Auditing Principles and Practice 2020

lOMoARcPSD|16729859
Auditing Principles AND Practice 2020
Auditing Principle and practice (Mzumbe University)
Scan to open on Studocu
Studocu is not sponsored or endorsed by any college or university

Downloaded by Zack Brighton (zackbrightone2329@gmail.com)
lOMoARcPSD|16729859
B3-Auditing Principles and Practice, 2020 BCC Financial Consultants
SECTION A
INTRODUCTION TO AUDIT AND ASSURANCE ENGAGEMENT
TOPIC 1: History and concept of Audit and assurance engagement……………………....3
TOPIC 2: Planning the engagement…………………………………………………………..15
TOPIC 3: Professional scepticism, materiality and fraud…………………………………..23
TOPIC 4: Going concern……………………………………………………………………….30
SECTION B
THE NATURE AND USE OF INTERNAL CONTROLS
TOPIC 5: Internal financial control and internal control…………………………………….34
TOPIC 6: Component of internal control……………………………………………………...36
TOPIC 7: Evaluation of the internal control………………………………...………………...43
SECTION C
THE NATURE OF AUDIT EVIDENCE AND SELECTION OF SUFFICIENT
APPROPRIATE AUDIT EVIDENCE (SAAE)
TOPIC 8: Audit evidence and audit assertions……………………………………………...49
TOPIC 9: Audit sampling……………………………………………………………………...55
TOPIC 10: The audit of specific account balances…………………………………………...61
TOPIC 11: Audit final review………………………………………………………………….68
SECTION D
PROFESSIONAL ETHICS, PUBLIC INTEREST, FUNDAMENTAL OBJECTIVES,
THREATS AND SAFEGURDS TO INDEPENDENCE
TOPIC 12: Professional ethics and Ethical principles……………………………………….79
SECTION E
BASICS OF ASSURANCE REPORTS, IDENTIFYING AND EXPLAINING THE
CONTENT AND THE DIFFERENT TYPES AND WHEN THEY MAY BE
USED
TOPIC 13: Audit reports……………………………………………………………………….87
SECTION F
PUBLIC SECTOR AUDITING
TOPIC 14: Public sector auditing………………………………………………………………96
SECTION G
INTERNAL AUDIT
TOPIC 15: Internal Audit……………………………………………………………………..104
REVIEW QUESTIONS…………………………………………………………………….....108
1 | Prepared by Johnson Filikunjombe, CPA(T), BAF-BS (Mzumbe), Cell: +255 765 381738

lOMoARcPSD|16729859
SECTION A
INTRODUCTION TO AUDIT AND ASSURANCE
ENGAGEMENTS

lOMoARcPSD|16729859
TOPIC 1
HISTORY AND CONCEPT OF AUDIT AND ASSURANCE ENGAGEMENT
HISTORICAL DEVELOPMENT OF AUDIT

The word audit comes from a Latin word audire, meaning <to hear= or <to listen=. Before
industrialization, business owners (principal) were receiving a verbal reporting from
managers (agent) on business performances. It was the duty of the principal to assess how
the business performance is, after hearings and presentation.
After industrialization, business developed then got spread geographically and becomes
more complex and hence difficult for the principal (owner) to call agent to make oral
presentation. Therefore principal decide to hire or engage the third parties (external
auditor) to cross-examine the performance of the business as prescribed by manager
(agent).
In early 19909s audit started to be a profession. Professional audit and accountants bodies
started. The first was Institute of Charted Accountants England and Wales, and the second
was ACCA that by then was called CCA. The professional examination was offered to
prepare the professional accountant. Accounting firm were also started and among the
first accounting firm was Price Water house Coopers (PWC) and KPMG. In Tanzania
NBAA was found in 19709s as the first Accounting and Auditing board in Tanzania to
oversees accounting and auditing activities and it started to prepare and examine
candidates who were looking to becomes professional accountants.
DEFINITION OF AUDITING
Auditing is an independent examination of Financial Statement and expression of opinion
by an appointed auditor on whether or not Financial Statements shows true and fair view
in all material respects based on laws, standard and techniques pronouncement.
CONCEPT FROM THE DEFINITION
1. Independent
This means that the auditor is free from the conflicts of interest that should originate from
threat such as self-interest threat, self-review threat, intimidation threat, advocacy threat
and familiarity threat. Independent also means that the person is objective and free from
biasness.
2. Examination
This is the verification of records, documents, and books to collect audit evidences that
will be adequate and sufficient as well as appropriate to express opinion in Financial
Statements.
3. Express of opinion
The primary purpose of auditor is to express an opinion on Financial Statement and not
finding fraud or errors. There are two types of opinions that are Unqualified or
Unmodified opinion that issued when Financial Statement are showing true and fair view

lOMoARcPSD|16729859
and Qualified or Modified opinion issued when Financial Statement does not shows true
and fair view.
4. Financial Statements
This refers to the subject matter whereby an auditor draws conclusion from them. There
Financial Statements includes, Income Statement, Statement of financial position (balance
sheet), Statement of cash flows, and Statements of change in equity.
Users of Financial Statements

The Financial Statements are used by different group of users (stakeholders) as follows;
 Investors
 Shareholders
 Supporters
 Suppliers
 Employees
 Banks or lenders
 Creditors
 Manager or Director
 Customers
5. True and Fair view

The term <true and fair= is not defined in the Companies Act, but in simple terms, we can
say that truth means something factually correct and fair means just, equitable and not
misleading. Financial statements are said to be true and fair
a) If does not contain material misstatements
b) If they have been prepared in accordance to applicable standards e.g. IAS, IFRS,
and IPSAS etc.
c) If have been prepared according to applicable laws and regulations e.g. company
laws
Simply meaning that the Financial Statement do not shows errors. They may not be fully
correct but they show the reality and provide reasonable assurance.
6. Appointed Auditor
An auditor is appointed by the shareholders (owners), not director or managers. An
auditor is appointed at the Annual General Meeting (AGM) by a passing resolution.
For the public sector, the honourable president also appoints CAG who in turn
responsible to appoint the internal auditor general (IAG)
7. Acts governing audit

Audit is governed by the following acts in Tanzania
 Company Act
 Income Tax Act (ITA)
 VAT Act
 Procurement Act

lOMoARcPSD|16729859
 Public Finance Act

 Public Audit Act
 Bank and Financial Institution Act
 CMSA Act (Capital Market and Security Authority)
8. Standards
These are the international guiding frameworks where the audit should base on. Includes
IAS9s, IFRS and ISA9s.
9. Auditor
An auditor can be individual person, firm, organization, partnership or a company, which
is legal entity with recognized professional qualification and certified.
OBJECTIVES OF AUDIT
Primary objectives
 Expression of opinion on whether the financial statements give a true and fair view
and are prepared, in all material respects, in accordance with an applicable
financial reporting framework.
Secondary objectives
 To detect errors and misstatements
 To detect fraud
 To detect irregularities and non-compliance to laws and regulations
There are others services which can be offered by the auditor i.e. tax consultation,
preparation of Financial Statements, preparation of payrolls consultation etc.
ASSURANCE ENGAGEMENT
Assurance engagement is an arrangement in which a practitioner express a conclusion
designed to enhance a degree of confidence of intended users other than those responsible
parts about the outcome of the evaluation or measurement of a subject matter against
criteria
To summarize the above formal definition, read through the following example to
understand how assurance engagement is performed and how it enhances the confidence
of users.
Example:
Management (responsible party) of company A Ltd fulfilled its responsibility of
evaluating entity9s financial position, financial performance and changes in cash flows
(these all three aspects are in short the subject matter) by publishing financial statements
in accordance with International Financial Reporting Standards (criteria) and the assets,
liabilities etc. are recognized, measured, presented and disclosed in the financial
statements (subject matter information) as per the requirements of IFRSs. Practitioner

lOMoARcPSD|16729859
(auditor) is appointed by the shareholders (users) to express his opinion (assurance) in

the form of a report over the recognition, measurement, presentation and disclosures i.e.
financial statements (subject matter information) made by the management (responsible
party) are actually in accordance with IFRSs (criteria) and the actual financial position,
performance and changes in cash flow (subject matter).
From the definition of assurance engagement and also from the above example we
understood that not every engagement undertaken by the practitioner amounts to
assurance engagement.
ELEMENTS OF AN ASSURANCE ENGAGEMENT

For an engagement to be assurance engagement it must have the following FIVE essentials
or elements (also known as essentials or elements of assurance engagements):
1. A three party relationship

A three party relationship involving a practitioner, responsible party, and Intended users.
i) Practitioner; this is the auditor i.e. the one to review the subject matter (Financial
statement) and who gives assurance or who can be relied upon e.g. a professional
accountant
ii) The responsible party
Is the part or person who is responsible for the subject matter information e.g. the
board of directors of a company and management.
iii) Intended users,
The person, persons or class of persons who want to purchase or for whom the
practitioner prepares the assurance report e.g. the shareholders of an entity i.e.
shareholders.
2. A suitable subject matter

A suitable subject matter is the data that the responsible party has prepared, and which
requires verification: for example,
 Historical financial information,
 Non-financial performance or condition e.g. Effectiveness and efficiency in raw
material utilization
 Prospective financial information,
 Physical characteristics e.g. Capacity of facility
 System and process e.g. entity9s internal control system like IT system.
 Behaviour of corporate, government practices, compliances with regulation or
human resources etc.
 Corporate social responsibility reports etc.
However, the subject matter would be appropriate only if it is measurable and is

supported by evidence.

lOMoARcPSD|16729859
3. Suitable criteria
Criteria are the benchmark used to evaluate the subject matter. Could be formal e.g. IFRS,
ISA9s, IAS9s IPSAS9s or informed of users evaluating a system that has its own criteria.
The subject matter is compared to the criteria in order for it to be assessed and an opinion
provided.
Characteristic of suitable criteria

A suitable criteria should has the following characteristics
 Relevance
 Completeness i.e. not omitting relevant factors
 Reliability i.e. allows reasonable consistent evaluation
 Understandability so as to a clear conclusion.
 Neutrality i.e. should not be bias
4. Sufficiency and appropriate audit evidence (SAAE)

The practitioner should the engagement with an attitude of professional scepticism
(covered under topic 3), regarding with obtaining the evidences in order to give the
required level of assurance.
5. An assurance opinion
An assurance report in appropriate form is the opinion that is given by the practitioner to
the intended user and the responsible party based on the evidence obtained and the whole
process of audit work.
The opinion should be in the form of a written report issued by the practitioner providing
assurance of:
 Higher degree as under reasonable assurance engagements
 Moderate degree as under limited assurance engagements.
LEVELS OF ASSURANCE ENGAGEMENT

The Framework permits only two types of assurance engagements. They are a reasonable
assurance engagement and a limited assurance engagement.
1. Reasonable Assurance
Is the highest but not absolute assurance considering circumstances and facts on the
engagement. In this type of assurance engagement, the practitioner obtains sufficient
appropriate evidence in order to reduce the assurance engagement risk to an acceptably
low level. The practitioner doesn9t aim to say that everything is fully correct, but ascertains
that it is materially true and fair
Objectives of an a reasonable assurance engagement

In a reasonable assurance engagement, the practitioner:
 Gathers sufficient appropriate evidence,
 Concludes that the subject matter conforms with the relevant criteria,
 Ensures that the level of risk is acceptably low and

lOMoARcPSD|16729859
 Expresses the conclusion in a positive form. E.g. <The financial statements show a
true and fair view=, or <The appointment of the employee was fair=
Why reasonable assurance and not absolute assurance?

The reasons as to why reasonable assurance is provided are as follows;
 The use of selective (sampling testing)
 Inherent limitation e.g. internal control risk
 Audit evidence tends to be persuasive rather than conclusive.
 The use of judgement when gathering evidence.
 Time constraints
 In some cases, the characteristic of the subject matter might not be precise.
2. Limited assurance engagement

Is the type of assurance by which practitioners express opinion in negative form. The
objective of a limited assurance engagement is a reduction in assurance engagement risk
to a level that is acceptable in the circumstances of the engagement, but where that risk is
greater than for a reasonable assurance engagement,
Objectives of a limited assurance engagement

In a limited assurance engagement, the practitioner:
 Gathers sufficient appropriate evidence
 Ensures that the subject matter conforms with the relevant criteria,
 To ensure that level of risk that is acceptable in the circumstances of the
engagement
 Expresses the opinion in a negative form
Example of Assurance Engagement

 Audit of Financial Statement, it always gives a reasonable assurance.
 Review of Financial Statement, it always gives a limited assurance.
 Risk assessment report.
 System reliability report.
 Report on social issues of environmental report.
 Review of internal control.
 Value for money audit (VFM),
Example of Non-Assurance Engagement
1. Agreed upon procedures;

Is an engagement in which an auditor carry out procedures as agreed by the client and
any appropriate third parties to report on the findings. He doesn9t give an opinion but
rather report the fact. Here the report is restricted to those parties that have agreed to the
procedures to be performed since others are unaware of the reason for the procedures,
hence may misinterpret the results. Example fraud investigation, insurance claims,
verifying account receivables and payables and non-financial data.

lOMoARcPSD|16729859
2. Compilation Engagement;
Is a service extended by the practitioner to assist management in the preparation of the
Financial Statements. The practitioner here doesn9t give an opinion but only gives
compiled information.
A compilation engagement occurs in the following circumstance

 Preparing Financial Statement.
 Calculating taxable income.
AN ATTESTATION ENGAGEMENT AND A DIRECT REPORTING ENGAGEMENT
1. Attestation engagement
Is an arrangement with a client where an independent third party investigates and reports
on subject matter created by a client.
It involve the following:

 Examining, reviewing and performing agreed-upon procedures on the subject
matter of an assertion.
 Issuing a written communication that expresses a conclusion about the reliability
of written assertions prepared by a separate party.
Example of attestation engagements

 Verifying compliance with applicable laws and regulations.
 Verifying internal control over financial reporting.
 Verifying accounting for reporting on grants and contracts.
 IT / system audit.
 Examining financial forecasts and projections.
 Examining pro forma financial statements (whether in accordance with the
applicable law or not)
Therefore, in all cases, the practitioner is attesting that something is correct or fairly stated,
from the work they have carried out, and provide <a reasonable assurance.=
B. Direct reporting engagement

A direct reporting engagement involves the following:
 An independent examination of financial information or other information that has
been prepared for use by another party.
 The engaging party may not state that the financial statements follow the criteria.
However, the examining party will still need to State which standards have been
used, expressing an opinion in accordance with the agreed terms of the
engagement which is <a limited assurance=

lOMoARcPSD|16729859
RIGHTS OF AN AUDITOR
1. Right of access to records

The auditor has the right to access the company9s books of account, records, vouchers and
other documents necessary to collect evidence, at a reasonable time, either with or without
notice.
2. Right to information and explanations

An auditor can ask any of the officers or other persons associated with the company to
provide information or explanations essential to discharge their duties effectively as an
auditor.
3. Right to receive resolutions

The auditor also has the right to receive a copy of any written resolution proposed and
any further communications related to it in the same way as a member of the company.
4. Right to attend and receive notice of meeting

An auditor has the right to receive all the notices of the general meetings and attend those
meeting like any other member of the company.
5. Right to speak
An auditor has the right to speak and to be heard at general meetings of the company on
any of the matter, which concerns him as an auditor.
DUTIES OF AN AUDITOR
1. Adequate accounting records

The auditor while performing his duties must check whether proper and adequate
accounting records have been maintained and prepared. The auditor also needs to ensure
that for the branches not visited by him, adequate returns necessary for carrying out the
audit have been received.
2. Compliance with legislation

It is the duty of an auditor to ensure that all the applicable provisions (like labour laws)
have been complied with while preparing the financial statements.
3. Verification of records
The auditor9s duty is to examine, compare and verify the accounting records and returns
with the financial statements. If the accounting records do not agree with the financial
statements or are incomplete, then it is the duty of the auditor to report this fact to the
shareholders.
4. Truth and fairness

It is the primary duty of the auditor to prepare a report on the financial statements
examined by him and state whether, in his opinion and to the best of his knowledge, the
financial statements provide:

lOMoARcPSD|16729859
 A true and fair state of affairs at the end of accounting period, in the case of
statement of financial position (SOFP) and
 A true and fair view of the amount of profit or loss during the accounting period,
in the case of statement of comprehensive income (SOCI).
5. Adequate disclosure
Another duty of an auditor is to ensure that the financial statements and all the other
material disclosures are made in accordance with the applicable statute. The auditor also
needs to verify whether all the payments and benefits accruing to directors from the
company are properly disclosed in the accounts.
AUDITOR9S LIABILITY AND THE EXPECTATION GAP

There are number of aspects of law and regulation under which auditors:
 May have penalties imposed on them for a criminal offence, or
 May have legal claims made against them (for damages) for negligence
This has become an important area in recent years, due to the growing complexity of the
business and legal environment and increased legal actions against auditors. This
occurred as the result of expectation gap.
Expectations gap is the difference or gap between what the users of the financial statement
and other member of the public think that auditors do, and what auditors actually do.
Elements of expectations gap

There are three main elements in the expectation gap
1. A standard gap.
This occurs because of the perception that auditing standard are more prescriptive than
they actually are, and that auditors have wide ranging rules that they must follow.
2. A performance gap.
This occurs because of perception that audit work has fallen below the required standards
3. A liability gap.
This arises from a lack of understanding about the auditor9s liability and whom the auditor
may be liable to.
In addition, there is a perception that auditors have a responsibility for detecting all fraud,
whenever this occurs. High level of expectation about what auditors should do may lead
to legal action against auditors if this level of expectation is not met. To reduce the
frequency and cost of legal action, and to maintain the image of the audit profession in the
mind of the public, it is in the interest of the profession to take steps to close the gap.

lOMoARcPSD|16729859
Closing the expectations gap

Ways of attempting to close the gap include the following:
i) The profession should attempt to improve the general level of knowledge and
understanding about the audit process. The requirement of the audit report to
include an explanation of the nature of an audit.
ii) The profession should improve the public9s knowledge of the auditor9s
responsibility in the area of fraud.
iii) Controls over the auditing profession may be improved, as a means of enhancing
public confidence.
CLASSIFICATION OF AUDIT
1. Internal and External audit

Internal audit refers to function of an entity that performs assurance and consulting
activities designed to evaluate and improve the effectiveness of the entity9s governance,
risk management and internal control processes.
External audit
An external audit is performed by external auditors, who are independent of the
organisation and provide an independent opinion on the organisation9s financial
statements. It is a review and assessment of the financial records to form an overall
conclusion as to whether:
 The financial statements show a true and fair view.
 The financial statements have been prepared using acceptable accounting policies,
which have been consistently applied.
 The financial statements comply with all the relevant regulations and statutory
requirements.
 Adequate disclosure of all material matters relevant to the proper presentation of
financial information has been made.
Difference between Internal and External audit

Determined and influenced by Determined and influenced by country
management laws e.g. company laws
Auditors are employees of the company Auditors are external to the company
Performed according to IPPF. Internal Performed according to ISA9s
audit standards
Focus on internal control and procedures Focus on financial statements
2. Statutory and Non-statutory audit

Statutory audit (external audit)
Statutory audit is the engagement of an audit of financial statements by independence
auditors to the entity9s financial statements as the compliance with the local law that entity
being operating. In most of the countries or territories, audit of financial statements is
required by law or status.

lOMoARcPSD|16729859
An entity that operated in those countries is required to submit the audited financial
statements as per the law requirement. For example, the insurance companies required
submitting their financial statements to related government body to review. Tax
department is one of the best examples of government body that entity required to submit
the annual financial statements along with audit report to them for review and assess if
the taxes expenses are properly paid off.
Non-statutory audit
Non-statutory audit is the audit of financial statements that is not required by law. It is
different from statutory audit that entities need to engage with audit firm to perform their
review in financial statements. For non-statutory audit, entity may exempt from the law9s
requirement, but entity still engage with the firm.
3. Interim and Final audit

Interim audit
This is an audit conducted in between two annual audits. Its object is to enable the
company to declare an interim dividend. Interim audit involves a complete audit of
accounts for a part of the year i.e. from the date of the last Balance Sheet to the date of
the interim accounting period
Final audit
This is also known as periodical audit, annual audit or complete audit. This type of audit
is usually done at the end of the financial year when all the accounts have been balanced
and trading and profit and loss account and the balance sheet have been prepared.
In the case of such an auditor visit his client only once a year and goes on checking the
accounts until the audit work for whole of the year is completed. Final audit ensures
smooth flow of work, is economical and there is no possibility of friendly-ties between
then audits staff and the clients staff, hence it ensures independence.
PROCESS OR STAGES OF CARRYING OUT TYPICAL AUDIT

1. Planning [Audit plan] ISA 300
2. Risk assessment ISA 315
3. Testing and gathering of audit evidence ISA 500
4. Conclusion and opinion ISA 700
5. Audit report
BENEFITS OF AN AUDIT
a) Improves the quality and reliability of information, giving investors faith in and
improving the reputation of the market.
b) Independent scrutiny and verification may be valuable to management.
c) May reduce the risk of management bias, fraud and error by acting as a deterrent.
d) May detect bias, fraud and error.

lOMoARcPSD|16729859
e) Enhances the credibility of the financial statements, e.g. for tax authorities or
lenders.
f) Deficiencies in the internal control system may be highlighted by the auditor.
LIMITATIONS OF AN AUDIT:
a) Financial statements include subjective estimates and other judgemental matters.
b) Internal controls may be relied on which have their own inherent limitations.
c) Representations from management may have to be relied upon as the only source
of evidence in some areas.
d) Evidence is often persuasive not conclusive.
e) Do not test all transactions and balances. Auditors test on a sample basis

lOMoARcPSD|16729859
TOPIC 2
PLANNING THE ENGAGEMENT
Introduction
An audit involves a systematical analysis and evaluation of the risks facing an
organisation, so an auditor must have a well understanding and methodical plan in place
before commencing his work. In additional, the inherent limitations of audit make it
necessary that the auditors assess the risk of material misstatements in the financial
statements before giving their opinion.
Therefore, a study of the components of audit risks and an understanding of the risk of
material misstatements play a very important role in planning the audit.
Definition
Engagement planning involves considering the strategies and objectives of the area or
process under review and prioritizing the risks relevant to the engagement. The plan must
contain the engagement objectives, scope, timeline, and resource allocations. Established
engagement objectives and scope enable internal auditors to focus efforts on the
significant risks in the area or process under review, develop the engagement work
program, and communicate clearly with management and the board.
COMPONENT OF ENGAGEMENT PLANNING

Several planning steps contribute to the development of the engagement objectives and
scope. The specific details of the steps and the order in which they are performed may be
adapted to suit the needs of the individual internal audit activity, organization, and
engagement. For example, an internal audit activity might begin to formulate preliminary
objectives before completing all of the steps necessary to finalize them. However,
engagement planning generally includes the following steps:
i) Risk and risk assessment

ii) Different approaches to audit
iii) Obtaining an understanding of the entity
iv) Audit strategy and audit plan
v) Analytical procedures
1. OBTAINING AND UNDERSTANDING OF THE ENTITY

Understanding an entity is a basic requirement for planning and performing an audit. It
is essential that an auditor gather an understanding of the entity and sufficient knowledge
of the business of the entity in order to plan and implement an audit assignment. This will
enable them to identify and assess the risks of material misstatements in the financial
statements and to decide their audit strategy.
The auditor will need to have a well understanding in the following area
i) Competition of the entity in the market
ii) Cyclical or seasonal activity of the entity
iii) Technological and other developments in the industry and their impact on
the entity

lOMoARcPSD|16729859
iv) Regulatory environment and external factors such as an understanding of

the laws and regulations those are applicable to the entity
v) The nature of the entity and Objectives and strategies and significant business risks
of the entity
vi) Internal control of an entity
vii) Entity9s selection and application of accounting policies including the
reasons for changes thereto.
Sources of information for understanding the entity and its environment

The auditor can use various sources (internal and external) to gain an understanding of
the entity and its environment, this includes
i. Inquire of management and others within the entity
ii. Those charged with governance
iii. Internal audit personnel
iv. Employees
v. Legal counselors and compliance officers of the entity
vi. Marketing or sales personnel
vii. Performing analytical procedures
viii. Observation and inspection
ix. IT personnel
x. Other stakeholders
2. RISK AND RISK ASSESMENT

Due to time and resource constraints, not all risks can be reviewed during an engagement.
Therefore, auditors must conduct a preliminary risk assessment and prioritize risks
according to significance, which is measured as a combination of risk factors.
TYPES OF RISKS
1. Business risks
Is a risk resulting from significant conditions, events, circumstances, actions or that could
adversely affect an entity9s ability to achieve its objectives and execute its strategies, or
from the setting of inappropriate objectives and strategies. These risks arise from the
nature of entity9s business and could prevent the entity from achieving its goals.
Types of business risks

 Financial risk, they results from the way an entity is financed i.e. the mix of source
of capital (debt to equity)
 Operational risk, they result from the entity9s day-to-day operations e.g. Faults of
the production facility
 Compliance risks, these risks arise due to the failure to comply with the applicable
laws and regulations. These risks relate to reporting and misstatement in the
financial statement and breach of any law or regulations.

lOMoARcPSD|16729859
2. Audit risks
This is the risk that the auditor expresses an inappropriate audit opinion when the
financial statements are materially misstated or not materially misstated.
The main reason for an incorrect audit opinion is that the auditors receive and rely upon
fraudulent or inaccurate information to base their findings and conclusions on. The main
reason why an auditor ends up using such information is because of the three different
types of risks that all organizations face. These risks are inherent risks, control risks and
detection risks.
It9s mathematically represented as, (AR=IR×CR×DR)
Types of audit risk
A. Inherent risk,
Are the risks that organizations face because of the business they are in and the nature of
their industry. The term inherent is used here because these types of risks will always be
present for the organisation and are an inevitable as part of its business environment.
These risk cannot be fully eliminated, however possible steps can be taken to mitigate
them.
B. Control risk,
is the risk that an organization9s internal control systems do not adequately protect the
organisation either because they have not been adequately designed and / or
implemented.
C. Detection risk,
This is the risk that the procedures performed by the auditor to reduce audit risk to an
acceptably low level will not detect a misstatement that exists and that could be material,
either individually or when aggregated with other misstatements.
The existence and combination of these risks all potentially lead to the possibility that any
auditor may unwillingly end up using inaccurate or fraudulent information whilst
conducting their audit. If detection risk is too high, auditors then carry out more audit
procedures to mitigate the risk.
NOTE:
Inherent risk and control risk are within the entity and cannot be controlled by the auditor.
Therefore, in circumstances where there is high inherent and / or control risk, the auditor
must plan and perform a much more audit procedures in order to compensate and
therefore reduce the level of the overall audit risk.
If inherent risk and control risk are both low, then detection risk can be high whilst still
achieving low audit risk. Less audit work will be required to reduce the audit risk to an
acceptable level.

