Topic: Audit Failure and Expectation Gap

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  • 10 Marks

AA – July 2023 – L2 – Q2c – Audit Failure and Expectation Gap, Regulatory Framework and Audit Responsibilities

Identification of inherent limitations of audit and misconceptions regarding the role of an auditor.

c) Reasonable assurance is the highest level of assurance auditors may provide. However, due to the limitations of auditing, it is impossible to guarantee ‘absolute’ assurance. Some users of financial statements, however, have the misconception that an audit provides absolute assurance and that the audit opinion guarantees that the financial statements are ‘accurate.’ The ‘Expectations Gap’ refers to these and other misunderstandings regarding the work of an auditor.

Required:
i) State FOUR (4) inherent limitations of an audit that makes it impossible to provide ‘absolute’ assurance.

(6 marks)
ii) State THREE (3) misconceptions about the role an auditor plays. (4 marks)

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  • 4 Marks

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.

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)

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  • 5 Marks

AA – Nov 2020 – L2 – Q1a – Audit Failure and Expectation Gap

Discuss factors that account for the audit expectation gap.

In recent years, some well‐publicized corporate failures and its subsequent implication of the reporting auditors have highlighted the audit expectation gap. Public misperceptions are a major cause of the threat of legal challenges facing the accounting profession. One of the key challenges facing assurance providers is understanding and tackling the expectation gap in assurance.

Required:
Discuss what factors account for the expectation gap.
(5 marks)

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  • 6 Marks

AA – May 2020 – L2 – Q2a – Audit Failure and Expectation Gap

Define the concept of materiality in the context of an audit.

ISA 320: Materiality in Planning and Performing an Audit explains the concept of materiality and how it is used by the auditor in engagement to reach important conclusions regarding procedures and evidence obtained. The concept of materiality is a core concept in risk-based audit approaches.

Required:
i) Explain materiality. (2 marks)

ii) Briefly assess FOUR (4) ways materiality impacts an audit. (4 marks)

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  • 15 Marks

AA – May 2020 – L2 – Q1b – Audit Failure and Expectation Gap

Identify and explain business risks in the provided scenario.

Unbalanced and Co. Ltd. is a trading company at Abossey Okai. It deals in auto parts. It is owned by a husband and wife; Divine and Grace. Divine travels to South Korea twice a year to buy auto parts for the business whilst Grace runs the day-to-day administration of the shop.

Divine borrows (loans) from friends to add up to the company’s money to buy parts when he travels. These loans are repaid when the goods are sold back home. The loans are not receipted. Some of the loans are banked, others are not. The company’s money and the loans collected are changed into foreign currency, some through the bank, and others not through the bank. The company does not keep receipts for air tickets, hotel bills, and the expenses made by the owners. However, Divine can reel off what he paid without batting an eyelid.

Import duties are paid by bankers’ drafts, so those are clearly stated in the bank statements. Grace has a notebook in which she enters the daily sales but the records in the book are scanty. However, all import invoices are properly filed. Most of the sales are banked and the bank statements are readily available. Grace is assisted by one attendant.

The success of the business, you understand, depends on the vigilance and strictness of the owners.

Required:
i) Identify the business risks in the passage and explain why they are risks. (10 marks)

ii) What general factors would you consider when planning the audit? (5 marks)

 

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  • 10 Marks

AA – July 2023 – L2 – Q2c – Audit Failure and Expectation Gap, Regulatory Framework and Audit Responsibilities

Identification of inherent limitations of audit and misconceptions regarding the role of an auditor.

c) Reasonable assurance is the highest level of assurance auditors may provide. However, due to the limitations of auditing, it is impossible to guarantee ‘absolute’ assurance. Some users of financial statements, however, have the misconception that an audit provides absolute assurance and that the audit opinion guarantees that the financial statements are ‘accurate.’ The ‘Expectations Gap’ refers to these and other misunderstandings regarding the work of an auditor.

Required:
i) State FOUR (4) inherent limitations of an audit that makes it impossible to provide ‘absolute’ assurance.

(6 marks)
ii) State THREE (3) misconceptions about the role an auditor plays. (4 marks)

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  • 4 Marks

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.

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)

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  • 5 Marks

AA – Nov 2020 – L2 – Q1a – Audit Failure and Expectation Gap

Discuss factors that account for the audit expectation gap.

In recent years, some well‐publicized corporate failures and its subsequent implication of the reporting auditors have highlighted the audit expectation gap. Public misperceptions are a major cause of the threat of legal challenges facing the accounting profession. One of the key challenges facing assurance providers is understanding and tackling the expectation gap in assurance.

Required:
Discuss what factors account for the expectation gap.
(5 marks)

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  • 6 Marks

AA – May 2020 – L2 – Q2a – Audit Failure and Expectation Gap

Define the concept of materiality in the context of an audit.

ISA 320: Materiality in Planning and Performing an Audit explains the concept of materiality and how it is used by the auditor in engagement to reach important conclusions regarding procedures and evidence obtained. The concept of materiality is a core concept in risk-based audit approaches.

Required:
i) Explain materiality. (2 marks)

ii) Briefly assess FOUR (4) ways materiality impacts an audit. (4 marks)

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  • 15 Marks

AA – May 2020 – L2 – Q1b – Audit Failure and Expectation Gap

Identify and explain business risks in the provided scenario.

Unbalanced and Co. Ltd. is a trading company at Abossey Okai. It deals in auto parts. It is owned by a husband and wife; Divine and Grace. Divine travels to South Korea twice a year to buy auto parts for the business whilst Grace runs the day-to-day administration of the shop.

Divine borrows (loans) from friends to add up to the company’s money to buy parts when he travels. These loans are repaid when the goods are sold back home. The loans are not receipted. Some of the loans are banked, others are not. The company’s money and the loans collected are changed into foreign currency, some through the bank, and others not through the bank. The company does not keep receipts for air tickets, hotel bills, and the expenses made by the owners. However, Divine can reel off what he paid without batting an eyelid.

Import duties are paid by bankers’ drafts, so those are clearly stated in the bank statements. Grace has a notebook in which she enters the daily sales but the records in the book are scanty. However, all import invoices are properly filed. Most of the sales are banked and the bank statements are readily available. Grace is assisted by one attendant.

The success of the business, you understand, depends on the vigilance and strictness of the owners.

Required:
i) Identify the business risks in the passage and explain why they are risks. (10 marks)

ii) What general factors would you consider when planning the audit? (5 marks)

 

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