Topic: Audit evidence

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AAA – Nov 2017 – L3 – Q5 – Audit Evidence

Evaluate XYZ Bank’s provision for litigation, discuss audit procedures per ISA 501, and prepare litigation disclosure for financial statements.

Question

You are the audit manager for XYZ Bank Limited for the year ended December 31, 2016. The Bank’s Board noted a litigation issue involving a lawsuit from BBB Limited, where the Bank was found liable for a cheque conversion worth ₦2.1 billion. The high court imposed a penalty on the Bank for this amount, which BBB Limited is now claiming.

The Bank has objected to the judgment, appealing to the Court of Appeal, with legal counsel advising that a favorable outcome is expected. The Bank’s litigation-related financial information is as follows:

Provision for litigation (recognized in financial statements): ₦96 million
Litigation cases as defendant: 50
Litigation cases as plaintiff: 10
Claims in favor of the Bank: ₦2.7 billion
Claims against the Bank (including the ₦2.1 billion case): ₦3.2 billion

Requirements:
a. Discuss FOUR specific considerations under ISA 501 for obtaining audit evidence on litigation provisions.

(5 Marks)
b. Evaluate the adequacy of the litigation provision recognized in the financial statements as at December 31, 2016.

(5 Marks)
c. Prepare a summary disclosure of the litigation status for inclusion in the financial statement notes as at December 31, 2016.

(5 Marks)

Answer

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Tags: Audit evidence, Financial Disclosure, IAS 37, Litigation, Provisions
Level: Level 3

Topic: Audit evidence
Series: NOV 2017

AA – Nov 2023 – L2 – Q2 – Audit Evidence

Discuss requirements and methods for designing an audit sample and circumstances when sampling may be inappropriate.

Question

ISA 530 Audit sampling states that the objective of the auditor when using audit sampling is to provide a reasonable basis to draw conclusions about the population from which the sample is drawn.

Required:

a. In accordance with ISA 530, what are the requirements the auditor should consider in designing a sample size? (6 Marks)

b. Explain FIVE sampling methods that are available for the use of the auditor. (10 Marks)

c. State FOUR circumstances where sampling may not be appropriate for use by the auditor. (4 Marks)

Answer

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Tags: Audit evidence, Audit Methods, ISA 530, Non-Sampling Circumstances, Sampling
Level: Level 2

Topic: Audit evidence

AA – May 2016 – L2 – Q7a – Audit Evidence

Identify additional information needed to determine the audit opinion for Musky Fresh Ltd following supplier difficulties.

Question

Musky Fresh Limited has been in existence, for a number of years, importing perfume. The managing director had built up the business using contacts he already had in the industry. The company imports only one brand of perfume which is manufactured exclusively by one company. The perfume is distributed via ‘shops within shops’ at 20 branches of a well-known store. Under this agreement, Musky Fresh Limited pays a percentage of its takings to the store, with a minimum annual payment of N100,000 per store.

The audit is nearing completion, but you have just heard that the Arabian manufacturer is facing serious financial difficulties, and that supplies have ceased.

Required:

a. Set out the further information the auditor would require before reaching his audit opinion. (6 Marks)

Answer

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Tags: Audit opinion, Financial difficulties, Going Concern, Supplier Risks, Trade Payables
Level: Level 2

Topic: Audit evidence
Series: MAY 2016

AA – May 2016 – L2 – Q2 – Planning an Audit

Planning and identifying audit risks for a new client with an increased demand for products, using a standard costing system for inventory valuation.

Question

Sweet Dreams, a limited liability company, is a new audit client and you are at the
planning meeting for the forthcoming audit. The company has grown rapidly and has
May 31 as year-end. The financial statements have not been audited in previous years
since the organization has only just converted from a partnership to a company.
The company’s bankers have requested that an audit be undertaken on the financial
statements for the year ending May 31, 2016. Higher levels of inventory required to
meet the increasing demand for its products have necessitated a request for an increase
in the bank’s overdraft facility.
The company makes beds, buying its materials directly. At the year-end, inventory
comprises raw materials, work-in-progress and finished goods. It does not undertake
continuous inventory counting but does intend to perform a full inventory count on
May 31, 2016. It uses standard costing system to value finished products and work-inprogress.

Answer

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Tags: Audit Planning, Audit Risk, Control Systems, Inventory Management, Material Misstatement
Level: Level 2

Topic: Audit evidence, Planning an Audit, Risk Assessment and Internal Control
Series: MAY 2016

AA – Nov 2022 – L2 – Q4 – Audit Evidence for Engineering Assets and Liabilities

Addressing audit evidence for engineering company assets and liabilities, including procedures for confirmations and plant disposals.

