Audit & Assurance - Regular Test 8

Suggested Answers
Certificate in Accounting and Finance – Spring 2024

Note regarding marking scheme:

The marking scheme is given as a guide. Markers also award marks for alternative approaches to a
question and relevant/well-reasoned comments/explanations. Moreover, the available marks in
answer may exceed the total marks of a question.

Ans 1.
i. After the assembly of the final audit file has been completed, the auditor shall not delete or discard
audit documentation of any nature before the end of the retention period. The firm should establish
its own policies and procedures for the retention of engagement documentation. The retention
period for audit engagement ordinarily is no shorter than five years from the date of auditor’s
report.

ii. Changes in the audit documentation during the final file assembly process may only be made if they
are administrative in nature. Examples of such changes include:
a. Deleting or discarding superseded documentation;
b. Sorting, collating and cross referencing working papers;
c. Signing off on completion checklist relating to file assembly process;
d. Documenting audit evidence that the auditor has obtained, discussed and agreed with the
relevant members of the engagement team before the date of the auditor’s report.

iii. Under exceptional circumstances, the auditor performs new or additional procedures or draws new
conclusions after the date of the Auditor’s report. In this relation the auditor should document:
a. The circumstances encountered.
b. The new or additional audit procedures performed, audit evidence obtained, and conclusion
reached, and their effect on the auditor’s report.
c. When and by whom the resulting changes to audit documentation were made and reviewed

Ans # 2

i. For substantive testing for additions to fixed assets, sampling is not appropriate. Auditor should
select high value items for this population to cover a large portion of population efficiently

ii. We want to test operational effectiveness of control, sampling on individual invoices is appropriate,
however the amounts should be ignored (because it is a test of control). As population is large, using
statistical sampling would be appropriate.

iii. In auditing payroll, sampling is not appropriate technique, in this area analytical procedures are
performed instead test of details.

iv. Population consist of small number of large items , so 100% examination should be made , Moreover
there is usually a significant risk in long term loans , so it will be both efficient and effective to
examine all loans.

Ans # 3
Reliability of audit evidence is dependent on the following factors:
 Audit evidence is more reliable when it is obtained from independent sources outside the entity under
audit.
 Internally generated audit evidence is more reliable when the related controls are effective.
 Audit evidence obtained directly by the auditor is more reliable than audit evidence obtained indirectly
or by inference.
 Audit & Assurance - Regular Test 8
Suggested Answers
Certificate in Accounting and Finance – Spring 2024
 Audit evidence is more reliable when it exists in documentary form.
 Audit evidence provided by original documents is more reliable than audit evidence provided by
photocopies.

Ans # 4
(i)
Part (a)
Selection of all customers over Rs. 7,500 will verify 57% of population in amount by testing only 14% of
population in number. Auditor will be more confident in his conclusion on debtors as he has covered substantial
portion.

Part (b)
Selection of some accounts with zero balances will ensure completeness of debtors. If major parties with which
client does business have zero balances, it may indicate possibility of misstatements e.g. non recording or
misclassification of sales or fraudulent activities.

(ii)
Following types of accounts may require special attention:
 Account with credit balances
 Over-due balances
 Accounts in dispute
 Accounts not examined
 Accounts crossed credit limit
 Related parties

Ans # 5
In such case the auditor is required to document:
 the circumstances;
 the new or additional procedures performed, audit evidence obtained, conclusions reached and their
effect on the auditor’s report; and
 when and by whom resulting changes to audit documentation were made and who reviewed the

Ans # 6
(i)
Part (a)
Evidence obtained by auditors
This is in general the most reliable type of audit evidence because there is little risk that it can be manipulated
by management.

Analytical procedures
Such as calculation of ratios, trends in order to examine unusual variations, recalculation of expenses and
income such as interest income, interest expense and salary reconciliation.

Physical inspection or observations

Such as attendance at inventory count or physical verification of fixed assets

Performance of calculation
Making up figures in the accounts such as the computation of total inventory value, fair value calculation of
investments.
 Audit & Assurance - Regular Test 8
Suggested Answers
Certificate in Accounting and Finance – Spring 2024

Part (b)
Evidence provided by the management of the client:

The auditor cannot place the same degree of reliance on evidence provided by client management as on that
provided/obtained from outside the entity. However, it will often be necessary to place some reliance on such
evidence. The auditor will need to obtain audit evidence that the information supplied is complete and accurate,
and apply judgment in doing so, taking into account previous experience of the client’s reliability and the extent
to which the client’s representations appear compatible with other audit findings, as well as the materiality of
the item under discussion.

Examples:
 The company’s accounting records and supporting schedules. Although these are prepared by
management, the auditors have a statutory right to examine such records in full. This right enhances the
quality of the information.
 The client’s explanation of apparently unusual fluctuations in results. Such evidence requires
interpretation by the auditors and, being oral evidence, only limited reliance can be placed on it.
 Information provided to the auditors about the internal control system. The auditors need to confirm
that this information is accurate and up-to-date, and that it does not simply describe an idealized system
which is not adhered to in practice.

(ii)
The nature, timing and extent of audit procedures may be affected by following matters/ factors:

 The nature and complexity of the matter to which the management's expert relates.
 The risks of material misstatement in the matter.
 The availability of alternative sources of audit evidence.
 The nature, scope and objectives of the management's expert's work.
 Whether the management's expert is employed by the entity, or is a party engaged by it to provide
relevant services.
 The extent to which management can exercise control or influence over the work of the management's
expert.
 Whether the management's expert is subject to technical performance standards or other professional
or industry requirements.
 The nature and extent of any controls within the entity over the management's expert's work.
 The auditor's knowledge and experience of the management's expert's field of expertise.
 The auditor's previous experience of the work of that expert