Q1.

Describe responsibilities in relation to the prevention and

detection of fraud and error?
1. The auditor must conduct audit in accordance with ISA 240
The Auditor’s responsibilities in relation to fraud in an
audit of financial statement and is responsible for
obtaining reasonable assurance that the financial
statements taken as a whole are free of material
misstatement whether due to fraud or error.
2. The auditor must identify and assess risk of material
misstatement due to fraud.
3. The auditor must obtain sufficient evidence regarding
assessed risk through designing and implementing
appropriate responses.
4. Auditor must respond appropriately to fraud or suspected
fraud identified during an audit.

Q2. Describe preconditions required for an audit?

ISA 210 Agreeing the terms of audit engagement requires the
auditor to:
1. Determine whether the financial reporting framework
applied in preparation of financial statements is applicable
In considering this the auditor must have assessed the nature of
entity and nature and use of financial statement and whether
law or obligations prescribe applicable framework.
 2. Obtaining the agreement of management that they
acknowledge and understand their responsibilities for the
following:
- Preparing the financial statements in accordance with
applicable financial reporting framework
- Internal controls necessary for preparation of financial
statements to be free from material misstatement whether
due to fraud or error.
- Providing the auditor with access to information relevant
for the audit and access to staff of the entity to obtain
sufficient audit evidence.

Q3. Explain the benefits of audit planning?

Audit Planning is addressed by ISA 300 Planning an audit of
financial statements. It states that adequate planning benefits
the audit of financial statement in several ways:
1. Helping the auditor to devote appropriate attention to
important areas of an audit.
2. Helping the auditor to identify and assess potential
problems on a timely basis.
3. Helping the auditor to properly organize and manage an
audit engagement so that it is performed in an effective
and efficient manner.
4. Facilitates supervision of engagement team members and
review of their work.
 5. Assisting, where applicable, in coordination of work done
by experts.

Q4. Explain the purpose of an audit engagement letter and list

four items which should be included in an audit engagement
letter?
A. The letter of engagement outlines the responsibilities of
both the auditor and the client. Its purpose is to:
- Minimize the risk of misunderstanding between the
auditor and the client.
- Confirm the acceptance of engagement
- Forms basis of contract by outlining the terms and
conditions of engagement.
Items to be included in an audit engagement letter are:
1- Responsibilities of the auditor
2- Responsibilities of the management
3- Identification of the financial reporting framework used in
the preparation of financial statements.
4- The basis on which the audit firm will calculate its fee
5- The objective and scope of the audit

Q5. Describe substantive procedures the auditor should

perform to obtain sufficient and appropriate audit evidence in
relation to development expenditure?
 1. Obtain list of capitalized costs within intangible assets, cast
and agree the closing balance to the general ledger, trial
balance and financial statements.
2. Select a sample of capitalized costs and agree to payroll
records, invoices and other source documentation to
confirm that the amounts are correct and the cost relates
to the project.
3. Select sample of research expense and development cost
and agree to source documentation to confirm the date of
expenditure and if the costs were allocated correctly.
4. Review market research report and confirm if there is a
market for the new process and the selling price is high
enough to generate the profit.
5. Recalculate amortization costs correctly.
6. Review disclosure notes for intangible assets in draft
financial statement to confirm that they are in accordance
with IAS 38
7. Discuss with finance director the rationale for useful life of
the asset and consider its reasonableness and agree to
supporting documentation.

Q6. Describe substantive procedures the auditor should

perform to obtain sufficient and appropriate audit evidence in
relation to directors’ bonuses?
 1. Obtain a schedule of director’s bonus and cast the
schedule to confirm its accuracy and agree the amount to
that disclosed in financial statement.
2. Review the schedule of current liabilities and confirm that
bonus accrual is included as a year-end liability
3. Agree the individual bonus payment to post year end
payroll records.
4. Recalculate the bonus amount paid to the directors and
agree the criteria to supporting documentation and
percentage rate to be paid in director’s service contract.
5. Agree the amount paid as bonus with the post year end
cash book and bank statement.

