Topic: Audit and Assurance Risk Environment

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AA – July 2023 – L2 – Q3b – Audit and Assurance Risk Environment, Professional and Ethical Considerations

Factors external auditors should consider when engaging an actuary for evaluating an insurance company's reserves and premium rates.

Question

b) Fritz Insurance is a large insurance company that provides a wide range of insurance products to individuals and businesses. As part of their annual audit, the external auditor has engaged the services of an Actuary to assist with the evaluation of the company’s reserves and the adequacy of its premium rates.

Required:
Explain FIVE (5) factors to be considered by External Auditors in engaging the services of an Actuary to assist with the evaluation of the company’s reserves and the adequacy of its premium rates. (10 marks)

Answer

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Tags: Actuary, External Auditor, Insurance, Premium Rates, Reserves
Level: Level 2

Topic: Audit and Assurance Risk Environment, Professional and Ethical Considerations
Series: JULY 2023

AA – July 2023 – L2 – Q3a – Audit and Assurance Risk Environment, Audit and Assurance Evidence

Procedures external auditors perform to evaluate the effectiveness of data security controls.

Question

a) Abbey Ltd is a medium-sized manufacturing company that produces various products for consumers. The company has a large amount of confidential data, including financial records, trade secrets, and personal information of employees and customers. The company has recently become concerned about cyber security risks and has hired an external auditor to conduct an audit of their data security controls.

Required:
Explain FIVE (5) procedures the External Auditor would need to perform to obtain evidence to evaluate the effectiveness of Abbey Ltd’s data security controls.

(10 marks)

Answer

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Tags: Audit Procedures, Cybersecurity, Data security, External Auditor
Level: Level 2

Topic: Audit and Assurance Evidence, Audit and Assurance Risk Environment
Series: JULY 2023

AA – July 2023 – L2 – Q1b – Audit and Assurance Risk Environment, Audit and Assurance Evidence

Explanation of control weaknesses inherent in Non-Profit Organizations (NFPOs).

Question

b) Understanding the client’s business environment is critical to understanding the client’s business. There is a need for this because the objectives of commercial organizations are different from that of not-for-profit organizations (NFPOs). The inherent control weaknesses for both forms of organizations may not be the same.

Required:
Explain FIVE (5) control weaknesses inherent in NFPOs. (10 marks)

Answer

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Tags: Internal Control, Non-Profit Organizations, Risk, Weaknesses
Level: Level 2

Topic: Audit and Assurance Evidence, Audit and Assurance Risk Environment
Series: JULY 2023

AA – Nov 2023 – L2 – Q5b – Audit and Assurance Risk Environment

This question identifies areas in the audit process where Robotic Process Automation (RPA) can be applied.

Question

The sixth Market Scan from the IAASB’s Disruptive Technology team explored Robotic Process Automation, a technology used for executing repetitive tasks that has applications across the audit process, from data transformation to work paper creation, as well as the potential for forming part of an audited entity’s IT environment. Robotic Process Automation (RPA) is a technology that involves creating software robots or “bots” to perform repetitive, routine manual tasks, such as extracting data, filling out forms, or moving files. By completing rules-based actions that emulate human processes, RPA tools can autonomously complete various activities across multiple unrelated software systems.

Required:
State THREE (3) areas of the audit process where RPA can be deployed.
(3 marks)

Answer

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Tags: Audit technology, Automation in audit, Robotic Process Automation, RPA
Level: Level 2

Topic: Audit and Assurance Risk Environment
Series: NOV 2023

AA – Nov 2023 – L2 – Q2b – Professional and Ethical Considerations, Audit and Assurance Risk Environment

This question discusses five key factors to consider before accepting an audit engagement.

Question

Afrak and Associates is an Audit Firm that has been providing audit and assurance services for over 20 years. The firm has recently received a request from a new client, XYZ Ltd., to provide audit services. The audit engagement will cover the financial statements for the year ended December 31, 2022.

