Question Tag: Audit Procedures

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  • 15 Marks

AAA – May 2016 – L3 – Q6 – Audit Reporting

Discuss audit work and written representation letter for legal claims, outstanding balances, and investments.

Bob Removals Limited is a removals company. In the year ended December 31, 2015, the company made a trading profit of N800,000. You are the manager in charge of the audit.
The following issues have arisen:

(i) A customer is suing the company for N1 million for damage caused to antique furniture. The company is defending the claim and believes that the furniture was a reproduction as opposed to antique and therefore worth only N100,000.
(ii) A balance due from Safe Storage in respect of sub-contract work, of N300,000, has been outstanding for over six months. Your firm has been asked by Bob Removals’ accountant not to write to Safe Storage for direct confirmation of this amount as the latter company objects to such letters. You have been assured by the accountant that the relationship between the two companies is good and that the outstanding balance will be paid.
(iii) Bob Removals has recently invested in four new removal vans and is currently carrying out extensive refurbishment of its premises. As a result of this expenditure, the company has reached its overdraft limit of N500,000.

Required:

For each of the above issues:
a. State, with reasons, the audit work that you would expect to find when undertaking your review of the audit working papers for the year ended December 31, 2015.
b. Draft the relevant sections dealing with these issues of the written representation letter you would wish the directors to sign.

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  • 15 Marks

AAA – May 2016 – L3 – Q5 – Ethical Issues in Auditing

Identify and discuss fraud and error in the audit of Badagry Yachting and Marina.

Badagry Yachting and Marina (BYM) have a marina on the West Coast of Nigeria and a large sales operation dealing in yachts and speedboats. You are responsible for the audit of BYM and have found some potential causes of concern that could indicate fraudulent activity or financial misconduct within the company. In particular:

(i) 30% of the yachts on sale by BYM are supplied through one of the major international boating companies with a special finance arrangement deal. However, BYM have also obtained separate finance on these yachts, which are therefore in effect being ‘double financed’.
(ii) Ten yachts shown as assets by BYM cannot be located, with no explanation other than that they have not been sold. These yachts are worth approximately N50 million.
(iii) Long delays have occurred in performing reconciliations, with the last four months of reconciliations still not completed. At the time of the last reconciliation, material differences had been identified upon which no action appears to have been undertaken.
(iv) Sales have been overstated by N100 million in the current financial statements.
The finance director has been off sick with stress for the last five months and therefore has not been available to discuss any of the issues identified.

Required:

a. Explain the difference between fraud and error and how the issues shown here could be categorised as fraud or error. (6 Marks)
b. Discuss the role of management and the role of the auditor in the prevention and detection of fraud and error. (3 Marks)
c. Describe what steps you would take to further investigate and then report on the matters referred to above. (6 Marks)

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  • 15 Marks

AAA – May 2017 – L3 – Q6 – Group Audits

Draft a memorandum describing challenges, procedures, and instructions for a group audit engagement involving subsidiaries and associates in different countries.

You are an Audit Senior in ABC firm of Chartered Accountants, a Pan-African audit firm. You just resumed from your examination leave and received the following email from Mrs. Chidi, an Audit Manager in your firm.

Dear Audu,

Welcome back from leave and best of luck in your examination.
We have just been appointed as financial statements auditors to Gbogbonise Plc., a conglomerate having its head office in Lagos. Our preliminary discussion with the group Chief Financial Officer (CFO) indicates that the company has five subsidiaries and two associates. One of the subsidiaries is incorporated and operates in Ghana while one of the associates is incorporated and operates in The Gambia. The other members of the group are incorporated and operate in Nigeria. The group operations cover automobiles, agriculture, and manufacturing.
We will be meeting with the audit committee in three weeks to present our audit plan and strategy for the assignment.

Required:

a. Challenges that may be encountered in this engagement. (5 Marks)

b. General procedures that may be performed on significant and non-significant components. (3 Marks)

c. Salient items to be included in the group audit instructions. (3 Marks)

d. Procedures to be performed relating to the consolidation of the group. (4 Marks)

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  • 20 Marks

AAA – May 2019 – L3 – Q4 – Review of Subsequent Events and Going Concern Assumptions

Analyze the auditor's objectives, implications of going concern assumptions, directors' responsibilities, and risk assessment for going concern status.

