QUESTION 1

(a) ISA 610 using the work of internal auditors provides guidance to external auditors on the
use of internal audit work.

Required:
List and explain the various criteria that should be considered by external auditors when
assessing whether to take reliance from work performed by internal audit. (5 marks)

(b)Sembene Supplies employs 100 salesmen, each of whom covers a different area and is
supplied with a car. At the end of each week each salesman submits an expense claim on a
pre-printed form with supporting vouchers attached. Expenditure is on fuel together with
invoices for hotel accommodation, meals and entertaining.
Each claim is scrutinised by the assistant accountant. He raises any queries with the
salesman concerned and makes out cheques for signature by two directors.
The amount of salesmen’s expenses paid out annually is material to the financial statements.
Required
(i) Discuss the shortcomings of this system and suggest ways in which it could be improved.
(8 marks)
(ii) List the tests of control that the auditor might perform on this system. (7 marks)
(Total: 20 marks)

QUESTION 2

(a) In the audit of financial statements, auditors are required to comply fully with the
International Standards on Auditing (ISAs). In general terms the International Auditing and
Assurance Standards Board (IAASB) takes the view that “an audit is an audit and should be
conducted in line with the same auditing standards”. In 2009, (IAASB) issued Q&A
publication on matters relevant to audit of SME’s – “applying ISAs proportionately with the
size and complexity of an entity”.

Required:
Discuss the IAASB’s Clarity project on ISAs in relation to the audit of SME’s.
(10 marks)

(b) The responsibilities of external auditors are not always well understood. When external
auditors provide non-audit services to their audit clients, it is essential that the auditors
make a clear distinction between their audit and non-audit responsibilities.
Required
(i) Explain why it is essential for external auditors to be independent of their clients.
(5 marks)
(ii)Explain the advantages and disadvantages of external auditors providing consulting
services to their audit clients. (5 marks)
(Total: 20 marks)

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QUESTION 3
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 auditor’s judgement concerning the
sufficiency of audit evidence obtained. (4 marks)

(b) You are the audit senior in charge of the audit of Reynolds Co, a company that has been
trading for over 50 years. Reynolds Co manufactures and sells tables and chairs directly to
the public. The company’s year-end is 31 March.
Current liabilities are shown on Reynolds Co’s statement of financial position as follows:
2018 2017
₵ ₵
Trade payables 884,824 816,817
Accruals 56,903 51,551
Provision for legal action 60,000 –
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 Reynolds Co. The directors of Reynolds Co dispute the claim,
although they are recommending an out of court settlement to avoid damaging publicity against
Reynolds Co.
Required:
List the substantive audit procedures that you should undertake in the audit of current liabilities
of Reynolds Co for the year ended 31 March 2018. For each procedure, explain the purpose of
that procedure. Marks are allocated as follows:
(i) Trade payables (9 marks)
(ii) Accruals (3 marks)
(iii) The provision for legal action. (4 marks)
(Total: 20 marks)

QUESTION 4
You are an audit senior for an audit firm and are currently working on the audit of Technolab,
a company which produces sophisticated electronic laboratory equipment. The company
imports a high proportion of the components it uses from China. The equipment is used by
some laboratories dealing with hazardous chemicals.
As the audit draws to a close, the partner in charge has asked you to ensure that all procedures
relating to subsequent events and going concern are properly performed. You are to consider
the audit work to be performed in relation to ISA 560 Subsequent Events and ISA 570 Going
Concern.