Required:
Explain FIVE (5) factors Afrak and Associates must consider prior to accepting the audit engagement, paying attention to, risk areas that may give rise to liability, including fraud, error, and non-compliance.
(10 marks)

Answer

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Tags: Audit Engagement, Audit Risk, Client Acceptance, Ethical considerations, Fraud risk
Level: Level 2

Topic: Audit and Assurance Risk Environment, Professional and Ethical Considerations
Series: NOV 2023

AA – Nov 2023 – L2 – Q1a – Audit and Assurance Risk Environment

List five ways an external auditor can fulfill responsibilities toward a company’s corporate governance.

Question

The external auditor’s responsibility towards corporate governance is to provide an independent and objective assessment of the effectiveness and efficiency of the company’s corporate governance practices. The auditor’s role is to evaluate the company’s internal controls and make recommendations for improvements to ensure the company is adhering to good corporate governance practices.

Required:
State FIVE (5) ways the External Auditor can fulfill his/her responsibility towards the company’s corporate governance practices.
(5 marks)

Answer

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Tags: Corporate Governance, External Auditor, Internal Controls, Responsibilities, Risk Management
Level: Level 2

Topic: Audit and Assurance Risk Environment
Series: NOV 2023

AA – Mar 2023 – L2 – Q5a – Audit and Assurance Risk Environment

Identify and explain the components of an entity’s internal control system.

Question

ISA 315 (Revised): Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and Its Environment requires auditors to understand the entity’s internal control. An entity’s internal control is made up of several components.

Required:
In reference to the statement above, state the FIVE (5) components of an entity’s internal control and give a brief explanation of each component.

Answer

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Tags: Control Environment, Entity’s Risk Assessment, Internal Control, ISA 315
Level: Level 2

Topic: Audit and Assurance Risk Environment
Series: MAR 2023

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.

Question

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)

Answer

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Tags: Audit Procedures, Auditors' responsibilities, Financial Statements, Fraud, ISA 240
Level: Level 2

Topic: Audit and Assurance Risk Environment
Series: MAR 2023

AA – Dec 2022 – L2 – Q5e – Audit and Assurance Risk Environment

Lists four factors an auditor may consider when determining whether deficiencies in internal control are significant.

Question

The significance of a deficiency or a combination of deficiencies in internal control depends not only on whether a misstatement has actually occurred, but also on the likelihood that a misstatement could occur and the potential magnitude of the misstatement. Significant deficiencies may therefore exist even though the auditor has not identified misstatements during the audit.

Required:
State FOUR (4) matters that an Auditor may consider in determining whether a deficiency or combination of deficiencies in internal control constitutes a significant deficiency.

Answer

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Tags: Auditor's Role, Corporate Governance, Deficiency, Internal Control, Risk Assessment
Level: Level 2

Topic: Audit and Assurance Risk Environment
Series: DEC 2022

AA – Dec 2022 – L2 – Q5d – Audit and Assurance Risk Environment

States the auditor's responsibilities when significant deficiencies in internal control are identified during an audit.

Question

A significant deficiency in internal control is one which merits the attention of those charged with governance.

Required:
State THREE (3) requirements of an Auditor when there are deficiencies in internal control of a client.

Answer

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Tags: Auditor's responsibility, Corporate Governance, Deficiencies, Internal Control, ISA
Level: Level 2

Topic: Audit and Assurance Risk Environment
Series: DEC 2022

AA – May 2021 – L2 – Q2b – udit and Assurance Risk Environment, Completion Procedures and Reporting

State audit tests necessary to determine if an entity is a going concern.

Question

ISA 570: Going Concern guides auditors to ensure that an entity can continue to operate into the foreseeable future.

Required:
State TWO (2) audit tests necessary to ascertain whether an entity is a going concern. (5 marks)

Answer

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Tags: Audit Tests, Financial Statements, Going Concern, ISA 570, Risk Assessment
Level: Level 2

Topic: Audit and Assurance Risk Environment, Completion Procedures and Reporting
Series: MAY 2021

AA – May 2021 – L2 – Q1c – Audit and Assurance Risk Environment, Audit and Assurance Evidence

State instances where the auditor applies the concept of materiality.

