate the revenue. Auditor should reduce the detection risk by performing detail examination on the revenue to minimize the risk of material misstatement. b) The company has grown rapidly with the opening of 5 new outlests within a year. Such an aggresive growth may result a problem of overtrading, that is, shortage of cash for the normal operation. Moreover, Mr. Alex makes all the decision himself and the other members are too weak to challenge Alexs decision. As a result, the control risk is assessed as high because Alex may misuse his power to manipulate the financial results. Auditor should maintain his/her attitude of professional scepticism to gather sufficient appropriate evidence in order to reduce the detection risk.
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ABFA 3114 Principles Of Auditing Tutorial Questions Tutorial 7 Audit Risk & Materiality c) Sunrise Berhad has been making loss for the past few years and the relationship of the CEO and finance director is turning sour due to some inconsistency in business and accounting issues. In addition, the finance director was on six moths leave and would be replaced by newly appointed financial controller soon. All the incidents have indicated that the risk of material misstatement is high as there was some disagreement in business and accounting issues; and the previous financial controller was forced on leave and will be replaced by someone new in order to cover any material misstatement. Auditor should contact the previous financial controller to understand the issues that disagreed between him/her and the CEO. The risk of material misstatement is assessed as high as a result that there may be some contentious issues to manipulate the financial statements. Question 6 Describe the risks associated with the audit of Ajio and explain the implication of these risks for the overall audit risk. Risks and implications for audit risk Inherent and control risks (i) Charities can be viewed as inherently risky because they are often managed by non-professionals and are susceptible to fraud, although many charities and the volunteers that run them are people of the highest integrity who take a great deal of care over their work. The assessment of this aspect of inherent risk depends on each individual charity and the areas in which it operates.
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ABFA 3114 Principles Of Auditing Tutorial Questions Tutorial 7 Audit Risk & Materiality (ii) Charities are also at risk of being in violation of their constitutions which is important where funds are raised from public or private donors who may well object strongly if funds are not applied in the manner expected. Other charities and regulatory bodies supervising charities may also object. Again, the auditors will assess the level of risk. The involvement of a recently retired Chartered Certified Accountant in the preparation of accounts in the past may lower the auditors assessed inherent risk to an extent. (iii) Most small charities have a high level of control risk because formal internal controls are expensive and are not often in place. This means that donations are susceptible to misappropriation. Charities rely on the trustworthiness of volunteers. The auditors will assess the level of risk. Detection risk (iv) Detection risk comprises sampling risk and non-sampling risk. It is possible in this case that all transactions will be tested and therefore sampling risk (the risk that samples are unrepresentative of the populations from which they are drawn) is not present. (v) Non-sampling risk is the risk that auditors will draw incorrect conclusions because, for example, mistakes are made, or errors of judgement are made in interpreting results, or because the auditors are unfamiliar with the client, as is the case here. Audit risk (vi) Audit risk is the product of inherent risk, control risk and detection risk and is the risk that the auditors will issue an inappropriate audit opinion. This risk can be managed by decreasing detection risk by altering the nature, timing and extent of audit procedures applied. Where inherent risk is high and controls are weak (as may be the case here) more audit work will be performed in appropriate areas in order to reduce audit risk to an acceptable level.
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ABFA 3114 Principles Of Auditing Tutorial Questions Tutorial 7 Audit Risk & Materiality Question 7 A client fails to discover employee fraud on a timely basis because bank accounts are not reconciled monthly. = CR 2. Cash is more susceptible to theft than an inventory of steel bars.= IR 3. Confirmation of receivables by an auditor fails to detect a material misstatement. =DR 4. Disbursements have occurred without proper approval.=CR 5. There is inadequate segregation of duties.= CR 6. A necessary substantive audit procedure is omitted.=DR 7. Accounts receivables are susceptible to material misstatement, assuming there are no related internal controls.=IR 8. Technological developments make a major product obsolete.=IR 9. An auditor complies with auditing standards on an audit engagement, but the shareholders sue the auditor for issuing misleading financial statements.= AUDITOR BUSINESS RISK 10. Client lack sufficient working capital to continue operations.= IR AND CR
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Question 8 Briefly explain the factors which auditors should bear in mind when considering the inherent risk of a company. i.As a whole company Factors should be bear in mind are: 1. Market forces within the industry itself 2. the cash situation of the company, 3. the trading history of the company, 4. the nature and incidence of unusual transactions. 5. Political, economic, social, technological, competitive forces
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ABFA 3114 Principles Of Auditing Tutorial Questions Tutorial 7 Audit Risk & Materiality ii.At a specific area Tangible non current assets o Recent revaluation of assets o Change in depreciation method o The susceptibility of assets to theft / use for private benefit. o Old / unused property and equipment o The risk of technological obsolescence. Inventory o Introduction to new product. o Risk of out dated products o Fluctuation of sales demand o Susceptibility of assets to theft. o Storage condition of inventory Trade receivables o Number of customers recently lost. o Whether the client is dependent on a few customers o Credit term given by company o Trade receivable payment pattern. o Level of bad debts Trade payables o o o o Dependence on a few suppliers. Credit term obtained Threat from suppliers Any warranties granted to the company
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ABFA 3114 Principles Of Auditing Tutorial Questions Tutorial 7 Audit Risk & Materiality Question 9 List the factors which auditors should bear in mind when considering the control risk of a company. The quality and effectiveness of management and the degree of supervision exercised by the management. The existence and quality of internal control The competence of accounting staff The nature of accounting records kept The existence and effectiveness of the internal audit department. Question 10 Give reasons why the materiality level set at the planning stage may change during the audit. The use of a predetermined materiality level has some advantages. It enable the auditors to restrict the scope of audit work, and hence to make the most efficient use of time and staff and also avoiding unnecessary testing those immaterial items. However, sometime the auditors have to change the materiality level that has already predetermined in the planning during the conduct of audit. This is because the use of predetermined materiality level has some drawbacks such as: The choice of materiality is subjective- there is nothing to decide what figure is appropriate in any given case. The use of a materiality level implies errors below a certain size may not be detected by the auditors work. Individual immaterial errors may in total becomes material misstatement.
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ABFA 3114 Principles Of Auditing Tutorial Questions Tutorial 8 Audit Planning & Control Question 1 Briefly explain FOUR matters that should be considered by external auditor before accepting a new audit client a. Qualification to act as an auditor. Determine if the auditors are independent of the client and able to provide the desired service. b. Technical competence. Determine whether the auditors have the necessary expertise, technical skills and knowledge of the industry to carry out an effective audit especially if the client business is in a specialised industry. c. Resources available. Auditors should determine whether they have resources (e.g. audit staff, audit techniques ) to perform the audit work and complete the audit engagement within the deadline. d. Ethical matters. Auditors should determine if they accept the client would violate any applicable regulations and standards or face any ethical threats to the independence of the auditor. e. Risk assessment. Auditors should consider if they accept the client and the risk associated to the client would pose a significant danger to the auditors reputation. When auditors assess the risk, they need to consider the following: The viability and stability of the clients business The character and involvement of management The effectiveness of accounting system and internal control system The application of accounting standards and policies Whether is there any unusual item or going concern problem faced by the client
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ABFA 3114 Principles Of Auditing Tutorial Questions Tutorial 8 Audit Planning & Control f. Replacement of previous auditors. If this is the first year audit, auditors should consider the reasons for resignation of the previous auditor. Auditors should contact the previous auditor to find out is there any serious disagreement with directors over accounting matters. g. Procedures for obtaining information. When considering accepting appointment, auditors should obtain and review the available financial information (e.g. annual reports, interim management reports etc.) and inquire third parties (e.g. banks, solicitors) about any information concerning the integrity of the management. (ANY FOUR POINTS) Question 2 a) Identify to whom in a company an audit engagement letter should be addressed, and explain how the acceptance of the terms of engagement should be conveyed to the auditor. An audit engagement letter should be addressed to the directors of the company. If the client requires other services, the scope of these services should be set out clearly. Auditor should perform the following steps to ensure acceptance of engagement letter. Discuss with the directors on the terms of engagement on or before acceptance of a new client. Draft and sign the letter before commencing any part of the assignment. Receive the clients written resolution on acceptance to confirm to engage the auditor. Review the engagement letter every year to make any change.
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ABFA 3114 Principles Of Auditing Tutorial Questions Tutorial 8 Audit Planning & Control b) Explain the purposes of an audit engagement letter, state when such a letter should be issued to an audit client.
The purposes of engagement letter are: To clearly define the objective, scope of audit and the form of report To clearly define the extent of the auditors responsibilities To minimize the risk of misunderstandings between auditor and client To confirm acceptance by the auditor of his engagement To confirm acceptance by the auditor of his engagement To inform and educate the client on the limitation of the engagement Every auditor should send his client an engagement letter which sets out the auditors duties and responsibilities before commencement of audit work. c) Explain with reasons three examples of knowledge you would wish to obtain prior to 31 July 20x9 in order to assist in the planning of the audit. The viability and stability of the clients business in order to assess the audit risk The character and involvement of management to determine the integrity of management. The effectiveness of accounting system and internal control system to assess the control risk. The application of accounting standards and policies to determine the consistency of application of standards and policies. Whether is there any unusual item or going concern problem faced by the client to determine to risk of material misstatement.
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ABFA 3114 Principles Of Auditing Tutorial Questions Tutorial 8 Audit Planning & Control Replacement of previous auditors. Auditors should contact the previous auditor to find out is there any serious disagreement with directors over accounting matters. Procedures for obtaining information e.g. annual reports, interim management reports and inquire third parties such as banks, solicitors to ensure that there is no limitation of scope. (ANY 3 POINTS) d) Explain why good audit planning is essential for carrying out an effective audit.
