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 – April 2022 – L2 – Q3b – Audit and Assurance Evidence

Explains the determination of net realisable value and outlines audit procedures for verifying inventory valuation.

Question

b) The management of Zenda Plc have told you that inventory is correctly valued at the lower of cost and net realisable value. As the Auditor of Zenda Plc, you have already satisfied yourself that cost is correctly determined.

Required:
i) Explain how to determine net realisable value. (2 marks)
ii) Explain FOUR (4) audit procedures that you will perform to ensure that net realisable value of the inventory is at or above cost. (8 marks)

Answer

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Tags: Audit Procedures, Inventory, Net Realisable Value, Substantive Testing
Level: Level 2

Topic: Audit and Assurance Evidence
Series: APR 2022

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

Describes audit procedures for sales reliability and substantive tests for royalties in a publishing company.

Question

a) Oxtom Plc, is a publisher and producer of books of poetry. The company has been listed on the Ghana Stock Exchange. Also, it has been a client of your firm of Chartered Accountants for a number of years. The manager in charge of the audit prior to the commencement of the work, has been discussing the audit plan with the audit team, of which you are a member. The audit manager informed the team, among other things, that there has been a growing interest in poetry generally and that the company has acquired a reputation for publishing poets who are still relatively unknown.

During your audit you observed the following:

Contracts with the poets state that they are given a royalty of 10% on sales. Free copies of the books are provided to the poets and to some organizations such as copyright libraries and to others, such as reviewers and university lecturers. No royalties are paid on free copies.
The computerised customer master file contains a code indicating whether a dispatch is to earn a royalty for the author. This code is shown on the sales invoice and dispatch note when they are prepared.
A computerised royalty file is held, all entries therein bearing the invoice number and date.
The company keeps detailed statistics of sales made, including trends of monthly sales by type of customer, and colleges where its books are recommended as part of course material.
Bookshops have the right to return books which are not selling well, however, 10% of these are slightly damaged when returned. The company keeps similar records of returns as it does for sales.

Required:
i) Describe TWO (2) procedures you will perform to ensure that the sales kept by the company may be relied upon. (4 marks)
ii) Describe THREE (3) substantive tests you should perform to ensure that the royalties charged are accurate and complete, stating the objective of each test. (6 marks)

Answer

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Tags: Audit Procedures, Royalties, Sales Testing, Substantive Testing
Level: Level 2

Topic: Audit and Assurance Evidence
Series: APR 2022

AA – Mar 2024 – L2 – Q3b – Audit and Assurance Evidence

Identify examples of external confirmations and their corresponding audit assertions.

Question

ISA 500: Audit Evidence identifies seven main testing procedures. One of these is external confirmation.

Required:
i) List FOUR (4) examples of external confirmation. (2 marks)
ii) For each of the examples in (i) above, explain: ONE (1) audit assertion that the external confirmation supports, and ONE (1) audit assertion that the external confirmation does not support. (8 marks)

Answer

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Tags: Audit Assertions, Audit evidence, External Confirmations
Level: Level 2

Topic: Audit and Assurance Evidence
Series: MAR 2024

AA – Mar 2024 – L2 – Q3a – Audit and Assurance Evidence

Explain audit procedures to obtain sufficient and appropriate audit evidence for Galito Ltd's inventories.

Question

Galito Ltd is a Ghanaian company that operates in multiple industries and has several subsidiaries. Due to the complexity of its operations, its inventories and properties are scattered across the country and used by any of its subsidiaries.

Required:
As the auditor of Galito Ltd, explain FIVE (5) audit procedures to help obtain sufficient and appropriate audit evidence for its inventories.

Answer

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Tags: Audit evidence, Audit Procedures, Inventory Audit, Inventory Valuation
Level: Level 2

Topic: Audit and Assurance Evidence
Series: MAR 2024

AA – Mar 2024 – L2 – Q1a – Audit and Assurance Evidence

Ways in which management can support auditors in obtaining appropriate and sufficient audit evidence.

Question

Management of Bagabu Ltd has a filing system that is largely manual. Their external auditors have expressed concern about how to obtain appropriate and sufficient evidence to support their opinion.
Required:
State FIVE (5) ways management of Bagabu Ltd can support the auditors to obtain appropriate and sufficient audit evidence to support their opinion.

Answer

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Tags: Audit evidence, Audit opinion, External audit, Financial Statements, Internal Controls
Level: Level 2

Topic: Audit and Assurance Evidence
Series: MAR 2024

AA – April 2022 – L2 – Q1d – Audit and Assurance Evidence

Identify five circumstances when the work of an auditor's expert is needed.

Question

ISA 620: “Using the Work of the Auditor’s Expert” provides guidance to auditors on relying on the work carried out by experts. Even though an expert’s work might be sought for relating to a particular issue, the Auditor has sole responsibility for the audit opinion being expressed.

Required:
Identify FIVE (5) circumstances the work of an Auditor’s Expert may be needed. (5 marks)

Answer

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Tags: Auditor's responsibility, Expert Reliance, Experts, ISA 620
Level: Level 2

Topic: Audit and Assurance Evidence
Series: APR 2022

AA – April 2022 – L2 – Q1b – Audit and Assurance Evidence

Explain five factors that determine reliance on analytical procedures.

Question

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

Required:
Explain FIVE (5) factors to consider when determining the extent of reliance that can be placed on the results of such procedures. (5 marks)

Answer

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Tags: Analytical procedures, Audit, ISA 520, Reliance Factors
Level: Level 2