Question

You are part of an audit team engaged on the audit of an engineering company which has a substantial amount of plant and machinery in its books. While reviewing the accounts, you also observed that there were some current assets and liabilities that may require external confirmations.

Required:

a. How would you establish the amount and level of audit evidence required for the current assets and liabilities? (5 Marks)

b. State which procedures will be applied to generate audit evidence in the following scenarios:

i. Confirming the accuracy of figures in the trade receivables account
ii. Confirming that the plant and machinery purchased in the year is actually in use during the year
iii. Ascertaining that the change in performance is in line with expectations
iv. Confirming the accuracy of the total receivable figures in the statement of financial position
v. Confirming contingent liability as to legal fees (5 Marks)

c. State the audit procedures you would take concerning the disposal of plant and machinery. (5 Marks)

d. State the requirements of ISA 505 concerning maintaining control over the external confirmation requests of current assets and liabilities. (5 Marks)

Answer

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Tags: Audit evidence, Current Liabilities, Engineering Assets, External Confirmations, ISA 505 Compliance, Plant and Machinery Disposal
Level: Level 2

Topic: Audit evidence
Series: NOV 2022

AA – Nov 2014 – L2 – Q2 – Audit Evidence

Discuss factors affecting sufficiency of audit evidence and audit procedures for current liabilities in Radcliffe Co.

Question

Radcliffe Co.

ISA 500 Audit Evidence states that the objective of the auditor is to “design and perform audit procedures in such a way as to enable the auditor to obtain sufficient appropriate audit evidence to be able to draw reasonable conclusions on which to base the auditor’s opinion.”

Required:

a. List and explain the factors which will influence the auditors’ judgment concerning the sufficiency of audit evidence obtained. (4 Marks)

b. You are the audit senior in charge of the audit of Radcliffe Co, a company that has been trading for over 50 years. Radcliffe Co manufactures and sells tables and chairs directly to the public. The company’s year-end is 31 December. Current liabilities are shown on Radcliffe Co’s statement of financial position as follows:

Description	2013	2012
Trade payables	884,824	816,817
Accruals	56,903	51,551
Provision for legal action	60,000	–
Total	1,001,727	868,368

The provision for legal action relates to a claim from a customer who suffered an injury while assembling a chair supplied by Radcliffe Co. The directors of Radcliffe Co dispute the claim, although they are recommending an out-of-court settlement to avoid damaging publicity.

List the substantive audit procedures that you should undertake in the audit of the current liabilities of Radcliffe Co for the year ended 31 December 2013. For each procedure, explain the purpose.

Marks are allocated as follows:

Trade payables (9 Marks)
Accruals (3 Marks)
The provision for legal action (4 Marks)

Answer

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Tags: Audit evidence, Audit Judgment, Current Liabilities, ISA 500, Substantive Procedures
Level: Level 2

Topic: Audit evidence

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.

Question

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)

Answer

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Tags: Audit evidence, Audit Procedures, Documentation, Quality control
Level: Level 2

Topic: Audit Documentation, Audit evidence
Series: MAY 2021

AA – May 2017 – L2 – SA – Q1 – Audit Evidence

Analysis and identification of unusual features in Abricon Nigeria Ltd.'s profit and loss for audit purposes.

Question

The following is the statement of Profit or Loss and other comprehensive income of ABRICON NIGERIA LIMITED for the year ended December 31, 2016.

ABRICON NIGERIA LIMITED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE YEAR ENDED DECEMBER 31, 2016

Requirements:

(a) Perform analytical tests on the figures given. (16 Marks)

(b) Identify unusual features. (8 Marks)

(c) Provide possible explanations why some apparently unusual items were not selected in (b) above. (6 Marks)

Answer

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Tags: Analytical procedures, Financial Ratios, Income Statement Analysis, Profit or Loss Statement
Level: Level 2

Topic: Audit evidence
Series: MAY 2017

AA – May 2023 – L2 – SA – Q1 – Audit Evidence

Explaining objectives and steps in obtaining written representation and handling contradictions in audit evidence.

Question

Promise and Treasure are two good childhood friends. After their secondary education, Promise traveled abroad to further his education and obtained his degrees there. Treasure attended a university in Nigeria and graduated with a second-class lower degree. During his time abroad, Promise met some foreign associates and decided to start a company in Nigeria with Treasure.

The company, named Promise and Treasure Company Nigeria Limited, specializes in importing steel products with future plans to set up a local factory. The first-year accounts were prepared as of December 31, 2020. Your firm has been appointed as auditors for the company. Upon completing the audit, you requested a written representation from management. The Managing Director found this request unusual, as he believed all necessary information and documents had already been provided.

