NAME: FUNGAYI JOHANE MAJURIRA

STUDENT ID: 21981559

COURSE: AUDITING AND ASSURANCE 1

COURSE CODE: BBAC 232

PROGRAM: BACHELOR OF BUSINESS IN ACCOUNTING

LECTURER MR.L.C MAYAKA

DATE: 31 May 2021

End of Semester Final Exam June 2021 :

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QUESTION ONE

Preparation of audit working papers is an integral part of the auditor’s

responsibilities. Explain three categories in which audit working papers can be
classified and outline the advantages of audit working papers.

The audit working papers constitute the link between the auditor’s report and the client’s
records. All valid and important evidence is collected and compiled using working
papers. An audit is incomplete without preparation of working papers. The objects of an
auditor’s working papers are to record and demonstrate the audit work from one year to
the other. Working papers should provide, a means of controlling current audit work,
evidence of audit work performed, schedule of items in the accounts and information
about the business being audited including the recent history.

Working papers should record the audit plan, nature, timing and extent of audit
procedures performed and the conclusions drawn from the evidence obtained. They
should be sufficiently complete and detailed for an auditor to obtain an overall
understanding of the audit. However the extent of the documentation is a matter of
professional judgment since it is neither necessary nor practical that every observation,
consideration or conclusion is documented by the auditor in his working papers.

Working papers can be classified in three:

(a) Permanent file papers
(b) Audit administrative papers file
(c) Audit evidence file. The last two are usually classified as current file.

Permanent file papers contains documents and matters of continuing importance which
are required for more than one financial period. It includes;
 Statutory material governing the conduct of the audit such as the Companies Act
 Rules and regulations of the entity being audited such as policies and standards
 Rules and regulations of the entity such as Articles of Association , partnership
deeds
 Copies of documents of continuing importance and relation to the auditor such as
minutes of meeting that recorded the appointment of the auditor, guarantees and
indemnities entered into
 Addresses of registered office and all other premises with a short description of
the work carried at each of those premises
 Organizational charts showing the principal departments and subdivision thereof
and names of officials and their responsibilities showing the lines of authority
 A list of directors, their shareholding and service contracts
 A list of company advisors, bankers and lawyers
 Accounting policies used on material areas such as stock and depreciation
 A record of the study and the evaluation of the internal controls related to the
accounting system

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Administrative paper files contain documentation of the early planning phases of the
audit. Both administrative and evidence files are also called current files.
These include
 Audit Plan - being a detailed program giving instructions as to how each area of the audit
will be conducted. It details the specific procedures to be carried out to implement the
strategy and complete the audit
 Audit Program - details a checklist of the audit procedures and signs off on each
checklist item as it is completed and then inserts the audit program into the audit working
papers as evidence that audit steps were completed
 Time Budget – audit hours allocated to the audit will consequently influence the quality
of the audit taking care not to sacrifice one for the other
 Working Trial Balance-this would have been produced and during the interim audit and
will be a continuation from the interim to the current
 Lead Schedules-being a paper showing the general ledger accounts that are included in
each financial statement line item and note disclosure
 Adjusting Journal Entries and Reclassification Entries
 Supporting Schedules-a detailed itemization of the contents of an account
 Analysis of Ledger Accounts-after the books of original entries have been vouched and
postings there from are fully checked
 Reconciliations-the process that compares two sets of records that figures are correct and
in agreement and also confirming that accounts in the general ledger are consistent,
accurate and complete
 Letters of representation or confirmation from the client and correspondence
relating to acceptance of audit appointment.
 Extracts of important matters in the minutes of Board Meetings and General
Meetings as relevant to audit
 A record of the nature, timing and extend of auditing procedures performed, and
the results of such procedures
 Evidence that the work performed by assistants was supervised and reviewed
 Copies of communication with other auditors, experts and other third parties
 Conclusions reached by the auditor concerning significant aspects of the audit,
including the manner in which the exceptions and unusual matters, if any,
disclosed by the auditor’s procedures were resolved or treated
 Conclusions reached by the auditor concerning significant aspects of the audit,
including the
 Copies of the financial information being reported on and the related audit reports
 A copy of the accounts being audited which must be signed by the directors
 A file index showing the contents of the file
 A schedule of each item in the balance sheet showing the balance at the
beginning of the year, changes during the year and balance at the end of the
year. The schedule also shows details of work performed on each balance, the
result and conclusion made
 A schedule of the items in the profit and loss account. It will show the details of
work performed on each balance the result and conclusion reached

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  A check list for compliance with statutory disclosure requirements and accounting
standards
 A record of the questions raised during the audit and those raised in the previous
audit
 A detailed description of internal control system in form of flow charts,
questionnaires or any other suitable documentation
 A record of important statistics such as profit margin, liquidity ratios and
composition of sales
 A record or extract from minutes of all director’s meetings and of any internal
committee whose deliberations are important to the auditor
 The management letter setting out weaknesses of the internal control system

