64 Most Wanted Knowledge Based Questions
ACCA Audit & Assurance
Practice to Pass
Session December 2021
Sir Athar Mehmood
SKANS Rawalpindi
1- Discuss the importance of assessing risks at the planning stage of an audit. (4 marks)
June 2010
ISA 315 Identifying and Assessing the Risks of Material Misstatement Through Understanding the Entity and its
Environment says that the auditor 'shall identify and assess the risks of material misstatement at the financial
statement level and at the assertion level for classes of transactions and related disclosures, and account balances
and related disclosures'. (ISA 315) It is very important that auditors carry out this risk assessment at the planning
stage because:
•
•
•
•
It helps the auditor gain an understanding of the entity for audit purposes
It helps the auditor focus on the most important areas of the financial statements (where material
misstatements are more likely), therefore increasing efficiency
The risk assessment will form the basis of the audit strategy and the more detailed audit plan
Once the risks have been assessed, audit team members of sufficient skill and experience can be allocated
to maximise the chance of those risks being addressed
2. Explain examples of matters the auditor should consider in determining whether a deficiency in internal
controls is significant. (5 marks)
Dec 2010
ISA 265 includes examples of matters to consider when determining whether a deficiency in internal control is a
significant deficiency. These include (ISA 265):
•
•
•
•
•
The likelihood of the deficiencies resulting in material misstatements in the financial statements in the
future
The importance of the controls to the financial reporting process
The susceptibility to loss or fraud of the related asset or liability
The interaction of the deficiency with other deficiencies in internal control
The amounts exposed to the deficiencies.
3. Explain the factors that should be considered by an external auditor before reliance can be placed on the
work performed by a company's internal audit department. (3 marks)
Dec 2011
Factors to consider – Reliance on work performed by internal audit the following important criteria will be
considered by the external auditors when determining if the work of internal auditors is likely to be adequate.
Extent to which its objectivity is supported The auditor must consider the extent to which the internal audit
function's objectivity is supported by its organisational status, relevant policies and procedures. Considerations
include to whom the internal auditors report, any conflicting responsibilities, any constraints or restrictions,
whether those charged with governance oversee employment decisions regarding internal auditors and whether
management acts on recommendations made. Level of technical competence The auditor must consider whether
internal auditors are members of relevant professional bodies, whether they have adequate technical training and
proficiency and whether there are established policies for hiring and training. Whether a systematic and disciplined
approach is taken The auditor must also consider whether internal audit activities are systematically and properly
planned, supervised, reviewed and documented; and whether suitable audit manuals, work programmes and
internal audit documentation exist. The auditor must also consider whether the function has appropriate quality
control procedures in place.
Sir Athar Mehmood
SKANS Rawalpindi
Practice to pass session
December 2021
4. Explain the purpose of, and procedures for, obtaining written representations. (5 marks)
Dec 2012
Written representations are necessary information that the auditor requires in connection with the audit of the
entity’s financial statements. Accordingly, similar to responses to inquiries, written representations are audit
evidence. The auditor needs to obtain written representations from management and, where appropriate, those
charged with governance that they believe they have fulfilled their responsibility for the preparation of the
financial statements and for the completeness of the information provided to the auditor. Written representations
are needed to support other audit evidence relevant to the financial statements or specific assertions in the financial
statements, if determined necessary by the auditor or required by other ISAs. This may be necessary for
judgemental areas where the auditor has to rely on management explanations. Written representations can be used
to confirm that management have communicated to the auditor all deficiencies in internal controls of which
management are aware.
Written representations are normally in the form of a letter, written by the company’s management and addressed
to the auditor. The letter is usually requested from management but can also be requested from the chief operating
officer or chief financial officer. Throughout the fieldwork, the audit team will note any areas where
representations may be required. During the final review stage, the auditors will produce the written
representations which the directors will review and then produce it on their letterhead. It will be signed by the
directors and dated as at the date the auditor’s report is signed, but not after.
5.