Required:

a. Explain to the Managing Director the objectives of the auditor in obtaining a written representation as per ISA 580. (4 Marks)

b. State the steps the auditor should take if a representation by management is contradicted by other audit evidence. (6 Marks)

c. State THREE matters that are required of management in the letter of representation in line with ISA 580, requiring specific representation from management. (3 Marks)

d. Highlight SEVEN aspects of the form and contents of a letter of representation. (14 Marks)

e. State the steps the auditor should take if management refuses to provide the requested written representation. (3 Marks)

Answer

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Tags: Audit evidence, Audit Process, Auditor's Actions, ISA 580, Management Representation, Written Representation
Level: Level 2

Topic: Audit evidence
Series: MAY 2023

AA – May 2024 – L2 – SA – Q3 – Audit evidence

This question tests knowledge on reasons for obtaining letters of representation from clients' management, steps to take if representations are contradicted, and drafting a letter of representation.

Question

You are the Audit Senior-in-charge of the audit of Edinburg Nigeria Limited. The management of the company made some representations to you, which include:

Inventory worth ₦15 million in its only branch in Niger Republic, which you couldn’t visit because of the ongoing civil unrest in that country;
A donation of ₦500,000 was made to a motherless babies home by the Chairman but it was not receipted; and
The chairman received medical treatment amounting to ₦600,000 during his official visit to Germany to negotiate with equipment vendors, and he did not come back with any documentary evidence.

You have reported these matters to the partner of your firm, Olumisi Oregun & Co.

Required:

a. Explain two reasons for obtaining letters of representation from clients’ management. (4 Marks)

b. Explain three steps you will take if a representation by management is contradicted by other audit evidence. (6 Marks)

c. Draft a letter of representation, which the management of Edinburg Nigeria Limited will present to your firm. (10 Marks)

Answer

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Tags: Audit Contradictions, Client Representations, Procedures, Representation Letters
Level: Level 2

Topic: Audit evidence
Series: MAY 2024

AA – May 2024 – L2 – SA – Q2 – Audit Evidence

This question focuses on the risks of cash misstatements, bank confirmations, and audit procedures for verifying cash and cash balances.

Question

In the audit of organizations, auditors often place importance on cash and cash equivalents because of the risk of misstatement associated with them. There have been cases of unreported bank balances and bank accounts opened in the names of organizations and operated secretly without the knowledge of management.

The audit work performed on cash balances will usually depend on materiality considerations. In this context, materiality should be considered not only in terms of the amount in the statement of financial position, but also in terms of the value of individual transactions passing through the cash account during the period.

Required:

a. Explain three risks of misstatement associated with cash and cash balances. (3 Marks)

b. Enumerate and explain six areas covered by a bank confirmation letter. (6 Marks)

c. State and explain five audit steps you will perform after obtaining the confirmation replies from banks. (7 Marks)

d. State and explain four main audit steps involved in a physical count in verifying cash balances. (4 Marks)

Answer

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Tags: Audit Steps, Bank Confirmations, Cash Balances, Cash Misstatement Risks
Level: Level 2

Topic: Audit evidence
Series: MAY 2024

AA – Nov 2015 – L2 – Q2 – Audit Evidence

Explaining the concept of audit evidence, its importance, and describing its sources and attributes.

Question

a. The objective of an audit is for the auditor to express an opinion on the truth and fairness of the financial statements. In the performance of his duty, the auditor seeks to obtain acceptable evidence necessary for him to draw conclusions in order to express a valid opinion on the financial statements.
Required:
i. Describe audit evidence and justify why the auditor would require such evidence. (4 Marks)

b. Identify FOUR sources of audit evidence and illustrate how these sources would affect the auditor’s reliance on the evidence. (10 Marks)

c. Describe THREE attributes of audit evidence. (6 Marks)

Answer

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Tags: Audit evidence, Audit Judgment, Audit Process, Reliability of Evidence, Sources of Evidence
Level: Level 2

Topic: Audit evidence
Series: NOV 2015

AA – Nov 2019 – L2 – Q3 – Introduction to Auditing

Discuss the parties involved in the audit assurance process, conditions for accepting an assurance engagement, and recognizing reliable evidence.

Question

A financial analyst in his contribution at a seminar stated that audited financial statements show the records of stewardship of a company’s activities and the financial position of a company at the end of a period.

The financial report has input from key stakeholders who must perform their duties well and in an objective manner. In view of this, the report should give confidence to the users of the financial statements and support good corporate governance.

The financial report is used for decision making and is prepared based on management estimates, judgement, assumptions, and reliable evidence.

