Question Tag: Professional Skepticism

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  • 15 Marks

AAA – Nov 2011 – L3 – SB – Q1 – Application of Audit and Assurance Principles

Evaluate the steps for identifying and responding to fraud risk during audit planning.

Fela Idaewor is the auditor for Matty Co. Ltd, a rapidly expanding retail business based in Lekki. This is her first year as the audit manager. During her engagement planning, she observed multiple risk factors, such as the company’s strong interest in maintaining earnings and share prices, unrealistic financial forecasts, and high reliance on debt financing for expansion. Additionally, there were strong indications that fraud might have been committed by top management.

Required
(a) What should Idaewor do about the possibility of fraud at the planning stage? (7 Marks)
(b) What documentation is required for identifying risk factors? (5 Marks)
(c) If Idaewor has evidence suggesting fraud, what are her communication responsibilities to management? (3 Marks)

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  • 20 Marks

AAA – May 2018 – L3 – SB – Q2 – Auditor’s Legal Liability

Discuss the expectation gap, strategies to address it, and the role of professional skepticism in auditing financial statements.

Audit firms have been castigated over the years by the public whenever their clients have any financial or operational crises. The potential liability of auditors has also become an important topic in recent years due to the growing complexity of the business and legal environment and an increase in legal actions against auditors. One reason put forward to explain the high number of legal actions against auditors is the “expectation gap.”

Required:

a) Explain “expectation gap” and describe its THREE main elements. (5 Marks)

b) Discuss the strategies that could assist in closing the expectation gap. (10 Marks)

c) i. Explain briefly the concept of professional skepticism. (2 Marks)
ii. Evaluate the importance of professional skepticism in the audit of financial statements. (3 Marks)

(Total 20 Marks)

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  • 15 Marks

AAA – Nov 2022 – L3 – SC – Q5 – Audit Planning and Strategy

Discuss professional skepticism, benefits of audit planning, audit strategy, and audit stages.

At the weekly meeting of an audit firm, it was reported that a new audit client (Salisa Limited) has just been won. An implementation team has been constituted with a manager as the head. At the meeting of the implementation team, the manager stated that there is a need for the team to work on the audit planning strategy; the contents of which will form the audit planning memorandum that will be presented to the audit committee. He stated further that a professional clearance has to be sent to the former auditor after which, a background check will be performed on the directors and other principal officers of the company. It is also believed that for proper risk assessment, there is a need to understand the business operations of the company. He stated further that the audit will be structured into both interim and final audits.

An experienced member of the team also mentioned the need for the auditor to adopt an attitude of professional skepticism. He emphasized that planning the audit will involve the whole engagement team to establish an understanding of the terms of the engagement as required by ISA 210, which will help establish an overall strategy for the audit. Developing the audit plan will include the nature, timing, and extent of planned risk assessment procedures, further audit procedures, and documentation of the overall audit strategy.

Required:

a. Explain professional skepticism. (2 Marks)

b. State how adequate planning can benefit the audit team. (3 Marks)

c. Explain and illustrate what the establishment of the overall audit strategy involves. (3 Marks)

d. Discuss the elements of interim and final audits.

(7 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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  • 10 Marks

AA – May 2018 – L2 – Q3b – Audit and Assurance Risk Environment, Completion Procedures and Reporting

Explains the importance of professional skepticism and audit procedures for subsequent events in the audit process.

ii) Auditors are required to plan and perform an audit with professional skepticism, to exercise professional judgment, and to comply with ethical standards.

Required:
Explain what is meant by ‘professional skepticism’ and why it is so important that the auditor maintains professional skepticism throughout the audit. (5 marks)

b)
i) International Standard on Auditing (ISA) 560: Subsequent Events deals with the auditor’s responsibility towards events that occur after the reporting date and especially before the auditor’s report is issued.

Required:
Explain FIVE audit procedures to test subsequent events. (5 marks)

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  • 10 Marks

AA – May 2019 – L2 – Q1b – Audit and Assurance Evidence

Discusses the advantages of auditor independence and the inherent limitations of auditing.

b) The Institute of Chartered Accountants (Ghana) is organizing a continuous professional development program on the code of conduct for members and other relevant issues pertaining to audit. You are the audit partner of Lankai and Co, a firm of Chartered Accountants, and you are to present a paper on the independence of the auditor and the inherent limitations of auditing.
Required:
i) Explain TWO (2) advantages of independent audit.
(3 marks)
ii) The phrase “the auditor must be seen to be independent both in fact and appearance.”
(3 marks)
iii) Inherent limitations of audit.
(4 marks)

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  • 10 Marks

AAA – July 2023 – L3 – Q4a – The meaning of audit and assurance | Professional responsibility and liability

Discuss issues to consider in professional skepticism assessment and circumstances that can hinder professional skepticism during a performance audit.