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Required:
(a) Describe the auditor’s responsibilities for subsequent events occurring between:
(i) The year-end date and the date the auditor’s report is signed.
(ii) The date the auditor’s report is signed and the date the financial statements are
issued. (6 marks)

(b)Going concern relates to the judgement that an entity will continue to trade for the
foreseeable future.
(i) Explain the responsibilities of directors and auditors in relation to going concern.(3 marks)
(ii)Explain the audit procedures that audit could carry out when conducting the going concern
review of Technolab. (4 marks)

(c) Technolab has an internal audit department. The partner in charge of the audit is seeking
clarification regarding how any deficiencies in internal control should be identified and
communicated to management. The partner feels the report produced by the external
auditors may duplicate the produced by the internal audit function.
Required:
Explain how the purpose and content of an internal auditor’s report on internal control
deficiencies differs from one prepared by the external auditor. (7 marks)
(Total: 20 marks)

QUESTION 5
(a) Alexander is a company that provides call centre services for a variety of organisations. It
operates in a medium sized city and your firm is the largest audit firm in the city. Alexander
is owned and run by two entrepreneurs with experience in this sector and has been in
existence for five years. It is expanding rapidly in terms of its client base, the number of
staff it employs and its profits. It is now 15 Mar 2018 and you have been approached to
perform an audit for the year ending 30 Mar 2018. Your firm has not audited this company
before. Alexander has had three different firms of auditors since its incorporation.
Alexander’s directors have indicated to you that the reason that they wish to change auditors
is because of a disagreement about certain disclosures in the financial statements in the
previous year. The directors consider that the disagreement is a trivial matter and have
indicated that the company accountant will be able to provide you with the details once the
audit has commenced. Your firm has explained that before accepting appointment, there
are various matters to be considered within the firm and other procedures to be undertaken,
some of which will require the co-operation of the directors.
Your firm has other clients that operate call centres.
The directors have asked your firm to commence the audit immediately because audited
financial statements are needed by the bank by 30 April 2018. Your firm is very busy at
this time of year.
Required:
Describe the matters to consider within your firm and the other procedures that must be
undertaken before accepting the appointment as auditor to Alexander. (10 marks)

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(b) PNP Computers sells personal computers (PCs) to independent shops. You are the external
auditor of PNP Computers. Your interim audit revealed the following issues:

(1)The half year physical inventory count revealed that some PCs supposed to be in inventory
were missing and that other machines which had been returned by customers were in
inventory but had not been recorded as having been returned. A few of the missing PCs have
been traced to directors who borrowed them for use at home.
(2)Two customers had been allowed to exceed their credit limits and new customers in the last
year had not been allocated credit limits.
Required
Draft the section of your report to management dealing with the above weaknesses. Set out the
weaknesses, their implications and your recommendations for improvement. (10 marks)
(Total:20 marks)

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SUGGESTED SOLUTIONS

QUESTION 1

(a) Criteria to be considered when assessing whether to place reliance on internal audit work
include the following:

Objectivity of function
The external auditor should consider whom the internal auditors report to and whether they
are subject to any conflicting responsibilities, constraints or restrictions. This will affect the
capability of the internal auditors to communicate significant matters openly.

Scope of function
The external auditors should consider the extent and nature of assignments performed by
the internal auditors and the action taken by management as a result of internal audit reports.

Technical Competence
The external auditors should consider whether the internal auditors have adequate technical
training and proficiency.
Due professional care
The external auditors should consider whether the work of internal audit is properly planned,
supervised, reviewed and documented.

(b)
(i) Shortcomings
 There is no apparent check to ensure that expenditure is for genuine business purposes or
that the money has actually been spent.
 There is no apparent review to prevent fraudulent collusion between the assistant accountant
and salesmen.
 There is no apparent check by the directors on expense forms when cheques are being
signed.
 There are no formal authorisation procedures in place (no evidence of signature).
Suggested improvements
 Each salesman should complete a weekly log showing visits made and mileage covered.
 These should be checked and signed by the sales director and submitted to the assistant
accountant with the expense claims.
 Periodically, a member of the accounts staff should check that claimed mileage is consistent
with the mileage shown on the cars.
 The assistant accountant should ensure that fuel claims appear reasonable in relation to
mileage covered.
 The assistant accountant should ensure that accommodation and meals expenditure appears
reasonable in relation to clients visited and that invoices attached are in fact receipts (i.e. the
invoices have been paid).

