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THE INSTITUTE OF FINANCE MANAGEMENT ( IFM)

MODULE: AUDITING

CODE: AFU 07305

PROGAMME: BAC2

ACADEMIC YEAR 2021/2022

SEMESTER : ONE

LECTURER: DR MWIGA

REVIEW QUESTIONS ( SET II)

QUESTION 1

International Standard on Auditing Planning for an Audit of Financial Statements (ISA 300, paragraph
2) states that ‘The auditor should plan the audit so that the engagement will be performed in an
effective manner”.

REQUIRED:

Explain any five benefits of the auditor planning the audit of Financial Statements of client.

QUESTION 2

(a) At the completion of the audit work the auditor makes two reports:
 One report to the shareholders of the company (statutory Audit Report).

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  Another Report to the management of the entity i.e. the management letter (letter of
weakness).

REQUIRED:

(i) Explain the purposes of the statutory audit report.

(ii) Identify the disclosures to the statutory audit report.

(iii) State and explain the circumstances that may lead to qualified opinion in the audit
report.

(b) Vouching is defined as the independent examination of the source documentary evidence by
the auditor.

REQUIRED:

Identify any six matters that the auditor should pay keen attention to when examining vouchers.

QUESTION 3

You are assigned as the Audit senior in charge of the audit of Huisha Limited for the year ended 31 st
August 2015. The company operates 10 sales points throughout Tanzania and customers can buy its
exclusive anti-aging products as well as availing of treatments. One of its products, “Jaribu”, is sold at
TZS.12,000 per 300 ml pack, therefore cosmetic inventory is a material amount in the accounts of
Huisha Ltd. For a number of years Huisha Ltd has maintained perpetual records of inventory at each of
its ten sales points. However, it has continued to determine closing inventory by physical count at or
near the year end. You are in the process of planning the audit of inventory. In a meeting with the
company’s Finance Director, she has told you that the company is hoping to dispense with the annual
physical count and to rely on the perpetual records in determining closing inventory.

The company is in the process of creating an internet based sales order system for customers to
purchase its anti-aging products using credit cards for payment.

REQUIRED:

(a) State four reasons why inventory is often the most difficult and time consuming aspect of many
audits.

(b) On the assumption that control risk is low and there is no necessity to observe the inventory
count on or near year end, describe the substantive procedures you would perform, both during

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 the year and at the year end, in order to verify the completeness and existence of inventory.

(c) Identify risks that management should consider in relation to implementing an online sales
system and suggest an internal control for each risk that management could implement that
would reduce that risk.

QUESTION FOUR

a) ISA 315 (Redrafted) Identifying and Assessing the Risks of Material Misstatement through
Understanding the Entity and Its Environment requires auditors to obtain an understanding of
the entity and its environment, including its internal controls.

REQUIRED:

Explain why obtaining an understanding of the entity and its environment is important for an audit.

b) Twiga Motors Limited (Twiga) manufactures a range of motor vehicles and its year end on 30 th
June. You are the audit supervisor of Kilimo Associates and are currently preparing the audit
programmes for the audit of Twiga for the year ended 30 th June 2015. You have had a meeting
with your audit manager and he has notified you of the following issues identified during the
audit risk assessment process:

Twiga has a policy of revaluing land and buildings using a rolling basis over a five-year period.
During the year of audit, Twiga requested an external independent valuer to revalue a number of
properties, including a warehouse purchased in January 2015. Depreciation is charged on a pro-
rata basis. In respect of work in progress Twiga undertakes continuous production of vehicles, 24
hours a day, seven days a week. An inventory count is to be undertaken at the year end and Kilimo
Associates will attend. You are responsible for the audit of Work In Progress (WIP) and will be part
of the team attending the count as well as the final audit. WIP constitutes the partly assembled
vehicles at the year end and this balance is likely to be material. Twiga values WIP according to
percentage of completion, and standard costs are then applied to these percentages.

REQUIRED:

(i) Evaluate the factors Kilimo Associates should consider when placing reliance on the work of
the independent valuer.

QUESTION 5

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Your firm of Certified Public Accountants has recently obtained a new audit client, Hassan Limited. The
previous external auditors identified some employee’s fraud which had been perpetrated by a group of
employees over several years. The fraud was only discovered in the last year’s audit. As a result of
the extensive fraud, Hassan have developed an internal audit function comprising of a highly
experienced Chief Internal Auditor and two semi-qualified staff. Your audit partner is keen to ensure
that this year you will work closely with the new internal audit function to ensure that any further fraud is
identified.

You are aware that ISA 240: The auditor’s Responsibilities relating to Fraud in an Audit of Financial
Statements, deals with an external auditor’s responsibilities. However, both internal and external
auditors are required to deal with risks to the entity and this includes risks associated with fraud and
error.

