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

AAA – May 2017 – L3 – Q5b – Audit evidence | Reporting

Discuss the audit considerations related to inventory valuation at lower of cost and net realizable value and the implications of a refund policy on the audit report.

Question

You are an audit senior in Patampa and Associates, and nearing the end of the audit of Duakor Ltd. for the year ended 30 June 2016. Duakor Ltd owns a chain of clothing stores and also has a manufacturing division where it makes its own label brand “Dumas.” Own label clothing represents 50% of the inventory and sales of Duakor Ltd. The financial statements show a profit before tax of GH¢14m (2015 GH¢6m) and a statement of financial position total of GH¢46m (2015 GH¢30m). The following points have arisen on the audit:

i) Duakor Ltd. values its inventory at the lower of cost and net realizable value. Cost is determined by deducting a suitable estimated profit margin from the selling price. Inventory in the statement of financial position as at 30 June 2016 was GH¢2,530,000.

ii) Duakor Ltd. has a refund policy which states that a customer who is not satisfied with their purchase may return their goods within 28 days of purchase and obtain an exchange or a cash refund. Experience has shown that exchanges and refunds are common, as Duakor Ltd’s shops do not provide fitting rooms, space being at a premium. Duakor Ltd. does not make any provision in the financial statements for refunds.

Required:

Comment on the matters you will consider in relation to the implications of the above points on the audit report of Duakor Ltd. (10 marks)

Answer

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Tags: Audit opinion, Audit report, IAS 2, Inventory Valuation, Refund Policy
Level: Level 3

Topic: Audit evidence, Reporting
Series: MAY 2017

AAA – May 2017 – L3 – Q1 – Planning | Audit evidence | Evaluation and review

Assess the audit implications of subsequent events involving bad debt and legal actions, describe subsequent events review, and recommend audit procedures for identifying material subsequent events.

Question

You are the audit manager in charge of the audit of Serwah Ghanaba Ltd for the year ended 31 December 2014. The partner in charge of the audit instructs you to carry out a review of the company’s activities during the financial year end. The following issues came up during the review.

i) On 28 February 2015, Jessica Mensah, who owed the company GH¢500,000.00, was killed by some robbers on her way to Accra after a visit to her hometown. The amount was part of the GH¢800,000.00 debtors appearing on the statement of financial position for the year end 31 December 2014. It was realized that it will not be possible to recover the amount from the family of Jessica Mensah.

ii) In another development, the marketing director of the Company, Stephen Odoi, who was due to retire on 31 March 2015, embarked on a 6-month leave prior to retirement with effect from 1 October 2014. Investigation instituted in May 2015 revealed that Mr. Stephen Odoi took a contract appointment with another company from 1 November 2014. As a result of the investigation, the company decided to bring an action against Mr. Stephen Odoi to recover the salary paid to him from 1 November 2014 to 31 March 2015.

Required:

a) Assess the audit implications of issues (i) and (ii) above. (10 marks)

b) Describe the nature and purpose of subsequent events review. (5 marks)

c) Recommend the audit procedures which would be carried out in order to identify any material subsequent events. (5 marks)

Answer

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Tags: Audit Procedures, Bad Debt, Contingent Assets, Legal Issues, Subsequent Events
Level: Level 3

Topic: Audit evidence, Evaluation and review, Planning
Series: MAY 2017

AAA – May 2016 – L3 – Q5b – Audit evidence | Current issues

Discuss factors affecting audit quality according to the IAASB’s recent publication on Audit Quality.

Question

Audit Quality has been a topical issue for discussion in the accountancy profession in recent times. The International Auditing and Assurance Standards Board (IAASB) has recently issued a publication on the Framework for Audit Quality. The objectives of this publication are to raise awareness of the key elements of audit quality; to encourage key stakeholders to explore ways to improve audit quality; and to facilitate greater dialogue between key stakeholders on the topic. Although audit quality is principally the responsibility of auditors, there are many factors that contribute to it. The IAASB describes these other factors as contextual, inputs, outputs, and key interactions.