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 Entertainment expenses should be pre-authorised in principle by the sales director.
 The assistant accountant should check that entertainment expenses are reasonable and were
pre-authorised by the sales director.
 The assistant accountant should sign each claim as authorised.
 Complete and authorised documentation should be presented to the directors with the
cheques for signature. Once each cheque has been signed the directors should mark each
claim as paid.
(ii) Tests of control
 Select a sample of payments and agree them to supporting claims.
 Verify that each claim:
 is properly supported by vouchers;
 has been authorised (signed) by the assistant accountant; and
 was marked as paid by the directors.
 Review the supporting weekly log for evidence of authorisation by the sales director.
 Check that any entertainment expenses on the claims were pre-authorised by the sales
director and relate to clients visited that week.
 Examine the returned cheques for the sample chosen and verify that they were:
 made out to the salesman concerned; and
 properly signed.

QUESTION 2
(a)
(1)In the new clarity project on the ISAs, the IAASB reiterated that the next of the ISAs is
authoritative and must be followed even in the audit of SMEs.
(2)However, the IAASB did state that the work an auditor will need to do in order to comply
with the ISA will vary, a small simple entity being likely to require less work than a large
and complex one.
(3)The auditor needs to use professional judgement in applying the ISAs in order to determine
the procedures necessary to comply with their requirements.
(4)To take a specific example, the IAASB stated that, the requirement of ISA 315 to obtain an
understanding of the entity and its environment is relevant to smaller entities but that
because smaller entities are typically simpler, it will be much easier to obtain this
understanding.
(5)Individual clarity ISAs include guidance on specific points relating to small entity audits.
(6)The purpose of this guidance is to assist in the application of the requirement of the ISA to
a small entity audit.

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(7)The clarity project does not limit or reduce the responsibility of the auditor to apply and
with requirement of ISAs.

(b)
(i) External auditor independence
 External auditors are unable to fulfil their duties to shareholders if they are not independent
of the entity on which they are reporting.
 If external auditors have an interest in the financial statements on which they are reporting,
they may not be objective. For example, if they have prepared the financial statements on
which they are reporting, their view may not be considered objective.
 If they have financial or employment connections with the company on which they are
reporting they will not be objective.
 If they provide a significant level of additional services to the entity, some argue that they
cannot report objectively as auditors to shareholders.
(ii) Advantages and disadvantages of external auditors providing consulting services
 The principal advantage of providing consulting services lies in the fact that auditors are
best placed to provide such services, because they have an intimate knowledge of the
operations of the company.
 Equally, if they provide consulting services, the knowledge so obtained will be useful in
conducting the audit, and experience in general of consulting better enables auditors to
conduct their duties as auditors, because knowledge of other industries can be brought to
bear on the client.
 The principal disadvantage is that auditors often make a lot of money from such work, and
it is argued that auditors are not objective in these circumstances because they would be
unwilling to challenge directors or issue a modified auditor's report for fear of losing the
fees for consulting work.
 The other disadvantage is that if they have implemented systems that produce the financial
statements, they are unlikely to give a modified auditor's report on the information that those
systems produce.

QUESTION 3
(a) Factors affecting sufficiency of evidence
Assessment of inherent risk
As inherent risk increases, then more audit evidence will be required to reduce detection
risk.

Materiality of the item

A decrease in materiality means that more audit evidence will be required to ensure that no
material misstatement has occurred.

Nature of the accounting and control systems

Where the accounting and control systems are poor then more audit evidence is necessary
as less reliance can be placed on those systems.

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 Control risk
Determine the extent to which the directors have implemented a sound system of internal
control; poor internal controls increase control risk, decreasing reliance that can be placed
on those controls.

Experience from previous audits

Good experience from previous audits will decrease the amount of evidence required as the
auditor can place reliance on previous review of clients’ systems.

Result of audit procedures

Where the results of different audit procedures agree with each other, overall, less evidence
is needed – overall the evidence is more persuasive; however, where results are in conflict
then more evidence is required.