Reasons for audit planning: i. Able to assist auditor to meet the deadline. ii. Able to properly assess the the risk of material misstatement. iii. Able to deligate the audit work to various audit staff so to carry out the audit more effective and efficient manner. iv. Proper planning is the requirement of ISA300 Audit Planning. v. Without planning, auditor may face high audit risk. Question 3 You are an audit senior of a small accounting firm. Your audit manager has requested you to prepare brief notes on the following issues for your audit juniors. (a) Explain with TWO (2) reasons the importance of keeping complete audit working papers. 1. Working papers can help in the supervision of the audit work. The engagement partner needs to supervise the work delegated by him has been properly performed. Hence, by asking audit staff to produce detailed working papers, he is able to monitor the process of auditing.
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ABFA 3114 Principles Of Auditing Tutorial Questions 2. Working papers will provide, for future reference details of audit problems encountered. Tutorial 8 Audit Planning & Control 3. Working papers serve as evidence of work performed and conclusions drawn in order to form opinion. This can be invaluable sources of evidence in the litigation case where the Court orders the auditor to produce evidence. 4. Good working papers can help in planning and control the process of auditing. 5. The preparation of working papers encourages the auditors to adopt a high quality of auditing. (b) Describe TWO (2) types of audit working papers files and explain TWO (2) reasons of splitting the working papers files.
Audit files can be separated into 2 types:- (1) permanent audit file (PAF) & (2) current audit file (CAF). Permanent audit files are to :1. document information which is of recurring value regarding items appearing in the financial statements such as equity, number of issued shares etc. 2. document information of a permanent nature regarding the clients business. 3. give audit staff who are new to the audit information regarding the clients affairs and the nature of audit. Current audit files are audit files contain information relating primarily to the audit of a single (current) period. The objectives of the current audit file are to: Provide a record of the work planned. Detail the work performed including audit procedures performed, information obtained and conclusion reached. Enable the audit partner to review the audit.
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ABFA 3114 Principles Of Auditing Tutorial Questions Tutorial 8 Audit Planning & Control (c) Briefly describe the following types of working papers and their function: (i) Audit plan= An audit plan will set out the overall strategy while the detailed procedures will be given in the audit program. Audit program = An audit program consists of detailed instructions (detail audit procedures) that instruct the auditor to collect the evidence. Working trial balance= A working trial balance links the amounts in the financial statement to the audit working papers. Time sheet= Time sheet is an auditors records on the allocation of hours to a specified audit work, for example, Client A will be allocated an audit hours of 20 hours. Such allocation of hours will be used as a basis of calculation of audit fee.
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(iii)
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Question 4 When planning an audit, the auditor must assess the level of risk, materiality for the engagement and the going concern of the client. Explain how the auditor judgement about these affects auditors planned audit procedures. At the audit planning stage, if the auditor assesses the leval of risk as high, the materiality level will be adjusted to low level in order to increase the volume of audit checking. The auditor will use more subtantive procedures in gathering audit evidence rather than test of control. If the clients going concern status is in doubt, the financial statements should be prepared in the break up basis. Auditor has to ensure full disclosure on going concern issues have be disclosed in the explanatory note.
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ABFA 3114 Principles Of Auditing Tutorial Questions Tutorial 8 Audit Planning & Control Question 5 Factors to be assessed when considering the inherent risk i) Change in management.There were changes in management during the period and new management team might not possess the required management experience and knowledge. This will increase the risk of deliberate or unintentional misstatement in the financial statements. ii)Part time accountant.The appointment of a full time accountant while Dick is still a part-time company accountant would enable a proper handover of duties to the new accountant. This would ensure the new accountant who takes over the job is familiar with the companys accounting system and is therefore able to handle his job competently. Timely and proper preparation of accounting records could therefore be enhanced. iii.Excessive bonuses. The significant portion of managements compensation is represented by bonuses, the value of which is contingent upon the entity achieving unduly aggressive targets for production. These incentives or temptations might lead personnel to engage in dishonest, illegal, or unethical acts that might affect the truth and fairness of financial statements. iv.Potential overstatement of profitability.In order to target for a possible listing on its stock market, the company is planning an expansion and employing strategies to improve on profitability. There is a real risk of over-trading, i.e. the business will exhaust its cash resources too soon as a result of rapid growth. In such circumstances, there is a risk that creditors will go unpaid and that the business will be forced into liquidation. Overproduction also increases the risk of inventory obsolescence and having slow moving inventory. Conclusion: Based on the factors identified above, the inherent risk of the company appears to be high as a whole.
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ABFA 3114 Principles Of Auditing Tutorial Questions Tutorial 8 Audit Planning & Control Question 6 a. State when auditors should send an engagement letter to their new clients. - Auditor should send the engagement letter to client before commencement of audit work. b. The objectives of an letter of engagement are : -To serve as a contract and outlining the terms and conditions agreed by both parties (audit firm and audit client). - To clearly define auditors responsibility. -To avoid any misunderstandings with respect to the engagement. c. The contents of a letter of engagement include: The objective of the audit of financial statements. Managements responsibilities for the financial statements. The scope of audit including reference to application of legislation and regulations. The basis of audit fees charged. The inherent limitations of an audit and the risk that material misstatement may remain undiscovered. Unrestricted access to whatever records, documentation and other information requested in connection with the audit. d. The importance of audit planning is to ensure that: Appropriate attention is devoted to important areas. Potential problems are identified. Audit work is completed in efficient manner. Proper assignment of work t o audit team members To facilitate the direction, supervision and review of their work.
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ABFA 3114 Principles Of Auditing Tutorial Questions Tutorial 8 Audit Planning & Control e) The objectives of analytical procedures in audit planning are: To enhance auditors understanding of clients business, transactions and events that have occurred since last audit. To identify relevant risky areas to audit, existence of unusual items and transactions. f) Types of analytical procedures are: Compare current year financial information with prior periods, budget, industry standard. Compare the financial information to non financial information. Conduct a trend analysis. Question 7 Explain the following terms relating to audit documentation (12 marks) i. Permanent file: historical data that are of continuing relevance of audit; such as Memorandum of Association ii. Current file: data relate to the current years audit engagement; such as bank confirmation. iii. Audit plan: detailed audit procedures to implement the audit strategy in the form of audit program. iv. Working trial balance: links the amount in the financial statements to the audit working papers. v. Account analysis: analysis of the activity of a particular account for the period; such as legal fees. vi. Account listing: listing of items in an account; such as a trade payable listing.
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ABFA 3114 Principles Of Auditing Tutorial Questions Tutorial 10 Audit Works on Internal Control System Question 1 What are the major differences between a substantive strategy and a reliance strategy when the auditor considers internal control in planning an audit? A substantive audit strategy means that the auditor has made a decision not to rely on the entity's controls and to audit the related financial statement accounts directly. Control risk is set at the maximum when a substantive audit strategy is followed. With a reliance strategy, the auditor relies on the entity's controls and sets control risk below the maximum. The reliance strategy requires a more detailed understanding and documentation of internal control than does the substantive strategy. The auditor also plans and performs tests of controls to support the lower assessed level of control risk. Question 2 Why must the auditor obtain an understanding of the clients internal control? In addition to planning the audit of the financial statements, the auditor's understanding of the entity's internal control is used to (1) identify the types of potential misstatements, (2) consider factors that affect the risk of material misstatement, (3) design tests of controls, and (4) design of substantive procedures. Question 3 What is meant by the concept of reasonable assurance in terms of internal control? What are the inherent limitations of internal control? The concept of reasonable assurance recognises that the cost of implementing an entity's internal control should not exceed the benefits that are expected to be derived. Thus, an internal control system will not detect every error that might occur because it would be too costly to design such a system. Management override of internal control, personnel errors or mistakes, and collusion are inherent limitations of internal control
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ABFA 3114 Principles Of Auditing Tutorial Questions Tutorial 10 Audit Works on Internal Control System Question 4 What are an auditors responsibilities in identifying and reporting these matters? In obtaining an understanding of the entitys environment and internal control, the auditor may become aware of weaknesses in the internal control. The auditor should identify the weaknesses that come to the auditor's attention in the normal course of an audit but is not obligated to design procedures to search for weakness in internal control. Material weakness in the design or operation of the internal controls represent significant deficiencies in the design or operation of internal control which could adversely affect the organisation's ability to record, process, summarise, and report financial data consistent with the assertions of management in the financial statements. Such weaknesses that come to an auditor's attention, should be communicated to management and those charged with governance on a timely basis. The communication to management of material weaknesses would ordinarily be in writing. It is also important to indicate in the letter that only weaknesses which have come to the auditors attention as a result of the audit have been reported and that the audit has not been designed to determine the adequacy of internal control management purposes. The auditor may communicate material weakness at management as soon as practical and this could be during the engagement or at the completion of the audit. If that control deficiency was considered material, the auditor would immediately communicate the weakness to management.
