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A. Audit Planning:
ii. Examples of analytical procedures that could be performed at the planning stage
for account receivables:
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Compute bad debts as a percentage of gross revenues
Compute allowance for doubtful accounts as a percentage of account
receivables
Compute aged accounts as a percentage of total accounts
Compute interest income as a percentage of the average balance of
account receivables
C1 (Any 3 answers X 1 mark each = 3 marks)
First-year engagement.
Internal control weaknesses.
Management turnover.
High market pressures.
High fraud risk.
Higher than normal risk of bankruptcy.
C2 (Any 2 answers with explanation X 2 marks each = 4 marks)
C. Audit risk:
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Control risk – Control risk, which is the risk that a misstatement due to error
or fraud that could occur in an assertion and that could be material,
individually or in combination with other misstatements, will not be
prevented or detected on a timely basis by the company's internal control.
C4 (2 marks each = 4 marks)
ii. Procedures that auditor could perform to obtain an understanding of the client
business and its environment, including its internal control:
enquiries of those charged with governance, management and others
within the entity.
analytical procedures of key figures in the financial statements.
observation and inspection of client’s business premises.
inquiries from former auditor.
read company’s previous annual reports especially the Chairman’s
Statement and Directors’ Report.
discussion with internal audit personnel and review of internal audit
files/report.
review minutes of meetings.
Any other relevant answers.
C4 (Any 4 answers with explanation X 1.5 marks each = 6 marks)
(Total: 20 marks)
QUESTION 2
A. Audit evidence:
i. Examples of audit evidence:
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Physical examination
Confirmation
Documentation
Analytical procedures
Inquiries of the clients
Reperformance
Observation
C1 (Any 2 answers X 1 mark each = 2 marks)
B. Engagement letter:
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ii. Principal contents of an engagement letter:
The objective of the audit of financial statements.
Management’s responsibility for the financial statements as
described in ISA 200.
The financial reporting framework adopted by management in
preparing the financial statements, i.e., the applicable financial
reporting framework.
The introduction of the audit, including description about the client
and financial year end of the client.
The form of any reports or other communication of results of the
engagement.
The fact that because of the test nature and other inherent
limitations of an audit, together with the inherent limitations of
internal control, there is an unavoidable risk that even some material
misstatement may remain undiscovered.
Unrestricted access to whatever records, documentation and other
information requested in connection with the audit.
Management’s responsibility for establishing and maintaining
effective internal control.
C3 (Any two answers with explanation X 2 marks = 4 marks)
iii. Examples of documents kept in the permanent file and current file
respectively:
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Permanent Copies of, or excerpts from, the memorandum and articles
file of association of the company
Charts of accounts
Organisation chart
Accounting manual
Copies of important contracts (pension contracts, union
contracts, leases, etc)
Documentation of internal control (flow charts)
Terms of debenture and bond issues
Prior years’ analytical procedure results
Current file Copy of financial statements and auditor’s report
Audit plan and audit programs
Copies or, or excerpts from, minutes of important
committee meetings
Working trial balance
Adjusting and reclassification journal entries
Working papers supporting financial statement amounts
C4 (1 mark X 2 examples each = 4 marks)
(Total: 20 marks)
QUESTION 3
C. Segregation of duties:
i. Sets of incompatible functions that need to be segregated in an effective internal
control system for material purchase cycle:
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Separation of the custody of assets√ and accounting/recording√
Separation of authorization of transactions√ from custody of related
assets√
Separation of operational responsibilities√ from record-keeping
responsibilities√
C6 (2 sets = one mark for every √ = 4 marks)
ii. Reasons for maintaining proper segregation of duties in the material purchase
cycle:
It ensures that there is oversight and review to identify errors/frauds.
It helps to prevent fraud or theft because it requires two people to collude
in order to hide a transaction.
C6 (2 points with explanation X 2 marks each = 4 marks)
(Total: 20 marks)
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QUESTION 4
A. Petty cash is relatively small in amount but often at the centre of auditors’ attention:
- Although petty cash is small in amount, it is relatively risky due to:
Unauthorized use of money for personal expense
Inflated expense bills
Theft
Improper accounting [leading to shortage or excess cash]
Collusion between employees
misappropriation of cash by responsible staff
Overriding of controls over petty cash by management
C2 (2 marks)
C. Audit of inventory:
i. Substantive procedures that could be employed to audit inventory:
Perform cutoff tests for purchases, sales, purchase returns, and sales
returns and tie to movement of inventory.
Verify the clerical and mathematical accuracy of inventory listings.
Reconcile physical inventory amounts with perpetual records.
Reconcile physical counts with general ledger control totals.
With respect to tagged inventory, perform tests for omitted
transactions and tests for invalid transactions.
C5 (For every point X 1.5 marks = 6 marks)
ii. The need for the auditors to attend the stock taking process carried out by the
client company.
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While the principal reason for attendance at a stock take is to obtain
evidence to substantiate the existence of the stocks, attendance can
also enhance the auditor’s understanding of the business by providing
an opportunity to observe the production process and/or business
locations at first hand and providing relevant evidences.
Attendance at stocktaking can provide evidence to the auditor in
respect of the existence, completeness and valuation assertions
(including a consideration of possible obsolescence and deterioration).
The auditor attending a stock take considers whether the checking of
stocks as a whole is effective in confirming that accurate records of
stocks are maintained. If the entity’s records of stocks are not reliable
the auditor may need to request management to perform alternative
procedures which may include a full count at the year end.
C5 (4 marks)
(Total: 20 marks)
QUESTION 5
ii. The importance for the auditing profession to adopt conventional and uniform
wordings in the auditor’s report:
To avoid confusion to the readers/users of financial statement.
To avoid misunderstanding in the message contained in the audit
report being communicated to the readers/users of financial
statements.
C3 (any one answer with explanation = 2 marks)
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C4 (any four with explanation X 2 marks each = 8 marks)
C. Types of audit opinion classified as departure from the unqualified audit report.
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Types of audit
Explanation
opinion
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