Audit engagement rests on mutual understanding and respect between the auditor and the auditee. The Auditor, while not viewing the auditee as dishonest, must also have at the back of his mind that to err is human and must therefore not accept evidence from the auditee without further cross-checking the facts. The attitude should be that the auditor must have an enquiring mind. This is known as professional skepticism; while trusting, he must verify.

Required:

i) What FOUR (4) issues should be considered in Professional Skepticism assessment during performance audit? (5 marks)

ii) State FIVE (5) circumstances that can hinder Professional Skepticism at the engagement level. (5 marks)

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  • 10 Marks

AAA – Dec 2023 – L3 – Q1a – The Meaning of Audit and Assurance | Professional Responsibility and Liability

Explain the concept of professional skepticism and identify areas where it is important in auditing complex, subjective, or judgmental issues.

“Professional Skepticism is an essential concept in auditing practice and theory. It has been identified in almost all existing auditing standards. However, the way it should be characterised is still unclear” according to Maciej Ciolek (2017).

Required:

i) Explain the term Professional Skepticism within the context of the auditing profession. (2.5 marks)

ii) Discuss THREE (3) areas of audit that are complex, subjective or highly judgmental where Professional Skepticism may be important. (7.5 marks)

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  • 20 Marks

AAA – Aug 2022 – L3 – Q3 – Audit evidence

Discuss the implications of fraud on audit completion and the sufficiency of audit evidence for development costs.

You are the Senior Manager of Posterity Chartered Accountants. Security-Watch Ltd is an audit client of your firm, and the audit for the financial year ended 31 December 2021 is at the completion stage. The company installs and maintains security systems for businesses and residential customers.

Materiality for the audit of the company’s financial statements has been determined to be GH¢600,000. You are reviewing the audit working papers, and have gathered the following information:

Fraud
The Company’s Finance Director has informed the audit team that during the year, a fraud was suspected to have been committed by a Finance Officer, Ama Fofie, in the procurement department of the company. The Finance Officer is alleged to have raised fictitious supplier invoices and paid the invoiced amounts into her personal bank account. When questioned by the company’s Finance Director, Ama Fofie is alleged to have confessed that she had stolen GH¢50,000 from the company. The Finance Director asked the audit team not to perform any procedures in relation to the alleged fraudulent act, as the amount is immaterial. The Finance Director also stated that the financial statements would not be adjusted in relation to the fraud.
The only audit evidence on file is a written representation from management acknowledging the existence of the fraud, and a list of the fictitious invoices which is alleged to have been raised by Ama Fofie, provided by the Finance Director. The audit working papers conclude that the fraud is immaterial and that no further work is needed.
(6 marks)

Development Costs
In July 2021, the company commenced the development of a new security system, and incurred expenditure of GH¢1,000,000 up to the financial year end, which has been capitalised as an intangible non‑current asset. The only audit evidence obtained in relation to this balance is as follows:

  • Attachment of a sample of the costs included in the GH¢1,000,000 capitalised to supporting documentation such as supplier invoices.
  • Cash flow projection for the project, which indicates that a positive cash flow will be generated by 2022. The projection has been arithmetically checked.
  • A written representation from management stating that ‘management considers that the development of this new product will be successful’.

You are aware that when the Finance Director was asked about the cash flow projection which he had prepared, he was reluctant to answer questions, simply saying that ‘the assumptions underlying the projection have been agreed to be assumptions contained in the company’s business plan’. He provided a spreadsheet showing the projection, but the underlying information could not be accessed as the file was password protected and the Finance Director would not provide the password to the audit team.

Required:
a) Discuss the implications of the fraud for the completion of the audit, and the actions to be taken by Posterity Chartered Accountants.
(6 marks)

b) In respect of the development costs:
i) Comment on the sufficiency and appropriateness of the audit evidence obtained.
(10 marks)
ii) Recommend TWO (2) ways Posterity Chartered Accountants could obtain further evidence about the new security system.
(4 marks)

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  • 20 Marks

AAA – Aug 2022 – L3 – Q1 – Professional responsibility and liability | Practice management

Discuss the audit expectation gap, recommend ways to close it, and evaluate client acceptance decisions for a new audit client.