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ABFA 3114 Principles Of Auditing Tutorial Questions Tutorial 11 Introduction to Statement of Financial Position Audit (Cash & Bank) Question 1 i) 1) Cash receipts are recorded but not deposited in the clients bank account. 2) Payments made out of bank accounts are not properly authorized. 3) Interest and charges debited and credited to the bank accounts being recorded in the wrong financial statement account. ii) 1) Proper segregation of duties between cash receipts function and the accounts receivable function. Preparation of monthly bank reconciliation that are independently reviewed. 2) Proper segregation of duties between an individual who approves a purchase and an individual who have direct access to the cash disbursement for it. The individuals in the accounts payable department who initiate payment should not have access to the cheques after they are prepared. Cheques should not be prepared unless all source documents (purchase requisition, purchase order, receiving report and suppliers invoice) are included in the voucher packet and approved. 3) -Interest received recorded but no deposited into the bank account. -Interest received is recorded in the wrong period. - Interest received is recorded in the wrong account. - Charges are debited in the wrong amount.
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ABFA 3114 Principles Of Auditing Tutorial Questions Tutorial 11 Introduction to Statement of Financial Position Audit (Cash & Bank) Question 2 List the audit objectives for the audit of cash and show how you would gain the audit evidence in relation to those objectives at the year end. Risk area Cash receipts recorded but not received or deposit Internal control objectives Validity Internal control procedures -Segregation of duties between cash receipts and recording. -Perform monthly bank reconciliation to tally the receipts and recording. Cash receipts being stolen or lost before recording Completeness -Reconcile daily cash receipts with posting to accounts receivable subsidiary ledger. Tests of control -Observe and evaluate the process of segregation of duty. -Review monthly bank reconciliation to ensure no unexplained item exists. -Testing of the reconciliation of daily cash receipts with posting to accounts receivable ledger to ensure it is completely recorded. -Inquiry of client personnel about handling of monthly statements and examination of
-Prepare and send the customer / receivable statements periodically basis.
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Risk area
ABFA 3114 Principles Of Auditing Tutorial Questions Internal Internal control Tests of control control procedures objectives resolution of -Any customer complaints. complain should be handled by an independent party Timeliness Control procedures must be in placed to ensure cash receipts should be deposited on daily basis. Procedures should be in place to authorize cash discount. Examine the cash receipts and agree to the bank deposit slips.
Cash receipts are recorded in the wrong period
Cash discounts are not properly taken into account
Authorisation
Select a sample of cash receipts transaction and examine the approval of discount given. Review and testing of reconciliation.
Cash receipts recorded at the wrong amount
Valuation
Reconcile the daily remittance report to control listing of remittance advice. Prepare monthly bank reconciliation and having independent
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Risk area
ABFA 3114 Principles Of Auditing Tutorial Questions Internal Internal control Tests of control control procedures objectives review. Classification Prepare a chart of accounts to avoid confusion. Tracing of cash receipts from listing to cash receipts journal for proper classification. Review of cash receipts journal for unusual items.
Cash receipts recorded in the wrong account
Cash receipts posted to the wrong customers account. Cash receipts are not properly posted to general ledger accounts
Posting and summarisatio n
Reconcile daily remittance report with postings to cash receipts journal and accounts receivable ledger.
Review and testing of reconciliation; its IT application, testing of programmed controls of posting.
Review and testing Review the of client procedure monthly customer for mailing statements and statements and complaints. handling complaints from customers.
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ABFA 3114 Principles Of Auditing Tutorial Questions Tutorial 11 Introduction to Statement of Financial Position Audit (Cash & Bank) Question 3 a) Identify five information you would expect the bank of Anon to confirm in response to your bank letter. Full details of the account balances, including NIL balances, stating whether the balances are maintained in Ringgit or in some other currency. The separate amounts accrued but not charged or credited at 30 June 20x9 of provisional charges (including commitment fees); and interest. The amount of interest charged or credited during the year if not specified separately in the bank statement or other documents. For standing order, the amount and term of the agreed facilities. In the case of overdraft and loan, the amount of agreed facilities and repayment term (eg.monthly/quarterly/fixed date). Whether the account is subject to any restriction. Full titles and date of closure of all accounts closed during the year. b) Explain why it is important that you should send a bank letter to the bank of Anon. Your explanation should include commentary on the extent to which you could rely on : i) the companys bank statements are presented by the company; ii) verbal assurance from the managing director b) Bank confirmation is a third party representation where information is obtained from an independent third party which is more reliable than that provided by the clients management. The confirmation reply is addressed to the auditor and therefore it would not be subject to the clients manipulation. Bank statement is external documents which is more reliable than internal documents. However, the auditor would discount its
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ABFA 3114 Principles Of Auditing Tutorial Questions reliability as the bank statements are sent to the client and therefore might subject to the client manipulation.
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ABFA 3114 Principles Of Auditing Tutorial Questions Tutorial 11 Introduction to Statement of Financial Position Audit (Cash & Bank) Oral evidence from internal parties is the least reliable source of evidence as there is possibility that the managing director might suppress or manipulate the information provided to the auditor. In this regard, obtaining bank confirmation will enable the auditor to gather the most reliable source of evidence relating to the clients bank balances. 1. State the concern you would have and the action you would take if the managing director refused to authorize disclosure of the information required in the bank letter. The auditor would be unable to ascertain the existence and amount of overdraft and loans and the existence, ownership and proper custody of the bank balances. There may a risk that the bank balances are materially misstated. The auditor should try to explain to the managing director the importance of confirming the bank balances as a means of gathering appropriate audit evidence and a letter of authority permitting the banks to disclose the information requested is necessary. If the auditor still refused the letter authority, the auditor may consider withdraw from the engagement or issue a qualified audit report at the end of the audit. 2. i) explain the meaning of the term appropriate segregation of duties as applied to a cheque payment system. ii) Detail four control procedures that you would expect to find in the cheque payments system of Anon.
1.
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ABFA 3114 Principles Of Auditing Tutorial Questions Tutorial 11 Introduction to Statement of Financial Position Audit (Cash & Bank) 2. i) Proper segregation of duties reduces the likelihood that unauthorized cheque payments are made. It is important that an individual who approves a purchase not have direct access to cheque payment for it. Additionally, the individuals in the accounts payable department who initiate payment should not have access to the cheques after they are prepared. Cheques are forwarded directly from the IT department to the cashiers department for mailing to or collection by the suppliers. ii) - Supplier statements independently reviewed and reconciled to accounts payable records. - Monthly bank reconciliation prepared and reviewed. - Accounting for numerical sequence of cheques. - Cheques prepared only after all source documents have been independently approved. Question 4 (a) Outline FOUR (4) audit procedures other than bank confirmation that you would carry out in verifying cash and bank balances. Audit objectives Completeness, validity & accuracy Completeness, validity & accuracy Cut-off, Audit procedures 1. Obtain the cash and bank schedule from client and ensure the opening balance is agree to the financial statements and also ensure the closing balances are agree to the trial balance. 1. Perform analytical procedures and test reasonableness of closing balances. 1. Obtain bank reconciliation prepared by client.
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Audit objectives Completeness, validity & accuracy
ABFA 3114 Principles Of Auditing Tutorial Questions Audit procedures 2. Ensure balances agree to the lead schedule. 3. Select long outstanding unpresented cheques and uncredited deposit. 4. For unpresented cheques, trace to the following month bank statement and ensure they are cleared at the year end. 5. For uncredited deposit, select deposit from bank reconciliation and ensure it appear in bank statement prior to year end. 1. Obtain direct confirmation from bank on the bank account balance as well as name of account number, balances of account, bank loan, any credit facilities and charges of assets. 1. Discuss with management on the reason for opening new account and closure of account. 2. Discuss with management on the new facilities or credit applied for the bank account. 1. Scrutinise the cash book and bank statement before and after balance sheet date for exceptional entries and transfers which have material effect on the balance. 1. Review BOD minutes and loan agreement. 2. Identify whether any account i secured on assets of the company. 3. Determine whether the bank accounts are subject to any restrictions. 4. Consider legal right of set off of overdraft against positive bank balance. 1. Investigate any unusual or large payments to
Completeness, validity & accuracy Completeness, validity & accuracy Cut-off
Ownership
Presentation
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Audit objectives and disclosure
ABFA 3114 Principles Of Auditing Tutorial Questions Audit procedures related parties. 2. Evaluate financial statement presentation.
Tutorial 11 Introduction to Statement of Financial Position Audit (Cash & Bank) (b) If the auditor suspects that some type of fraud involving cash and bank has occurred, it may be necessary to extend the normal cash and bank audit procedures. Briefly explain THREE (3) extended audit procedures that auditor may use to detect fraudulent activities in the cash and bank accounts. In the event that auditor suspects that some form of fraud involving cash has occurred, the auditor should extend the normal audit procedures for cash transactions and balances. Three audit procedures can be used to detect fraudulent activities in the cash account are: Extended bank reconciliation procedures. Auditor will extend the coverage period to investigate the outstanding cheques and have a detailed examination of the outstanding items. Proof of cash. Reconcile the receipts and payments in the cash book with bank statement for a specific period to ensure all the transactions in the cash book and bank statement agreed and no transactions have been omitted from the book Tests of kiting. When cash has been stolen by an employee, it is possible to cover the cash shortage by following a practice known as kiting. This involves an employee covering the cash shortage by transferring money from one bank account to another and recording the transactions improperly in the entitys book. Test of kiting involves the preparation of an inter bank transfer schedule to ensure proper cut off for the cash transactions.
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ABFA 3114 Principles Of Auditing Tutorial Questions Tutorial 11 Introduction to Statement of Financial Position Audit (Cash & Bank) Question 5 a. Describe THREE (3) internal control procedures that could be implemented over the petty cash fund. (6 marks) b. Describe THREE (3) audit procedures that an auditor may carry out to audit petty cash fund. (6 marks) c. Describe ONE (1) substantive procedure for auditing cash receipt transactions and cash disbursement transactions based on each of the following audit objectives: i. Completeness ii. Cut off d. An auditor may carry out additional fraud related audit procedures if necessary. Briefly explain the following fraud related audit procedures : (5 marks) i. Proof of cash ii. Test for kiting a. Control procedures over petty cash are: A petty cash fund should be maintained on an imprest basis by an independent custodian. Pre-numbered petty cash vouchers should be used for withdrawing cash from the fund and a limit should be placed on the size of reimbursement made from petty cash Accounts payable clerks should review the vouchers before replenishing the petty cash fund. A surprise counts on petty cash should be conducted by an independent person. b. Audit procedures over petty cash are: Conduct a cash count Observation of internal control procedures such as cash disbursement, updating of petty cash book, safeguarding of petty cash fund.