Explain the difference between an interim and a final audit. (5 marks)
June2014
Interim audit
The interim audit is that part of the audit which takes place before the year end. The auditor uses the interim
audit to carry out procedures which would be difficult to perform at the year end because of time pressure. There
is no requirement to undertake an interim audit; factors to consider when deciding upon whether to have one
include the size and complexity of the company along with the effectiveness of internal controls.
Typical procedures undertaken during the interim audit include consideration of inherent risks, documenting
and testing of internal controls, testing of profit and loss transactions for the year to date and identification of
potential problems which may affect the final audit work.
Final audit
The final audit will take place after the year end and concludes with the auditor forming and expressing an
opinion on the financial statements for the whole year subject to audit. It is important to note that the final
opinion takes account of conclusions formed at both the interim and final audit.
Typical work carried out at the final audit includes follow up of items noted at the inventory count, obtaining
confirmations from third parties, analytical reviews of figures in the financial statements, substantive procedures
of account balances and transactions, review of events after the reporting period and going concern.
Sir Athar Mehmood
SKANS Rawalpindi
Practice to pass session
December 2021
6. Define the ‘three Es’ of a value for money audit. (3 marks)
June 2014
In performing a value for money audit, there are three areas which an auditor will commonly focus on being
economy, efficiency and effectiveness, and these are known as the ‘three Es’.
•
Economy – Keeping the cost of resources used to a minimum.
•
Efficiency – The relationship between the output from goods and services and the resources used to
produce them.
•
Effectiveness – How well the organization’s objectives have been achieved.
7. Describe FOUR benefits of documenting audit work. (4 marks)
i)
ii)
iii)
iv)
v)
vi)
June 2014
Provides evidence of the auditor’s basis for a conclusion about the achievement of the overall objective
of the audit.
Provides evidence that the audit was planned and performed in accordance with ISAs and applicable legal
and regulatory requirements.
Assists the engagement team to plan and perform the audit.
Assists members of the engagement team responsible for supervision to direct, supervise and review the
audit work.
Enables the engagement team to be accountable for its work.
Retains a record of matters of continuing significance to future audits.
8. Describe the audit procedures required in respect of the year-end accrual for tax payable on employment
income. (4 marks)
June 2014
i)
Accrual for income tax payable on employment income Procedures the auditor should adopt in respect of
auditing this accrual include:
ii) Agree the year-end income tax payable accrual to the payroll records to confirm accuracy.
iii) Re-perform the calculation of the accrual to confirm accuracy.
iv) Agree the subsequent payment to the post year end cash book and bank statements to confirm completeness.
v) Review any correspondence with tax authorities to assess whether there are any additional outstanding
payments due; if so, agree they are included in the year-end accrual.
vi) Review any disclosures made of the income tax accrual and assess whether these are in compliance with
accounting standards and legislation.
Sir Athar Mehmood
SKANS Rawalpindi
Practice to pass session
December 2021
9. Define what is meant by ‘audit sampling’ and explain the need for this. (3 marks)
June 2014
Audit sampling is the application of audit procedures to less than 100% of items within a population of audit
relevance, such that all sampling units have a chance of selection in order to provide the auditor with a
reasonable basis on which to draw conclusions about the entire population.
Audit sampling can be applied using either a statistical or a non-statistical approach. It involves testing a
smaller number of items and using the results to draw a conclusion about the whole balance or class of
transactions.
It is necessary for auditors to sample as it is impossible to select all items for testing as this would take the
audit team too long and it would cost too much.
In addition, auditors do not provide 100% assurance in their audit report about the financial statements, they
only provide reasonable assurance and hence it is not necessary to test every item within a population.
10. Explain the benefits of audit planning. (4 marks)
Dec 2014
Audit planning is addressed by ISA 300 Planning an Audit of Financial Statements. It states that adequate
planning benefits the audit of financial statements in several ways:
i)
ii)
iii)
iv)
v)
vi)
Helping the auditor to devote appropriate attention to important areas of the audit.