Itanforiti Publishers Limited has been in the printing and publishing business for many years in Ibadan. The company has been performing well with a competitive advantage over many companies in the industry as a result of the engagement of a high-profile team of personnel and in-house printing of its published books.

The board of directors comprises two brothers and their wives. The older brother is the chairman, and the younger, the managing director. The fortunes of the company started dwindling in 2013 when conflicts could no longer be resolved amicably among the members of the board of directors.

The chairman, being a majority shareholder, assumed executive powers by combining the roles hitherto played by the managing director with his own as executive chairman in 2015. Governance of the company became unsettled, and key staff of the organization started resigning in turn.

In 2016, the financial reports of the company revealed its inability to pay creditors, and the supply of raw materials became irregular. In addition, the level of receivables became too high with a significant figure of doubtful and irrecoverable debts.

Your firm acts as auditors to the company, and you have been presented with the financial statements for the year ended 31st December 2017, for audit. The financial statements were prepared on a going concern basis.

Required:
a. Identify and explain the objectives of the auditor in the area of going concern in accordance with International Standards on Auditing (ISA 570). (5 Marks)
b. Explain the going concern assumption and the implications for the financial statements if the entity is not a going concern. (5 Marks)
c. Explain the going concern duties of the directors. (3 Marks)
d. Evaluate the risk assessment procedures to be performed by the auditor on the going concern status of the entity. (ISA 570). (7 Marks)

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  • 20 Marks

AAA – May 2021 – L3 – Q6 – Review of Subsequent Events and Going Concern Assumptions

Evaluation of going concern issues at Wazobia Nigeria Limited and audit procedures to address identified risks.

Wazobia Nigeria Limited is a manufacturer of corrugated zinc roofs. Due to the economic recession, revenue continued to decline each year for the past three years. You are aware that the company had only N300,000 in cash at the year end. Extracts from the draft financial statements and other relevant information are given below.

Additional information:
(i) The bank loan was obtained in 2016 when the company started recording losses. The collateral for the loan is a fixed and floating charge on the assets of the company to the tune of the loan balance. The first tranche of repayment of the loan is due in 2019 and the amount repayable is N300 million.

(ii) Wazobia renegotiated its credit line with a major supplier and extended payment terms from 60 days to 90 days in order to improve working capital.

(iii) The terms for accessing the undrawn facilities stipulate that the company must meet certain covenants, including that interest cover is maintained at 2:1 and the ratio of bank loan to total assets does not exceed 1:1.

(iv) The contingent liability relates to litigation against the company by one of its customers for an alleged breach of contract to supply roofing sheets based on agreed specifications.

Required:
(a) Identify and explain the matters which may cast significant doubt on the company’s ability to continue as a going concern in the foreseeable future. (10 Marks)
(b) Recommend the appropriate audit procedures to be performed to adequately address the going concern matters identified. (10 Marks)

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  • 20 Marks

AAA – May 2021 – L3 – Q4 – Advanced Audit Planning and Strategy

Discussion of engagement letter elements, reasons for rejecting an engagement, procedures for new client acceptance, and opening balances audit.

As a Senior Manager in Inagbe and Co. (Chartered Accountants), you act as a mentor to some of the young auditors in practice. As a mentor, you discuss frequently with your young mentees on professional and personal matters. Zainab Nigeria Limited is a cosmetics company and has just recently appointed Inagbe and Co. as its auditor. One of your young mentees has been asked to be part of the engagement team. The mentee has come to you for some advice and you decided to use the opportunity to explain the process and procedures to be carried out when accepting a new engagement.

Required:

(a) Explain the elements of an engagement letter. (7 Marks)
(b) Discuss the circumstances under which an auditor may reject an audit engagement. (3 Marks)
(c) Discuss the procedures that an audit firm needs to carry out before accepting to audit a new client. (4 Marks)
(d) Explain the audit procedures that should be carried out on opening balances. (6 Marks)

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  • 20 Marks

AAA – May 2021 – L3 – Q3 – Audit Completion and Final Review

Evaluation of audit evidence sufficiency, recommendations for further procedures, and reporting internal control deficiencies in accordance with ISA 265.

