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Auditing and Assurance Revision Kit – Past exam questions and answers for kasneb CPA course
This revision kit consists of kasneb past paper questions and their suggested answers to act as a revision guide for those students taking kasneb courses.
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Or through Our Mobile App
TOPIC 1
NATURE AND PURPOSE OF AN AUDIT
QUESTION 1
April 2024 Question One A
Private companies are not required by law to have their financial statements examined by an auditor. However, all public entities are required by law to have their financial statements audited.
Required:
Explain SIX reasons why an audit is considered necessary for limited liability companies and other public entities.
(6 marks)
ANSWER
Reasons for Audits in Limited Liability Companies and Public Entities:
- Compliance with Legal Requirements:For public entities, audits are mandatory as per the securities laws and regulations. The capital markets Act requires all publicly traded companies to have their financial statements audited by an independent accounting firm. This requirement is essential to protect investors from potential fraudulent activities and to maintain confidence in the capital markets.
- Enhancing Credibility:An audit provides an independent assessment of an organization’s financial statements, which can significantly enhance their credibility among stakeholders such as investors, creditors, customers, employees, and regulatory bodies. A clean audit report signifies that the financial statements have been prepared in accordance with generally accepted accounting principles (GAAP) and provide a true and fair view of the organization’s financial position.
- Identifying Errors or Fraud:During an audit, the auditor examines the organization’s financial transactions, internal controls, and accounting practices to identify any errors or discrepancies that may exist. These findings can help management address any issues promptly and prevent potential future problems. Moreover, audits can also help detect fraudulent activities that might go unnoticed otherwise.
- Assessing Risk Management:Audits enable assessing an organization’s risk management processes by evaluating its internal controls system’s effectiveness in managing risks related to financial reporting. This assessment can provide valuable insights for management to improve their risk management strategies and mitigate potential threats to their business operations.
- Maintaining Regulatory Compliance:In certain industries or sectors where regulatory compliance is mandatory, audits play a significant role in demonstrating adherence to specific regulations or standards set by regulatory bodies.
- Enhanced Public Confidence: Audits can help to enhance public confidence in the financial reporting process. This is important for maintaining a healthy capital market.
QUESTION 2
April 2023 Question One A
Highlight THREE benefits that may be derived from independently audited financial statements. (3 marks)
ANSWER
- Enhanced Credibility and Reliability: Independent audits enhance the credibility and reliability of financial information presented in the statements. External auditors provide assurance that the financial statements are free from material misstatements and are prepared in accordance with relevant accounting standards.
- Increased Transparency: Audited financial statements increase transparency by providing an unbiased assessment of an organization’s financial position and performance. This transparency helps stakeholders make informed decisions based on reliable information.
- Improved Access to Capital: Companies with independently audited financial statements often find it easier to access capital from investors and lenders. The audit report serves as a signal of financial health and integrity, which can attract potential investors and creditors.
- Compliance with Regulations: Audited financial statements help organizations comply with regulatory requirements. Many regulatory bodies mandate the audit of financial statements for publicly traded companies or entities receiving public funding.
- Detection of Errors and Fraud: Independent audits can help detect errors, irregularities, or fraudulent activities within an organization. Auditors perform detailed testing procedures to identify any discrepancies or inconsistencies in the financial records.
- Risk Mitigation: Audited financial statements assist in identifying risks and weaknesses in internal controls. By highlighting areas of concern, audits enable management to take corrective actions to mitigate risks and improve operational efficiency.
- Stakeholder Confidence: The independent verification provided by audits instills confidence in stakeholders, including shareholders, customers, suppliers, and employees. Stakeholders are more likely to trust organizations that undergo regular audits by reputable auditing firms.
- Benchmarking and Performance Evaluation: Audited financial statements serve as a benchmark for evaluating an organization’s performance over time or against industry peers. Comparing audited financial data can help identify trends, strengths, weaknesses, and areas for improvement.
- Facilitation of Due Diligence: In mergers, acquisitions, or partnerships, audited financial statements play a crucial role in due diligence processes. Potential buyers or partners rely on audited information to assess the value and risks associated with a target company.
- Legal Protection: Audited financial statements provide legal protection to stakeholders by reducing the risk of litigation related to inaccurate financial reporting. In case of disputes or investigations, auditors’ opinions can support the organization’s position.
QUESTION 3
August 2022 Question Two C
Your firm has been appointed as incoming auditors of Taratibu Motors Ltd. Part of the agreement is a proposal of undertaking of continuous audits on the company’s financial statements.
Required:
Explain four disadvantages of conducting the proposed continuous audits. (4 marks)
ANSWER
- Change in Figures: In Continuous Audit some part of the accounting work is completed earlier, and therefore, there is a fear that the account books which have been audited may be tampered later on by the employees. If this happens then the Final Accounts shall not be able to show the true picture of the commercial organisation.
