Question Tag: Audit evidence

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  • 15 Marks

AAA – May 2023 – L3 – Q5 – Audit Completion and Final Review

Discuss reasons for reviewing predecessor auditor’s work, audit procedures for sufficient evidence, and actions for insufficient audit evidence.

Vigo Microfinance Bank Limited was incorporated on July 1, 2014, as a public limited company under the Companies and Allied Matters Act. The bank obtained a Microfinance banking license from the Central Bank on August 5, 2015, to operate on a nationwide basis and commenced business operation on September 5, 2015. The bank’s principal business is to provide microfinance banking and related services to the poor and underserved segment of society to alleviate poverty under the Microfinance Institutions Ordinance.

In 2019, the bank decided to convert to a commercial bank and commenced business operations on August 10, 2019, after final approval from the regulator. As of December 31, 2019, the bank had five branches (2016: 24) in the Federal Capital and four other major geopolitical zones in the country.

With the new commercial banking license, the bank employed the services of F.K. George Professional Services to audit its financial statements. As part of the activities to be carried out on the initial engagement, the external auditors began a review of the books of account of the predecessor auditor, and the following issues emerged:

  1. Some property, plant, and equipment in the books of account and prior year financial statements had negative net carrying amounts.
  2. The basis for impairment included in prior year financial statements regarding loans and advances could not be established from the working papers.
  3. A material amount of pre-operating expenses included in receivables schedules could not be satisfactorily explained.
  4. Audit work performed on interest income in the prior year was not supported by sufficient appropriate audit evidence.
  5. Details of outstanding tax liabilities could not be provided, as the amount in the financial statements was the figure supplied by the tax consultant, and not reviewed by the former external auditor.
  6. There was no satisfactory explanation for nil balances in prior year financial statements on contingent liabilities, as no evidence existed that requests for confirmation were made from solicitors of the bank.
  7. Details of contraventions included in the examiner’s report were not considered for disclosures in the financial statements.

The Central Bank is requesting the financial statements of the bank, and management is worried about delays in releasing the financial statements by the new external auditors despite several notifications and reminders.

The Chief Finance Officer of the bank complained to you, as a member of the engagement team, about the delay in concluding the audit. He argued that your firm should not be concerned about prior period financial statement issues, as your firm did not express an opinion on them. Furthermore, the responsibility for the financial statements lies with the board of directors.

Required:

(a) Discuss why your firm needs to carry out the above exercise. (3 Marks)

(b) Analyze the nature and extent of audit procedures necessary to obtain sufficient appropriate audit evidence. (8 Marks)

(c) Evaluate what your firm might likely do in case of inability to obtain sufficient appropriate audit evidence from the exercise. (4 Marks)

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  • 5 Marks

AAA – Nov 2016 – L3 – Q3b – Use of Experts in Audits

Evaluate the significance of expert evidence and factors to consider before relying on a specialist’s report in audits.

In connection with Accountancy and Audit, an Expert or Specialist is a firm or person that possesses special skills in a profession other than Accountancy.

Required:
i. What is the significance of evidence from Experts to an auditor? (2 Marks)
ii. Identify THREE factors to be considered before placing reliance on the report of a Specialist. (3 Marks)

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  • 15 Marks

AAA – Nov 2016 – L3 – Q3a – Internal Audit and Corporate Governance

Evaluate reliance on internal auditors for cash sales testing and significance of specialist reports as audit evidence.

You are the Audit Manager in charge of the audit of Mix Biz, a company which runs a chain of snack bars operating in a number of strategic locations in Lagos. Your firm has been the auditor for a number of years and has always had to substantively test cash sales because of lack of control over the recording of takings. The audit reports to date have been unmodified.

You have recently been informed that the company has employed a newly qualified Chartered Accountant as Chief Internal Auditor and a partly qualified Assistant Internal Auditor. Since their appointment halfway through the year ended December 31, 2015, they have spent most of their time carrying out substantive tests on cash sales.

The Directors are hopeful that your audit fee this year will decrease because you will be able to rely on the work carried out by the Internal Auditors.

