Question

As the lead auditor from Miranda Accountants, Miranda Krim manages the auditing activities of Kismat Group for the financial year ending in December 2019. Kismat Group is a small company selling mostly consumer products but has a small-scale involvement in the real estate sector. In 2019, due to staffing issues in the cash department, the company experienced some disruptions in cash management, and this has been communicated to Miranda in due course. After an initial analysis, Miranda realized that she has to collaborate with the banks the company is dealing with.
	[CONTINUED]
	Required:
	a.	Discuss the audit procedures that Miranda should apply in this regard.
Kiara Accountants finished auditing fieldwork on the financial statements of Numb Inc. on February 17, 2019 for the year ended December 31, 2018. Everything is fine except the company changed its inventory valuation from Last In First Out (LIFO) to First In First Out (FIFO) for which the auditor added an explanatory paragraph to the audit report. On 15 March 2019, the auditors completed the tax return and the draft of the financial statements. The final audit report was completed, attached to the financial statements, and delivered to the client on March 30, 2019.
	Required:
	b.	What should be the appropriate date on the auditor’s report and why?
	c.	What is a standard unqualified audit report? Discuss four circumstances that are required for a standard unqualified report to be issued.
Kiron Associates is the auditor of Al-Harmain Inc. for the year ended on 31 December 2019. The company operates a chain of restaurants in London and Manchester. To discuss audit engagement matters, auditors from Kiron Associates arranged a meeting in the corporate office of Al-Harmain group at Whitechapel. During the meeting, the auditors found “your meal is free if we fail to give you a receipt” written on the drive-through window of the restaurant.
	Required:
	d.	How would this observation influence Kiron Associates in terms of deciding the audit procedures for cash transactions at the restaurant?

Answer 1

a. Miranda can apply following audit procedures:

• Assess the cash management system in the company
• List down the activities involved, people conducting and controlling these activities, documents that get generated or used in each activity, risks associated with the activities, internal controls opeating in each activity.
• Miranda can test the internal controls opeational to assess the operating effectiveness and sufficiency of these controls.
• Execute substantive procedures extensively in areas where internal controls were found to be weak and make sample testing where internal controls were found to be strong.
• Obtain cash reports from the management for the period under audit
• Cash reports can be cross verified with altenate sources of evidence like cash withdrawal entries in bank statements, point of cash sale reports, communication with the debtors or creditors for cash transactions and any inconsistencies found can be sited and questioned
• Bank balances have to be confrmed from bank statements provided by the bank

b. The auditor should date the audit report not earlier than the date on which the auditor has obtained sufficient appropriate evidence to support the auditor's opinion. Hence in the given case if the auditor has completed the audit and necessary verifications and report on 15 March 2019, he can date the report as 15 March 2019 although the date of issuance was March 30,2019

c. Standard unqualified audit report is a report which is issued when auditor has not observed any exceptions or qualifications to the statement that the financial reports of  entity show a true and fair view of it's financial position and has been fairly presented as per the generally accepted accounting standards.

Circumstances for issuance of standard unqualified audit report:

• There were no material misstatements observed in the balances of accounts reported in the financials during the course of audit due to fraud or errors
• The financials were prepared as per the generally accepted standards of auditing
• The auditor is satisfied of the audit evidence obtained during the course of audit
• The auditee extended full cooperation for the conduct of audit without affecting auditor's independence and integrity

d. This observation indicates that the management anticipates instances of cash receiving staff personally pocketing cash receipts at counter. Hence audit procedures should be designed to site such instances where free meals were given due to non issuance of receipts and treatment given to such transactions in books of accounts by the entity. Also company's tolerance to fraud can be checked by finding out the penal actions taken by the company against the officer in default. Also physical cash verication reports can be checked for any differnces observed. Also other internal controls like surprise verifications of cash, daily verification of cash reports and cash deposits in bank can be tested for existence and sufficiency.