You are the manager responsible for the audit of Seraphim Nigeria Limited, a manufacturing company which produces biscuits. The company’s financial year ended on December 31, 2018, and you are reviewing the audit work which was completed on a number of material balances and transactions: assets held for sale, capital expenditure, and payroll expenses.

A summary of the audit procedures carried out by the audit team is given below:

(i) Provision for Restructuring:
The board approved changes in the management structure of the company. The directors determined that the company was ‘top heavy’ and decided that 80% of the middle management staff should be laid off. The Finance Director had estimated the cost of the restructuring to be N180 million and a manual journal has been posted to record a provision for restructuring costs. The Finance Director has overridden the segregation of duties control by posting this journal and approving it himself. He told the team that he had done it because he wanted to preserve the confidentiality of the transaction. The audit team discussed the planned restructuring with the Managing Director (MD). The audit team relied on the discussions with the MD and the board resolution approving the restructuring as audit evidence.

(ii) Investments:
The company’s investments trading portfolio is outsourced to a fund manager – Hala Funds Management Limited, which processed all trades done by the company. The investments balance and income on investments recorded in the financial statements have been traced and agreed to year-end reports from the service organization. The audit team relied on the reports from the fund manager which was given to them by the Chief Financial Officer (CFO) of the company.

Based on discussions, the audit team determined that the CFO had not classified the investments in line with the requirements of IFRS 9, and the interest income on its bonds investment was computed using the contractual rate.

The company made some investments directly without passing them through the fund manager, which is not in line with the company’s policy. The audit team traced and agreed those transactions to the bank statement. The amounts of investments made directly without involving the fund manager were not considered material.

Required:
For each of the two matters described above:
(a) Comment on the sufficiency and appropriateness of the audit evidence obtained. (10 Marks)
(b) Recommend further audit procedures to be performed by the audit team. (8 Marks)
(c) Explain the matters which should be included in a report in accordance with ISA 265: Communicating Deficiencies in Internal Controls to Those Charged with Governance and Management. (2 Marks)

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  • 15 Marks

AAA – Nov 2013 – L3 – SB – Q5 – Review of Subsequent Events and Going Concern Assumptions

Outline audit procedures to identify material subsequent events and explain the purpose and importance of subsequent events review.

You have just concluded the audit of Roico Limited for the year ended 31 December, 2012. During the review of the working paper file, the partner in charge discovered that no information is available on activities after year-end. The partner instructed the team leader to carry out a review of the company’s activities after year-end. The team leader was not comfortable with the instruction and wants to know why it is necessary to examine accounting information relating to the next accounting period.

You are required to:

(a) Enumerate the audit procedures which would be carried out in order to identify any material subsequent events. (10 Marks)

(b) Discuss the purpose and importance of subsequent events review. (5 Marks)

(Total: 15 Marks)

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  • 15 Marks

AAA – Nov 2013 – L3 – SB – Q2 – Audit Planning and Strategy

Outline reasons for audit planning and describe procedures for planning the audit of an existing client.

Planning an audit involves establishing the overall audit strategy for the engagement and development of an audit plan.

You are required to:

(a) Enumerate SEVEN reasons for audit planning. (7 Marks)

(b) Explain EIGHT audit procedures you would consider in planning the audit of an existing client. (8 Marks)

(Total: 15 Marks)

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  • 1 Marks

AAA – Nov 2013 – L3 – AII – Q9 – Quality Control in Audit Firms

Identifies the type of review conducted by a partner or manager for compliance with standards.

A review by a partner or manager to ensure that the form and content of the financial statements are in accordance with accounting standards, CAMA CAPC20 LFN 2004 and Securities and Exchange Commission (SEC), where applicable is ………………….. Review.