Audit evidence file

When preparing financial statements the management makes certain implicit or explicit
assertions about the financial affairs of the company. When the auditor is obtaining
evidence from the substantive procedure, he is concerned about testing or
substantiating the truth of these assertions. Assertions from management will be about
transactions that would have taken place during the year under review the account
balances and presentation and disclosure

The objective of an audit of the financial statement is for an auditor to express an

opinion of the financials whether they present a true and fair view of the financial
statements. In order for the auditors to do so he needs to gather sufficient and reliable
audit evidence. Before the auditor makes his conclusion he needs to have gathered
sufficient audit evidence on which to base his opinion so that whatever decision those
users come up with, is the right one. Audit evidence refers to the information obtained
by the auditor in arriving at the conclusions on which the audit opinion on the financial
statement is based.

Audit evidence comprises of source documents and accounting records underlying the
financial statements. The accounting records generally include, records of initial entries
and supporting records, records of electronic fund transfers, invoices and cheques,
general and subsidiary ledgers, journal entries and other adjustments to the financial
statements not reflected in the journal entries, records such as worksheets and
spreadsheets supporting cost allocations, computations and reconciliations, minutes of
meetings, confirmation from third parties, analysis reports, comparable data about
competitors, control manuals, and information obtained by auditor from audit procedure
such as observations and enquiries.

The source and amount of evidence needed to achieve the required level of assurance
is determined by the auditor’s judgment. The auditor’s judgment will be influenced by
the materiality of item being examined, the relevance and reliability of evidence
available from each source and cost involved in obtaining it. Audit evidence is obtained
through an approximate mix of tests of controls and substantive procedures where
internal control system is considered weak. Evidence may be obtained entirely from

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substantive procedures. Substantive procedures are audit tests carried out to test the
accuracy and validity of the accounting records and are mainly of two type, review
procedures and tests of details. The methods of obtaining audit evidence are inspection,
observation, inquiry and confirmation, recalculation and re-performance and analytical
procedure. Based on the evidence obtained the auditor will be able to make an opinion
that is true and fair.

The advantages of audit working papers-

1. It provides guidance to the audit staff with regard to the manner of checking the
schedules
2. The auditor is able to fix responsibility and guidelines on the staff member who
signs each schedule signed by him
3. It acts as an evidence in the court of law when a charge of negligence is brought
against the auditor
4. It acts as the process of planning for the auditor so that he can estimate the time
that may be required for the audit.
5. It improves the efficiency with which working papers are prepared because they
will be used for many clients
6. They provide means to control quality of audit work by ensuring that minimum
quality standards are maintained
7. It ensures that all relevant issues in the audit are addressed.

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QUESTION TWO

Auditing is one of the key functions as regards to corporate governance

(1) Outline the general procedures of gathering evidence suitable to carry out an
effective audit.

After the auditor has obtained the management assertions suitable for the audit
objectives procedures have to be undertaken to gather evidence that will confirm that an
effective audit has been carried out to support an opinion that regarded as true and fair.

The auditor’s responsibility is to design and perform audit procedures that will enable
him to obtain sufficient appropriate audit evidence to be able to draw reasonable
conclusions on which to base his opinion. The management assertions will be verified
through general procedures that include; Inspection (examining records, documents or
assets), Observation (Watching a process or procedure being performed by someone
else), External Confirmation (confirming something with a third party), Re-calculation
(checking the mathematical accuracy of documents or records), Examination of
records (auditor independently re-performs procedures or controls originally performed
by the client), Analytical procedures (making comparisons of financial information to
try to identify fluctuations or unusual results) and scanning ( picking up unusual
transactions). Scanning A procedure that helps auditors pick up unusual transactions
such as posting debit amount to income accounts, and credit amounts to expense
accounts. Unusual balance such as a credit balance in an asset account and debit
balances are noticeable during scanning procedure. In modern times, this is easily
achieved by use of computer aided audit software programs.
Audit evidence includes both information contained in the accounting records as
depicted in the financial statements as well as other information. Verbal Enquiry.

The audit report which shows the opinion of the auditor much have been conducted in a
way that shows that the procedure and material used in gathering the evidence was
relevant and reliable. The auditor will use information from inside the entity or outside. If
the information has been gathered from a management expert, the auditor must have
satisfied himself as to the significance of the expert’s work for his purpose by evaluating
his competence, his credentials, objectives and an understanding of the work of the
expert. If the information that the auditor uses has been produced by the client he
should evaluate whether it is sufficiently reliable, precise and detailed for his purpose.