- Hinderance in the Work of Business:
- In Continuous Audit, presence of the auditor and his staff creates hinderance in the regular work of the commercial organisation. Attention of the employees is drawn by them and some of the employees are asked to attend them only. This creates obstacles in the smooth working of the business-houses. Sometimes, even the management feels inconvenience due to the frequent appearance of the auditor.
- Expensive: Continuous Audit is expensive than Balance Sheet Audit. Since the auditor and his staff visits the commercial organisation to frequently, the management has to spend more on them, both time-wise and money-wise. Further auditor charges more audit fees for Continuous Audit.
- Break of Work Chain: In this system the audit work is done in piece Every time the auditor has to prepare his audit programme before starting his work. This requires more time and energy on his part.
- Secret Pact with Employees: The staff of the auditor comes in close contact with the employees of the organisation. It develops intimacy with them and there is every possibility of concealment of important facts with their connivance.
- Mechanical Work of Auditing: The audit work becomes mechanical since the work continues throughout the year and the interest of the staff or auditor is reduced. This has an adverse impact on audit work.
- Luxury for Small Business: Continuous Audit is more expensive, and therefore, small-scale commercial organisations are not able to adopt it. If they go for it, it proves to be a waste and luxury for them.
- Decrease in Moral Duty of Employees: The auditor visits the commercial house too frequently. This adversely affects the moral of the employees of the organisation as they do not pay attention to the audit work and the auditor. The staff of the employer may become friendly with the closeness/nearness the auditor and his staff. This may give an opportunity to misuse this relationship.
QUESTION 4
April 2022 Question One A
Your firm has been engaged in auditing small entities for the last five years. In a recent development, your firm has been appointed to conduct an audit on a large entity; which is the first assignment of such magnitude. You are required to undertake an interim audit and a final audit of the large entity.
Required:
(i) Explain the objective of an external audit. (2 marks)
(ii) Highlight five audit procedures you could undertake during the interim audit of the large entity. (5 marks)
(iii) Describe five audit procedures you would undertake during the final audit of the large entity. (5 marks)
(iv) Present two drawbacks of conducting an interim audit. (2 marks)
ANSWER
- i) Objective of an external audit
- It enhances the credibility of the financial statements prepared by the management
- It protects the interests of the third parties who are involved the management of the business.
- It acts as a preventive and detective measure against frauds and errors.
- The audited accounts can be used by the company for negotiating for loans from banking institutions
- ii) Audit procedures you could undertake during the interim audit of a large entity.
- Ascertaining and evaluating the accounting and internal control systems
- Recording and evaluating the systems.
- Limited analytical review procedures
- Limited substantive testing
- Notifying the weakness in the systems and providing recommendations for improvement.
- Planning the substantive procedures for the final audit
iii) Audit procedures you would undertake during the final audit of a large entity.
- Updating auditor’s knowledge on the client business and systems
- Determining whether the internal control systems have changed during the interim up to the year end
- Carrying out compliance testing
- Final analytical review procedures
- Final substantive testing
- Vouching transactions
- Assessing the appropriateness of accounting policies
- Assessing the reasonableness of accounting estimates
- iv) Drawbacks of conducting interim audit
- It may be expensive for an average business
- it may be disruptive
- Figures already audited may be altered by the client staff
- Client staff may depend on the auditor to solve their accounting problems.
QUESTION 5
December 2021 Question Three C
You are the auditor of Sharoh Ltd. which was incorporated in December 2018. The company’s main business is in real estate. Over the last two years, the company has recorded increased profits as a result of the Property Market-boom in the country. Due to the increased number of transactions, you as the auditor feel that it is prudent to have an interim audit. The management are however hesitant about your proposal.
Required:
Explain three reasons to the management of Sharoh Ltd. why an interim audit is necessary and how it could be of benefit to the client. (6 marks)
ANSWER
Reasons to the management of Sharoh Ltd why an interim audit is necessary and how it could be of benefit to the client.
Interim audit is necessary since it helps in increasing the efficiency and effectiveness of the management functioning concerning the accounting and the financial part of the business.
It involves preliminary audit work that facilitates faster completion of the final audit.
Benefits to the Client
- It facilitates declaration of interim dividends
- It is less expensive as compared to the other audits that are required to be conducted
- Errors and frauds are detected at an early stage.
- It is less disruptive than continuous audit
- Act as a preventive and detective measure against fraud and errors.
QUESTION 6
December 2021 Question Four C
Examine six factors that would lead to change in the inherent risk of Relax lintels and Cottages Ltd. (6 marks)
ANSWER
Factors that lead to change in the inherent risk of relax hotels and cottages ltd.
- Management integrity
- Management knowledge, competence and experience
- Any recent changes in management especially in the finance and accounting function.
