Question

SECTION A

This section consists of ONE (1) compulsory question

QUESTION 1

ABC Ltd is a wholesaler of furniture which has been in operation for ten years. It buys furniture from five major manufacturers and sells them to a range of customers. The company currently has a customer base of over 500 customers most of which are credit customers. The receivables balance comprises customers owing up to $2,000,000 to smaller balances of about $10,000, all with many different due dates for payments and credit limits. The level of receivables is considerably higher than last year and there are concerns about the creditworthiness of some customers.

The company has only recently computerised its operations including its accounting system. Manual invoices, receipts and cheques have been replaced with computer-generated documents. The sub-ledgers are now maintained in the accounting software which have facilitated more timely generation of statements much to the delight of customers. The sales process is initiated by a Purchase Order from the customer which is used to raise a system generated Sales Invoice and Delivery Slip. A copy of the Delivery Slip is given to the Security at the gate for logging and check off to allow passage of goods through the gate; another copy of the Delivery Slip is given for the customer to sign and then returned to the Sales Dept. All information is stored on ABC Ltd’s computer systems. There is no backup of data off site. The client’s staff are helpful although they cannot confirm completeness of documentation for the system.

You are the audit senior in charge assigned for ABC Ltd’s audit and you are in the process of planning the current year’s audit. You are contemplating the changes in the client’s audit environment and the impact that these changes will have on the audit risk and the audit methodology. Your audit assistant is curious why it is necessary to plan the audit from one year to the next. Why not just copy the previous year’s workpapers?

Required

1. Explain to the audit assistant the importance of and some of the benefits [at least four benefits] to be derived from having a tailored audit plan for each audit.

2. (a) Based on your risk assessment of the new computerized information system (CIS) environment, list two inherent risks of CIS you have identified and discuss how these factors impact the overall audit risk

(b) Outline the audit procedure which you will use in response to each risk identified in (a) above in planning the audit?

(c) State the approach for auditing in a computerized environment which you are using to design tests for testing controls over processing of data. Explain the reason for your choice, highlighting the benefits and drawbacks. State any assumption made as to resource availability.

(d) Explain how the choice of approach in (c) above is likely to impact audit risk? Identify the audit risk component which is most likely to be affected.

3. (a) Your audit plan notes that you will be testing the system of internal controls for the ‘three Es’. Explain the ‘three Es’ and the impact these will have on the audit if positive and if negative.

(b) State the audit procedure you will be using for the following:

i) To test the control over completeness of sales

ii) To test the accuracy and existence of receivables balances

(c) List the set of management assertions for “Sales” and “Accounts Receivable” which you will be testing.

SECTION B

This section consists of THREE (3) questions of TEN (10) marks each.

You are required to answer TWO (2) questions ONLY

QUESTION 2

(a) ISA 230 Audit Documentation requires auditors to prepare audit documentation for an audit of financial statements on a timely basis.

Required:

Describe FOUR benefits of documenting audit work.

(b) List and describe the THREE (3) characteristics of good quality audit evidence

(c) Outline THREE (3) methods of obtaining audit evidence and comment on the reliability of such evidence (high reliability / moderate reliability / poor reliability)

QUESTION 3

ISA 520 Analytical Procedures explain the concept of analytical procedures and its uses throughout the audit.

Required:

(i) What is meant by the term ‘analytical procedures’ (1 mark)

(ii)What are the different types of analytical procedures available to the auditor

(iii) Identify and explain THREE (3) opportunities for using analytical procedure during the different stages of the audit, including how the auditor may use such information derived from the analysis.

(3 marks)

(iv) Outline THREE (3) important factors to consider in using analytical procedure as a substantive test

QUESTION 4

ISA 700 Forming an Opinion and Reporting on Financial Statements requires auditors to produce an audit report. This report should contain a number of consistent elements so that users are able to understand what the audit report means.

Required:

Describe the content to be found in the any FOUR (4) components of an auditor’s unmodified report, and explain the purpose of each.