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  • 15 Marks

AA – Nov 2023 – L2 – Q6 – Audit of Financial Statements

Assessing development costs under IAS 38 and audit tests for verification.

Your client, Picturescope Limited, intends to produce a motion picture titled “Naija Power”. The development costs before presentation to investors for financing the production is estimated to be N15 million.

Required:

a. As the assurance provider, assess the situation to confirm that the amount spent so far can be recognised as development costs within the provisions of IAS 38 – Intangible Assets.
(6 Marks)

b. Explain the audit tests that you would perform in respect of the development costs expended so far.
(9 Marks)

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  • 20 Marks

AA – May 2021 – L2 – Q5 – Audit Evidence

Explanation of sufficient and appropriate audit evidence, factors in deciding audit evidence amount, auditor actions on inadequate evidence, and audit documentation rationale.

JAK Professional Services is a member firm of James Candle International in Cayman Islands. The member firm’s practice review exercise has just been concluded. As part of the global firm, practice reviews are done yearly on selected engagement files where member firms review one another. Some of the issues included in the review notes raised on JAK Professional Services audit files are as follows:

i. Lack of sufficient and appropriate audit evidence regarding audit of cash and bank as well as inventory balances. This was partly due to the fact that no evidence existed in the file regarding physical cash and inventory count which were material;

ii. No proper documentation of confirmation replies received from banks, receivables, and solicitors;

iii. No cash flow working documentation to show how the figures on the cash flow statements in the financial statements were arrived at;

iv. Improper documentation of how expected credit loss on financial instruments in the financial statements were arrived at; and

v. Figures in the financial statements could not be traced to the respective working papers.

As an experienced auditor, some of the trainees were not impressed about the report and have approached you for clarification.

You are required to explain:

a. Meaning of ‘sufficient and appropriate audit evidence’ (5 Marks)
b. Factors to be considered when deciding amount of audit evidence needed (4 Marks)
c. What auditors should do in case of inadequate audit evidence (5 Marks)
d. Reasons for sufficient and appropriate audit documentation (6 Marks)

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  • 20 Marks

AA – May 2017 – L2 – SA – Q4 – Inventory Accounting (IAS 2)

Examination of the importance of inventory and audit procedures for closing and work-in-progress inventory.

For many businesses, inventory is one of the areas requiring most attention from the auditor.

You are required to:

  1. (a) State FIVE reasons supportive of the importance of closing inventory to an Auditor. (5 Marks)
  2. (b) Prepare a list of FIVE audit procedures relevant to ascertaining the cost of work-in-progress and finished goods. (5 Marks)
  3. (c) State FIVE reasons why a physical count of inventory is important. (5 Marks)
  4. (d) List FIVE reasons why the Auditor must be present at physical inventory count. (5 Marks)

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  • 6 Marks

AA – Nov 2015 – L2 – Q3c – Internal Control Systems

Describing the audit procedures necessary to ensure accurate recording and issuance of inventory at sales outlets.

In respect of inventories held in the sales outlets, describe the audit procedures an auditor should perform to ensure that the inventories have been properly received, issued, and documented.

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  • 5 Marks

AA – Nov 2015 – L2 – Q3b – Internal Control Systems

Describing internal control procedures an auditor would expect for inventory management.

Describe TWO internal control procedures an auditor would expect the company to put in place in respect of inventories.

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  • 9 Marks

AA – Nov 2015 – L2 – Q3a – Internal Control Systems

Discussing the auditor's duties before, during, and after an inventory count.

You are the auditor of a Fast Food Company with many sales outlets. The company operates a central system of purchase and supply. The Goods Received Notes and Delivery Notes were not given utmost importance in the issuing and receiving of inventories. The suppliers’ ledger, stores’ ledger, and bin cards were not updated regularly. The outlet managers often complained of short supplies and shortages recorded against them regularly. Two of the outlet managers even complained directly to the Managing Director of the company concerning the shortages recently recorded against them. As a first step to solving the inherent weakness in the company’s inventory control process, management decided to undertake a physical inventory count.