REQUIRED:

(a) Explain how this new internal audit function can assist Hassan Limited to deal with risk of fraud
and error.

(b) Explain the responsibilities of external auditors in respect of the risk of fraud and error in an
audit of financial statements.

(c) Identify the additional roles the internal auditors may have within Hassan Limited.

QUESTION 6
You are an Audit Assistant on the audit of the Financial Statements of Builders Ltd. This is the third year
that you have been assigned to this audit. John is a newly recruited Audit Assistant and he too has
been assigned to this audit under your supervision.
You are planning the audit of the Financial Statements for the current year. You are assessing risk of
material misstatements in accordance with guidance in ISA 315 (Revised) Identifying and assessing the
risks of material misstatements through understanding the entity and its environment.

As part of risk assessment and gaining an understanding of the petty cash system, you request John,
the Audit Assistant to perform walk through tests of the petty cash system before performing tests of
controls.

The following system relates to the management of petty cash in Builders Ltd:

The company maintains a petty cash float of K10,000 under the responsibility of the Petty Cashier.
Payments out of petty cash are only made on the basis of approved petty cash vouchers signed by the
Office Manager. All paid petty cash vouchers and the supporting documents are required to be stamped
with a PAID stamp before submission for reimbursement.

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Required:

(i) Explain the meaning and use of walk-through tests performed at the planning stage of the audit.
(ii) Explain the meaning and purpose of performing tests of controls in the audit of Financial Statements.

(iii) State two (2) tests of controls that should be performed over the petty cash system of Builders Ltd.

QUESTION 7
You have been assigned to the audit of Bronze Ltd for the year ending 31 September 2020 as Senior
Auditor. The audit team comprising the Engagement Partner, the Audit Manager and four newly
recruited Audit Assistants has been put in place.
This is the first time that your firm will audit the Financial Statements of Bronze Ltd and you are at the
planning stage of the audit. As part of the planning of the audit you wish to assign staff to carry out the
risk assessment and evaluation of the internal controls of Bronze Ltd. The Audit Manager has
requested you to call for a pre-audit meeting with the rest of the audit team. He wants you to brief the
team on the need for carrying out risk assessments and the need for all members of the audit team to
observe professional skepticism throughout the audit and to use professional judgment during the audit.
It is your intention to place reliance on the effectiveness of the internal controls in Bronze Ltd. You will
only be able to do this if the results of the tests of controls suggest that the internal controls are
effective. In order to carry out tests of controls it is necessary that during the planning for the audit the
accounting and control systems are recorded.

Required:
(i) Explain four (4) methods that the audit team may use in assessing risk and gaining an understanding
of Bronze Ltd at the planning stage of the audit.

(ii) Explain any two (2) methods that Audit Assistants should use to record the accounting and control
systems of Bronze Ltd and give two (2) disadvantages of using each method.

(iv) Explain the meaning of professional skepticism and professional judgment and give
one (1) example each where they can be applied during the audit of Bronze Ltd.

QUESTION 8

(a) According to the auditing standards, an Auditor should prepare on a timely basis, audit
documentation that provides a sufficient and appropriate record of the basis for the auditor’s
report and evidence that the audit was performed in accordance with the International
Standards on Auditing (ISAs) and applicable legal and regulatory requirements.

REQUIRED:
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 (i) Outline five (5) contents of audit working paper

(ii) Outline circumstances in which auditors are required (requested) to

(b) Mention four preparatory procedures which auditor should consider when carrying out audit
planning.

QUESTION 10

(a) The audit program is an important part of the auditors’ working papers and records a significant
part of audit evidence that is required to justify the audit opinion.

REQUIRED:

(i) State any five uses of an audit program.

(ii) List four disadvantages of an audit program

QUESTION 11

You are the audit senior of Kwizera & Co and are currently planning the audit of Gitonga Contractors
Ltd (GCL) for the year ending 30 June, 2018. GCL deals in construction of real estate properties for
both commercial and residential purposes.

GCL operates in the construction industry which is highly volatile and the inherit risk is generally
assessed as high. This is largely due to the fact that many assumptions and judgments are especially in
the costing of materials and valuation of properties.

Determining materiality is therefore key if Kwizera & Co is to give an appropriate audit opinion. The
audit team needs to ensure that detailed audit procedures including analytical procedures are carried
out for all items that are considered material in GCL’s financial statements.

REQUIRED:

(a) Determine the factors that may influence the inherit risk at GCL.

(b) Discuss the factors you would consider in determining whether to use analytical review procedures
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during the audit of GCL.
(c) Identify the methods that can be used by the audit team in assessing whether or not an item is
material during the audit of GCL’s financial statements

QUESTION 11

(a) Define ‘audit evidence’

(b) Explain four sources of audit evidence.

(c) Provide explanation on the following terms in relation to audit evidence:

(i) Sufficiency of audit evidence