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Audit and Assurance

Suggested Answers
Certificate in Accounting and Finance Spring 2016
Ans.1

(a)

(i)

The approach of not sending confirmation requests to balances below


Rs. 100,000 is not correct unless the total of such balances is clearly immaterial.

(ii) The conclusion documented by the team is not correct as the confirmation received
from creditors only confirms the recorded amount and is not relevant for the purpose
of testing of unrecorded liabilities.
(b)

(i)

The audit team is required to discuss the matter with clients management and ask
them to send confirmation as per the normal sampling procedure of the audit firm.
In case the management does not agree, the audit team should evaluate the
implications of management's refusal on the auditor's assessment of the relevant risks
of material misstatement, including the risk of fraud, and on the nature, timing and
extent of other audit procedures;

(ii) Following information should be tested by the audit team to draw conclusion related
to unrecorded liabilities:

Ans.2

subsequent disbursements
unmatched receiving reports (Inventory Cutoff)

(a)

Key controls on cash sales and cash handling:


Responsibility to receive cash should be clearly identified.
(i)
Proper locks should be provided to each person responsible for handling cash.
(ii)
(iii) Cash should be kept in a locked and secure area until it is deposited.
(iv) Cash registers and credit card machines should be balanced at least once a day.
Proper policies should be made to deal with cash shortages/excesses.
(v)
(vi) Timely deposit of cash should be ensured.
(vii) Cash register should be used to record cash sales.
(viii) Transfers of cash from one person to another should be kept at a minimum.

(b)

(i)
(ii)

Adequate segregation of duties or independent checks.


Adequate system of authorization and approval of transactions (for example, in
purchasing, movement between locations etc.)
(iii) Use of door locks and surveillance cameras.
(iv) Surprise physical count and timely reconciliation of inventory items.
Mandatory vacations for employees performing key control functions.
(v)
(vi) Periodic rotation of employees.
(vii) Restricted storage area.
(viii) Different entry and exit doors.
(ix) Access controls over automated records, including controls over and review of
computer systems event logs.
Job applicant screening of employees with access to assets.
(x)

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Audit and Assurance


Suggested Answers
Certificate in Accounting and Finance Spring 2016
Ans.3

(a)

(b)

(i)

Forging or altering accounting records or supporting documentation which form the


basis of the financial statements
(ii) Misrepresenting or intentionally omitting events or transactions from the financial
statements
(iii) Intentionally misapplying accounting principles
(iv) Concealing or not disclosing, facts that could affect the amounts recorded in the
financial statements.
(v) Engaging in the complex transactions that are structured to misrepresent the financial
position or financial performance of the entity.
(vi) Embezzling receipts (for example, diverting them to personal bank accounts)
The auditor is required to perform the following procedures to identify the risks of material
misstatement due to fraud:

Make inquiries of management in respect of:


- their assessment of the risk of material fraud
- their process in place for identifying and responding to the risks of fraud
- any specific risks of fraud identified or likely to exist
- any communications within the entity in respect of fraud (including to employees
regarding managements views on business practices and ethical behaviour)

Make inquiries of management and others within the entity as to whether they have
any knowledge of any actual, suspected or alleged frauds and to obtain views about
the risks of fraud.
Evaluate any unusual or unexpected relationships identified in performing analytical
procedures which might indicate a risk of material fraud.
Evaluate information obtained from other risk assessment procedures to see if any
fraud risk factors exist.

Ans.4

(a)

The appointment of KCC is valid, as 90 days have not lapsed in case of outstanding bill.
However, the concerned partner should be requested to settle the amount of bill before the
expiry of 90 days as it will result in disqualification of KCC as auditors of NEL.

(b)

Appointment of Zubair and Company is valid.


Under the Companies Ordinance, 1984, there is no restriction on the appointment of
spouse of chief executive of an associated company as the auditor.
The holding of 100,000 shares by Saima is required to be disclosed at the time of
appointment. Further, these shares should be disposed off within 90 days of the
appointment.

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Audit and Assurance


Suggested Answers
Certificate in Accounting and Finance Spring 2016
Ans.5

(a)

Familiarity or intimidation threats may be created if a member of audit team joins the audit
client.
Following are the safeguards:
(i) Modifying the audit plan;
(ii) Assigning individuals to the audit team who have sufficient experience as compared to
the individual who has joined the client;

(b)

A loan from an audit client to an audit team member will not create a threat to
independence, if the loan is made under normal lending procedures, terms and conditions.
If the loan is not made under normal lending procedures, terms and conditions, a selfinterest threat would be created that would be so significant that no safeguard could reduce
the threat to an acceptable level. However, as the loan has already been disbursed, the only
safeguard available is to remove the manager from the audit team or ask him to settle the
lease obligation.

Ans.6

(a)

Key substantive procedures for verification of provisions include the following:


(i) Ensure that all provisions have been recognized in accordance with the IAS 37.
(ii) Review the measurement of the closing balance for each provision and discuss these
with management if appropriate. Consider whether it might be appropriate to take
expert advice on the existence or measurement of a provision.
(iii) Review the board approval related to provisions booked in the financial statements.
(iv) Review the list of provisions for possible omissions, based on the auditors knowledge
of the business and the industry in which it operates.
(v) Relate the testing of provisions to other areas of the audit work, such as
correspondence with lawyers/minutes of Board of directors meeting (which might
reveal more information about matters to which the provisions relate).
(vi) Compare provisions for the current financial year with provisions in previous years,
and investigate any major differences or omissions.
(vii) Review the subsequent events to ensure completeness of provisions.