lOMoARcPSD|16729859
RISK ASSESMENT PROCEDURES

These are the audit procedures performed to obtain an understanding of the entity and
its environment, including the entity9s internal control, to identify and assess the risks of
material misstatement, whether due to fraud or error, at the financial statement and
assertion levels.
Those procedures to be carried out to assess the risks include;

i. Inquire from management and other within the entity
ii. For entities with an internal audit function, then auditor must make enquiries with
the internal audit department about the suspicious of the existence of fraud
affecting the entity.
iii. Inquire from those charged with governance about how they are dealing with risks
within the entity.
iv. Auditor must evaluate any unusual and unexplained relationships that that have
been identified while performing analytical procedures.
v. Other information that will help to identify risk of material misstatement. Example
past experiences of dealing with the client in other engagement.
vi. Evaluation of fraud or risk factors
3. DIFFERENT APPROACHES TO AUDIT
A. Risk based auditing

Is an auditing approach where by auditors focus on the audit risks associated with the
entity, which poses the greatest risk of material misstatement in the financial statements.
The rationale behind the approach is that by identifying and concentrating on the areas
that pose the highest audit risk of providing misrepresented or inaccurate information,
the majority of the material misstatements will be found through the audit.
Steps in risk based auditing

i. Identify the risks, understand the type of business operation and activities of
organization. This help to outline the potential risks.
ii. Determine probabilities of risk occurring, the higher the probability, the greater
the threat to the organization, and subsequently the audit.
iii. Determining exposure, determine the potential loss and effect on the financial
statements.
iv. Reviewing the control risk, reviewing and evaluating the controls that an
organization has implemented to address these risks.
v. Deciding the strategy, planning an audit strategy to investigate all the high-risk
areas.
A risk-based approach is suitable in the following cases:

 When the nature of business is such that the audit risk is very high e.g. cash based
business (as the possibility of misappropriation is higher).
 If the business environment is complex e.g. international business with a
centralized information system.

lOMoARcPSD|16729859
 When the entity9s internal control system is effective and can be relied upon for
areas other than those for which the risk is assessed as high.
Others audit approach includes:

a) Top down approach, identifies business risks and relate them with financial
statement.
b) System audit, understand, identify weakness and checks effect on internal control
system.
c) Balance sheet approach, this involve performing substantive procedures on
account balances.
d) Transaction cycle approach, involving selecting transaction and trace them from
occurrence to amount entered in the statement of financial statement (balance
sheet)
e) Directional testing, (checks overstatement of debit balances and understatement
of credit balances)
Here auditor identifies the direction of the test to find the errors and omissions (if
any) in the financial statement of an organisation. Bearing these factors in mind,
auditors need to examine the SOFP (balance sheet) and SOPL (income statement)
of an organisation to determine whether: assets have been overstated, liabilities
have been understated, income has been understated and expenses have been
overstated.
4. AUDIT STRATEGY AND AUDIT PLAN
Audit strategy
This sets the scope, timing and direction of the audit and guides the development of the
more detailed audit plan. Once the overall strategy has been planned, detailed
consideration can be given to each individual audit objective and how it can be best met.
Components of audit strategy

Audit strategy includes the following information:
i. Understanding the entity9s environment e.g. location, activities covered and
strategy.
ii. Characteristics of the engagement
iii. Ascertaining the reporting objectives, timing of the audit and communications
required.
iv. Understanding the accounting and internal control systems.
v. Deciding the direction of the audit e.g. setting materiality level, area of weakness
identification, preliminary risk assessment.
vi. consideration of the team-members required.
Audit plan
An audit plan converts the audit strategy into a more detailed plan and includes the
nature, timing and extent of audit procedures to be performed by engagement team
members in order to obtain sufficient appropriate audit evidence to reduce audit risk to a

lOMoARcPSD|16729859
low level. Audit planning is a detailed recording of each procedure and process required
to perform an audit. Once the overall strategy has been determined, the auditor should
prepare a detailed plan of the areas determined in the audit strategy. Once the audit
strategy has been decided, the next stage is to decide how it is going to be carried out; an
audit plan is necessary.
Contents of audit plan

The following are some the matters which are included in the audit plan:
a) A description of the nature, timing and extent of planned risk assessment
procedures, which will enable the assessment of the risks of material misstatement
due to fraud.
b) Any change in accounting or internal control system since last year.
c) Any change in the accounting policy since last year.
d) Areas of special attention.
e) Materiality levels.
f) Associated party transaction.
g) Understanding and assessing of the strength of the control environment of the
entity
h) A description of the nature, timing and extent of planned further procedures at the
assertion level, This applies to each material class of transactions, account balance,
and disclosure.
i) Formation of audit team and allocation of work and duties to the assistants.
j) Types of audit evidence desired in order to comply with ISAs.
k) Explanation on decision relating to testing the operating effectiveness of controls
and nature, timing and extent of planned substantive procedures.
5. ANALYTICAL PROCEDURES
Analytical procedures are the audit procedures designed and performed by an auditor,
which seek to provide evidence as to the completeness, accuracy and validity of the
information contained in the accounting records or in the financial statements.
Procedures consists have the systematic study and comparison of relationships and trends
among the elements of financial information and the investigation of significant
fluctuations and variances from the expected relationships and trends. Any inconsistent
relationship and trends should be investigated.
Steps involved in analytical procedures

Unlike physical verification and external confirmation, analytical procedures do not
provide direct evidence about the amount of transaction or balance. Rather, they give an
idea of what the amount should be or is reasonably expected to be.
Steps involved:
i. Expectation; the auditor develop an expectation of what the financial information
figure should be. This can be agreed through ratio analysis.
ii. Identification; involves identification of significant variations between the actual

lOMoARcPSD|16729859
data with the expected data.

iii. Investigation of unusual variances; once variance have been computed, and if
significant variations are found, then auditor would consult the management in
order to establish explanations for the variations revealed.
iv. Performance of alternate procedures; If the auditor or management do not find
the variation reasonable, then they investigate further, for example, by inspecting
inventory or sales invoices.
ACCEPTING AN ENGAGEMENT
An audit engagement refers to an audit that an auditor performs. More specifically, it
refers only to the initial stage of an audit during which the auditor notifies the client he
has accepted the audit work and clarifies his understanding of the audit's purpose and
scope. Even more specifically, the term audit engagement can refer to the written letter by
which the auditor formally notifies the client he will engage in audit services.
Preconditions for an audit

Auditors should only accept a new audit engagement, or continue an existing audit
engagement if the 'preconditions for an audit' required by ISA 210 Agreeing the terms of
audit engagements are present.
ISA 210 requires the auditor to:

 Determine whether the financial reporting framework to be applied in the
preparation of the financial statements is appropriate; and
 Obtain the agreement of management that it acknowledges and understands its
responsibilities.
If the preconditions for an audit are not present, then the auditor should discuss the matter
with management, and should not accept the engagement unless required to do so by law
or regulation.
Procedures for obtaining an engagement

If the engagement is offered, the auditor should:
i. Ask the client for permission to contact the outgoing auditor (reject the
engagement if client refuses)
ii. Contact the outgoing auditor, asking for any reasons why they should not accept
the appointment. If a reply is not received, the prospective auditor should try and
contact the outgoing auditor by other means e.g. by telephone. If a reply is still not
received the prospective auditor may still choose to accept but must proceed with
care.
iii. Ensure that the legal requirements in relation to the removal of the previous
auditors and the appointment of the firm have been met.
iv. Carry out checks to ensure the firm can be independent, is competent to do this
audit and has the necessary resources
v. Assess whether this work is suitably low risk
vi. Assess the integrity of the company's directors

lOMoARcPSD|16729859
vii. As a commercial organisation, the firm should also ensure that this is a desirable
client (e.g. Right industry, suitable profit margin etc.)
viii. Not accept the appointment, where it is known that a limitation will be placed on
the scope of the audit.
ENGAGEMENT LETTER
An engagement letter this is the letter written by the auditor to client, defines the legal
relationship (or engagement) between the audit firm and its client(s). This letter states the
terms and conditions of the engagement, principally addressing the scope of the
engagement and the terms of payments for the firm.
The engagement letter will be sent before the audit. It specifies the nature of the contract
between the audit firm and the client and minimizes the risk of any misunderstanding of
the auditor's role. It should be reviewed every year to ensure that it is up to date but does
not need to be reissued every year unless there are changes to the terms of the
engagement. The auditor must issue a new engagement letter if the scope or context of
the assignment changes after initial appointment.
ISA 210 requires the auditor to consider whether there is a need to remind the entity of
the existing terms of the audit engagement for recurring audits and many firms choose to
send a new letter every year, to emphasize its importance to clients.
The contents of an engagement letter

The contents of a letter of engagement for audit services are listed in ISA 210 Agreeing
the Terms of Audit Engagements. They should include the following:
i. The objective and scope of the audit;
ii. The responsibilities of the auditor;
iii. The responsibilities of management;
iv. The identification of an applicable financial reporting framework;
v. Reference to the expected form and content of any reports to be issued;
vi. The unavoidable risk that some material misstatements may go undetected due to
the inherent limitations in an audit;
vii. Arrangements regarding the planning and performance of the audit;
viii. The expectation that management will provide written representations;
ix. The agreement of management to make available to the auditor draft financial
statements and other information in time to complete the audit in accordance with
the proposed timetable;
x. The agreement of management to inform the auditor of facts that may affect the
financial statements;
xi. The basis on which fees are computed and billing arrangements;
xii. A request for management to acknowledge receipt of the engagement letter and to
agree the terms outlined;
xiii. Agreements concerning the involvement of auditors experts and internal auditors;
and
xiv. Restrictions to the auditor's liability.

lOMoARcPSD|16729859
TOPIC 3
PROFESSIONAL SCEPTICISM, MATERIALITY AND FRAUD
1. PROFESSIONAL SCEPTICISM
Professional scepticism is an attitude that includes a questioning mind and a critical
assessment of audit evidence. The auditor should maintain an attitude of professional
scepticism throughout the audit, recognizing the possibility that a material misstatement
due to fraud could exist, notwithstanding the auditor9s past experience with the entity
about the honesty and integrity of management and those charged with governance. It
involve an assessment of audit evidence i.e. thinking outside the box. SAAE has to do
with the measure of quality of evidence and ethics.
SAAE also has to do with the measures of quantity and this will depend on
a) Risk assessment- high-risk client more evidence is required.
b) The materiality level- low level of materiality means more audit evidence e.g. 1m
and 10m
c) The nature of accounting system and internal control. If reliable, effectively this
means less audit evidence.
d) Auditor knowledge experience; if knowledgeable and experienced then less audit
evidence.
e) The findings e.g. other audit procedures.
f) Source and reliability of the information
Appropriate Audit evidence is a measure of quality that is determined by relevance and

reliability.
Audit evidence is said to be reliable when;

i) It is obtained directly by the practitioner from independent source.
ii) It is documented rather than oral presentation.
iii) It is in original documents rather than photocopied ones.
iv) It tends to be more reliable when surrounding control re operating effectively.
v) A written assurance report in an appropriate form.
(To be discussed as the topic)
Situations that requires an attitude of professional scepticism

a) When audit evidence contradicts other audit evidence obtained
b) When information that brings into question the reliability of documents and
responses to inquiries to be used as audit evidence.
c) Conditions that may indicate possible fraud
d) Circumstances that suggest the need for audit procedures in addition to those
required by the ISAs

lOMoARcPSD|16729859
2. MATERIALITY
The concept of materiality is very important throughout the audit exercise, especially
during the process of risk assessment, planning, deciding the sample size to be checked,
the actual checking and reporting.
Definition
Materiality refers to the level of misstatement (including omissions) that could
individually or in aggregate affect the economic decisions of the users of the financial
statements.
Information is material if its omission or misstatement has the ability to influence the
economic decisions of the users taken on the basis of the financial statements. Materiality
is not an absolute term, and therefore it changes from year to year and from entity to
entity. This means that the same item may be material to one concern and non-material to
another, or the same item could be material in a particular year and not material in
another.
Importance of materiality concept

The concept of materiality is very important throughout the audit exercise. Materiality
helps the auditors:
i. During the process of risk assessment and planning,
ii. To decide the sampling techniques and the sample size to be checked,
iii. During the actual checking and reporting, in order to determine the level of errors
at which the audit report may be qualified.
iv. Evaluating the effect of identified misstatements on the audit and of uncorrected
misstatements, if any, on the financial statements.
Determinants of materiality
Determining materiality for the financial statements as a whole is a matter of professional
judgment. Materiality is determined on the basis of quantitative and qualitative factors.
1. Qualitative factors
Qualitative materiality refers to a transaction which is not material because of its size, but
because of the nature of the item e.g. Statutory requirement.
Some of the factors that need to be considered when making a judgment on materiality
are:
a) Relative significance, materiality of item is determined by viewing its significance
to the class to which it belongs.
b) Comparison with the corresponding previous year9s figures, patterns of income
and expenses
c) Transactions of abnormal and non-recurring nature
d) Statutory requirement, if it is omitted then it is material
e) Recurring errors

lOMoARcPSD|16729859
2. Quantitative factors
Calculated materiality amounts derived using quantitative approaches may be increased
or decreased based on the auditors9 professional judgment about the possible effect of
qualitative factors.
a) Possible effect on misstatement on profitability trends
b) Significant effect of misstatement on the share price for the company
c) Accuracy and reliability of accounting system
d) Possible effect of a misstatement on segment reporting
Calculation of materiality levels

Determining materiality involves professional judgment and the partner in charge of the
audit makes the final decision. However, some guidance needs to be given to audit team
members when they are planning and performing the audit. A percentage is often applied
to a chosen benchmark as a starting point in determining materiality for the financial
statements as a whole.
The following benchmarks are often used, and acceptable in your exam, in the calculation
of materiality on the financial statements as a whole:
Details %
Revenue 0.5 to 1
Profit before tax (PBT) 5 to 10
Total assets 1 to 2
Performance materiality
The amount or amounts set by the auditor at less than materiality for the financial
statements as a whole to reduce to an appropriately low level the probability of
uncorrected and undetected misstatements for the financial statements as a whole.
If applicable, performance materiality also refers to the amount or amounts set by the
auditor at less than the materiality level or levels for particular classes of transactions,
account balances or disclosures.

lOMoARcPSD|16729859
3. FRAUD AND ERRORS
FRAUD
Fraud is an intentional act by one or more individuals among management, those charged
with governance, employees, or third parties, involving the use of deception to obtain an
unjust or illegal advantage.
Two types of intentional misstatement are relevant to the auditor:

i) Misstatements resulting from fraudulent financial reporting and
ii) Misstatements resulting from misappropriation of assets.
Types of fraud
a) Management fraud; this is committed by one or more member of management or
those charged with governance. Usually it involve large amount of money/slightly
bigger.
b) Employee fraud; this is committed by employees of the entity. Usually are small
amount but are frequently perpetuated.
FRAUD RISK FACTORS

These are conditions or event that generally present when fraud exist. It includes incentive
or pressure, opportunity and rationalization.
A. INCENTIVE OR PRESSURE
Excessive pressure exists for management to meet the requirements or expectations of
third parties. Includes
 Profitability or trend level
 Need to obtain additional debts or equity financing
 Managerial ability to meet debt repayment or exchange listing requirements or
debt covenant
B. OPPORTUNITY
The nature of the industry or entity9s operations provides opportunities to engage in
fraudulent financial reporting. Includes
 Significance transaction in the ordinary course of business
 A strong financial presence or ability to dominate a certain industry that may
allow the industry to dictate terms
 Complex transaction at the year end
 Ineffective monitoring of management i.e. dominated by a single person
 Complex organization structure
 Internal control deficiencies

lOMoARcPSD|16729859
C. RATIONALIZATION
For fraud to take place, the perpetrator would find out the best reasons or justification
why it was so to ratify their wrongdoing.
Reasons given:
 Everyone is doing it
 Family problem
 Outstanding bills
D. CAPABILTY
For fraud to take place a person must have an ability, confidence and guts tom commit
wrongdoing at an expense of the business.
Fraudulent financial reporting

This involves intentional misstatement, including omissions of amounts or disclosures in
the financial statements, to deceive financial statement used.
Misappropriation of assets
This involves the theft of an entity9s assets and is often perpetrated by employees in
relatively small and immaterial amounts. However, it can also involve management who
are usually more capable of disguising or concealing misappropriations in ways that are
difficult to detect.
Fraud and Misstatement
1. FRAUD
The term fraud refers to the intentional misrepresentation of financial information by one
or more individuals among management, employees or third parties. Fraud may involve
manipulation of records or documents, misappropriation of assets, suppression or
omission of the effects of transactions from records or documents, recording of
transactions without substance or misapplication of accounting policies.
2. MISSTATEMENT
Is difference between the amounts, classification, presentation, or disclosure of a reported
financial statement item and the amount, classification, presentation, or disclosure that is
required for the item to be in accordance with the applicable financial reporting
framework. A misstatement of financial statements can arise from fraud or error.
Misstatement may results from then either of the following:

 Inaccurate collection and processing of data in the financial statements
 Omission of an amount or non-disclosure of any fact
 Incorrect accounting estimates- by overlooking or misinterpreting facts
 Management9s accounting estimates considered unreasonable by the auditor
 Management9s adoption and application of accounting policies considered
inappropriate by auditor

lOMoARcPSD|16729859
Fraudulent financial reporting

This means manipulation i.e.
i) Alteration of an accounting record or supporting document.
ii) Intentional omission of events or transactions from the financial statements
iii) Intentional misapplication of an accounting principle regarding amounts,
classification, disclosure, etc.
Misappropriation of assets
Misappropriation of assets can occur in many ways, including:
i) Theft of assets e.g. inventory, cash or non-current assets of the entity.
ii) Embezzling receipts e.g. cash received from sale of scrap is recorded at a lower
amount than the actual cash received. The cashier keeps the difference in cash.
iii) Making a payment for goods and services not received. For example, making
payments to fictitious employees.
iv) Using the entity9s assets for personal use e.g. employee9s family members using the
company car.
Auditing fraud with professional skepticism

Auditors are watchdogs. They are not supposed to presume the presence of any
misstatement or fraud in the financial statements, but during the course of audit if they
come across any misstatement they should consider whether the overall audit strategy and
audit plan need to be revised. Remember, the auditor should however be auditing with an
air of professional skepticism.
Risk assessment process

ISA 315 requires a discussion among the engagement team members on matters relating
to how and where the entity9s financial statements may be susceptible to material
misstatement due to fraud, including how fraud might occur. Risk assessment procedures
are carried out in order to obtain information of the entity and its environment, which are
susceptible to fraud. These procedures include:
Inquire from management and others within the entity regarding:

a) Management9s assessment of risks of material misstatement due to fraud. This will
require an understanding of the methods followed by the management, for instance
identifying the areas where a material misstatement due to fraud could arise and
assessing the impact of the risks (identified above) on the business, and the
probability of their occurrence.
b) Whether proper risk management procedures are in existence in the company and
whether they are managing the risks that the business faces.
c) Management9s communication to those charged with governance regarding the
process for identifying and responding to the risk of fraud, i.e. in the minutes of the
board meetings.
d) Management9s communication to employees about business practices and ethical
behavior i.e. through the entity9s code of ethics or ethical policies.

lOMoARcPSD|16729859
e) Knowledge of any actual / suspected fraud within the entity: the auditor will
enquire about the management9s knowledge of material errors and fraud which
have occurred within the entity and suspected fraud which exists within the entity
which is being investigated by the management.
For entities with an internal audit function, the auditors must make enquiries with the
internal audit department about the internal auditors9 knowledge / suspicion of the
existence of fraud affecting the entity, and in addition, Auditors must evaluate any
unusual and unexplained relationships that have been identified while performing
analytical procedures.
ERROR
Error is an unintentional misstatement in financial statements, including the omission of
an amount or a disclosure. This refers to unintentional mistakes in financial information,
e.g. mathematical or clerical mistakes, oversight or misinterpretation of facts, or
unintentional misapplication of accounting policies.
Responsibility of management for prevention and detection of fraud and error

According to ISA 240, the primary responsibility for the prevention and detection of the
fraud rests with both those charged with governance of the entity and with management.
Therefore, Prevention of fraud typically involves designing internal controls by the
management of an organisation such that internal controls are in place for each process
and it ensures that, works done by one person is checked by another person. Thus, internal
controls assist management to prevent fraud.
Responsibility of the external auditor

According to ISA 200, the overall objective of the auditor is to obtain reasonable assurance
about whether the financial statements as a whole are free from material misstatement,
whether due to fraud or error, thereby enabling the auditor to express an opinion on
whether the financial statements are true and fair and are prepared, in all material respects,
in accordance with an applicable financial reporting framework.
It is not the primary responsibility of the external auditor to prevent or detect fraud or
error in the financial statements. However, in the course of conducting the audit, if they
come across a situation where they have reason to believe that fraud or error might exist
to a material extent, they should modify their audit programmes or perform additional
procedures to confirm or dispel their suspicion of fraud or error.
However, at the same time, this does not mean that it is not the duty of the auditor to detect
fraud if situations give indications of fraud. The auditor should exercise due care and
diligence to uncover the fraud.

lOMoARcPSD|16729859
TOPIC 4
GOING CONCERN
Introduction
Financial statements prepared by management are based on the assumption of going
concern. ISA 570 establish standard and guidelines on auditor responsibility in auditing
financial statements with respect to going concern used in preparation of financial
statement including considering management assessment of the entity9s ability to continue
as a going concern.
Definition
Going concern is the one of the fundamental accounting assumption used in the
preparation of the financial statement, where it states that the enterprise will continue in
operational existence for the unforeseeable future period.
Key assumption on going concern

i) There is no intention to cease production or provision of services (liquidation)
ii) There is no intention to reduce the scale of production or provision of services
iii) The organization does not seek any legal protection against its creditors and lenders
RESPONSIBILITY OF MANAGEMENT AND AUDITOR TO GOING CONCERN

Each party of management and auditor is having responsibility regarding the issue of
going concern as identified below:
Management responsibility
i) Management is having responsibility of making an assessment of an entity9s ability
to continue as a going concern.
ii) Management must disclose the going concern status on the financial statement in a
note form by giving the clear reason as why exist as a going concern and why it
does not.
Auditor9s responsibility
Principally, auditor is not responsible to ensure the company has the going concern status.
Why?
i) This is simply because, auditor9s responsibility is to consider the appropriateness
of management use of going concern in the preparation of financial statements.
ii) He considers whether there is material uncertainty about the entity9s ability to
continue as a going concern that is needed to be disclosed in the financial statement.
iii) Auditor test for indication of events or condition which cast significant doubts on
continuity beyond the twelve months after the balance sheet date

lOMoARcPSD|16729859
INDICATORS FOR THE COMPANY WITH GOING CONCERN
1. Financial indicators
i) Adverse key financial ratios
ii) Failure or arrears or discontinuity of paying dividend
iii) High gearing ratio
iv) Indication of withdrawal of financial support by lenders and other creditors
v) Substantial operating loss or significant deterioration in the value of assets used to
generate cash flows
vi) Changing from credit to cash on delivery transaction with suppliers and customers
vii) Inability to pay creditor on due dates
2. Operational indicators
i) Loss of key management personnel without replacement
ii) Loss of major market share, franchise or license
iii) High staffs turnover
iv) Many litigation
3. Others
i) Non-compliance with statutory requirement
ii) Change in government policy that may adversely affect the business
Auditing procedures
The following are the procedures that an auditor will exercise when going concern events
or conditions are identified
i. Review management plans for future actions based on going concern assumptions.
ii. Gather sufficient appropriate audit evidence (SAAE).
iii. Seek written representation from management regarding its plan for future actions.
iv. Analysing and discussing then entity9s latest available interim financial (the more
recent ones) statement.
v. Review minutes on the meeting of shareholders or those charged with governance
so as to review if there are any financial difficulties.
vi. Inquires the entity9s lawyer regarding the existence of litigation and the impact on
the financial statement.
vii. Considering the entity plan to deal with unfulfilled customers9 orders.
viii. Review events after period end (subsequent events) to see the impact on the going
concern.

lOMoARcPSD|16729859
AUDITING REPORT WITH GOING CONCERN

This has been clarified under different scenarios as follows:
1. Going concern assumption appropriate but material uncertainty exist

If adequate disclosure is made in the financial statement, then auditor should unqualify
the opinion but modify the report by adding an emphasize matter paragraph that highlight
the condition or situation casting significant doubt about going concern and draw
attention to the users on the notes disclosed.
E.g. ……. <Without qualifying our opinion we draw attention to note X in the financial
statement, which indicate that there is a continual loss for the cumulative years, current
liabilities exceed its current assets by xxx amount. The condition indicates the existence
of material uncertainty which may cast significant doubt about the company ability to
continue as a going concern.=
 If adequate disclosure is not made in the financial statement, the auditor should
express a qualified or adverse opinion as appropriate by including specific reference
to the fact that there is material uncertainty that cast significant doubts about entity9s
ability to continue as a going concern.
E.g. ……. <The company financing arrangement expire and amount outstanding are
payable on March 19 2000. The company has been unable to renegotiate or obtain
financial replacement to finance the situation. This situation indicates the existence of
material uncertainty which may cast………. and therefore it may be unable to realize its
assets and discharge its liabilities in the normal course of business. The financial
statements and notes don9t disclose this fact.
In our opinion except for the omission of the information included above, then financial
statement gives a true and fair view of then financial position of the company as at
Dec………. and the results of its operation and its cash flows for the year then ended in
accordance with………=
2. Going concern assumption inappropriate

 If in auditor9s judgement, the entity will not be able to continue as a going concern,
then the auditor should express an adverse opinion if the financial statement have
been prepared on going concern basis.
 Again if enough disclosure is made but inappropriate, give adverse opinion.

lOMoARcPSD|16729859
SECTION B
THE NATURE AND USE OF INTERNAL CONTROLS

lOMoARcPSD|16729859
TOPIC 5
INTERNAL FINANCIAL CONTROL AND INTERNAL CONTROL
Risk of Material Misstatement (ROMM)

ISA 315, identifying and assessing the risk of material misstatement through
understanding the client and its environment. It states that the objective of an auditor is
to identifying and assesses the ROMM at the financial statement and assertion level
through understanding entity and its environment including the entity9s internal control
there by providing a basis for designing and implementing responses to the assessed risk
of material misstatement.
Definition
Internal control is the process designed, and affected by those charged with governance,
management and other personnel to provide reasonable assurance about the achievement
of the entity9s objectives with regard to reliability of financial reporting, effectiveness and
efficiency of operations as well as compliance with applicable laws and regulations plus
safeguards of entity9s assets.
Key definition concept

