C2 GRANDE FINALE SOLVING MAY 2024 - SET 1 (SOLUTIONS)

(C2) - AUDIT AND ASSURANCE GRANDE FINALE SESSION - MAY 2024 - SET 1
GRANDE FINALE PROBLEM SOLVING SESSION

(C2) - AUDIT AND ASSURANCE
FOR MAY 2024 EXAMS
SET 1 - ANSWERS
Prepared : Dalton Mkaro - Masters of Finance & Investment , Bachelor of Accountancy, ATEC II , CPA (T)
Keep in touch via : +255 719 305 808 | info@covenantfinco.com | www.covenantfinco.com
ANSWER = QUESTION ONE
(a) Corporate governance and Audit Committee’s written terms of reference
According to the Cadbury report (1992), corporate governance is defined as the system by which
companies are directed and controlled.
The following are the responsibilities which should be included in the written terms of reference
for the Audit Committee for Panone Ltd:
(i) To review the company’s risk management system.
(ii) To review the company’s internal control.
(iii) To monitor and review the effectiveness of the company’s internal audit function.
(iv) To monitor the integrity of the financial statements of the company and any formal
announcements relating to the company’s financial performance, reviewing significant
financial reporting judgements contained in them.
(v) To make recommendations to the board, for it to put to the shareholders for their approval in
general meeting, in relation to the appointment, reappointment and removal of the external
auditor and to approve the remuneration and terms of engagement of the external auditors.
(vi) To develop and implement policy on the engagement of the external auditor to supply non-
audit services.
(b) Internal Audit Function

(i) Criteria used when evaluating the internal audit function
ISA 610 (Revised) Using the work of internal auditors gives the following criteria which the external
auditor must use when evaluating the internal audit function:
(i) The extent to which its objectivity is supported by its organizational status, relevant policies
and procedures
(ii) The level of competence of the function
(iii) Whether the internal audit function applies a systematic and disciplined approach (including
quality control).
(ii) Evaluation of whether Deloitte & Co. should use the work of the Internal Audit Function for
Panone Ltd -The Internal Audit Function for Panone Ltd has :-
Strengths
• The Internal Audit Function reports to the Board of Directors. However, for the Internal Audit
Function to more effective, it must report to the Audit Committee instead of the entire Board
of Directors.
• The internal auditors are members of the Tanzania Institute of Chartered Accountants (NBAA).
However, more information is required in order to appropriately evaluate the level of
competence of the function given that there are different levels of NBAA membership.
• The Internal Audit Function has appropriate quality control procedures and internal audit
documentation.
Prepared By: Dalton Mkaro – Masters of Finance & Investment, Bachelor of Accountancy , ATEC II, CPA (T),
Contacts: +255 719 305 808 | info@covenantfinco.com | www.covenantfinco.com Page | 1
Weaknesses
• Management has been too busy to act on the recommendations made by internal auditors.
• The Human Resource Department (HRD) oversees the employment decisions regarding
internal auditors. However, in order to strengthen independence, those charged with
governance must oversee employment decisions regarding internal auditors.
Conclusion - ISA 610 (Revised) states that the auditor shall not use the work of the internal auditor
if the internal audit function is found to be lacking in any area.
• The Internal Audit Function for Panone Ltd has some weaknesses and as such Deloitte & Co.
must not use the work of the Internal Audit Function.
• The Finance Director is an interested party and his views on the effectiveness of the Internal
Audit Function may not be objective.
( c ) Deficiencies in the credit sales system for Panone Ltd

Deficiencies Explanations
(1) Panone Ltd only allows credit sales to No assessment of credit worthiness is
government institutions performed. Some government institutions
may not have the capacity to pay and this
could result in unnecessary lengthy legal
battles.
(2) Any sales representative for Panone Ltd Without a designated senior staff, there is a
raises a sales order possibility of confusion which may provide
ground for fraudulent activities.
(3) The sales orders are not pre-numbered. It is very difficult to check the completeness
of sales orders and avoid unnecessary
disputes.
(4) No-one checks the sales order Errors and frauds may go unnoticed.
(5) The sales representative packs the There is a failure in segregation of duties in
required goods and raises a dispatch note allowing the sales representative to both pack
the goods and raise a dispatch note. It is
possible that the dispatch note could be
replaced later in order to conceal any fraud
in quantities dispatched.
(6) A consolidated invoice is sent by the Delayed invoicing has a negative impact on
marketing department at the end of the Panone Ltd.’s cash flows. In the long run,
month to each government institution Panone Ltd.’s going concern status could
become questionable.
(7) There is no credit limit Government institutions could be abusing the
credit facilities resulting in unnecessarily
huge receivable balance. This could be
beyond what Panone Ltd can afford. In
addition, financing cost for receivables is
likely to be very high, and may significantly
erode the margins.
( d ) Audit procedures for wages paid in cash:

1. Arrange to attend the pay-out of wages to confirm that the official procedures are being
followed.
2. Before the wages are paid compare payroll with wage packets to ensure all employees have a
wage packet.
3. Confirm that no employee receives more than one wage packet by attending the pay-out.
4. Agree entries in the unclaimed wages book with the entries on the payroll.
5. Confirm that unclaimed wages are banked regularly by scrutinizing bank statements and
matching to amounts in the unclaimed wages book.
6. Review the pattern of unclaimed wages in unclaimed wages book; variations may indicate
failure to record.
( e ) Audit risks and recommend appropriate responses

Audit risks Explanations Audit responses
(1) Inventories are There is a risk that some Test internal controls over
susceptible to theft. inventories included in the inventories.
financial statements could Attend inventory count and
have been stolen and carry out appropriate test
therefore do not exist. counts.
Hence, there is a possibility Assign more experienced
of the inventory balance audit staff to the audit of
being overstated. inventories.
(2) Invoicing government There is a risk of revenue For a sample of revenue
institutions in arrears. being recorded in a wrong entries recorded prior to the
period. Hence, the revenue year end, agree the
figure in the financial transactions as relating to pre
statements could be year-end sales by inspecting
misstated. the consolidated invoices and
the other supporting
documentation such as the
dispatch notes.
(3) Management bonuses Management has an Check the application of the
are reliant on sales incentive to manipulate guidelines given in IFRS 15
performance. performance, increasing the Revenue from contracts with
risk of revenue (sales) being customers.
overstated. For a sample of revenue
figures recognized agree to
relevant documentation e.g.
invoices, dispatch notes etc.
(4) Large amounts of cash There is an increased risk of Perform/reperform a

are collected and held prior fraud or theft. It is possible reconciliation of a sample of
to banking. that the amount of cash till records to actual
recorded in the financial bankings.
statements could be wrong.
(5) Overreliance on This may indicate Review correspondence with

overdraft facilities. going concern the bank for any evidence of
problems. withdrawal or extension of
overdraft facilities.
Definition and recommended substantive procedures Definition of substantive procedures

Substantive procedures are audit procedures performed to detect material
misstatements at the assertion level. They are generally of two types:
1. Substantive analytical procedures
2. Tests of detail of classes of transactions, account balances and disclosures.
Recommended substantive procedures

• Obtain a bank reconciliation and a listing for the outstanding lodgments
• Cast both the bank reconciliation and the listing for the outstanding lodgments to confirm
arithmetical accuracy
• Match the lodgments in the cashbooks and bank statements in order to verify the completeness of
the listing for outstanding lodgments
• Agree the total for the listing for the outstanding lodgments to the amount shown on the bank
reconciliation
• Verify by inspecting paying-in slips that outstanding lodgments are paid in prior to the year-end
• Review bank statements after the reporting date to check whether the outstanding lodgments have
been credited.
ANSWER = QUESTION TWO
(a) Advantages of professional codes of ethics:

• Codes represent a clear statement that professionals are expected to act in the public
interest, and act as a benchmark against which behavior can be judged. They should thus
enhance public confidence in the professions.
• Codes emphasise the importance of professionals considering ethical issues actively and
seeking to comply, rather than only being concerned with avoiding what is forbidden.
• The International Ethics Standards Board for Accountants (IESBA) code states that it
can be applied internationally. Local difference are not significant
• Codes can include detailed guidance, which should assist ethical decision-making
• Codes can include explicit prohibitions if necessary
• Codes prescribe minimum standards of behavior that are expected.
(b) Ethical threats and actions (safeguards):