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ABFA 3114 Principles Of Auditing Tutorial Questions Select samples of transactions and vouch it to source documents. c. Completeness -For cash receipt, trace a sample of remittance advice to cash receipts journal or deposit slips. -For cash disbursement, trace a sample of payment vouchers to the cash disbursement journal. Cut off -For cash receipts, examining a sample of remittance for the cut off period a few day before and after the year end to ensure transactions are recorded in the correct period -For cash disbursement, examine a sample of payment for cut off period to ensure payments are recorded in the correct accounting period. d. Proof of cash- Reconcile the receipts and payments in the cash book with bank statement for a specific period to ensure all the transactions in the cash book and bank statement agreed and no transactions have been omitted from the book. Tests of kiting- Prepare an inter bank transfer schedule to ensure proper cut off for the cash transactions.
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ABFA 3114 Principles Of Auditing Tutorial Questions Tutorial 11 Introduction to Statement of Financial Position Audit (Cash & Bank) Question 6 a. Cash and bank balances usually have high inherent risk and therefore are normally a critical audit area. Briefly explain why this is a critical audit area. (5 marks) Cash and bank balances usually have high inherent risk and therefore are normally a critical audit area due to the following reasons: It is highly liquid and therefore susceptible to fraud. Most of the business transactions go through cash and bank Because of its residual nature, cash does not have a predictable relationship with other financial statement accounts. As a result, analytical procedures could not be used in the audit of cash and its equivalent. Explain FOUR (4) audit objectives in auditing cash and bank balance. (8 marks) c. Explain SIX (6) audit procedures used when auditing bank balance (12 marks)
b.
Audit objectives Completeness, validity & accuracy Completeness, validity & accuracy Cut-off, Completeness, validity &
Audit procedures 2. Obtain the cash and bank schedule from client and ensure the opening balance is agree to the financial statements and also ensure the closing balances are agree to the trial balance. 2. Perform analytical procedures and test reasonableness of closing balances. 6. Obtain bank reconciliation prepared by client. 7. Ensure balances agree to the lead schedule. 8. Select long outstanding unpresented cheques
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Audit objectives accuracy
ABFA 3114 Principles Of Auditing Tutorial Questions Audit procedures and uncredited deposit. 9. For unpresented cheques, trace to the following month bank statement and ensure they are cleared at the year end. 10.For uncredited deposit, select deposit from bank reconciliation and ensure it appear in bank statement prior to year end. 2. Obtain direct confirmation from bank on the bank account balance as well as name of account number, balances of account, bank loan, any credit facilities and charges of assets. 3. Discuss with management on the reason for opening new account and closure of account. 4. Discuss with management on the new facilities or credit applied for the bank account. 2. Scrutinise the cash book and bank statement before and after balance sheet date for exceptional entries and transfers which have material effect on the balance. 5. Review BOD minutes and loan agreement. 6. Identify whether any account i secured on assets of the company. 7. Determine whether the bank accounts are subject to any restrictions. 8. Consider legal right of set off of overdraft against positive bank balance. 3. Investigate any unusual or large payments to related parties. 4. Evaluate financial statement presentation.
Completeness, validity & accuracy Completeness, validity & accuracy Cut-off
Ownership
Presentation and disclosure
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ABFA 3114 Principles Of Auditing Tutorial Questions Tutorial 11 Introduction to Statement of Financial Position Audit (Cash & Bank) Question 7 Required: a) Discuss the shortcomings of this system and suggest ways of improving the system. (6 marks) b) Describe three tests of control that the auditor would perform on this system. (4 marks) c) Describe three substantive tests that the auditor would perform on the item salesmens expenses. (5 marks) d) During the audit, the auditor discovered that the salesman in one area was submitting false claims for entertaining customers. What further action should the auditor take? (5 marks) [Total: 20 marks] a. Shortcomings of the system. There is no check that the expenses claimed by the salesmen were actually expended. There is no check that the xpenses were properly incurred by the salesmen in carrying out their duties. As a result, the deputy chief accountant could easily perpetrate a fraud either alone or in collusion with a salesman. Immprovement. Each salesman should complete a weekly log showing calls made and mileage covered. The logs and the expense claims should be submitted to the sales manager who should check and sign the log before passing it to the deputy cheif accountant for reimbursement.
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ABFA 3114 Principles Of Auditing Tutorial Questions At intervals a member of the accounts staff should verify that claimed mileage is consistent with the mileage shown on the cars recorders.
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ABFA 3114 Principles Of Auditing Tutorial Questions Tutorial 11 Introduction to Statement of Financial Position Audit (Cash & Bank) The directors should verify that complete andsigned documentation is attached to and is consistent with the cheques presented to them. They should cancel the presented documents to prevent a second claim.
b. Tests of control Tests of control are those tests which seek evidence on the effectiveness of internal control system. The tests of control could be performed ae: Select a sample of payments and verify each claim is fully supported by authorised voucher and that the additions are correct. Examine the returned cheques for the sample chosen and verify that the chques are made out to the salesman concerned and are properly signed. This may form part of the audit of the bank transactions.
c. Substantive procedures Substantive procedures are thoe procedures which seek to provide audit evidence as to the financial statement assertions of completeness, existence, measurement, valuation etc. The substantive procedures that could be performed are:
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ABFA 3114 Principles Of Auditing Tutorial Questions Completeness-Examine expense claims paid after the balance sheeet date to ensure that all outstanding claims are included. Measurement and valuation- Review mileage claims with mileage records obtained from inspection of cars or repair invoices.
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ABFA 3114 Principles Of Auditing Tutorial Questions Tutorial 11 Introduction to Statement of Financial Position Audit (Cash & Bank) Verify that salesmen who have made claims are legitimate employees of the company. Select a sample of hotel and entertaining expenses and verify that they are valid.Test the analysis of bank payments to ensure that all expenses payments and no other payments are correctly charged to the account. Review previous years accounts, directors minutes and budgets, if any, seek evidence of the validity of the total expenses. d. Auditors actions on discovering the false claim. Immediately inform the management verbally and in writing in the management letter. Consider whether the discovery casts on the effectiveness of the system, hence whether further tests may be required. Consider whether the discovery cast doubt on the companys records in general and hence whether further work may be necesary in other areas.
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ABFA 3114 Principles Of Auditing Tutorial Questions Tutorial 12 Introduction to Statement of Financial Position Audit (Property Plant & Equipment) Question 1 Explain any THREE (3) key control procedures in property, plant and equipment. (6 marks). The key control procedures in PPE are: i. Purchase requisitions are initiated in relevant department and authorized ar the appropriate level within the organization. ii. Large capital assets are to be purchased only after passing through a specific capital budgeting process. iii. Monthly reconciliation of the PPE subsidiary ledger to the general ledger control accounts to ensure completeness. iv. The initial function should be segregated from the final approval function. v. The record function should be segregated from the general ledger function. Describe FOUR (4) substantive procedures that an auditor may carry out in auditing PPE. (8 marks) Substantive procedures in PPE are:i. Obtain a schedule of PPE, cast the calculation and agree totals to the general ledger to ensure completeness. ii. Obtain detailed information for additions or disposal of PPE during the year, agrees the amounts to totals shown on the main schedule to ensure accuracy and completeness. iii. Agree the addition of PPE to the suppliers invoices or purchase agreement to ensure the accuracy and validity of transaction. iv. Conduct a physical inspection on the newly purchase PPE to ensure their existence.
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ABFA 3114 Principles Of Auditing Tutorial Questions v. Examine the purchase and sales of PPE before the year end to ensure that the transaction is recorded in the correct period
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ABFA 3114 Principles Of Auditing Tutorial Questions Tutorial 12 Introduction to Statement of Financial Position Audit (Property Plant & Equipment) vi. Examine the purchase and sales of PPE after the year end to ensure that they are recorded after the year end. Question 2 PPE is one of the items that will be audited by auditor in the financial statement audit. Explain TWO (2) reasons for the above audit.(4 marks) The reasons are because PPE are significant items in the Statement of Financial Position, involve complex accounting issues and difficult to audit. Question 3 Describe audit procedures to be carried out (at least 10 procedures), for each of the procedure mentioned, you should identify the associated objective(s) Assertions about classes of transactions (Objective of procedure) Occurrence Substantive procedures
1. Vouch significant additions and disposals to vendor invoices or other supporting documents. 2. Review lease agreements to ensure that lease transactions are accounted for properly. 1. Trace a sample of purchase requisitions to loading dock reports and to the PPE records i.e. transaction and master file. 2. Vouch a sample of PPE additions to documentation indicating proper
Completeness
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ABFA 3114 Principles Of Auditing Tutorial Questions Assertions about Substantive procedures classes of transactions (Objective of procedure) authorisation. Accuracy 1. For assets written off, test amounts charged against income and accumulated depreciation. 1. Examine the purchases /sales of capital assets for a few days before and after year end. 2. Inquiry of client personnel and a review of lease transactions for the same period can provide evidence on proper cut off for leases. 1. Vouch transactions included in repairs and maintenance for items that should be recognised as PPE. 2. Review lease transactions for proper classification between operating and finance leases.
Cut-off
Classification
Assertions about account balances (Objective of procedures) Existence
Substantive procedures
1. Verify the existence of major additions by physically examining the property, plant & equipment.
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ABFA 3114 Principles Of Auditing Tutorial Questions Assertions about Substantive procedures account balances (Objective of procedures) 2. Confirm that the company physically inspects all items in the non-current asset register each year 3. Inspect assets, concentrating on high value items and additions in year. Confirm items inspected exist, are in use, are in good condition and have correct serial numbers 4. Review records of income yielding assets 5. Reconcile opening and closing vehicles by numbers as well as amounts Rights obligations Completeness and 1. Examine or confirm deeds or documents for proof of ownership. title
