Audit and Assurance

Suggested Answers
Certificate in Accounting and Finance – Spring 2019

Ans.1 (a) (i) No further audit work is required.

(ii) This is a timing difference. We need to obtain goods delivery note and customer
acknowledgement to ascertain the date of delivery and date of acceptance of goods.

(iii) This is an adjusting event. We should perform the following steps:

 Check the return of goods with the relevant goods receipt document.
 Ask the client to reduce the sales and receivables and incorporate corresponding
effects in cost of sales and inventory.

(iv) Follow-up procedures should be initiated. For example, second request and third
request letters could be sent, or the client could be asked to contact the customer for a
reply.

Subsequent receipt of the amount should be checked.

If no payment (or only part-payment) has been received, the outstanding sales invoices
should be checked with:

 Purchase order issued by the customer.

 Delivery note duly acknowledged by the customer.

(b) Written representations are necessary information that the auditor requires in connection
with the entity’s financial statements. Although written representations provide audit
evidence, they do not provide sufficient appropriate audit evidence on their own about any
of the matters with which they deal. The fact that the management has provided reliable
written representations do not affect the nature or extent of other audit evidence that the
auditor should obtain. Hence, considering the scenario, the auditor should take the
following steps to obtain the required evidence:

 Inquire management about reasons for refusal to send confirmation.

 Seek audit evidence as to their validity and reasonableness.
 In case a valid reason is not provided by the management, evaluate the implications of
management’s refusal on the auditor’s assessment of the relevant risks of material
misstatement, including the risk of fraud and on the nature, timing and extent of other
audit procedures;
 Perform alternative audit procedures to obtain relevant and reliable audit evidence,
such as:

– Obtain the correspondence with the supplier.

– Check subsequent receipt from the supplier.

 Communicate with those charged with governance, if:

– The auditor concludes that management’s refusal to allow the auditor to send a
confirmation request is unreasonable.
– The auditor is unable to obtain relevant and reliable audit evidence from
alternative audit procedures.

 The auditor shall determine the implications for the audit and the auditor’s opinion in
accordance with ISA 705 given such a limitation on scope.

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 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Spring 2019

Ans.2 (a) The audit report should include only those matters in the KAM section which required
significant auditor attention.

Areas which require significant auditor attention are those which:

 Involve significant audit risks

 Significant judgement on the part of management / auditor.
 Significant transactions and events affecting the audit.

Even though KAMs are extracted from the matters communicated with those charged with
governance, however, not all significant risks or matters communicated to those charged
with governance are considered as KAMs. The auditor needs to determine whether the risk
of overstatement of revenue fulfills the above mentioned criteria and is of most significance
to the current year audit, only then it can be included as a key audit matter.

(b) Even if the auditor determines, depending on the facts and circumstances of the entity and
the audit, that there are no key audit matters to communicate, the audit report shall include
the key audit matter section.

The fact that there are no key audit matters to communicate in the report, should be
mentioned under the heading Key Audit Matters.

(c) A matter giving rise to a qualification by their nature is a key audit matter. However, these
matters shall not be described in the Key Audit Matters section of the audit report, rather
the matter is to be reported in accordance with the requirements of related ISA. However,
reference to the basis for qualified opinion is to be included in the Key Audit Matter section.

Ans.3 (i) Provision against litigation

Even though the change in provision against litigation is not significant but due to the high
inherent risk, further steps needs to be taken as follows:

 Circulate confirmation to legal advisors of the company.

 Scrutinize payments of legal expenses to ensure that all legal cases have been identified
by the client.
 Review the minutes of the board meetings.
 Obtain expert advice, if considered necessary.
 Verify the basis for recording of provision.

(ii) Trade payables

Despite the increase in cost of sales, trade payables have decreased. Consequently the
following procedures may be performed:

 Circulate balance confirmation requests to trade creditors.

 Compare the current list of trade payables with prior year’s working papers to identify
any omissions.
 Ensure that all regular suppliers are included in the list of trade creditors.
 Scrutinize subsequent payments and ensure that appropriate accruals were made
against those payments.

(iii) Loans to employees

Despite the reduction of entitlement of loan, it has increased from previous year.
Considering this inconsistency, following procedures may be performed:

 Discuss the increase in loan amount with management.

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 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Spring 2019

 Check payment of amount of loan given to employees during the year with payment
voucher having acknowledgment of employees.
 Obtain confirmation of loan balances from employees.
 Verify approval of new loan given to employees.
 Ensure that recoveries are being made as per policy and are recorded.

(iv) Trade debtors

Sales has increased by 15% but debtors have only increased by 6%. Considering this
inconsistency following procedures may be performed:

 Discuss the reason for change with the management.

