FACULTY OF BUSINESS

COURSE NAME: AUDITING AND ASSURANCE SERVICES 1

COURSE CODE: BUS 07414

LECTURER: SIR NDATURU

ASSIGNMENT TYPE: TAKE HOME TEST

GROUP NUMBER FOUR (4)

MEMBERS;

GROUP NAMES REGISTRATION NUMBER

01 LOVENESS J ANGALO 2016100441
02 DANIEL A MOLLEL 2016100374
03 IRENE RAYMOND SWAI 2016100406
04 MWITA SITTA 2016110063
0 RHODA R BENJAMIN 2016100312
5

DUE DATE: Monday 25th June, 2018

TIME: 0800am
ANSWER TO QUESTION ONE;

Internal controls are the means by which the operations, assets and performance of
an entity are directed, controlled and safeguarded so that the risk of errors and fraud is
minimized and the performance of the entity is kept within practicable performance ranges. It is
the process designed, implemented and maintained by those charged with governance,
management and other personnel to provide reasonable assurance about the achievement of an
entity’s objectives with regard to reliability of financial reporting, effectiveness and efficiency of
operations and compliance with applicable laws and regulations. A significant deficiency is a
deficiency, or a combination of deficiencies, in internal control over financial reporting that is
less severe than a material weakness, yet important enough to merit attention by those
responsible for oversight of the company's financial reporting. According to IAS 265 the
following are matters that the auditor may consider in determining whether a deficiency in
internal control is significant;

The possibility that the deficiencies may result in material misstatements in the
financial statements in the future; A significant deficiency is a control deficiency, that adversely
affects the company's ability to initiate, authorize, record, process, or report external financial
data reliably in accordance with generally accepted accounting principles such that there is more
than a remote likelihood that a misstatement of the company's annual or interim financial
statements that is more than inconsequential will not be prevented or detected, examples When a
loss contingency exists, the likelihood that the future event or events will confirm the loss or
impairment of an asset or the incurrence of a liability can range from probable to remote.

The susceptibility to loss or fraud of the related asset or liability; this is the
possibility that the related asset or liability is vulnerable to loss or fraud. For example, if the
supervisor of a manufacturing set up approves the working hours of temporary staff and also
makes the payment of the wages to these employees the cash related to wages is vulnerable to
fraud.

The financial statement amounts exposed to the deficiencies. This is the likelihood
that multiple control deficiencies that affect the same financial statement account balance or
disclosure increase the likelihood of misstatement and may, in combination, constitute a material
weakness, even though such deficiencies may individually be less severe. Example the lack of
procedures to be used to enter transactions totals and procedures used to initiate, authorize,
record, and process journal entries in the general ledger may expose amounts in the financial
statements to deficiencies

The volume of activity that has occurred or could occur in the account balance or
class of transactions may be exposed to the deficiency or deficiencies. For example, if there is a
large volume of purchase transactions, there is a possibility of deficiencies being present in the
internal control system related to purchases.
 The importance of the controls to the process of financial reporting, for instance;
the nature of controls which are prevalent in preventing and detecting fraud, the nature of
controls used for the selection and application of significant accounting policies, the nature of
controls used for significant transactions with related parties and the nature of controls used for
significant transactions outside the entity’s normal course of business.

Other matters to be considered by an auditor in determining the significance of

deficiencies in internal control can be, the cause and frequency of the exceptions detected as a
result of the deficiencies in the controls, the interaction of the deficiency with other deficiencies
in internal control and the subjectivity and complexity of determining estimated amounts, such as
fair value accounting estimates.

Conclusively, the significance of a deficiency or a combination of deficiencies in

internal control depends not only on whether a misstatement has actually occurred, but also on
the likelihood that a misstatement could occur and the potential magnitude of the misstatement.
Significant deficiencies may therefore exist even though the auditor has not identified
misstatements during the audit. Apart from the above explained and highlighted matters to be
considered, IAS 265 also gives guidance to auditors on indicators of significant deficiencies in
internal control.
ANSWER TO QUESTION TWO

A system of quality control is broadly defined as a process to provide the firm

with reasonable assurance that its personnel comply with applicable professional standards and
the firm's standards of quality. Ethical and professional issues are the principles and expectations
governing the behavior of individuals and organizations in the conduct of internal auditing. It
describes the minimum requirements for conduct, and behavioral expectations rather than
specific activities. The following are comments on quality control, ethical and professional issues
raised in respect of the audit of Rombo Ltd and the wide policies of Machame Associates;

Intimidation threat to objectivity; this arises when the audit client imposes fee
pressure on the audit firm. Here it is seen that the company’s audit committee rejected to
increase audit fees. This threat forces an auditor to reduce the extent and quality of work. Due to
an increase in scope of the audit, and therefore the fee also should increase rather than remain the
same.