1. Obtain a lead schedule of property, plant & equipment and agree the total to the general ledger. 2. Obtain detailed schedules for additions and disposals of PPE and agree the amount to total shown on lead schedule. 3. Physically examine a sample of capital assets and trace them into the PPE subsidiary ledger. & 1. Evaluate fixed assets for significant write off by performing the following procedures: Identify the event or change in circumstance indicating that the carrying value of the asset may not be recovered. Verify written off loss by determining the sum of expected future cash flows and
Valuation allocation
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ABFA 3114 Principles Of Auditing Tutorial Questions Assertions about Substantive procedures account balances (Objective of procedures) comparing that sum to the carrying value. Examine entitys document supporting such as directors minutes on the written off. Question 4 Segregation of duties is one of the key controls for property, plant and equipment. Explain THREE (3) types of segregation of duties that can be implemented for property, plant and equipment. Describe ONE (1) possible error or fraud that might occur if each of these segregation of duties is not implemented. Segregation of duties The initiation function should be segregated from final approval function to avoid unauthorised or unnecessary purchase Possible Errors/Fraud Resulting from Conflict of Duties If one individual is responsible for initiating a PPE transaction and also has authority to approve the transaction, it is likely unauthorised purchases of assets can occur. This can result in purchase of unnecessary assets that do not meet the companys quality control standards; or illegal payments to supplier or contractors.
The PPE records function If an individual is responsible for the should be segregated from the PPE records and also for the general general ledger function. ledger functions, that individual can conceal any defalcation that would normally be detected by reconciling subsidiary records with the GL control account. The PPE records function If an individual is responsible for the
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ABFA 3114 Principles Of Auditing Tutorial Questions Segregation of duties Possible Errors/Fraud Resulting from Conflict of Duties should be segregated from the PPE records and also has custodial custodial function. responsibility for the related assets, tools and equipment can be stolen and the theft can be concealed by adjustment of the accounting records. If a periodic physical inventory of PPE is taken, the individual responsible for the inventory should be independent of the custodial and record keeping functions. If an individual who is responsible for the periodic physical inventory of PPE is also responsible for the custodial and record keeping functions, theft of the entitys physical assets can be concealed.
Question 5 (a) Briefly describe FIVE (5) types of internal control that may be implemented by a company in controlling the companys property, plant and equipment. Control Objectives 1.Occurrence Control procedures 1. The purchase of PPE must pass through a specific capital budgeting process which should require higher approval authority. 2. Review of suppliers invoices to satisfy the assertion of occurrence. Test of Control Analytical review 1. General review between current and prior year figures to ascertain any unexplained differences 2. Review of sensitive codes in the general ledger such as
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Control Objectives
ABFA 3114 Principles Of Auditing Tutorial Questions Control procedures Test of Control repairs or maintenance
2.Authorisation Purchase requisitions are initiated in relevant departments and authorized at the appropriate level within the entity.
1. Internal control procedures should be in place to ensure that the authorisation to purchase PPE is consistent with the authorization. 2. Control procedures must be in place for authorising the sale or disposal of noncurrent assets. 3. All major maintenance or improvement transactions should be properly authorised by an appropriate level of management.
1.
Discuss the level of capital purchases in the year with the purchasing manager
2. Review the board minutes for authorisation of capital purchases
3.Completeness The detailed PPE ledger should includes complete information for each PPE such as
1. Perform monthly reconciliation of the PPE subsidiary ledger to general ledger control account.
1.
Review of the movements on the non-current asset codes 2. Compare budgeted capital purchases
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Control Objectives description, location and serial number, date of purchase, installation cost, depreciation method, residual value and estimated useful economic life.
ABFA 3114 Principles Of Auditing Tutorial Questions Control procedures Test of Control 2. Periodically compare the details recorded in PPE subsidiary ledger with the existence of physical assets. Obtain or prepare a summary of tangible non-current assets showing how gross book value, accumulated depreciation, and net book value reconcile with the opening position. 3. Compare non-current assets in the general ledger with the noncurrent assets register and obtain explanations for differences. 4. Check whether assets which physically exist are recorded in noncurrent asset register. 5. If a non-current asset register is not kept, obtain a schedule showing the original with actual capital purchases
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Control Objectives
ABFA 3114 Principles Of Auditing Tutorial Questions Control procedures Test of Control costs and present depreciated value of major non-current assets. 6. Reconcile the schedule of noncurrent assets with the general ledger.
(b) Briefly describe ONE (1) test of control that auditor may carry out on
EACH of the above-mentioned internal control. Analytical review 1. General review between current and prior year figures to ascertain any unexplained differences 2. Review of sensitive codes in the general ledger such as repairs or maintenance
1. Discuss the level of capital purchases in the year with the purchasing manager 2. Review the board minutes for authorisation of capital purchases 1. Review of the movements on the non-current asset codes 2. Compare budgeted capital purchases with actual capital purchases
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ABFA 3114 Principles Of Auditing Tutorial Questions Tutorial 12 Introduction to Statement of Financial Position Audit (Property Plant & Equipment)
(c) Briefly explain analytical procedures and TWO (2) uses of analytical
procedures in auditing. ISA 520 define AP as consisting of evaluations of financial information made by a study of plausible relationship among both financial and non financial data. The important concept of AP is the comparison of figures. a. To assist in planning the nature, timing and extent of other audit procedures. It is also known as PRELIMINARY AP. (BEFORE AUDITING) b. As substantive procedures when their use can be more effective and efficient than other procedures in reducing detection risk for specific financial statement assertions. It is also known as SUBSTANTIVE AP. (DURING AUDITING)
c. As part of the overall review of financial statements when completing the audit. It is also known as FINAL AP. (AFTER AUDITING). The objective of AP at the overall review stage of an audit is to assist the auditor in assessing the conclusions reached and evaluating the overall financial statement presentation. (d) List THREE (3) analytical procedures that can be used in auditing property, plant and equipment. Analytical procedures Compare prior year balances in PPE and depreciation charges with current year balances after consideration of any changes in conditions or asset composition.
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ABFA 3114 Principles Of Auditing Tutorial Questions Tutorial 12 Introduction to Statement of Financial Position Audit (Property Plant & Equipment) Example Property, plant & equipment (o/s) Depreciation charged 20x9 compared to20x8 xxx xxx yyy yyy
Compute the ratio of depreciation charges to the related PPE account and comparison to prior years ratios.
Example Depreciation / PPE y ratio
20x9 compared to20x8 x ratio
Compute the ratio of repairs and maintenance expense to the related PPE account and comparison to prior years ratios.
Example
20x9 compared to20x8
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ABFA 3114 Principles Of Auditing Tutorial Questions Repair & maintenance expense/PPE x ratio y ratio
Compute the ratio of insurance expense to the related PPE account and comparison to prior years ratio.
Example Insurance expense/PPE ratio
20x9 compared to20x8 x ratio y
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ABFA 3114 Principles Of Auditing Tutorial Questions Tutorial 12 Introduction to Statement of Financial Position Audit (Property Plant & Equipment) Review capital budgets and comparison of the amounts spent with amounts budgeted.
Example: Compare actual expense on PPE to budgeted amount.
Question 6 State four objectives of the internal controls that should be exercised over non current assets. 1. Occurrence- All the purchase of fixed assets are actually occur. 2. Authorization- All transactions are authorized. 3. Completeness. All transactions are completely recorded 4. Segregation of duty. Proper segregate the duties from initial to custody.
Explain how the non current assets register, if properly maintain may be useful to the company The advantages of maintaining non current asset register are a complete information for each PPE such as description, location and serial number, date of purchase, installation cost, depreciation method, residual value and estimated useful economic life are completely recorded.
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ABFA 3114 Principles Of Auditing Tutorial Questions Any addition or disposal of PPE could be easily identified and managed. It facilitates the calculation of depreciation or amortization.
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ABFA 3114 Principles Of Auditing Tutorial Questions Tutorial 12 Introduction to Statement of Financial Position Audit (Property Plant & Equipment) State some key information that should be recorded in the non current assets register. Key information include description, location and serial number, date of purchase, installation cost, depreciation method, residual value and estimated useful economic life are completely recorded Explain why is it particularly important that there should be strong internal controls over the disposal of the cars by the company This is to ensure the disposal is supported by documentation, the transfer of title, sales price and dates of completion and payment are complete. The calculation of profit or loss is accurate. The disposals have been authorized and the proceeds are reasonable. Suggest three internal controls that should be implemented by the company over the disposal of cars. 1. Verify disposals with supporting documentation, checking transfer of title, sales price and dates of completion and payment. 2. 3. 4. Check calculation of profit or loss. Check that disposals have been authorized. Consider whether proceeds are reasonable.
5. If the property was used as security, ensure release from security has been correctly made.
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ABFA 3114 Principles Of Auditing Tutorial Questions 6. For significant disposals, consider impact upon other areas of business and whether disposal should be disclosed.
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ABFA 3114 Principles Of Auditing Tutorial Questions Tutorial 12 Introduction to Statement of Financial Position Audit (Property Plant & Equipment) With regard to the delivery of office furniture to the company on 31 March 20x5: State how the company should have reflected the transaction in its accounting records The purchase should be recorded on 31 March 2005. Briefly describe two procedures the companys auditor should carry out to verify that the delivery occurred on that date. 1. Examine the purchases /sales of capital assets for a few days before and after year end. 2. Inquiry of client personnel and a review of lease transactions for the same period can provide evidence on proper cut off for leases.
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ABFA 3114 Principles Of Auditing Tutorial Questions Tutorial 13 & 14 Computer Auditing Question 1 a. Describe two (2) types of control in an information technology environment. (6 marks)
General control: It relates to the overall environment within which computer base accounting systems are developed, maintained and operated to all the applications. Application control: It applies to the processing of individual accounting applications such as payroll or sales system.
b. Describe two (2) types of audit approach in an IT environment. (4 marks)

