Topic: Audit and Assurance Evidence

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AA – Nov 2024 – L2 – Q5b – Substantive Testing of Accounts Receivable

Explain three substantive tests for verifying accounts receivable balance.

Question

Baaba & Associates, an audit firm, is conducting a year-end audit of Rashida LTD. The audit team is particularly concerned about the accuracy of the accounts receivable balance reported on the statement of financial position as of December 31, 2023. Therefore, as part of their audit procedures, they need to perform substantive tests to identify any material misstatements, errors, or fraud that could impact the accuracy of the financial statements.

Required:
Explain THREE substantive tests that the audit team at Baaba & Associates should perform to obtain sufficient appropriate audit evidence regarding the accuracy of Rashida LTD’s accounts receivable balance.

Answer

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Tags: Accounts Receivable, Audit evidence, Audit Procedures, Financial Reporting, Risk Assessment, Substantive Testing
Level: Level 2

Topic: Audit and Assurance Evidence
Series: Nov 2024

AA – Nov 2024 – L2 – Q3b – Audit Assertions for the Income Statement

Explain two key audit assertions for the income statement.

Question

Audit assertions are claims made by management regarding the accuracy and completeness of various elements of financial statements. These assertions are used by auditors to develop audit procedures and gather evidence to support their audit opinion. Assertions are categorised into those related to the income statement and those related to the statement of financial position.

Required:
Explain TWO key Audit Assertions for the Income Statement.

Answer

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Tags: Audit Assertions, Audit evidence, Financial Reporting, Financial Statements, Income Statement, Substantive Testing
Level: Level 2

Topic: Audit and Assurance Evidence
Series: Nov 2024

AA – Nov 2024 – L2 – Q3a – Management’s Expert and Audit Evidence

Explain the term "management’s expert" and four factors to consider before relying on their work as audit evidence.

Question

Question:
ISA 500: Audit Evidence provides guidance for auditors intending to rely on the work of a management’s expert. If the information to be used as audit evidence has been prepared using the work of a management’s expert, the auditor must evaluate the management’s expert.

Required:
i) Explain the term “management’s expert.”
ii) Explain FOUR factors to consider before relying on the work of a management’s expert as audit evidence.

Answer

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Tags: Audit evidence, Audit Reliability, External audit, Financial Reporting, Management’s expert, Professional Judgment, Risk Management
Level: Level 2

Topic: Audit and Assurance Evidence
Series: Nov 2024

AA – July 2023 – L2 – Q5b – Audit and Assurance Evidence, Professional and Ethical Considerations

Explanation of five benefits of documenting audit work.

Question

b) ISA 230: Audit Documentation deals with the auditor’s responsibility to prepare audit documentation for an audit of financial statements.

Required:
State FIVE (5) benefits of documenting audit work. (5 marks)

Answer

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Tags: Audit Documentation, Audit Work, Benefits, ISA 230
Level: Level 2

Topic: Audit and Assurance Evidence, Professional and Ethical Considerations
Series: JULY 2023

AA – July 2023 – L2 – Q3a – Audit and Assurance Risk Environment, Audit and Assurance Evidence

Procedures external auditors perform to evaluate the effectiveness of data security controls.

Question

a) Abbey Ltd is a medium-sized manufacturing company that produces various products for consumers. The company has a large amount of confidential data, including financial records, trade secrets, and personal information of employees and customers. The company has recently become concerned about cyber security risks and has hired an external auditor to conduct an audit of their data security controls.

Required:
Explain FIVE (5) procedures the External Auditor would need to perform to obtain evidence to evaluate the effectiveness of Abbey Ltd’s data security controls.

(10 marks)

Answer

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Tags: Audit Procedures, Cybersecurity, Data security, External Auditor
Level: Level 2

Topic: Audit and Assurance Evidence, Audit and Assurance Risk Environment
Series: JULY 2023

AA – July 2023 – L2 – Q1c – Audit and Assurance Evidence, Professional and Ethical Considerations

Explanation of fraud risk factors in risk assessment procedures according to ISA 240.