Quality of information available

Some sources of audit evidence are more reliable than others – meaning less evidence is
needed when relying on those sources, for example, documentary evidence is more reliable
than oral evidence.

(b) Substantive procedures

(i) Trade payables
Audit procedure
Cast the list of trade payables
and agree the total to the
payables ledger and then to the
general ledger.
Test, on a sample basis that
payables on the list agree to the
individual ledger balance and
from the ledger to the list.
Compare trade payables
individually and in total to prior
year balances and explain any
unusual changes.
Select a sample of individual
payables accounts for testing,
focusing on material balances,
zero balances and a sample of
other items.
Select population from purchase
invoices received after the year-
Reason for procedure
To confirm that the list is complete, is
accurately stated in the general ledger
and contains no unusual or reconciling
items which must be investigated.
To confirm that the list agrees to the
payables ledger.
To explain changes in the balances. For
example, the increase in payables could
indicate cash flow problems and
Reynolds Co is delaying payment to
suppliers in response to this.
Comparison may also indicate lack of
completeness of the list where payables
balances have been omitted.
Material balances should always be
tested to ensure correctness and test a
large amount of payables by value. Some
zero balances are tested to ensure that
invoices have not been omitted from one
supplier.
Confirm completeness of recording of
purchase invoices.

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 Audit procedure Reason for procedure
end. Trace to evidence of goods
receipt and where goods
received prior year-end, ensure
invoice amount included in
purchase accrual.
Take a sample of purchase To ensure that liabilities recorded in the
invoices recorded in the PDB are represented by goods received
purchase day book (PDB) just during that year, and recorded in the
prior to the year end and trace to correct period (cut-off testing).
goods received note (GRN),
ensuring that the goods were
received prior to the end of the
year.
Take a sample of GRNs prior to To ensure completeness of recording of
the end of the year and trace to amounts payable.
purchase invoice or the ‘goods
received not invoiced’ accrual in
the financial statements.
Take a sample of GRNs just To ensure that the purchases figure is not
after the end of the year and overstated in this year’s financial
trace to purchase invoice. statements.
Ensure that the invoice is
recorded in the PDB after the
year-end.
List all debit balances and obtain To confirm why the balance arose and
an explanation from the client. consider re-classifying the amounts as
receivables. Debit balances may indicate
a deficiency in internal control with
additional implications for audit testing.

(ii) Accruals
Audit procedure Reason for procedure
Cast the list of accruals and agree Confirm that the list is complete, the
individual amounts to the general balances are accurately stated in the
ledger accounts. general ledger and contains no
unusual or reconciling items which
must be investigated.