Helping the auditor to identify and resolve potential problems on a timely basis.
Helping the auditor to properly organise and manage the audit engagement so that it is performed in an
effective and efficient manner.
Assisting in the selection of engagement team members with appropriate levels of capabilities and
competence to respond to anticipated risks and the proper assignment of work to them.
Facilitating the direction and supervision of engagement team members and the review of their work.
Assisting, where applicable, in coordination of work done by experts.
Sir Athar Mehmood
SKANS Rawalpindi
Practice to pass session
December 2021
11. Describe FOUR elements of an unmodified auditor’s report and for each explain why they are included.
(4 marks) Dec 2014
The following elements should be included within an auditor’s report along with why:
Title – The auditor’s report shall have a title which clearly indicates that it is the report of an independent auditor,
this distinguishes this report from any other.
Addressee – The auditor’s report shall be addressed as required by the circumstances of the engagement, this is
determined by law or regulation but is usually to the shareholders. This clarifies who may rely on the opinion and
who may not, such as third parties.
Introductory paragraph – The introductory paragraph in the auditor’s report shall identify the entity whose
financial statements have been audited, state that the financial statements have been audited, identify the title of
each statement which comprises the financial statements, refer to the summary of significant accounting policies
and other explanatory information and specify the date or period covered by each financial statement. This
paragraph aims to clarify what time period the audit covers and which pages of the financial statement have been
audited, as not every page is audited.
Management’s responsibility for the financial statements – This section of the auditor’s report describes the
responsibilities of those in the organisation who are responsible for the preparation of the financial statements.
This paragraph along with that of the auditor’s responsibilities looks to make clear what the role of management
is, as well as what the role of the auditor is. It seeks to reduce the expectation gap.
Auditor’s responsibility – The auditor’s report shall state that the responsibility of the auditor is to express an
opinion on the financial statements based on the audit and that the audit was conducted in accordance with
International Standards on Auditing and ethical requirements and that the auditor plans and performs the audit to
obtain reasonable assurance about whether the financial statements are free from material misstatement. Along
with the management’s responsibility paragraph, it seeks to make clear the role of the auditor and also what
management’s role is. Also this paragraph seeks to explain what an audit involves and that only material
misstatements are considered, as opposed to all errors.
Opinion paragraph – When expressing an unmodified opinion, the auditor’s opinion shall either state that the
financial statements ‘present fairly’ or ‘give a true and fair view’ in accordance with the applicable financial
reporting framework. This paragraph details whether the financial statements are true and fair or not.
Other reporting responsibilities – If the auditor addresses other reporting responsibilities in the auditor’s report,
these shall be addressed in a separate section in the auditor’s report titled ‘Report on Other Legal and Regulatory
Requirements’. This is important where there is local legislation which requires reporting on; this needs to be
clearly identified in the report as this is in addition to the requirement of the ISAs.
Signature of the auditor – The auditor’s report must be signed, this can be either the personal name of the auditor
or, the signature is on behalf of the firm, depending on the jurisdiction in which the auditor is operating. This
clarifies which firm or auditor has performed the audit engagement.
Date of the auditor’s report – The auditor’s report shall be dated no earlier than the date on which the auditor
has obtained sufficient appropriate audit evidence on which to base the auditor’s opinion on the financial
statements. The date of the audit report is important in the case of subsequent events which impact the financial
statements; the auditor’s role is different depending on whether the audit report was signed or not when the
subsequent event came to light.
Auditor’s address – The auditor’s report shall name the location where the auditor practices. This is useful
in case shareholders need to contact the auditors.
Sir Athar Mehmood
SKANS Rawalpindi
Practice to pass session
December 2021
12. Explain the factors Auditor should consider when placing reliance on the work of the independent
valuer. (5 marks)
Dec 2014
ISA 500 Audit Evidence requires auditors to evaluate the competence, capabilities including expertise and
objectivity of a management expert.