Question

c) ISA 240 (Redrafted): The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements requires the Auditor to perform procedures to identify the risk of material misstatement due to fraud. The Auditor must evaluate information obtained from other risk assessment procedures to see if any fraud risk factors are present.

Required:
Explain FIVE (5) risk factors in risk assessment procedures with regard to fraud. (5 marks)

Answer

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Tags: Fraud, ISA 240, Misstatement, Risk Assessment
Level: Level 2

Topic: Audit and Assurance Evidence, Professional and Ethical Considerations
Series: JULY 2023

AA – July 2023 – L2 – Q1b – Audit and Assurance Risk Environment, Audit and Assurance Evidence

Explanation of control weaknesses inherent in Non-Profit Organizations (NFPOs).

Question

b) Understanding the client’s business environment is critical to understanding the client’s business. There is a need for this because the objectives of commercial organizations are different from that of not-for-profit organizations (NFPOs). The inherent control weaknesses for both forms of organizations may not be the same.

Required:
Explain FIVE (5) control weaknesses inherent in NFPOs. (10 marks)

Answer

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Tags: Internal Control, Non-Profit Organizations, Risk, Weaknesses
Level: Level 2

Topic: Audit and Assurance Evidence, Audit and Assurance Risk Environment
Series: JULY 2023

AA – Nov 2023 – L2 – Q4c – Completion Procedures and Reporting, Audit and Assurance Evidence

This question explains the auditor's actions if management refuses to provide representations.

Question

ISA 580: Written Representations guides the use of management representations as audit evidence, the procedures to be applied in evaluating and documenting management representations, and the action to be taken if management refuses to provide appropriate representations.

Required:
Explain the action to be taken by the auditor if management refuses to provide representations.
(3 marks)

Answer

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Tags: ISA 580, Qualified Opinion, Scope Limitation, Written representations
Level: Level 2

Topic: Audit and Assurance Evidence, Completion Procedures and Reporting
Series: NOV 2023

AA – Nov 2023 – L2 – Q4a – Audit Failure and Expectation Gap, Audit and Assurance Evidence

This question distinguishes between fraud and error in the audit of financial statements.

Question

ISA 240: The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements, distinguishes fraud from error and provides significant guidance on the auditor’s responsibilities to consider fraud in an audit of financial statements.

Required:
Distinguish between fraud and error giving an example of each.
(4 marks)

Answer

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Tags: Audit Responsibility, Error, Financial Statements, Fraud, ISA 240
Level: Level 2

Topic: Audit and Assurance Evidence, Audit Failure and Expectation Gap
Series: NOV 2023

AA – Nov 2023 – L2 – Q3b – Audit and Assurance Evidence

This question asks for the verification procedures to be followed for assets, liabilities, and equity in an audit.

Question

Automech Ltd is a manufacturer of automotive parts based in Ghana. The company’s accountant has been manipulating the accounts payable balance by teeming and lading to misrepresent the financial position of the company. The accountant has been recording fictitious invoices and payments to suppliers to increase the accounts payable balance and misrepresent the company’s expenses.

The external auditor, who was engaged to audit the financial statements of the company, performed substantive testing for transaction cycles and verification procedures for assets, liabilities, and equity items. However, the auditor failed to identify the risk of teeming and lading in the accounts payable balance.

During the audit, the auditor reviewed the accounts payable balance and performed confirmation procedures to verify the balance with the suppliers. However, the accountant had provided the auditor with fake confirmation responses, and the auditor failed to detect the fraud.

Although the financial statements of Automech Ltd were misstated, the Auditor issued an unqualified opinion, stating that the financial statements were presented fairly, in all material respects, in accordance with the applicable financial reporting framework. After the audit, the fraud was discovered by a whistle-blower, and the accountant was fired. The company’s reputation was damaged, and the external auditor faced legal action for failing to detect the fraud.

Required:
State and explain the procedures that should be followed for verification of assets, liabilities, and equity items in Automech Ltd.
(10 marks)

Answer

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Tags: Assets, Audit evidence, Equity, Liabilities, Verification procedures
Level: Level 2

Topic: Audit and Assurance Evidence
Series: NOV 2023

AA – Nov 2023 – L2 – Q3a – Audit and Assurance Evidence

This question asks for four substantive testing methods that could detect fraud in the accounts payable balance.