Q7. Describe substantive procedures the auditor should

perform to obtain sufficient and appropriate audit evidence in
respect to the redundancy costs?
1. Review the supporting documentation to confirm that the
decision to discontinue the brand was notified to members
of staff prior to year-end.
2. Obtain schedule of redundancy calculated by employee
and agree the amount to trial balance/financial position.
3. Recalculate redundancy provision to confirm completeness
and agree components of costs to supporting
documentation such as employee contract.
 4. Confirm the amount paid as redundancy and agree it to
the cash book/payroll records and provisions made in
financial statements.
5. Review the disclosures made in financial statements to
verify that they are in accordance with requirements of IAS
37 Provision, Contingent Assets and Contingent Liabilities.
Q8. Describe substantive procedures in relation to Valuation of
trade receivables?
1. Discuss with finance director the rationale for not
increasing the allowance for trade receivables and review
its overall adequacy.
2. Review the aged trade receivable ledger to identify any
slow moving receivables or old receivable balances and
discuss the status of these balances with credit controller
to assess whether they are likely to be received.
3. Calculate the potential level of trade receivables which are
not recoverable and assess whether it is material or not
and discuss it with the management.
Q9. Describe substantive procedures in relation to disposal of
plant and machinery?
1. Obtain a breakdown of disposals, cast the list and review
non-current assets register to ensure that all assets have
been removed.
2. Select a sample of disposals and agree the sale proceeds to
the supporting documentation such as sundry sale
invoices.
 3. Recalculate profit/loss on disposal and agree the amount
to the trial balance and profit and loss statement.
4. Review the disclosure of disposal in draft financial
statement to ensure that it is in accordance with IAS 16
property, plant and equipment.

Q: Define and explain materiality and performance materiality?

Materiality is defined in ISA 320 as follows: ‘Misstatements,
including omissions, are considered to be material if individually
or in aggregate, they are expected to reasonably influence the
economic decisions of users taken on the basis of financial
statements.’
If financial statements are materially misstated then they will
not fairly present the position, performance and cashflows of
the entity.
Material misstatements could either be due to its size
(quantitative) or nature (qualitative) or a combination of both.

Performance materiality:
Performance materiality is defined in ISA 320 as follows: ‘The
amount set out by the auditor at less than materiality for the
financial statements as a whole to reduce to an appropriately
low level the probability that the aggregate of uncorrected and
undetected misstatements exceeds the materiality of financial
statements as a whole’.
Performance materiality is set out at a lower level than overall
materiality of the financial statements. It is used in the testing
of individual transactions, account balances and disclosures.

SUBSTANTIVE PROCEDURES FOR INVENTORY VALUATION:

1. Obtain a breakdown of damaged goods held in inventory
and returned from customers, cast it and agree to confirm
its accuracy.
2. Discuss with management if any write downs were made.
If so, follow through the write down to inventory valuation.
3. Review post year end sales and agree it to invoices to
assess NRV.
4. Agree a sample of sales return to relevant documentation.
Q/- Substantive procedures for revenue:
1. Compare overall level of revenue against prior year and
budget for the year and investigate any significant
differences.
2. Calculate final gross profit margin and compare it against
prior year and investigate any significant fluctuation.
3. Take a sample of invoices and recalculate the total of
invoices including discount and sales tax.
4. Agree a sample of orders to GDN, GL and invoice.
 5. For sales under price promise, compare the level of claims
made to date with the refund liability recognised and
assess its reasonableness.

Analytical Procedures:
During the planning stage, the analytical procedures must be
used as risk assessment procedures to help an auditor to obtain
overall understanding of an entity and to asses risk of material
misstatement.
During final audit, analytical procedures should be used to
obtain sufficient appropriate evidence. Substantive procedures
can either be test of details or substantive analytical
procedures.
During final review stage, an auditor must design and perform
analytical procedures which assist them when forming an
overall conclusion as to whether the financial statements are
consistent with auditor’s understanding of the entity.

Q/- Identify 3 main areas which should be included in audit

strategy:
1. Main characteristics of the engagement.
Ex: Whether the financial info to be audited is prepared in
accordance with relevant financial reporting framework.
 2. Reporting objectives and timing and nature of
communication.
Ex: The timing of audit meeting and review of work
performed.
3. Significant factors affecting the audit.
Ex: The determination of overall materiality level for the
audit.

Q/- Define Audit risk and component of audit risk?

