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 – May 2016 – L2 – Q1a – Audit and Assurance Evidence

This question discusses the assessment of the validity and pertinence of different forms of audit evidence and auditing standards.

Question

(a) ‘Audit evidence must be reviewed critically with respect to its validity and pertinence as evidence before it is permitted to influence the mind of the auditor with respect to the assertion at issue’.

(i) An Auditor is considering using a copy of credit sale invoices on a file as evidence for the credit sales figure in the accounts. How would he assess the validity and pertinence of this file as audit evidence? (3 marks)

(ii) A mail order company invoices its customers with up to five ladies’ dresses. Most customers accept and pay for one or two dresses and return the rest. A credit note is then issued. The accounts incorporate a provision for returnable dresses at the year end. The audit is completed very quickly and post-balance sheet events are not usable by the auditor as evidence. What evidence would the auditor regard as valid and pertinent in respect of the provision? (3 marks)

(iii) What factors would influence an auditor in considering the acceptability as evidence of certificates received from third parties? (3 marks)

(iv) A building contracting company has constructed an office block on its own land for its own use. State the evidence the auditor would require on the cost of the building. (3 marks)

(v) Discuss the different forms of audit evidence that would be available to auditors of very small companies and of very large companies. (3 marks)

Answer

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Tags: Audit evidence, Audit Procedures, Audit Standards, Pertinence, Validity
Level: Level 2

Topic: Audit and Assurance Evidence
Series: MAY 2016

AA – Nov 2015 – L2 – Q5 – Completion Procedures and Reporting, Audit and Assurance Evidence

Discussing financial statement amendments for inventory valuation, depreciation, and contingent liabilities, and their impact on the auditor’s report.

Question

Big Build is a listed construction company with an annual revenue of GHS350m. Big Build’s draft statement of profit or loss shows a profit before tax for the year ended December 31, 2008, of GHS40m.

Big Build’s audit firm is conducting an audit. This is the first audit of Big Build that this audit firm has conducted. An enquiry to the previous audit firm revealed no reasons for concern. On completing audit work at the company’s premises, the audit senior drafts a memo, extracts from which are reproduced below:

(a) Inventory valuation:
Inventories include GHS7m, at cost, for scrap rubber from used car tyres. This material is widely used as a road surface in other countries. Contracts for road building with this country’s Highways Agency, the state authority for road construction, do not currently permit the use of this material. However, the matter was known to be under review, and Big Build speculated on a favourable outcome of this review and purchased the material. In February 2009, shortly before the financial statements were approved by the directors, the Highways Agency reported that it would not, currently, accept the use of this material. If used on non-Highways Agency contracts, the material’s net realisable value would not exceed GHS2m.

The finance director maintains that the issue of the Highways Agency report was a non-adjusting event after the reporting period. The write-down of the inventory should, therefore, be reflected in the next period’s financial statements.

(b) Depreciation:
During the year ended December 31, 2005, the company purchased two computer-controlled earth movers at a cost of GHS2,500,000 each and a further two at the same price during the year ended December 31, 2006. Depreciation has been provided at 10% straight line, the same basis as it previously depreciated conventional earth movers. This year, 2008, the company has decided that improvements in technology made it worthwhile scrapping their first two computer-controlled earth movers and replacing them with the latest model at a cost of GHS6,000,000 each. The company provides a full year’s depreciation charge in the year of acquisition and none in the year of disposal.

The company’s chief engineer tells you that technology is developing so rapidly it appears likely they will continue to replace these machines every five years. In spite of this, the finance director claims that the depreciation rate of 10% is in line with the industry standard and reflects the physical life of the machines. He urges that continued improvements in technology cannot be foreseen, and that there is no justification for increasing depreciation to 20% because of the possibility of technological obsolescence.

(c) Contingent liability:
The company is being sued for GHS50m by the Highways Agency for defective work on a recently completed road. The company maintains that it met the Highways Agency’s specification and it is the Agency’s engineers who are at fault in drawing up the specification. Big Build maintains that it has no case to answer, that the possibility of loss is remote, and that the claim need not be disclosed as a contingent liability. An investigative journalist has recently published an article suggesting that other roads constructed by the company exhibit similar faults. The managing director has admitted that the company’s road building techniques are under investigation by the Highways Agency. If the company were to lose the case, its future going concern would be threatened. No disclosure has been made in the financial statements.

Required:
For each of the following three issues, discuss whether the financial statements require amendment and describe the impact on the auditor’s report if the issue remains unresolved.
a) Inventory valuation.
(6 marks)
b) Depreciation.
(7 marks)
c) Contingent liability.
(7 marks)

Total: 20 marks

Answer

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Tags: Audit opinion, Contingent Liabilities, Depreciation, Financial Statement Amendments, Inventory Valuation
Level: Level 2

Topic: Audit and Assurance Evidence, Completion Procedures and Reporting
Series: NOV 2015

AA – Dec 2022 – L2 – Q4a – Audit and Assurance Evidence

Explains the term "analytical procedures" and discusses the types and uses of analytical procedures in an audit.

Question

You are an Audit Assistant of Apakye & Associates, a firm of Chartered Accountants. Your firm engaged an intern who would like to know more about analytical procedures.