 It is a process not an event or series of actions.
 It is affected by people i.e. management, board of directors and other personnel.
 It only provide a reasonable assurance based on four things
 Effectiveness i.e. doing right thing.
 Efficiency i.e. doing in right way.
 Economy i.e. achieving objective at reasonable cost.
 Reliable reporting i.e. timely reporting.
CLASSIFICATION AND TYPES OF INTERNAL CONTROL

Internal control classified into four categories as follows
i) Directive controls, are the one designed to encourage a particular desirable event
or behaviour to occur e.g. Employee9s manual.
ii) Detective control, these are designed to detect errors or irregularities that may
have occur e.g. Review and approval.
iii) Corrective control, this one designed to correct errors irregularities that may have
occurs e.g. Reconciliation.
iv) Preventive control, these are designed to stop errors and irregularities from
occurring in the first place.
TYPES OF INTERNAL CONTROL
1. Application control
These are control related to a particular system e.g. Physical controls, authorization and
approval computerized system etc.

lOMoARcPSD|16729859
2. General control
This attempt to get an overall impression of the controls that are present in an
organisation. They flow at entire organisation and not a particular system. E.g. control
personnel, supervision, management control etc.
EFFECTIVE INTERNAL CONTROLS AND INTERNAL FINANCIAL CONTROLS
Effective internal controls

An internal control system is said to be effective if it enable an organisation to achieve its
objectives, which include
 Effective and efficient operations including risk mgt.
 Accurate and timely financial reporting.
 Compliance with all relevant laws and regulations.
Objective of effective internal control

i) Avoidance of fraud, errors, wastes and inefficiency.
ii) Maximum accuracy of all records and data, which bring in accuracy of policy
decision.
iii) Enabling auditors determining the degree of reliance they can place on the various
system.
iv) Informing management about weakness detected in internal controls so that action
can be taken.
v) Enabling planning of the audit.
vi) Understanding the component of internal control.
Effective Internal Financial Controls

Effective internal financial controls enable entity to limit cost in accordance with budget,
through the use of cost budget and variance analysis. It also decides the amount of budget
to be allocated to different areas. A sound and effective system of internal financial control
can therefore improve the integrity of the financial statements.
From the above, it is clear that efficient internal controls improve the controls in all areas
of the entity9s operations, including financial controls.
Benefits of effective internal controls and financial controls

 Identify and respond to business risks.
 Safeguarding of both tangible and intangible assets.
 Maintenance of proper records.
 Helping an organisation to comply with all relevant applicable laws and
regulations.
 Improving the integrity of the financial statements

lOMoARcPSD|16729859
TOPIC 6
COMPONENTS OF INTERNAL CONTROL SYSTEM
Introduction
Internal control is a process through which an organisation provides reasonable assurance
regarding the achievement of its objectives. The aim of internal controls is also prevention
and early detection of fraud and error.
Even if an entity has very good internal controls, the controls may have certain
deficiencies, which can lead to errors or misstatements in the financial statements and
therefore needs the auditor always to be alerted. The auditor should assess the internal
control of the entity, and in the process will identify the deficiencies thereon.
If the risk of misstatement is high, the auditor will have to alter the audit plan and audit
strategy to carry out more extensive controls.
Components Of Internal Control System

There are the five components of internal control systems
1. Control Environment
2. The Entity9s Risk Assessment Process
3. The Information System
4. Control Activities
5. Monitoring of Control
1. CONTROL ENVIRONMENT
This includes the governance and management functions and the attitudes, awareness
and actions of those charged with governance and management concerning the entity9s
internal control and its importance in the entity. Under this we can also include how
people are recruited, trained, the structure of the organization, responsibility, and
accountability.
The auditor should obtain an understanding of the control environment. For obtaining
this understanding, the auditor should evaluate whether:
 Management, with the oversight of those charged with governance, has created
and maintained a culture of honesty and ethical behavior; and
 The strengths of the elements in the control environment collectively.
The control environment includes the following:
A. Communication and enforcement of integrity and ethical values

Maintaining good communication within the organisation and with outsiders, enforcing
ethical practices and integrity within the entity will assure the auditors of the control
environment. The auditor will prove this by testing the communication flow within the
organization.

lOMoARcPSD|16729859
B. Commitment to competence
This refers to the knowledge and skill necessary to carry out tasks or individual jobs. If it
is effective, the operations of the entity will be carried out efficiently, and hence this will
provide assurance of the truth and fairness of the financial statements of the entity.
C. Participation by those charged with governance

The auditors will test whether the attributes of personnel charged with governance
includes; independence from management, their experience and stature, the extent of
their involvement and scrutiny of activities and their interaction with internal and
external auditors.
D. Organizational structure
This provides the framework within which an entity9s activities for achieving its
objectives are planned, executed, controlled and reviewed.
E. Assignment of authority and responsibility

It includes the policies and communications, which ensure that all the personnel are aware
of the objectives of the entity and they know how their individual actions will contribute
to those objectives.
F. Human resource policies and practices

Human resource policies and practices relate to recruitment, orientation, training
evaluating, counseling, and remedial actions. The auditor would test the standards for
recruitment and training policies followed by the entity.
2. THE ENTITY9S RISK ASSESSMENT PROCESS

This looks at how the entity itself assesses material risks, which might arise. It has to
estimate the significance of those risks and the likelihood that are occurring. Having
identified a risk, having assessed the likelihood of its occurring, the entity then has to
decide what to do about it, what controls would address the risks identified?
Steps of risk assessment process

i) Identification of business risks relevant to financial reporting.
ii) Estimate significance of risk.
iii) Assessment of likelihood of their occurrence.
iv) Decision of action to manage them.
3. THE INFORMATION SYSTEM

These are procedures established to record, process, summarize and report the
transactions to maintain accountability of related assets and liability and equity. They
include the related business processes relevant to financial reporting, and communication.
An information system consists of hardware components, software, people, procedures
and data and it involve the procedures and records.

lOMoARcPSD|16729859
According to ISA 315, the auditor should obtain an understanding of the information
system, relevant to financial reporting, including the following areas;
 The classes of transactions, which are significant to the financial statements.
 Procedures, by which transactions are initiated, recorded, processed and reported
in the financial statements.
 How the information system captures events and conditions.
 The financial reporting process used to prepare the entity9s financial statements,
including significant accounting estimates and disclosures.
4. CONTROL ACTIVITIES
These are defined as those policies and procedures, in addition to the control
environment, which are established to achieve the entity9s specific objectives. These
include the policies and the procedures, which help to ensure that the management
directives are followed.
Control activities comprises the following
A. Segregation of duties
This means that just one person cannot carry out a single transaction. If one person can
carry out a transaction, it9s very difficult to control that transaction. Work undergoes no
checking procedures meaning that errors are likely to go uncorrected; it also opens the
door to fraud. The more important aspect of segregation of duties is the fact that one
person is checking the work of another and so errors are likely to be identified and
corrected.
B. Record and record keeping

All transaction should be properly recorded and properly maintained. They must be kept
in a permanent form (i.e. ink).
C. Proper Authorization and review

The authorization or approval and control of documents are very important. The
appropriate person should approve transactions. For example the purchase of fixed
assets, the granting of credit, the writing off of a bad debt, and the approval of employees9
overtime.
The person responsible for authorization will inspect the document and also the
supporting documents, and satisfy himself that the transaction is appropriate and valid.
They then approve it by initialing and dating the document.
D. Comparison
Comparing, for example, the results of stock takes to the book records of stocks. Another
example would be comparing goods receive notes with the original purchase orders to
make sure that what has been received was, in fact, what was ordered. Constant
comparison means that errors, if they do occur, are much more likely to be discovered.
E. Physical controls

lOMoARcPSD|16729859
These are designed to ensure the physical security of assets, and include adequate
safeguards such as secured facilities over access to assets and records; authorization for
access to computer programs and data files; and periodic verification of assets.
F. Review of Performance
Management reviews the performance to know whether the results are according to
expectations and whether the goals have been met. Wherever there are irregularities
noticed in the performance review, management can investigate the reasons for these
irregularities and take corrective action.
G. Information processing
This refers to the variety of controls, which are performed to test the accuracy,
completeness and authorization of transactions in a computerized system. They can be
application controls or general control.
5. MONITORING OF CONTROL
This includes periodic assessment of effective of internal control performances over time.
It include assessing the internal control if requires modification. Generally it is the process
of assessing the effectiveness of internal performances over time.
LIMITATIONS OF INTERNAL CONTROL

Although auditors place reliance on internal controls, you must understand that there
are certain inherent limitations:
๏ Cost vs. benefit The cost of establishing a system of internal control

may be greater than the benefits. To take a ridiculous
example, it9s very unlikely that anyone is going to
establish a system of internal control over the issue of
paperclips or envelopes. The amount of management
time taken up with authorizing trivial amounts of
expenditure simply makes it uneconomic. At some
stage however the benefits may outweigh the costs
and, for example, when it comes to photocopying
many organizations do have some sort of
authorization or at least accounting system to track
who uses most of the photocopying resource.
๏ Human error For example, one person makes out an invoice using
the wrong selling price and another one checks it and
doesn9t see the error. This is always a possibility even
in the best-regulated circumstances.
๏ Collusion. Where two or more employees cooperate to get
around the internal control system. The collusion
might be to carry out a fraud or it might be to cover
up some error that was made. The more segregated
duties are, the more people it would need to collude

lOMoARcPSD|16729859
to carry out an entire transaction.

๏ Bypass of controls Say someone has forgotten to order a vital piece of
equipment and that to speed matters up, instead of
getting the proper authorization for the purchase,
they issue the purchase order without that
authorization. They are bypassing the controls: it may
be done with the best possible intentions, but if
bypass of controls becomes too common essentially
the controls are not operating.
๏ Non-routine transactions These are transactions that are so rare that no system
of internal control has been devised. An example can
be the disposal of non-current assets. Many of these
assets are scrapped when they are disposed of, and to
establish a system of internal control might not have
been thought worthwhile. However, occasionally an
asset with a substantial value might be disposed of,
and if there is no system for getting the right price and
for ensuring that the proceeds come to the
organisation, and then there is a possibility that those
transactions are not properly recorded.
Others includes
 Obsolescence
 Manipulation by the management
RESPONSIBILITIES FOR INTERNAL CONTROL
Management
They are responsible for installing and maintenance of effective controls to ensure the
objective are met.
Auditor
The auditor is responsible to obtain an understanding of internal control in order to
determine to what external he/she may rely over internal control. It assists in audit
planning.
OBJECTIVES OF INTERNAL CONTROL

i) Ensure reliability entity9s financial reporting.
ii) Ensure effectiveness and efficiency operation.
iii) Compliance of with laws and regulations.
iv) Safeguarding entity9s assets i.e. misappropriation of company9s cars.

lOMoARcPSD|16729859
REVIEW QUESTIONS
a) ISA 325 Identifying and assessing the risk of material misstatement through
understanding the entity and its environment requires an auditor to obtain an
understanding of control activities relevant to the audit. Control activities are the
policies and procedures, which help ensure that management directives are carried
out.
Required:
Describe FOUR different types of control activities and, for each type, provide an
example control a company a company may implement (4 marks)
b) Equestrian Co. manufactures smartphone and tablets. Its main customers are
retailers who then sell to the general public. The company9s manufacturing is
spread across five sites and goods are stored in its nine warehouse located across
the country. You are an audit supervisor of Baseball & Co and in preparation for
the forthcoming audit for the year ending 30 June 20X8, you are reviewing the
following notes your audit manager has provided you with in relation to the
company9s internal control.
Equestrian Co. has a small audit (IA) department. During the year, IA started a
programme of physically verifying the company9s assets and comparing the results
to the non-current assets register, as this type of reconciliation had not occurred for
some time. To date only 15% of assets have their existence confirmed as IA has
experienced significant staff shortages and several members of the current IA team
are new to Equestrian Co.
During the year, Equestrian Co conducted an extensive reorganization of its

manufacturing process to improve efficiency. Due to significant number of employee
changes required, the human resources department (HR) has been very busy and to
ease their workload during this period, the payroll department has assisted by setting
up any new employees who have joined the company. In January 20X8, the wage rate
paid to employees was increased by the HR director and he notified payroll by
emailing the payroll supervisor.
New sales ledger system was introduced in May 20X8 and will continue to be run in
parallel with the old system until IA has completed its checks between the two
systems. New customers obtained by the sales team are required to undergo a full
credit check; on the basis of this, a credit limit is proposed by sales staff and approved
by the sales director and these credit limits remain static in the sales system.
Monthly perpetual inventory counts are undertaken at each of the nine warehouses,
as a full year-end inventory counts is too disruptive for the company. High value
items are stored in a secured area in each warehouse. Access is via a four-digit code,
which for convenience is the same across all cites. Due to the company9s
reorganization programme, some of the monthly inventory counts were not
performed.

lOMoARcPSD|16729859
An accounts clerk undertakes bank reconciliation monthly and details of all

reconciling items are included. Where the sum of the reconciling items is significant,
the reconciliation is dent to the financial controller for review. In order to maximize
cash balances the finance director approves all purchases invoices for payment 75
days after receipts of the invoice.
Required:
Identify and explain EIGHT deficiencies in Equestrian Co.9s internal controls and
provide a recommendation to address each of these deficiencies.
Note: Prepare your answer using two columns headed Control deficiency and
Control recommendation respectively.

lOMoARcPSD|16729859
TOPIC 7
EVALUATION OF INTERNAL CONTROL
INTRODUCTION
An auditor needs to rely heavily on the internal control system of an entity, in order to
complete his audit in an effective manner and within the prescribed time frame planned.
While assessing the internal control system of an entity, the auditor needs to analyze it, in
order to identify existing deficiencies, if any. These deficiencies will limit the extent to
which the auditor can rely on the internal control systems. If the internal control system
cannot be relied upon, a greater amount of substantive testing will have to be carried out.
ISA 265 stipulates how an auditor and management should work together to address
report on deficiency noted on the internal control system.
DEFICIENCY IN INTERNAL CONTROL

This is a situation exist where by the internal control designed and implemented is unable
to prevent, or detect and correct significant misstatements, errors and irregularities in the
financial statements on timely basis, or such control is completely missing.
Nature of the deficiency in internal control

A deficiency in the system occurs, either
a) On account of deficiencies in the design of the internal control system, or
b) On account of the non-implementation or incorrect implementation of the existing
system.
1. Deficiency in design of the system

The internal control system may be weak because it is not designed properly. Even if an
internal control system is operating according to its design, it may not be effective due to
improper design.
Identification of deficiencies in the system designed

The deficiencies in the system can be identified at the time of when the auditor obtaining
an understanding of the system or on evaluation of the system. Deficiencies in the system
can be identified by;
A. Evaluation of the organisation chart

This chart explains the authority and responsibilities of various personnel in the
Organisation. The chart will enable an external auditor to know who is responsible for
what and who is reporting to whom. If single person is given task or power to execute
many duties, then there will be no segregation of duties, as the rule requires no single
person should have exclusive right over any transaction.
B. Evaluation of written policies and procedures of the entity

This will enable the auditor to point out any deficiency, which is due to the improper
design of the policies or procedures.

lOMoARcPSD|16729859
C. Evaluation of the authorisation policy

The auditor will review whether the authority is given for all significant transactions and
process, and two or more people give all joint authorities for significant transactions
example-signing cheques.
D. Evaluation of various reports

An auditor can collect information of deficiencies from various reports like previous
year9s external auditor, internal audit report, regulators report (CMSA, stock exchange)
and feedback from suppliers and customers.
E. Discussion with audit committee

It is obvious that all deficiencies identified in the entity are reported to the audit
committee; hence this will provide the auditor with information about the deficiencies in
the system.
2. Deficiency in the implementation of the system

This means that, even a well-designed system cannot be effective if it is not communicated
properly and implemented effectively. Therefore the auditor should take the following
actions
A. Identification of the deficiency in the implementation of the system

This means that, in order to be effective, the auditor should ensure that an internal control
system must be well designed, well communicated and must operate effectively.
B. Carry out test of controls

These are the audit procedures performed by an auditor to test the operating effectiveness
of control, policies and procedures designed to reduce control risk. This is the best way of
identifying deficiencies in the system. Tests of controls include:
1. Observation of procedures
Once the auditor evaluate the internal control, will require to observe various procedures
and processes to confirm the effective of the system and implementation of written
policies and procedures then auditor can identify deficiencies.
2. Inspection of documents
The auditor may inspect the documents of a sample of transactions, to determine whether
they have been checked for calculations, authorized according to the requirements etc.
3. Enquiry of personnel
An auditor should question personnel at various levels (operating and supervisory level)
to satisfy himself by reviewing regular reports.
4. Re-performance and recalculations

Auditor can also test control by re-performing task and conducting recalculations, already
performed by the internal control (bank reconciliation).

lOMoARcPSD|16729859
SIGNIFICANT DEFICIENCY IN INTERNAL CONTROL
According to ISA 265, significant deficiency in internal control

Refers to the deficiency or combination of deficiencies in internal control that, in the
auditor9s professional judgment, is of sufficient importance to merit the attention of
those charged with governance.
Management has responsibility to design, implement and monitor the internal control
system to ensure it works effectively and efficiently throughout the year. But this is
contrary to the external auditor who is in turn not responsible for detecting and reporting
about internal control deficiencies. However, if during the course of the audit significant
deficiencies noticed by them, they should communicate these deficiencies to those
charged with governance through letter of weakness.
Matters to consider when determining whether a deficiency in internal control is a

significant deficiency
According to ISA 265, requires an auditor to Communicate significant deficiency
identified during the course of audit to those charged with governance on timely basis.
Therefore the following are some of matters that the auditor needs to consider when they
determine whether a deficiency or combination of deficiencies in internal control is called
a significant deficiency:
i) The possibility that the deficiencies may result in material misstatements in the
financial statements in the future.
ii) The possibility that the related asset or liability is vulnerable to loss or fraud e.g.
Approve the payment of wages to the staff or foremen to operate a manufacturing
set up, this could be vulnerable to fraud.
iii) The amounts in the financial statements may be exposed direct to the deficiencies.
iv) The number of activities occurring in the account balance or class of transactions
may be exposed to the deficiencies, i.e. the complex the transaction, the high
possibility of deficiencies being present in the internal control system.
v) The importance of the controls to the process of financial reporting, for instance
controls relate to preventing and detecting fraud, controls used for the selection
and application of significant accounting policies, controls used for significant
transactions with related parties and controls used for significant transactions
outside the entity9s normal course of business.
Indicators of significant deficiencies in internal control

i) When the previous communicated significant deficiencies by the auditor is not
corrected or no suitable plan to take remedial actions.
ii) The auditor has not received a satisfactory response to important risks, which were
identified. For example, there are no controls on these risks.
iii) No risk assessment report by risk department

lOMoARcPSD|16729859
Impact of the deficiencies on auditor9s reliance on the system

Deficiencies limit the extent of auditor9s reliance on those systems in the following ways.
a) If the auditor finds that there are some deficiencies in the system, first of all, they
should determine the impact of these deficiencies on the effective operation of the
whole internal control system so as to determine the extent of reliance.
b) If the internal controls are not effective, then this increases the probability of error or
fraud (misstatement), the external auditor should increase the level of substantive
procedures to be carried out by them because in this case, they cannot rely on the
internal control system and have to collect more sufficient appropriate audit
evidence.

lOMoARcPSD|16729859
LETTER OF WEAKNESS
Introduction
Letter of weakness, this is also called management letter or letter of communication. ISA
260 states the communication of deficiencies in internal control system. Deficiencies in
internal controls can be communicated either in writing or orally. Oral communication
does not relief the auditor about the responsibility to communicate the significant
deficiencies in writing hence a need for management letter or letter of weakness.
Definition
Letter of weakness this is a letter from an auditor to management and those charged with
governance communicating significant deficiencies in internal control system identified
during the audit. It enables management to take the necessary actions to remove the
reported significant deficiencies in internal control system in the future and make the
system more effective.
Communication of deficiencies in internal control system

 Should be communicated on timely basis to help management to take corrective
measures in appropriate time.
 For significant deficiencies, the auditor may communicate them orally to assist
them taking timely remedial actions, but this does not eliminate the need for the
auditor to repeat the communication if the remedial actions has not yet been taken.
 The deficiencies should be reported to management and those charged with
governance and not to others.
CONTENTS OF MANAGEMENT LETTER
1. Deficiencies in the system of internal controls

 It gives details of the noticed deficiencies
 It communicate the reasons for deficiencies
2. The implication of then deficiencies

 Communicate the possible consequences of such deficiency
 Helps those charged with governance to take immediate corrective actions
3. The recommendations suggested by the auditor

 The auditor suggests corrective action(s) to be taken to remove such deficiencies
4. Disclaimer
Here the auditor states that, it is not the primary duty of then external auditor to evaluate
the controls. Only noticed deficiencies during the course have been reported.
Example of the disclaimer paragraph…………99 We have noticed the following deficiencies in

the internal control system over payroll, during the course of our audit. We did not design the
audit procedures to discover deficiencies in the internal control system. The deficiencies stated
below are those which were discovered while performing the audit…99

lOMoARcPSD|16729859
SECTION C
THE NATURE OF AUDIT EVIDENCE AND
SELECTION OF SUFFICIENT APPROPRIATE AUDIT
EVIDENCE (SAAE)

lOMoARcPSD|16729859
TOPIC 8:
AUDIT EVIDENCE AND ASSERTIONS
To make the better understanding, this should be connected with;

 ISA 315, Risk assessment
 ISA 200, Objective of auditor
 ISA 505, External confirmation
Introduction
The auditor tests the validity of different assertions with the help of suitable audit
procedures. The auditor has to use professional judgment to determine the evidence to be
examined before arriving at the conclusions. There are different sources and types of
evidence. Which evidence is appropriate and how much evidence is sufficient? These are
the issues the auditor has to decide upon.
Definition
Audit evidence; means all the information used by the auditor in order to arrive at the
conclusions on which they form their opinion. Audit evidence verifies the correctness of
the assertions contained in the financial statements.
1. ASSERTIONS
Assertions mean representation by management, explicit or otherwise, that are embodied
in the financial statements. An assertion is the representation or communication, that
management conveys some information through each figure or sentence contained in the
statements. Therefore in fact, financial statements are a summary of management9s
assertions.
In particular, ISA315 states the following:

<……....Management……..makes assertions regarding the recognition, measurement,
presentation and disclosure of the various elements of financial statements and related
disclosures
Example;
By presenting payroll expenses in the SOPL, management asserts that:
 This expense was for genuine employees,
 It includes the amounts incurred for the accounting period, whether paid or not,
 The employees worked on the company9s business.
TYPES OF ASSERTIONS
Assertions used by the auditor to consider the different types of potential misstatements
that may occur fall into the following two categories and may take the following forms:
A. Assertions relating to transactions and event (income statement)

a) Occurrence; transactions and events that have been recorded have occurred and
pertain to the entity.

lOMoARcPSD|16729859
a) Completeness; all transactions and events that should have been recorded have
been recorded.
b) Accuracy; amounts and other data relating to recorded transactions and events
have been recorded appropriately.
c) Cut-off; transactions and events have been recorded in the correct accounting
period.
d) Classification; transactions and events have been recorded in the proper accounts.
B. Assertions relating to account balances (Balance sheet items) at period end

a) Existence; means all assets, liabilities, and equity interests that have been recorded
exist.
b) Rights and obligations; the entity holds or controls the rights to assets, and
liabilities are the obligations of the entity.
c) Completeness; all assets, liabilities and equity interests that should have been
recorded have been actually recorded.
d) Accuracy, valuation and allocation; all assets, liabilities, and equity interests are
included in the financial statements at appropriate amounts and any resulting
valuation or allocation adjustments are appropriately recorded.
e) Classification; transactions and events have been recorded in the proper accounts.
SOURCES OF AUDIT EVIDENCE

The procedures for obtaining audit evidence are;
1. Inspection of records or documents;

This supports the assertion of occurrence.
Advantages
 This audit evidence is valid
 It provides a strong base on which a question can be raised
 The day-to-day operations of the entity would usually not be disturbed by the
auditor inspecting documents.
Disadvantages
 Some documents may contain areas where interpretation is required
 As it is internally generated documents, hence are less reliable than third party.
2. Inspection of tangible assets;

Assets are physically verified. This supports the assertion of existence. For example, items
of machinery are physically checked with reference to their identification number and
location recorded in the assets register
Advantages
 It is current evidence and not evidence related to the past, hence useful.
 It provides a better understanding of the business by allowing the auditor to see
the location and functioning of different assets.

lOMoARcPSD|16729859
Disadvantages
 Tests need to be corroborated by other evidence, since they do not confirm the
other assertions like valuation and allocation and rights obligations.
3. Observation;
This is when auditors look at a process or procedure being performed by others. For
example, observation of the counting of inventories. This supports the assertion of
existence.
Advantage
 It is very useful as it is the only evidence that the controls are operating at present.
Disadvantages
 The evidence provided is restricted to the point of time when the observation takes
place only.
 Auditor9s presence may influence the behavior of client9s staff. They may comply
with the control procedures just to show the auditor that they are doing so and not
otherwise.
4. Inquiry;
Inquiry means asking for information from knowledgeable persons, both financial and
non-financial, throughout the entity or outside the entity.
This kind of evidence can be used to test any assertion. However, it is corroborative
evidence, which supports the conclusions drawn on the basis of other evidence.
Advantages
 Provides direct interface with the client9s personnel and facilitates better
understanding of the business.
 It is interactive and doubts can be cleared on the spot.
Disadvantages
 The responses, which the auditor receives, may not represent an independent
opinion; they may represent the one-sided perception of an individual or
management.
 Overly aggressive questioning has the potential to alienate the auditee. If an
employee goes into a defensive frame of mind, they may not give honest and
objective answer
5. External Confirmation;
Confirmation is the process of obtaining a written representation of information or of an
existing condition directly from a third party.
Advantage

lOMoARcPSD|16729859
 It is usually viewed as reliable audit evidence since it has many characteristics of

good evidence i.e. it is received from an independent source, in original
documentary form and is obtained directly by the auditor.
Disadvantage
 Third parties may or may not provide the confirmations, e.g. customers may not
reply to the circularization request.
6. Recalculation;
Recalculation involves checking the mathematical accuracy of documents or records. It
may be performed manually or through Computer. This checks the accuracy.
Advantage
 It is the most efficient method to evaluate the outcome of a process
Disadvantage
 The calculation needs to be corroborated by other evidence
 Recalculation may be complex and time-consuming
 Assistance of outside experts may be needed, hence increase the costs
7. Re-performance;
This consists of the auditor9s independent execution of procedures or controls that were
originally performed as part of the entity9s internal control. The procedures or controls
may be either manual or computer based.
8. Analytical procedures;
This consist of studies of the relationships either between the figures of financial
statements or between financial and non-financial information.
Analytical procedures are mainly done at three stages