Required:
a. Explain the issues that will be relevant to your firm in deciding:
i. whether you can rely on the work performed by the Internal Auditors (8 Marks)
ii. how much reliance to place on that work (7 Marks)

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  • 1 Marks

AAA – Nov 2013 – L3 – A – Q15 – Audit Reporting

This question assesses the primary purpose of sending a letter of enquiry to a legal firm regarding client litigation.

The main reasons why auditors send a letter of enquiry to the legal firm handling litigation or claims on behalf of their client is to provide:
A. Auditors with weak position in client litigation and claims
B. Auditors with written submission and statement of claims to the court
C. Information concerning the progress of outstanding cases to date
D. Auditors with corroborative audit evidence
E. Auditors with impact of legal opinion on financial statements

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  • 1 Marks

AAA – Nov 2013 – L3 – A – Q11 – Advanced Audit Planning and Strategy

This question tests knowledge of analytical procedures used to produce audit evidence.

Which of the following is an analytical procedure generally used to produce audit evidence?
A. Confirmations mailed directly to the auditor by the client’s customers
B. Physical observation of inventories
C. Relationship among current financial balances and prior balances, forecasts, and non-financial data
D. Detailed examination of external and internal documents
E. Circularisation letters to debtors and creditors of the company

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  • 8 Marks

AAA – Nov 2021 – L3 – Q3b – Audit of IT Systems and Data Analytics

Discuss audit team activities using CAATs on client premises and analyze two types of audit software.

You have been appointed as the auditor of a company that processes its accounting functions using a computer system. You have decided to use computer-assisted audit techniques (CAATs) to generate necessary audit evidence for this engagement.

Required:

i. Discuss the activities members of the audit team could perform with their computers in the client’s office. (4 Marks)

ii. Analyze TWO types of audit software in use in computer-based information systems. (4 Marks)

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  • 1 Marks

AAA – Nov 2011 – L3 – SA – Q20 – Audit of IT Systems and Data Analytics.

Identifies the documentation that aids in understanding the internal control system.

To obtain an understanding of the internal control system, which ONE of the following computer documentations can assist the auditor?

  • A. System narrative
  • B. System flowchart
  • C. System counts
  • D. Record layout
  • E. Programme listing

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  • 1 Marks

AAA – Nov 2011 – L3 – SA – Q19 – Use of Experts in Audits

Identifies an unnecessary factor when considering reliance on a specialist’s work in audits.

All the following are necessary when the auditor is considering whether to rely on the work of a specialist EXCEPT:

  • A. The independence of the specialist
  • B. The experience of the specialist
  • C. The fees charged by the specialist
  • D. The specialist’s relationship with the client
  • E. Compatibility of the data in preparing the financial statement

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  • 1 Marks

AAA – Nov 2011 – L3 – SA – Q17 – Audit Reporting

Identifies the technique involving ratios and statistical analysis to obtain audit evidence.

The computation of ratios and trends and the use of statistical formula to obtain audit evidence is:

  • A. Hot review
  • B. Audit sampling
  • C. Substantive test
  • D. Analytical review
  • E. Audit review

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  • 20 Marks

AAA – Nov 2020 – L3 – Q3 – Audit of Specialized Industries

Audit planning, risk assessment, internal control, audit evidence, and reporting in a not-for-profit organization.

Question:
You are the Audit Manager at HWO, an audit firm. HWO has secured the audit of SIGMA For Africa, a not-for-profit organization. You have been assigned the audit of SIGMA For Africa. An extract of the unaudited financial statements is as follows:

SIGMA For Africa Statement of Financial Position
As at 31 December

Furthermore, you were assigned an audit senior. Based on preliminary discussions with your audit senior, you noted that the senior had no prior experience with audits of not-for-profit entities.

Required:
To help your audit senior understand how to audit a not-for-profit organization, prepare a presentation note summarizing the key considerations in the audit for the following areas:

a. Planning (4 Marks)
b. Risk analysis (4 Marks)
c. Internal control (4 Marks)
d. Audit evidence (4 Marks)
e. Reporting (4 Marks)

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  • 15 Marks

AA – Nov 2018 – L2 – Q6 – Audit Evidence

Explains the factors auditors consider for sufficient evidence, reliability principles, and steps to take when audit evidence is insufficient.