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ISA 500 (Audit Evidence) states that audit evidence should have certain characteristics.
The quantity of the audit evidence needed is affected by the auditor’s assessment of the
risks of material misstatement and the quality of the evidence so provided. It should be
sufficient, sufficiency is a measure of quantity, auditors must obtain enough evidence to
form their opinion. Sufficiency is affected by risk. The riskier an item is, the more
evidence the auditors should obtain over that item. Sufficiency is also affected by
materiality. The more material an item is, the more evidence the auditors should obtain.
Sufficiency is also affected by reliability. The less reliable audit evidence is, the more if it
is needed and vice versa. It should be reliable. To be useful, audit evidence must be
reliable in terms of its source and its nature. Evidence generated by an auditor is more
reliable than client generated evidence. Third party or independent evidence is more
reliable than evidence generated by the client. Original documents are more reliable
than photocopies. Written evidence is more reliable than oral evidence. Audit evidence
should also be relevant. Audit evidence is relevant if it proves or goes a long way to
prove the financial statement assertions.

Audit evidence comprises both information that supports and corroborates

management’s assertions, and any information that contradicts such assertions. If the
evidence that the auditor has obtained from one source shows some inconsistency with
information obtained from another source then he should decide what manner of
changes he should apply in order to resolve that anomaly and assess the impact it will
have on the other aspects of the audit

To fully confirm the client’s management assertions the auditors must test a number of
things on both the profit and loss and the statement of financial position. On the profit
and loss he must test transactions for occurrence (that the transaction actually took
place and to test the occurrence of a sale, the auditor will inspect the sales invoice,
goods delivery note, and maybe the original order (documents) to make sure that the
sale has taken place, and cannot be cancelled or returned by the customer),
completeness(that all items have been recorded), accuracy(transactions have been
recorded at the correct amounts), cut off(that transactions have been recorded in the

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correct month just before and after the accounting year), classification(transactions
recorded in the correct account balances such as interest recorded as finance costs
instead of admin expenses), presentation and disclosure(transactions have been
presented and disclosed in accordance with the relevant financial reporting framework).

On the statement of financial position the auditor must test transactions for,
existence( that the items on the statement of financial position actually exist in real life),
completeness( ensure that all of the items pertaining to the company assets, liabilities
have been recorded on the statement of financial position to test the Existence of an
asset, the auditor will select some assets from the client’s list (asset register) and then
physically inspect the asset in use by the company), rights and obligations (ownership)(
he must test to ensure that all of the assets on the statement of financial position are
owned by the company and all of the liabilities are an obligation of the company,
valuation( he tests to ensure that the balances are recorded at the correct value,
presentation and disclosure( he must devise tests to ensure that the transactions have
been presented and disclosed in accordance with the relevant financial reporting
standard).

To give effect to these tests the auditor follows general procedures to gather these audit
evidences. In order to perform substantive tests and tests of control, auditors can use
these variety of techniques, inspection, observation, confirmation, recalculation, re-
performance, scanning and analytical procedure.
Inspection
Inspection involves examining records or documents, whether internal or external, in
paper form, electronic form, or other media, or a physical examination of an asset.
Inspection of records and documents provides audit evidence of varying degrees of
reliability, depending on their nature and source and, in the case of internal records and
documents, on the effectiveness of the controls over their production. An example of
inspection used as a test of controls is inspection of records for evidence of
authorization.

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Some documents represent direct audit evidence of the existence of an asset, for
example, a document constituting a financial instrument such as a stock or bond.
Inspection of such documents may not necessarily provide audit evidence about
ownership or value. In addition, inspecting an executed contract may provide audit
evidence relevant to the entity’s application of accounting policies, such as revenue
recognition.
Inspection of tangible assets may provide reliable audit evidence with respect to their
existence, but not necessarily about the entity’s rights and obligations or the valuation of
the assets. Inspection of individual inventory items may accompany the observation of
inventory counting.
Observation
Observation consists of looking at a process or procedure being performed by others,
for example, the auditor’s observation of inventory counting by the client’s personnel, or
of the performance of control activities. Observation provides audit evidence about the
performance of a process or procedure, but is limited to the point in time at which the
observation takes place, and by the fact that the act of being observed may affect how
the process or procedure is performed.
External Confirmation
An external confirmation represents audit evidence obtained by the auditor as a direct
written response to the auditor from a third party (the confirming party), in paper form, or
by electronic or other medium. These external confirmation procedures are frequently
relevant when addressing assertions associated with certain account balances and their
elements. However, external confirmations need not be restricted to account balances
only. For example, the auditor may request confirmation of the terms of agreements or
transactions an entity has with third parties; the confirmation request may be designed
to ask if any modifications have been made to the agreement and, if so, what the
relevant details are.
Recalculation
Recalculation consists of checking the mathematical accuracy of documents or records.
Recalculation may be performed manually or electronically.
Re-performance

