Suggested Answers ASSURANCE November-December 2019 ? a) » “Assurance can never be absolute” ~ write limitations of assurance. 7 ‘You have been appointed as statutory auditor of Zaiden Ltd, a private limited company. Before starting the audit work, a written audit engagement contract needs to be executed. Write the issues required to be included in the audit engagement letter. 8 a) Limitations of assurance A key’ issue for accountants is that there are limitations to assurance servi always a risk inyolved that the wrong conclusion will be drawn. and therefore there The limitations of assurance services include: + The fact that testing is used -the auditors do not oversee the process of building the financ statements from start to finish. + The fact that the accounting systems on which assurance providers may place ad liance also have inherent limitations. oct that mpst audit evidence is persuasive rather than conclusive. +The fact that assurance providers would not test ery item in the subject matter + The fact that the client's staff metabers may collude in fraud that can then be deliberately hi from the auditor or misrepresent matters to them for the same purpose + The fact that assurance provision can be subjective and professional judgements have made = The fact that assurance providers rely on the responsible party and its staff to provide co mation, which in some cases may be impossible to verify by other means. © The fact that some items in the subject matter may be estimates and are therefore unc impossible to conclude absolutely that judgemental estimates are correct. «The fact that the nature of the assurance report might itself be limiting, as every judgement ¢ conclusion the assurance provider has drawn cannot be included in it b) The following items shall be included in the engagement letter + The objective of the audit of financial statements. +The scope of the audit, which could include reference to applicable legislation, regulations, pronouncements of professional bodies to which the auditor adheres. + The auditor's responsibility. + The reporting framework that is applicable for the financial statements being prepared example International Financial Reporting Standards. + Management's responsibility to prepare the financial statements and to provide the auditor 6 esticied access to whatever records, documentation and other information is requested connection with the audi + The form of any reports of results of the engagement Aa 11) What are the various types ol activities are the a at do you understand by o# nize tis activities 2s per Intern of control activity 2 pet I control activities, ) Control activities are the policies and procedures that I arned ou! ip ensure that mani Information Processing Physical — | Controls | [ ftitious employee Transactions documents shotld be s | appropriate pers For example, overume should be departmental i ___| purchasing man Review and analyse of| A review highlights and explains any uncxp actual performance venus | variances. This reduce chhood of errors budgets, forecasts and | deliber | prior period performance S Relating different sets of | For example, comparing si data (operating or | to sales in the statement of profit of lo | financial) to one another 2 ‘Comparing intemal data | For example. compans’ with external sources of | indicators (KPIs) with industry sector KJ | transactions’ doc purchase orders by 1 misstateme | information 2 call Review of functional or | For example, a revicw of sales by branch, repion | activity performance | and | Product type. _ ] Gontrols. to check the | The two broad groupings of information syste accuracy. completeness | control activities are application controls a authorization of | general IT contrul iy authorized personnel should have access | certain assets (particularly bl ones) For example, ensuring that the inventories store only open when the store personnel are there a lis therwise locked ‘Authorization for access wsswords aver computer peu i ims and uta fi [to computer programas | will ensure only authorised pers and data files them, For example, » password over the payroll system | prevents unauthorized changes such as F can ace ArPeriodic counting and | comparison with amount shown For example, a physical count of petty eash The balance shown in the cash book should! be the control | same amount as is in the petty cash box | accounts | Assigning different ‘gation makes it more difficult for fraudulent | individuals the | to be processed (since a number of people | responsibilities of | would have to collude in the fraud) and also for accidental errors to be processed (since the _more transactions | people that are involved, the more checking there ining custody | can be) authorizing transactions, recordin and mai of assets, For example, the same staff should not record transactions and carry out the related reconciliations at va} the penod-end. - Analytical procedures help auditor understand the client's business, a) Define analytical proce¢ tb) Brefly explain the way and means to perform analytical procedures. ©) The following annual acco nancial tr nts is un Matton of Fle g Lid. taken from Budget-2019 and Sal 1,500,000 1,439,665 Gross m 0,000 442 Salaries 375.000 3 Repairs and renewals 8.606 Depreciation 9,000 Motor expenses 28.000 Other costs 16,090 You are required y out analynieai procedure ment on followin Sales and Cost of sales Repairs and renewals Motor expenses. a ORTON aR) 4 Actual-2019 2) Analytical procedures means evaluations of financial information through analysis of plausible relationships among both financial and non-financial data, Analytical procedures also encompass such investigation as is necessary of identified fluctuations or relationships that are inconsistent with other relevant information or that 1 from expected values by a significant amount. A8 3|Pageby Hive HA statow that analytical pte He int emily, from budgets or forecasts OF Xf \ntietpatod results of th t's ratio of sales ton ich as a comparison of the eben ilies of cOMparable $176 An Ny to other ent Sinvilar tnduastey information, with industry averages, or with the ratios relatiny 2n of relationships between + Consile conform to # predicted pattern based on 1 Hements of financial information that are expectest | jcace, such as the relationship of gross profil 19 sa entity's expe mation, suchas the relationship of payr costs 10 nurnber of employe Repuirs and renewal Motor expense ex do not appear to have fallen much below what pss marpin has changed so much (from 40% Wo 3/*e) indicates that there may n one or the other (might H On the face of i ticipated for the year. t the fact that the problem somewhere in sales and cost of sales, hence rather than foc been selected cost of sales only, due to the fact that the major difterence from budget as here) 1 wou ve best 10 look at the whole tssue together. Gro k wrong because understated in error -and sales were actually much bet s margin ny Je fer for the year than anticipated Depreciation, as expected, appears to have been predicted accurately and is low nok. Problems w depreciation if they existed would probably be uncovered by an analysis