This would include consideration of the qualifications of the valuer and assessment of whether they were
members of any professional body or industry association. The expert’s independence should be ascertained,
with potential threats such as undue reliance on client or a self-interest threat such as share ownership considered.
In addition, auditor should meet with the expert and discuss with them their relevant expertise.
13. Write a Covering Letter in respect of the Sales and Dispatch System. (2 marks)
Dec 2014
Board of directors
Hummingbird Co
23 Buzzard Lane
Peregrine City
Hawk Country
4 December 2014
Dear Sirs,
Audit of Hummingbird Scents Co (Hummingbird) for the year ended 30 September 2014
Please find enclosed the report to management on deficiencies in internal controls identified during the audit for
the year ended 30 September 2014. The appendix to this report considers deficiencies in the sales system and
recommendations to address those deficiencies.
Please note that this report only addresses the deficiencies identified during the audit and if further testing had
been performed, then more deficiencies may have been reported.
This report is solely for the use of management and if you have any further questions, then please do not hesitate
to contact us.
Yours faithfully
An audit firm
14. Explain the purpose of review engagements and how these differ from external audits; and Describe
the level of assurance provided by external audits and review engagements. (4 marks)
June 2015
Review engagements
Review engagements are often undertaken as an alternative to an audit, and involve a practitioner reviewing
financial data, such as six-monthly figures. This would involve the practitioner undertaking procedures to state
whether anything has come to their attention which causes the practitioner to believe that the financial data is not
in accordance with the financial reporting framework.
A review engagement differs to an external audit in that the procedures undertaken are not nearly as
comprehensive as those in an audit, with procedures such as analytical review and enquiry used extensively. In
addition, the practitioner does not need to comply with ISAs as these only relate to external audits.
Sir Athar Mehmood
SKANS Rawalpindi
Practice to pass session
December 2021
Levels of assurance
The level of assurance provided by audit and review engagements is as follows:
External Audit – A high but not absolute level of assurance is provided; this is known as reasonable assurance.
This provides comfort that the financial statements present fairly in all material respects (or are true and fair) and
are free of material misstatements.
Review Engagements – where an opinion is being provided, the practitioner gathers sufficient evidence to be
satisfied that the subject matter is plausible; in this case negative assurance is given whereby the practitioner
confirms that nothing has come to their attention which indicates that the subject matter contains material
misstatements.
15. Identify and explain FOUR financial statement assertions relevant to classes of transactions and events
for the year under audit. (4 marks)
June 2015
Assertions for Classes of Transactions and Events
i) Occurrence; The transactions and events that have been recorded have actually occurred and pertain to the
entity.
ii)
Completeness; All transactions and events that should have been recorded have been recorded.
iii) Accuracy; The amounts and other data relating to recorded transactions and events have been recorded
appropriately.
iv) Cut-off; Transactions and events have been recorded in the correct accounting period.
v)
Classification; Transactions and events have been recorded in the proper accounts.
16. Identify and briefly explain the FIVE components of an entity’s internal control. (5 marks) June 2015
ISA 315 Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and Its
Environment considers the components of an entity’s internal control. It identifies the following components:
i) Control environment
The control environment includes the governance and management functions and the attitudes, awareness, and
actions of those charged with governance and management concerning the entity’s internal control and its
importance in the entity. The control environment sets the tone of an organisation, influencing the control
consciousness of its people.
The control environment has many elements such as communication and enforcement of integrity and ethical
values, commitment to competence, participation of those charged with governance, management’s philosophy
and operating style, organisational structure, assignment of authority and responsibility and human resource
policies and practices.
ii) Entity’s risk assessment process
For financial reporting purposes, the entity’s risk assessment process includes how management identifies
business risks relevant to the preparation of financial statements in accordance with the
entity’s applicable financial reporting framework. It estimates their significance, assesses the likelihood of their
occurrence, and decides upon actions to respond to and manage them and the results thereof.