 Primary stage, risk assessment procedures (when planning audit)
 Execution stage; substantive analytical procedures (during audit)
 Completion stage; at audit finalization stage.
Advantages
 Provides a sound basis for determining the reasonableness of data
 Helps in assessing the need for further tests
 Provides a good audit-planning tool since it enables the auditor to decide the
relative importance and priorities of different items.
Disadvantages
 Unstable operating environment makes it difficult to predict relationships.
 Lack of availability of reliable data may limit the ability to use analytical
procedures.

lOMoARcPSD|16729859
SUFFICIENT, APPROPRIATE AUDIT EVIDENCE (SAAE)

ISA 500 requires that an auditor obtain sufficient and appropriate audit evidence to
supports the conclusion on which to base the opinion.
After knowing the various sources of audit evidence, now we need to know how much
audit evidence is needed. Ask yourself,
 Why does auditor needs to t evidence?
 How does the auditor collect evidence?
 How much to collect?
ISA 500 states that there should be sufficient and appropriate Audit evidence, to be able
to draw reasonable conclusions on which to base an audit opinion
1. Appropriateness
Appropriateness is the measure of the quality of audit evidence. The quality of evidence
or its appropriateness depends upon
i) Relevance and
ii) Reliability
Relevance
Audit evidence is said to be relevant when it contributes to conclusions that assist in
forming an opinion by the auditor. Means that the procedures should have a link to what
assertion is being tested.
Reliability
This depends on the source of audit evidence and more reliable audit evidence is more
appropriate.
Factors that affect reliability of audit evidence

i) Evidence is more reliable when it is obtained from independent sources outside
the entity.
ii) Internal evidence (evidence generated within an entity) is more reliable when the
related controls are effective. A good internal control system should mean that the
checking performed by the client reduces a likelihood errors been made.
iii) Evidence obtained directly by the auditor is better than evidence passed on by the
clients. The problem is that if the evidence is passed on by the client, you don9t
know if it9s complete. The client could be suppressing information they don9t want
you to see.
iv) Written evidence or documented is much better than oral. If evidence is oral then
no evidence you can prove against
v) Originals are better than photocopies. Nowadays with scanners and graphics
programs it9s very easy to alter documents and these alterations are very difficult
to spot. Therefore original contracts and documents of title should be sighted. The
auditors may take a photocopy to keep on their audit file, but they should be taken
from the original documents.

lOMoARcPSD|16729859
2. Sufficiency
This is the measure of the quantity of audit evidence. It refers to the value of the
transactions on which the auditor would obtain audit evidence.
In case the audit evidence is insufficient on account of difficulty in obtaining it, the
implication of insufficient evidence on the audit opinion must be considered.
Factors affecting sufficient of audit evidence

Source and reliability of available information
a) Experience of earlier audits (the auditor would increase the quantity of evidence
on period end balances and transactions where misstatements on account of fraud
or error were noticed in the previous audits)
b) Results of audit procedures (if the physical count of assets indicates anomalies, the
auditor will have to increase the quantum of evidence)
c) Risk assessment (areas where the risk of material misstatement is high need to be
supported with greater quantity of evidence)
d) Nature of accounting and internal control systems (if the results of tests of control
show efficient controls, the auditor can reduce the quantum of evidence)
e) Materiality (the quantitative and qualitative factors that determine materiality

need to be considered)
Interrelationship between sufficiency (quantity) and appropriateness (quality) of audit

evidence
The higher the quality, the less quantity will be required. However, the auditor has to use
judgment in deciding what is sufficient and what is appropriate. If the audit evidence is
of a poor quality, merely obtaining more evidence may not help.

lOMoARcPSD|16729859
TOPIC 9:
AUDIT SAMPLING
Introduction
It would be almost impossible for an auditor to check all of its transactions, unless a client
is very small, also the cost of such an audit would be too high. Recently many
organization have established internal control which, if are reliable then it is not necessary
to check all the transactions and hence the use of audit sampling.
The auditor wants reasonable assurance about the assertions in the financial statements.
If the controls are good and if samples are selected in such a manner that they are
representative of the population, then by verifying the sample, the auditor can have
reasonable assurance about the population.
This study is dealt with in ISA 530, audit sampling
Definition
According to ISA 530, audit sampling is 88The application of audit procedures to less than
100% of items within a population of audit relevance such that all sampling units have a
chance of selection in order to provide the auditor with a reasonable basis on which to
draw conclusions about the entire population.99 Population is the entire set of data from
which a sample is selected and about which the auditor wishes to draw conclusions.
In other words, the standard recognizes that auditors will not ordinarily test all the
information available to them because this would be impractical as well as uneconomical.
Instead, the auditor will use sampling as an audit technique in order to form their
conclusions. Some procedures that the auditor may adopt do not involve audit sampling,
100% testing of items within a population, for example. Auditors may deem 100% testing
appropriate where there are a small number of high value items that make up a
population, or when there is a significant risk of material misstatement and other audit
procedures will not provide sufficient appropriate audit evidence.
In devising their samples, auditors must ensure that the sample selected is representative
of the population. If the sample is not representative of the population, the auditor will be
unable to form a conclusion on the entire population.
The need for sampling

The sampling technique is needed during the auditing process due to the following
reasons
a) Reduce the audit cost, costs have to be incurred, e.g. salaries to the staff
conducting the audit. It will usually be very expensive to test every item in any
large accounting population.
b) Time constraints, the time spent in verification is substantial if the volume is

large. There are time constraints on the completion of audit, hence sampling
saves time while retaining the confidence level.

lOMoARcPSD|16729859
c) Reasonable assurance, as its base an audit gives a reasonable assurance and not
absolute assurance about the assertions contained in the financial statements
therefor It is not necessary to verify the entire population in order to obtain
reasonable assurance.
There is no requirement of any ISA to use sampling. The auditor uses professional
judgment to decide whether to use sampling or not. Usually large populations are suitable
for audit sampling. However, Sampling may not always be appropriate. If a population
contains a low number of high value items, and other means do not provide sufficient
appropriate evidence, it may be more appropriate to carry out a 100% examination. For
example, if the addition of non-current assets contains only 10 invoices of high value. It
will be appropriate to apply audit procedures to each of the purchases.
METHODS OF SAMPLING
ISA 530 recognizes that there are many methods of selecting a sample, but it classify into
two classes i.e. statistical sampling and non-statistical sampling
1. Statistical sampling
Is an approach to sampling that has the characteristics of random selection of the sample
items; and the use of the probability theory to evaluate sample results, including
measurement of sampling risk. They include the following:
A. Random selection
This method of sampling ensures that all items within a population stand an equal chance
of selection by the use of random number tables or random number generators. The
sampling units could be physical items, such as sales invoices or monetary units.
B. Systematic selection
The method divides the number of sampling units within a population into the sample
size to generate a sampling interval. The starting point for the sample can be generated
randomly.
C. Monetary unit sampling

The method of sampling is a value-weighted selection whereby sample size, selection and
evaluation will result in a conclusion in monetary amounts. The objective of monetary
unit sampling (MUS) is to determine the accuracy of financial accounts. The steps
involved in monetary unit sampling are to:
 Determine a sample size
 Select the sample
 Perform the audit procedures
 Evaluate the results and arriving at a conclusion about the population.
MUS are based on attribute sampling techniques and are often used in tests of controls
and appropriate when each sample can be placed into one of two classifications –
8exception9 or 8no exception9. It turns monetary amounts into units – for example, a
receivable balance of $50 contains 50 sampling units. Monetary balances can also be

lOMoARcPSD|16729859
subject to varying degrees of exception – for example, a payables balance of $7,000 can be
understated by $7, $70, $700 or $7,000 and the auditor will clearly be interested in the
larger misstatement.
2. Non-statistical sampling
This is a sampling approach that does not have characteristics of a statistical sample. The
following are some methods of sampling used:
A. Haphazard sampling
Under this method, sample items are selected arbitrarily, usually by manual choice. The
objective of this selection process is that all items in the population have an equal chance
of being represented in the sample. Therefore the selection process must be unbiased (i.e.
the auditor must not deliberately avoid certain items) and free from predictability. The
limitation of this method of selection is that there is no way to ensure that the estimates
derived will be unbiased.
B. Sequence selection or block selection

Under this method, sample items are selected sequentially or in a block from within a
population. This kind of sample may not be representative of the population and is liable
to pick items from one day or period only. Therefore this method of selection is rarely
used. This method of selection can be successful only if many blocks are selected.
Difference between statistical and non-statistical sampling

Aspect Statistical sampling Non-statistical sampling
Selection of a Is taken at random or with the Based on judgement of the
sample use of probability theory. auditor
Evaluation of It uses probability theory. It is evaluated according to
sample results the judgement of the auditor
Sample size Provide a means to estimate Does not provide a means to
minimum sample size, with a estimate minimum sample
specified risk and precision size
Risk Provides a means to take a Does not provide a means to
calculated risk, with a statistical take a calculated risk.
measurement of sampling risk.
Tests of controls Is less suitable because the Non-statistical sampling is
auditor9s analysis of the nature more suitable.
and cause of errors will often be
more important than the
statistical analysis of the mere
count of errors
Tests of details Statistical sampling is more Non-statistical sampling is
suitable because statistical less suitable.
analysis of errors and their
projection to the sample is useful
in the case of details.

lOMoARcPSD|16729859
PROCEDURES OF SAMPLING
1. Plan the sample
A. Population,
Means the entire set of data from which a sample is selected and about which the
auditor wishes to draw conclusions. Planning of a sample starts with ensuring that the
population from which the sample is selected is appropriate and complete.
B. Stratified population
The process of dividing a population into sub-populations, each of which is a group of
sampling units that have similar characteristics (often monetary value).
Audit efficiency may be improved if the population is divided (stratified) between

different groups on the basis of characteristics. Stratification reduces the variability of
items within each group and allows the sample size to be reduced without a proportional
increase in sampling risk.
Sampling risk: is the risk that the auditor9s conclusion based on a sample may be different
from the conclusion if he entire population were subjected to the same audit procedure.
C. Define what constitute an error

Here the auditor considers what constitutes an error by reference to the objectives of audit
procedures
D. Determine acceptable or tolerable misstatement

This is the maximum error in a population that the auditor is willing to accept.
E. Sampling and non-sampling risk

If the auditor does not look at every item in the population, there is a risk that all the items
in the sample were correct, but that there were many errors in the whole population.
Alternatively, there might be many items in the sample, which were incorrect, but they
were the only ones in the whole population that were incorrect. The auditor has had 8bad
luck9 in sampling and can draw wrong conclusions as a result.
There are two types of sampling risk
1. Over-optimism
This is the risk that the auditor will conclude; in the case of controls, that they are more
effective than they actually are and in the case of test of details, that material error does
not exist when in fact it does. Therefore this risk affects the effectiveness of an audit,
leading to an inappropriate audit opinion.
2. Over-pessimism
The risk that the auditor will conclude; in the case of controls, that they are less effective
than they actually are and in the case of test of details, that material error exists when in

lOMoARcPSD|16729859
fact it does not. Therefore this risk affects audit efficiency, leading to additional work to
establish that the initial conclusions were incorrect.
2. Determine sample size

The goal is that the sample should represent the population within the specified
tolerances. By verifying the sample, the auditor should be able to judge the characteristics
of the population and draw audit conclusions.
Confidence level and sampling risks

Confidence level is the probability that the sample will be representative of the
population. For example, if 95% is a confidence level then 5% is a sampling risk.
3. Select the sample

Statistical sampling requires that each sampling unit should have a known chance of
selection. statistical sample is selected in one of the following ways:
Ways of selecting statistical sample

a) Random number tables are used to select the items to be a sample. The items in the
population have to be pre-numbered.
b) Computer assisted audit techniques (CAAT). Audit programs can be used to select
samples randomly from a population.
c) Systematic sampling i.e. a random number is generated to determine which item
in the population is the first in the sample. Example after every fiftieth item.
4. Perform the audit procedures

After selecting a sample the audit procedure is performed. For example, after a sample is
selected for circularization of receivables, the letters are actually prepared and dispatched.
The replies are analysed.
COMPUTER ASSISTED AUDIT TECHNIQUES (CAAT)/TOOLS

Computer-assisted audit techniques (CAATs) refer to the practice of using computers to
automate the IT audit processes. CAATs may involves software packages that apply
statistical analysis and business intelligence tools. The traditional method of auditing
allows auditors to build conclusions based upon a limited sample of a population, rather
than an examination of all available or a large sample of data
Therefore not CAATs addresses these problems. CAATs, as it is commonly used, is the
practice of analyzing large volumes of data. A well designed CAATs audit will not be a
sample, but rather a complete review of all transactions. Using CAATs the auditor will
extract every transaction the business unit performed during the period reviewed. The
auditor will then test that data to determine if there are any problems in the data.
There are two types of CAATs

i) Audit software
ii) Test data

lOMoARcPSD|16729859
1. Audit software
Audit software is used to interrogate a client's system. It can be either packaged, off-the-
shelf software or it can be purpose written to work on a client's system. The main
advantage of these programs is that they can be used to scrutinize large volumes of data,
which it would be inefficient to do manually. These procedures can simplify the auditor's
task by selecting samples for testing, identifying risk areas and by performing certain
substantive procedures. The software does not, however, replace the need for the
auditor's own procedures
2. Test data
Test data involves the auditor submitting 'dummy' data into the client's system to ensure
that the system correctly processes it and that it prevents or detects and corrects
misstatements. The objective of this is to test the operation of application controls within
the system.
Advantages of CAATs
 CAATs allow the audit team to test a large volume of data more accurately and
quickly than if tested manually.
 CAATs decrease the scope for human error during testing and can provide
evidence of higher quality.
 By using CAATs, auditors can test actual transactions within the system rather
than working on printouts from previewed files.
 Reduce cost and saves time.
 Auditors can utilize CAATs to test programs controls as well as general internal
controls associated with computers.
 Results from CAATs can be compared with results from traditional testing. If the
results correlate, overall confidence is increased.
 The use of CAATs allows audit team members more time to focus on risk areas
and issues requiring judgment, rather than performing routine calculations that
can be carried out by audit software.
Disadvantage of CAATs
 Setting up the software needed for CAATS in the first year is likely to be time
consuming to expensive.
 Audit staff working on audit engagement will need to be trained so they have a
sufficient level of IT knowledge to apply CAATs when auditing.
 If testing is performed on data in the live system, there is a risk that live client
data may be corrupted and lost.
 If the system has changed then it may be expensive and time consuming to re-
design the CAATs in the next years
 If the system is not compatible with CAATs then they will need to be tailored to
the system, which may be costly.
 If there is not adequate system documentation available, it will be difficult to
design appropriate CAATs due to a lack of understanding of the system

lOMoARcPSD|16729859
TOPIC 10:
THE AUDIT OF SPECIFIC ACCOUNT BALANCES
Introduction
A substantial portion of the financial statements consists of certain important items, i.e.
receivables, inventory, payables and accruals, bank and cash and tangible non-current
assets and long-term liabilities.
A major part of substantive procedures, therefore, relates to these items. If the procedures
are understood and applied correctly to these areas, it goes a long way in enabling the
auditor to form an opinion. Hence the purpose and nature of substantive procedures in
these areas are explained in this topic.
Audit test can be categorized into two major categories

i) Test of control
ii) Test of details
1. Test of control
Are the audit procedures to test the operating effectiveness of controls, policies, and
procedures designed to reduce control risks. It is usually done after testing design and
implementation of the controls.
2. Substantive test
Are those activities designed and performed by the auditor to detect material
misstatement or fraud due to fraud or errors related to transactions or account balances.
Substantive test can further be classified into two:
A. Substantive analytical procedures

This procedure involves comparison of the current financial information with prior period
information, budgets, forecast, industry etc. Analytical procedures can be carried out at
different stages
 At the start of the audit, here the aim is to gain an understanding of the process.
 In the middle; the aim is to obtain an evidences related to transactions and
balances.
 At the end; the aim is to get an overall audit picture.
Factors determine the extent of use of analytical procedures

i) Type of enterprise e.g. profits or non-profit organization, these procedures are less
applicable.
ii) Knowledge of the client and similar audits, therefore auditor will always conduct
analytical test to prove.
iii) Availability of relevant information.
iv) Reliability, relevance, comparability and independence (control over preparation)
of information.
v) Cost effectiveness.

lOMoARcPSD|16729859
3. Test of details (ToD)

This includes tracing figures to support documentation to determine if the transaction and
balances are valid properly classified, accurate and complete. Test of details can further
be classified into:
A. Substantive test of details of transactions

This is the test for errors or fraud in individual transaction. E.g. sales, purchases, etc.
B. Substantive test of details of balances

This focuses on items that are obtained in the financial statement account balances and
disclosures.
Example of substantive procedures to test account balances includes;

 Bank confirmation for bank balances
 Receivable confirmation
 Physical observation of inventory count
 Confirming validity of inventory valuation through computation
 Physical matching of fixed assets to records
AUDIT OF SPECIFIC ACCOUNT BALANCES
1. AUDIT OF REFCEIVABLES
Receivables includes the amounts to be recovered in cash as a result of trade receivables
or loan receivables and services to be received in return for the prepayments made
(accruals)
A. TEST OF DETAILS OF BALANCES

Procedures
1. Direct confirmation (external confirmation)

These are confirmations of balances (with or without details of their components) at a
given date, obtained by an auditor directly from the accounts receivables. Here the auditor
directly obtains confirmations from account receivables (independent sources) in original
document. It is always applicable to a sample of receivables.
Advantage of direct confirmation

a) More reliable as it is external evidence.
b) Exist in original documents.
c) It is independent evidence as the auditor obtains it direct.
Disadvantage of direct confirmation

a) Customers may not reply the auditor9s request for information.
b) The auditor selects the items for confirmation based on information in the audit
client9s accounting records and books only hence may ignore information that was
deliberately kept off the books.

lOMoARcPSD|16729859
c) The time and financial costs involved in the traditional confirmation process can
be staggering.
POSITIVE AND NEGATIVE EXTERNAL CONFIRMATION REQUESTS
Positive confirmation request

Positive confirmation request is a request that the confirming party respond directly to
the auditor indicating whether the confirming party agrees or disagrees with the
information in the request, or providing the requested information.
The respondent is asked to reply to the auditor in all cases. The respondent is expected to
do this either by confirming that the given information is correct or by providing the
correct information.
Negative confirmation request

Negative confirmation request is a request that the confirming party respond directly to
the auditor only if the confirming party disagrees with the information provided in the
request. This asks the respondent to reply only in the event of disagreement with the
information provided.
Negative confirmation requests are expected to provide less reliable audit evidence than
the use of positive confirmation requests, since the auditor does not know whether non-
response means agreement or merely that the accounts receivables has not bothered to
respond. If that is the case the auditor may performing other substantive procedures so
as to supplement the use of negative confirmations.
When are negative confirmation requests suitable?

Negative confirmation request can be used when;
 The assessed risk of material misstatement is lower.
 The auditor has obtained sufficient appropriate evidence relating to the efficiency
of the controls.
 A large number of small balances are involved.
 A substantial number of errors are not expected.
 The auditor has no reason to believe that respondents will disregard these
requests.
Other procedures continue:

i) Obtain receivable schedule and confirm if the total agrees with trial balances
(receivable balances)
ii) Match the total of receivable schedule to the sales ledger control account.
iii) Inquire if any receivable been factored or discounted.
iv) Check reasonableness of bad debts computation (analytical procedures)
v) Recalculate discount and check for approval.

lOMoARcPSD|16729859
B. SUBSTANTIVE TEST OF TRANSACTION ON RECEIVABLES

Procedures:
i) Check cut off procedures to ensure sales are recorded in a correct period.
ii) Inquire for goods shipped on consignment (third party)
iii) Vouch some invoices that make up sales.
iv) Check the policies and procedures used to record sales transactions. See if
appropriate internal controls exist on the activity so as to ensure that all the sales
transactions are recorded.
v) For a sample of sales transactions recorded in the ledger, trace the sales invoices to
the customer9s orders and dispatch documents.
2. AUDIT OF INVENTORIES
Inventory consists of: (TVs manufacturing company)

 Raw materials e.g. components for electronic goods
 Finished goods e.g. fully assembled electronic equipment such as a television
 Work in progress (goods for which the manufacturing process is incomplete) e.g.
half-assembled TV sets lying on the shop floor
Inventory is regarded as an important and high-risk area of audit because:

 It usually has a substantial effect on the profit of the entity
 It is usually subject to an element of estimation
 It may be complex
A. TEST OF DETAILS OF BALANCES OF INVENTORY

Procedures:
i) Observe physical inventory count to prove all the inventories which recorded, are
physically exist
ii) Obtain confirmation for inventories held in public warehouses and third party.
iii) Test high value items.
iv) Test inventories in transit by reviewing transfer documentation.
v) Test for lower of cost or net realizable value especially for outdated stock.
vi) Finished goods cost analysis this more applicable to manufacturing company.
vii) Review of freight costs as it form part of the inventory cost.
viii) Establish inventory9s ownership, this is through reviewing purchase documents or
transfers documents.
ix) Work in progress testing to determine the percentage of completion.
B. SUBSTANTIVE TEST OF TRANSACTION ON INVENTORIES

Procedures:
i) Check if the system record all purchases transaction to prove completeness.
ii) Check if goods bought were recorded in the correct accounting period to satisfy
with cut off.
iii) Vouch a sample of transaction from purchase.

lOMoARcPSD|16729859
iv) Perform a test to prove that any goods received on consignment have not been
included in inventory, because they do not belong to the client even if the good are
physically present.
v) Perform a test to prove that any goods sent on consignment have been included in
inventory, because they belong to the client even if they are physically outside the
client9s premises.
3. AUDIT OF PAYABLES AND ACCRUALS
Trade payables are the amounts to be paid towards purchase of merchandise. Accruals
are the amounts owed towards goods and services at the reporting period but not paid or
recorded in the books of accounts.
The audit procedures for testing the assertions are as follows:
A. TEST OF ACCOUNT BALANCES OF PAYABLES

Procedures:
i) Direct confirmation. This is the same as explained under receivable except that,
instead of assets, the liabilities are to be confirmed. But here negative confirmations
are more acceptable for payables than for receivables because people will be
willing to tell the client that they have to receive money.
Other procedures continue:

i) Obtaining the schedules of payable and accrued liabilities then agree it with trial
balance.
ii) Verify discount and rebates, as they have to reduce the amount of payables.
iii) Review suppliers9 reconciliations and resulting adjustments.
iv) Review correctness of tax computations.
v) For bank loan, and overdraft agrees with bank confirmation.
vi) For bank loan, and overdraft review contract to confirm if all the requirement have
been met.
vii) Trace the accruals to the expense payables accounts in the SOFP.
viii) Carry out analytical analysis.
B. TEST OF DETAILS OF TRANSACTION ON PAYABLES AND ACCRUALS

Procedures:
i) Check if all credit purchases transaction is recorded in the correct period to ensure
the cut off.
ii) See if an appropriate internal control exists on the activity, in order to ensure that
all the purchase transactions are recorded.
iii) Confirm that the rates charged are in accordance with the purchase orders;
recalculate the tax calculations and the discounts.
iv) Enquire if any transactions represent goods received on consignment, and if so,
whether they have been excluded from purchases as well as inventory.
v) Choose a sample of items in the inventory list and confirm that they have been

lOMoARcPSD|16729859
included under purchases.

vi) Take a sample of the purchase invoices and confirm that they are classified under
the correct account heads.
4. AUDIT OF BANK AND CASH.
A. TEST OF DETAILS OF BALANCES ON BANK AND CASH

Procedures:
i) Verify if cash and bank schedule match with trial balance amount.
ii) Verify balance with confirmation letters.
iii) Review bank reconciliation and resulting adjustments.
iv) Petty cash count certificates and year-end cash certificates for cash in hand should
be obtained and agreed to the balances.
v) Ascertain the bank accounts, which have collaterals on assets of the company. This
information can be obtained by verifying minutes of the board meetings and
discussions with the client.
B. TEST OF DETAILS OF TRANSACTIONS ON BANK AND CASH

Procedures:
i) See if appropriate internal control exists on the activity so as to ensure that all the
bank and cash transactions are recorded. Check the policies and procedures used
to record bank and cash transactions.
ii) Check if cash transaction has been recorded in the correct period.
iii) Review significant cash transaction occurred.
5. AUDIT OF NON CURRENT ASSETS
A. TEST OF DETAILS OF BALANCE ON NON-CURRENT ASSETS

Procedures:
When testing the details of non-current assets, procedure below may be used to confirm
balances (test of details of balance)
i) Verify the opening balances with previous year opening balances.
ii) Verify if depreciation rate disclosed are actually used and are within statutory
limits and are realistic (reasonable)
iii) Agrees breakdown balances with ledger balances i.e. break down the total amount
or balance of non-current assets to know its components.
iv) Physical inspection of sample of non-current assets.
v) Verifying rights and obligations through tittle deeds registration documents or
lease documents.
vi) Test for valuation of non-current assets i.e. cost model or revaluation model.
vii) Verify the disposals of non-current assets and the accounting for profit or loss on
such items.
viii) Before accepting the work of an expert, evaluate the experts9 work (independence,
objectivity, scope of work, assumptions used) and confirm the reasonableness of
the valuation. ISA 620

lOMoARcPSD|16729859
B. TEST OF DETAILS OF TRANSACTION ON NON-CURRENT ASSETS

Procedures:
i) Check the policies and procedures used to record transactions related to non-
current assets. Check whether the system ensures that all the transactions are
recorded correctly.
ii) Verify the accounts where miss postings might have occurred e.g. the repairs
account may have been debited for the amount of a non-current asset purchased
and vice-versa.
iii) Agree the breakdown of balances with the ledger balances.
6. AUDIT OF SHARE CAPITAL, NON CURRENT LIABILITIES AND RESERVES

The share capital of an entity can be either equity or preference capital. A newly formed
company or an existing company could either issue it. The shares may be issued for both
cash consideration and other than cash consideration.
A. TEST OF DETAILS OF BALANCES ON EQUITIES