Audit around the computer: concerning only the input and output Audit through the computer: concerning about the input, output and also the processing routines of the computer. c. Describe any THREE (3) effects of IT on an organizations internal controls. (6 marks)
IT affects the business risks that influence the achievement of entity objectives. It affects the control procedures that ensure managements directives are carried out. IT affects the information and communication requirement IT affects the monitoring activities.
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ABFA 3114 Principles Of Auditing Tutorial Questions d. Describe THREE (3) security and access controls on IT that may be implemented by an organization (6 marks) Security and access controls are; Restricting access to computers to authorized users only such as locked doors, authorized cards. Password to restrict access to programme and data files. Logging or trail to record and monitor access to computer files and programmes. Secure storage of backup data in a safe and separate location.
Question 2
(a)
Identify and explain four matters that the audit partner of your firm should consider before deciding whether to accept the appointment as the companys auditors.
1.Qualification to act as an auditor. Determine if the auditors are independent of the client and able to provide the desired service. 2.Technical competence. Determine whether the auditors have the necessary expertise, technical skills and knowledge of the industry to carry out an effective audit especially if the client business is in a specialised industry. 3.Resources available. Auditors should determine whether they have resources (e.g. audit staff, audit techniques ) to perform the audit work and complete the audit engagement within the deadline. 4.Ethical matters. Auditors should determine if they accept the client would violate any applicable regulations and standards or face any ethical threats to the independence of the auditor.
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ABFA 3114 Principles Of Auditing Tutorial Questions 5.Risk assessment. Auditors should consider if they accept the client and the risk associated to the client would pose a significant danger to the auditors reputation. When auditors assess the risk, they need to consider the following: The viability and stability of the clients business The character and involvement of management The effectiveness of accounting system and internal control system The application of accounting standards and policies Whether is there any unusual item or going concern problem faced by the client 6. Replacement of previous auditors. If this is the first year audit, auditors should consider the reasons for resignation of the previous auditor. Auditors should contact the previous auditor to find out is there any serious disagreement with directors over accounting matters. 7. Procedures for obtaining information. When considering accepting appointment, auditors should obtain and review the available financial information (e.g. annual reports, interim management reports etc.) and inquire third parties (e.g. banks, solicitors) about any information concerning the integrity of the management.
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ABFA 3114 Principles Of Auditing Tutorial Questions (b) Explain the four effects of computer accounting system on internal control.
IT affects all the factors that affect the control environment. IT affects the business risks that influence the achievement of entity objectives. It affects the control procedures that ensure managements directives are carried out. IT affects the information and communication requirement IT affects the monitoring activities. (c) Explain why it is important for a strong control to be exercised over the development of the new computer accounting system. Consistent application of predefined business rules and performance of complex calculations in processing large volume of transactions or data. Enhancement of the timeliness, availability and accuracy of information. Facilitation of additional analysis of information. Enhancement of the ability to monitor the performance of the entitys activities and its policies and procedures. Reduction in the risk that controls will be circumvented. Enhancement of the ability to achieve effective segregation of duties by implementing security controls in applications, databases and operating system. (d) Outline five examples of controls to prevent unauthorized changes to data files that you would expect to find in the new accounting system of Fozz.
Under general controls