Audit risk is the risk that the auditor expresses an inappropriate
audit opinion about the financial statements when they are
materially misstated. There are two main components of audit
risk:
1- Risk of material misstatement: This is further classified into
2 components.
-Inherent risk: This risk is caused by an error or omission in
the financial statements due to a factor other than internal
controls of a company. This is most likely to occur when
transactions are complex or when financial estimates
require a high degree of judgement.
-Control risk: The probability of a risk of material
misstatement occurring due to failure of internal controls
of a business. This is most likely to occur when a business
has poor internal controls in place.
 2- Detection risk: Detection risk is the risk that procedures
performed by an auditor to reduce audit risk to an
acceptably low level will not detect a misstatement which
exists and which could be material. It is affected by
sampling and non-sampling risk.

Q/- Describe the matters which should have been considered

prior to accepting the audit?

___ should have considered any issues which could threaten

compliance with ACCA’s code of ethics and conduct or local
legislation, such as the level of fee, to ensure that the firm is not
unduly reliant on this fee, as well as consideration should be
given to any conflict of interest that might arise due to this with
existing clients.
The firm should consider whether it is competent to perform
the audit of ABC company. The firm needs to ensure that it has
adequate resources, necessary skill and knowledge level
required to perform this audit.
The firm needs to consider what it already knows about the
company’s directors. The reputation and integrity of directors
needs to be considered.
The firm must also consider the level of risk associated with the
audit of this company and if its acceptable for the firm.
Additionally, it should have considered whether the expected
audit fee was adequate in relation to the risk of auditing ABC
company.
Q/- Explain safeguards ABC should implement to ensure that
this conflict of interest is properly managed.
1. Both KJH and its rival competitor should be notified that
ABC is acting as an auditor for both of them and if
necessary, obtain consent.
2. Make employees and partner of the firm sign
confidentiality agreements.
3. Implement procedures to prevent access to information
such as physical separation of both engagement teams and
confidential and secure data filing.
4. Advise one or both the companies to seek advice from
independent accountant.
5. A senior individual at the firm, not involved in the audit of
either company should monitor the application of above
safeguards regularly.
6. Use separate engagement teams with different
engagement partners and team members.

Q/- Explain the additional factors Amethyst & Co should

consider during the audit in relation to ABC’s use of the payroll
service organization?
1. The audit team should gain an understanding of the
services being provided at Payroll Co, including materiality
of the payroll and the basis of outsourcing contract.
 2. The audit team should assess the design and
implementation of controls over ABC’s payroll at Payroll
Co.
3. The audit team may wish to visit Payroll Co to undertake
test of controls to ensure operating effectiveness of the
controls.
Q/- Identify and explain two factors which would include that
an engagement letter for an existing audit client should be
revised?
i- Indication that there is a misunderstanding regarding
the objective and scope of the audit, this
misunderstanding would need to be clarified.
ii- A significant change in the nature or size of the business
as this would require the auditor to change the
approach of audit in order to reflect the change in
business.
iii- Any revised or special terms for audit engagement, as
this would require inclusion in the engagement letter.
iv- Any change in legal or regulatory requirements, as the
engagement letter is a contract and it may become out
of date due to change in legal or regulatory
requirements.
Q/- List 4 matters which should be included within an audit
engagement?
i- Objective and Scope of the audit
ii- Responsibilities of the auditor
 iii- Responsibilities of the management
iv- The basis on which fee is calculated and any billing
arrangements
v- Identification of financial reporting framework for
preparation of financial statements.
Q/- Identify 4 sources of information relevant to gaining an
understanding and describe how this information will be used
by the auditor?
i- Prior Financial Statements: This would provide
information regarding the size of the entity, key
accounting policies, disclosure notes and whether the
audit opinion was modified or not.
ii- Discussion with previous auditor/access to audit files:
This would provide info regarding issues identified
during previous year’s audit and audit approach
adopted.
iii- Discussions with management: This provides
information regarding the business, issues arisen in the
year and any change in accounting policies from prior
year.
iv- Reviewing board minutes: This provides an overview of
key issues arisen during the year and how those charged
with governance addressed them.
Q/- Explain the quality management procedures that Maple &
Co should have in place during engagement performance?
- Briefing/Direction of the team: The team should be
informed of the responsibilities, objectives of the work and
nature of the entity or any other relevant information
required to perform their work effectively and efficiently.
- Supervision (Tracking of the progress): The audit
supervisor must keep track of the progress of the audit and
ensure that the work is being completed on time or
whether additional staff needs to be brought in or
discussion regarding extension of deadline needs to be
done.
- Supervision (significant issues): The audit supervisor must
ensure that significant issues are being dealt with
promptly. If issues are resolved as soon as they are
identified, this indicates that the work is likely to be
completed within agreed timeframe.
- Documentation: The audit work needs to be documented
to provide evidence that the work performed was in
accordance with required standards and also provides a
basis for the audit opinion issued.
- Consultation: Consultation needs to be taken by an expert
where the team does not have the required expertise. The
audit supervisor must identify areas where consultation is
required and should make arrangements for such
consultation.
Q/- Explain the purpose of review engagements and how these
differ from external audits?
Review engagements are often undertaken as an alternative to
external audit where a practitioner reviews financial data such
as six monthly figures. The reviewer undertakes procedures to
reach to a conclusion that nothing has come to the
practitioner’s attention which causes them to believe that
financial data is not in accordance with required financial
reporting framework.
It differs from external audit as the procedures taken in review
engagements are not nearly as comprehensive as those
conducted in external audit such as analytical review, enquiry
used extensively. Additionally in review engagements, the
practitioner is not required to comply with ISAs as these only
relate to external audit.
Q/- Describe the level of assurance provided by external audits
and review engagements?
External audit: This provides comfort that financial statements
represent fairly in all material respect or are true and fair and
free from material misstatement.
This provides high (not absolute) level of assurance. This is
called reasonable assurance.
Review engagement: In review engagements, negative
assurance is given whereby practitioner confirms that nothing
has come to their attention that causes them to believe that the
subject matter contains material misstatements.