Question

Materiality is a fundamental concept in both auditing and accounting. The Framework for the preparation of financial statements states that information is material if its omission, misstatement, or non-disclosure could influence the economic decisions of users taken based on the financial statements.

Required:
State TWO (2) instances which require the Auditor to apply the concept of materiality. (2 marks)

Answer

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Tags: Audit evidence, Financial Statements, Materiality
Level: Level 2

Topic: Audit and Assurance Evidence, Audit and Assurance Risk Environment
Series: MAY 2021

AA – May 2021 – L2 – Q1b – Audit and Assurance Risk Environment, Planning and Approach for Audit and Assurance Engagements

Identify sources for audit knowledge and explain components of internal control and risk-based auditing.

Question

To prepare an audit strategy and an audit plan, the Auditor will need to gain an understanding of the entity and its environment in accordance with ISA 315 “Identifying and assessing the risk and material misstatement through understanding the entity and its environment”.

Required:
i) State FIVE (5) sources from which the Auditor can obtain knowledge of the industry and the organisation.

(5 marks)

ii) Identify FIVE (5) components that together make up internal controls. (5 marks)

iii) Define the concept of risk-based auditing. (3 marks)

Answer

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Tags: Audit strategy, Internal Controls, ISA 315, Risk Assessment, Risk-based Auditing
Level: Level 2

Topic: Audit and Assurance Risk Environment, Planning and Approach for Audit and Assurance Engagements
Series: MAY 2021

AA – Nov 2021 – L2 – Q1b – Audit and Assurance Risk Environment

Discusses six business risks faced by an audit firm when auditing a technology retailer.

Question

Mogya Bi Accounting Firm is the Auditors of Abronyeh Enterprise (Abronyeh), a retailer selling computers, phones, and other high-technology equipment. Abronyeh was set up just a year ago by its sole owner Adam Joseph. Adam Joseph has employed several bookkeepers to help him with accounting records and the preparation of financial statements, and the most recent one has just left. In order to start the business, Adam Joseph re-mortgaged his house and, in addition, took out a business loan. As part of the loan agreement, Adam Joseph is obliged to provide a copy of the annual financial statement.

Required:
Explain SIX (6) business risks that Mogya Bi Accounting Firm faces when conducting the audit of Abronyeh and explain why they could be identified as risks.

Answer

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Tags: Audit Risk, Business Risks, Financial Statements, Misstatement, Technology Retailer
Level: Level 2

Topic: Audit and Assurance Risk Environment
Series: NOV 2021

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.

Question

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)

Answer

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Tags: Audit Procedures, Audit report, ISA 570, Professional Skepticism, Subsequent Events
Level: Level 2

Topic: Audit and Assurance Risk Environment, Completion Procedures and Reporting
Series: MAY 2018

AA – May 2018 – L2 – Q2b – Audit and Assurance Risk Environment

Identifies deficiencies in a company's wages system and provides recommendations to prevent misstatements in financial statements.

Question

Third Floor Ltd is a construction company with many contracts being executed concurrently. A large number of workers are on various construction sites. Third Floor Ltd has an internal audit department, and the team is currently reviewing cash wages systems within the company.

The following information is available concerning the wages systems:

Workers on each site are controlled by a foreman. The foreman has a record of all employee numbers and can issue temporary numbers for new employees.
Any overtime is calculated by the computerised wages system and added to the standard pay.
The two staff in the wages department make amendments to the computerised wages system in respect of employee leave, illness, as well as setting up and maintaining all employee records.
The computerised wages system calculates deductions from gross pay, such as employee taxes (PAYE), and other statutory deductions.
Finally, a list of net cash payments for each employee is produced. Cash is delivered to the wages office by secure courier. The two staff place cash into wages envelopes for each employee along with a handwritten note of gross pay, deductions, and net pay. The envelopes are given to the foreman for distribution to the individual employees.