 Circulate confirmation requests to debtors.
 Trace a sample of shipping documents to sales invoice and into the sales and
receivable ledgers.

(v) Cost of sales

Despite 15% increase in sales, cost of sales has increased by only 10%. Considering this
fluctuation, following steps may be performed:

 Perform cut-off test for purchases.

 Check that the correct quantity of material, labour and overheads has been used.
 Perform analytical calculations over the cost of inventory consumed and other major
costs.
 Verify the major costs with bills, invoices and other related documents.

(vi) Expenses
Even though the finance cost would also have reduced due to reduction in loan, expenses
have increased by 17%. Considering this fluctuation, following steps may be performed:
 Ask the client for the detailed breakup of the expenses
 Enquire from management for any inconsistencies in the break-up of expenses
obtained.

(vii) Taxation
Tax rate was exactly 35% of the profit before taxation in last year which have reduced to
32%. Considering this fluctuation, following steps may be performed.
 Obtain and review the tax working prepared by the management
 Check the enacted tax rates.

Ans.4 (a) Following procedures shall be followed for appointment of the existing auditor for the next
year:

 The board shall first obtain the consent of the proposed auditor.
 A notice shall be given to the members with the notice of general meeting.
 On the appointment of the auditor the board shall ensure that, within fourteen days
from the date of appointment of the auditor, an intimation is sent to the registrar
thereof, together with the consent in writing of the appointed auditor.

(b) Procedure for shareholder(s):

Javed should follow the following process if he alone or together with other willing
shareholders, holds 10% shareholdings in Alpha Limited:

 The shareholder(s) should first obtain the consent of the proposed auditor.
 A notice should be given to the company in this regard, not less than seven days before
the date of the annual general meeting.
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 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Spring 2019

Responsibilities of the board:

The company shall forthwith send a copy of notice received from Javed to the retiring
auditor and shall also post it on the company’s website.

Since an auditor, other than the retiring auditor is proposed to be appointed, the board shall
ensure that:

 The retiring auditor is given an opportunity to make a representation in writing to the

company at least two days before the date of general meeting.
 Representation received from the retiring auditor is read out at the meeting before
taking up the agenda for appointment of the auditor.

Ans.5 (i) No comments.

(ii) Obtaining the asset schedule showing opening balances, addition, disposal, depreciation and
closing balance addresses the assertion of completeness only but not accuracy.

(iii) Apart from verifying the cost of the asset through purchase invoices, the following steps
would also be required:

 Verify the date from which asset was available for use from purchase invoices or the
completion certificate of capital work in progress, to ensure that depreciation is
recorded from the correct date.
 Check the allocation of total expenditure between capital and revenue expenditure in
case of additions.
 Check that purchases are duly authorised.

(iv) Physical inspection of assets may not address the assertion of ownership.

Additional procedures
 For addressing the assertion of ownership, check the title documents of the assets
especially the assets purchased on sample basis.
 Check bank confirmation for any charge on assets, if any.
 Check register of charges maintained by the client, if any.
 Physically verify the existing assets from register to floor and vice versa.

(v) This step would not be enough. Following procedures would also be required.

 Perform analytical procedures on the overall depreciation.

 Review the depreciation rates for reasonableness in the light of the nature of assets, its
estimated useful life and residual value.
 Ensure that consistent depreciation methods are in use.
 Ensure that fully depreciated assets are not subject to depreciation.
 Obtain approval for additions made during the year.

The audit program has no procedure related to presentation assertion. Auditor should review the
disclosure in the financial statements and ensure that they are correct and clear.

Ensure that non-current assets have been classified in appropriate account.

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 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Spring 2019

Ans.6 (a) Matters to be included in engagement letter

 Being the first year of audit for our firm, arrangements concerning the involvement of
predecessor auditor would be necessary.
 Use of auditor’s expert may be required as RRL has changed its accounting policy from
historical cost convention to revaluation model.
 Due to strict deadlines:

– It should be included in the engagement letter that management would make

available the draft financial statements along with all relevant information in time
to allow for the completion of audit in accordance with the proposed time table.
– We need to communicate the planning and performance of the audit, including the
composition of the audit team.
– We may also consider using RRL’s internal audit department and this fact may
have to be communicated through the engagement letter.

(b)  There is a risk of embezzlement in cash collection and inventory.

 Donation for food are recorded in donation for education account and vice versa.
 Contributions are spent on other than intended purpose.
 There is a risk that the money spent on administration is not recorded as administration
cost and is misclassified.
 Since only one person is responsible for managing the accounts, there is a lack of
segregation of duties and hence risk of fraud and error may arise.
 Since there is no full time person to look after the accounts, there is a risk that
transactions are not recorded on a timely basis.