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ABFA 3114 Principles Of Auditing Tutorial Questions Data centre and network operations control System software acquisition, change and maintenance control Access security control Application system acquisition, development and maintenance control. Under application controls Data capture controls Data validation controls. Processing controls. Output controls. Error controls. (e) Describe the effect that the existence of the new accounting system will have on the planning of the financial statements audit of the company.
If the new system is purchased ensure data conversion from existing to new systems were properly reconciled and it balances. Extra time is required to test the new system and ensure that it support Fozzs business. Question 3 (a) Explain what you understand by the term audit trail. Illustrate your answer. Audit trail means a chain of evidence provided by documentation or other cross referencing that connects account balances and other summary results with original transaction data. (b) Explain why there is often a loss of visible audit trail in many computerbased accounting systems. In an advanced IT system, many computer based programs lack of visible audit trail because it only exist in electronic form. There are fewer hardcopy
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ABFA 3114 Principles Of Auditing Tutorial Questions form of documents. Most of the data is stored in the electronic format which lack audit trail. (c) Explain each of the following terms. Comment on when it would be appropriate for an auditor to adopt each of these respective audit approach. i) Audit around computer concerning only the input and output ii) Audit through computer concerning about the input, output and the processing routines of the computer (d) Describe FIVE (5) factors that should be considered by you in determining the audit approach. Staffing requirements and use of expert. Consideration of materiality and risk Understand the applicable laws and regulations Identify related parties Going concern issues Consideration of internal audit function. Review audit strategy with audit committee Additional value added services.
Question 4 (a) Explain the purpose of using batch control totals in a computerized accounting system and identify three control totals that may be used when processing purchases data from purchase invoices. Give an example of each control total identified.
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ABFA 3114 Principles Of Auditing Tutorial Questions - Financial total a total of some value field in the set of transaction (such as total purchases or total amount of purchases invoices to be recorded) - Hash total a total of some non-financial field in the batch of transactions (such as total number of units purchased) - Record count a total of the number of transactions included in the batch (such as total number of transactions included in a batch of purchases) (b) List and explain the purpose of five programmed controls that you would expect to find over the processing of data through the computersied accounting system of Books.
Range test a check to ensure that the value in a field falls within
an allowable range of values Field test a check on a field to ensure that it contains either all numeric or alphabetic characters Sign test a check to ensure that the data in a field have the proper arithmetic sign Check-digit verification a numeric value computed to provide assurance that the original value was not altered Reasonableness tests controls that determine if the processing results are outside some predetermined value
(c) Identify five internal control procedures to facilitate the physical security of a computer based accounting system and related software. limit access to the computer facilities through the use of locked doors with authorized personnel being admitted through use of conventional key, an authorization card, or physical recognition. programmers must not allowed access to the computer room to prevent them from making unauthorized modification to systems and application programs.
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ABFA 3114 Principles Of Auditing Tutorial Questions the entity should have an operational disaster plan, which may include an off-site backup location for processing critical applications. physical control over programs and data can be maintained by a separate library function that controls access and use of files. authorization controls that limit access only to authorized information, user identification controls such as passwords, and data communication controls such as encryption of data, to restrict access to authorized personnel only. Kindly discuss with students past years questions and imbued in them the technique of answering them. Thank you very much. If there is any errors found, kindly supply the right solution and revert to lcng@mail.tarc.edu.my
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ABFA 3114 Principles Of Auditing Tutorial Questions Tutorial 1 Introduction to Auditing Question 1 Why is the studying of auditing different