The potential liability of auditors has become an important topic in recent years, due to the growing complexity of the audit business environment and an increase in legal actions against auditors. One argument put forward to explain the high number of legal actions against auditors is the “expectation gap”.

i) Explain the Audit Expectation Gap and the elements in the Gap.
(4 marks)

ii) Recommend TWO (2) ways of closing the audit expectation gap.
(2 marks)

b) International Standards on Auditing (ISA) defines professional scepticism as an attitude that includes a questioning mind, being alert to conditions which may indicate possible misstatements due to error or fraud and a critical assessment of audit evidence. It explicitly requires auditors to plan and perform an audit with professional scepticism recognising that circumstances may exist that may cause financial statements to be misstated.

Required:

Recommend FOUR (4) approaches or ways that the professional practice firms and auditors could adopt to create the awareness of the importance of professional scepticism and its application.
(4 marks)

c) Opelee Partners, a firm of Chartered Accountants is considering the acceptance of a new client, The Monkoo Group Plc (The Group).

The Group is a listed company, and it has a total of 14 subsidiaries, 10 of which are foreign subsidiaries. The Group is a food processing company and each of its foreign subsidiaries provides a particular ingredient used in the Group’s main processing plant, which is based in Ghana. The subsidiaries produce raw ingredients including corn, wheat, vegetables, and nuts.

If Opelee Partners decides to accept the appointment, it will perform the audit of the Group’s consolidated financial statements, and that of the financial statements of some of the individual subsidiaries. The Group audit committee has suggested that, in order to keep the audit fee as low as possible, Opelee Partners could audit the companies based in Ghana but the foreign subsidiaries would be audited by local firms. These foreign subsidiaries contribute 60% to the Group’s total assets.

As the Managing Partner of Opelee Partners, you have also obtained the following information from an internet search regarding the Group:

  • Local protestors: One subsidiary, Konti Plc, has been accused of environmental damage, due to its operations impacting on the rainforest and causing harm to wildlife. There have been some protests by concerned citizens in the country where Konti Plc is located. Digital recordings of these protests have spread world-wide on social media.
  • Expansion of operations: The Group has recently expanded its operations in a certain country by acquiring a large area of land on which to grow wheat. To receive government approval for the acquisition, a significant ‘incentive payment’ was made to a government minister. This has been reported widely in the media.

Required:

Evaluate the matters Opelee Partners should consider before accepting the audit of The Group under the following areas:

i) The audit firm’s capabilities
(4 marks)

ii) Ethical issues
(4 marks)

iii) Client integrity
(2 marks)

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  • 15 Marks

AAA – Nov 2011 – L3 – SB – Q1 – Application of Audit and Assurance Principles

Evaluate the steps for identifying and responding to fraud risk during audit planning.

Fela Idaewor is the auditor for Matty Co. Ltd, a rapidly expanding retail business based in Lekki. This is her first year as the audit manager. During her engagement planning, she observed multiple risk factors, such as the company’s strong interest in maintaining earnings and share prices, unrealistic financial forecasts, and high reliance on debt financing for expansion. Additionally, there were strong indications that fraud might have been committed by top management.

Required
(a) What should Idaewor do about the possibility of fraud at the planning stage? (7 Marks)
(b) What documentation is required for identifying risk factors? (5 Marks)
(c) If Idaewor has evidence suggesting fraud, what are her communication responsibilities to management? (3 Marks)

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  • 20 Marks

AAA – May 2018 – L3 – SB – Q2 – Auditor’s Legal Liability

Discuss the expectation gap, strategies to address it, and the role of professional skepticism in auditing financial statements.

Audit firms have been castigated over the years by the public whenever their clients have any financial or operational crises. The potential liability of auditors has also become an important topic in recent years due to the growing complexity of the business and legal environment and an increase in legal actions against auditors. One reason put forward to explain the high number of legal actions against auditors is the “expectation gap.”

Required:

a) Explain “expectation gap” and describe its THREE main elements. (5 Marks)

b) Discuss the strategies that could assist in closing the expectation gap. (10 Marks)

c) i. Explain briefly the concept of professional skepticism. (2 Marks)
ii. Evaluate the importance of professional skepticism in the audit of financial statements. (3 Marks)

(Total 20 Marks)

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  • 15 Marks

AAA – Nov 2022 – L3 – SC – Q5 – Audit Planning and Strategy

Discuss professional skepticism, benefits of audit planning, audit strategy, and audit stages.

At the weekly meeting of an audit firm, it was reported that a new audit client (Salisa Limited) has just been won. An implementation team has been constituted with a manager as the head. At the meeting of the implementation team, the manager stated that there is a need for the team to work on the audit planning strategy; the contents of which will form the audit planning memorandum that will be presented to the audit committee. He stated further that a professional clearance has to be sent to the former auditor after which, a background check will be performed on the directors and other principal officers of the company. It is also believed that for proper risk assessment, there is a need to understand the business operations of the company. He stated further that the audit will be structured into both interim and final audits.