(b)

Factors to be considered by auditor in deciding sufficiency of audit evidence:


The decision relating to sufficiency of audit evidence depends upon the judgment of the
auditor. Apart from professional judgment, following factors are also relevant in
determining the sufficiency of audit evidence.
(i) the seriousness of the risk that the financial statements might not give a true and fair
view; when this risk is high, more audit evidence will be required
(ii) the materiality of the item
(iii) the strength of the internal controls in the clients accounting systems

(c)

In order to evaluate the adequacy of internal audit function, the external auditor should
assess whether:
(i) The work was properly planned, performed, supervised, reviewed and documented;
(ii) Sufficient, appropriate evidence was obtained to enable internal auditors to draw
reasonable conclusions;
(iii) Appropriate conclusions were reached, consistent with any reports prepared;
(iv) Any exceptions or unusual matters were properly resolved.

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Audit and Assurance


Suggested Answers
Certificate in Accounting and Finance Spring 2016
(d)

Physical access controls over an IT System might include:


(i) Doors and door-locks
(ii) Alarms
(iii) Surveillance camera or video
(iv) Cables that allow a user to lock a laptop to a desk
(v) Fingerprints readers to log-in to a system
(vi) Lockable briefcase

(e)

Professional Skepticism:
It refers to an attitude that includes a questioning mind, being alert to conditions which may
indicate possible misstatement due to error or fraud, and a critical assessment of audit
evidence.
However, it does not mean that the auditors should disbelieve everything they are told, but
they should view what they are told with a skeptical attitude, and consider whether it
appears reasonable and whether it conflicts with any other evidence.

Ans.7

Ans.8

(a)

(i)

Planning stage The concept of materiality is used in determining the nature, timing
and extent of further audit procedures;

(ii)

Reporting stage The materiality concept is used in evaluating the effect of


uncorrected misstatements, if any, on the financial statements and in forming the
opinion in the auditor's report.

(b)

The auditor shall document the following aspects of materiality:


(i)
Materiality for the financial statements as a whole;
(ii) Performance materiality;
(iii) Basis of computing materiality; and
(iv) Any revision of (i) to (ii) as the audit progresses.

(a)

In this case, the representation provided by the management contradicts with the audit
evidence obtained later and therefore we should:

consider whether his risk assessment of that area is still appropriate

consider whether additional audit procedures are needed

assess the impact on auditors assessment of managements integrity, document those


concerns and consider withdrawing from the audit.

(b)

The written representation from the management must cover:


the completeness of the information that has been provided about the identity of

related parties and related party relationships and transactions, and


the adequacy of accounting for and disclosure of such related party relationships and

transactions in the financial statements.


The audit report should not be signed unless the written representation has been received.
If management does not provide the written representation, it will result in limitation of
scope and we would take appropriate actions, including determining the possible effect on
the opinion in the auditors report.

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Audit and Assurance


Suggested Answers
Certificate in Accounting and Finance Spring 2016
(a)

(i)
(ii)
(iii)
(iv)

(b)

The factors that should be considered in evaluating the adequacy of the experts work,
include:

reasonableness of the experts conclusions

consistency of those conclusions with other audit evidence

reasonableness of significant assumptions and methods used

relevance, completeness and accuracy of source data.

Ans.10 (a)

Audit Trail in a computerized environment:


An audit trail refers to the ability of the auditor to trace a transaction through all its
processing stages. An audit trail can be provided by a record (log) of how the computer has
processed any transaction.

Ans.9

the nature, scope and objectives of the experts work


the respective responsibilities of the expert and the auditor
the form of the experts report
confidentiality requirements

An audit trail may not exist in paper form in an online system, but the computer program
should be written so as to generate the audit trail on request for any transaction.
(b)

Embedded Audit Facilities:


It is an audit software that is built into the clients IT system, either temporarily or
permanently.
The purpose of embedded audit facilities is to allow the audit to carry out tests at the time
the particular transactions are being processed, in real time.
This can be very useful for the audit of online systems where:

data is continually processed and master files are being continually updated, and/or

it is difficult, if not impossible, for the system to provide a satisfactory audit trail for the
transactions, through the system.

an embedded audit facility may also print details of the transactions it has monitored,
or copy them to a computer file, so that the auditor can study the transactions.

Ans.11 Audit risk


There is a risk that revenue from fees income and sale of goods is misstated due to following
reasons:

Fees income may be recognized immediately on receipt of fees rather than recognized on
monthly basis as the services are rendered.

Discounts given to students may not be accounted for properly, resulting in overstatement of
revenue.

There is a risk that revenue related to sale of course material is in appropriately classified as
part of the university fees, as a result of which it may have been recognized proportionately
on the basis of time (services provided).

Entire revenue from sale of course material may not be recognized.

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Audit and Assurance


Suggested Answers
Certificate in Accounting and Finance Spring 2016
Audit procedures and test

Understand and test the system of recording revenue i.e. between sale of books and university
fees.

Review global reconciliation keeping into consideration of number of students registered,


semester fees, and discount allowed, cost of course material etc.

Ensure that revenue is booked for course material in respect of all registered students
irrespective of whether course material is taken by them or not.

Ensure that cost of books not yet claimed has been charged off in the accounts.
(THE END)

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