Topic: Internal Audit and Corporate Governance

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AAA – May 2016 – L3 – Q3 – Internal Audit and Corporate Governance

Identify internal controls for managing risks at KAGM and explain related financial statement risks.

Question

The Kuramo Art Gallery and Museum (KAGM) is in the centre of a city that is popular with tourists. About 65% of its income comes from admission fees and annual memberships, and about 30% of its income comes from sponsorship of special exhibitions by companies. Most of the remaining income comes from a small cafe and gift shop in the art gallery and museum.
Admission fees come from sales of tickets to daily visitors and from annual membership subscriptions from ‘Friends of KAGM’ who are entitled to free entry to the art gallery and museum at any time.
Day tickets can be purchased by credit card in advance, by a telephone ‘hotline’ or at KAGM’s website on the Internet. Alternatively, day tickets can be bought with cash or credit card at the ‘door’ on the day of the visit. Reduced prices are available for children, students, and individuals aged over 65, and there are also special reduced-price ‘family tickets’ for two adults and two children.
Sponsorship arrangements are agreed up to 18 months in advance. Some corporate sponsors, particularly transport companies (bus companies and railway companies) sell advertising to KAGM.
The management of KAGM have identified the following applicable risks that need careful attention. They believe that these risks should be managed actively.

(i) There is a failure to attract more visitors because of the poor condition of many of the paintings in the art gallery and of the items in the museum. Paintings must be restored regularly because their condition deteriorates. KAGM has just one specialist restorer, who is unable to keep up with the required volume of work. The management of KAGM recognise that investment in new items and the restoration of existing items is inadequate, but blame the lack of income for the problem.
(ii) Some corporate sponsorship agreements may not be invoiced due to poor communication between the sponsors, KAGM’s sponsorship managers, and the accounts department of KAGM.
(iii) Some sponsorship agreements are not invoiced at their correct amount. This happens often when a sponsor is also a company that provides advertising for KAGM. Normal practice is for these sponsors to deduct their advertising charges from the amount they pay to KAGM in sponsorship. However, the accounts department in KAGM is not given the details of these set-off arrangements.
(iv) Some of the cash received from day visitors at the door may be stolen (or lost, or used by management for business expenses) and does not reach KAGM’s cashier.
(v) The on-line booking system for buying tickets in advance on the KAGM website is not always available because the website is ‘down’.

Required:

(a) Describe appropriate internal controls to manage each of the applicable risks described above. (15 Marks)
(b) Explain the financial statement risks that arise from each of these applicable risks. (5 Marks)

Answer

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Tags: Cash Handling, financial statement risks, Internal Controls, Risk Management, Sponsorship
Level: Level 3

Topic: Internal Audit and Corporate Governance

AAA – May 2017 – L3 – Q3c – Internal Audit and Corporate Governance

Provide examples of internal audit reports used by external auditors.

Question

Give THREE examples of internal audit activity reports that might be used by the external auditor. (6 Marks)

Answer

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Tags: Audit evidence, External audit, Internal Audit Reports
Level: Level 3

Topic: Internal Audit and Corporate Governance

AAA – May 2017 – L3 – Q3b – Internal Audit and Corporate Governance

Explain the evidence needed to determine reliance on internal auditors' work.

Question

Explain what evidence you would seek as an external auditor to satisfy yourself that you can rely on the work of internal auditors. (4 Marks)

Answer

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Tags: External Audit Evidence, Internal Audit, Reliance on Internal Audit
Level: Level 3

Topic: Internal Audit and Corporate Governance

AAA – May 2017 – L3 – Q3a – Internal Audit and Corporate Governance

Develop a presentation comparing the roles, independence, and responsibilities of external and internal auditors.

Question

Your firm has been external auditors of Specific Processors Plc for some years. Specific Processors Plc. has an Internal Audit Department engaged in both compliance and operational auditing within the company.

The head of the Internal Audit Department, Mr. Lucky Suleiman, FCA, has invited you to give a talk during their annual training week on the roles of external and internal auditors, the type of work they carry out, and their specific responsibilities.

Required:

Develop a suitable presentation focusing on the differences and similarities between external and internal auditors in terms of:

i. General Role
ii. Independence
iii. The work carried out in the following areas:

Systems of Internal Control
Operational Auditing
iv. Reporting Responsibilities

Answer

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Tags: Audit Independence, External audit, Internal Audit, Operational Auditing, Reporting Responsibilities
Level: Level 3

Topic: Internal Audit and Corporate Governance

AAA – Nov 2013 – L3 – AII – Q11 – Internal Audit and Corporate Governance

Identify four key factors for internal control evaluation in universities.