Procedures:
i) The closing balance in the share capital a/c in the general ledger must be reconciled
with the balances extracted from the register of members.
ii) Review the minutes of the board meeting through which allotments were
recommended.
iii) Review the guidelines issued by regulatory authorities relating to issue of shares.
iv) If the share certificates have been issued, trace the particulars of the shares issued
from the allotment register to the counterfoil of the share certificates.
B. TEST OF DETAILS OF TRANSACTION ON EQUITIES

i) Verify the journal entry to confirm that the share application account has been
debited and the share capital account has been credited.
ii) Trace a sample of entries from the cash book and journal into the ledger accounts.
iii) For a sample of entries in the register of members, trace the amount of application
money received from the application forms to the cash book.

lOMoARcPSD|16729859
TOPIC 11
AUDIT FINAL REVIEW
Introduction
The auditor needs to evaluate the findings and audit evidence obtained to see whether
they have gathered sufficient appropriate audit evidence to form an opinion. This will be
performed after completion of audit procedures but before forming an audit opinion on
the financial statements
Also the auditor should consider the potential impact of uncorrected misstatements on
the financial statements, that in one or other way will affect the opinion.
Overall review of financial statements

After completing the audit work in accordance with the audit plan, a senior level auditor
or the one responsible for a particular audit, should conduct an overall review of the
financial statements. The objective of a review of financial statements is to provide the
auditor with sufficient audit evidence, when taken together with the conclusions drawn
from the other audit work, to form an opinion on the financial statements.
Therefore, during the completion stage of the audit, the auditor arrives at an audit opinion
after re-examining, the audit evidence gathered during the course of audit; and the final
edition of the financial statements.
AUDIT PROCEDURES PERFORMED DURING THE OVERALL REVIEW
1. Review of financial statements, analytical procedure

The auditor review all the findings, their working papers and the evidence gathered by
performing audit procedures. In addition, ISA 520 Analytical Procedures requires the
application of analytical procedures, at the overall review stage to conclude whether the
financial statements as a whole are consistent with the auditors9 knowledge of the
business. If significant fluctuations are noticed, the auditor would have to make inquiries
with the management and obtain sufficient appropriate evidence to support the
management9s responses.
Analytical procedures will enable an auditor to confirm the availability of sufficient audit
evidence to address the inconsistencies identified by the analytical procedures and this
helps the auditor to determine whether the conclusions reached during the audit are
reasonable and whether the final audit report can be prepared.
Analytical procedures includes calculation of important ratios, trends of sales, purchases,

production variances in consumption of materials etc.
2. Sufficiency and appropriateness of audit evidence (SAAE)

An auditor should assess whether the information gathered and audit evidence obtained
during the audit are sufficient and appropriate (meaning of sufficient quantity and
necessary quality) to express an audit opinion.

lOMoARcPSD|16729859
While reviewing the audit evidence, the auditor should review the working papers of the
audit. This process will enable him to understand whether the audit work has been
properly planned, executed and recorded.
The audit senior must ensure that the audit documentation prepared during the
completion stage of audit include the date of review, the extent of review carried out and
the name of the person who reviewed the work.
3. Review of notes to accounts

The auditor reviews all the notes forming part of the financial statements to confirm
adherence with the applicable financial reporting framework and consistency with the
financial statements.
4. Checklists
A checklist acts as a reminder when carrying out an audit that all the necessary procedures
have been conducted. An example of a checklist would be a statutory disclosure checklist.
This is used to ensure that all disclosures required by law have been properly made in the
5. Other procedures
Other areas which are considered during the overall review include the following;
a. Subsequent events
The auditor should ensure that all subsequent events have been properly identified and
considered for disclosure or inclusion in the financial statements means those events
occurred after the reporting date but before the date of the audit report
Procedure for review of subsequent events

 Obtaining an understanding of any procedures management has established to
ensure that subsequent events are identified
 Inquiring of management and, where appropriate, those charged with governance,
as whether any subsequent events have occurred that might affect the financial
statements
 Reading minutes of the meetings of the entity9s management, held after the date
of financial statement preparation. The auditor has to go through the minutes of
all meetings to become aware of facts like these and their implications.
 Reading the latest available subsequent interim financial statements
 Determination of the appropriateness of the adjustments or disclosures to financial
statements
 Obtaining written representation (to be discussed)
b. Going concern status of the entity

The auditor considers whether management has reviewed the entity9s going concern
status appropriately before preparing the financial statements. The auditor should check

lOMoARcPSD|16729859
the basis on which the financial statements have been prepared and review the disclosures
made by management, the action taken by management to deal with the event etc.
c. Written representation
The auditor should review the sufficiency and appropriateness of the audit evidence
obtained. When, for any matter, it is expected that the matter is material to the financial
statements, but sufficient appropriate audit evidence is not available, they should obtain
written representation. Sometimes, management refuses to sign a written representation.
In such cases, the auditor may doubt the reliability of the audit evidence.
d. Uncorrected misstatements
The auditor should take into consideration the effect of uncorrected misstatement in the
report and take the procedures to correct them.
e. Appropriateness of the accounting policies and consistency in implementation

They should check to see whether they are followed consistently. They should also check
if any change has been made in the accounting policy and, if so, whether it has been
properly disclosed along with its implications on the profit or loss of the entity.
The auditor should consider several factors in order to determine the appropriateness of
accounting policies are as follows:
 Whether the accounting policies adopted by the entity enable the financial
statements to reflect the substance of the underlying transactions and not merely
their legal form.
 Whether the accounting policies adopted by the client are commonly adopted by
other industries under which the client falls.
 If the applicable accounting standards are not implemented, would the financial
statements still be true and fair.
f. Audit clearance meeting

The audit conclusion meeting is held by the auditor with management or those charged
with governance. The matters discussed in the meeting would relate to the matters
relating to the audit of the financial statements. Some of the matters discussed are the
difficulties faced during the audit, ethical matters which need to be clarified, the
sufficiency of the entity9s internal controls, etc.
The audit clearance meeting ensures conformity between the financial statements, the
auditor9s report and any of the other matters discussed.
Purpose of overall review of evidence
a. To form an opinion on the financial statements

As the primary objective, the auditor should express an opinion on whether the financial
statements, in all material respects, give a true and fair view and are presented fairly in
accordance with the applicable financial reporting framework. Then to provide

lOMoARcPSD|16729859
professional judgment, the auditor should perform a review of the findings of the audit.
If the completion stage of the audit is not performed appropriately, there is a risk of an
inappropriate opinion being given on the financial statements.
b. To consider the need for further audit procedures

The auditor should consider the sufficiency and appropriateness of the audit evidence
obtained. This will enable him to decide whether, on the basis of the information gathered
by him, it is possible to form an opinion.
c. Consistency of financial statements with auditors9 knowledge of the business

An auditor needs to conclude whether the financial statements as a whole are consistent
with the auditors9 knowledge of the business, and this will be performed through
analytical procedures.
d. Coverage of audit in accordance with audit planning

The audit senior reviews the work carried out at the earlier stages of audit and confirms
that the audit has been conducted in accordance with the audit plan. This in turn will also
ensure compliance of the audit in accordance with the ISAs, satisfactory completion of
audit procedures, meeting with the audit objectives and the availability of working papers
in line with the audit opinion.
e. Compliance with ISA 220

The overall review of audit evidence at the completion stage of audit ensures that the basic
quality requirement of ISA 220, Quality Control for an Audit of Financial Statements
(which is a review of all audit work) is satisfied.
f. Consistency of financial statements with information appearing in audited financial statements

The audit senior confirms that the financial statements are consistent with the information
appearing in the audited financial statements. Thus, this will help to confirm the
genuineness of the financial statements.
Uncorrected misstatements
Misstatement is a difference between the amount, classification, presentation, or
disclosure of a reported financial statement item and the amount, classification,
presentation, or disclosure that is required for the item to be in accordance with the
applicable financial reporting framework. Misstatements can arise from error or fraud.
misstatements also include those adjustments of amounts, classifications, presentation, or

disclosures that, in the auditor9s judgment, are necessary for the financial statements to
be presented fairly, in all material respects, or to give a true and fair view.
Uncorrected misstatements
Uncorrected misstatements is the aggregate of the errors that the auditor has accumulated
during the audit and that have not been corrected. Therefore Those errors which are not
corrected by the entity are called uncorrected misstatements.

lOMoARcPSD|16729859
Generally, an unadjusted audit differences is attached to the written representation letter.

However, this does not relieve the auditor of their responsibility for the audit. The auditor
would have to evaluate the effect on the financial statements of: Identified misstatements
on the audit; and Uncorrected misstatements, both individually as well as in aggregate.
SIGNIFICANCE OF UNCORRECTED MISSTATEMENTS
1. Additional audit procedures

the auditor may extend their audit procedures to reduce the risk or ask management to
adjust the financial statements when an auditor concludes that the aggregate of
uncorrected misstatements is material. If management refuses to adjust the financial
statements and the auditor they should consider modifying the audit report.
2. Communication of uncorrected misstatements

ISA 450 requires that the auditor should inform those charged with governance of the
uncorrected misstatements observed during the audit, along with their effects, either
individually or in aggregate, on the opinion in the audit report
3. Written Representation
The auditor shall obtain a written representation containing a summary of uncorrected
misstatements from management or those charged with governance stating that they
believe the effects of uncorrected misstatements are immaterial, individually and in
aggregate, to the financial statements as a whole.
WRITTEN REPRESENTATIONS
During the course of an audit, auditors can come across situations where, on a matter that
is material to the financial statements, they are unable to gather sufficient appropriate
audit evidence. Therefore the auditor is required to obtain a representation by
management to be used as additional evidence. This does not mean that it will be a
substitute for other audit evidence that the auditor could reasonably expect to be
available. However, when it is expected that no evidence other than this is available, it
can be used as audit evidence.
Definition
Written representation is a written statement by management provided to an auditor
confirming certain matter or to support other audit evidence.
As explained prior, it can be used as audit evidence, but not a substitute for other audit
evidence expected to be available.
Purpose of management representation

i) Acknowledging responsibility of financial statement by management i.e. they are
responsible for the preparation of financial statement.
ii) Acknowledging responsibility for other matters such as ensuring:
 Adequate system of internal control
 Adjustment relating to subsequent events

lOMoARcPSD|16729859
 Going concern assumptions

iii) It can be used as audit evidence in law suit
iv) Acknowledging representations previously made verbally by management
v) It minimizes misunderstanding between management and auditor
vi) Provide reasonable assurance about effectiveness of internal control system
Procedures for obtaining written representation

There is no specific procedure laid down for obtaining written representation by an
auditor. It differs case by case. During the audit course, the auditor may note down the
matters for which representation is required, therefore the auditor may prepare those
question of all the subject matters for which they want information from management and
ask management to fill it in and sign it. Otherwise, they may discuss all the matters orally,
note them down and ask management to sign and acknowledge their statement. A written
representation may be in the form of a representation letter from management.
Procedure in summary:
i) In some instance auditors may note down matters for which representation is
required.
ii) In some circumstance management may prepare it, but all in all, regardless who is
preparing it, it must be signed by management.
iii) It might be signed by CEO and CFO in circumstance it can also involve the director.
Reliability of written representation

Since a written representation is an internal document, there is a lack of independence
and therefore it is less reliable than external evidence. As management gives written
representation, it may be argued that it comes from a responsible source and is therefore
reliable. On the other hand, in cases where appropriate audit evidence is not sufficient, it
is possible that management may manipulate the information it provides.
Evaluation of reliability
If a representation is obtained for matters, which have a material effect on the financial
statements, the auditor should evaluate the reliability of the representation. For this they
should:
i) Seek corroborative audit evidence
ii) Evaluate consistency of the representation with other evidence, if any
iii) Auditor should review it with an attitude of professional skepticism
Refusal by management to provide representation

Under the following circumstances, management may refuse to provide representation:
 When it feels that, by obtaining representation from management, an auditor is
trying to pass their responsibility onto management
 When management is, in fact, ignorant of the fact
 When it wants to hide something from the auditor

lOMoARcPSD|16729859
What should an auditor do when management refuse to provide a written

representation?
Sometimes management may refuse to provide a written representation to management
due to their reasons. But in all circumstances;
i) An auditor should discuss the reason for the refusal with the management
ii) Re-evaluate the integrity of management
iii) Take appropriate actions, including issuing a modified report with a disclaimer of
opinion on the financial statements.
Matters on which written representations are obtained

In written representation, management acknowledges its responsibility for the
presentation of the financial statements according to the financial reporting framework
and for providing all necessary information and documents,
Management responsibilities includes;

1. Preparation of Financial Statements
2. Other representations
i) Information Provided and Completeness of Transactions
ii) Maintenance of Internal control system
iii) Uncorrected aggregated financial misstatements i.e. management has to
state that they are immaterial and hence no impact or effect on the financial
statements.
iv) Subsequent events, management should consider those events that
occurred after auditing but before issuing the report.
v) Appropriate treatment and sufficient disclosure of related party
transactions.
vi) Responsility on fraud, management should take all the necessary
procedures to prevent fraud.
vii) Going concern (as discussed on topic 4)
3. Other circumstances:
i) When sufficient appropriate audit evidence (SAAE) on a particular item is
not available.
ii) When the matter is judgmental i.e. provision for bad debts

lOMoARcPSD|16729859
AUDIT OF SUBSEQUENTY EVENTS ISA 560/IAS 10
Introduction
It is not possible to prepare financial statements that present a true and fair view by
considering only those events and transactions that take place before the date at which
the statement of financial position is prepared. Material event that occur after the
reporting period should also be considered when preparing the financial statement for
the year.
According to ISA 560,

Subsequent event are those events, favourable and unfavourable that occurs between
the end of the reporting period and the date of the when the financial statements are
authorized for issue.
Key dates needs to be distinguished under subsequent events

These are also referred to as the components or elements of subsequent events
a) Date of financial statement; the date at the end of the latest accounting period
covered by the financial statement. This is the most recently date of the financial
statement.
b) Date of financial statement approval; the date on which those charged with
governance assert that financial statement are complete but before being audited
c) Date of auditors report; this is then date on which the auditor signs the audit
report.
d) Date of issue of financial statement; the date on which auditors report and audited
financial statements are made available to the public by management and those
charged with governance.
TYPES OF SUBSEQUENT EVENTS
1. Adjusting event;
These are event that provide further evidence of conditions that already existed at the
end of the reporting period. Adjustment events require rectification in the financial
statement at reporting period after the evidence that obligation or asset is recognized.
Example of adjustment events:

a) High level of assurance
 Settlement of court case after the reporting period, provides evidence of
the present obligation existed at reporting period.
 Legal advice from the company lawyer
 Similar case with similar circumstance can stand as an evidence to prove
that the event will occur and hence adjustment is needed.
b) Receipt of information after reporting period indicating an impairment of asset at

reporting period like:

lOMoARcPSD|16729859
 Written off of bad debts due to the death of debtor or notification of

bankrupt/solvency of customer after reporting
 Sales of inventory after reporting period that provide evidence of the NRV
of the inventory existed at reporting period.
 Permanent decrease in the long term investment
c) Determination of cost or proceeds on realization of assets for the asset acquired

or sold at reporting period
d) Determination of cost of bonus payment or profit sharing after reporting period
if the entity have present obligation at reporting period.
e) Discovery of fraud or errors that shows that financial statement are incorrectly
presented.
2. Non-adjustment event;
These are events that occurred due to conditions arising after the reporting period. Non-
adjustment events require disclosure in the notes to the financial statement at reporting
period. No adjustment in the financial statement but disclosure is required.
Example of non-adjustment events:

a) Business combination after then reporting period, they are material to be
disclosed on then financial statement.
b) Loss of plant or inventory due to fire or floods
c) Announcing and commencement of a major restructuring or reorganization of
then business after the reporting period.
d) Purchase of fixed assets and reclassification of non-current assets as held for sale
e) Sale of bond or issuing shares after the end of period
f) Major destruction of production plants by fire or natural disaster
g) Chang es in tax laws or rates, enacted after reporting period, these have to be
disclosed as their impact is in future.
h) Entering into significant commitment or guarantee after the reporting period,
these should be disclosed under capital commitment.
Auditor9s responsibilities with regard to subsequent event

1. For event occurring between date of financial statement and then date of signing
auditors report:
 An auditor is responsible for such event and should undertake the necessary
procedures to identify them so as to adjust or to disclose them accordingly.
 If an auditor discover material subsequent event within this period and the
management refuse to adjust or to disclose, an auditor should issue appropriate
opinion i.e qualifying or adverse depending on then pervasiveness of the matter.
2. Facts discovered after auditors report but before financial statement are issued
 Auditors has no obligation to perform any procedures regarding those events
 If any auditor becomes aware of such an event:

lOMoARcPSD|16729859
 If the event would have not change his opinion, then no need of any
procedure
 If the event would have caused him to issue different report, he should:
i) Discuss the matter with management
ii) Determine if financial statement needs to be amended
iii) If management amends financial statements auditor should issue an audit
report
iv) If management does not amend an auditor should take appropriate action
to prevent reliance on auditors report
3. Facts known after financial statement have been issued:

 The auditor has no obligation
 If the auditor becomes aware of the fact and such a fact would have caused him
tom issue a different report:
i) Discuss the matter with management
ii) Determine if the financial statement needs to be amended
iii) Inquire how management intends to amend the financial statements
 If amend management amends, the auditor should carry procedures necessary on
amendments
 If management does not amends, auditor should prevent public reliance on his
earlier report and re issue another report such as qualified or disclaimer
Audit procedures for subsequent events

i) Read the latest available interim financial statements and do the necessary
comparison
ii) Read available minutes of the meetings i.e shareholders meeting, directors
meeting or appropriate committees.
iii) Inquires of client9s legal counsel concerning litigation, claim and assessment
iv) Obtain a letter of representation and this should be dated as at the date of auditors
report.
v) Inquiries on the following issues:
 Any substantial contingent liabilities or commitment existed as at financial
statement date
 Any significant change on capital stock
 Long term debts, working capital up to the date of inquiry
 Whether any unusual adjustment has been made from date on financial
statement to the date of inquiry
 Any changes in company9s related parties
 Whether the company has entered into any significant unusual transaction

lOMoARcPSD|16729859
SECTION D
PROFESSIONAL ETHICS, PUBLIC INTEREST,
FUNDAMENTAL OBJECTIVES, THREATS AND
SAFEGUARDS TO INDEPENDENCE

lOMoARcPSD|16729859
TOPIC 12
PROFESSIONAL ETHICS, PUBLIC INTEREST, FUNDAMENTAL OBJECTIVES,
THREATS AND SAFEGUARDS TO INDEPENDENCE
Introduction.
Like the members of many other professional bodies, accountants (including students)
have a set of multiple ethical responsibilities. These codes of practice apply to all
members, whether in public practice or not. The detailed rules of conduct vary between
the professional bodies, but all the major bodies have codes that are broadly similar. What
differentiate one and another is, each has its own regulatory body. They are required to
act ethically towards and in the best interests of the following three groups:
 Their clients or employers;
 The accounting profession and
 The public at a large.
Therefore accounting body such as the International Federation of Accountants (<IFAC=)

publish and issue sets of ethical standards that they expect their members to live by.
FUNDAMENTAL PRINCIPLES OF PROFESSIONAL CODE OF ETHICS
1. Integrity
This principle requires members to be straightforward and honest in all professional and
business relationships. Also members must also not be associated with or <sign off= on
any fraudulent or inaccurate financial reports and / or statements.
Therefore accountant must ensure that the financial statements and assurance provided:
 Are carefully prepared
 Do not contain information which is false or deceptive
 Contain information which is relevant
 Exclude information which is vague i.e. they must not misguide the users
2. Objectivity
A professional accountant should not allow bias, conflict of interest or undue influence
of others to override professional or business judgments. In order to ensure objectivity, a
professional accountant:
 Should be unbiased and impartial. This applies to accounting and audit
assignments;
 Must avoid any relationship which will affect their professional judgment;
 Must not accept or offer gifts or hospitality, which will affect their professional
judgment.
3. Professional Competence and Due Care

A professional accountant has a continuing duty to maintain professional knowledge and
skill at the level required to ensure that a client or employer receives competent
professional services based on current developments in practice, legislation and

lOMoARcPSD|16729859
techniques. A professional accountant should act diligently and in accordance with

applicable technical and professional standards when providing professional service. In
order to ensure that they act in accordance with professional competence and due care,
accountants must:
 Keep their professional knowledge and skills up-to-date
 Ensure that clients or employers are provided with professional services based on
the latest developments in the profession, both legislative and technical
 Provide professional services by acting conscientiously and in accordance with
applicable technical and professional standards
 Be professionally competent and make sound judgments while applying their
professional knowledge and skills
 Ensure all their subordinates and staff have the necessary training and supervision
to competently perform the tasks assigned to them
4. Confidentiality
A professional accountant should respect the confidentiality of information acquired as a
result of professional or business relationships and should not disclose any such
information to third parties without proper and specific authority unless there is a legal
or professional right to do so. Confidential information should not be used for personal
advantage of the professional accountant or third parties.
Confidentiality comprises the following

 Non-disclosure of information. However information can be disclosed to a third
party if the accountant has the specific authority to do so (for example a client9s
permission), or the accountant has a legal duty or professional right to do so.
 Non-utilization of information to the advantage of the accountant, e.g. the auditor
sells shares in the client9s company after receiving confidential information about
the company which will reduce the price of the company9s shares.
 Confidentiality of information received from a prospective client or employer
 Confidentiality of information received within the firm / organization where the
accountant is employed from a prospective client or employer.
 Maintaining confidentiality of information within the firm or client organization
5. Professional behavior
All members should comply with relevant laws and regulations and should avoid any
action that discredits the profession. Also, members act ethically when marketing and
promoting their services. Members should not engage in any false advertising and should
not slander the work of any other accountant
INTEGRITY, OBJECTIVE AND INDEPENDENCE

The requirement for independence is that, for an audit report to be of value, the auditor:
 Must be independent, and also
 Must be seen independent.

lOMoARcPSD|16729859
The opinion of an auditor must be an independent opinion given by professional person

with appropriate skills in audit work, and the opinion must not be influenced by anyone
else, and in addition to that must not be influenced by the opinions and views of the
management of the company whose financial statements have been audited.
In order to have value in audit report, the auditors must have independence of mind and
not be independent in appearance. Independence of the auditor is a matter of public
confidence in the process.
 Auditor needs to be fully aware of the situations that may damage their
independence and objectivity. Such situations are referred to as threats to auditor
independence.
 Any threat to independence may be reduced by safeguards that are taken by an
audit practice (audit firm)
THREATS TO INDEPENDENCE
Almost all accountants at some point in their career will find themselves in situations
where they are in danger of violating one or more of these principles. Therefore the code
recognizes the following general sources of threat to the fundamental principles.
1. Self-interest threat.
This arises when the accountant or the audit firm has a financial interest or other interest
in a matter. This means that, self-interest and the accountant will therefore not act with
objectivity and independence may influence the accountant9s decisions.
Examples of circumstances that may create self-interest threat includes, but not limited to:
a) A direct financial interest or material indirect financial interest in an assurance
client.
b) A loan or guarantee to or from an assurance client or any of its directors or officers.
c) Undue dependence on total fees from an assurance client.
d) Concern about the possibility of losing the engagement.
e) Having close business relationship with an assurance clients.
f) Potential employment with an assurance client.
g) Contingent fees relating to assurance engagements.
2. Self review threat.

This occurs when an accountant is required to review or reevaluate a previous judgment
he has made or action that he has taken. This can also apply to audit firms when prepared
financial statements for a client company and then acted as an auditor, therefore it would
be reviewing its own work and would be reluctant to criticize or question it. This would
be a threat to objectivity and independence.
Examples of circumstances that may create self review threat includes, but not limited to:
a) A member of the assurance team being, or having recently been, a director or
officer of the assurance.
b) A member of the assurance team being, or having recently been, an employee of

lOMoARcPSD|16729859
the assurance client in a position to exert direct and significant influence over the
subject matter of the assurance engagement.
c) Performing services for an assurance client that directly affect the subject matter
of the assurance engagement.
d) Preparation of original data used to generate financial statements or preparation
of other records that are the subject matter of the assurance engagement.
3. Advocacy threat.
This occurs when the accountant is in a position where he is expected to defend the
client9s position or justify the position of the client, and act as an advocate for the client9s
position or point of view. This would be a threat to objectivity and independence.
Examples of circumstances that may create advocacy threat includes, but not limited to:
a) Dealing in, or being a promoter of, shares or other securities in an assurance client.
b) Acting as an advocate on behalf of an assurance client in litigation or in resolving
disputes with third parties.
c) Becoming a leading broker or leading bank to raise capital for client.
4. Intimidation threat.
This occurs when the accountant is deterred from acting with objectivity due to threats
against him or his firm. The nature of the threat may be a threat by the client that it will
take work away from the audit firm unless it agrees with the point of view of the client
management.
Examples of circumstances that may create intimidation threat includes, but not limited to:
a) Threat of replacement over a disagreement with the application of accounting
principles.
b) Pressure to reduce inappropriately the extent of work performed in order to
reduce fees.
c) Threaten to kill the auditor.
5. Familiarity threat.
This occurs when the accountant becomes too sympathetic with the client9s position due
to close relationships, for example due to a long association over many years in carrying
out the audit.
Examples of circumstances that may create familiarity threat includes, but not limited to:
a) A member of the assurance team having an immediate family member or close
family member who is a director or officer of the assurance client.
b) A member of the assurance team having an immediate family member or close
family member who, as an employee of the assurance client, is in a position to
exert direct and significant influence over the subject matter of the assurance
engagement.
c) A former partner of the firm being a director, officer of the assurance client or an

lOMoARcPSD|16729859
employee in a position to exert direct and significant influence over the subject
matter of the assurance engagement.
d) Long association of a senior member of the assurance team with the assurance
client.
e) Acceptance of gifts or hospitality, unless the value is clearly insignificant, from the
assurance client, its directors, officers or employees.
ETHICAL SAFEGUARDS TO THREAT
Ethical safeguards
Ethical safeguards are measures taken by organization to remove the ethical threat. The
way to tackle this would be to avoid situations causing ethical threats. However,
practically it is not possible to avoid ethical threats completely. Safeguards that may
eliminate or reduce to an acceptable level the threats faced by members fall into three
broad categories:
1. Safeguards created by the profession, legislation or regulation:

This means the application of accounting standards, auditing standards, code of ethics,
professional qualifications and experience for entry into the profession, educational
training and continuous professional development.
This includes:
a) Educational, training and experience requirements for entry into the profession
b) Continuing education requirement
c) Profession standards and monitoring and disciplinary processes
d) External review of a firm9s quality control system
e) Legislation governing the independence requirements of the firm
2. Safeguards within the assurance client:

Includes:
a) When the assurance client9s management appoints the firm, persons other than
management approve the appointment.
b) The assurance client has competent employees to make management decision
c) Policies and procedures that emphasize the assurance client9s commitment to fair
financial reporting
d) Internal procedures ensure objective choices in commissioning non-assurance
engagement
e) A corporate governance structure, such as an audit committee, that provides
appropriate oversight and communication regarding a firm9s service.
3. Safeguards within the firm9s own systems and procedure:

Includes:
a) Firm leadership that stresses the importance of independence and expectation
those members of assurance teams will act in the public interest
b) Policies and procedures to implement and monitor quality control of assurance
engagement

lOMoARcPSD|16729859
c) Documentation of independence policies regarding the identification of threat to

independence
d) Internal policies and procedures to monitor compliance with firm policies and
procedures as they relate to independence
e) Policies and procedures to monitor and, if necessary, manage the reliance on
revenue received from single assurance engagement
f) Using different partners and teams with separate reporting lines for provision of
non-assurance services to an assurance client
g) Policies and procedures to prohibit individuals who are not members of the
assurance team from influencing the outcome of the assurance engagement
IMPORTANCE OF PROFESSIONAL ETHICS
1. Ensures accountants provide quality work and act in public interest

The IFAC code is underpinned by the concept that accountants should provide quality
work in the public interest. The public expectation is that we protect their interests by
ensuring objective reporting within generally accepted accounting principles, standards
and laws. For example, according to the Code of Ethics, all audit firms are required to set
up policies and procedures to implement and monitor quality control of engagements.
2. Provides guidance to accountants to act with independence

Independence is strengthened in law by giving auditors the right to all information
necessary for their audit and by creating a criminal offence where directors deliberately
or recklessly mislead auditors. Independence is also strengthened by the rules relating to
removal.
3. Provides public assurance about accountant9s work

Ethical codes should be seen as essential in giving public assurance that accountants and
auditors are capable, competent, trustworthy, honest and sufficiently independent to
provide the objectivity results.
4. Reminds accountants of their obligations

minority of accountants has fallen short in ethical standards and need the spirit in writing
to remind them of their obligations and to provide the backdrop of standards that
underpin compliance monitoring, investigation and disciplinary processes.
RULES BASED AND PRINCIPLES BASED APPROACHES TO PROFESSIONAL ETHICS.