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 Audit procedure
Compare individual accruals with
amount in the prior year accounts.
Agree accruals to payments made
after the end of the year for
example, amounts payable for tax
deducted from wages payments to
remittance to the tax authority.
Review payments after the year-end
to determine whether any accruals
are required. Where the need for an
accrual is identified, ensure this is
included in the accruals list.
Check calculations of individual
accruals to supporting
documentation for example, tax
deductions from wages to the
amount shown on the payroll as
deducted from wages for the last
month of the year.
(iii) Provision for legal action
Audit procedure
Discuss the provision with the
directors.
Obtain a letter from Reynolds Co’s
lawyers.
Review any correspondence with
the customer.
Obtain a written representation
letter from the directors.
If possible, trace the payment made
after the end of the year to receipt
from the customer stating that the
payment is accepted in ‘full and
final settlement’ i.e. no other
payments are expected to be made.
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Reason for procedure
Compare individual accruals with
amount in the prior year to account for
unusual differences and identify
omissions from the list this year.
To help ensure the accuracy of the
amounts paid and confirm that the
accruals are genuine.
To confirm completeness of the
accruals listing.
To check that the accrual has been
calculated correctly and therefore
testing for over or understatement of
each accrual.
Reason for procedure
To attempt to confirm whether the
company is liable for the payment and
confirm that an out-of-court
settlement is appropriate.
To provide evidence on whether
Reynolds may be liable for payment
and check the amount provided is
approximately correct.
To help determine Reynolds Co’s
liability and determine whether the
customer may accept the out-of-court
settlement.
To confirm that the directors are
considering settlement out of court.
To confirm the accuracy of the
amount stated in accruals.
QUESTION 4
(a)
(i) Between the year-end date and the date the auditor’s report is signed, the auditors shall
perform audit procedures which will identify and detect all material subsequent events
which require adjustment of or disclosure in the financial statements.
Additional audit procedures are not required where satisfactory audit evidence has been
gained.
(ii)The auditor has no obligation to perform any audit procedures between the date the auditor’s
report is signed and the date the financial statements are issued.
However, if a fact becomes known that would have influenced the auditor’s report had the
auditor known it at the date the auditor’s report was signed then the issue shall be discussed
with management to determine whether the financial statements need amendment.
Where the financial statements need amending, additional audit procedures shall be
conducted on that area and the original subsequent events review extended to the date of the
of the new auditor’s report which will be issued.
If management refuse to amend the financial statements and the auditor’s report has already
been provided to the entity, and if management intend to issue the financial statements with
this report, the auditor shall take steps to prevent reliance on the report. This might include
speaking at the AGM or resigning.

(b)
(i) It is the director’s responsibility to make an assessment of an entity’s ability to continue as
a going concern and to prepare the financial statements on the going concern basis if that is
believed to be appropriate. This may require the directors make judgments about inherently
uncertain future outcomes of events or conditions.
It is the auditor’s responsibility to obtain sufficient appropriate audit evidence about the
appropriateness of management’s use of the going concern assumption in the preparation of
the financial statements and to conclude whether there is material uncertainty about the
entity’s ability to continue as a going concern.
(ii) Obtain a copy of the cash flow and statement of profit or loss forecasts for the year ahead.
Discuss with management the basis on which they have been prepared and obtain supporting
documentation, if possible, for any assumptions which are inconsistent with the
performance of the current period. Compare the performance of the business post year end
with the forecasts.
Discuss with management whether there have been any breaches of Health and Safety
legislation or potential litigation which may influence Technolab’s ability to trade.
Discuss with management whether there have been any supply problems and whether there
are alternative suppliers available to the business should supply problems arise.
Review the order book in the post year period for evidence of continued demand for
Technolab’s products.

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(c) Differences between External and Internal audit’s report to management
External auditor’s report
The external auditor’s report to management only details significant deficiencies in the internal
control systems which have come to the attention of the auditor as part of their normal audit
procedures. It is not a comprehensive list of all deficiencies.
This reflects the wider role of the external auditor and that internal audit staff have the time
available to take a more detailed approach. It also reflect the narrower aim of the external
auditor, focussing on the accuracy of the financial statements.
Internal audit reports
Reporting on internal control deficiencies is one of the internal audit function’s main roles.
They carry out tests on systems and controls according to the needs of the business to ensure
effective control and effective use of resources. This is likely to require internal auditors
carrying out a series of assignments, each focusing on a particular aspect of operations and
control.
The overall objective will be to assess the effectiveness of the organisation’s control systems
and the potential risks that the business faces. The impact of the risks can be assessed and
alternative controls put into place if required.
The internal auditors have a wider focus than the external auditors. The external auditors will
observe controls with a view to the impact on the financial statements. The internal auditors
will have a wider more wide-ranging perspective, and will include operational efficiency and
compliance issues as well as financial issues.
There is no prescriptive format to the internal audit function’s reports, however the report
should contain the following:
Executive summary
This will summarise the terms of reference, the key objectives of the assignment and the major
findings and recommendations.
Body of the report

This will set out the detail of what work has been done, by whom, what observations were
drawn, what recommendations have been made, when they should be implemented and by
whom.
Appendices
These may contain details of the tests carried out and the results thereof. They may also include
analyses of potential impacts of controls deficiencies.