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Re-performance involves the auditor’s independent execution of procedures or controls
that were originally performed as part of the entity’s internal control.
Analytical Procedures
Analytical procedures consist of evaluations of financial information through analysis of
plausible relationships among both financial and non-financial data. Analytical
procedures also encompass such investigation as is necessary of identified fluctuations
or relationships that are inconsistent with other relevant information or that differ from
expected values by a significant amount. planning. Auditor uses knowledge of client’s
business to form expectations about what their financial statements should look like. At
the start of the audit, the client supplies the auditor with draft financial statements. The
auditor looks at the figures, and compares them with what was predicted. Those figures
which do not appear to make sense, given the auditor’s knowledge of the company, will
require more audit testing than those figures which are as predicted.
Enquiry
Inquiry consists of seeking information of knowledgeable persons, both financial and
non-financial, within the entity or outside the entity. Inquiry is used extensively
throughout the audit in addition to other audit procedures. Inquiries may range from
formal written inquiries to informal oral inquiries. Evaluating responses to inquiries is an
integral part of the inquiry process. Responses to inquiries may provide the auditor with
information not previously possessed or with corroborative audit evidence. Alternatively,
responses might provide information that differs significantly from other information that
the auditor has obtained, for example, information regarding the possibility of
management override of controls. In some cases, responses to inquiries provide
a basis for the auditor to modify or perform additional audit procedures. Although
corroboration of evidence obtained through inquiry is often of particular importance, in
the case of inquiries about management intent, the information available to support
management’s intent may be limited. In these cases understanding management’s past
history of carrying out its stated intentions, management’s stated reasons for choosing a
particular course of action, and management’s ability to pursue a specific course of
action may provide relevant information to corroborate the evidence obtained through

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inquiry. In respect of some matters, the auditor may consider it necessary to obtain
written representations from management and, where appropriate, those charged with
governance to confirm responses to oral inquiries.

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(2) Describe the benefits of getting accounts audited to a business and the public
at large.
The owner or shareholders of a business usually entrust the operations of the entity to
management who device ways and means to achieve the objectives as set out by them.
The owners are usually not at the premises and may have multiple branches nationally
and internationally. The owners may have advised management to install technical
systems that may be useful in ensuring that operations, transactions and results are
honestly achieved at minimum risk. Despite the existence of sophisticated mechanisms
around the operations of an entity shareholders need peace of mind to know that what
the management is asserting to be the year end results of the business is actually
correct. In order to achieve this peace of mind they hire independent auditors who will
give their opinion as the true and fair position of the management assertions.

These assertions by the management need an independent individual or body to

perform a series of procedures that will certify that what the management of the entity is
saying about the status of the company is in fact true. The external auditor generally
welcomes the existence of internal control systems within an entity as a good control
system helps in the assessment of the strength and integrity of client’s management. If
controls are good, assurance is gained that the financial statements are materially
correct. Companies have internal control systems, to safeguard assets, to try to reduce
fraud, to increase business efficiency, to reduce the risk of breaching laws or
regulations and to improve accuracy of their accounting information.

An audit ensures that the business is compliant. The statutory and regulatory
requirements of the industry are sometimes overlooked or ignored by management
paving the way for litigations thereby channeling resources out of the business which
ought to have been used productively. Shareholders will have peace of mind knowing
that the organization is hundred percent compliant. Non-compliance runs the risk of
fines, loss of customers and a tarnished reputation.
An audit will help to identify weaknesses in the accounting system. Usually an entity
should have its internal control systems that strongly exhibits the following, a strong

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control environment that has strong management attitude, managers follow same
controls as staff, no overriding of controls by managers, those breaching controls are
punished, and controls are part of staff training so that they understand the importance
of controls. The internal controls should be strong enough to exhibit segregation of
duties where different parts of processes are done by different people, that nobody
checks their own work and that nobody has total control of all parts of a transaction.
Once auditors gain an understanding of the business overall systems and control
environment it helps them to identify deficiencies in the accounting systems and
controls for which recommendations making the business more efficient and less prone
to fraud and errors.

An audit provides independent verification that the financial statements are a true and
fair representation of the business current situation. This provides invaluable credibility
and confidence to the organization’s clients, employees, suppliers, investors and tax
authorities. Most lenders especially banks would need copies of the audited financial
statements for the past three to five before they can consider lending money or
guarantees to the organization. These audited financial statements will be proof and
confirmation that the financial position of the organization is as it appears to be and will
look more favorably on companies that have an audit.

An audit can expose fraud, errors and corruption. Workplace fraud can occur for years
without being detected and it can be so material that some businesses never recover
financially or be able to repair their reputation. These can mostly only be identified
through an audit.

An audit can be an important and effective tool for identifying fraud and opportunities to
commit fraud. Some experienced auditors can easily pinpoint weaknesses in an
organization’s systems and controls and subsequently give suggested ways to
strengthen these to prevent fraud occurring. Audit thus facilitates the provision of advice
that can have great financial benefits to the organization tabling how the business is
being run, what margins can be expected and why they are not being achieved.