Required:
Identify and explain FIVE deficiencies in Third Floor Ltd’s system of internal control over the wages system that could lead to misstatements in the financial statements, and, for each deficiency, suggest an internal control to overcome that deficiency. (15 marks)

Answer

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Tags: Deficiencies, Internal Control, Misstatements, Recommendations, Risk, Wages system
Level: Level 2

Topic: Audit and Assurance Risk Environment
Series: MAY 2018

AA – May 2019 – L2 – Q3 – Audit and Assurance Risk Environment

Discusses audit procedures related to inventory misstatement and indicators and audit procedures for going concern assessment.

Question

Damongo Ltd (Damongo) is a computer hardware specialist and has been trading for over ten years. Damongo is the only hardware specialist listed on the Ghana Stock Exchange within five years after incorporation.

The company is funded partly through overdrafts and loans and also by several large shareholders. The year-end is 31 December 2017. Damongo has experienced significant growth in previous years. However, in the current year, a new competitor, HardWare Specialist Co (HardWare), has entered the market and through competitive pricing has gained considerable market share from Damongo. One of Damongo’s large customers has stopped trading with them and has moved its business to HardWare. In addition, a number of Damongo’s specialist developers have left the company and joined HardWare. Damongo has found it difficult to replace these employees due to the level of their skills and knowledge. Damongo has just received notification that its main supplier who provides the company with specialist electrical equipment has ceased trading.

Damongo is looking to develop new products to differentiate itself from the rest of its competitors. It has approached its shareholders to finance this development, however, they declined to invest further in Damongo. Damongo’s loan is long term and it has met all repayments on time. The overdraft has increased significantly over the year and the directors have informed you that the overdraft facility is due for renewal next month, and they are confident it will be renewed.

The directors have produced a cash flow forecast which shows a significantly worsening position in the coming 12 months. They are confident that the new products being developed is viable. Damongo has trading history of significant growth and they believe it is unnecessary to make any disclosures in the financial statements regarding going concern.

At the year end, Damongo received notification from one of its customers that the hardware installed for the customers’ online ordering system has not been operating correctly. As a result, the customer has lost significant revenue and has informed Damongo that they intend to take legal action against them for loss of earnings. Damongo has investigated the problem post year end and discovered that other work-in-progress is similarly affected and inventory should be written down. The Finance Director believes that as this misstatement was identified after the year end, it can be amended in the 2017 financial statements.

Required:
a) Describe THREE (3) procedures the auditors of Damongo Ltd should undertake in relation to the uncorrected inventory misstatement identified above.
(6 marks)

b) Explain FIVE (5) going concern potential indicators of Damongo Ltd.
(10 marks)

c) Identify SIX (6) going concern audit procedures which you should perform for Damongo Ltd.
(6 marks)

d) The auditors have been informed that Damongo’s bankers will not take a decision on the overdraft facility until after the audit report is completed. The directors have now agreed to include some going concern disclosures. Describe the impact on the audit report of Damongo Ltd if the auditor believes the company is a going concern but that this is subject to a material uncertainty.
(3 marks)

Answer

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Tags: Audit Procedures, Financial Distress, Going Concern, Inventory Misstatement, Material Misstatements
Level: Level 2

Topic: Audit and Assurance Risk Environment
Series: MAY 2019

AA – May 2019 – L2 – Q2a – Audit and Assurance Risk Environment

Explains differences in audit approach between interim and final audit and discusses factors for relying on internal auditors' work.

Question

a) You are the Audit Manager in charge of the audit of Adepaye Ltd (Adepaye) for the year ended 30 April 2016 and you are currently planning the year-end audit. Adepaye specialises in the sale of provisions at its head office. The company has opened branches in Ofankor Barrier, Makola, Nanakrom, Kasoa, and Kanda within ten years of incorporation. During the interim audit, you noted that due to the present economic challenges in Ghana, the company has suffered increases in costs. Also, the presence of competitors is driving the sales prices of the company downward, affecting the profitability of the company.

Furthermore, the company has not recorded profit for over five years, thus threatening the going concern of the company. Due to the consistent cash flow challenges, the company has financed its operations with bank overdrafts and huge long-term loans as part of its capital structure.