Question

Required:
State and explain FOUR (4) substantive testing that would have detected the fraud being perpetuated by the Accountant.
(10 marks)

Answer

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Tags: Audit evidence, Fraud Detection, Substantive Testing, Teeming and lading, Transaction cycles
Level: Level 2

Topic: Audit and Assurance Evidence
Series: NOV 2023

AA – Nov 2019 – L2 – Q3 – Audit and Assurance Evidence

Discusses the audit objectives, sources of evidence for inventory audit, and why stocks present high audit risk.

Question

The information in the financial statements of your client, Honesty Company Limited, represents claims by management in relation to its responsibility to prepare financial statements that give a true and fair view of the company’s state of affairs and results of operations for the year under review. These claims are referred to as financial statement assertions.

Required:
a) Outline the audit objectives for the audit of stock (inventories) in the financial statements. Your answer should relate to the financial statement assertions. (8 marks)

b) Discuss FOUR (4) sources from which evidence can be obtained to confirm the quantities and value of stocks. (8 marks)

c) Explain why stocks present high audit risk. (4 marks)

Answer

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Tags: Audit evidence, Audit Objectives, Audit Risk, Financial statement assertions, Inventory
Level: Level 2

Topic: Audit and Assurance Evidence
Series: NOV 2019

AA – Nov 2019 – L2 – Q2a – Audit and Assurance Evidence

Explains examples of external confirmations and identifies relevant and irrelevant audit assertions.

Question

ISA: 505 External Confirmations states that ‘the auditor should determine whether the use of external confirmations is necessary to obtain sufficient appropriate audit evidence at the assertion level’. An Auditor may obtain external confirmations from third parties to corroborate the audit evidence already available with the auditor. The Auditor shall determine whether positive or negative request is appropriate given the condition.

Responses or events of non-responses are required to be evaluated. Responses may be unreliable if they are served indirectly to the auditor, not served by the intended person, or transmission is compromised, and the auditor may have to perform additional procedures to resolve doubts and suspicion. In events of non-responses or management refusal to permit the auditor to seek confirmations, the auditor shall assess if modification in the auditor’s report is necessary.

Required:
Explain FOUR (4) examples of external confirmations and for each one identify:
i) An audit assertion that the external confirmation supports; and
ii) An audit assertion that the external confirmation does NOT support.
(10 marks)

Answer

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Tags: Assertions, Audit evidence, External Confirmations, ISA 505, Third Party Confirmations
Level: Level 2

Topic: Audit and Assurance Evidence
Series: NOV 2019

AA – Mar 2023 – L2 – Q3 – Audit and Assurance Evidence

Explain why property, plant and equipment, trade receivables, and inventory were selected for further investigation.

Question

Maggie Manufacturing is a long-established manufacturing company. The audit manager has been provided with the following extracts from the draft financial statements for 2021, prior to the final audit planning meeting with the financial controller.

Draft Statement of Financial Position (Extracts):

The manager has reviewed these extracts and has identified three financial statement headings that require further investigation: property, plant, and equipment, trade receivables, and inventory. He has also calculated certain accounting ratios.

Required:
a) Explain why the manager has selected these three headings for further investigation.

b) Detail and explain the further information that the manager should request from the financial controller at the final audit planning meeting to clarify the situation with regards to the three financial statement headings.

Answer

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Tags: Audit Procedures, Financial Information, Financial Statement Headings, Inventory, Property Plant and Equipment, Trade receivables
Level: Level 2

Topic: Audit and Assurance Evidence
Series: MAR 2023

AA – Nov 2017 – L2 – Q5a – Audit and Assurance Risk Environment

Summary: Discuss the impact of an ongoing lawsuit on the audit report if the matter remains unresolved.

