AUD589 – JUNE 2015

SOLUTION AUD 589 JUNE 2015

QUESTION 1
A. Benefits derived from audit planning:
i. To achieve audit objectives
ii. To assist in the direction and control of the work & minimize possibility of audit
failure
iii. To help keep audit cost reasonable
iv. To obtain sufficient appropriate evidence
v. To avoid misunderstanding
vi. To protect from legal liability
(Any 3 points x 1 mark = 3 marks)

B. An audit programme is a list of work that the auditor will perform in the audit of financial
statements./ The importance of audit programmes is to provide clear sets of instruction / on
the work be carried out./
(3 x / = 3 marks)

C i) There is an inverse relationship between inherent risk or control risk, and detection risk. For
instance, if inherent risk or control risks are assessed as high, detection risk would be set at a
low level.
(3 x / = 3 marks)

ii) When detection risk is determined to be low, more substantive procedures should be
performed so as to compensate for the higher level of inherent and control risks.
(3 x / = 3 marks)

D. 3 steps of audit planning:

i) Obtain knowledge of the client business/

These include better understanding of the company, the company’s history, major
activity, organization structure, management integrity, reliability of work done by internal
auditor/

ii) Assess materiality and acceptable inherent audit risk/

These include identifying the level of inherent risk and derives the materiality level to
help an auditor in determining the degree of reasonable assurance. /

iii) Understand the Internal Control System (ICS) and assess control risk/
These include identifying transaction cycles, type of transactions, way transaction being
processed, describing the internal control and accounting system and identifying control
risk. /

iv) Review the previous audit work and develop overall audit plan programme/
These include understand the previous audit team’s performance, prepare audit budget,
determine the degree of reliance on internal control and develop audit programme. /

(Any 3 points X 2/ = 6 marks)

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E. The importance of an engagement letter formalizes the arrangement reached between

auditor and the client. This letter serves as a contract, outlining the responsibilities of both
parties and preventing misunderstandings between the two parties.
(2 marks)
(Total: 20 marks)

QUESTION 2

A. Reason for an auditor to obtain sufficient and appropriate evidence:

As a basis for his opinion/ on the truth and fairness of the financial statements under
examination. /
(2 X / = 2 marks)
B. Auditor’s powers [s174 (4-9)] In relation to evidence ONLY:
i) A right to access at all-time to the books and records/
ii) A right to obtain information and explanation when he consider necessary/
iii) A right to make written representations using evidence he has gathered when the
company proposes to dismiss him as an auditor/
(Any 3 points X / = 3 marks)

C. Factors that will affect the reliability of audit evidence (with explanation):
-source of the evidence/-external is more reliable than internal/
-system of internal control/-strong system will produce reliable data/
-method of obtaining evidence/ -direct source is more persuasive/
-qualification of the provider, explain
-degree of objectivity, explain
(Any 3 explanation x 2 = 6 marks)

D.
(i) Internal documentation has been prepared and used within the client’s organization/
without having gone to any outside party such as customer. / Example: Internal memo/

External documentation either originated with and outside party/ or was an internal
document which went to an outside party and is now in the hands of the client or readily
accessible. / Example : Invoice /
(3 points x 2 marks = 6 marks)

E. Types of audit evidence:

 Confirmation/
 Reperformance (mechanical accuracy) /
 Analytical procedure/
(3 X / = 3 marks)
(Total : 20 marks)

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QUESTION 3

A. Segregation of duties will reduce the opportunity of any one person to be in the
position of both to perpetrate and conceal errors or fraud in the normal cause of his
or he duties.
(2 marks)

B.
Internal Controls weaknesses Effect
1 Purchases transaction is not properly The wrong classification might have
classified no effect on net profit but it affects
(Classification)  the gross profit of the company,
hence the gross profit margin. 
2 Making payments twice for same invoice.  Reduce cash asset of the company,
affects company liquidity. 
3 Purchases not recorded on a timely basis due Purchases might be under or
to the delay in submitting receiving reports to overstated due to failure to receive
accounts department.  the receiving reports timely 

4 Cash payment were made without due Overpayment for purchases and
checking of the goods received with receiving hence reduce company’s liquidity 
reports and purchase invoices.
5 Duties are not adequately segregated . Loss of asset- cash due to
embezzlement

(Any 4 weakness and effect x 2 mark = 8 marks)

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C.

Internal Controls that were Recommended internal control

absent
1 Purchases transaction is not Account distributions should be reviewed by a
properly classified responsible individual prior to the entry or recording into
(Classification) the system. 
2 Making payments twice for same The payments should only be made on original invoices
invoice. with supporting purchase order and delivery notes and
all of those documents should be stamped “PAID” after
the payment is made. 

3 Purchases not recorded on a Receiving report should be send to accounting

timely basis due to the delay in
submitting receiving reports to
accounts department
department at the end of the day on which the raw
materials are received.
Accounting department must record in numerical
sequence the receiving report after obtaining the last
number used from receiving department. 

4 Cash payment were made An individual should be identified to do reconciliation so

without due checking of the
goods received with receiving
reports and purchase invoices.
5 Duties are not adequately
segregated
6 Cash payment should be
correctly recorded
that payments are only made on goods purchased and
received by the company. 
No employees should be given the combined duties of
recording and physical custody of assets. Regardless of
how trustworthy the person is. The chief clerk should
not be allowed to record the billing in sales journal and
at the same time responsible of receiving cash.
Should have internal verification by another responsible
person/executive and bank reconciliation should be
prepared on timely basis at the end of each month.

