SUGGESTED SOLUTIONS

CL1- Advanced Audit and Assurance

July 2021
 SECTION 1
Answer 01
1.1

Learning outcome/s: 3.1.1

Study text reference: Volume I, Chapter 7 (Page 235)
Correct answer: C

1.2

Learning outcome/s: 3.2.1

Study text reference: Volume I, Chapter 11 (Page 332)
Correct answer: D

1.3

Learning outcome/s: 8.3.1

Study text reference: Volume II, Chapter 20 (Page 635)
Correct answer: B

1.4

Learning outcome/s: 3.3.1

Study text reference: Volume I, Chapter 13 (Page 472)
Correct answer: A

1.5

Learning outcome/s: 5.5.1

Study text reference: Volume II, Chapter 16 (Page 463)
Correct answer: D
1.6

Learning outcome/s: 7.4.1

Study text reference: Volume II, Chapter 19 (Page 583)
Correct answer: D

1.7

Learning outcome/s: 5.3.1

Study text reference: Volume II, Chapter 16 (Pages 468 – 476)
Correct answer: B

1.8

Learning outcome/s: 7.1.1

Study text reference: Volume II, Chapter 18 (Page 567)
Correct answer: A

1.9

Learning outcome/s: 7.2.1

Study text reference: Volume II, Chapter 18 (Pages 553 – 556)
Correct answer: C

1.10

Learning outcome/s: 1.3.1

Study text reference: Volume I, Chapter 2 (Page 53)
Correct answer: D

(Total: 20 marks)
 SECTION 2
Answer 02

Learning outcomes/s: 4.2.1 and 4.3.1

Study text reference: Volume II, Chapter 15 (Pages 436 and 440)

(a) Audit automation

 100% testing – It is true that audit automation enables auditors to examine a

complete data set. However, at present the auditor obtains evidence on the
effectiveness of controls in assessing the risk of material misstatements. If 100%
testing of transactions is possible, the auditor does not have to worry about the
controls. Nonetheless, the auditor still wants to understand the system which
provides the data set. On the other hand, the auditor is expected to provide
reasonable assurance, and this will not change in the future as it always involves
professional judgment. So, whether 100% checking is relevant to an audit is a
question.

 It is correct that the use of audit automation will significantly reduce human
intervention in analysing data and will have a significant impact on the efficiency
of audits. On the other hand, it requires resources skilled in high technology to
conduct data analytics. In contrast, although technology can help to obtain
evidence, auditors and stakeholders may become overconfident in the technology.
The auditor is still required to apply professional judgment in performing an
audit.

(b) Advantages of using CAATs

 The auditor can test program controls as well as general internal controls
associated with computers.
 The auditor can test a greater number of items more quickly and accurately than
would be the case otherwise.
 The auditor can test transactions rather than paper records of transactions that
could be incorrect.
 CAATs are cost-effective in the long-term if the client does not change its systems.
 The results from CAATs can be compared with the results from traditional testing.
If the results correlate, overall confidence is increased.

(Total: 10 marks)
Answer 03

Learning outcomes/s: 1.2.2 and 8.1.1

Study text reference: Volume I, Chapter 3, Page 77
Volume II, Chapter 20, Page 625

(a) Effective control (b) Test of control

Invoice is matched with the relevant goods
received note (GRN) and purchase order (PO)
before it is entered into the system. This makes
sure that the correct goods have been delivered,
in the correct quantities, and that the supplier is
invoicing for the correct price.
Select a sample of invoices and check whether
they are filed with the relevant GRN and PO
and whether there is evidence of matching of
the three documents.

Batch controls are used when entering the - Observe the invoice entry process to ensure
invoice details. This enables data entry errors to batch control sheets have been used and the
be identified and corrected on a timely basis. manually produced invoice total is matched
with the computer generated total before
processing.
- Using test data, check the data entry process.

The accountant checks and authorises Review a sample of payment vouchers for
individual payments. This prevents improper evidence of the accountant’s review and
payments. authorisation.

Payments are made by the cashier and recorded Observe the payment and recording system to
by the accounts division. This is to reduce the ensure there is adequate segregation of duties.
risk that a person will be able to make an
incorrect (fraudulent) payment.

Invoices are stamped as “PAID” and then filed. Inspect a sample of invoices for evidence of the
This prevents invoices being paid twice. payment stamp.

Invoices are stamped as "ENTERED". This Select a sample of invoices recorded in the
prevents invoices being processed twice. purchase system and inspect them to ensure
they are marked as "ENTERED".
(c)

 The aims of internal audit are agreed by the board.