Increase in materiality level. This is an inappropriate quality control procedure

and it has been caused by the fee pressure. This may hinder the quality of audit evidence to
support the audit opinion. According to international standard of auditing , it requires the audit
engagement partner to review the audit documentation to be satisfied that audit work is complete
and that sufficient appropriate audit evidence has been obtained to support the conclusions
reached and for the auditor’s report to be issued.

Reduction and selection of sample; There are also quality control issues with the
selection of samples to be used in tests of detail. First, the use of judgemental sampling may
result in sample sizes which are smaller than would have been selected using statistical sampling
methods, or in the selection of items which are not representative of the whole population. ISA
530 Audit Sampling requires the auditor to determine a sample size sufficient to reduce sampling
risk to an acceptably low level, and to select items for the sample in such a way that each
sampling unit in the population has a chance of selection. The risk is that the use of judgement
has led to inappropriate audit conclusions being made. Also some locations were completely
excluded from the sample. There is a high risk that these items have not been subject to sufficient
audit procedures and that the relevant assertions have not been covered by audit testing. For
example, if the non-current assets have not been physically verified, and no other procedures
relevant to their existence have been performed, then assets recognized in the financial
statements may be overstated

Inclusion of review of board minutes in the off-shoring arrangements. There is

no regulation to prohibit this practice, but quality control implications have been brought into
question. If the overseas office is performing only low-risk and non-judgemental work, the risk
to audit quality is relatively low. However, it seems in the case of Machame associates audit
other more subjective tasks were included in the off-shoring arrangement, such as the review of
board minutes. The review of board minutes should be performed by an auditor with sufficient
knowledge and understanding of the audit client to be able to identify matters which are
significant in the context of that audit. It is impossible that an auditor in an overseas office with
no direct understanding or experience of Rombo Ltd would be able to identify relevant matters
for the attention of the rest of the audit team.

Threat to objectivity; the admission of Mabala Maporu who was a finance

director from Rombo Ltd to Machame Associates leads to threats objectivity, example self-
interest, self-review or familiarity threats. Mabala Maporu helped the audit team by providing
information about the audited entity means that the threats described above apply in this
situation, and there is a perception of a lack of independence of the audit team. The other threat
is that Mabala Maporu retained a shareholding in Rombo Ltd for six months after his
appointment as an audit partner in Machame Associates. This gives rise to a self-interest threat to
objectivity, as it would have been in Mabala’s interests to act in such a way as to maximise his
financial interest in Wire Co until the point when he sold his shares. There is a general
prohibition on auditors holding a financial interest in an audit client.

Not only that but also self interest threat aroused when Mabala encouraged the
audit firm’s policy on cross-selling non-audit services. Since a member of the audit team is
evaluated on or compensated for successful selling non-assurance services to audit clients
therefore the audit team member clearly has a financial interest.

Inspite of the above issues, the following are recommendations to be taken by

the Machame Associate audit firm; to start with Machame Associates may wish to consider
whether it is appropriate to continue with the audit engagement. The audit firm’s concerns
should be communicated to those charged with governance of Rombo Ltd, and the audit
committee should be made aware of the implications of the fee pressure on the audit.

Secondly, if the audit firm wishes to continue the off-shoring of audit

procedures, then controls must be put in place to ensure that only appropriate tasks are included
in the arrangement, and that monitoring and review procedures are performed to give comfort on
the quality of the work performed. The audit firm must ensure that its firm-wide policies adhere
to the requirements of accepted auditing standard.

Thirdly, The matter of Mabala moving from Rombo Ltd to Machame

Associates should be discussed with Machame Associate’s partner responsible for ethics, and it
should also be discussed with Rombo Ltd’s audit committee, who are responsible for oversight
of auditor independence. And the issue of shareholding, a review of the firm’s procedures
should take place, and Mabala Maporu should be asked why he did not dispose of the shares
more quickly.

Lastly on the issue of benefiting from cross-selling of non-audit services;

safeguards must be in place to reduce the potential threat to an acceptable level, such as a review
of audit work performed and also the audit firm should consider other ways to increase revenue
and to evaluate staff performance which do not raise threats to objectivity.