Question Tag: Audit Procedures

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  • 20 Marks

AAA – May 2022 – L3 – Q3 – Audit of Prospective Financial Information

Discuss auditor assurance work on prospective financial information, cash flow forecast procedures, and forming an opinion on PFI.

Tijara Nigeria Limited has a credit facility of N6 million with Godiya Bank. The facility was due to expire on December 31, 2021. The overdraft in the recently audited statement of financial position as at September 30, 2021 is N5.5 million. The directors of Tijara have started negotiations with their bankers for a renewal of the facility and to increase the amount to N9 million. To support this request, the bank has asked Tijara to provide a business plan for the coming twelve months consisting of a cash flow forecast supported by a forecast income statement and statement of financial position.

The management of Tijara has produced a cash flow forecast for the period October 1, 2021, to September 30, 2022, and, at the request of the bank, has asked an auditor to examine and report on it.

The Audit Manager, who has recently completed Tijara’s audit, has been asked to make a preliminary examination of the cash flow forecast and supporting materials. The manager has made the following observations:

  1. The cash flows from sales are based on the assumption of an overall increase in sales of 24% compared to the previous financial year. Analysis shows that this is based on an increase in selling price of 5% and an increase in the volume of sales of 18%. Just over a quarter of all Tijara sales are made to foreign customers.
  2. The cost of sales in the recently audited comprehensive income to September 30, 2021, was 80% of sales revenue, giving a gross profit of 20%. In the forecast income statement for the year to September 30, 2022, the cost of sales has fallen to 72%, giving a gross profit of 28%. Manufacturing costs are made up of equal proportions of materials, labor, and production overheads.
  3. The trade receivables collection period used in the cash flow forecast to September 30, 2022, is 61 days. In the year to September 30, 2021, this period averaged 93 days. Management has stated that it is its intention to inform all customers of a new standard 60-day credit period. In addition, an early settlement discount of 1% will apply to customers who settle their accounts within 30 days of the statement. Conversely, the credit period for trade payables has been extended from an average of 45 days in the current year to 90 days in the forecast.
  4. The cash flow forecast showed that the maximum credit required during the period would rise to nearly N9 million in August 2022.

Required:

a. Describe the general approach to the assurance work an auditor should consider before accepting the engagement of a reporting accountant on Prospective Financial Information (PFI) under ISAE 3400: The Examination of Prospective Financial Information. (8 Marks)

b. Detail the procedures applicable to the cash flow forecast of Tijara for the year to September 30, 2022. (7 Marks)

c. Prepare a summarized presentation of what the reporting accountant should consider in forming an opinion on prospective financial information (PFI). (5 Marks)

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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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  • 15 Marks

AAA – Nov 2016 – L3 – Q5 – Regulatory Framework and Professional Standards

Identify steps and procedural actions auditors take under ISA 250 to ensure compliance with laws and regulations.

In compliance with ISA 250 “Consideration of Laws and Regulations in an Audit of Financial Statements,” the auditor shall conduct the audit in a manner that gives them confidence that the client has met all legal requirements of the country in which it operates.

As the Audit Partner in charge of APB Manufacturing Plc, you are required to:

a. Identify and clarify SIX steps that ISA 250 requires of you in ascertaining that the company complies with all applicable laws and regulations. (9 Marks)
b. State and explain FOUR procedural actions you will take in the event that the company failed to comply, in material areas, with applicable laws and regulations. (6 Marks)

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  • 1 Marks

AAA – Nov 2013 – L3 – A – Q4 – Audit Reporting

This question tests understanding of the primary purpose of audit working papers.

The primary purpose of audit working papers is to
A. Support the underlying concepts included in the preparations of the basic financial statements
B. Aid the auditors in adequately planning their work
C. Aid the auditors in adequately circularising the client’s debtors
D. Provide a point of reference for future audit engagements
E. Identify area of weaknesses so as to conduct extended substantive and compliance tests

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  • 1 Marks

AAA – Nov 2012 – L3 – SA – Q13 – Audit Reporting

Determining the correct date to include on an audit report.

The auditor should always date the audit report on a date:

A. The financial statements were approved
B. After the directors have approved the financial statements
C. When the directors approved the audit work
D. The audit assignment was completed
E. The audit commenced

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  • 1 Marks

AAA – Nov 2012 – L3 – SA – Q10 – Audit of Complex Transactions

Identifying irrelevant ledger accounts in a payroll journal review.