Question

Lexon Institute provides tuition for accountancy studies writing professional examinations. You are the audit manager of DAR and Co. Chartered Accountants. The following were identified during the financial audit of Lexon. Revenue is GH¢30m, Profit before tax is GH¢10 million and total assets is GH¢25 million.

i) The regulator of the Accountancy profession has filed a lawsuit against Lexon Institute for GH¢3.9 million alleging a non-compliance with the Regulators rules and regulations for running a tuition center. This case is ongoing and will not be resolved prior to the audit report being signed. The matter is disclosed as a contingent liability.
(4 marks)

ii) Depreciation has been calculated on the total of land and buildings. In previous years it has only been charged on buildings. Total depreciation is GH¢2·5 million and the element charged to land is GH¢2 million.
(4 marks)

iii) Lexon Institute’s computerised purchases is backed up daily, however for a period of three months the purchases records and the back-ups have been corrupted, and therefore cannot be accessed. Purchases for these three months amounted to GH¢4m.
(4 marks)

Required:
Discuss each of these issues and describe the impact on the audit report if the above issues remain unresolved.

(Total: 15 marks)

Answer

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Tags: Audit report, Contingent Liability, Financial Reporting, IAS 37, Lawsuit
Level: Level 2

Topic: Audit and Assurance Evidence
Series: NOV 2017

AA – Nov 2017 – L2 – Q4 – Audit and Assurance Evidence

Describe the substantive procedures you would apply to audit wages and salaries.

Question

You are part of the audit team auditing the financial statements of Stainless Co. Ltd for the year ended 30 June 2017. The company has a staff of 200. You have been asked to audit the wages and salaries expenses for the year.

Required:
i) Describe the substantive procedures you would apply in your work.

ii) Identify the objective that a substantive procedure seeks to achieve.

Answer

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Tags: Financial Reporting, Payroll Audit, Substantive Procedures, Wages and Salaries
Level: Level 2

Topic: Audit and Assurance Evidence
Series: NOV 2017

AA – Nov 2017 – L2 – Q3c – Audit and Assurance Evidence

List and explain three factors to consider when determining the extent of reliance on analytical procedures as substantive audit evidence.

Question

ISA 520 Analytical Procedures provides guidance to auditors on the use of analytical procedures during the course of the external audit.

Required:
When using analytical procedures as substantive audit procedures, list and briefly explain with examples three factors to consider when determining the extent of reliance that can be placed on the results of such procedures.

Answer

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Tags: Analytical procedures, Audit evidence, Audit Techniques, Financial Statements
Level: Level 2

Topic: Audit and Assurance Evidence
Series: NOV 2017

AA – Nov 2017 – L2 – Q3b – Audit and Assurance Risk Environment

Describe five financial events or conditions that may cast doubt on the going concern assumption of an organization.

Question

One of the basic assumptions underlying the preparation of financial statements is the going concern concept, which assumes that the entity has the ability to continue to operate into the foreseeable future. However, some events and conditions may cast doubt on the entity’s ability to continue as a going concern.

Required:
Describe five financial events or conditions that may cast doubt about the going concern assumption of an organization.

Answer

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Tags: Audit Risk, Financial Events, Financial Statements, Going Concern
Level: Level 2

Topic: Audit and Assurance Evidence
Series: NOV 2017

AA – Nov 2017 – L2 – Q3a – Audit and Assurance Risk Environment

Describe four factors affecting judgment about materiality in an audit context.

Question

Anaba Sampson is an audit assistant at Global Accountants, a firm of Chartered Accountants. During the audit of a client’s account, for the year ended 31 December 2011, Anaba detected an error amounting to GH¢10.00 in respect to each interest payment, which recurred multiple times. The Chief Accountant advised Anaba not to request any adjustment entry, claiming the errors were insignificant. The company had 3,000 deposit accounts, and interest was paid half-yearly.

Required:
i) Describe four factors affecting judgment about materiality.

ii) Discuss the advice of the Chief Accountant.

Answer

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Tags: Audit evidence, Audit Risk, Financial Reporting, Judgment, Materiality
Level: Level 2

Topic: Audit and Assurance Evidence
Series: NOV 2017

AA – Nov 2017 – L2 – Q2c – Audit and Assurance Evidence

State three items to be included in a management letter according to ISA 265.

Question

ISA 265 Communication of deficiencies in internal control to management and those charged with governance specifies control deficiencies that must be communicated to those charged with governance and management.

Required:
State three items to be captured in a management letter.

Answer

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Level: Level 2