(b) Based on the provisions of ISA 700 Forming an Opinion and Reporting on Financial Statements,

outline (i) the TWO (2) areas of management responsibilities and (ii) the auditor’s responsibility which should be clearly set out in the audit report      

(c) The auditor is required to state the set of laws and regulations which it complied with in conducting the audit. Explain why it is important to disclose this information and the possible consequence of non-disclosure of this information

SECTION C

This section consists of TEN (10) Multiple Choice questions

You are required to answer all questions

QUESTION 5

Required:

Select the correct answer and record in your Answer Booklet

When the financial statements are fairly stated but the auditor concludes there is substantial doubt whether the client can continue in existence, the auditor should issue a/ an

Adverse opinion

Qualified opinion only

Unqualified opinion

Unqualified opinion with explanatory paragraph

Although the quantity, type, and content of audit documentation will vary with the circumstances, audit documentation generally will include the

Copies of those client records examined by the auditor during the course of the engagement.

Evaluation of the efficiency and competence of the audit staff assistants by the partner responsible for the audit.

Auditor’s comments concerning the efficiency and competence of client management personnel.

Auditing procedures followed and the testing performed in obtaining evidential matter

The most reliable type of audit evidence that an auditor can obtain is

Physical examination by the auditor

Calculations by the auditor from company records

Confirmations received directly from third parties.

External documents

Which of the following statements relating to internal and external auditors is correct?

Internal auditors are required to be members of a professional body

Internal auditors’ scope of work should be determined by those charged with governance

External auditors report to those charged with governance

Internal auditors can never be independent of the company

Which TWO of the following controls of a sales system ensure that all goods despatched are completely and accurately invoiced?

Good Dispatched Notes are matched to sales invoices

Sales invoices are sequentially numbered

Sales invoices are matched to customer orders

Regular review of unfulfilled orders

I and II

II and IV

II and III

I and IV

Which of the following is a substantive audit procedure for wages and salaries?

Inspect a sample of clock cards for evidence of authorisation by a responsible official

Recalculate a sample of payroll deductions such as payroll taxes to confirm accuracy

Attempt to access and make changes to the payroll master file using the log on for a junior clerk

Interview the payroll clerk to ascertain how overtime pay is processed and the documents used

Which of the following is not an inherent risk of a Computerised Information System (CIS) environment?

Lack of audit trail

Lack of supervision of IT staff

Poor network connectivity resulting in system downtime

Lack of segregation of duties in the processing of data

Which of the following types of documentary evidence should the auditor consider to be the most reliable?

A sales invoice issued by the client and supported by a delivery receipt from an outside trucker.

Confirmation of an account payable balance mailed by and returned directly to the auditor.

A check issued by the company and bearing the payee's endorsement which is included with the bank statement mailed directly to the auditor.

An audit schedule prepared by the client's controller and reviewed by the client's treasurer.

The auditor will issue and adverse auditor's opinion if

The scope of the audit is limited by the client

The exception to the fairness of presentation is so material that an "except" opinion is not justified

The auditor did not perform sufficient auditing procedures to form an opinion on the financial statements taken as a whole

Major uncertainties exist concerning the company's future

Which of the following best describes the reason why an independent auditor reports on financial statements?

A misappropriation of assets may exist, and it is more likely to be detected by independent auditors.

Different interests may exist between the company preparing the statements and the persons using the statements.

A misstatement of account balances may exist and is generally corrected as the result of the independent auditor’s work.

Poorly designed internal controls may be in existence.

Answer 1

SECTION C (10 Marks)

When the financial statements are fairly stated but the auditor concludes there is substantial doubt whether the client can continue in existence, the auditor should issue a/ an

Disclaimer of opinion

Although the quantity, type, and content of audit documentation will vary with the circumstances, audit documentation generally will include the

Auditing procedures followed and the testing performed in obtaining evidential matter

The most reliable type of audit evidence that an auditor can obtain is

Physical examination by the auditor

The auditor will issue and adverse auditor's opinion if

The auditor did not perform sufficient auditing procedures to form an opinion on the financial statements taken as a whole

Which of the following best describes the reason why an independent auditor reports on financial statements?

A misappropriation of assets may exist, and it is more likely to be detected by independent auditors.