ABFA 3114 Principles Of Auditing Tutorial Questions Tutorial 1 Introduction to Auditing

Attendance at/notices of general meetings

Right to speak general meetings

Rights in relation to written resolutions Right to require laying of accounts

ABFA 3114 Principles Of Auditing Tutorial Questions

Professional Competence (C)

Professional Behaviour (B)

viii. ix. (b)

ABFA 3114 Principles Of Auditing Tutorial Questions

ABFA 3114 Principles Of Auditing Tutorial Questions

-Prepare and send the customer / receivable statements periodically basis.

Cash receipts are recorded in the wrong period

Cash discounts are not properly taken into account

Cash receipts recorded at the wrong amount

Cash receipts recorded in the wrong account

Posting and summarisatio n

Audit objectives Completeness, validity & accuracy

Completeness, validity & accuracy Completeness, validity & accuracy Cut-off

Audit objectives and disclosure

Audit objectives accuracy

Completeness, validity & accuracy Completeness, validity & accuracy Cut-off

Presentation and disclosure

ABFA 3114 Principles Of Auditing Tutorial Questions

Assertions about account balances (Objective of procedures) Existence

2. Review the board minutes for authorisation of capital purchases

Example Depreciation / PPE y ratio

20x9 compared to20x8 x ratio

20x9 compared to20x8

Example Insurance expense/PPE ratio

20x9 compared to20x8 x ratio y

Example: Compare actual expense on PPE to budgeted amount.

b. Describe two (2) types of audit approach in an IT environment. (4 marks)

Under general controls

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