Question

Ace Ltd has in place a defined benefit pension plan for all its management employees and service gratuity scheme for all contract employees. A valuation estimate by management on 31 December 2017 indicated that the plan is in deficit by Ksh 258 million. The deficit is not recognized in the statement of financial position. You have assessed the effects of omission of this liabilities and you are certain that it not only contravenes accepted accounting practice, but is also material and pervasive.

Required:

a) Briefly explain the responsibility of the auditor in relation to the financial statements

b) List four assertions of financial statements relevant to the audit of tangible non-current assets and state one audit procedure which provides appropriate evidence for each assertion.

c) Explain the term ‘audit risk’ and the three elements of risk that contribute to total audit risk.

d) Discuss the type of audit opinion you will issue in the above case and draft the opinion paragraph

e) Explain meaning of control environment and state the implication of weak control environment to the overall approach of the audit work.

Answer 1

A)

· RISK ASSESSMENT, AUDIT RISKS, AND AUDIT PROCEDURES. IDENTIFYING AND ASSESSING THE OVERALL RISK OF MATERIAL MISSTATEMENT...

· INTERNAL CONTROLS. ADDITIONALLY, THE AUDITOR IS ALSO RESPONSIBLE FOR OBTAINING AN UNDERSTANDING OF THE INTERNAL CONTROLS...

· ACCOUNTING ESTIMATES. THE AUDITOR IS ALSO RESPONSIBLE TO ENSURE THAT THE ACCOUNTING POLICIES AND THE OVERALL...

· AUDIT CONCLUSION. AFTER HAVING CONDUCTED THE RELEVANT AUDIT RISK ASSESSMENTS.

B)

AUDIT ASSERTIONS	TRANSACTIONS AND EVENTS	ACCOUNT BALANCES	DESCRIPTION
EXISTENCE OR OCCURRENCE	OCCURRENCE	EXISTENCE	TRANSACTIONS OR EVENTS RECORDED ACTUALLY OCCURRED DURING THE ACCOUNTING PERIOD. ITEMS RECORDED ACTUALLY EXIST AT THE BALANCE SHEET DATE. THESE TWO AUDIT ASSERTIONS ARE SIMILAR; THE DIFFERENCE IS THAT OCCURRENCE IS FOR INCOME STATEMENT TRANSACTIONS WHILE EXISTENCE IS FOR BALANCE SHEET ITEMS.
RIGHT AND OBLIGATION		RIGHT AND OBLIGATION	THE COMPANY HAS THE RIGHT TO CONTROL AND USE ITS ASSETS AND HAVE OBLIGATIONS TO PAY ITS LIABILITIES. RIGHT AND OBLIGATION ASSERTION IS ONLY FOR BALANCE SHEET ITEMS ONLY.
COMPLETENESS	COMPLETENESS	COMPLETENESS	ALL TRANSACTIONS, EVENTS, ASSETS, LIABILITIES, AND EQUITIES THAT SHOULD HAVE BEEN RECORDED HAVE BEEN RECORDED IN FINANCIAL STATEMENTS. WE TEST THIS AUDIT ASSERTION FOR BOTH INCOME STATEMENT TRANSACTIONS AND BALANCE SHEET ITEMS.
ACCURACY, OR VALUATION AND ALLOCATION	ACCURACY	VALUATION AND ALLOCATION	AMOUNT RELATED TO TRANSACTIONS AND EVENTS HAVE BEEN RECORDED APPROPRIATELY. ITEMS IN THE BALANCE SHEET HAVE BEEN APPROPRIATELY EVALUATED AND ALLOCATED TO REFLECT THEIR ACTUAL ECONOMIC VALUE.

C)

DETECTION RISK IS ONE OF THE THREE ELEMENTS THAT COMPRISE AUDIT RISK, THE OTHER TWO BEING INHERENT RISK, AND CONTROL RISK. DETECTION RISK OCCURS WHEN AN AUDITOR FAILS TO IDENTIFY A MATERIAL MISSTATEMENT IN A COMPANY'S FINANCIAL STATEMENTS. THERE ARE THREE TYPES OF AUDIT RISK: DETECTION RISK, INHERENT RISK, AND CONTROL RISK.

INCREASING THE SAMPLE SIZE CAN REDUCE DETECTION RISK, BUT SOME RISK WILL ALWAYS REMAIN. DETECTION RISK IS ONE OF THE THREE ELEMENTS THAT COMPRISE AUDIT RISK, THE OTHER TWO BEING INHERENT RISK, AND CONTROL RISK. DETECTION RISK OCCURS WHEN AN AUDITOR FAILS TO IDENTIFY A MATERIAL MISSTATEMENT IN A COMPANY'S FINANCIAL STATEMENTS. INHERENT RISK IS THE RISK POSED BY AN ERROR OR OMISSION IN A FINANCIAL STATEMENT DUE TO A FACTOR OTHER THAN A FAILURE OF INTERNAL CONTROL.

D) IN THIS CASE MOSTLY INHERENT RISK HAPPENDED. NEED TO BE ASSESSED THE EFFECTS OF OMISSION OF THIS LIABILITIES AND YOU ARE CERTAIN THAT IT NOT ONLY CONTRAVENES ACCEPTED ACCOUNTING PRACTICE. A VALUATION ESTIMATE BY MANAGEMENT ON 31 DECEMBER 2017 INDICATED THAT THE PLAN IS IN DEFICIT BY KSH 258 MILLION. AN ASSESSED LEVEL OF RAW OR UNTREATED RISK; THAT IS, THE NATURAL LEVEL OF RISK INHERENT IN A PROCESS OR ACTIVITY WITHOUT DOING ANYTHING TO REDUCE THE LIKELIHOOD OR MITIGATE THE SEVERITY OF A MISHAP, OR THE AMOUNT OF RISK BEFORE THE APPLICATION OF THE RISK REDUCTION EFFECTS OF CONTROLS. ANOTHER DEFINITION IS THAT INHERENT RISK IS THE CURRENT RISK LEVEL GIVEN THE EXISTING SET OF CONTROLS, WHICH MAY BE INCOMPLETE OR LESS THAN IDEAL, RATHER THAN AN ABSENCE OF ANY CONTROLS.

E) CONTROL ENVIRONMENT. A CONTROL ENVIRONMENT, ALSO CALLED "INTERNAL CONTROL ENVIRONMENT", IS A TERM OF FINANCIAL AUDIT, INTERNAL AUDIT AND ENTERPRISE RISK MANAGEMENT. CUSTOMER COMPLAINTS. ANOTHER SIGN OF A WEAK INTERNAL CONTROL SYSTEM IS A HIGHER THAN USUAL NUMBER OF CUSTOMER COMPLAINTS. ORGANIZATIONS SHOULD DEVELOP A SYSTEM TO ENSURE THAT CUSTOMERS ARE PLEASED WITH THE PRODUCTS AND SERVICES.