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Auditing is a cornerstone of good public sector governance. By providing unbiased,
objective assessments of whether public resources are managed responsibly and
effectively to achieve intended results, auditors help public sector organizations achieve
accountability and integrity, improve operations, and instill confidence among citizens
and stakeholders. The public sector auditor’s role supports the governance
responsibilities of oversight, insight, and foresight. Oversight addresses whether public
sector entities are doing what they are supposed to do and serves to detect and deter
public corruption. Insight assists decision-makers by providing an independent
assessment of public sector programs, policies, operations, and results. Foresight
identifies trends and emerging challenges. Auditors use tools such as financial audits,
performance audits, investigations, and advisory services to fulfill each of these roles.

Auditing supports the governance roles of oversight ( evaluating whether public sector
entities are doing what they are supposed to do, spending funds for the intended
purpose, and complying with laws and regulations), insight (to assist decision-makers
by assessing which programs and policies are working and which are not, sharing best
practices and benchmarking information, and looking horizontally across public sector
entities and vertically among the levels of the public sector to find opportunities to
borrow, adapt, or reengineer management practices) and foresight (help organizations
look forward by identifying trends and bringing attention to emerging challenges before
they become crises). Because the public sector’s success is measured primarily by its
ability to deliver services successfully and carry out programs in an equitable and
appropriate manner, public sector audit activities should have the authority and the
competency to evaluate financial and program compliance, effectiveness, economy,
and efficiency. Moreover, auditors also must protect the core values of the public sector,
as it serves all citizens.

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QUESTION THREE

(1) Explain the term vouching and

(2) state how you would vouch the following:

(a) Credit purchases

(b) Credit sales
(c) Stocks and Assets

Vouching is the examination of vouchers and of all documentary evidence in support of

a transaction and includes identification of any document that should be available to the
auditor to carry out that examination. Documentary evidence in support of any business
transaction is called a Voucher. It substantiates the entries in the book of accounts and
confirms how genuine the transaction is. All vouchers relating to the business
transactions should be carefully preserved and properly filed.

The objective of vouching is to establish the authenticity of a transaction as recorded in

the primary books of accounts. It checks whether a transaction is genuinely connected
with the business. It ascertains whether the transaction is supported by documentary
evidence. It checks vouchers pertaining to the financial year under audit. It checks
whether the voucher has been approved by a competent authority. It also checks
whether a proper identification of expenditure as capital or revenue. The other objective
of vouching is to check mathematical accuracy of the captured figures calculations and
totals.

The essential elements to be borne in mind when examining a voucher are; that the
voucher is made out in the client’s name and relate to the client’s business. Date of the
voucher. Amount shown in figures should match with words. Signature of the official
authorizing officer. How vouchers originating from outside the business are genuine.
The account in which the amount of the voucher is adjusted is the one that would clearly
disclose the character of the receipts or payments posted thereto on its inclusion in the
financial accounts. Vouchers that have been inspected should be cancelled or stamped.
Clarification should be obtained regarding missing vouchers. Help should not be sort

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from client’s staff. Pre-receipt vouchers should not be accepted. Over writing or
cancellation on a voucher should not be accepted. Alteration of any kind should be
supported by the signature of the authority.

The two types of vouchers are primary and secondary vouchers. Primary vouchers
constitute the original evidence such as memos, rent receipts, agreements, salaries
statement, purchase invoices among others. Secondary vouchers are also called
collateral vouchers. These include copies of supporting documents which are not
available in original form like duplicate or carbon copy of sale invoice, counterfoils of
pay in slips among others.

The vouching procedure include , check general consideration, check internal control,
check cash book, check bank statements, check documentary evidence, check
authority, check acknowledgements, check type of expenditure whether Capital or
revenue. After the examination is over, each voucher should be either impressed with a
rubber stamp or initialed so that it may not be presented again in support of another
entry.

How to vouch for credit purchases.

The purchases on credit should be verified by reference to the suppliers invoices to
which generally copies of delivery notes, disclosing the dates and particulars of goods
received and acknowledged by the Receiving Department, are also attached. While
vouching entries for purchases with the invoices, the following points should be
specially observed:
(a) that the date of invoice falls within the accounting period;
(b) that the invoice is made out in the name of the client;
(c) that the supplier’s account has been credited with the full amount of the invoice and
that the deduction in the amount of the invoice, if any, has been made on a proper basis
(d) that the goods purchased are those that are regularly dealt in by the client or
required for the process of manufacture carried on by it and that the price payable has
been correctly arrived at;

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(e) that the cost of purchases has been debited to an appropriate nominal account or
accounts;
(f) that the invoice is signed by the accountant to show that he has verified it as well as
the storekeeper to indicate that the delivery of goods have been taken by him. If the
invoice relates to the purchase of a technical store or a chemical, the price which may
be dependent on its quality, a copy of the report of a technical person showing that the
article purchased is of the specification for which the order has been placed; and
(g) that the manager or some other official, competent to sanction payment, has
authorized its payment.
For the control of expenditure on purchases it is essential that these should be
classified under the following heads;
1) purchases of raw materials
2) purchases of packaging
3) purchases of finished goods
4) purchases of articles such as stationery
5) purchases of making additions to assets