of the statement of finane position Repairs and renewals and motor expenses vary substantially from buduct, so are worth further Investigation, Ce Ou 8) Briefly discuss about activities of the Intemal Audit funcuon bb) What do you mean by ‘Internal Control"? Give a brief about the objectives of the internal control system, Nem tui oe iit function has mainly two key roles to play in relation to organizational rv it: (i) ensuring the Company's Fisk Manapement system operates effectively (a) ensurt Hed in respect of business risks Operate effect nternal anagem that strategies amplem the activities of intemal contrat function usually invols. + Monitoring internal controls + Examining financial and operational infornvation + Review of the economy, efficiency and effectiveness of ope [Page Ay‘+ Review of compliance with laws, regulations and other external requirements + Special investigations, for insurance, into suspected fraud + Mentifying and evaluating significant exposures to risk and contributing to the improvement of risk management and control systems + Assessing the governance process in its accomplishment of objectives on ethics and values, performance management and eccountability, communicating risk and control information to appropriate areas of the organisation and effectiveness of, communication among those changed with governance, extemal and internal auditors, and management ®) limermal Control: Internal control is the process designed and effected by those charged with govermance, muinagement and other personnel to provide reasonable assurance about the achievement of the entity's objectives with regard to reliability of financial reporting, effectiveness ani efficiency of operanons and compliance with applicable laws and regulations. A company has various objectives to set up intemal control system To minimize the company’s business risks To ensure it reporss its financial position correctly to shareholders To ensure that it operates effectively and efficiently © To ensure that it complies with relevant laws and regulations. is a key source of information underlying an audit. Give a chart of idea! 6 f relevant evicience obtained +. Please list out the key features 4 ocedures peri is considered rmati ofa “Werkang Pape: 2) Ap sndit file will normally co following working erstanding the grol, such as the following: ity and its environment ding its internal _ Information conceming legal documents, agreements and minutes Extracts from, or copies of, important legal documents, agreement s and mimutes _ Information regarding the industry, economic and legislative environment within which the entity operates Extracts from the eatity's internal control manual = Evidence of the planning process including audit plans and any changes thereto «Evidence of the auditor's consideration of the work of the intemal audit function and conclusions reached '» Analyses of transactions, balances, significant ratios and trends © The identified and assessed risk of material misstatements + Arecord of nature, timing, extent and results of audit procedures AS S|Paeecc, what the high value inventory vs, w at the count, for imstane fic issues that will + Assess the key issues arisin the risks are (outlined above), or whether there are any *pe counting complex + Plan his count attendance, Including sample sizes and tare + Attend the inventory count, at which he will carry out sample counts counters are counting properly, the instructions are being adhered to, procedures for obwol and damaged inveatory are being followed, Argus inventory is properly separated ard not and to gain an overall impression of the level and state ‘of the inventories and cunct whether the count bas been carried out properly + Trace a sample of items on the final inventory sheets back \o onigan ensure all count documents are reflected in the final sheet A inventory lines ensure that count documents a + Obtain an analysis of aged debt at the year end fre for debt in excess of GSP’s published credit term + Carry out an analysis of after-date receipts to observe whether any old debt remair outstanding at audit date + If so, collate a list of old debt as yet unpaid and compare the results of any confirmation replies that are covered by the list + Cross-refer her list to any list of debt written off in the financial statements. + Discuss old debts not wntten off with the credit controller to see what steps GSP has taken recover the debt + Consider whether any of the debt requires writing off in the financial statements. Thi im receivables ledger records and review amount should be entered on a list of potential adjustmen's. If matenal, it should be referred to senior audit team members iter te) Write short notes on the following items as described in the IESBA Code of Ethics a) Conflict of interest. b) Self-review threat ¢) Intimidation threat. 4) Safeguards. ORL Te} a) Conflict of interest: A conflict of interest is a situation in whi ituatio ich @ person or organization involved in muliple interests (financial, emotional, or otherwise), one of which could pout corrupt the motivation of the individual or organization ou A conflict of interest creates a threat to objectivity and ma Je ay create threat eee ets le threats to the other funclaments * The professional accountant provides a professional service related to a particular matter for _ {Wo oF more clients whose interests with respect to that matter are in conflict: or : + The interests of the professional accountant with res 1 t with respect to a particular matter and the interests of the client for whom the professional accountant provides a neater ‘ 7 related to that matter are in conifict. A _“_— 8|Page») ° 4) Self-review threat: The threat that a professional accountant will not appropriately evaluate the results of 8 previous judgment made or service performed by the professional accountant or by another individual within the firm or employing organization, on which the accountant will rely when forming a judgment as part of providing a current service Intimidation threat: The threat that a professional accountant will be deterred from acting objectively because of actual or perceived pressures, including attempts to exercise undue influence over the professional accountant. Should there be any sign of such threat, the auditor would evaluate the situation and take necessary recourse so that the audit can be conducted objectively or refrain from accepting such engagement. Safeguards: Safeguards are actions or other measures that may eliminate threat or reduce them to an acceptable level. They fall into two broad categories: Safeguards created by the profession, legislation or regulation; and Safeguards in the work environment Safeguards created by various means include + Educational, training and experience requirements for entry into the profession Continuing professional development requirements + Corporate governance regulations + Professional standards Professional or regulatory monitoring and disciplinary procedures Extemal review by a legally empowered third party of the reports, returns, communications ‘or information produced by a professional accountant. 9|Page