(Any 4 x 1 mark = 4 marks)

c) The purpose of preparing Bank Reconciliation is to determine that:

1. the difference between the balances as per bank statement and bank balance is due to
valid reasons (timing difference).

2. If there is fraud, the company can immediately commence investigation to detect it and
appropriate actions can be taken to prevent it from recurring.

3. The difference in balances is as a result of errors made by either a bookkeeper or the

bank which will then be identified and corrected.

4. Preparing bank reconciliation will ensure there will be no delay in crediting receipts into
the bank account.

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5. Irregular items such as dishonoured cheques can be identified promptly and immediate
action can be taken by the company. .

(any 3 points x 2 marks = 6 marks)

(Total: 20 marks)

QUESTION 4

A. Three (3) objectives of control over freehold premises

(i) to ensure all acquisitions are properly authorized
(ii) to safeguard the premises
(iii) to ensure all premises are properly recorded
(iv) to ensure premises are written off over their useful life
(v) to ensure profits and losses on disposals (if any) are properly accounted for.

(Any 3 points X 1 mark = 3 marks)

B. Three (3) audit procedures that should be undertaken by an auditor in verifying freehold
premises.
i. Check the accuracy of this year’s depreciation.
ii. Check whether the amount disclosed in the financial statements is appropriate.
iii. Check whether the cost and the accumulated depreciation balances brought
forward from previous year agree with the previous year’s file.
iv. Ensure that no revenue expenditure has been capitalized
v. Physically inspect the premises and check the plans
vi. Ensure that the premises are not subject to mortgage or charge.

(any 3 points with explanation X 2 marks = 6 marks)

C. Four factors :

(i) the qualification and experience of the valuer

(ii) the basis of valuation
(iii) the reasonableness of the valuation
(iv) the independence of the valuer
(any 4 factors with explanation X 1.5 marks = 6 marks)

D. Audit procedures to verify ownership and valuation of property, plant and equipment:

Completeness – examine a sample of capital assets and trace them into the property, plant
and equipment subsidiary ledger (1 ½ marks).
The purpose is to determine that all assets that belongs to the company are recorded in the
book and not unstated. (1 mark)

Ownership – examine title deeds, and where relevant contractual agreements or documents for
proof of ownership. (1 ½ marks).

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The purpose is to determine only property, plant and equipment that belongs to the company is
included in the statement of financial position (1 mark).

Valuation – prepare the list of property, plant and equipment, including those newly acquired
and excluding those that have been disposed, cast to determine its book value; Consult
property valuer to determine its market value and compare with the value stated by the
management; or test the calculations of depreciation for a sample of property, plant and
equipment. (1 ½ marks).

The purpose is to make sure that the amount of property, plant and equipment is stated
reasonably in the statement of financial position (1 marks)
(any 2 x 2 ½ marks = 5 marks)
(Total: 20 marks)

QUESTION 5

A. Two (2) requirements pertaining to the auditor’s reporting duties on a company’s financial
statements under Section 174(2) are to give an opinion on whether:

1. The financial statements are properly drawn up in accordance with the provisions of the
Act so as to give true and fair view of the company’s state of affairs and result of
operations

2. The financial statements are prepared in accordance with applicable approved

accounting standards

3. Accounting and other records are properly kept

(Any 2 points x 1 m = 2 marks)

B. Free from material misstatement – is intended to inform users that the auditor’s responsibility
is limited to material financial information. Materiality is important because it is impractical for
auditors to provide assurance on immaterial amounts.

(2 marks)

C
i) Adverse opinion – due to disagreement in terms of material item to be disclosed.
An adverse opinion is issued because the overall financial statements are so
materially misstated i.e. the misstatements caused a material and pervasive
effect on the FSs that they do not present fairly the state of affairs or result of
operation in conformity with GAAPs.

ii) Disclaimer opinion – insufficient audit evidence. In this case, the auditor is
unable to form an opinion at all due to inability to obtain sufficient audit evidence,
since they were not able to observe all physical inventories and confirm account
balances with third party. 
(2 points X 4 marks = 8 marks)

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D.

i) Type of audit report is modified report with adverse opinion. The reason is that
the standard (clean) opinion paragraph will be replaced with an adverse opinion
because of the disagreement in relation to the non-disclosure of the item that is
material and pervasive.
(2 marks)

ii) Type of audit report is modified report with disclaimer opinion. This is because
the auditor will include in its report a disclaimer of opinion paragraph replacing the
opinion paragraph.

(2 marks)

E. 'adverse opinion' and 'disclaimer of opinion'

Adverse opinion – the auditor expresses an adverse opinion when the effects of misstatements
or non-disclosure of items in the financial statements are due to departure from the applicable
financial reporting framework which are both material and pervasive. The auditor also explains
the nature of the departure and size of the misstatement that relates to specific amounts, and
states the opinion that the financial statements do not present fairly in accordance with the
applicable financial reporting framework.

Disclaimer opinion - In a disclaimer, the auditor explains the reasons for withholding an opinion
and explicitly indicate that no opinion is expressed. This is a situation where the auditor
disclaims opinion due to not able to obtain sufficient appropriate audit evidence which are
material and pervasive.
(4 marks)
(Total: 20 marks)