Required:
Discuss with examples what factors affect Audit Quality according to the recent publication of the IAASB on Audit Quality. (10 marks)

Answer

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Tags: Audit quality, Contextual Factors, IAASB, Inputs, Key Interactions, Outputs
Level: Level 3

Topic: Audit evidence, Current issues
Series: MAY 2016

AAA – May 2016 – L3 – Q5a – Internal audit and outsourcing | Audit evidence

Prepare a report to management on the deficiencies in the payroll internal control system and provide recommendations.

Question

a) Broni & Co. have audited the annual financial statements of Bibini Co. Ltd., a public limited liability company, for the year ended 31st December 2014. The accounting system of the company is partially computerized.

During the audit, it was detected that just two members of staff out of one hundred and fifty workers were entirely and equally responsible for the maintenance of personnel records and preparation of the payroll. The chief accountant only confirms that the amount of the wages and salaries cheque agrees with the total of the net wages column in the payroll, then he signs without any reasonableness check of the amount of the total wages cheque. This situation is a serious deficiency in the control system which can have serious implications. As audit senior, you are considering communicating this situation to management, showing the deficiency, implications, and recommendations.

Required:
Prepare an appropriate report to management on the deficiency noted in the internal control system for payroll. (10 marks)

Answer

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Tags: Deficiency, Internal Control, Management Report, Payroll System, Recommendations
Level: Level 3

Topic: Audit evidence, Internal audit and outsourcing
Series: MAY 2016

AAA – May 2016 – L3 – Q3b – Audit evidence | Planning

Outline procedures for reviewing the opening balances in draft financial statements.

Question

Demonstrate how you will review the opening balances in the draft financial statements. (10 marks)

Answer

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Tags: Audit Planning, Audit Procedures, Financial Statement Review, Opening Balances
Level: Level 3

Topic: Audit evidence, Planning
Series: MAY 2016

AAA – May 2016 – L3 – Q3a – Planning | Audit evidence

Use analytical procedures to assess the financial statement extracts and their impact on the audit of accounts receivable.

Question

Your audit and assurance firm has just accepted a financial statement audit engagement from Lunch Special Ltd., a restaurant that prepares lunch for the general public and on special orders. The company operates at a number of sales points in the city.

The company uses a computerised system that has networked all the Sales Points to its Head Office. Your firm is planning the new audit and has received the draft financial statements for the year. As the audit senior to lead the engagement team, you are examining the financial statements, an extract of which is shown below:

Required:
i) Using analytical procedures at the planning stage, state your observations drawn from the extracts from the draft financial statements and how they may impact your audit of the Accounts Receivables. (10 marks)

Answer

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Tags: Analytical procedures, Audit Planning, Financial Statement Analysis, Receivables Audit
Level: Level 3

Topic: Audit evidence, Planning
Series: MAY 2016

AAA – Nov 2023 – L3 – Q5b – Audit Evidence, Evaluation and Review

Describe the auditor’s responsibility for subsequent events occurring between specific periods in the audit process.

Question

b) In conducting an audit, audit procedures must be planned and performed so as to consider all significant transactions occurring after the reporting period. This means that the audit work does not stop with events only up to the reporting period. There are two key dates after the reporting period: the date of the audit report and the date that the financial statements are issued.

Required: Describe the auditor’s responsibility for subsequent events occurring between:

i) The year-end date and the date the auditor’s report is signed; and (2 marks)

ii) The date the auditor’s report is signed and the date the financial statements are issued. (3 marks)

Answer

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Tags: Auditor's responsibility, ISA 560, Subsequent Events
Level: Level 3

Topic: Audit evidence, Current issues
Series: NOV 2023

AAA – Nov 2023 – L3 – Q5a – Current Issues, Audit Evidence

Explain the stages of money laundering and audit obligations in a scenario involving suspicious transactions.