Question

In the evaluation of the system of internal control as applicable to a university, there are four factors to be considered by the auditors as follows: Methods of keeping records, ………………. and ………………….., segregation of duties, and custodial controls.

Answer

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Tags: Custodial Controls, Internal Control, Segregation of Duties, Universities
Level: Level 3

Topic: Internal Audit and Corporate Governance
Series: NOV 2013

AAA – Nov 2016 – L3 – Q3a – Internal Audit and Corporate Governance

Evaluate reliance on internal auditors for cash sales testing and significance of specialist reports as audit evidence.

Question

You are the Audit Manager in charge of the audit of Mix Biz, a company which runs a chain of snack bars operating in a number of strategic locations in Lagos. Your firm has been the auditor for a number of years and has always had to substantively test cash sales because of lack of control over the recording of takings. The audit reports to date have been unmodified.

You have recently been informed that the company has employed a newly qualified Chartered Accountant as Chief Internal Auditor and a partly qualified Assistant Internal Auditor. Since their appointment halfway through the year ended December 31, 2015, they have spent most of their time carrying out substantive tests on cash sales.

The Directors are hopeful that your audit fee this year will decrease because you will be able to rely on the work carried out by the Internal Auditors.

Required:
a. Explain the issues that will be relevant to your firm in deciding:
i. whether you can rely on the work performed by the Internal Auditors (8 Marks)
ii. how much reliance to place on that work (7 Marks)

Answer

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Tags: Audit evidence, Audit Fee Reduction, Internal Audit Reliance, Specialist Reports
Level: Level 3

Topic: Internal Audit and Corporate Governance

AAA – Nov 2013 – L3 – A – Q19 – Internal Audit and Corporate Governance

This question identifies assignments that qualify as continuous audit functions.

Question

Which of the following assignments can be regarded as a continuous audit function?
A. Examining the effectiveness, efficiency, and economy of a cement project
B. Evaluating the adequacy of the security and control measures of the information technology
C. Ascertaining the fairness of the annual financial statements and notes to the accounts
D. Reviewing the internal control procedures before commencing the audit
E. Reviewing the company’s compliance with relevant guidance and release of financial information periodically

Answer

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Tags: Compliance, Continuous Audit, Financial Reporting, Internal Control
Level: Level 3

Topic: Internal Audit and Corporate Governance
Series: NOV 2012

AAA – Nov 2011 – L3 – SB – Q6 – Internal Audit and Corporate Governance

Explores the functions and significance of various committees and concepts in governance, including the Public Accounts Committee and due diligence.

Question

Write short notes on the following:

(a) Public Accounts Committee
(3 Marks)

(b) Value-for-Money Audit
(3 Marks)

(d) Due Diligence
(3 Marks)

(e) Due Process
(3 Marks)

Answer

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Tags: Audit Alarm, Due diligence, Due Process, Public Accounts Committee, Value for Money Audit
Level: Level 3

Topic: Internal Audit and Corporate Governance
Series: NOV 2011

AAA – Nov 2023 – L3 – SC – Q6 – Internal Audit and Corporate Governance

Discusses control activities for Reliable Ltd and external auditor responsibilities in light of control gaps and bank requirements.

Question

Reliable Limited is into wholesale and retail supply and distribution of stationeries to companies and educational institutions. The company maintains business relationships with other enterprises that are owned by close friends and relatives. The books of account of the company were kept manually and in simple Excel. The company had only a staff member in the accounts department since it is a small business operation.

A review of the company’s operations shows that inventory of stationeries purchased was not properly valued due to incomplete recording of purchases made. Although bank statements are obtained, the balances on the bank statements were not reconciled with the cash book.

Cash from sales made was not banked intact, and expenses relating to cash takings from the till were not all recorded or properly monitored. Added to this, goods bought from related parties were sometimes overvalued as suppliers made frivolous claims which could not be disputed due to poor record keeping. The Managing Director and owner of the company has been sick for some time, and the wife concentrated more on her own business, leaving the operations of the company to a relation who is not well educated. Available evidence revealed that invoices and vouchers of the company were approved without management review, and the procedure or selection of suppliers was not transparent.

The company has just won a contract for the supply of stationeries in one of the states in the Federation, and it was found that there was inadequate cash flow to execute the contract. The manager of the company informed the Managing Director’s wife of the development, and it was agreed that a bank loan would be needed. On approaching the bank, updated financial statements of the company were requested to determine the financial health of the business and ability to repay the loan when due.

Your firm has been appointed as auditors of the company with a stipulated deadline to complete the audit so that the company could meet the bank’s conditions. The firm has conducted a preliminary review of the operations of the company, and some control gaps have been noted.