In order to review a payroll journal, the auditor is NOT likely to interface with which of the following ledger accounts?

A. Pay As You Earn
B. Pension
C. Staff loans
D. Current Assets
E. National Health Insurance

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  • 15 Marks

AAA – Nov 2011 – L3 – SB – Q5 – Review of Subsequent Events and Going Concern Assumptions

Identifies going concern symptoms, audit procedures for evaluating going concern, and factors to assess continuation potential.

When a company is experiencing going concern problems, it may exhibit various financial and non-financial symptoms.

Required:

(a) State FIVE financial and FIVE non-financial going concern symptoms.
(5 Marks)

(b) State the audit procedures you would adopt as an auditor to determine whether a client company is experiencing going concern problems.
(6 Marks)

(c) What other factors would you consider in assessing if the company can continue despite the going concern issues?
(4 Marks)

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  • 1 Marks

AAA – Nov 2011 – L3 – SAII – Q18 – Review of Subsequent Events and Going Concern Assumptions

Definition of audit procedures for recording transactions in the correct period.

The audit procedures that ensure that transactions are recorded in the period to which they belong are known as…………………….

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  • 1 Marks

AAA – Nov 2011 – L3 – SAII – Q11 – Regulatory Framework and Professional Standards

Definition of audit procedure statements by accountancy bodies.

Statements by professional accountancy bodies stating the basic procedures to be adopted when conducting an audit assignment are called………………..

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  • 5 Marks

AA – July 2023 – L2 – Q2a – Regulatory Framework and Audit Responsibilities

Procedures for appointing a new auditor after a conflict of interest at AWS Bank Plc.

a) AWS Bank Plc has one of their non-executive directors as a partner with their external auditors. This was known after a due diligence was conducted by Bank of Ghana (BoG) and later reported to the directors of AWS Bank Plc. BoG has advised the directors of the bank to take the necessary action within a month.

Required:
What procedures should the Directors of AWS Bank Plc take in appointing the new Auditor? (5 marks)

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  • 20 Marks

AA – Mar 2023 – L2 – Q3 – Audit and Assurance Evidence

Explain why property, plant and equipment, trade receivables, and inventory were selected for further investigation.

Maggie Manufacturing is a long-established manufacturing company. The audit manager has been provided with the following extracts from the draft financial statements for 2021, prior to the final audit planning meeting with the financial controller.

Draft Statement of Financial Position (Extracts):

The manager has reviewed these extracts and has identified three financial statement headings that require further investigation: property, plant, and equipment, trade receivables, and inventory. He has also calculated certain accounting ratios.

Required:
a) Explain why the manager has selected these three headings for further investigation.

b) Detail and explain the further information that the manager should request from the financial controller at the final audit planning meeting to clarify the situation with regards to the three financial statement headings.

 

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  • 10 Marks

AA – Mar 2023 – L2 – Q2c – Audit and Assurance Risk Environment

Discuss the auditor’s responsibilities concerning fraud and the procedures to follow when fraud risks are identified.

ISA 240: The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements recognizes that financial statements’ misrepresentation can occur as a result of either fraud or error. The distinction is whether the underlying activity that caused the misrepresentation was deliberate or unintentional. An auditor’s job is not to determine whether or not fraud has happened. The external auditor is concerned with getting reasonable assurance that the financial statements as a whole are free of material misstatement, whether due to fraud or error.

Required:
i) Describe TWO (2) ways by which the external auditor may report fraud in an engagement. (2 marks)
ii) Discuss TWO (2) types of fraud in relation to the financial statements. (2 marks)
iii) State SIX (6) audit procedures that the auditor is required to perform in light of the risk of fraud. (6 marks)

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  • 6 Marks

AA – Mar 2023 – L2 – Q1b – Professional and Ethical Considerations

Explain the concept of professional skepticism and its importance in auditing a loss-making entity.

You are the Audit Manager of Golden Beach Hotels Ltd (GBHL), which has been making losses in its operations due to various factors such as competition, renovation of non-current assets, and non-compliance with laws and regulations in the hospitality industry. These factors are not obvious in the draft financial statements submitted for auditing.