Care should also be taken to errors that may tantamount to fraud where;
i) invoice runs into several pages or where the amount of an invoice has been
distributed over several accounts, the amount so adjusted should be added together to
confirm that there has not been error.
(ii) invoices are in duplicate or triplicate and payment is made on account of the original
invoice, it should be confirmed that the original invoice has also been paid or adjusted
separately to avoid double payment.
(iii) special conditions attached to some invoices should be verified that these are the
same as were agreed to at the time the order was placed, e.g., payment of freight and
insurance charges of goods while in transit
(iv) where goods have been purchased for the use by an officer or a subordinate but the
invoice is made out in the name of the client for obtaining the benefit of trade discount, it
should be seen that the cost has been charged to the person concerned and not to the
purchases account.

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(v) an invoice is addressed to an individual, particular care should be taken when
vouching such an item, since the individual may have attempted to procure goods for
his own use while allowing the company to pay for them. The system of internal check
for purchases should be such as to preclude such a possibility. Nevertheless, it should
be seen whether the goods are of a type which the company usually requires, and
whether the invoice has been duly checked by someone other than the individual to
whom it was addressed.
(vi) the delivery note and the goods inward note should be examined and it should be
seen that the goods were inspected on arrival. Further evidence should also be sought
to establish whether the goods were actually received into stock. The original order for
goods should have been duly authorized by a responsible official.
(vii) though it might not be practicable for an auditor to verify that every item of goods
purchased has been entered in stock, he should trace into the stock record at least
purchases of goods during the opening and closing months and accept the correctness
of the rest only if he is satisfied that there exists a system of internal control which
prevent payment being made for any goods not received.

How to vouch for credit sales.

The credit sales should be verified by reference to copies of invoices issued to
customers and, in the process, attention should be paid to the following matters:
(a) that each item of sales relates to the period of account under audit;
(b) that the goods are those that are normally dealt in by the client.
(c) that the sale price has been correctly arrived at and the copy of the requisition slip
issued by the sales department and the copy of the delivery note showing the date and
mode of dispatch of goods are attached with the invoice.
(d) that the amount of the invoice has been adjusted in an appropriate account; and
(e) that the sale has been authorized by a responsible official and in response thereof
he has initialed the invoice; also that any alteration in the invoice has been attested by
the same person. It should be generally verified that the sales have been made at a
uniform rate, and on identical terms as regards payment of, sales-tax, packing charges.
The additional charges recovered along with the sale price should be credited to

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separate accounts, appropriately headed, and not to the sales account. When a trade
discount is allowed, the amount so discounted should be deducted from the sale price.
Where any special trade discount has been allowed, the reason should be ascertained.
The different types of sales should be classified under the following heads:
(1) sale of raw materials.
(2) sale of finished goods.
(3) sale of empties and other packing materials.
(4) sale of assets.
In the cases of small businesses that do not have large stocks the auditor should trace
sales especially of goods sold at the beginning and at the close of the year. Such a step
is essential for verifying that the sales of goods issued in the previous year or years
have not been adjusted in the accounts of the year under audit, also that the goods sold
during the year have not been erroneously included in the closing stock. This would also
disclose any bogus sales debited to the accounts of fictitious customers for which
payments have not been received.

The sale of goods on hire-purchase basis , of the goods sent out on sale or return basis
or on consignment basis should be separately recorded. When credit sales are not
adjusted in the accounts at the time they are made but at the time the sale proceeds are
collected, there can be no guarantee that any amount collected in such sales has not
been misappropriated. The auditor should, therefore, draw the attention of the
management to the risk involved in adopting such practice.

Vouching Stocks and Assets

The process of auditing is done through a set of rules and regulations as per the
companies’ act. It examines the financial statement of a company to determine the
prepared statements to be true and fair in terms of company affairs.

Similarly, a stock audit is a process that refers to physical verification of the inventory
which includes evaluation of inventory items based on the reference of the assignment.

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The stock audit process is necessary to reduce the avoidable investment on stocks or
inventory to ensure proper balance in the process. As high levels of stock result in
overstocking which may result in the poor value of cash flows and financial losses.

The auditor’s task is to check the statements during the process of examination. If
he/she comes across with any fraud or discrepancy by the management of the
company, then the auditor should mention those in his report. The auditor
cannot perform an audit on assumption that management of the company might have
committed fraud.

The main reasons for executing the audit are to correct the discrepancies that are
present in the stock record when verified with the physical stock bypassing necessary
adjustment entries. Following are the reasons why it is looking forward to performing a
stock audit:

The objective of conducting a stock audit is to ensure the security of funds that are lent
by the bank, being safe and valued correctly.