 Internal audit covers all areas of controls, and not just accounting controls.
 Internal audit has whatever access is necessary to people and documents.
 The head of internal audit has clear access to the chairman and chief executive officer
of the organisation, as well as to the chairman of the audit committee.
 The head of internal audit reports to a senior director.
 The internal audit department is independent of the executive management.
 Internal audit fulfils the requirements of auditing standards and best practices.
 Internal audit is consulted if there are likely to be significant changes in the business
or control systems.
 The internal auditor does not have operational involvement in areas outside the
internal audit.
 Results of the internal audit work are clearly communicated, and the recommendations
are acted upon by the senior management.
 Internal audit’s performance is regularly assessed.

(Total: 10 marks)
Answer 04

Learning outcomes/s: 1.2.2

Study text reference: Volume II, Chapter 19 (Pages 602 and 604)

(a) The firm has provided valuation services in 2020, when it was not the auditor of the
company. However, this continues to appear in the financial statements and therefore
it is important to understand the impact (of the services provided to the company) on
independence, if the firm accepts the appointment as the external auditor.

The firm was involved in determining a value that appears in the statement of financial
position of the company. Hence, this will have a self-review threat as it will be subject
to the audit and the auditor is expected to express an opinion on the consolidated
financial statements.

If the goodwill amount is not material, the firm may consider appropriate safeguards
to mitigate the threat to independence in accepting this engagement. One of the
safeguards may be the appointment of a second partner to review the work of this and
other related areas.

However, with the given facts, it appears that the amount is material to the financial
statements as this was a material acquisition. In this case there are no safeguards
available to mitigate the self-review threat arising as a result of providing valuation
services. Hence the invitation cannot be accepted.

Additional points

 Obtain confirmation from the client that he understands the valuation and
assumptions used for the valuation and acknowledges the responsibility for the
valuation.
 Use separate personnel for the audit.
(b)

Service Independence implications

Preparation of tax returns Tax return preparation generally does not threaten
for the year ending 31 independence, as long as the management takes
December 2021 responsibility for the returns. If the management is
willing to assume responsibility, the firm will be able
to provide this service as it will be provided by a
different engagement team independent to the audit
team.

Calculation of the income This is a public listed entity and there is a prohibition
tax liability of the company imposed by the Code of Ethics. This would result in a
as at 31 December 2021 self-review threat as the auditor is involved in
determining an amount that will appear in the
financial statements of the company that are subject
to the audit. Further, it involves the auditor taking up
management responsibility. Hence, the firm will not
be able to accept this service.

Provision of tax advisory If this service is clearly supported by tax legislation

services and the advice will not depend on a particular
accounting treatment or presentation in the financial
statements, this service can be undertaken.

(Total: 10 marks)
Answer 05

Learning outcomes/s: 6.4.1

Study text reference: Volume II Chapter 17 (Page 532)

(a) In an engagement to provide a compilation service, there is neither reasonable

assurance nor negative assurance, because no procedures are performed to verify the
information. No opinion is provided because no assurance is provided.

Therefore, including an opinion paragraph such as, “In our opinion, the financial
information has been compiled, in all material respects, on the basis of the Sri Lanka
Accounting Standard for Small and Medium-sized Entities (SLFRS for SMEs)” is not
appropriate.

The compilation report should include a sentence that simply states, “These financial
statements and the accuracy and completeness of the information used to compile them
are your responsibility”.

(b)

 Obtain an understanding of the business and the accounting practices and principles of
the industry.
 Enquire from management personnel the nature of the business transactions and the
form of accounting records and information.
 Read the compiled information to ensure it is appropriate in form and content.

(Total: 10 marks)
 SECTION 3
Answer 06

Learning outcomes/s: 2.4.1, 2.5.1 and 3.4.1

Study text reference: Volume I Chapter 4 (Pages 139 – 142, 155 – 161)
Volume I Chapter 13 (Pages 382 – 389)
Volume I Chapter 10 (Page 317)

(a) Appropriate benchmarks

1. Total assets
2. Revenue

Reasons for selecting the benchmark

1. As GRL is a company driven by assets, it is best to use an asset-based measure for
materiality rather than the profit figure.
2. As GRL’s profits are volatile, these figures are not suitable to calculate materiality.
Therefore it is best to use revenue for the calculation of materiality.