An experienced member of the team also mentioned the need for the auditor to adopt an attitude of professional skepticism. He emphasized that planning the audit will involve the whole engagement team to establish an understanding of the terms of the engagement as required by ISA 210, which will help establish an overall strategy for the audit. Developing the audit plan will include the nature, timing, and extent of planned risk assessment procedures, further audit procedures, and documentation of the overall audit strategy.

Required:

a. Explain professional skepticism. (2 Marks)

b. State how adequate planning can benefit the audit team. (3 Marks)

c. Explain and illustrate what the establishment of the overall audit strategy involves. (3 Marks)

d. Discuss the elements of interim and final audits.

(7 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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  • 10 Marks

AA – May 2018 – L2 – Q3b – Audit and Assurance Risk Environment, Completion Procedures and Reporting

Explains the importance of professional skepticism and audit procedures for subsequent events in the audit process.

ii) Auditors are required to plan and perform an audit with professional skepticism, to exercise professional judgment, and to comply with ethical standards.

Required:
Explain what is meant by ‘professional skepticism’ and why it is so important that the auditor maintains professional skepticism throughout the audit. (5 marks)

b)
i) International Standard on Auditing (ISA) 560: Subsequent Events deals with the auditor’s responsibility towards events that occur after the reporting date and especially before the auditor’s report is issued.

Required:
Explain FIVE audit procedures to test subsequent events. (5 marks)

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  • 10 Marks

AA – May 2019 – L2 – Q1b – Audit and Assurance Evidence

Discusses the advantages of auditor independence and the inherent limitations of auditing.

b) The Institute of Chartered Accountants (Ghana) is organizing a continuous professional development program on the code of conduct for members and other relevant issues pertaining to audit. You are the audit partner of Lankai and Co, a firm of Chartered Accountants, and you are to present a paper on the independence of the auditor and the inherent limitations of auditing.
Required:
i) Explain TWO (2) advantages of independent audit.
(3 marks)
ii) The phrase “the auditor must be seen to be independent both in fact and appearance.”
(3 marks)
iii) Inherent limitations of audit.
(4 marks)

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  • 10 Marks

AAA – July 2023 – L3 – Q4a – The meaning of audit and assurance | Professional responsibility and liability

Discuss issues to consider in professional skepticism assessment and circumstances that can hinder professional skepticism during a performance audit.

Audit engagement rests on mutual understanding and respect between the auditor and the auditee. The Auditor, while not viewing the auditee as dishonest, must also have at the back of his mind that to err is human and must therefore not accept evidence from the auditee without further cross-checking the facts. The attitude should be that the auditor must have an enquiring mind. This is known as professional skepticism; while trusting, he must verify.

Required:

i) What FOUR (4) issues should be considered in Professional Skepticism assessment during performance audit? (5 marks)

ii) State FIVE (5) circumstances that can hinder Professional Skepticism at the engagement level. (5 marks)

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  • 10 Marks

AAA – Dec 2023 – L3 – Q1a – The Meaning of Audit and Assurance | Professional Responsibility and Liability

Explain the concept of professional skepticism and identify areas where it is important in auditing complex, subjective, or judgmental issues.

“Professional Skepticism is an essential concept in auditing practice and theory. It has been identified in almost all existing auditing standards. However, the way it should be characterised is still unclear” according to Maciej Ciolek (2017).

Required:

i) Explain the term Professional Skepticism within the context of the auditing profession. (2.5 marks)

ii) Discuss THREE (3) areas of audit that are complex, subjective or highly judgmental where Professional Skepticism may be important. (7.5 marks)

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  • 20 Marks

AAA – Aug 2022 – L3 – Q3 – Audit evidence

Discuss the implications of fraud on audit completion and the sufficiency of audit evidence for development costs.

You are the Senior Manager of Posterity Chartered Accountants. Security-Watch Ltd is an audit client of your firm, and the audit for the financial year ended 31 December 2021 is at the completion stage. The company installs and maintains security systems for businesses and residential customers.

