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 2021 – L2 – Q3 – Audit and Assurance Evidence

Identify substantive tests using audit software, potential problems with audit software, and explain auditing around the computer.

Question

Expert Ltd (Expert) is a wholesaler of furniture (such as chairs, tables, and cupboards). Expert buys the furniture from six major manufacturers and sells them to over 1,000 customers ranging from large retail chain stores to smaller owner-controlled businesses. The receivables balance includes customers owing up to GHȼ200,000 to smaller balances of about GHȼ20,000, all with different due dates for payments and credit limits. All information is stored on Expert’s computer systems, although previous audits have adopted an ‘audit around the computer’ approach.

You are the Audit Senior in charge of the audit of the receivables balance. For the first time with this client, you have decided to use audit software to assist with the audit of the receivables balance. IT staff at Expert are happy to help you, the Auditor. However, they cannot confirm the completeness of systems documentation and warn that the systems have very old operating systems, limiting file compatibility with modern programs.

To limit the possibility of damage to Expert’s computer files, a copy of the files will be provided by Expert’s IT staff for the Auditor to use with their own audit software.

Required:
a) State SIX (6) substantive tests that should be carried out using audit software on the receivables balance of Expert Ltd. (9 marks)

b) Identify FOUR (4) potential problems of using audit software at Expert Ltd. For each problem, explain how it can be resolved. (8 marks)

c) Explain the concept of “auditing around the computer” and discuss why this increases audit risk for the Auditor. (3 marks)

Answer

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Tags: Audit Around the Computer, Audit risks, Audit Software, Receivables, Substantive Test
Level: Level 2

Topic: Audit and Assurance Evidence
Series: MAY 2021

AA – May 2021 – L2 – Q1c – Audit and Assurance Risk Environment, Audit and Assurance Evidence

State instances where the auditor applies the concept of materiality.

Question

Materiality is a fundamental concept in both auditing and accounting. The Framework for the preparation of financial statements states that information is material if its omission, misstatement, or non-disclosure could influence the economic decisions of users taken based on the financial statements.

Required:
State TWO (2) instances which require the Auditor to apply the concept of materiality. (2 marks)

Answer

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Tags: Audit evidence, Financial Statements, Materiality
Level: Level 2

Topic: Audit and Assurance Evidence, Audit and Assurance Risk Environment
Series: MAY 2021

AA – Nov 2021 – L2 – Q2b – Audit and Assurance Evidence

Describes the substantive procedures auditors should adopt to verify valuation, completeness, and rights and obligations of property, plant, and equipment (PPE).

Question

Describe FOUR (4) substantive procedures the external auditor of HMH should adopt to verify each of the following assertions in relation to an entity’s property, plant and equipment (PPE):

i) Valuation
ii) Completeness
iii) Rights and obligations

(Note: Assume that the hospital prepares Financial Statements in accordance with International Financial Reporting Standards)

Answer

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Tags: Completeness, PPE, Rights and Obligations, Substantive Procedures, Valuation
Level: Level 2

Topic: Audit and Assurance Evidence
Series: NOV 2021

AA – Nov 2021 – L2 – Q1c – Audit and Assurance Evidence

Explains three purposes of audit documentation in line with ISA 230.

Question

Audit evidence may come in many forms. For instance, enquiries may be verbal, while confirmations may be in written form. Regardless of the form of audit evidence they obtain, auditors need to document their procedures. The process of documenting audit evidence is known as audit documentation.

Required:
Explain THREE (3) purposes of audit documentation in line with ISA 230: Audit Documentation.
(3 marks)

Answer

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Tags: Audit Documentation, Audit evidence, Audit Procedures, ISA 230
Level: Level 2

Topic: Audit and Assurance Evidence
Series: NOV 2021

AA – May 2018 – L2 – Q4b – Audit and Assurance Evidence

Identifies key financial statement assertions for year-end account balances and describes substantive procedures related to inventory.

Question

b)
i) Identify and explain two financial statement assertions relevant to account balances at the year-end. (2 marks)
ii) For each identified assertion, describe a substantive procedure relevant to the audit of year-end inventory.

(4 marks)

Answer

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Tags: Assertions, Financial statement assertions, Inventory, Substantive Procedures, Year-end balances
Level: Level 2

Topic: Audit and Assurance Evidence
Series: MAY 2018

AA – May 2018 – L2 – Q4a – Audit and Assurance Evidence

Describes substantive audit procedures for depreciation of assets and a legal claim involving food poisoning.

Question

BDE Company Limited operates a hotel providing accommodation, leisure facilities, and restaurants. Its year-end is 31 March. You are the senior associate of ABC and Associates and are currently preparing the audit programmes for the year-end audit of BDE Company Limited. You are reviewing the notes of last week’s meeting between the audit manager and finance director, where two material issues were discussed.

Depreciation
BDE Company Limited incurred significant capital expenditure during the year for refurbishing the restaurant facilities for the hotel. The finance director has proposed that the new leisure equipment should be depreciated over 10 years using the straight-line method.

Food Poisoning
BDE’s directors received correspondence in January from a group of customers who attended a wedding at the hotel. They have alleged that they suffered severe food poisoning from food eaten at the hotel and are claiming substantial damages. BDE’s lawyers have received the claim and believe that the lawsuit against the company is unlikely to be successful.