Required:

a. Discuss suitable control activities that will be required in the above scenario and how you will assess the degree of effectiveness of the internal control systems.
(10 Marks)

b. Identify and explain what the external auditors are expected to do during the course of the above audit.
(5 Marks)

Total: 15 Marks

Answer

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Tags: Bank Reconciliation, Cash Management, Control Gaps, Corporate Governance, External audit, Financial Statements, Internal Controls, Inventory Valuation, Loan Assessment, Related parties
Level: Level 3

Topic: Internal Audit and Corporate Governance
Series: NOV 2023

AAA – Nov 2023 – L3 – SB – Q4 – Internal Audit and Corporate Governance

Evaluate auditor’s rights, management's responsibilities, and reasons for possible auditor resignation at Phil Plc.

Question

Phil Plc has been in business of manufacturing textile materials for about twenty years and has been rendering good returns to shareholders on their investments until about a few years ago, precisely in 2019. The business of the company went down drastically in 2020 due to measures taken to contain the spread of the COVID-19 virus, which included travel bans, quarantines, social distancing, and closures of non-essential services. The COVID-19 pandemic significantly caused disruptions to businesses worldwide, resulting in economic slowdown. The problem was aggravated with the Federal Government of Nigeria enforcing restrictions on movement. All businesses and offices were affected with exceptions of power distribution, oil and gas (petroleum), and retail companies.

COVID-19 pandemic impacted the economy generally, and the following were the impacts on the company:

Increase in cost of raw materials as a result of devaluation of the currency due to the drop in the price of crude oil;
Shortage in supply of key raw materials sourced from other countries, for example, China; and
Increase in ocean freight costs and inland transportation.

The impact of the outbreak of COVID-19 directly caused economic losses through disruptions in supply chains, demand, and financial markets, affecting business investment, household consumption, and international trade. The crisis led to a decline in revenue.

However, despite the challenges, management continued to strive for impressive performance for the shareholders. A board member believed there is an unhealthy relationship between management and the board of directors as she accused management of lack of transparency and threatened to resign. The problem was compounded after the year-end audit when the auditors reported that the company’s internal controls were ineffective and accused management of fraudulent financial reporting. The external auditors also threatened to restate the prior year’s financial statements, believing there were misstatements of certain account balances.

The Managing Director and some directors argued that it is their responsibility to prepare financial statements and that auditors do not have the right to make restatements. However, the Chairman of the audit committee and a few directors supported the auditors and appealed to management to allow the auditors to perform their regulated duties, warning that they may report to the Financial Reporting Council on management’s activities.

The external auditors, surprised by management’s actions, threatened to resign. They were also uncomfortable with the following issues during the audit:

The supporting documents from which financial statements were prepared;
Review of opening balances revealing omission of some transactions and significant information in disclosures;
Misapplication of accounting principles regarding amounts, classifications, presentation, and disclosures.

Added to the above, the external auditors identified risks likely affecting asset valuation and other significant accrued liabilities. Your firm is preparing for a discussion with the audit committee and has instructed your team to review specific sections.

Required:

a. Evaluate the rights and duties of the auditors in a professional engagement. (10 Marks)

b. Enumerate what you consider as the responsibilities of management and those charged with governance in Phil Plc. (5 Marks)

c. Discuss the reason why your firm may resign the appointment as the auditors of the company. (5 Marks)
(Total 20 Marks)

Answer

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Tags: Auditor's Rights, COVID-19 Impact, Governance responsibilities, Internal Controls, Resignation of Auditors
Level: Level 3

Topic: Internal Audit and Corporate Governance
Series: NOV 2023

AAA – May 2016 – L3 – Q3 – Internal Audit and Corporate Governance

Identify internal controls for managing risks at KAGM and explain related financial statement risks.

Question

Required:

Answer

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Tags: Cash Handling, financial statement risks, Internal Controls, Risk Management, Sponsorship
Level: Level 3

Topic: Internal Audit and Corporate Governance

AAA – May 2017 – L3 – Q3c – Internal Audit and Corporate Governance

Provide examples of internal audit reports used by external auditors.

Question

Give THREE examples of internal audit activity reports that might be used by the external auditor. (6 Marks)

Answer

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Tags: Audit evidence, External audit, Internal Audit Reports
Level: Level 3

Topic: Internal Audit and Corporate Governance

AAA – May 2017 – L3 – Q3b – Internal Audit and Corporate Governance

Explain the evidence needed to determine reliance on internal auditors' work.