Professional accountants can face conflicts of interest whilst acting in accordance with the
principles set out in the code of ethics. The ethical conflict can be resolved using either of
two approaches of professional ethics: rules-based or principles-based.
1. Rules-based approach
The approach sets out rules which accountants are required to follow in all situations.
This involves determining every possible conflict of interest faced by the accountant and

lOMoARcPSD|16729859
finding a solution as laid down by the regulatory authority. This involve following a
specific rules.
2. Principles-based approach
This approach has no set standards. It gives guidelines on the principles that need to be
applied when resolving conflict of interest. The choice of the method of resolving the
conflict rests with the accountant.
Advantages of rules-based approach to ethical conflict resolution (over principles based approach)
a) Easy to adopt, a rules-based approach clarifies ways of dealing with ethical

conflicts and is, therefore, easy to follow.
a) Easy to modify, a rules-based approach to ethics is easy to modify whenever
appropriate.
Disadvantages of rules-based approach to ethical conflict resolution (over principles based approach)
a) May not offer solution to all situations of ethical conflict; a rules-based approach
involves determining every possible situation of conflict faced by the accountant
and providing a solution to each threat. It is, therefore, exhaustive and gives little
attention to any area left out unless the rules are amended.
b) Judgements cannot be always objective; in situations where there is an ethical
dilemma, different people can find different solutions after adopting different
safeguards. Therefore, it may be difficult to comply with actions mentioned in the
code of ethics based only on rules.
Advantages of principles-based approach to ethical conflict resolution (over rules based approach)
a. Offers easy solutions to resolve ethical conflict

The approach focuses on an objective to ensure that the independence of a professional
accountant is not breached. It offers solutions to many ethical conflicts. Although the
solution to all situations is not made explicit, if the accountant follows the objective of
independence, the principle would have been adhered to. In short, this approach can
easily adapt to changes.
b. Recognises that judgements can be subjective

A principles-based approach understands that there can be different solutions to the same
problem after adopting appropriate safeguards.
Disadvantages of a principles-based approach to ethical conflict resolution (over rules based approach)
a) Does not offer perfect solutions: a principles-based approach focuses on the
objective of maintaining accountants9 independence. Then there is no perfect
solution to any ethical dilemma as the same problem can have a variety of
solutions.
b) Not enforceable in law: it is difficult to legally enforce the adoption of ethical
resolution by this approach because the adoption of this approach is voluntary.

lOMoARcPSD|16729859
SECTION E
BASICS OF ASSURANCE REPORTS, IDENTIFYING
AND EXPLAINING THE CONTENT AND THE
DIFFERENT TYPES AND WHEN THEY MAY BE
USED.

lOMoARcPSD|16729859
TOPIC 13
INDEPENDENT EXTERNAL AUDITORS REPORT
Meaning
Independent external auditors report means the final output of the work of external
auditor after collecting all evidence. ISA 700,= Forming an opinion and reporting on
financial statements= states objective of an auditor is
a) To form an opinion on the financial statements based on an evaluation of the
conclusions drawn from the audit evidence obtained; and
b) To express clearly that opinion through a written report that also describes the
basis for that opinion.
CONTENTS OF THE AUDITOR9S REPORT
1. Title
The auditor9s report should have an appropriate title that helps the reader to identify it
and easily distinguish it from other reports, such as that of management. The most
frequently used title is <Independent Auditor= or <Auditor9s Report= in the title to
distinguish the auditor9s report from reports that might be issued by others.
2. Addressee
The report should be addressed as required by the circumstances of the engagement and
the local regulations. The report is usually addressed either to the shareholders or
supervisory board or the board of directors of the entity whose financial statements have
been audited. In some countries, such as The Netherlands, auditor9s reports are not
addressed at all because the reports are meant to be used by (the anonymous) public at
large.
3. Opening or Introductory Paragraph

The introductory paragraph of the auditor9s report should include the following matters:
a) The name of the entity whose financial statements have been audited.
b) The fact that the statements have been audited.
c) The title of each of the financial statements that comprise the entire set of the
financial statements audited.
d) Reference to the summary of the significant accounting policies and explanatory
notes.
e) Date and period of audit covered.
An illustration of an opening (introductory) paragraph is:

<We have audited the accompanying balance sheet of the ABC Company as of December 31, 20X3,
and the related statements of income and cash flows for the year then ended. These financial
statements are the responsibility of the Company9s management. Our responsibility is to express
an opinion on these financial statements based on our audit.=

lOMoARcPSD|16729859
4. Scope Paragraph
Scope refers to the auditor9s ability to perform audit procedures deemed necessary in the
circumstances. The scope paragraph is a factual statement of what the auditor did in the
audit. This provides the reader assurance that the audit has been carried out in accordance
with established standards or practices for such engagements. The scope paragraph
should include a statement that the audit was planned and performed to obtain
reasonable assurance about whether the financial statements are free of material
misstatement and that the audit provides a reasonable basis for the opinion. The use of
these phrases, or similar wording, means that the audit provides a high level of assurance,
but it is not a guarantee. The report should indicate the auditing standards or practices
followed in conducting the audit by reference to International Standards on Auditing
(ISA) or to standards or practices established within a country. Unless otherwise stated,
the auditing standards or practices followed are presumed to be those of the country
indicated by the auditor9s address. The auditor9s report should describe the audit as
examining, on a test basis, evidence to support the financial statements amounts and
disclosures and assessing the accounting principles used in the preparation of those
statements. The report should also describe the Audit as evaluating the financial
statements overall and assessing the significant estimates made by management in the
preparation of those statements.
An illustration of a scope paragraph is:

<We conducted our audit in accordance with International Standards on Auditing (or refer to
relevant national standards or practices). Those Standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis for our opinion.=
5. Opinion Paragraph
The opinion paragraph of the auditor9s report should clearly indicate the financial
reporting framework used to prepare the financial statements (including identifying the
country of origin of the financial reporting framework when the framework used is not
International Financial Reporting Standards) and state the auditor9s opinion as to whether
the financial statements give a true and fair view (or are presented fairly, in all material
respects) in accordance with that financial reporting framework and, where appropriate,
whether the financial statements comply with statutory requirements. The terms used to
express the auditor9s opinion are <give a true and fair view= or <present fairly, in all material
respects,= and are equivalent. Both terms indicate, amongst other things, that the auditor
considers only those matters that are material to the financial statements.
International Standard on Auditing (ISA) 200 states that the objective of an audit of financial
statements is to enable the auditor to express an opinion whether the financial statements are
prepared, in all material respects, in accordance with an identified financial reporting framework.

lOMoARcPSD|16729859
The financial reporting framework is determined by International Financial Reporting Standards

(IFRSs), rules issued by professional bodies, and the development of general practice within the
country, with the appropriate consideration of fairness and with due regard to local legislation. To
advise the reader of the context in which fairness is expressed, the auditor9s opinion would indicate
the framework upon which the financial statements are based by using words such as <... in
accordance with International Accounting Standards (or [title of financial reporting framework
with reference to the country of origin]) ...= The reporting framework may be IFRSs or a national
financial reporting framework. International Auditing Practice Statement (IAPS) provides
guidance when the auditor expresses an opinion on financial statements that are prepared under
IFRSs or both IFRSs and national financial reporting frameworks.
6. Date of Report
The date of the audit report should be the date when the auditor has obtained sufficient
appropriate audit evidence based on which they can give an opinion on the financial
statements. This audit evidence includes the evidence that a complete set of financial
statements has been prepared by management and that management takes responsibility
for the preparation. The date of the audit report is very important since it informs the
readers that the auditor has considered the effects of all the events and transactions that
happened up to this date.
7. Auditor9s Address
The report should name the location, country or the jurisdiction where the auditor
practices.
8. Signature
The audit report should be signed in the name of the audit firm, the personal name of the
auditor or both, as appropriate according to the laws applicable to the jurisdiction. Certain
jurisdictions may also require the auditor to mention the fact that the firm or the auditor
is recognized by the proper licensing authority in the jurisdiction or the auditor9s
professional accountancy designation.
FORMS OF AN AUDITOR9S REPORT

The most common type of audit report is the standard unqualified audit report. It is used
for more than 90 percent of all audit reports. Other audit reports are referred to as <other
than unqualified reports=. Other than unqualified reports include those reports that
express: an adverse opinion, disclaimer of opinion, and qualified opinion The form of an
auditor9s report will generally be the form of the unqualified report consisting of three
paragraphs: introduction, scope, and opinion (see above). Reports can also include a
fourth paragraph (after the opinion paragraph) called <paragraph emphasizing an
uncertainty= or <explanatory paragraph.= In some countries a paragraph referring a
qualification as a result of inadequate accounting procedures or disclosure may be
inserted just before the opinion paragraph.

lOMoARcPSD|16729859
Modified Opinion
An auditor9s report is considered to be modified in the two different situations:
1. Matters that do not affect the Auditor9s Opinion (which would mean adding an
emphasis of matter paragraph)
2. Matters that do affect the Auditor9s Opinion (instances that call for either a
a) Qualified opinion,
b) Disclaimer of opinion, or
c) Adverse opinion.
Standard Unqualified Opinion Auditor9s Report

The auditor9s unqualified report should be expressed when the auditor concludes that
i) The financial statements give a true and fair view (or present fairly, in all material
respects) in accordance with the identified financial reporting framework.
ii) Any changes in accounting principles or in the method of their application, and
their effects, have been properly determined and disclosed in the financial
statements.
Requirements to Give Unqualified Opinion

In an auditor9s report on financial statements an unqualified opinion is issued in a clear
and affirmative manner when the auditor is satisfied in all material respects that:
i. The financial information has been prepared using acceptable accounting policies,
which have been consistently applied;
ii. The financial information complies with relevant regulations and statutory
requirements;
iii. The view presented by the financial information as a whole is consistent with the
auditor9s knowledge of the business of the entity;
iv. There is adequate disclosure of all material matters relevant to the proper
presentation of the financial information.
When Opinion Cannot be Unqualified

An auditor may not be able to express an unqualified opinion when either of the following
circumstances exists and, in the auditor9s judgment, they are material to the financial
statements.
i) There is a limitation on the scope of the auditor9s work; or
ii) There is a disagreement with management regarding the acceptability of the
accounting policies selected, the method of their application or the adequacy of
financial statement disclosures.
The circumstances described in (i), scope limitation, could lead to an auditor9s report
containing a qualified opinion or a disclaimer of opinion, or in some countries, even in a
withdrawal from the engagement. The circumstances described in (ii), disagreement with

lOMoARcPSD|16729859
management, could lead to an auditor9s report containing a qualified opinion or an

adverse opinion.
Auditor9s Report Containing a Qualified Opinion

An auditor9s report containing a qualified opinion is issued when the auditor concludes
that
i. An unqualified opinion cannot be expressed but that the effect of any
disagreement with management, or limitation in scope, is not so material as to
require an adverse opinion or a disclaimer of opinion.
ii. A qualified opinion should be expressed as fairly presenting the financial
statements <except for= the effects of the matter to which the qualifications relates.
Auditor9s Report Containing an Adverse Opinion

An adverse opinion is issued when the effect of a disagreement is so material and
pervasive to the financial statements that the auditor concludes that a qualification of his
report is not adequate to disclose the misleading or incomplete nature of the financial
statements.
It is obvious from reading the opinion paragraph that an adverse opinion report is likely
to have a very negative effect on the readers of the report and the related financial
statements; therefore, such reports are issued only after all attempts to persuade the client
to adjust the financial statements have failed. The only other option available to the
auditor in this situation is withdrawal from the engagement.
Auditor9s Report Containing a Disclaimer of Opinion

An auditor9s report containing a disclaimer of opinion should be expressed when the
possible effect of a limitation on scope is so material and pervasive that the auditor has
not been able to obtain sufficient appropriate audit evidence (SAAE) and therefore is
unable to express an opinion on the financial statements.
Whenever the auditor issues a report that is other than unqualified, he should include a
clear description of all the substantive reasons that should be included in the report and
a qualification of the possible effect(s) on the financial statements. This information
should be set out in a separate paragraph, preceding the opinion or disclaimer of opinion
and may include a reference to a more extensive discussion, if any, in a note to the
Matters that Do Not Affect the Auditor9s Opinion (Modification of an Auditor9s Report
Containing an Unqualified Opinion)
In certain circumstances, an auditor9s report may be modified by adding an emphasis of
matter paragraph to highlight a matter affecting the financial statements. The addition of
an emphasis of matter paragraph does not affect the auditor9s opinion. The paragraph
should follow the opinion paragraph and state that the auditor9s opinion is not qualified
by this.

lOMoARcPSD|16729859
An emphasis of a matter paragraph

This is the paragraph included in the audit report that refers to a matter appropriately
presented or disclosed, but in the auditor9s judgment, is of such importance that means it
is fundamental to users9 understanding of the financial statements.
The matters must firstly be disclosed in the financial statements or included in the notes
on financial statement. Also the matter reported on emphasize of matter paragraph
should not lead to material misstatement in the financial statement. It is only written
apply with unmodified or unqualified opinion.
This is not a mandatory paragraph in all audit reports unless there is something to bring
attention of the reader of financial statement.
Examples of situation to be reported under emphasize of matter paragraph includes

i) To highlight a material matter regarding a significant going concern problem.
ii) An uncertainty relating to the future outcome of exceptional litigation or
regulatory
iii) An early application, (were permitted) of a new accounting standard. E.g. New
IFRS that has been applied in advance of its effective date.
iv) A major catastrophe that had, or continue to have, a significant effect on the entity9s
financial position.
v) If there is a significant uncertainty which may affect the financial statements, the
resolution of which is dependent upon future events;
An illustration of an emphasis of matter paragraph for a significant uncertainty in an

auditor9s report follows <Without qualifying our opinion we draw attention to Note X to the
financial statements. The Company is the defendant in a lawsuit alleging infringement of certain
patent rights Circumstances That May Result in Other Than an Unqualified Opinion=
Other matters paragraph or other reporting responsibilities (EOM)

This is a paragraph included in the auditor9s report that refers to a matter other than those
presented or disclosed in the final auditor9s judgment, that is relevant to users9
understanding of the audit, the auditor9s responsibilities or the auditor9s report.
When the auditor addresses other reporting responsibilities within then auditor9s report
on the financial statements, these other reporting responsibilities should be addressed in
a separate section in the auditor9s report that follows the opinion paragraph.
Issues to be included in other matters paragraph

i) Country laws and regulations requiring an auditor to state some issues.
ii) To whom the report has been prepared for and for what purpose.
iii) If the company has or has not kept proper accounting records
iv) If the information specified by law regarding the directors9 remuneration and
transaction with the company is disclosed or not disclosed.

lOMoARcPSD|16729859
v) The law, which requires the auditor to revisit, should be mentioned. Audit may
state <As required by the company Act, CAP 212 Act No.12 of 20XX…= or <As
required by mining Act…=
vi) If the auditor is reporting more than one set of financial statements. E.g. that
prepared under NBAA and set, which is prepare under IFRS.
Illustration of Auditors9 Report on Financial Statements
INDEPENDENT AUDITOR9S REPORT
Appropriate Addressee
Report on the Financial Statements

We have audited the accompanying financial statements of ABC Company, which
comprise the statement of financial position as at December 31, 20X1, and the statement
of comprehensive income, statement of changes in equity and statement of cash flows for
the year then ended, and a summary of significant accounting policies and other
explanatory information.
Management9s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these financial
statements in accordance with International Financial Reporting Standards, and for such
internal control as management determines is necessary to enable the preparation of
financial statements that are free from material misstatement, whether due to fraud or
error.
Auditor9s Responsibility
Our responsibility is to express an opinion on these financial statements based on our
audit. We conducted our audit in accordance with International Standards on Auditing.
Those standards require that we comply with ethical requirements and plan and perform
the audit to obtain reasonable assurance about whether the financial statements are free
from material misstatement. An audit involves performing procedures to obtain audit
evidence about the amounts and disclosures in the financial statements. The procedures
selected depend on the auditor9s judgment, including the assessment of the risks of
material misstatement of the financial statements, whether due to fraud or error. In
making those risk assessments, the auditor considers internal control relevant to the
entity9s preparation and fair presentation of the financial statements in order to design
audit procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the entity9s internal control.5 An audit also
includes evaluating the appropriateness of accounting policies used and the
reasonableness of accounting estimates made by management, as well as evaluating the
overall presentation of the financial statements. We believe that the audit evidence we
have obtained is sufficient and appropriate to provide a basis for our audit opinion.

lOMoARcPSD|16729859
Opinion
In our opinion, the financial statements present fairly, in all material respects, (or give a
true and fair view of) the financial position of ABC Company as at December 31, 20X1, and
(of) its financial performance and its cash flows for the year then ended in accordance with
International Financial Reporting Standards.
Report on Other Legal and Regulatory Requirements

[Form and content of this section of the auditor9s report will vary depending on the
nature of the auditor9s other reporting responsibilities.]
Auditor9s signature
Date of the auditor9s report
Auditor9s address

lOMoARcPSD|16729859
SECTION F
PUBLIC SECTOR AUDITING AND VALUE FOR
MONEY AUDIT

lOMoARcPSD|16729859
TOPIC 14
Introduction
The economy of any country divided into two that is public sector and private sector.
Public sector is the one of the main sector in the economy (apart from private sector),
which is concerned with providing various services mainly by the government for the
sake of improving the social and economic well-being of the citizen. The Institute of
Internal Auditor (IIA) defined the public sector, which consists of governments, and all
publicly controlled or publicly funded agencies, enterprises, and other entities that
deliver public programs, goods or services.
Private sector this is usually composed of organizations that are privately owned and
not part of the government including corporations aiming at both profit and non-profit
such as sole trade, corporative, partnerships and charities
Elements of public sector

The elements of the public sector varies by country, but in most countries the public
sector includes such services as military, police, public transit and care of public roads,
public education, an long with health care and those working for the government itself
such as elected officials.
The public sector might provide services that a non-payer cannot be excluded from (such
as street lighting), services, which benefit all of society rather than just the individual
who uses the services.
Public sector criteria

Several criteria were developed by the IIA as explained below. Does organization deliver
programs; goods or services that can be considered public goods or that are established
by the government policy?
i) Is substantially all the organization9s funding provided by government or
determined by government policy?
ii) Is the organization accountable to, and does it report directly to government,
including a government department or agency, or a minister of government?
iii) If the organization has a board of directors, commission, or similar appointed
body, does the government control the majority of appointments?
iv) If the organization has share capital, is government the majority shareholder?
v) Are the organization9s employee9s members of the public services, subject to
public service rules, and receiving public service benefit?
vi) If they are subjected to public service rules.
vii) Is there a legislative requirement for the organization to be audited by the
government auditor (C.A.G)
viii) Overall, does government control, directly or indirectly, the organization9s
policies, operations, administrations, or services delivery?

lOMoARcPSD|16729859

Public sector auditing, is an independent, objective and systematic examination and
expression of opinion on financial statement of entities under public sectors by the C.A.G
based on constitution and laws or auditing standard on whether value for money has
been achieved.
Laws governing public sector auditing

There are many laws but the following are the key ones
a) Constitution of the United Republic of Tanzania, under article 136 states that there
shall be an office for CAG of the URT.
b) Public audit Act
c) Public finance Act
Controller And Auditor General (C.A.G)

The constitutional of the United Republic of Tanzania Article 136, states that there shall
be an office for C.A.G, it also stipulates its mandates for C.A.G
C.A.G is a constitutional position, as they are mandated and determined from the country
constitutional.
Appointment of C.AG
C.A.G is appointed by the president of the URT from among the citizens of the United
Republic of Tanzania by birth. The president shall considers relevant professional
qualifications, experience and leadership skills suitable for appointment to the post.
Upon appointment of the Controller and Auditor General, shall subscribe to the oath
before then president. The C.A.G shall, in addition to the terms and conditions specified
in the constitution, hold office on such other terms and conditions as may be provided in
any written law.
Mandate or responsibilities of the C.A.G

i) Check on the authorization of the use of public fund
ii) Detect if fund have been spent on the area as purposed
iii) Prepare audit report for all public sectors
iv) Auditing and investigation
v) Checking for value for money
Tenure and removal of C.A.G

The C.A.G shall hold office for the fixed term of five years and shall be eligible for
renewal for one term only. Unless the question of removal becomes the subject of
investigation in terms of Article 144(3) of the constitution, C.A.G shall vacate office:
i) Upon attaining the age of sixty five years
ii) Resigning on account of medical grounds or any other grounds
iii) By giving the six months9 notice to resign to the president
iv) If the auditor becomes unsound mind or incapacity

lOMoARcPSD|16729859
The powers of C.A.G

Public audit Act states the power of C.A.G as explained below
i) Power to call, the ability to call any person to explain any matter relating to audit
ii) Power to examine, the examinations of documents with respects to audit they can
even ask several question and non-responses it can cause the legal impact.
iii) Power to appoint, the power to appoint any person or firm to perform an audit
on his or their behalf but that report will be signed by the C.A.G
iv) Power to search information anywhere as long as it helps in auditing
v) Power of acceptance, the ability to accept any certificate, work or any evidence
from any person or firm with respect to audit.
vi) Power to request any services
vii) Power to discharge the audit
viii) Power to recommend, the ability to recommend any action to protect government
resource or to improve internal control system. Or even to address any weakness
detected.
ix) Independence and status, the C.A.G is complete independent, he can perform his
work freely without any threat. By status this means that, a job give a person more
recognition.
x) Immunity power, cannot be sued for the mistakes made during audit, he is legally
protected.
xi) Information access power
xii) Expert engagement power
xiii) Audit standard power
xiv) Code of ethics selection
INTERNAL AUDITOR GENERAL (IAG)

Public Finance Act 2010, CAP, 348, Section 37 titled Office of Internal Auditor General
states that there shall be an internal Auditor General under the ministry responsible for
finance. The Internal Auditor General shall be appointed by the president from amongst
qualified persons in accountancy, auditing or financial matters on such terms and
conditions to be specified in the letter of appointment. Therefore IAG is an internal
auditor of the United Republic of Tanzania.
The Internal Auditor General shall be responsible to the permanent secretary and
paymaster General seated in the Ministry of Finance.
Functions or duties of IAG

The Internal Auditor General shall be responsible to the paymaster General
1. Development of internal audit policies, rules, standards, manuals and guidelines
2. Reviewing and appraising compliance to laid down laws regulations, standards,
system and procedures in ministries, departments, government institutions,
regions, local government authorities, executive agencies and donor funded
project.
3. Ensuring control and proper accountability of public monies and property

lOMoARcPSD|16729859
4. Scrutinize and compile audit reports from ministries, department, government

institutions, regions, local government authorities, executive agencies and donor
funded projects and shall prepare a summary of major audit observations and
recommendations and submit the same to the paymaster general for further
action.
5. Undertakes continuous audit risk management
6. Develop and supervise the implementation of internal audit strategy
7. Develop, implement and review annual audit programme
8. Manage and control the quality of operations of the audit and enhance capacity
of audit committees
9. Review and appraise budget planning and implementation with view of
promoting compliance with national goals and objectives
10. Prepare audit report and advice the government on interventions measures
towards ensuring values for money on public expenditure.
11. Make follow up on the agreed audit recommendations and required corrective
actions.
12. Undertakes special and investigative audits
13. Review, monitor, evaluate and recommend on systems of government revenue
collections for proper accountability
14. Participate in the hearing and render advice to the relevant parliamentary
oversight committees.
Area of differences CAG IAG

a) Scope of work The scope of work of the CG is The scope of work of IAG is
prescribed and determined by the prescribed in the Public
constitution of the country as Finance Act. Constitution is
well as Public Audit Act. much more superior and
where there is a conflict
from other law and
constitution; the
constitution will be the
final law to be used.
b) Reporting line Then CAG reports to the IAG reports to the

parliament where his report is Paymaster General in the
tabled at the parliament after Ministry of Finance.
being received by Hon. President
of the URT, therefore he reports
to the one of the pillars of the
country.
c)
d) Independence CAG are much more autonomous IAG is not too much more
and independent as it is a independent as compared
constitutional position. to the CAG.