As a chartered accountant, you have been invited to make a contribution at the seminar in support of the statement of the analyst:

You are required to discuss:

Parties to an audit assurance process, stating their duties and rights. (4½ Marks)
When a professional should accept an assurance engagement. (8 Marks)
How to recognize a reliable evidence in an audit and assurance engagement. (7½ Marks)

Answer

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Tags: Audit Assurance, Parties to Audit, Reliability of Evidence
Level: Level 2

Topic: Audit evidence, Introduction to Auditing
Series: NOV 2019

AA – Nov 2020 – L2 – Q1d – Audit Evidence

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

Question

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

Answer

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Tags: Audit Procedures, Insurance, Premium Income
Level: Level 2

Topic: Audit evidence
Series: NOV 2020

AA – May 2018 – L2 – Q2 – Audit Evidence

This question addresses the auditor’s determination of sufficient and reliable audit evidence as required by ISA 500.

Question

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

Required: a. Explain briefly THREE factors that an auditor will consider in determining what constitutes sufficient audit evidence. (6 Marks) b. Explain briefly TWO principles that would assist an auditor in assessing the reliability of the audit evidence. (4 Marks) c. Describe FOUR principles that would assist an auditor in assessing the relevance of audit evidence. (10 Marks)

Answer

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Tags: Audit evidence, ISA 500, Relevance, Reliability, Substantive Testing
Level: Level 2

Topic: Audit evidence
Series: MAY 2018

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.

Question

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:

Identify FIVE substantive procedures you will carry out to verify additions to the assets in 2016. (10 Marks)
Explain FIVE substantive procedures for verifying disposal of assets during the year. (10 Marks)
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)

Answer

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Tags: Additions, Audit Procedures, Disposals, Non-current Assets, Statutory Books, Substantive Testing
Level: Level 2

Topic: Audit evidence
Series: MAY 2018

AA – Nov 2021 – L2 – Q5 – Audit Evidence

Discuss analytical review procedures and their purpose in auditing.

Question

One of the audit testing procedures available to the auditor is the Analytical Review Procedure.

a. Explain what is meant by Analytical Review Procedures. (6 Marks)
b. Explain FOUR types of general Analytical Review Procedures. (4 Marks)
c. What is the purpose of performing Analytical Review Procedures at the audit planning stage? (5 Marks)

Answer

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Tags: Analytical review, Audit Procedures, Financial Analysis, Planning Stage
Level: Level 1

Topic: Audit evidence
Series: NOV 2021

AA – Nov 2021 – L2 – Q2 – Audit Evidence

Discuss characteristics of good audit evidence and testing procedures for gathering it.

Question

ISA 500 on audit evidence sets out the objective of the auditor is to design and perform audit procedures in such a way to enable him to:
(i) Obtain sufficient and appropriate audit evidence
(ii) Draw reasonable conclusions
(iii) Base his audit opinion

Required:
a. Identify THREE characteristics of a good audit evidence. (3 Marks)
b. List and explain briefly FIVE testing procedures for gathering audit evidence. (10 Marks)
c. What factors will the auditor consider when assessing the reliability of audit evidence? (7 Marks)
(Total 20 Marks)

Answer

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Tags: Audit evidence, ISA 500, Reliability, Testing Procedures
Level: Level 2

Topic: Audit evidence
Series: NOV 2021

AA – May 2019 – L2 – Q7 – Audit Evidence

Discussion on the importance of closing inventory to auditors, risks of misstatement, and constituents of inventory valuation.

Question

For many businesses (except service organizations), inventory is one of the areas that needs most attention from the auditor. Hence, audit work on inventory is often given to more experienced members of the audit team who will subject the work to a more rigorous review and quality control. In addition, IAS 2 requires that inventory should be valued at the lower of cost and net realizable value on an item-by-item basis.

You are required to:

a. Briefly explain SIX reasons why closing inventory is very important to the auditor. (6 Marks)

b. Explain FIVE principal risks of misstatement associated with closing inventory. (5 Marks)

c. Identify the constituents of cost and net realizable value in an inventory valuation exercise. (4 Marks)

Answer

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Tags: Cost and Net Realisable Value, IAS 2, Inventory Audit, Inventory Valuation, Misstatement Risks
Level: Level 2

Topic: Audit evidence
Series: MAY 2019

AA – May 2019 – L2 – Q5 – Audit Evidence

Justification for requiring confirmations of receivables, payables, and bank balances, and contents of confirmation letters.

Question

In the course of an audit assignment, an auditor requires an independent and external confirmation for the following items:

Receivables
Payables
Bank Balances

You are required to:

a. Justify the need for confirmation in respect of the items listed above. (9 Marks)

b. State the contents of each of the letters sent to request for confirmation in TWO of the items stated above. (6 Marks)

Answer

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Tags: Audit Confirmation, Audit evidence, Bank Balances, Payables, Receivables
Level: Level 2