Required:
With reference to ISA 520: Analytical Procedures,
i) Explain the term ‘analytical procedures’.
ii) Explain the different types of analytical procedures available to the auditor.
iii) Describe THREE (3) situations in the course of audit when analytical procedures can be used.

Answer

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Tags: Analytical procedures, Audit Procedures, Financial Statements, ISA 520, Risk Assessment
Level: Level 2

Topic: Audit and Assurance Evidence
Series: DEC 2022

AA – Nov 2015 – L2 – Q1b – Audit and Assurance Evidence, Completion Procedures and Reporting

This question covers the audit procedures to confirm inventory existence, completeness, and valuation at the year-end.

Question

Describe the audit procedures that the auditor should perform at the year-end to confirm each of the following:
i. The existence of inventory.
ii. The completeness of inventory.
iii. The valuation of inventory.
(8 marks)

Answer

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Tags: Audit Procedures, Completeness, Evidence, Existence, Inventory, Valuation
Level: Level 2

Topic: Audit and Assurance Evidence, Completion Procedures and Reporting
Series: NOV 2015

AA – Dec 2022 – L2 – Q3c – Audit and Assurance Evidence

Discusses the reasons for conducting a physical inventory count and outlines the responsibilities of management and auditors with respect to physical inventory counts

Question

ISA 501: Audit Evidence – Additional considerations for specific items requires that, if inventory is material to the financial statements, the auditor should obtain sufficient appropriate audit evidence by, among others, being present at physical inventory counting unless impractical. The Managing Director of MLT Ltd is at a loss as to why in this age of technological advancement, auditors insist on being present during physical inventory count.

Required:
i) Explain FOUR (4) reasons for conducting physical inventory counts.
ii) Discuss the responsibilities of Management and Auditors with respect to physical inventory counts.

Answer

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Tags: Auditor Responsibilities, Inventory Management, ISA 501, Management responsibilities, Physical Inventory Count
Level: Level 2

Topic: Audit and Assurance Evidence
Series: DEC 2022

AA – Dec 2022 – L2 – Q3b – Audit and Assurance Evidence

Explains four limitations of using ratio analysis in auditing and their impact on financial statement assertions.

Question

You have been presented with the Financial Statements of Asiki Ltd, an audit client that has been consistent in reporting good financial performance. As part of obtaining audit evidence your Audit Manager has asked you to perform analytical procedures on the company’s General and Administrative Expenses using ratio analysis.

Required:
Explain to the Audit Manager FOUR (4) limitations of ratio analysis and how these could impact on assertions.

Answer

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Tags: Analytical procedures, Audit Limitations, Financial Statements, Ratio Analysis
Level: Level 2

Topic: Audit and Assurance Evidence
Series: DEC 2022

AA – Dec 2022 – L2 – Q3a – Audit and Assurance Evidence

Outlines five general principles from ISA 500 for assessing the reliability of audit evidence provided by a client

Question

You have been asked by your Audit Manager to assess the audit evidence provided by a client, a small company owned by Mr. and Mrs. Randolph-Phillips. You observed that the files have been neatly packaged and well referenced. You are however skeptical as to the quality of evidence provided because the year’s audit encountered many difficulties.

Required:
Outline FIVE (5) general principles in accordance with ISA 500: Audit Evidence, that will assist you in assessing the reliability of the audit evidence received.

Answer

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Tags: Audit evidence, Audit Principles, Audit Process, ISA 500, Reliability
Level: Level 2

Topic: Audit and Assurance Evidence
Series: DEC 2022

AA – May 2017 – L2 – Q4b – Audit and Assurance Evidence

Explanation of a contingent liability and audit procedures for its verification.

Question

At a meeting to discuss the draft accounts with senior management of Good Old Days Ltd, the external auditors, Gelian Chartered Accountants, asked management to confirm the amount of contingent liability of GH¢100 million in respect of a pending legal suit against the company. The CEO quizzed the chief accountant to explain how the amount of GH¢100 million was arrived at.

Required:
i) Describe briefly what a contingent liability is, giving examples where appropriate. (2 marks)
ii) Explain in detail the audit procedures for the verification of contingent liabilities. (5 marks)

Answer

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Tags: Audit Procedures, Contingent Liability, Legal claims, Verification
Level: Level 2

Topic: Audit and Assurance Evidence
Series: MAY 2017

AA – May 2017 – L2 – Q4a – Audit and Assurance Evidence

Explanation of the difference between statistical and non-statistical sampling, and methods of sample selection.

Question

ISA 530 Audit Sampling states that the objective of the auditor, when using audit sampling, is to provide a reasonable basis for the auditor to draw conclusions about the population from which the sample is selected.

Required:
Explain the difference between statistical sampling and non-statistical sampling and describe FOUR methods of sampling selection.

Answer

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Tags: Audit Sampling, ISA 530, Non-Statistical Sampling, Sampling Methods, Statistical Sampling
Level: Level 2

Topic: Audit and Assurance Evidence
Series: MAY 2017

AA – Nov 2016 – L2 – Q4a – Audit and Assurance Evidence

List and explain factors that influence the auditor’s judgment on the sufficiency of audit evidence.

Question

List and explain FOUR factors that will influence the auditor’s judgment regarding the sufficiency of the evidence obtained.

Answer

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Tags: Audit evidence, Judgment, Sufficiency
Level: Level 2