The auditor is required by ISA 500 to design and perform appropriate audit procedures for obtaining sufficient and appropriate audit evidence.

Required:
a. Identify five factors that an auditor will consider in determining what constitutes sufficient audit evidence.
(5 Marks)

b. Explain five principles that would assist the auditor in assessing the reliability of audit evidence.
(5 Marks)

c. What steps must the auditor take if he discovers that the evidence obtained is insufficient to form an opinion?
(5 Marks)

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  • 15 Marks

AA – Nov 2018 – L2 – Q5 – Audit Evidence

Outline the audit tests for purchased goodwill and development projects, and the conditions for recognizing development projects in financial statements.

The intangible assets that can be recognized in the statement of financial position are purchased goodwill, intangibles having a readily ascertainable market value, and development costs.

Required:
a. State five audit tests required to obtain audit evidence on purchased goodwill.
(5 Marks)

b. Identify five audit tests relevant to obtaining evidence on development projects.
(5 Marks)

c. Itemize five conditions that must be fulfilled before development projects can be recognized in the financial statements.
(5 Marks)

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  • 10 Marks

AA – July 2023 – L2 – Q5c – Completion Procedures and Reporting

Identification of circumstances leading to modified audit opinions and types of opinions issued in each case.

c) According to ISA 705: Modification of the auditor’s report, the auditor’s opinion on financial statements other than unmodified opinion depends on his/her judgement on two major circumstances.

Required:
i) State the TWO (2) circumstances that may result in an audit opinion being modified. (2 marks)
ii) Discuss the types of opinion that may be issued under each of the two circumstances. (8 marks)

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  • 10 Marks

AA – Nov 2023 – L2 – Q3b – Audit and Assurance Evidence

This question asks for the verification procedures to be followed for assets, liabilities, and equity in an audit.

Automech Ltd is a manufacturer of automotive parts based in Ghana. The company’s accountant has been manipulating the accounts payable balance by teeming and lading to misrepresent the financial position of the company. The accountant has been recording fictitious invoices and payments to suppliers to increase the accounts payable balance and misrepresent the company’s expenses.

The external auditor, who was engaged to audit the financial statements of the company, performed substantive testing for transaction cycles and verification procedures for assets, liabilities, and equity items. However, the auditor failed to identify the risk of teeming and lading in the accounts payable balance.

During the audit, the auditor reviewed the accounts payable balance and performed confirmation procedures to verify the balance with the suppliers. However, the accountant had provided the auditor with fake confirmation responses, and the auditor failed to detect the fraud.

Although the financial statements of Automech Ltd were misstated, the Auditor issued an unqualified opinion, stating that the financial statements were presented fairly, in all material respects, in accordance with the applicable financial reporting framework. After the audit, the fraud was discovered by a whistle-blower, and the accountant was fired. The company’s reputation was damaged, and the external auditor faced legal action for failing to detect the fraud.

Required:
State and explain the procedures that should be followed for verification of assets, liabilities, and equity items in Automech Ltd.
(10 marks)

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  • 10 Marks

AA – Nov 2023 – L2 – Q3a – Audit and Assurance Evidence

This question asks for four substantive testing methods that could detect fraud in the accounts payable balance.

Automech Ltd is a manufacturer of automotive parts based in Ghana. The company’s accountant has been manipulating the accounts payable balance by teeming and lading to misrepresent the financial position of the company. The accountant has been recording fictitious invoices and payments to suppliers to increase the accounts payable balance and misrepresent the company’s expenses.

The external auditor, who was engaged to audit the financial statements of the company, performed substantive testing for transaction cycles and verification procedures for assets, liabilities, and equity items. However, the auditor failed to identify the risk of teeming and lading in the accounts payable balance.

During the audit, the auditor reviewed the accounts payable balance and performed confirmation procedures to verify the balance with the suppliers. However, the accountant had provided the auditor with fake confirmation responses, and the auditor failed to detect the fraud.

Although the financial statements of Automech Ltd were misstated, the Auditor issued an unqualified opinion, stating that the financial statements were presented fairly, in all material respects, in accordance with the applicable financial reporting framework. After the audit, the fraud was discovered by a whistle-blower, and the accountant was fired. The company’s reputation was damaged, and the external auditor faced legal action for failing to detect the fraud.