Sir Athar Mehmood
SKANS Rawalpindi
Practice to pass session
December 2021
iii) Information system, including the related business processes, relevant to financial reporting, and
communication
The information system relevant to financial reporting objectives, which includes the accounting system, consists
of the procedures and records designed and established to initiate, record, process, and report entity transactions
(as well as events and conditions) and to maintain accountability for the related assets, liabilities, and equity.
iv) Control activities relevant to the audit
Control activities are the policies and procedures which help ensure that management directives are carried out.
Control activities, whether within information technology or manual systems, have various objectives and are
applied at various organizational and functional levels.
v) Monitoring of controls
Monitoring of controls is a process to assess the effectiveness of internal control performance over time. It
involves assessing the effectiveness of controls on a timely basis and taking necessary remedial actions.
Management accomplishes the monitoring of controls through ongoing activities, separate evaluations, or a
combination of the two. Ongoing monitoring activities are often built into the normal recurring activities of an
entity and include regular management and supervisory activities.
17. Identify and explain TWO factors which would indicate that an engagement letter for an existing audit
client should be revised. (2 marks)
Sep Dec 2015
Engagement letters for recurring/existing clients should be revised if any of the following factors are present:
i)
ii)
iii)
iv)
v)
vi)
vii)
Any indication that the entity misunderstands the objective and scope of the audit, as this
misunderstanding would need to be clarified.
Any revised or special terms of the audit engagement, as these would require inclusion in the engagement
letter.
A recent change of senior management or significant change in ownership. The letter is signed by a
director on behalf of those charged with governance; if there have been significant changes in management
they need to be made aware of what the audit engagement letter includes.
A significant change in nature or size of the entity’s business. The approach taken by the auditor may need
to change to reflect the change in the entity and this should be clarified in the engagement letter.
A change in legal or regulatory requirements. The engagement letter is a contract; hence if legal or
regulatory changes occur, then the contract could be out of date.
A change in the financial reporting framework adopted in the preparation of the financial statements. The
engagement letter clarifies the role of auditors and those charged with governance, it identifies the
reporting framework of the financial statements and if this changes, then the letter requires updating.
A change in other reporting requirements. Other reporting requirements may be stipulated in the
engagement letter; hence if these change, the letter should be updated.
Sir Athar Mehmood
SKANS Rawalpindi
Practice to pass session
December 2021
18. List SIX matters to be included within an audit engagement letter. (3 marks)
Dec 2015, Mar 2020
i) The objective and scope of the audit;
ii) The responsibilities of the auditor;
iii) The responsibilities of management;
iv) Identification of the financial reporting framework for the preparation of the financial statements;
v) Expected form and content of any reports to be issued;
vi) Elaboration of the scope of the audit with reference to legislation;
vii) The form of any other communication of results of the audit engagement;
viii) The fact that some material misstatements may not be detected;
ix) Arrangements regarding the planning and performance of the audit, including the composition of the audit
team;
x) The expectation that management will provide written representations;
xi) The basis on which fees are computed and any billing arrangements;
xii) A request for management to acknowledge receipt of the audit engagement letter and to agree to the terms
of the engagement;
xiii) Arrangements concerning the involvement of internal auditors and other staff of the entity;
xiv) Any obligations to provide audit working papers to other parties;
xv) Any restriction on the auditor’s liability;
xvi) Arrangements to make available draft financial statements and any other information.
19. Identify FIVE sources of information relevant to gaining an understanding of ENTITY and describe
how this information will be used by the auditor. (5 marks)
Sep-Dec 2015
Understanding an Entity
− Prior year financial statements: Provides information in relation to the size of Entity as well as the key
accounting policies, disclosure notes and whether the audit opinion was modified or not.
− Discussions with the previous auditors/access to their files: Provides information on key issues identified
during the prior year audit as well as the audit approach adopted.
− Prior year report to management: If this can be obtained from the previous auditors or from management,
it can provide information on the internal control deficiencies noted last year. If these have not been
rectified by management, then they could arise in the current year audit as well and may impact the audit
approach.