Required:
a. Itemize the duties of the auditor in relation to inventories count under the following headings:
i. Before the count.
ii. During the count.
iii. After the count. (9 Marks)

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  • 15 Marks

AA – Nov 2015 – L2 – Q1b – Internal Control Systems

Identifying internal control weaknesses in a company and recommending audit tests to ensure effectiveness.

Success Nigeria Limited is a company engaged in haulage business. The services provided by the company, which has over 100 trucks in its fleet, include lifting of petroleum products from the depots to the filling stations of its clients spread over many locations.

The Central Store for spare parts for repairs of the trucks is located at the Head Office. The inventory operation is handled by the Personal Assistant to the Managing Director in addition to his normal schedule of duties in the Managing Director’s office. Spare parts supplied are received by the Personal Assistant who keeps them in the Central Store without raising any Goods Received Notes for the items. The invoices and delivery notes brought by vendors are submitted to the accounts department directly for payment. Because of the pressure of work in the Managing Director’s office, the Personal Assistant to the Managing Director does not maintain any inventory records. Whenever there is a need for spare parts required for truck repairs, a pre-printed requisition form is completed by the mechanic in charge of the repair. The form is submitted to the Personal Assistant who supplies the spare parts from the Central Store. The mechanic collects the parts without any acknowledgment of receipt. The requisition forms collected for all the spare parts supplied are kept in one of the cabinets in the Personal Assistant’s office, and they are collated by the Accountant on a monthly basis whenever he is to prepare the management accounts.

At the end of the financial year, December 31, 2014, the Accountant conducted an inventory count of the items in the Central Store for the purpose of using the value for the preparation of the financial statements for the year ended December 31, 2014. The Managing Director observed later while reviewing the financial statements that the repairs and maintenance account did not reflect the true position of the repair works carried out on the trucks during the year.

Required:
i. Describe FIVE Internal Control weaknesses from the above scenario. (5 Marks)
ii. Recommend controls required to address the identified weaknesses in (i). (5 Marks)
iii. Describe the audit tests to be carried out to assess if each of the controls is operating effectively. (5 Marks)

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  • 20 Marks

AA – May 2022 – L2 – SB – Q3 – Planning an Audit

Discuss the benefits of audit planning, importance of maintaining audit quality, and procedures auditors should establish to ensure audit quality.

The objective of the auditor, according to ISA 300 – Planning an audit of financial statements, is to plan and perform an audit in an effective manner.

a. Explain the benefits of audit planning. (5 Marks)
b. Why is it important that audit firms should maintain the quality of their work? (5 Marks)
c. Explain the procedures a firm of auditors should establish internally to maintain the quality of its work. (10 Marks)

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  • 6 Marks

AA – Nov 2020 – L2 – Q1d – Audit Evidence

List and explain audit procedures appropriate for auditing gross premium income in an insurance company.

List and explain the type of audit procedures that might be appropriate in the audit of gross premium income.

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  • 34 Marks

AA – May 2018 – L2 – Q1 – Audit Evidence

This question focuses on substantive procedures to verify additions and disposals of non-current assets and statutory books to be audited.

The following figures were supplied by a small business client to your firm regarding its non-current assets for the year ended 31 December 2016:

Generating Plant (N) Equipment & Fittings (N) Furniture (N) Motor Vehicles (N)
Opening Balance 400,000 3,637,000 247,000 1,450,000
Additions – 530,000 – –
Disposal – – – (400,000)
Closing Balance 400,000 4,167,000 247,000 1,050,000

Depreciation:

Generating Plant (N) Equipment & Fittings (N) Furniture (N) Motor Vehicles (N)
Opening Balance 160,000 873,000 59,800 859,000
Charge for the Year 80,000 416,700 24,700 260,000
Charge on Disposal – – – (236,966)
Closing Balance 240,000 1,289,700 84,500 882,034

Required:

  1. Identify FIVE substantive procedures you will carry out to verify additions to the assets in 2016. (10 Marks)
  2. Explain FIVE substantive procedures for verifying disposal of assets during the year. (10 Marks)
  3. Explain briefly FOUR of the statutory books that the auditor is required to audit in the course of his audit engagement in an entity. (10 Marks)

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