Required:
State and explain FOUR (4) substantive testing that would have detected the fraud being perpetuated by the Accountant.
(10 marks)

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  • 20 Marks

AA – Nov 2019 – L2 – Q3 – Audit and Assurance Evidence

Discusses the audit objectives, sources of evidence for inventory audit, and why stocks present high audit risk.

The information in the financial statements of your client, Honesty Company Limited, represents claims by management in relation to its responsibility to prepare financial statements that give a true and fair view of the company’s state of affairs and results of operations for the year under review. These claims are referred to as financial statement assertions.

Required:
a) Outline the audit objectives for the audit of stock (inventories) in the financial statements. Your answer should relate to the financial statement assertions. (8 marks)

b) Discuss FOUR (4) sources from which evidence can be obtained to confirm the quantities and value of stocks. (8 marks)

c) Explain why stocks present high audit risk. (4 marks)

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  • 10 Marks

AA – Nov 2019 – L2 – Q2a – Audit and Assurance Evidence

Explains examples of external confirmations and identifies relevant and irrelevant audit assertions.

ISA: 505 External Confirmations states that ‘the auditor should determine whether the use of external confirmations is necessary to obtain sufficient appropriate audit evidence at the assertion level’. An Auditor may obtain external confirmations from third parties to corroborate the audit evidence already available with the auditor. The Auditor shall determine whether positive or negative request is appropriate given the condition.

Responses or events of non-responses are required to be evaluated. Responses may be unreliable if they are served indirectly to the auditor, not served by the intended person, or transmission is compromised, and the auditor may have to perform additional procedures to resolve doubts and suspicion. In events of non-responses or management refusal to permit the auditor to seek confirmations, the auditor shall assess if modification in the auditor’s report is necessary.

Required:
Explain FOUR (4) examples of external confirmations and for each one identify:
i) An audit assertion that the external confirmation supports; and
ii) An audit assertion that the external confirmation does NOT support.
(10 marks)

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  • 5 Marks

AA – Nov 2017 – L2 – Q3c – Audit and Assurance Evidence

List and explain three factors to consider when determining the extent of reliance on analytical procedures as substantive audit evidence.

ISA 520 Analytical Procedures provides guidance to auditors on the use of analytical procedures during the course of the external audit.

Required:
When using analytical procedures as substantive audit procedures, list and briefly explain with examples three factors to consider when determining the extent of reliance that can be placed on the results of such procedures.

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  • 15 Marks

AA – Nov 2017 – L2 – Q3a – Audit and Assurance Risk Environment

Describe four factors affecting judgment about materiality in an audit context.

Anaba Sampson is an audit assistant at Global Accountants, a firm of Chartered Accountants. During the audit of a client’s account, for the year ended 31 December 2011, Anaba detected an error amounting to GH¢10.00 in respect to each interest payment, which recurred multiple times. The Chief Accountant advised Anaba not to request any adjustment entry, claiming the errors were insignificant. The company had 3,000 deposit accounts, and interest was paid half-yearly.

Required:
i) Describe four factors affecting judgment about materiality.

ii) Discuss the advice of the Chief Accountant.

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  • 12 Marks

AA – Nov 2017 – L2 – Q2b – Audit and Assurance Evidence

Tabulate four tests of controls the auditor would perform on the sales system of Animo Company Limited, along with their objectives.

Animo Company Ltd has been operating in the manufacturing sector for over a decade. The company achieved significant growth but had weak internal controls in its early stages. To meet increasing demand, Animo acquired a large manufacturing plant and six warehouses for final product storage. Sales ordering, goods despatch, and invoicing customers are organized using unique reference numbers, and a price list is updated quarterly. Customers also receive discounts for bulk purchases. Sales orders are managed electronically, with despatch lists and goods delivery notes generated automatically for each order.

Required:
i) Tabulate four tests of controls the auditor would normally carry out on the sales system of Animo Company Limited and state the objective for each test.

ii) Describe two substantive procedures the auditor should perform to confirm Animo Company Limited’s year-end receivables balance.

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