Question

Explain what evidence you would seek as an external auditor to satisfy yourself that you can rely on the work of internal auditors. (4 Marks)

Answer

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Tags: External Audit Evidence, Internal Audit, Reliance on Internal Audit
Level: Level 3

Topic: Internal Audit and Corporate Governance

AAA – May 2017 – L3 – Q3a – Internal Audit and Corporate Governance

Develop a presentation comparing the roles, independence, and responsibilities of external and internal auditors.

Question

Required:

Develop a suitable presentation focusing on the differences and similarities between external and internal auditors in terms of:

i. General Role
ii. Independence
iii. The work carried out in the following areas:

Systems of Internal Control
Operational Auditing
iv. Reporting Responsibilities

Answer

Find Related Questions by Tags, levels, etc.

Tags: Audit Independence, External audit, Internal Audit, Operational Auditing, Reporting Responsibilities
Level: Level 3

Topic: Internal Audit and Corporate Governance

AAA – Nov 2013 – L3 – AII – Q11 – Internal Audit and Corporate Governance

Identify four key factors for internal control evaluation in universities.

Question

Answer

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Tags: Custodial Controls, Internal Control, Segregation of Duties, Universities
Level: Level 3

Topic: Internal Audit and Corporate Governance
Series: NOV 2013

AAA – Nov 2016 – L3 – Q3a – Internal Audit and Corporate Governance

Evaluate reliance on internal auditors for cash sales testing and significance of specialist reports as audit evidence.

Question

The Directors are hopeful that your audit fee this year will decrease because you will be able to rely on the work carried out by the Internal Auditors.

Answer

Find Related Questions by Tags, levels, etc.

Tags: Audit evidence, Audit Fee Reduction, Internal Audit Reliance, Specialist Reports
Level: Level 3

Topic: Internal Audit and Corporate Governance

AAA – Nov 2013 – L3 – A – Q19 – Internal Audit and Corporate Governance

This question identifies assignments that qualify as continuous audit functions.

Question

Answer

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Tags: Compliance, Continuous Audit, Financial Reporting, Internal Control
Level: Level 3

Topic: Internal Audit and Corporate Governance
Series: NOV 2012

AAA – Nov 2011 – L3 – SB – Q6 – Internal Audit and Corporate Governance

Explores the functions and significance of various committees and concepts in governance, including the Public Accounts Committee and due diligence.

Question

Write short notes on the following:

(a) Public Accounts Committee
(3 Marks)

(b) Value-for-Money Audit
(3 Marks)

(d) Due Diligence
(3 Marks)

(e) Due Process
(3 Marks)

Answer

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Tags: Audit Alarm, Due diligence, Due Process, Public Accounts Committee, Value for Money Audit
Level: Level 3

Topic: Internal Audit and Corporate Governance
Series: NOV 2011

AAA – Nov 2023 – L3 – SC – Q6 – Internal Audit and Corporate Governance

Discusses control activities for Reliable Ltd and external auditor responsibilities in light of control gaps and bank requirements.

Question

Required:

a. Discuss suitable control activities that will be required in the above scenario and how you will assess the degree of effectiveness of the internal control systems.
(10 Marks)

b. Identify and explain what the external auditors are expected to do during the course of the above audit.
(5 Marks)

Total: 15 Marks

Answer

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Tags: Bank Reconciliation, Cash Management, Control Gaps, Corporate Governance, External audit, Financial Statements, Internal Controls, Inventory Valuation, Loan Assessment, Related parties
Level: Level 3

Topic: Internal Audit and Corporate Governance
Series: NOV 2023

AAA – Nov 2023 – L3 – SB – Q4 – Internal Audit and Corporate Governance

Evaluate auditor’s rights, management's responsibilities, and reasons for possible auditor resignation at Phil Plc.

Question

COVID-19 pandemic impacted the economy generally, and the following were the impacts on the company:

Increase in cost of raw materials as a result of devaluation of the currency due to the drop in the price of crude oil;
Shortage in supply of key raw materials sourced from other countries, for example, China; and
Increase in ocean freight costs and inland transportation.

The external auditors, surprised by management’s actions, threatened to resign. They were also uncomfortable with the following issues during the audit:

The supporting documents from which financial statements were prepared;
Review of opening balances revealing omission of some transactions and significant information in disclosures;
Misapplication of accounting principles regarding amounts, classifications, presentation, and disclosures.

Required:

a. Evaluate the rights and duties of the auditors in a professional engagement. (10 Marks)

b. Enumerate what you consider as the responsibilities of management and those charged with governance in Phil Plc. (5 Marks)

c. Discuss the reason why your firm may resign the appointment as the auditors of the company. (5 Marks)
(Total 20 Marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Auditor's Rights, COVID-19 Impact, Governance responsibilities, Internal Controls, Resignation of Auditors
Level: Level 3