lOMoARcPSD|16729859
e) Constitutional The CAG is a constitution IAG is not a constitutional

position position as it has been written in position
the constitution that there shall be
an office of the CAG of the URT.
f) Immunity power The CAG has immunity; The IAG has no immunity
therefore s/he cannot prosecute power compared to CAG.
based on findings and
recommendations made during
execution of the work.
g)
h) Responsibility and CAG is an external auditor of the IAG is an internal auditor
focus URT of the URT
i) Power & limitation CAG can audit IAG IAG cannot audit CAG
CAG and IAG similarities

i) Appointment: The Hon. President of United Republic of Tanzania appoints both,
CAG and IAG.
ii) Internal control: Both, CAG and IAG are interested in strong, sound, effective and
efficiency internal control system of the public sector to realize value for money.
iii) Audit approach: Both, CAG and IAG use value for money audit approach in
conducting their audit for the sake of ensuring public sector goals are achieved
economically and efficiently.
iv) Qualification: Both, CAG and IAG share the same accounting and auditing
professional qualification, like CPA and may be monitored by the same profession
accounting board, the NBAA.
v) Accounting standard: Both, CAG and IAG may use same auditing standards set
by the INTOSAI for public sector. However discretionary power of the CAG, may
order any other preferred auditing standards to be used for public sector.
vi) Client: Both, CAG and IAG are serving the public sector as their main client.

lOMoARcPSD|16729859
VALUE FOR MONEY AUDIT (VFM)

Value for money is an audit approach commonly used in public sector or entities not for
profit (NGOs). It is a systematic, independent, objective review of audit whereby the
organization, department, agency, programme or project is measured in terms of
effectiveness; efficiency and economy achieve the intended results. The emphasis of VFM
audit is of 3E9s.
ELEMENTS FOR VALUE FOR MONEY AUDIT
1. Effectiveness
Effectiveness refers to the achievement of the goals and objectives of a certain operation
or activity. The emphasis is on the achievement of goal. It shows the relationship between
output and the planned objectives. It measures the extent to which the outputs produced
or acquired and the use of policies and procedures has achieved the stated goals and
objectives of the entity. The principle of effectiveness says ensure that the output from a
given task or activity achieves the desired results. The output is clearly known but the
input is sometimes not clear.
2. Efficiency
Efficiency means the minimum resource inputs to achieve a given quantity and quality
of output. Efficiency shows the relationship between inputs and outputs, i.e. how much
has been achieved in terms of quantity and quality for a given level of input in terms of
quantity and quality. The auditor makes comparison of the relationship of goods or
services produced with the amount of resources used to produce them. An efficient
operation is the one, which produces the highest output or return at minimum cost, lesser
resources or at one unit of output. The principles of efficiency say, maximize output from
the use of a given batch of resources, or minimize level of resources deployed in
producing the output required. The output can be defined in terms of financial, material
or time resources, while the output is normally defined in terms of quality of size.
3. Economy
This refers to the amount of resources needed to acquire highest output at lowest cost,
viz. rising output at constant inputs. Economy means getting the right amount of
resources, of the right quality, delivered at the right time and place, at the lowest cost.
Emphasis is the control of the input or cost by keeping it to minimum levels at given
levels of output taken as a whole. Hence the auditors are more concerned with the
quantity of input, which is clearly defined.

lOMoARcPSD|16729859
INTERNATIONAL ORGANIZATION OF SUPREME AUDIT INSTITUTION

(INTOSAI)
INTOSAI is a professional organization of supreme audit institutions (SAI) in countries
members of the United Nations or its specialized agencies. It is a United Nation Board,
which is an independent, autonomous, and objective institution providing guidance on
how to conduct public sector audit effectively, objectively, efficiently and economically.
In short it provides audit standards for government audit.
A Supreme Audit Institution (SAI) is a public body of a state or organization, which

however designated, constituted or organized, exercises by virtual of law or other formal
action of the state, the highest public auditing function of that state in an independent
manner, with or without jurisdictional competence.
Members of INTOSAI
National supreme audit institutions in each country there is an organization responsible
for government audit. For the case of Tanzania the following are the members:
i) National Audit Office of Tanzania (NAOT)
ii) Internal Auditor General (IAG)
iii) National Board of Accountant and Auditors (NBAA)
iv) Tanzania Association of Accountants (TAA)
Function of INTOSAI
i) Set standard for public sector auditing
ii) Foster the exchange of ideas, knowledge and experience among members
iii) Support SAIs capacity building, cooperation and continuous performance
improvement to in the country
iv) Promote good national governance through enhancing transparency, ensuring
accountability, maintaining credibility, promote public trust and foster the
efficient and effective receipt and use of public resources for the value and benefits
of their citizen
v) Act as a recognized global public voice of Supreme Audit Institutions (SAIs)

lOMoARcPSD|16729859
SECTION G
INTERNAL AUDIT

lOMoARcPSD|16729859
TOPIC 15
INTERNAL AUDIT
Introduction
The auditors may be engaged as Internal Auditors of organizations or contracted to
provide internal audit services. Internal Audit serves as an important ingredient for
corporate governance, risk management and internal controls. This topic focuses on
various aspects of performing internal auditing for entities in accordance with internal
audit professional practice framework.
Meaning of internal audit

Internal auditing is an independent appraisal function established within an organization
to examine and evaluate its activities and controls within the organization. It is a function,
which focus on examining and evaluating the adequacy and effectiveness of other
controls.
Institute of Internal Auditors (IIA) define Internal auditing, as is an independent, objective

assurance and consulting activity designed to add value and improve an organization's
operations.
Internal audit helps an organization to accomplish it objectives by bringing a systematic,

disciplined approach to evaluate and improve the effectiveness of risk management,
control and governance process. Internal audit it gives recommendations based on
analyses and assessments of data and processes.
Standard frameworks
Internal audit profession is governed by Institute of Internal auditors, (IIA) which set out
standards and guidance to internal audit practitioners across the world. IIA has
representative office in most of countries including Tanzania.
Therefore internal audit is guided by the standards called International Professional

Practice Framework (IPPF).
Purpose of internal audit

 Compliance auditing, as would be concerned with the compliance of procedures
with internal controls as laid down by management.
 Efficiency auditing, as concerned with determining whether resources are being
used efficiently.
 Effectiveness auditing, as would be concerned with determining whether
resources are being used to proper effect.
 Operational auditing, the auditor is concerned with the whole organization and
not just with finance and accounting.
STAGES OF PERFORMING AN INTERNAL AUDIT ASSIGNMENT
Step 1: Planning Phase. The activities involved includes

lOMoARcPSD|16729859
 Send out Notification letter for the audit to business unit

 Set and review audit scope and objectives
 Assessment or risks and identification of controls.
Step 2: Field work. The activities involved includes

 Hold a meeting with business unit
 Interview keys staffs about procedures (Inquires)
 Conducts audit procedures to obtain evidence
 Communicate about the audit9s progress and potential findings
Step 3: Reporting. The activities involved includes

 Holding a conference with management to discuss observation
 Issue a draft report to management as request responses to address
recommendations with target dates for final actions.
 Receive management comments responding to draft report to determine whether
management decisions have been reached and planned actions.
 Issue final report to management including management responses and
evaluations of provided recommendations.
Step 4: Follow up
 Request management to provide regular updates on report9s recommendation
implementation
 Report quarterly or by-annually to senior management on the implementation
status/progress
 As part of annual planning, include limited scope follow up audits to verify
implementation and effectiveness of management actions
CODE OF ETHICS FOR INTERNAL AUDITORS

The purpose of the Code is to promote an ethical culture in the profession of internal
auditing. The IIA's Code of Ethics provides principles and rules of conduct under four
headings
1. Integrity Principle
The integrity of internal auditors establishes trust and thus provides the basis for reliance
on their judgments. Internal auditors should perform their work with honesty, diligence
and responsibility.
2. Objectivity Principle
Internal auditors exhibit the highest level of professional objectivity in gathering,
evaluating, and communicating information about the activity or process being examined.
3. Confidentiality Principle
Principle Internal auditors respect the value and ownership of information they receive
and do not disclose information without appropriate authority unless there is a legal or
professional obligation to do so.

lOMoARcPSD|16729859
4. Competency Principle
Internal auditors apply the knowledge, skills and experience needed in the performance
of internal auditing services. They should engage only in those services for which they
have the necessary knowledge, skills and experience.
Roles of internal auditors

 Evaluation internal control
 Risk management
 Influencing the corporate governance
RELATIONSHIP BETWEEN INTERNAL AND EXTERNAL AUDITORS
External auditor
The objective of the external auditor is to form an opinion on the truth and fairness of the
financial statements. Reliance may be placed on the internal controls, which is the work
of Internal Auditors.
This ISA 610 provide guidance to external auditor on how they will apply work of Internal
Audit in areas like;
 To obtain information relevant to external auditor9s assessment of risks
 Use Internal Audit work in partial substitution of audit evidence
 Use Internal Audit to perform audit procedures under the directions, supervision
and review of the external auditors.
Internal auditor
The prime objective of the internal auditor is to advise the management on whether it9s
major operations have sound systems of internal controls. Therefore, they will test
transactions to confirm the evaluation and determine the implications of any systems
weaknesses. These systems are designed to ensure the future welfare of the entity.
DIFFERENCES AND SIMILARITIES OF INTERNAL AND EXTERNAL AUDITORS
Differences
 The external auditor is not an employee of the entity. Internal auditors work for
and on behalf of the entity.
 Internal audit is not a legal requirement. It is a voluntary function, which covers
all the entity9s operations, not just the financial ones. However in some
industry/sector like Banking and for listed companies this may be a requirement
 Internal auditors report to the board of directors or the audit committee. The
external auditors report to the shareholders.
Similarities
 Both the external and the internal auditor carry out controls testing and both are
concerned that the entity complies with its control procedures.

lOMoARcPSD|16729859
 Both operate as professionals and both produce formal reports on their activities.
Internal Audit report

Internal auditors typically issue reports at the end of each audit that summarize their
findings, recommendations, and any responses or action plans from management. Each
audit finding within the body of the report may contain five elements, sometimes called
the "5 C's":
 Condition: What is the particular problem identified? Also called finding
 Criteria: What is the standard that was not met? The standard may be a company
policy or other benchmark.
 Cause: Why did the problem occur?
 Consequence: What is the risk/negative outcome (or opportunity foregone)
because of the finding?
 Corrective action: What should management do about the finding? What have they
agreed to do and by when?
Outsourced internal audit services

Internal audit is not mandatory, so many entities may decide to outsource or contract out
the function. This may result in the external audit firm providing both the external and
the internal audit function.
The advantages of outsourcing internal audit include the following

 Some organizations are not large enough to warrant a separate internal audit
department. Outsourcing is therefore the only means by which they can benefit
from the function.
 The independence of the function is enhanced.
 The investigation of sensitive areas such as management fraud is easier if
outsourcing is used.
 External providers may have easier access to specialist knowledge.
Disadvantages of outsourcing internal audit

 It appears to go against the spirit of corporate governance, which regards regular
monitoring of key controls by internal audit as an integral part of the entity9s
system of controls.
 Using external providers may be more expensive because they are paid fees, which
include a profit element.
 External staff may change frequently and the new staff will have to become
acquainted with the system and hence bring inefficiency.

lOMoARcPSD|16729859
REVIEW QUESTIONS

lOMoARcPSD|16729859
QUESTION 1.
For 20 years and in 80 countries, Helpbonse, a Non-Governmental Organisation (NGO)
has empowered people in developing appropriate survival business skills needed in the
modern global environment. It delivers technical and management assistance in all
aspects of the economy. A core aspect of its mission statement is the promotion of broad-
based economic growth and vibrant communities. Its headquarters is in Mwinilunga, in
North-western province.
Helpbonse recently recruited an Internal Auditor following recommendations made by

the External Auditor. The controls have always been assessed as poor. A number of frauds
have gone undetected and most donors want to stop supporting Helpbonse. Management
has repeatedly refused to provide the much needed representations to the external
auditor. The governing board is excited about the recruitment of the Internal auditor. One
of the board members is confident that all the outstanding issues in the management letter
will be resolved.
Required:
a)
i) Define internal audit (2 marks)
ii) List and explain three (3) differences between internal and external auditors.
(6 marks)
iii) Discuss the riole of the Internal Auditor in the prevention, detection and correction
of fraud. (5 marks)
b.
i) Distinguish between a representation letter and a management letter. (4 marks)
ii) State (3) possible actions to be taken by external auditors f management does not
provide the requested written representation. (3 marks)
QUESTION 2.
You are the audit senior in Papa & Co, a firm of ZICA Chartered Accountants. You have
concluded the audit of one of your audit clients, Zeta Ltd, whose year ends in 31 December
2014. The financial statements have recently been issued to the shareholders and the
annual general meeting has been set for 24 March 2015.
Before the annual general meeting, you discover that inventory which existed at the
period end valued at cost of Tsh. 5,000,000 was sold . for Tsh. 25,000,000. inventory is
considered material to the financial statements. Babu is the Board Chairman and Chief
Executive Officer (CEO)
Required:
i) Explain what is meant by subsequent event events in the audit of financial
statements whose year end is 31 December 2014 (3 marks)
ii) Discuss the action that your firm will take in view of the above event discovered
after the issue of the financial statements but before the annual general meeting. (5
marks)

lOMoARcPSD|16729859
iii) Discuss the matter of Babu being both Board Chairman and Chief Executive Officer
(CEO) of Zeta Ltd and make any recommendation necessary in line with best
practice. (5 marks)
QUESTION 3.
Ajio is a charity whose constitution requires that it raises funds for educational project.
These project seek to educate children and support teachers in certain countries. Charities
in the country from which Ajio operates have recently become subject to new audit and
accounting regulations. Charity income consists of cash collections at fund raising events,
telephone appeals and bequests (money left to the charity by deceased persons). The
charity is small and the trustees do not consider that the charity can afford to employ a
qualified accountant. The charity employs a part-time bookkeeper and relies on
volunteers for fund raising. Your firm has been appointed as accountant and auditors to
this charity because of the new regulations. Accounts have been prepared (but not
audited) in the past by a volunteer who is a recently retired Certified Professional
Accountant.
Required:
Describe the risks associated with the audit of Ajio under the headings inherent risk,
control risk and detection risk and explain the implications of these risks for overall audit
risk. (10 marks)
QUESTION 4.
a) ISA 300 planning an audit of financial statements provides guidance to assist
auditors in planning an audit.
Required: explain the benefits of audit planning. (4 marks)
b)
You are an audit supervisor of Chania & Co. And are planning the audit of your client,
Sitia Sparkle Co which manufactures cleaning products. Its year end was 31 July 2006 and
draft profit before tax was $33.6 million. You are supervising a large audit team for the
first time and will have specific responsibility for supervising and reviewing the work of
the audit assistant in your team.
Sitia Sparkle Co purchases most of its raw materials from supplier in Africa and these
goods are shipped directly to the company9s warehouse and the goods were usually in
transit for up to three weeks. The company has incurred $1.3 million of expenditure on
developing a new range of cleaning products which are due to be launched into the
market place November 2006. In September 2005, Sitia Sparkle Co also invested $0.9
million in a complex piece of plant and machinery as part of the development process.
The full amount has been capitalised and this cost includes the purchase price, installation
cost and training costs.
This year, the bonus scheme for senior management and directors has been changed so
that rather than focusing on profits, it is instead based on the value of year-end total assets.

lOMoARcPSD|16729859
In previous years an allowance for receivables, made up of specific balances, which

equalled almost 1% of trade receivable was maintained. However, the finance director
feels that this is excessive and unnecessary and has therefore not included it for 2006 and
has credited the opening balance to the profit or loss account.
A new general ledger system was introduced in May 2006; the finance director has stated
that the data was transferred and the old and new systems were run in parallel until the
end of august 2006. As a result of additional workload on the finance team, a number of
the control account reconciliations were not completed as at 31 July 2006, including the
bank reconciliation. The finance director is comfortable with this as these reconciliations
were completed successfully for both June and August 2006. In additional, the year-end
close down of the purchase ledger was undertaken on 8 August 2006.
Required:
i) Describe SIX audit risks, and explain the auditor9s response to each risk, in
planning the audit of Sitia Sparkle Co. Note: prepare your answer using two
columns headed Audit risk and Auditor9s response respectively. (12 marks)
ii) in line with ISA 220 Quality control for an Audit of financial statements, describe
the audit supervisor9s responsibilities in relation to supervising and reviewing the
audit assistants9 work during the audit of Sitia Sparkle Co (4 mark)
QUESTION 5
According to ISA 706, <Emphasis of Matter and Other Matter Paragraphs in the
independent auditors report= an auditor may under some circumstances, insert other
matter or emphasis of matter paragraph in his report
Required:
i) What is Emphasis of matter paragraph and enumerate circumstances under which
an auditor may emphasis a matter in his opinion.
ii) What is other matter paragraph and the circumstances under which an auditor
may issue other matter paragraph.
QUESTION .6
You are the audit supervisor of Seagull & Co and are currently planning the audit of your
existing client, Eagle Heating Co. (Eagle), for the year ending 31 December 2014. Eagle
manufactures and sells heating and plumbing equipment to a number of home
improvement stores across the country.
Eagle has experienced increased competition and as a result, in order maintain its current
levels of sales, it has decreased the selling price of its products significantly since
September 2014. The finance director has informed your manager that he expects
increased inventory levels at the year end. He also notified your manager that one of
Eagle9s key customers has been experiencing financial difficulties. Therefore, Eagle has
agreed that the customer can take a six-month payment break, after which payments will

lOMoARcPSD|16729859
continue as normal. The finance director does not believe that any allowance is required
against this receivable.
In October 2014 the financial controller of Eagle was dismissed. He had been employed
by the company for over 20 years, and he has threatened to sue the company for unfair
dismissal. The role of financial controller has not yet been filled and so his tasks have been
shared between the existing finance department team. In addition, the purchase ledger
supervisor left in August and a replacement has been appointed in the last week.
However, for this period no supplier statement reconciliations or purchase ledger control
account reconciliations were performed.
You have undertaken a preliminary analytical review of the draft year to date statement
of profit or loss, and you are surprised to see a significant fall in administration expenses.
Required:
Explain FIVE audit risks, and the auditor9s response to each risk, in planning the audit of
Eagle Heating Co.
QUESTION 7.
Having completed the file review, you have concluded that the use of the going concern
assumption is appropriate, but that there is significant doubt over Co9s ability to continue
as a going concern. You have advised the company9s audit committee that a note is
required in the financial statements to describe the significant doubt over going concern.
The audit committee is reluctant to include a detailed note to the financial statements due
to fears that the note will highlight the company9s problems and cause further financial
difficulties, but have agreed that a brief note will be included.
Required:
a. Discuss procedures that an auditor may employ when gathering evidence
regarding entity9s going concern assumption.
b. In respect of the note on going concern to be included in Co9s financial statements,
discuss the implications for the audit report and outline any further actions to be
taken by the auditor.
QUESTION 8.
a.
i) Define a <test of control= and a <substantive procedure=
ii) State ONE test of control and ONE substantive procedures in relation to sales
invoicing
b. Shiny Happy Window Co. (SHW) is a window cleaning company. Customers'

windows are cleaned monthly, the window cleaner then posts a stamped
addressed envelope for payment through the customer9s front door.

lOMoARcPSD|16729859
SHW has a large number of receivable balances and these customers pay by cheque or
cash, which is received in the stamped addressed envelopes in the post. The following
procedures are applied to the cash received cycle:
1. A junior clerk from the accounts department opens the post and if any cheques or
cash have been sent, she records the receipts in the cash received and then places
all the monies into the locked small cash box.
2. The contents of the cash box are counted each day and every few day these sums
are banked by which ever member of the finance team is available.
3. The cashier records the details of the cash received log into the cash receipts day
book and also updates the sales ledger.
4. Usually on monthly basis the cashier performs a bank reconciliation, which he then
files, if he misses a month then he catches this up in the following month9s
reconciliation.
Required:
For the cash cycle of SHW:
i) Identify and explain THREE deficiencies in the system;
ii) Suggest controls to address each of these deficiencies; and
iii) List test of controls the auditors of SHW would perform to assess if the control are
operating effectively.
c. Describe substantive procedures an auditor would perform in verifying a

company9s bank balance.
QUESTION 9
After carrying out different audit tests and obtaining sufficient and appropriate audit
evidence, an auditor will then proceed to finalize audit. Sometimes it is difficult to obtain
all evidence but yet as part of audit finalization, the auditor is required to eventually issue
an audit report detailing his/her opinion.
In this light, you are required to explain

i) Circumstance under which an auditor can qualify an opinion
ii) When can an auditor issue a disclaimer of an opinion?
iii) When can an auditor issue an adverse opinion?
QUESTION 10
You are the trainee accountant of Gabriella Enterprises Co and are preparing the financial
statements for the year ended 30 September 2010. The financial statements are expected
to be approved in the Annual General Meeting, which is to be held on Monday 29
November 2010. Today's date is 22 November 2010. You have been made aware of the
following matters:

lOMoARcPSD|16729859
1. On 14 October 2010, a material fraud was discovered by the bookkeeper. The

payables ledger assistant had been diverting funds into a fictious supplier bank
account, set up by the employee, which had been occurring for the past six months.
The employee was immediately dismissed, legal proceedings against the
employee have been initiated and the employee9s final wages have been withheld
as part-reimbursed back to the company.
2. On 20 September 2010, a customer initiated legal proceedings against the company
in relation to a breach of contract. On 29 September 2010, the company9s legal
advisers informed the directors that it was unlikely the company would be found
liable; therefore, no provision has been made in the financial statements, but
disclosure as a contingent liability has been made. On 29 October 2010, then court
found the company liable on a technicality and is now required to pay damages
amounting to a material sum.
3. On 19 November 2010, a customer ceased trading due to financial difficulties
owing $2500. As the financial statements are needed for the board meeting on 22
November 2010, you have decided that because the amount is immaterial, no
adjustment is required. The auditors have also confirmed that this amount is
immaterial to the draft financial statements.
Required:
a) For each of the three events above, you are required to discuss whether the
financial statements require an amendment.
b) State the audit procedures to be performed for each event.
QUESTION 11.
Part A
Mukwa Associates has been auditing Kembo Plc for over three (3) years. The engagement
partner has just received a telephone call from a chairman of the board of Kembo Plc. The
chairman claims that the audit work done in the previous year (year ended 31 October
2014), was sub-standard mainly because a fact discovered after the financial statements
had been issued, was ignored by Mukwa Associates.
The fact relates to a material receivable balance for a customer who had been declared
bankrupt on 3 January 2015. Management brought this to the attention of Mukwa
Associates, who completely ignored it. The Annual General Meeting was held last week
and financial analyst has written an article in a popular business magazine about the
omission. This has resulted in a minimal drop in the share price. This has adversely
affected the performance bonus board member had expected.
The board resolved to make a recommendation to the shareholders to remove Mukwa

Associates as auditors for the coming year, inspite of the recent re-appointment. Kembo
plc is one of the reputable clients, and Mukwa Associates is not prepared to lose it. The
engagement partner has assured the chairman that everything will be done to investigate

lOMoARcPSD|16729859
the matter and depending on the outcome of the investigations, some members of the
engagement team would be disciplined and reported to NBAA.
However, the shareholders are likely to unanimously resolve to remove Mukwa

Associates due to the reported decrease in their wealth.
Required:
a) Using the information given in the scenario,
i) Discuss the fundamental principle of professional competence and due care.
ii) Discuss the responsibilities of the auditors regarding facts discovered after the
financial statement have been issued.
Part B
i) Suggest, giving justification for each, three (3) audit procedures which Mukwa
Associates should have undertaken in respect of the material receivable balance.
ii) Draft opinion paragraph of the audit report, assuming management did amend
the financial statements and you were satisfied with the amendments after
carrying out further procedures.
b) Assume the audit for the current year of Kembo plc has just been completed and
the audit senior for the new audit firm has suggested the following <emphasis of
matter paragraph=
<The financial statements for Kembo Plc for the year ended 31 October 2014, were
audited by another auditor who expressed an unmodified opinion on those
financial statements on 18 December 2014=
Required:
Evaluate the suitability of the proposed emphasis of matter paragraph and suggest
any necessary amendments.
QUESTION 12
a) Upon completion of his audit works for different clients, the Engagement Partner
reviewed the audit working papers and came across the following:
Client 1. There was material inconsistency between the financial information and
other information in documents containing the financial statements and the
auditor9s report thereon. The material inconsistency has been traced to the
financial information but management has refused to affect any change when
requested to do so.
Client 2. Stocks worth TZS.5 million were valued at cost in the financial
statements. The review of the events after the reporting date indicated that not all
the stocks could be sold in the normal course of business. Some were damaged and

lOMoARcPSD|16729859
some have become obsolete and slow moving. The total assets of the Company are
TZS.20 million. If the stocks were valued at net realizable value, the value would
have been reduced by TZS.2.0 million. The Directors have refused to allow the
stocks to be valued at lower of cost and net realizable value and valued all the
stocks at cost.
Client 3. Management refused to allow auditors to carry out circularization of

debtors. The receivables figure was material in the financial statements. In
addition, the auditors have not received a reply to the letter of enquiry sent to the
Company9s solicitors in respect of a major litigation affecting the Company. The
auditors assessed that the effect of the two items is both material and pervasive.
Client 4. Subsequent events indicated that a major debtor has become insolvent.
The amount involved was material. The directors of the entity have refused to
recognize an allowance for a write-off of the amount.
REQUIRED:
i) For each of the items above, explain with reasons the type of audit opinion
to be issued. (12 marks)
ii) Explain the action that should be taken by the auditors against management
after refusing to allow the auditors to carry out the necessary audit
procedures. (2 marks)
b) Misunderstanding of the auditor9s in respect of the audit process is a major

component of the <expectations gap=.
REQUIRED:
i) Explain the term <expectations gap= (3 marks)
ii) How can this gap be narrowed? (3 marks) (Total: 20
marks)
QUESTION 13
Part A
Compliance with fundamental principles of professional ethics may potentially be
threatened by a wide range of different circumstances.
REQUIRED:
State any five (5) ethical threats and for each threat give one example of a circumstance
that may create the threat. (5 marks)
Part B
Assume you are the audit manager of Island Associate Auditors and you are planning to
audit MAM Plc, a listed Company at Dar es Salaam Stock Exchange and which has been
your audit client for four years. MAM specializes in manufacturing luxury mobile phones.