Ans.7 (a) Performance materiality means the amount or amounts set by the auditor at less than
materiality for the financial statements as a whole or at less than the materiality level for
particular classes of transactions, account balance or disclosures.

Performance materiality is set to reduce to an appropriately low level the probability that the
aggregate of uncorrected and undetected misstatements in the financial statements or in
classes of transactions, account balance or disclosures exceeds the materiality as a whole.

(b) If the external auditor uses internal auditors to provide direct assistance on the audit, the
external auditor shall include the following in the audit documentation:

 The evaluation of the existence and significance of threats to the objectivity of the
internal auditors, and the level of competence of the internal auditors used to provide
direct assistance;
 The basis for the decision regarding the nature and extent of the work performed by the
internal auditors;
 Who reviewed the work performed and the date and extent of that review in accordance
with ISA 230;
 The written agreements obtained from an authorized representative of the entity and the
internal auditors; and
 The working papers prepared by the internal auditors who provided direct assistance on
the audit engagement.

Ans.8 Evaluation of the situation:

The auditor has no obligation to perform any audit procedures regarding the financial statements
after the date of the auditor’s report. However, the matter has come to the knowledge of the
auditor before publication of financial statements and imposition of penalty is indicative of
condition that existed at balance-sheet date.

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 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Spring 2019

Course of action:
Had the actual amount of penalty imposed by the court been known to the auditor at the date of
the auditor's report, it may have caused the auditor to ask the management for adjustment in the
financial statements. Therefore, the auditor need to perform the following procedures:

 Discuss the matter with management and, where appropriate those charged with
governance
 Inquire how management intend to address the matter in the financial statements.
 Instruct management not to issue the financial statements before the necessary amendments
have been made

 If the financial statements are amended, the auditor is required to:

– Carry out the necessary audit procedures on the amendment.

– Extend his review of subsequent events up to the date of the new audit report.

 If the financial statements are not amended, the auditor is required to

– Take appropriate action to prevent reliance on the audit report, after taking legal
advice.
– In the longer term, the auditor should also consider resigning from the audit, but this
would not be appropriate as an immediate response to the problem.

Ans.9 (a) Logical access controls are tools and protocols used for identification, authentication,
authorization and accountability in computer information systems. It enables the
organization to identify users, restrict access to specific resources and produce audit trail of
systems and user activity.

 The login account must uniquely identify the person, but it must be part of a standard
similar to all other logins.
 The password has to be sophisticated and must be of a certain prescribed length.
 The access to the system must be limited in accordance with roles and responsibilities of
the users.
 User must be logged out after a certain period of in-activity.

(b)  Maintaining secure second copies of all programs and data files (‘back-up copies’).
 Take measures for the protection of equipment against fire, power failure and other
hazards.
 Make disaster recovery plans, such as an agreement with another entity to make use of
its computer center in the event of a disaster.
 Suitable maintenance and service agreements with software companies to provide
‘technical support’ in the event of operating difficulties with the system.

Ans.10 (a) Offering business advice to the audit client in such an informal manner is a breach of
professional behavior by the audit junior. He also appears to be in breach of the
fundamental principal of professional competence and due care, unless he has the required
competency to offer such an advice.

Moreover, business relationship between the member of the audit team and the audit client
will create self-interest threat and intimidation threat.

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 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Spring 2019

Due to above, the following safeguards may be implemented:

 Any work performed by the audit junior to date should be critically reviewed.
 We need to take steps to ensure that the client does not act on any advice that the
junior provided.
 We should also assess any gaps in our internal training process; the junior should have
received training prior to his audit assignments so that he understood his role as an
auditor.

(b) All announcements, communications and public notices should:

 Be aimed at informing the recipients or the public in an objective manner.

 Conform to the basic principles of legality, decency, clarity, honesty and truthfulness.
 Not project an image, which is inconsistent with that of a professional person bound to
high ethical and technical standards.

Activities / statements which may expressly be considered not to meet the above criteria
and are therefore prohibited include those that:

 Create false, deceptive or unjustified expectations of favourable results.

 Imply the ability to influence any court, tribunal, regulatory agency or similar body or
official.
 Consist of self-laudatory statements that are not based on verifiable facts.
 Make comparisons with other professional accountants in practice.
 Contain any other representations that would likely to cause a reasonable person to
misunderstand or be deceived.
 Make unjustified claims to be an expert or specialist in a particular field of
accountancy.
 Contain testimonials or endorsements.

(THE END)

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