− Entity’s accounting systems notes/procedural manuals: Provides information on how each of the key
accounting systems operates and this will be used to identify areas of potential control risk and help
determine the audit approach.
− Discussions with management: Provides information in relation to the business, any important issues
which have arisen or changes to accounting policies from the prior year.
− Review of board minutes: Provides an overview of key issues which have arisen during the year and how
those charged with governance have addressed them.
Sir Athar Mehmood
SKANS Rawalpindi
Practice to pass session
December 2021
− Current year budgets and management accounts: Provides relevant financial information for the year to
date. It will help the auditor during the planning stage for preliminary analytical review and risk
identification.
− Entity’s website: Recent press releases from the company may provide background on the business during
the year as this will help in identifying the key audit risks.
− Financial statements of competitors: This will provide information about entity’s competitors, in relation
to their financial results and their accounting policies. This will be important in assessing entity’s
performance in the year and also when undertaking the going concern review.
20. Explain FOUR factors which influence the reliability of audit evidence. (4 marks)
Sep-Dec 2015
The following factors or generalizations can be made when assessing the reliability of audit evidence:
i)
ii)
iii)
iv)
v)
The reliability of audit evidence is increased when it is obtained from independent sources outside the
entity.
The reliability of audit evidence which is generated internally is increased when the related controls
imposed by the entity, including those over its preparation and maintenance, are effective.
Audit evidence obtained directly by the auditor is more reliable than audit evidence obtained indirectly
or by inference.
Audit evidence in documentary form, whether paper, electronic or other medium, is more reliable than
evidence obtained orally.
Audit evidence provided by original documents is more reliable than audit evidence provided by
photocopies or facsimiles, the reliability of which may depend on the controls over their preparation and
maintenance.
21. Explain the five elements of an assurance engagement. (5 marks)
June 2016
In accordance with ISAE 3000 Assurance Engagements other than Audits or Reviews of Historical Financial
Information,
• An assurance engagement will require a three-party relationship comprising of:
− The intended user who is the person who requires the assurance report.
− The responsible party, which is the organization responsible for preparing the subject matter to be
reviewed.
− The practitioner (i.e. an accountant) who is the professional who will review the subject matter
and provide the assurance.
• A second element which is required for an assurance engagement is suitable subject matter. The subject
matter is the data which the responsible party has prepared and which requires verification.
• Thirdly this subject matter is then evaluated or assessed against suitable criteria in order for it to be assessed
and an opinion provided.
• Fourth, the practitioner must ensure that they have gathered sufficient appropriate evidence in order to give
the required level of assurance.
• Last, an assurance report provides the opinion which is given by the practitioner to the intended user.
Sir Athar Mehmood
SKANS Rawalpindi
Practice to pass session
December 2021
22. Define audit risk and the components of audit risk. (4 marks)
June 2016, Mar-June 2017
Audit risk is the risk that the auditor expresses an inappropriate audit opinion when the financial statements
are materially misstated. Audit risk is a function of two main components, being the risk of material
misstatement and detection risk. Risk of material misstatement is made up of a further two components,
inherent risk and control risk.
Inherent risk is the susceptibility of an assertion about a class of transaction, account balance or disclosure to a
misstatement which could be material, either individually or when aggregated with other misstatements, before
consideration of any related controls.
Control risk is the risk that a misstatement which could occur in an assertion about a class of transaction, account
balance or disclosure and which could be material, either individually or when aggregated with other
misstatements, will not be prevented, or detected and corrected, on a timely basis by the entity’s internal control.
Detection risk is the risk that the procedures performed by the auditor to reduce audit risk to an acceptably
low level will not detect a misstatement which exists and which could be material, either individually or when
aggregated with other misstatements. Detection risk is affected by sampling and non-sampling risk.
23. Describe TWO methods for documenting the sales system, and for each explain ONE advantage and
ONE disadvantage of using this method. (6 marks)
Sep 2016, Mar-June 2019
There are several methods which can be used to document the sales system.