lOMoARcPSD|16729859
During the planning stage of the audit you have obtained the following information: The
employees of MAM Plc are entitled to purchase mobile phones at a discount of 10%. The
audit team has in previous years been offered the same level of staff discount. During the
year, the financial controller of MAM was ill and hence unable to work. The Company
had no appropriate staff to perform his duties. Hence, a qualified audit senior from Island
Associate Auditors was seconded to the client for three months.
The audit partner has recommended that the audit senior to be included in the team to
audit MAM Plc as he has good knowledge of the client.
The fee income derived from MAM was boosted by this engagement of seconding the
audit senior to MAM to 16% of the firm9s total fees. From a review of the correspondence
files, you have noted that the audit partner of Island Associate Auditors and the finance
director of MAM have known each other for many years and in fact went on holiday
together last summer with their families. As a result of this friendship the partner has not
yet spoken to the client about the fee for last year9s audit, 20% of which is still outstanding.
REQUIRED:
Explain the specific ethical threats which may affect the independence of Island Associate
Auditors during the audit of MAM Plc, and for each threat explain how it might be
avoided. (10 marks)
a) Describe the steps an audit firm should undertake prior to accepting a new audit
engagement. (5 marks) (Total: 20 marks)
QUESTION 14
You are an audit senior in Hearn & Co. and are currently reviewing documentation for
Shabrey Ltd9s. Shabrey is a small company that produces and sells high-quality knitwear.
Its customers are principally fashion boutiques. Shabrey has two directors, one of whom
manages the day-to-day administration of the business. The other is a non-executive
director. A senior employee, Patrick, is responsible for processing revenue and
receivables.
The company has one sales representative, who visits customers9 boutiques and is
responsible for finding new customers and for generating and taking orders from all
customers. Orders are recorded on an order form which is referenced with the date and
time the order was placed and the customer9s initials. The sales representative passes the
completed forms to the warehouse. The completed order is despatched from the
warehouse by courier, accompanied by a copy of a despatch note.
A second copy of the despatch note is sent to Patrick, who prepares an invoice using its
details and the company9s authorised price list. He sends one copy of the invoice to the
customer and retains a second copy. Each Friday, Patrick inputs the week9s invoices into
the computerised sales and nominal ledger. He then files them alphabetically by customer
name. Despatch notes are not retained because filing space is limited.

lOMoARcPSD|16729859
Patrick opens the post daily and lists remittances received from customers. Each Friday,
he inputs the information listed to the receivables ledger. He passes the cheques to the
managing director who is responsible for their lodgement. Patrick reviews the
computerised accounts receivables ledger balances every month and writes to customers
who have not paid within 90 days of receiving goods. The receivables ledger is printed
out annually for year-end purposes. Otherwise, no hard copy is printed and Patrick
reviews the receivables ledger on the computer screen.
The company9s computer software includes the facility to produce a day book and an
accounts receivables ledger control account. These are not used because Patrick considers
that the low volume of transactions (10 to 15 invoices per week) renders them
unnecessary.
REQUIREMENT:
As the external auditors of Shabrey:
a) Discuss the significant deficiencies in the sales and receivables system. (7 marks)
b) For the significant deficiencies in the sales and receivables system, assess the
possible implications of each deficiency for the financial statements. (7 marks)
c) Justify a recommendation to address each deficiency. (6 marks)
[Total: 20Marks]
QUESTION 15
Your audit firm, CDE&Co. has just taken on a new client, La-Nua Ltd (La-Nua), a very
successful indigenous health club that operates both a membership and pay as you use
system. La-Nua, which commenced business in 2010, has faced competition for the last
two years from a nationwide health club, Gyms Ltd, which operates a members-only
policy. You have just been advised that your firm has received an invitation to tender for
the audit of the company that owns Gyms Ltd.
The Managing Director of La-Nua, Maeve, is an old college friend of your audit manager
and it was through this connection that your firm was able to tender for its audit. You
have been assigned as senior auditor for La-Nua.
On a recent visit to your office, Maeve stated that she would like to extend an offer that
all staff of CDE&Co. would be eligible for a special membership rate, which is 50% of
standard membership rates and then entitles the member to 75% off special classes.
She proposed that you sit on the board of directors at La-Nua as a non-executive director.
Additionally, she proposed that your firm confirm, as part of the audit, the figures on an
insurance claim to be submitted in respect of damage caused by a burst water pipe. The
pipe burst during a spell of cold weather in the main gym area just prior to the year end.
REQUIREMENT:
a) In the context of the above scenario:
i) Evaluate the ethical threats (real or perceived) which may affect the independence
of your firms audit of La-Nua; and (8 marks)

lOMoARcPSD|16729859
ii) For each threat recommend how it might be eliminated or mitigated to a

satisfactory level. (8 marks)
b) Discuss the benefits of an audit committee to a company. (4 marks)
QUESTION 16
You have just completed your internship at a firm of Certified Public Accountants and are
competing to be retained as a permanent staff member. The firm9s audit partner
responsible for recruitment wishes to ensure that the successful candidate is competent in
the core areas of the audit process. As part of the selection process, all candidates have
been requested to submit a memorandum to the Audit Partner relating to the following:
 Audit engagement letters
 Methods of obtaining audit evidence
 The design and performance of substantive analytical procedures.
REQUIREMENT:
a) Appraises the typical items that should be included in an audit engagement letter.
(7 Marks)
b) Outlines SIX methods of obtaining audit evidence, and provides a brief illustrative
example of each. (7 marks)
c) Discusses the factors that the auditor should consider when designing and
performing substantive analytical (6 marks)
[Total: 20 Marks]
QUESTION 17
You are appointed to be a leader to a group of new trainee audit staff on the area of fraud
and error. A number of the trainees have stated that they are aware that the issue of fraud
and error is something they will likely face in the completion of their duties, but are
unsure as to what their responsibilities and those of the directors are in this area. You
decide to provide them with explanatory notes with regard to audit matters pertaining to
fraud and error.
Requirement:
Prepare notes for the trainee audit staff on your induction course which:
a) Differentiate between the responsibilities of the auditor and the directors with
respect to fraud. (4 marks)
b) Discuss the steps which auditors should take when fraud is suspected. (10 marks)
c) Evaluate the limitations of audit procedures in detecting fraud and error. (6 marks)
[Total: 20 Marks]
QUESTION 18
Irish Bus Tours (IBT) is an Irish-registered company that offers premium coach tours
around Ireland. Your firm has recently been appointed auditor for IBT.
You as audit senior are now preparing an overall audit strategy, with one of its principal
sections being an overview of IBT9s business and the tourism industry.
REQUIREMENT:

lOMoARcPSD|16729859
a) Describe THREE benefits an auditor derives from planning audits. (3 marks)

b) Outline the responsibilities of the new and previous auditors when a company is
changing auditors. (4 marks)
c) According to ISA 220 - Quality Control for an Audit of Financial Statements, the
auditor should consider certain factors before accepting a new engagement or
continuing an existing engagement. Discuss three such factors. (9 marks)
d) As per ISA 320 - Materiality in Planning and Performing an Audit, briefly set out the
following:
 What constitutes a material misstatement?
 How the auditor might calculate 8materiality9? (4 marks)
[Total: 20 Marks]
QUESTION 19
You are the external auditor of Fuel Nation Co (Fuel Nation) for the year ended 31 March
2016. Fuel Nation operates 12 petrol stations in Leinster. As well as selling petrol, each
petrol station also has a convenience shop and a car wash facility. Each petrol station is
responsible for its own inventory procurement and produces monthly management
accounts which are sent to the central accounts department at Fuel Nation.
Invoices received from fuel suppliers and other suppliers of goods are kept on record at
the individual petrol stations. A monthly summary of the invoices is supplied to the
central accounts department from each petrol station. Fuel Nation is financed by a Tsh.
250,000,000bank loan, of which the capital is repayable at a rate of Tsh. 50,000,000 per
annum for the next 5 years starting on 31 December 2016.
Requirement:
a) You are required to prepare a memo for your junior audit staff in which you:
Outline what is meant by the term analytical procedures and how they may be
used during the various stages of the audit of Fuel Nation. (4 marks)
b) Discuss four appropriate analytical procedures that should be performed to
examine Fuel Nation9s revenue and profit. (4 marks)
c) Specify appropriate substantive procedures that should be carried out to verify
each of the following assertions:
 The valuation of inventory
 The completeness of payables (8marks)
d) Describe appropriate substantive procedures that should be performed to audit
Fuel Nation's bank loan. (4 marks
[Total: 20 Marks]
QUESTION 20
a) ISA 300 Planning an audit of financial statements requires auditors to establish the
overall strategy for an audit.
Requirement:
Which key items should be included in an audit strategy document, and why? (8
marks)

lOMoARcPSD|16729859
b) ISA 315 Identifying and assessing risks of material misstatement through

understanding the entity and its environment, requires auditors to assess the risks
of material misstatement of the financial statements whether due to fraud or error,
through obtaining an understanding of the entity and its environment, including
internal controls, in order to be able to design and perform further audit
procedures.
Requirement:
Evaluate critically three procedures that should be carried out to obtain an
understanding of an entity in order to conduct its audit for the first time.
(6 marks)
c) In line with ISA 320 Materiality in planning and performing an audit, discuss the
meaning of materiality and briefly assess its impact on an audit.
(6 marks) [Total: 20 Marks]
QUESTION 21
The partner in charge of the audit of AKxL Garage Ltd (AKxL) has asked you to
commence planning for the forthcoming audit. The company is a newly acquired client of
your firm.
The company has a turnover of approximately €5 million with a profit of €300,000. It holds
the franchise for a leading car brand in the Louth and Meath region and operates from
premises in Navan and Drogheda. It also retails second-hand cars together with related
ancillary services such as car servicing, repairs, and valeting.
AKxL has been in operation since 1974 and has been run by the Kavanagh family. At
present the company is run by Pat and Jane together with their cousin John, who joined
the company in the past year. Pat is responsible for all car servicing, car repairs and petrol
sales. He has been in this position for the last ten years. Jane has recently taken over the
administration and accounting side of the business due to the retirement of her uncle,
Mick Kavanagh, who previously handled these matters. Jane was previously in charge of
sales for new and second-hand cars. John, who is Mick9s son and as mentioned above,
joined the company this year, has taken over sales function from his cousin Jane.
The company sold approximately 200 new cars during the year and currently has 20 new
cars in stock, 15 on order for customers and five 8demonstration9 models for potential
customer test drives. It also has in stock 60 second-hand cars which were accepted as
8trade- ins9. AKxL carries a large stock of spare parts as it advertises that it offers a speedy
and comprehensive repairs service to customers.
The company has a significant level of short-term borrowings, which it uses to finance its
stock and a newly constructed extension to the show room in the Drogheda premises.
Recent issues of leading motoring trade magazines indicate that the car manufacturer
from which AKxL holds its franchise is reviewing its car models with a view to narrowing

lOMoARcPSD|16729859
the product range. There have also been some suggestions in the trade and wider business
press that this manufacturer would like to sell cars directly to customers rather than via
garages such as AKSL9s. It is also reported that the manufacturer might be forced to do so
under forthcoming legislation.
REQUIREMENT:
a) Assess the inherent risk associated with AKxL Garage Ltd at both the entity level
and account balance/class of transaction level. (8 marks)
b) Describe the internal controls that should exist over car sales where the control risk
is deemed to be low in this area. (6 marks)
c) Recommend the audit work that should be carried out to establish if the company
is a going concern. (6 marks)
[Total: 20 Marks]
QUESTION 22
Hiko Plant and Machinery Hire Company operates from twelve separate depots
providing a national plant and machinery hire service throughout the country. The
company offers hire services of a wide variety of tools and equipment to builders and
corporate customers on credit and to members of the public on advance payment terms,
including payment by cash. In addition to the revenue generated from the hire of plant
and machinery, the company also generates income from the sale of damaged or aged
machinery and the hire of accessories and safety equipment.
REQUIREMENT:
a) Critically evaluate THREE factors that would suggest that there may be a high
inherent risk applying to Plant and Machinery Income as reported in the financial
statements of Hiko Plant and Machinery Hire Company. (12 marks)
b) What is meant by each of the following from an audit perspective?

i) Audit risk
ii) Inherent risk
iii) Control risk
iv) Detection risk. (6 marks)
(c) Explain the meaning of the term 8audit evidence9 and its importance in the context of
an audit of financial statements. (2 marks)
[Total: 20 Marks]
QUESTION 23
a) List and explain FIVE factors that will influence the auditor9s judgment regarding
the sufficiency of the evidence obtained. (5 marks)
b) What key issues must an auditor consider before relying on the work of an expert?
(5 marks)
c) ISA 505 External Confirmations states that <the auditor should determine whether
the use of external confirmations is necessary to obtain sufficient appropriate audit
evidence at the assertion level.=

lOMoARcPSD|16729859
Required:
Provide examples of external confirmations and for each one outline:
i) An audit assertion that the external confirmation supports; and (5 marks)
ii) An audit assertion that the external confirmation does NOT support. (5
marks)
[Total: 20 Marks]
QUESTION 24
a) In January 2015 the IAASB issued ISA 701, Communicating Key Audit Matters in
the Independent Auditor9s Report. This standard is required to be applied to the
audit of all listed entities.
Required:
i) Explain the term Key Audit Matters as defined in ISA 701.
(3 marks)
ii) Give TWO examples of key audit matters. (4 marks)
b) When an audit firm is in disagreement with management and is therefore unable

to express an unqualified opinion as to whether the financial statements of a
company give a true and fair view, it may opt to express a qualified opinion or an
adverse opinion in its report on the financial statements.
Required:
Evaluate the circumstances, when due to disagreement, an audit firm may express
a qualified opinion or an adverse opinion in its report on the financial statements
of a company. (6 marks)
c)
Bunju Co provides scientific services to a wide range of clients. Typical assignments range
from testing food for illegal additives to providing forensic analysis on items used to
commit crimes to assist law enforcement officers.
The annual audit is nearly complete. As audit senior you have reported to the engagement
partner that Bunju Co is having some financial difficulties. Income has fallen due to the
adverse effect of two high-profile court cases by customers who bought drugs from the
Company part way through the year. There has been adverse publicity for Bunju Co, and
a number of clients have withdrawn their contracts. A senior employee then left Bunju
Co, stating lack of investment in new pharmaceutical products and facilities was
increasing the risk of incorrect information being provided by the company.
A cash flow forecast prepared internally shows Bunju Co requiring significant additional
cash within the next 12 months to maintain even the current level of services. Bunju9s
auditors have been asked to provide a negative assurance report on this forecast.
Required:
Explain the audit procedures that may be carried out to determine whether or not Bunju
Co has the ability to continue as a going concern entity. (7marks)
[Total: 20 Marks]

lOMoARcPSD|16729859
QUESTION 25
Part A
Professionals have an obligation to respect confidentiality of information about client or
employer9s affairs acquired in the course of professional services. The duty of
confidentiality continues even after the end of the relationship between the professional
auditor and the client or employer.
Required
i) Explain four situations justifying when can confidential information be disclosed?
(3 marks)
ii) What factors to consider when disclosing such information? (3 Marks)
Part B
You are an audit manager of Shalom & Associates (SnA audit firm) and you are planning
the audit of Ebenezer Finance Co (Ebenezer), a banking institution that provides a range
of financial services including loans in Tanzania. Your firm has audited Ebenezer for four
years and the company9s year-end is 30 September 2015.
At the end of August, Ebenezer9s financial controller left and the new replacement is not
due to start until approximately two months after the year-end. The finance director, who
is the sister-in-law of the audit engagement partner, has asked if a member of the audit
team can be seconded to Ebenezer for three months to act as the temporary financial
controller. You are aware that a number of the audit team members currently bank with
Ebenezer and two team members have significant loans owing to the company.
Shalom9s taxation department also provides services to Ebenezer. They have been
approached by Ebenezer to represent them in negotiations to resolve some outstanding
issues with the taxation authorities, for which the fees quoted are substantial. The finance
director has informed the audit engagement partner that when the audit is complete, she
would like the whole team to attend an evening watching the national football team play
a match followed by a luxury meal.
Required:
Using the information above:
i) Identify and explain FIVE ethical threats which may affect the independence of
Shalom & Associates firm in the audit of Ebenezer Finance Co; and
(5 Marks)
ii) For each threat, explain how it might be reduced to an acceptable level. (5 Marks)
Part C
Auditors are required to plan and perform an audit with professional scepticism, to
exercise professional judgment and to comply with ethical standards. (5 Marks)
Required:
Explain what is meant by 8professional scepticism9 and why it is so important that the
auditor maintains professional scepticism throughout the audit.

lOMoARcPSD|16729859
QUESTION 26
Part A
The Article 143(5) of the Constitution of the United Republic of Tanzania (URT) of 1977,
empowers the Controller and Auditor General (CAG) to audit the account of public
authorities and other bodies including those entities which the Government is the
majority shareholders as per the Public Audit Act No. 11 of 2008.
Required
i) Discuss tenure and the removal of the Controller and Auditor General (CAG) from
his office. (8 marks)
ii) Mention and explain the legal mandates of the Controller and Auditor General
(CAG) in Tanzania. (6 marks)
Part B
Public Finance Act, CAP 348 s.37 states that there shall be an Internal Auditor General
(IAG) under the ministry responsible for finance.
Required
Point out any SIX functions of the Internal Auditor General (IAG)? (6 marks)
QUESTION 27
Part A
Tumaini Civil Works Ltd is a construction company with many contracts being executed
concurrently. A large number of workers are on various construction sites. Tumaini Civil
Works Ltd external auditors are trying to wages systems of the company. The following
information is available concerning the wages systems:
A foreman controls workers on each site. The foreman has a record of all employee
numbers and can issue temporary numbers for new employees. Any overtime is
calculated by the computerised wages system and added to the standard pay.
The two staff in the wages department make amendments to the computerised wages
system in respect of employee leave, illness, as well as setting up and maintaining all
employee records. The computerised wages system calculates deductions from gross pay,
such as employee taxes (PAYE), and other statutory deductions.
Finally, a list of net cash payments for each employee is produced. Cash is delivered to
the wages office by secure courier. The two staff places cash into wages envelopes for each
employee along with a handwritten note of gross pay, deductions and net pay. The
envelopes are given to the foreman for distribution to the individual employees.
Required:
Identify and explain FIVE deficiencies in Tumaini Civil Works Ltd system of internal
control over the wages system that could lead to misstatements in the financial statements,
and, for each deficiency, suggest an internal control to overcome that deficiency.
(10 Marks)

lOMoARcPSD|16729859
Part B
Briefly explain any FOUR advantages of out outsourcing internal audit department (4
Marks)
Part C
ISA 320 Materiality in Planning and Performing an Audit provides guidance on the
concept of materiality in planning and performing an audit.
Required:
Define performance materiality and explain circumstances justifying that materiality
should not be determined by size alone, but also nature of an item.
(6 Marks)
QUESTION 28
Part A
Compare and contrast the role of internal auditors and external auditors. [5 Marks]
Part B
BCC Financial Consultants is a large company limited by shares which operates a network
of teaching centres in countries across East Africa. The Company was incorporated under
the requirements of the Companies Act, 2002 on 19 January 2010 and domiciled in
Tanzania. Students who register with the Center pay 30% during initial registration and
the remaining 70% over the course period. You are the senior Associate of Add Consult.
BCC is a new client and you are currently planning the audit with the audit manager to
audit the company for the year ended 31 December 2018.
You have been provided with the following planning notes from the audit partner
following his meeting with the Finance Director.
BCC purchases stationery from a supplier in China and these goods are shipped to the
company9s central warehouse. The goods are usually in transit for a fortnight and the
company correctly records the goods when received. BCC does not undertake a year-end
inventory count, but carries out monthly continuous (perpetual) inventory counts and
any errors identified are adjusted in the inventory system for that month.
During the year the directors of the Company have each been paid a significant bonus,
and they have included this in wages and salaries expenses. The Companies Act requires
separate disclosure of the bonus. BCC has a policy of revaluing its land and buildings and
this year has updated the valuations of all land and buildings.
During the year the company introduced a bonus based scheme on sales for its sales
persons. The bonus target was based on increasing the number of students signing up for
6-month courses by the school for individuals running accountancy examinations. This
has been successful and revenue has increased by 25%, especially in the last few months
of the year. The level of receivables is considerably higher than last year and there are
concerns about the creditworthiness of some students.

lOMoARcPSD|16729859
Required:
i) Describe FIVE (5) audit risks, and explain the auditor9s response to each risk, in
planning the audit of BCC Financial Consultants. (5 Marks)
ii) Suggest a response to reduce each of the identified risk to a low level possible.
(5 Marks)
Part C
An assurance engagement is an evaluation or measurement of a subject matter by a
professional accountant that is the responsibility of another party, against identified
suitable criteria to express a conclusion that provides the intended user with a level of
assurance about that subject. Both audit of cash flow forecast and statutory audits are
assurance engagements.
Required:
In this light, distinguish between type of assurance issued when auditing cash flow
forecast and type of assurance issued under statutory audit (5 Marks)
QUESTION 29
You act as the audit senior oABC Plc and you are about to begin the annual audit of the
company. ABC plc is a wholesale distributor of Irish farmhouse cheeses. ABC plc9s
distribution network at present consists of four countries; Ireland, France, England and
Germany.
To ensure continuity of supply, the company has a distribution warehouse in each

country. Its head office is situated in Tipperary, Ireland where the administration,
purchasing and accounting functions are dealt with for all four markets.
Given the geographical spread of its markets, strong internal controls are of high
importance to ABC Plc. In the course of the audit you will carry out a detailed examination
of ABC plc and its environment, including the company9s internal controls.
Required:
a) Outline what is meant by the term 8internal control environment9 and evaluate
THREE major factors that will be reflected in the control environment of a
company such as ABC plc. (7 marks)
b) Discuss why it is important for the auditor to obtain an understanding of the
company and its environment, including the company9s internal controls.
(5 marks)
c) Advise why an auditor will wish to establish if internal controls of a company are
effective and outline the stages involved in reviewing controls.
(6 marks)
d) For any two stages referred in your answer to (c) above, provide ONE specific
example of an activity linked to that stage. (2 marks)
(Total: 20 Marks)

lOMoARcPSD|16729859
QUESTION 30
You are the auditor of Mandota Ltd and in the course of the statutory year end audit you
identified the following significant points in regards to the purchases control system:
Amendments to the payables master file can only be made by the Managing Director
(MD). Access to the master file is restricted to the MD by password protection.
A print out of the master file is periodically extracted by the MD and compared to the
underlying system data to ensure that it has not been amended without authorisation.
The payables ledger balances are reconciled to the supplier statements by Mr Ricky who
is responsible for processing purchasing and payables. All reconciliations are retained on
file to assist with the preparation of year-end accruals and in cases of disputed payments.
At month end Mr Ricky prints off an aged payables ledger and writes cheques to all
suppliers with amounts in the 870 days and older9 column. He then presents the cheques
to the MD along with a copy of the aged payables ledger. The MD scrutinises the cheques
and relates the payables back to the authorised list of suppliers on the master file. The MD
then signs the cheques, and Mr Ricky mails them to suppliers.
All expense claims are supported by receipts, as required by company policy. All claims
are authorized by the MD, who checks that the receipts are sufficient evidence and that
claims are relevant to the business.
Required:
a) Discuss the strengths in the purchases and payables control system of Mandota
Ltd. (7 marks)
b) Outline tests of controls that you as auditor of Mystery Ltd should perform to
assess if the controls are operating effectively. (7 marks)
c) Describe the overall objectives of the auditor, when conducting an audit in
accordance with ISA 200 Overall Objectives of the Independent Auditor and the
Conduct of an Audit in Accordance with International Standards on Auditing.
(6 marks)
(Total: 20 Marks)

Auditing Principles and Practice 2020

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Auditing Principles and Practice 2020

Uploaded by

Copyright:

Available Formats

lOMoARcPSD|16729859

Auditing Principles AND Practice 2020

Auditing Principle and practice (Mzumbe University)

Scan to open on Studocu

Studocu is not sponsored or endorsed by any college or university

B3-Auditing Principles and Practice, 2020 BCC Financial Consultants

Downloaded by Zack Brighton (zackbrightone2329@gmail.com)

B3-Auditing Principles and Practice, 2020 BCC Financial Consultants

Downloaded by Zack Brighton (zackbrightone2329@gmail.com)

B3-Auditing Principles and Practice, 2020 BCC Financial Consultants

HISTORICAL DEVELOPMENT OF AUDIT

CONCEPT FROM THE DEFINITION

Downloaded by Zack Brighton (zackbrightone2329@gmail.com)

B3-Auditing Principles and Practice, 2020 BCC Financial Consultants

Users of Financial Statements

5. True and Fair view

7. Acts governing audit

Downloaded by Zack Brighton (zackbrightone2329@gmail.com)

B3-Auditing Principles and Practice, 2020 BCC Financial Consultants

 Public Finance Act

Downloaded by Zack Brighton (zackbrightone2329@gmail.com)

B3-Auditing Principles and Practice, 2020 BCC Financial Consultants

(auditor) is appointed by the shareholders (users) to express his opinion (assurance) in

ELEMENTS OF AN ASSURANCE ENGAGEMENT

1. A three party relationship

2. A suitable subject matter

However, the subject matter would be appropriate only if it is measurable and is

Downloaded by Zack Brighton (zackbrightone2329@gmail.com)

B3-Auditing Principles and Practice, 2020 BCC Financial Consultants

Characteristic of suitable criteria

4. Sufficiency and appropriate audit evidence (SAAE)

LEVELS OF ASSURANCE ENGAGEMENT

Objectives of an a reasonable assurance engagement

Downloaded by Zack Brighton (zackbrightone2329@gmail.com)

B3-Auditing Principles and Practice, 2020 BCC Financial Consultants

Why reasonable assurance and not absolute assurance?

2. Limited assurance engagement

Objectives of a limited assurance engagement

Example of Assurance Engagement

Example of Non-Assurance Engagement

1. Agreed upon procedures;

Downloaded by Zack Brighton (zackbrightone2329@gmail.com)

B3-Auditing Principles and Practice, 2020 BCC Financial Consultants

A compilation engagement occurs in the following circumstance

AN ATTESTATION ENGAGEMENT AND A DIRECT REPORTING ENGAGEMENT

It involve the following:

Example of attestation engagements

B. Direct reporting engagement

Downloaded by Zack Brighton (zackbrightone2329@gmail.com)

B3-Auditing Principles and Practice, 2020 BCC Financial Consultants

1. Right of access to records

2. Right to information and explanations

3. Right to receive resolutions

4. Right to attend and receive notice of meeting

1. Adequate accounting records

2. Compliance with legislation

4. Truth and fairness

Downloaded by Zack Brighton (zackbrightone2329@gmail.com)

B3-Auditing Principles and Practice, 2020 BCC Financial Consultants

AUDITOR9S LIABILITY AND THE EXPECTATION GAP

Elements of expectations gap

Downloaded by Zack Brighton (zackbrightone2329@gmail.com)

B3-Auditing Principles and Practice, 2020 BCC Financial Consultants

Closing the expectations gap