Required:
i) Describe substantive procedures to obtain sufficient and appropriate audit evidence in relation to the above two issues. (6 marks)

ii) List and explain the purpose of three items that should be included on every working paper prepared by the audit team during the audit of depreciation and food poisoning of BDE Company Limited. (3 marks)

Answer

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Tags: Audit evidence, Depreciation, Food poisoning, Legal claims, Substantive Procedures
Level: Level 2

Topic: Audit and Assurance Evidence
Series: MAY 2018

AA – May 2019 – L2 – Q4 – Audit and Assurance Evidence

Defines analytical procedures and outlines substantive procedures for revenue, profit, inventory, payables, and bank loan verification.

Question

You are the external auditor of Paa Willy Ltd (PW) for the year ended 31 March 2019. PW operates 12 convenience stores in the Greater Accra region:

Each store sells food.
Each store is responsible for its own inventory procurement and produces monthly management accounts which are sent to the centralised accounting department at PW head office.

PW is financed by a GH¢250,000 bank loan which is repayable at a rate of GH¢50,000 per annum over each of the next 5 years starting on 31 October 2019. It also has an overdraft facility of GH¢100,000, which it uses in full. The bank overdraft facility is due for renewal on 1 May 2020.

The bank has already told the company that it will need a cash flow forecast for two years from 1 February 2020 in order for the bank to decide whether or not the overdraft facility will be renewed. The bank has also said it will require a report from the external auditors to confirm the accuracy of the forecast.

Required:
a) Define the term analytical procedures.
(2 marks)

b) In relation to the work of an external auditor:
i) Describe THREE (3) analytical procedures that should be performed to confirm PW’s revenue and profit.
(3 marks)
ii) Outline THREE (3) substantive procedures that should be adopted to verify each of the following assertions:

The valuation of inventory.
(3 marks)
The completeness of payables.
(3 marks)

c) Recommend FOUR (4) appropriate substantive procedures that should be performed to confirm PW’s bank loan.
(4 marks)

Answer

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Tags: Analytical procedures, Bank Loan, Inventory Valuation, Payables Completeness, Revenue and Profit, Substantive Procedures
Level: Level 2

Topic: Audit and Assurance Evidence
Series: MAY 2019

AA – May 2019 – L2 – Q2b – Audit and Assurance Evidence

Explains the components of internal control per ISA 315 and reasons for focusing on internal controls during substantive testing.

Question

b) For many firms, the audit evidence that they obtain does not focus on a client’s internal systems and controls; rather, the work is focused on the substantive testing of the transactions and balances which make up the entity’s accounts. Consequently, many practitioners do not believe that they are required to spend much time documenting a client’s internal systems and controls or indeed to test whether any of the controls actually operate in practice in any detail. However, to ignore this area will mean that the requirements of ISA 315: Identifying and Assessing the Risks of Material Misstatement Through Understanding the Entity and its Environment are not complied with.

Required:
i) Explain the components of an internal control system in line with ISA 315.
(5 marks)
ii) Why is the work on internal controls necessary when auditors take the substantive approach?
(4 marks)

iii) Why is the work on internal controls necessary when auditors take the substantive approach?
(4 marks)

Answer

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Tags: Audit evidence, Internal Control Components, ISA 315, Substantive Testing
Level: Level 2

Topic: Audit and Assurance Evidence
Series: MAY 2019

AA – May 2019 – L2 – Q1b – Audit and Assurance Evidence

Discusses the advantages of auditor independence and the inherent limitations of auditing.

Question

b) The Institute of Chartered Accountants (Ghana) is organizing a continuous professional development program on the code of conduct for members and other relevant issues pertaining to audit. You are the audit partner of Lankai and Co, a firm of Chartered Accountants, and you are to present a paper on the independence of the auditor and the inherent limitations of auditing.
Required:
i) Explain TWO (2) advantages of independent audit.
(3 marks)
ii) The phrase “the auditor must be seen to be independent both in fact and appearance.”
(3 marks)
iii) Inherent limitations of audit.
(4 marks)

Answer

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Tags: Audit Limitations, Auditor Independence, Ethical Principles, Professional Skepticism
Level: Level 2

Topic: Audit and Assurance Evidence
Series: MAY 2019

AA – Nov 2018 – L2 – Q4b – Audit and Assurance Evidence

Explains audit procedures for verifying the valuation of land and buildings in the financial statements.

Question

b. At a meeting to deliberate with management on the draft financial statement of E.T Company Ltd, the external auditors, Sampson Amarty and Co., a firm of Chartered Accountants, demanded that management should explain how an amount of GH¢200,000 for land and building in the financial statements had been arrived at. The Managing Director asked the Director of Finance to explain how the amount of GH¢200,000 was arrived at. The Director of Finance explained that the amount of GH¢200,000 was given to them by an external valuer, S.K. Valuation Experts.

Required:
Explain the audit procedures that would be adopted in verifying the land and building value in the financial statements. (7 marks)

Answer

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Tags: Audit Procedures, Financial Statements, Land and Building Valuation, Verification
Level: Level 2