- Unusual pressure on the management and staff
- Nature of the clients business for example some business models are complex
- Factors affecting the industry such as the regulatory framework.
- Significant related party transactions and balances.
QUESTION 7
December 2021 Pilot Paper Question One A and B
(a) Explain the meaning of the term “inherent risk”.
(2 marks)
(b) State with reasons five factors that would affect the initial assessment of inherent risk at the financial statement level. (10 marks)
ANSWER
a)Inherence risk – This is the susceptibility or likely hood of account balances either individually or where aggregated with other 40 material misstatement assuming that there are no related controls.
- b) Factors that would affect the initial assessment of inherent risk at the financial statement level
- Management integrity – How the management are honest and straightforward in providing information
- Management knowledge, competence and experience – the level of knowledge and skills posed by the management
- Any recent change in management especially in the finance and accounting function.
- Nature of the client business for example some business models are very complex.
- Significant related party transactions and balances – those transactions that have being done by directors or related parties generally.
CONTENT
- Nature and purpose of an audit
- Nature and objectives of an audit
- Development of audit (early audit and modern audit)
- Users of audited financial statements
- Features of audits
- Distinction between auditing and accounting
- Types and classification of audits
- Situations when different audits are performed (interim, continuous, final, operational)
- Advantages and disadvantages of various types of audits
- Nature of work done for different audits
- Inherent limitations of an audit
- Assurance and non- assurance engagements
- Definition and objectives of assurance engagements
- Audit as an assurance engagement
- Elements of an assurance engagement
- Types of assurance engagements (Audit, Review assignments)
- Differences between audit and review engagements
- International Standard on Assurance Engagement-ISAE 3000
- Accepting appointment to perform assurance engagement
- Review of interim financial information – ISRE 2410
- Levels of assurance and reports issued on assurance engagements
- Non-assurance engagements (Agreed upon procedures engagement -ISRS 4400 and compilation assignments-ISRS 4410
- Attestation and direct reporting engagements
- Legal and professional framework
- Regulatory framework for external audits
- Appointment of the auditors
- Qualifications and disqualifications of auditors
- Removal and resignation of auditors
- Remuneration of the auditors
- Rights and duties of auditors
- Mechanisms of regulations of auditors-role of professional bodies, Audit committee, rotation of audit firms
- Professional ethics/code of ethics for professional accountants
- Importance of the professional ethics
- Basic/fundamental principles for Code of Ethics for accountants
- Other professional guidelines on audit fees, conflict of interest, advertising and publicity and opinion shopping by clients
- Auditors independence /objectivity and its importance
- Threats to independence and safeguards.
- Threats on adherence to other fundamental principles and safeguards to the threats
- Development and status of ISAs in execution of audits
- Relationship between International Standards of Auditing and National Auditing Standards
- Purposes/importance of adoption of ISA in the audit.
- Planning and Risk Assessment
- Obtaining, accepting and retention of an audit engagement
- Matters to consider before and after acceptance of nomination
- Pre-conditions of an audit
- Engagement letter, procedure of sending letter, purposes and contents of the letter-ISA 210
- Circumstances for revision of engagement terms
- Understanding the entity and its environment
- Background information about the entity or client.
- Ways of gathering knowledge about the business
- Reasons/importance of information gathered about the client
- Reasons of review of previous audit files and communication with previous auditors
- Overview of audit process
- Audit risk assessment
- Components of audit risk (Inherent, Control and Inherent risks)
- Assessment of different types of audit risks
- Factors leading to increase or decrease of inherent, control and detection Risks
- Adoption of risk based audit, reasons and procedure
- Advantages and Disadvantages of the approach
- Evaluating and prioritising risk and control factors
- Mechanisms to minimise the risks associated with client audits.
- Audit planning
- Purpose and challenges in audit planning
- Planning for new and existing clients
- Development of the overall audit strategy
- Contents of audit planning memorandum/ overall plan
- Relationship between audit strategy and audit plan
- Design of audit programs, importance and problems of the programs
- Impact of material misstatements on audit strategy and degree of work done
- Influence of interim audit work on the year end/final audit.
- Audit documentation
- Reasons and importance of audit documentation
- Sources, features and purposes of working papers
- Storage of working papers-permanent audit file and current audit file, auditors note book or diary
- Lien or custody on working papers
- Standardisation of working papers
- advantages and disadvantages
- Safe custody and retention of working papers
- Form and content of working papers
- Automated working papers
- Quality control policies and procedures implemented by audit firm
- Objectives of quality controls to the audit firm/ auditors
- Peer review and its objectives
- Internal control systems (ICS)
- Objectives of internal control system
- Component of internal control system
- Features of Internal control system
- Designing of internal control system.