Q/-List 4 examples of matters the auditor may consider when

obtaining an understanding of the entity?
1- Market and its competitors
2- Regulatory Framework
3- Legislation and regulations
4- Financing structure
5- Ownership of the entity
6- Capital Investment Activities

Q/-Explain the audit procedures you should perform in order to

place reliance on the continuous (perpetual) counts for year-
end inventory?
1. Attend at least one of the perpetual inventory counts to
review the controls over inventory are adequate.
2. Review adjustments made to inventory records on a
monthly basis to gain an understanding of the level of
differences arising on a month by month basis.
3. Discuss with management how they will ensure that the
inventory at the year end is not under or over stated. If
significant differences arise that means the inventory are
not adequately maintained.
Q/-Substantive procedures for directors’ bonus and
remuneration?
1. Obtain a schedule of directors’ remuneration including
bonus and cast the addition of schedule to confirm
arithmetical accuracy.
2. Agree the individual bonus payment to payroll records.
3. Inspect cash book and bank statement to confirm the
amount of bonus paid.
4. Review any bonus disclosures made and assess if these are
in compliance with local legislation.

Q/- Explain the auditor’s responsibility to consider laws and

regulations in audit of the financial statements?
1. The auditor must perform audit procedures to help
identify non-compliance with laws and regulations that
may have a material impact on financial statements.
2. The auditor must obtain sufficient appropriate evidence
regarding non-compliance with laws and regulations that
have a direct impact on financial statements such as the
requirement of separate disclosure of director’ bonus.
3. If non-compliance with laws and regulations is identified,
the auditor should communicate this information to
management and those charged with governance.
4. If the identified non-compliance has a material impact on
financial statements then the issued audit opinion must be
modified with an adverse opinion.
Q/- Describe limitation of internal controls?
1. Human error in the design and application of internal
control: An entity may have adequate internet controls
over a particular area of financial statements. However,
human application of that internal control may give rise to
inherent limitation. Such as, an employee reviewing bank
reconciliation might not detect an error.
Similarly, there may also be a flaw in the design of the
internet control which means that it does not operate as
intended.
2. Circumvention of Internal controls: No system of internal
control will be completely effective in identifying and
detecting all the errors. Employees may manipulate such
deficiencies in the internal controls of the entity for
personal gain or to conceal fraudulent activity.
3. Management override of internal controls: Management
holds the power to override an entity’s internal controls
regardless of its strength.
4. Use of judgement on nature and extent of internal
controls: Professional judgement will be needed to
determine the type and extent of internal controls
required within the company and certain controls may be
absent or ineffective. In particular, systems may be
designed to deal with routine transactions and may
therefore be inadequate in dealing with non-routine
transactions.
Q/-Describe 4 matters the auditor may consider in determining
whether a deficiency in internal control is significant?
1. The importance of the controls to financial reporting
process.
2.