In a discussion with management and those charged with governance during the interim audit, you were informed that the company plans to improve the customer relationship management of its operations to maintain its market share. The company has asked its bank for a loan to finance its working capital. This they believe would improve the liquidity of the company.

The company has prepared a cash flow forecast for five years from the end of the reporting year 30 April 2016 to support its bank loan request. The internal audit department has reported on the forecast to the board of directors. However, the bank has said it would like a report from the external auditors to confirm the reasonableness of the forecast amidst the current challenges in Ghana after their final audit.

The company has approached your firm to examine the cash flow forecast and then to report to the bank.

Required:
i) Explain TWO (2) differences in audit approach that the Audit Manager would adopt during the interim audit and the final audit.
(6 marks)
ii) Explain FIVE (5) factors you will consider before placing reliance on the work of the internal auditors of Adepaye Ltd.
(10 marks)

Answer

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Tags: Audit Planning, Final Audit, Interim Audit, Internal Audit, Risk Assessment
Level: Level 2

Topic: Audit and Assurance Risk Environment
Series: MAY 2019

AA – Nov 2018 – L2 – Q4a – Audit and Assurance Risk Environment

Identifies audit problems likely to be encountered when a client shifts from manual to computer-based accounting systems.

Question

a. All Souls Ltd is the audit client of Objectivity Auditors, a firm of Chartered Accountants. All Souls Ltd has been operating a manual system of accounting for the past 10 years. All Souls Ltd is contemplating the acquisition of a new accounting software to facilitate the preparation of its accounting records.

Required:
As an audit senior of Objectivity Auditors, advise your audit team on the problems which are likely to be encountered by auditors while a client is moving from manual-based accounting records to computer-based accounting records. (8 marks)

Answer

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Tags: Audit Problems, Data Processing, Internal Controls, Manual to Computerized Systems
Level: Level 2

Topic: Audit and Assurance Risk Environment
Series: NOV 2018

AA – Nov 2018 – L2 – Q3a, b & c – Audit and Assurance Risk Environment

Identifies audit risks at International Training Center and outlines appropriate auditor responses.

Question

International Training Center (ITC) is a large company limited by shares that operates a network of teaching centers in countries across West Africa. The Company was incorporated under the requirements of the Companies Act, 1963 (Act 179), on 19 January 1990 and domiciled in Ghana. Students who register with the Center pay 30% during initial registration and the remaining 70% over the course period. You are the senior Associate of Add Consult. ITC is a new client, and you are currently planning the audit with the audit manager to audit the company for the year ended 31 December 2017.

You have been provided with the following planning notes from the audit partner following his meeting with the Finance Director.

ITC purchases stationery from a supplier in China, and these goods are shipped to the company’s central warehouse. The goods are usually in transit for a fortnight, and the company correctly records the goods when received. ITC does not undertake a year-end inventory count but carries out monthly continuous (perpetual) inventory counts, and any errors identified are adjusted in the inventory system for that month.
During the year, the directors of the Company have each been paid a significant bonus, and they have included this in wages and salaries expenses. Separate disclosure of the bonus is required by the Companies Act.
ITC has a policy of revaluing its land and buildings, and this year has updated the valuations of all land and buildings.
During the year, the company introduced a bonus-based scheme on sales for its salespersons. The bonus target was based on increasing the number of students signing up for 6-month courses by the school for individuals running accountancy examinations. This has been successful, and revenue has increased by 25%, especially in the last few months of the year. The level of receivables is considerably higher than last year, and there are concerns about the creditworthiness of some students.

Required:
a. Describe FIVE (5) audit risks, and explain the auditor’s response to each risk, in planning the audit of International Training Center. (10 marks)

b. Identify FIVE (5) audit procedures Add Consult should perform in order to place reliance on the continuous (perpetual) counts for year-end inventory. (5 marks)

c. Describe substantive procedures Add Consult should perform to confirm the directors’ bonus payments included in the financial statements. (5 marks)

Answer

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Tags: Audit risks, Directors' Bonus, Inventory, Revenue Recognition, Valuation
Level: Level 2