- Auditors and management responsibility over ICS
- Advantages and disadvantages /inherent limitations of ICS
- Indicators of weaknesses in ICS and actions taken by management
- The evaluation of internal control systems by auditors using Internal Control Questionnaire, Flow charts and narrative notes
- Tests of controls on specific control environments
- Internal controls theory and practice-sales and debtors, purchases and creditors, inventories and work in progress, fixed assets, salaries and wages
- Communication of improvements on ICS weaknesses/ risks associated – Management letter.
- Internal Audit Function
- Scope and objectives of internal audit
- Criteria of using internal audit work
- Areas of support on external auditors’ work
- Internal audit review reports and actions by management and those charged with governance
- Design of risk based internal audit plan
- Internal audit key performance indicators
- Managing and monitoring follow up of audit recommendations made to board/ management.
- Outsourcing internal audit function-advantages and disadvantages.
- Audit committee-functions, merits and demerits.
- Internal check systems-scope, features, advantages and disadvantages
- Information technology threats and control
- Auditors duty on compliance with laws and regulations.
- Overview of Forensic Accounting
- Nature, purpose and scope of forensic accounting
- Types of forensic investigations: corruption, asset misappropriation, financial statement fraud, others
- Asset Recovery process and legal framework
- Errors, Frauds and Irregularities
- Differences between error and frauds
- Types of errors-omission, commission, principle, reversal of entries
- Types of Frauds-Teeming and lading, ghost employees, window dressing, misappropriation of goods and fraudulent financial reporting
- Causes of frauds and fraud triangle
- Indicators of errors and frauds
- Detection and prevention of errors and frauds and deterrence-role of internal audit
- Materiality and Implications of errors and frauds in the financial statements
- Impact of errors and frauds on the audit plan
- Reporting on error and frauds
- External auditors and Management responsibility on error and frauds
- Auditors professional skepticism.
- Audit evidence
- Financial statement assertions and audit evidence
- Types and features of audit evidence (sufficiency, reliability and relevance)
- Audit evidence gathering procedures/ techniques
- Materiality and limitations of audit evidence
- Financial statement assertions and audit evidence
- Audit sampling techniques – statistical and non-statistical
- Analytical reviews procedures- nature, objectives, timing and extent of support evidence
- Types of analytical Procedures-Variance analysis, reasonableness tests, trend analysis
- Using the work of experts- areas of support and considerations
- Using management representations (importance, procedures adopted and matters covered).
- Auditing in the public sector
- Introduction to auditing in the public sector and regulatory provisions
- Objective and scope of public sector audit (compliance, performance, financial, value for money)
- Establishment, mandate and functions of public sector auditors
- The parties to audit in public sector-auditor, responsible party and intended users
- Role of internal audit function in public entities
- Relationship between external and internal auditors in the public sector
- Audit reports by office of Auditor General.
- Functions of audit advisory board and executive committee in Auditor General office.
- Auditors Reports
- Purposes of auditors’ report and concept of true and fair view
- Legal /Statutory provisions on audit reports
- Basic elements contents of audit reports
- Emphasis of the matter paragraph and key audit matters
- Types and Consequences of different types of audit reports issued.
- Features of unqualified and qualified audit reports
- Reasons for qualifications of audit reports (Limitation of scope, inherent uncertainties, disagreements)
- Types of qualifications-disclaimer, except for and adverse opinions.
- Overall audit review and finalisation
- Subsequent events/Post balance sheet events review (adjusting and non – adjusting events, auditor’s responsibility and audit procedures)
- Going concern review (Auditors and management responsibility, indicators of going concern difficulties, audit procedures, mitigation plans and reporting)
- Management representations on contentious matters affecting financial statements like guarantees made, capital commitments, borrowings, unusual accounting adjustments.
- Review of compliance with accounting policies, opening balances, prior period audits by other auditors
- Format for presentation of independent auditor’s report.
- Auditing in a computerised system
- Audit objectives in computerised systems
- Differences between computerised and manual systems
- Benefits and drawbacks of computerised accounting systems
- Types of controls in computerised systems (Administrative, system development, processing controls, application controls, master files and standing data
- Auditors use of computers in the course of audit
- Planning the audit in computerised systems
- Audit approaches – audit around, with and through the computer and circumstances when each is applied
- Loss of audit trail, causes and measures to mitigate the loss of audit trail
- Computer Assisted Audit Techniques (CAATS) – Audit software and test data
- Types of audit software and functions and types of test data
- Factors considered before using CAATS and steps in CAATS application
- Advantages and disadvantages of CAATS
- Use of embedded audit modules and integrated test facilities
- Information security controls (Encryption, Firewalls, Passwords, Antivirus)
- Contemporary and emerging issues in audit
- E- commerce auditing
- Cloud documentation
- Use of data analytics tools in audit (Anomaly detection, diagnostic analysis, predictive analysis.
Questions and answers