Question

a) You have commenced the audit of Atika Ltd, a company involved in the importation and sale of plumbing materials. As part of the audit, you have noticed the following:

Atika Ltd does not pay its suppliers in Germany through the bank. It relies mostly on the black market for the transfer of funds to its suppliers.
Atika only sells its goods in Ghana.
On 25 March within the audit year, there was a cash deposit of US$2,500,000.00 into the forex account of Atika Ltd.
On 30 March the company transferred the following:
- US$499,999.99 to an unknown account in Cameroon
- US$399,999.99 to an unknown account in Kenya
- US$499,999.99 to an unknown account in Niger
- US$250,000.00 to the personal account of the Managing Director
- US$150,000.00 to an unknown company.
The company’s general ledger shows a revenue of GH¢1,560,000.00.
The import documentation shows purchases of GH¢36,000,000.00. There is no evidence of payment for the goods from Atika Ltd’s bank accounts.
The closing inventory amounted to GH¢2,145,200.00.

The Audit Manager has raised the issue of money laundering considering the nature of the transactions above.

Required:

i) Explain to the team members the various stages of money laundering and show how the above transactions confirm the client’s engagement in money laundering. (6 marks)

ii) What are the obligations on the firm for money laundering? (4 marks)

Answer

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Tags: Audit Obligations, Financial Crimes, Money laundering
Level: Level 3

Topic: Audit evidence, Current issues
Series: NOV 2023

AAA – Nov 2023 – L3 – Q2 – Audit Evidence, Evaluation and Review

Discuss the need for financial statement amendments and audit procedures for three subsequent events: a lawsuit, a warehouse flood, and a receivable.

Question

Omega Ltd was incorporated to engage in the production, supply and retail of sachet water. The final audit for the Financial Statements ending 31 December 2022 is nearly complete and it is proposed that the Financial Statements and Audit Report will be signed in March 2023. Revenue for the year is GH¢78 million and profit before tax is GH¢7.5 million. The following events have occurred subsequent to the end of the reporting year of the company.

Lawsuit:
A key supplier of Omega Ltd is suing them for breach of contract. The lawsuit was filed prior to the year end, and the sum claimed by the supplier is GH¢1 million. This has been disclosed as a contingent liability in the Notes to the Financial Statements. However, correspondence has just arrived from the supplier indicating that they are willing to settle the case for a payment by Omega Ltd of GH¢0.6 million. It is likely that the company will agree to this.
(7 marks)
Warehouse:
Omega Ltd has three warehouses sited in different locations. Following extensive rain on 20 February, 2023, one of the warehouses was completely flooded and as a result, all inventory in the warehouse valued at GH¢1 million was damaged and has been disposed off. The insurance company has already been contacted. No amendments or disclosures have been made in the financial statements.
(7 marks)
Account Receivables:
A customer of Omega Ltd has been experiencing cash flow problems and its year-end balance is GH¢0.3 million. The company has just become aware that its customer is experiencing significant going concern difficulties. Omega Ltd believes that as the company has been trading for many years, they will receive some, if not full payment from the customer, hence the receivables balance has not been adjusted.
(6 marks)

Required:
Using the three issues above: a) Discuss whether the financial statements require amendment;
b) Describe audit procedures that should be performed in order to form a conclusion on the amendment; and
c) Explain the impact on the audit report should the issues remain unresolved.

Answer

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Tags: Audit Procedures, Financial Statement Amendments, IAS 10, Subsequent Events
Level: Level 3

Topic: Audit evidence, Evaluation and review
Series: NOV 2023

AAA – Aug 2022 – L3 – Q5b – Audit evidence

Explain the relevance of CAATs in evaluating audit evidence.

Question

Computer-Assisted Audit Techniques (CAATs) is a growing field within the IT audit profession. CAATs is the practice of using computers to automate the IT audit processes.

Required:
Explain THREE (3) relevance of CAATs in evaluating audit evidence.

Answer

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Tags: Audit evidence, CAATs, Control Testing, IT Audit
Level: Level 3