(b) Risk (c) Response

Revenue recognition

Revenue for the nine months ended  Discuss the accounting policy for revenue
30 June 2021 amounting to Rs. recognition with the management in order to
1,160 million includes revenue of determine whether it is appropriate and consistent
Rs. 200 million on completed with the prior period.
projects for which the sales  For a sample of sales recognised during the period,
agreements are not signed with the trace the amounts back to the sales agreements,
customers. notice of possession documents and project
completion certificates in order to ensure the
Per the accounting policy for occurrence of revenue.
revenue recognition, income from  Test cut-off using sales agreements, notice of
the sale of property is recognised possession documents and project completion
when the sales agreement is signed certificates to ensure sales have been recorded in the
between the customer and GRL, and correct accounting period.
100% of the construction of the  Perform analytical procedures where monthly
property is completed. Therefore, revenue is compared to expectations and budgeted
there is a risk that the revenue is revenue.
recognised incorrectly.
(b) Risk (c) Response

Trade receivables

There is a risk that trade receivable  Obtain a copy of the aged receivables listing and
may be overstated if revenue has vouch a sample of balances to the sales agreements
been recognised incorrectly. to ensure that the report is correctly aged.
 Discuss with the management the basis on which
debts are written off as irrecoverable or have an
allowance made against them.
 Verify specific provisions considering
correspondence with debtors.
 Review correspondence with customers considered
doubtful.
 Review a sample of balances on the aged receivables
listing to ensure that they are included at their
recoverable amount.
 Review the cash book after the year-end to verify that
amounts outstanding at the year-end have been
settled subsequently.
 Perform testing for movements in the balance
between the interim date and the year-end (roll
forward procedures).
 Perform analytical procedures. Compare the number
of days’ sales this year with last year.
 Check approval for allowances and write offs.
 Enquire about disputed invoices.
 Consider if any legal proceedings have been
instituted against some customers.

Warranty provision
Calculation of the warranty  Review agreements and correspondence with
provision requires judgment as it is customers.
an uncertain amount. However,  Compare the provision with subsequent claims to the
there is a risk that the management date of the audit.
would understate this provision in  Compare the provision made in the prior year with
order to increase profits. the actual claims.
 Review the estimate of costs to be incurred.
 Review consistency in the assumptions and cost
estimation method.
 In the case of new projects, evaluate reasonableness
of estimates.
 Obtain confirmation from lawyers for warranty
claims made during the year.
(b) Risk
Investment property
During the year GRL started to rent
out the properties it had in
inventory. As a result, they were
transferred from inventory to
investment property. Therefore,
there is a risk that inventory has
been incorrectly transferred to
investment property.
Inventory
At the beginning of the financial
year GRL held a large stock of
unsold properties in its inventory.
During the year it started to rent
these properties out and
transferred them from inventory to
investment property. There is a risk
(c) Response
Depreciation
 Inspect the property to ascertain the reasonableness
of the remaining useful life.
 Consider the assumptions on which the management
has established depreciation rates.
 Verify that the depreciation rates have been properly
approved.
 Compare the depreciation rates to the rates used by
other companies in the same industry.
Other
 On a test basis, select some equipment items and
trace them to the asset register. Investigate items
physically found, but not entered in the asset
register.
 Review the records of income yielding assets.
Ascertain the relationship of income with the value of
the assets.
 Compare the asset register with the general ledger.
Enquire about the reasons for not including the cost
of certain assets in the general ledger if they appear
in the asset register.
 Check whether any capital expenditure has been
charged to revenue.
 Verify that finance leases have not been treated as
operating leases.
 Test a sample of properties transferred from
inventory to investment property.
 Verify a sample of lease agreements entered into
with tenants.
Verifying net realisable value
 Obtain an age analysis of the inventory and identify
slow-moving items.
 Obtain selling prices to verify the unit selling price.
 Review the reasonableness of further costs to be
incurred and the direct selling expenses.
 Verify subsequent selling prices.
 Review quantities moved in the subsequent period.
 (b) Risk
that the inventory as at 30
September 2021 is not valued at the Inventory count
lower of cost and net realisable
value (NRV).
(c) Response
 Consider the reliance of the work of the internal
auditor.
 Review the client’s count instruction.
 Verify that count sheets are pre-numbered.
 On a test basis, compare quantities per the count
sheet with physical quantities.
 On a test basis compare the physical quantities with
the count sheet.

Testing opening balances

 Observe the current physical inventory and work

back to the opening inventory.
 Perform audit procedures to verify the valuation of
opening inventory.