Required:
Explain what is meant by professional skepticism, and why this is necessary to understand the financial performance and position of GBHL.

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  • 5 Marks

AA – Mar 2023 – L2 – Q1a – Planning and Approach for Audit and Assurance Engagements

Explain the advantages and audit procedures of conducting an interim audit.

Kosobi Insurance Company Ltd (KICL) prepares its annual financial statements to 31 December each year. Due to the magnitude of transactions, interim financial statements are prepared each year and subjected to an interim audit. This is done to facilitate early completion of the final audit of the annual financial statements. The finance and accounts team of KICL consider this to be more work and unwarranted.

You are the Audit Senior and head of the audit team carrying out the audit field work on KICL. As part of your exit meeting with management of KICL, you intend to justify the need for an interim audit.

i) State THREE (3) advantages in conducting Interim Audit.
ii) Identify TWO (2) audit procedures in conducting Interim Audit.

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  • 8 Marks

AA – Nov 2020 – L2 – Q3c – Audit and Assurance Evidence

Outline procedures to determine reliance on an auditor’s expert's work.

Future Prospects Company Ltd is a multinational company operating in Ghana. Its core operations include management of pension funds and real estate development. In preparing the financial statements, they carry out an appraisal of the pension funds to assess its ability to pay benefits to contributors. Periodic revaluation of lands and buildings was also carried out.

Required:
Outline FOUR (4) procedures you will follow to determine whether you can place reliance on work performed by an auditor’s expert.
(8 marks)

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  • 6 Marks

AA – Nov 2020 – L2 – Q2a – Audit and Assurance Risk Environment

Discuss procedures to obtain understanding of an entity for a first-time audit.

ISA 315: Identifying and assessing risks of material misstatement through understanding the entity and its environment requires auditors to assess the risks of material misstatement of the financial statements, whether due to fraud or error, through obtaining an understanding of the entity and its environment, including internal controls, in order to be able to design and perform further audit procedures.

Required:
Discuss FOUR (4) procedures that should be carried out to obtain an understanding of an entity in the conduct of a first-time audit.
(6 marks)

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  • 5 Marks

AA – May 2016 – L2 – Q4a – Completion Procedures and Reporting

This question outlines the external auditor's responsibilities and the work required regarding the going concern status of a company.

(a) Describe external auditor’s responsibilities and the work that the auditors must perform in relation to the going concern status of companies. (5 marks)

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  • 15 Marks

AA – May 2016 – L2 – Q1a – Audit and Assurance Evidence

This question discusses the assessment of the validity and pertinence of different forms of audit evidence and auditing standards.

(a) ‘Audit evidence must be reviewed critically with respect to its validity and pertinence as evidence before it is permitted to influence the mind of the auditor with respect to the assertion at issue’.

(i) An Auditor is considering using a copy of credit sale invoices on a file as evidence for the credit sales figure in the accounts. How would he assess the validity and pertinence of this file as audit evidence? (3 marks)

(ii) A mail order company invoices its customers with up to five ladies’ dresses. Most customers accept and pay for one or two dresses and return the rest. A credit note is then issued. The accounts incorporate a provision for returnable dresses at the year end. The audit is completed very quickly and post-balance sheet events are not usable by the auditor as evidence. What evidence would the auditor regard as valid and pertinent in respect of the provision? (3 marks)

(iii) What factors would influence an auditor in considering the acceptability as evidence of certificates received from third parties? (3 marks)

(iv) A building contracting company has constructed an office block on its own land for its own use. State the evidence the auditor would require on the cost of the building. (3 marks)

(v) Discuss the different forms of audit evidence that would be available to auditors of very small companies and of very large companies. (3 marks)

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  • 10 Marks

AA – Dec 2022 – L2 – Q4a – Audit and Assurance Evidence

Explains the term "analytical procedures" and discusses the types and uses of analytical procedures in an audit.

You are an Audit Assistant of Apakye & Associates, a firm of Chartered Accountants. Your firm engaged an intern who would like to know more about analytical procedures.

Required:
With reference to ISA 520: Analytical Procedures,
i) Explain the term ‘analytical procedures’.
ii) Explain the different types of analytical procedures available to the auditor.
iii) Describe THREE (3) situations in the course of audit when analytical procedures can be used.

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