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QUESTION 5
(a) Internal matters and other procedures before appointment
The firm needs to consider a variety of commercial issues and ethical matters (under
IESBA’s Code of Ethics for Professional Accountants).
Internal matters
Before accepting appointment the firm should ensure that:
(i) it has the necessary staff with appropriate competencies to complete the audit (this seems
likely given that the firm has other clients in this sector);
(ii) the staff are available at what is a busy time of year for the firm (it may be possible that
all of the staff with the necessary competencies are otherwise occupied);
(iii) the firm is independent of Alexander. It is unlikely that there will be any issues
concerning shareholdings in the client (because it is owned and run by two entrepreneurs),
however, there may be staff or partners who are related to the client or are otherwise
connected with it;
(iv) there are no conflicts of interest that cannot be properly managed. Conflicts of interest
may exist because the firm has other clients in this sector.
Other procedures
The firm should:
(v) seek the directors' permission to communicate with the company accountant about the
nature of the disagreement and the directors should authorise the accountant to co-operate
with the firm;
(vi) seek the clients' permission to communicate with the incumbent auditors. If permission
is refused, the appointment shall be carefully considered;
(vii) communicate with the incumbent auditors (preferably in writing) requesting all the
information which ought to be made available to enable the firm to decide whether or not to
accept the appointment (if there are no such matters, the incumbent auditors should inform
the firm of this);
(viii) seek appropriate transfer information (such as a copy of the last set of accounts and a
detailed trial balance reconciled to the accounts);
(ix) indicate a likely fee (or the basis on which fees are calculated) to Alexander, ensure that
this is acceptable and that the client is able to pay (by some form of credit check);
(x) ensure that the incumbent auditor has properly resigned, been dismissed or has not
sought re-appointment in accordance with legal requirements; and
(xi) ensure the appointment is valid in law and has been properly documented.

(b)
(1)Inventory records and PCs held by directors
Weaknesses
The inventory records are not a reliable record of actual inventory held because:
 customer returns have not been recorded
 some items recorded as being in inventory are missing

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 Some ‘missing’ items are held at directors’ own homes.
Implications
 Year-end inventories may be misstated if reliance is placed on year-end inventory records
instead of a year-end count.
 Inventory losses may go unnoticed until the next physical count delaying insurance claims
and making theft more likely.
 Customers may not be given credit for goods returned such that trade receivables will be
overstated and there may be a loss of customer goodwill.
 PCs ‘borrowed’ by the directors are unlikely to still be suitable for resale at their full value
and may need to be written down in the financial statements.
 Orders could be accepted which cannot be fulfilled if decisions are taken based on incorrect
inventory records.
Recommendations
 All inventory despatches should be recorded on sequentially numbered despatch notes and
be subsequently matched with a sales invoice.
 All inventory returns should be recorded on sequentially numbered returns notes and be
subsequently matched with a credit note.
 A responsible official (e.g. warehouse manager) should authorise any movement out of
inventory other than for sales. These items should either be removed from the inventory
records and transferred to the non-current assets register (e.g. PCs used by directors) or
retained within the inventory records with a note as to their location.
 Physical security over inventory should be improved.
 Until the accuracy of the inventory records is established, monthly counts should be
performed.

(2)Customer credit limits

Weaknesses
The system in operation over credit limits has been broken down as:
 credit limits are being exceeded
 credit limits are not being allocated to new customers.
Implications
 Customers may make purchases for which they are then unable to pay, resulting in bad
debts.
 Customers may take advantage of the deterioration in credit control and delay payment.
Recommendations
 A credit limit must be set by a responsible official (e.g. sales director) before a new customer
can be accepted.
 Before an order is accepted from a customer, a check should be made to see if that order,
together with the outstanding balance on that customer’s account, exceeds that customer’s
credit limit. If that is the case then either the order should not be accepted at that time, or an
increased limit should be authorised.

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