(d)

 In this scenario the engagement team has used the monetary unit sampling (MUS)
method. MUS is a type of value weighted selection in which sample size, selections
and evaluation result in a conclusion in monetary amounts.
 MUS is a more appropriate sample selection method in this case compared to other
sample selection methods (random, haphazard, systematic, block). One benefit of this
approach to defining the sampling unit is that audit effort is directed to the larger
value items because they have a greater chance of selection and can result in smaller
sample sizes.

Additional point

 In this scenario the engagement team has covered 80% of the population and they
have sent confirmation requests to 35 customers out of 58 customers. Under these
circumstances the sampling method the engagement team has selected for
circularisation can be regarded as appropriate.
(e)

 For tests of details, the auditor should project misstatements found in the sample to
the population to obtain a broad view of the scale of the misstatement.
 Misstatements established as anomalies can be excluded when projecting sample
errors to the population. In this case the posting error in the general ledger due to a
system failure on 10 December 2020 can be considered as an anomaly.
 Further, the in-transit items have been subsequently cleared. These also should not
be considered as errors.
 Therefore, only the exception related to the dispute with the customer can be
considered as an error, and it should be projected to the total population in order to
calculate the projected misstatement.
 The auditor should compare the projected misstatement with the tolerable
misstatement and see whether the exceptions noted would result in an audit
misstatement.
 Where the audited entity has corrected specific errors found in the sample, the
projected error may be reduced by the amount of these corrections.

(Total: 20 marks)
Answer 07

Learning outcomes/s: 3.7.1 and 5.1.1

Study text reference: Volume II Chapter 14 (Page 412)
Volume II Chapter 16 (Pages 458 and 460)

(a) SLAuS 560 requires the auditor to obtain sufficient appropriate audit evidence on
whether events occurring between the date of the financial statements and the
date of the auditor’s report that need adjustment or disclosure in the financial
statements are properly reflected in the financial statements. Accordingly, the auditor
is supposed to obtain the required evidence up to the date of issuing the auditor’s
report.

(b)
 Making enquiries of management – these enquiries shall cover areas such as
changes to the status involving subjective judgments and the assumptions made.
 Read minutes of general board/committee meetings and enquire about any
inconsistent information.
 Review the latest available interim financial statements, budgets, cash flow
forecasts and other management reports.
 Obtain evidence concerning litigation or claims, directly from the company's
lawyers (with client permission).
 Obtain written representations that all events occurring subsequent to the
period-end, which need adjustments or disclosures, have been adjusted or
disclosed.

Additional points

 Review management procedures for identifying subsequent events to ensure

such events are identified.
 Review the valuation of inventory of the company to ensure that they have been
valued at the lower of cost and NRV.
(c) According to LKAS 10, this is considered to be an adjusting event. As the amount is
material, the client should be requested to make an adjustment in the financial
statements and the audit working papers should support this. If the adjustments are
made, there will be no impact on the audit report.

If the adjustments are not made, the auditor should address this matter in the
auditor’s report, and it would result in a qualified opinion on the financial statements
after considering the materiality of the amount involved.

Carrying value of stock: LKR 10 million

Margin: 10%

Therefore, selling price: LKR 11 million

NRV (60%): LKR 6.6 million

Impairment (LKR 10 million – LKR 6.6 million) = LKR 3.4 million
This is above the materiality of LKR 3 million.

(d) The auditor’s report should include an emphasis of matter paragraph and bring
this matter to the attention of the users of the financial statements.

The following paragraph should be included in the auditor’s report.

“We draw attention to Note X in the financial statements, which describes the
uncertainty related to the outcome of the lawsuit filed against the company by Neon
PLC. Our opinion is not modified in respect of this matter”.

(e)
 A statement that the management is responsible for the other information.
 An identification of the other information obtained before the date of the
auditor’s report (for listed entities), and also the other information expected
to be obtained after the date of the auditor’s report.
 A statement that the auditor’s opinion does not cover the other information.
 A description of the auditor’s responsibilities for reading, considering and
reporting on other information.
 Where other information has been obtained, either a statement that the
auditor has nothing to report, or a description of any uncorrected material
misstatements.

(Total: 20 marks)
 Notice of Disclaimer

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you accept the answers on an "as is" basis.

They are not intended as “Model answers’, but rather as suggested solutions.

The answers have two fundamental purposes, namely:

1. to provide a detailed example of a suggested solution to an examination question; and

2. to assist students with their research into the subject and to further their understanding and appreciation of
the subject.

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CL1- Suggested Solutions July 2021