Materiality for the audit of the company’s financial statements has been determined to be GH¢600,000. You are reviewing the audit working papers, and have gathered the following information:

Fraud
The Company’s Finance Director has informed the audit team that during the year, a fraud was suspected to have been committed by a Finance Officer, Ama Fofie, in the procurement department of the company. The Finance Officer is alleged to have raised fictitious supplier invoices and paid the invoiced amounts into her personal bank account. When questioned by the company’s Finance Director, Ama Fofie is alleged to have confessed that she had stolen GH¢50,000 from the company. The Finance Director asked the audit team not to perform any procedures in relation to the alleged fraudulent act, as the amount is immaterial. The Finance Director also stated that the financial statements would not be adjusted in relation to the fraud.
The only audit evidence on file is a written representation from management acknowledging the existence of the fraud, and a list of the fictitious invoices which is alleged to have been raised by Ama Fofie, provided by the Finance Director. The audit working papers conclude that the fraud is immaterial and that no further work is needed.
(6 marks)

Development Costs
In July 2021, the company commenced the development of a new security system, and incurred expenditure of GH¢1,000,000 up to the financial year end, which has been capitalised as an intangible non‑current asset. The only audit evidence obtained in relation to this balance is as follows:

  • Attachment of a sample of the costs included in the GH¢1,000,000 capitalised to supporting documentation such as supplier invoices.
  • Cash flow projection for the project, which indicates that a positive cash flow will be generated by 2022. The projection has been arithmetically checked.
  • A written representation from management stating that ‘management considers that the development of this new product will be successful’.

You are aware that when the Finance Director was asked about the cash flow projection which he had prepared, he was reluctant to answer questions, simply saying that ‘the assumptions underlying the projection have been agreed to be assumptions contained in the company’s business plan’. He provided a spreadsheet showing the projection, but the underlying information could not be accessed as the file was password protected and the Finance Director would not provide the password to the audit team.

Required:
a) Discuss the implications of the fraud for the completion of the audit, and the actions to be taken by Posterity Chartered Accountants.
(6 marks)

b) In respect of the development costs:
i) Comment on the sufficiency and appropriateness of the audit evidence obtained.
(10 marks)
ii) Recommend TWO (2) ways Posterity Chartered Accountants could obtain further evidence about the new security system.
(4 marks)

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  • 20 Marks

AAA – Aug 2022 – L3 – Q1 – Professional responsibility and liability | Practice management

Discuss the audit expectation gap, recommend ways to close it, and evaluate client acceptance decisions for a new audit client.

The potential liability of auditors has become an important topic in recent years, due to the growing complexity of the audit business environment and an increase in legal actions against auditors. One argument put forward to explain the high number of legal actions against auditors is the “expectation gap”.

i) Explain the Audit Expectation Gap and the elements in the Gap.
(4 marks)

ii) Recommend TWO (2) ways of closing the audit expectation gap.
(2 marks)

b) International Standards on Auditing (ISA) defines professional scepticism as an attitude that includes a questioning mind, being alert to conditions which may indicate possible misstatements due to error or fraud and a critical assessment of audit evidence. It explicitly requires auditors to plan and perform an audit with professional scepticism recognising that circumstances may exist that may cause financial statements to be misstated.

Required:

Recommend FOUR (4) approaches or ways that the professional practice firms and auditors could adopt to create the awareness of the importance of professional scepticism and its application.
(4 marks)

c) Opelee Partners, a firm of Chartered Accountants is considering the acceptance of a new client, The Monkoo Group Plc (The Group).

The Group is a listed company, and it has a total of 14 subsidiaries, 10 of which are foreign subsidiaries. The Group is a food processing company and each of its foreign subsidiaries provides a particular ingredient used in the Group’s main processing plant, which is based in Ghana. The subsidiaries produce raw ingredients including corn, wheat, vegetables, and nuts.

If Opelee Partners decides to accept the appointment, it will perform the audit of the Group’s consolidated financial statements, and that of the financial statements of some of the individual subsidiaries. The Group audit committee has suggested that, in order to keep the audit fee as low as possible, Opelee Partners could audit the companies based in Ghana but the foreign subsidiaries would be audited by local firms. These foreign subsidiaries contribute 60% to the Group’s total assets.

As the Managing Partner of Opelee Partners, you have also obtained the following information from an internet search regarding the Group:

  • Local protestors: One subsidiary, Konti Plc, has been accused of environmental damage, due to its operations impacting on the rainforest and causing harm to wildlife. There have been some protests by concerned citizens in the country where Konti Plc is located. Digital recordings of these protests have spread world-wide on social media.
  • Expansion of operations: The Group has recently expanded its operations in a certain country by acquiring a large area of land on which to grow wheat. To receive government approval for the acquisition, a significant ‘incentive payment’ was made to a government minister. This has been reported widely in the media.

Required:

Evaluate the matters Opelee Partners should consider before accepting the audit of The Group under the following areas:

i) The audit firm’s capabilities
(4 marks)

ii) Ethical issues
(4 marks)

iii) Client integrity
(2 marks)

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