Inventory Audit also known as stock audit where the evaluation is done for raw
materials that gets converted to finished goods. It is important to keep the information
updated about the quantity and the quality of raw materials in stock

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QUESTION FOUR
Write short notes on management assertions and how Auditors’ key in their
objectives based on the assertions.

The financial statements are the assertions of the management. There are many
reasons why financial statements may have errors, deliberate or accidental including
things such as, transactions missed out, fake transactions recorded, transactions
recorded in the wrong accounting period. As a result the auditors must test a number of
things about each balance in the financial statements. These assertions are different
depending upon whether you are testing the profit and loss or statement of the financial
position.
Based on the management transactions and account balance assertions the auditors
should use these assertion as keys in their objectives. In the profit and loss account the
auditors should set as their objective the testing of transactions.
Transactions assertions
a. Occurrence- that the transaction recorded or disclosed actually happened and
relate to the entity. Check sales and purchases invoices, goods received notes,
payment vouchers. Relevant test-select a sample of entries from the sales
account in the general ledger and trace to the appropriate sales invoice and
supporting goods dispatched notes and customer orders
b. Completeness-that transactions that should have been recorded and disclosed
have not been omitted. Relevant test- Peruse bank statements to see if supplier
payments were not recorded or cash receipts from customers were not recorded
c. Accuracy-this means that there have been no errors while preparing or in posting
transactions to the ledger. The reference to disclosure being appropriately
measured and described means that the figures and explanations are not
misstated. Relevant test – re-performance of calculations on invoices, payroll
d. Cut-off-that the transactions are recorded in the current accounting period.
Relevant test-recording last goods received notes and dispatch notes at the
inventory count and tracing to purchase and sales invoices to ensure goods
received before the year-end are recorded in purchase at the year end.

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 e. Classification-that transactions recorded in the appropriate accounts such as
purchases of raw materials has not been posted to repairs and maintenance.
Relevant test- check purchase invoices posting to general ledger
f. Presentation and disclosure-description and disclosures of transaction are
relevant and easy to understand. Relevant test-confirm that the total employee
benefits expense is analyzed in the notes under separate headings such as
wages and salaries, pension, social security.
The auditors will further test management assertion of account balances.
Account Balances assertions
g. Existence-means that assets and liabilities really do exist and there has been no
overstatement e.g by the inclusion of fictitious receivables and inventory.
Relevant test-physical verification of non-current assets, circularization of
receivables, payables and the bank letter.
h. Rights and obligations-means that the entity has a legal title or controls the rights
to an asset or has an obligation to repay a liability. Relevant test-in the case of
property, deeds of title can be reviewed. Current assets are agreed to purchase
invoices. Long term liabilities such as loans can be agreed to the relevant loan
agreement.
i. Completeness-that there are no omissions and assets and liabilities that should
be recorded and disclosed have been, that is there gas been no understatement
of assets and liabilities. Relevant test-a review of the repairs and expenditure
account ban sometimes identify items that should have been capitalized and
have been omitted from non-current assets. Reconciliation of payables ledger
balances to supplier statements also confirms completeness
j. Accuracy, valuation, and allocation-means that amounts at which assets,
liabilities and equity interests are valued, recorded and disclosed are all
appropriate. Relevant test-vouching the cost of assets to purchase invoices and
checking depreciation rates and calculations
k. Classification-means that assets, liabilities and equity interests are recorded in
the proper accounts. Relevant test-checking purchase invoices postings to the
appropriate accounts

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l. Presentation-this means that the descriptions and disclosures of assets and
liabilities are relevant and easy to understand. Relevant test-use disclosure
checklist to ensure that financial statement presentation complies with
accounting standards and relevant legislation

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QUESTION FIVE

(a) Define an audit program and state its advantages

An audit program is a detailed, written statement designed by the auditor indicating the
work to be performed by the audit assistants, specifying the procedure to be followed in
verification of each item in the financial statements and the time limit for completion of
work, instructions and guidance to the audit staff. In short the audit program is a tool for
planning, directing and controlling audit work.
The features of the audit program are,
1. It is a set of procedures to be adopted to conduct the audit more efficiently
2. It is a written scheme designed by the auditor
3. It is a blue print of the audit work
4. It facilitates delegation of work, based on the capabilities of audit staff
5. It acts as evidence in future for the audit work being performed
6. It specifies the work to be done by the audit staff, the m,anner and time limit for
completion of the work
The objectives of an audit program are,
1. To provide clear instructions to the audit assistants specifying the nature of work
to be performed and fixing the time span for completion of each work
2. To facilitate co-ordination among various parts of audit work
3. To ensure uniformity in the performance of audit work and to avoid duplication
and repetition of work.
4. To attain a fair allocation of work among audit team.
5. To fix responsibility and accountability of each audit assistant.
6. To serve as a guide for planning the audit work in future
7. To serve as evidence in future showing the date of completion of audit work,
methods or procedure undertaken and persons involved  in completion of the
audit work.
The contents of an audit program are
1. Name of client
2. Nature of operations and business of client
3. Review of system of internal check