Ethical threats Explanations Actions (Safeguards)
(1) Long association with Palamaganda Associates Review the situation and if
client were appointed auditors for necessary:
Kijazi Ltd ten (10) yearsago. • Rotate senior staff
There could be familiarity • Obtain second
threat due to along or close partner reviews
relationship with Kijazi Ltd. • Perform Independent
The auditors could be too (but internal) quality
sympathetic to Kijazi Ltd.’s control reviews.
interests or to accepting of
their work. This will impair
objectivity.
(2) Lowballing The Engagement Partner has Palamaganda Associates
been lowballing and as a mustensure that they carry out
result has been able to an audit of the quality
provide Kijazi Ltd with demanded by auditing
lucrative other services. It is standards and that the “cut-
not considered ethically price” audit fee does not call
wrong to charge a low price their independence into
for an audit in itself. This question.
does not generally threaten
independence.
(3) Recruitment of four (4) The Finance Director has The ethical threat is not
Accounts Assistants requested significant given that
Accounts Assistants are
Palamaganda Associates to junior staff members.
assist with therecruitment of
four (4) Accounts Assistants. However, Palamaganda
This could create a self- Associatesmust still not make
interest threat. The management decisions. The
independence of involvement could be limited
Palamaganda Associates to reviewing a shortlist of
may be adversely affected. candidates.
During the audit,

Palamaganda Associates
may not appropriately assess
the work of individuals they
helped recruit.
(4) Gifts and hospitality Kijazi Ltd has promised to Given that the laptop is
provide the Audit Senior unlikely to be considered
with a laptop. This could trivial and inconsequential,
negatively affect objectivity this offer must be refused. If
of the Audit Senior. The the issue of the laptop is
Audit Senior may fail to urgent, then Palamaganda
exercise appropriate levels of Associates must procure a
professional skepticism. laptop for the Audit Senior
immediately.
(5) Provision of internal Palamaganda Associates has Palamaganda Associates must
use
audit services received notification that it personnel not involved in the
has been nominated to be audit and avoid assuming
internal auditor of Kijazi management responsibilities.
Ltd. This could create self-
interest, familiarity and self-
review threats. For example,
it may be very difficult to
question the work of internal
auditors for fear of
Damaging Palamaganda
Associates’ reputation.
( c ) Main methods of obtaining audit evidence which can be used when auditing the depreciation
figure
• Recalculation – this consists of checking the mathematical accuracy of the workings for
depreciation
• Analytical procedures – comparing the depreciation figure for the current year with the
predicted (expected) amount.
( d ) Analytical procedures:
• A proof in total test on depreciation can be used as a substantive test (analytical procedure).
• In this test, the auditor will predict the expected charge for the year for depreciation by using
Kijazi Ltd.’s accounting policy for depreciation and applying this to the brought forward
figures for non-current assets from the prior year audited financial statements, factoring in
additions and disposals for the year.
• The figure obtained can be compared to the charge in the draft financial statements to assess
its reasonableness and accuracy.
ANSWER = QUESTION THREE
(a) Receivables:
(i) Teeming and lading fraud:
Teeming and lading involves an employee first stealing the cash receipts from a receivable (receivable
1) and not recording the receipt against the customer account. Then the employee receives more cash
from another receivable (receivable 2) and allocates it against receivable 1 in order to conceal the
stolen funds. Similarly, he or she then allocates monies from receivable 3 against amounts owed from
receivable 2, and so on. By allocating the funds in this way, there is only an apparent time lag on
posting the receipt of cash, rather than an obvious uncollected debt.
(ii) Action to take:
If auditors suspect teeming and lading has occurred, detailed testing will be required on cash receipts,
particularly on prompt posting of cash receipts.
(iii) Cut-off tests:

• For a sample of sales invoices around the year-end, inspect the dates and compare with the dates of
dispatch and the dates recorded in the ledger for application of correct cut-off.
• For sales returns, select a sample of returns documentation around the year-end and trace to related
credit entries.
• Perform analytical procedures on sales returns, comparing the ratio of sales returns to sales.
• Review material after-date invoices, credit notes and adjustments and ensure that they are recorded
correctly in the relevant financial period.
(b) Going concern:
(i) The objectives of the auditor are:

• To obtain sufficient appropriate audit evidence regarding, and conclude on, the appropriateness of
management’s use of the going concern basis of accounting in the preparation of the financial
statements
• To conclude, based on the audit evidence obtained, whether a material uncertainty exists related to
events or conditions that may cast significant doubt on the entity’s ability to continue as a going
concern
• To report in accordance with ISA 570 (Revised).
(ii) Actions to take:

• Ask management to extend its assessment to at least 12 months from the date of the financial
statements
• If the assessment is extended to at least 12 months from the date of the financial statements, discuss
the assessment with management
• Inquire of management its knowledge of events or conditions beyond the period of the assessment
that cast significant doubt on the entity’s ability to continue as a going concern
• Evaluate management’s assessment of the entity’s ability to continue as a going concern
• Remain alert throughout the audit for evidence of events or conditions that may cast significant
doubt on the entity’s ability to continue as a going concern
• If management refuse to extend its assessment to at least 12 months from the date of the financial
statements, discuss the issue with those charged with governance
• If the issue is still unresolved, a qualified opinion or a disclaimer of opinion in the auditor’s report
may be appropriate, because it may not be possible for the auditor to obtain sufficient appropriate
audit evidence regarding the use of the going concern basis of accounting in the preparation of the
financial statements.
ANSWER = QUESTION FOUR
(a)(i) Importance of professional skepticism in auditing:

It is important because it helps auditors to have a questioning (enquiring) mind and to be alert:
▪ That the financial statements may be materially misstated due to frauds or errors.
▪ That it is possible for management to override internal controls.
▪ To the audit evidence that contradicts the other audit evidence obtained.
▪ To questionable documents, information and responses to enquiries.
(ii)Differences between reasonable and limited assurance:

Reasonable assurance
o This provides high level assurance,
o Which is expressed in a positive form.
o Arises from a significant amount of work done.
o An external audit is an example of an assignment that results gives a reasonable assurance.
Limited assurance
o This provides lower level assurance,
o Resulting from lesser work compared with a reasonable assurance engagement and
o It is expressed in a negative form.
o A review engagement provides limited assurance.
(b ) (i) Deficiencies and recommendations in the internal control system:

Deficiencies (i) Recommendations
(1) Suppliers’ accounts reconciliations Suppliers accounts reconciliations shouldbe

done regularly (e.g. monthly) by the
Suppliers’ accounts reconciliations are no responsible official and reviewed and signed
longer performed. There is a risk that errors monthly by someone senior (e.g.finance
and frauds may be committed andgo manager).
unnoticed and undetected, leading toloss of
goodwill or funds.
Credit limits The credit limits should be set by someone

(2) These are set by a senior sales ledger clerk. senior (e.g. the sales manager) and these
There is a risk of setting too high or too low credit limits should be reviewed regularly
credit limits by a relatively junior officer, and signed (e.g. by sales director) to
which may lead to loss of revenue or minimise bad debts and loss of
irrecoverable debts (bad debts).
sales/revenue.
(3) Sales discounts The sales discounts should be set by

The sales supervisor decides on sales discount someone senior (e.g. the sales manager) and
levels. There is a risk wrong or to high these sales discounts should be reviewed
discounts may be set, because the supervisor regularly and signed (e.g. by sales director)
my not have the necessary skills and to minimise bad debts and loss of
experience to set appropriate discounts.
sales/revenue.
(4) New employees Someone senior (e.g. HR manager) should

The payroll department has helped by setting be setting up new employees, and it should
up any new employees who have joined. There be reviewed by an independent responsible
is a risk of payroll frauds because ghost official (e.g. HR director) and the review
employees may be set up. evidenced by signature.
(5) Salary increment Any salary increment should be approved by

The finance director increased employees’ the board to ensure that only approved salary
salaries by 5%, without the board approval and increment is given to employees.
directed the payroll accountant to change HR and payroll departments should update
payroll data. There is a risk the finance director the employees and payroll records
may give more than 5% to some employees.
accordingly.
(6) Payroll master file Someone senior (e.g. finance manager)

The payroll accountant made changes to the should be amending payroll data in the
payroll details in the payroll master file. There payroll master file, and it should be reviewed
is a risk of payroll frauds because ghost by an independent responsible official (e.g.
employees may be set up. Also wrong finance director) and the review evidenced
amendments may be done, due to lack of skills
by signature.
and experience.
(7) Payments policy Cash flow forecasting/budgeting should be

Delaying suppliers payments for 4 months, done regularly. The policy of delaying
may lead to a risk of missing out on early payment should be reviewed or revised, and
settlement discounts. Also, this can lead toa suppliers should be paid in timely,such that
loss of supplier goodwill as well as the risk supplier goodwill is not lost.
that suppliers may refuse to supply goods.
(8) Bank transfer payments The finance director should review the whole
The finance director only authorizes the total payments list and supporting documents
amount of payments to be made. There is a risk before authorizing. He should also agree the
that suppliers could be paid an incorrect amounts to be paid to supporting
amount, or that sums are being paid to documentation. He should evidence his
fictitious suppliers.
approval by signing the bank transfer list.
ANSWER = QUESTION FIVE
(a) Validity of the appointment of PWC Chartered Accountants:
(i) The appointment of auditor PWC Auditors:

This appointment was not valid as the auditor was single handedly picked. The due process of
appointing an auditor was not followed. There are professional ethics that must be followed when
being appointed as auditors.
(ii) Formalization of appointment of PWC Chartered Accountants:

The appointment of PWC Chartered Accountants may be formalized by requiring that the firm be
appointment by members at a general meeting.
Once the appointment is made by the shareholders, then PWC Chartered Accountants will require
communicating with the previous auditors before accepting nomination.
(iii) The roles and functions of the following committees:
1. Nomination committee – the committee is in charge of recommending appointments for directors

and board members of Omo Ltd.
2. Risk committee – the committee is in charge of examining risk management policies of the entity.
3. The audit committee is responsible for appointment of auditors and reviewing of financial
statements.
4. Remuneration committee-this is the committee that is responsible for developing a policy for
remunerations of Directors and Board members.
(b) External auditors can respond to assessed risks in the following ways:
o The engagement team at PWC Chartered Accountants needs to emphasize that auditors need
to observe professional skepticism throughout the audit of Omo Ltd
o More additional staff should be included on the audit team so that a thorough audit is being
performed.
o PWC Chartered Accountants senior auditors need to be on the ground and ensure that proper
supervision is carried during the audit.
o Auditors from PWC need to be unpredictable when performing audit procedures.
o The audit team should make changes to scope, timing and extent of their audit procedures
(c)Audit procedures for the following assertions:

(i) Completeness –
o There will be a need to review the numerical sequence of clock cards. Attend the payment of cash
wages to employees in order to confirm if the right procedures are being followed.
o Before wages are paid, compare payroll with wage packet to confirm if all employees have a wage
packet.
(ii) Cut –off –

o Obtain a sample of employee payments and agree whether they were recorded in the current
accounting year.
o Obtain the company policies and procedures and review for any reporting changes to the payroll
department.
(iii) Accuracy-
o Recalculate benefits and deductions for a sample of employees.
o Review reconciliations of payroll before and after payments have been made.
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C2 GRANDE FINALE SOLVING MAY 2024 - SET 1 (SOLUTIONS)

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(C2) - AUDIT AND ASSURANCE GRANDE FINALE SESSION - MAY 2024 - SET 1

GRANDE FINALE PROBLEM SOLVING SESSION

ANSWER = QUESTION ONE

(a) Corporate governance and Audit Committee’s written terms of reference

(b) Internal Audit Function

( c ) Deficiencies in the credit sales system for Panone Ltd

( d ) Audit procedures for wages paid in cash:

( e ) Audit risks and recommend appropriate responses

(4) Large amounts of cash There is an increased risk of Perform/reperform a

(5) Overreliance on This may indicate Review correspondence with

Definition and recommended substantive procedures Definition of substantive procedures

Recommended substantive procedures

ANSWER = QUESTION TWO

(a) Advantages of professional codes of ethics:

(b) Ethical threats and actions (safeguards):

During the audit,

ANSWER = QUESTION THREE

(i) Teeming and lading fraud:

(iii) Cut-off tests:

(b) Going concern:

(i) The objectives of the auditor are:

(ii) Actions to take:

ANSWER = QUESTION FOUR

(a)(i) Importance of professional skepticism in auditing:

(ii)Differences between reasonable and limited assurance:

(b ) (i) Deficiencies and recommendations in the internal control system:

(1) Suppliers’ accounts reconciliations Suppliers accounts reconciliations shouldbe

Credit limits The credit limits should be set by someone

(3) Sales discounts The sales discounts should be set by

(4) New employees Someone senior (e.g. HR manager) should

(5) Salary increment Any salary increment should be approved by

(6) Payroll master file Someone senior (e.g. finance manager)

(7) Payments policy Cash flow forecasting/budgeting should be

ANSWER = QUESTION FIVE

(a) Validity of the appointment of PWC Chartered Accountants:

(i) The appointment of auditor PWC Auditors:

(ii) Formalization of appointment of PWC Chartered Accountants:

(iii) The roles and functions of the following committees:

1. Nomination committee – the committee is in charge of recommending appointments for directors

(c)Audit procedures for the following assertions:

(ii) Cut –off –

COVENANT INSTITUTE OF ACCOUNTANCY & TECHNOLOGY (CIAT)

3 VETA Certificate in Business 2 passes of at least a “D” grade in form four

*******TO BE CONTINUED, WATCH OUT FOR SET 2 ******

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*TO BE CONTINUED, WATCH OUT FOR SET 2