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 4. Date of commencement of audit work
5. Duration of audit work
6. Accounting system followed in client organization
7. Review the report of the previous auditor
8. Review the remarks, instructions or objections raised in the previous audit report
9. Examine the various accounts and subsidiary books
10. Examine the statutory books and registers, profit and loss account and balance
sheet
 Advantages of an Audit program

1. It helps in estimation and division of work. Audit program helps in estimating the
quantum of audit work in advance and also helps in dividing the work among the
audit assistants based on their capabilities
2. It helps in fixation of responsibility. It enables to fix responsibility on the audit
assistants by clearly defining the scope of work
3. Helps in future planning. Audit program serves as a basis for planning the audit
assistants by clearly defining the scope of work
4. Serves as a guide. It serves as a valuable guide for the staff inexecution of the
audit work for succeeding years
5. Valuable evidence. It serves as an evidence for the work done as inials of those
who have done the particular work are appended to it. The auditor can produce
the audit program as a proof when a charge of negligence being brought upon im
6. Uniformity. It provides for uniformity in audit work as the same work will be done
every year
7. Continuity. When an audit staff goes on leave others can continue the work by
referring to the audit program, hence, audit program provides for continuity of
work
8. Co-ordination. It facilitates coordination and helps in supervising the work of audit
staff
 

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(b)Draw up an audit program that will address key areas of cash disbursements

During your audit you need to test management financial statements assertions. When
you test cash disbursements during the audit, your first job is to figure out how your
audit client pays its invoices. For cash disbursement transactions you need to test the
following assertions: occurrence, completeness, authorization, accuracy and cut-off.

Occurrence: this tests whether the payment transactions actually took . Payments can
be made but the documentation will show that it did not take place. So the payment has
to be recorded in the books as having taken place.

Completeness-that transactions that should have been recorded and disclosed have not
been omitted and that transactions that there is continuity such as when an invoice has
been raised its to be paid

Authorization: this step addresses whether the client’s management and staff follow
proper internal controls or other company authorization procedures when handling
revenue transactions. Cash disbursements should be approved by the appropriate level
of management. To test this select a sample of payments and check that all payments
have proper authorization. A further step will be to vouch the cash disbursement back to
the source document. Check that different types of expenses are being approved by
individuals who would be familiar with the type of expense. An advertising expense
should come from an employee in marketing, not an employee in manufacturing

Accuracy: this addresses that transactions are free from error, the dollar amount, the
correct supplier account posting and the correct financial account.

Cutoff: this addresses the issue where the client may move the transactions from one
year to the other in order to show more positive results. As an auditor your job is to have
a reasonable assurance the company records payables and payments when they are
incurred.

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Philican Enterprises Ltd
Audit Program for Cash disbursements
Audit Scope: This audit will focus on cash disbursements to establish if it is being done
according to company policy as well as the correct application of accounting standards
Audit Objectives: Determine that Philican Enterprises complies with its own policy
regarding cash disbursements and also that its applying the correct account standards.
Risks: Inadequate documentation to support compliance
No segregation of duties
Unauthorized personnel accessing cash
No management regular review of list of authorized personnel
Planning Procedure Done By Date W/P Ref
1. Prepare audit engagement letter and
distribute to management
2. Hold an open meeting with management
3. Update the Work Program based on
changes to regulations or prior audit
recommendations
Review Procedures
Obtain and review any written policies,
standards or procedures related to cash
disbursements and ensure that they reflect
current practices.
Obtain any prior year recommendations and
management responses to those
recommendations and verify that they have been
implemented if not establish why
Verify that the internal control system is
functional and the extent to which it can
minimize risks
Audit procedure :
Completeness: Has the transaction been

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recorded in the accounting records
Measurement: Is the transaction recorded at the
correct value
Occurrence: Is the transaction recorded as
expenditure in the current year of account
Regularity: Is the transaction legal and regular
Disclosure: Is the transaction correctly coded
and disclosed
Detailed Procedure: Verify and make sure the
ability to perform and record cash disbursements
is restricted to authorized personnel.
Validate that the responsible manager regularly
reviews the list of personnel authorized to enter
disbursements.
Verify that the decisions about who to pay, how
much to pay and when to pay is captured and
being followed.
Check the list of authorized personnel to handle
cash
Check the list of managers or personnel
authorized to authorize cash disbursements.
Check Cash payment voucher
Check if authority has been granted
Check payment supporting documents e.g
invoices and bills
Check if the vouchers totals against invoice
totals
Check if this a once off payment or it is regular
Do a recalculation check of the invoice value
against cost per unit quantity and totals
Check who is receiving the cash and who has

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authorized that person to receive the cash
Check all entries if correctly recorded and in the
correct accounts

Complete audit working paper file

Determine that all issues are documented
appropriately
Hold a closing conference with key management
to discuss the results of the audit
Obtain management response to all
recommendations

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