Narrative notes
Narrative notes consist of a written description of the system; they would detail what occurs in the system at each
stage and would include any controls which operate at each stage.
Advantages of this method include:
i)
They are simple to record; after discussion with staff members, these discussions are easily written up as
notes.
ii) They can facilitate understanding by all members of the audit team, especially more junior members who
might find alternative methods too complex.
Disadvantages of this method include:
i) Narrative notes may prove to be too cumbersome, especially if the system is complex or heavily automated.
ii) This method can make it more difficult to identify missing internal controls as the notes record the detail but
do not identify control exceptions clearly.
Sir Athar Mehmood
SKANS Rawalpindi
Practice to pass session
December 2021
Questionnaires
Internal control questionnaires (ICQs) or internal control evaluation questionnaires (ICEQs) contain a list of
questions; ICQs are used to assess whether controls exist whereas ICEQs assess the effectiveness of the controls
in place.
Advantages of this method include:
i)
Questionnaires are quick to prepare, which means they are a timely method for recording the system.
ii) They ensure that all controls present within the system are considered and recorded; hence missing controls
or deficiencies are clearly highlighted by the audit team.
Disadvantages of this method include:
i) It can be easy for the staff members to overstate the level of the controls present as they are asked a series of
questions relating to potential controls.
ii) A standard list of questions may miss out unusual or more bespoke controls used by the company.
Flowcharts
Flowcharts are a graphic illustration of the internal control system for the sales system. Lines usually
demonstrate the sequence of events and standard symbols are used to signify controls or documents.
Advantages of this method include:
i) It is easy to view the system in its entirety as it is all presented together in one diagram.
ii) Due to the use of standard symbols for controls, it can be effective in identifying missing control
Disadvantages of this method include:
i) They can sometimes be difficult to amend, as any amendments may require the whole flowchart to be
redrawn.
ii) There is still the need for narrative notes to accompany the flowchart and hence it can be a timeconsuming method.
24. In line with ISA 220 Quality Control for an Audit of Financial Statements, describe the audit
supervisor’s responsibilities in relation to supervising and reviewing the audit assistants’ work during the
audit. (4 marks)
Sep 2016
Supervision
During the audit, the supervisor should keep track of the progress of the audit engagement to ensure that the audit
timetable is met and should ensure that the audit manager and partner are kept updated of progress.
The competence and capabilities of individual members of the engagement team should be considered, including
whether they have sufficient time to carry out their work, whether they understand their instructions and whether
the work is being carried out in accordance with the planned approach to the audit.
In addition, part of the supervision process should involve addressing any significant matters arising during the
audit, considering their significance and modifying the planned approach appropriately.
The supervisor would also be responsible for identifying matters for consultation or consideration by the audit
manager or engagement partner of the client.
Sir Athar Mehmood
SKANS Rawalpindi
Practice to pass session
December 2021
Review
The supervisor would be required to review the work completed by the assistants and consider whether this work
has been performed in accordance with professional standards and other regulatory requirements and if the work
performed supports the conclusions reached and has been properly documented.
The supervisor should also consider whether all significant matters have been raised for partner attention or for
further consideration and where appropriate consultations have taken place, whether appropriate conclusions have
been documented.
25. Describe FIVE types of procedures for obtaining audit evidence. (5 marks)
Sep 2016
Inspection
Inspection involves examining records or documents, whether internal or external, in paper form, electronic form,
or other media, or a physical examination of an asset.
Observation
Observation consists of looking at a process or procedure being performed by others.
Analytical procedures
Analytical procedures consist of 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 which are inconsistent with other relevant information or
which differ from expected values by a significant amount.
Inquiry
Inquiry consists of seeking information from knowledgeable persons, both financial and non- financial, within
the entity or outside the entity.
Recalculation
Recalculation consists of checking the mathematical accuracy of documents or records. Recalculation may be
performed manually or electronically.
External Confirmation
An external confirmation represents audit evidence obtained by the auditor as a direct written response to the
auditor from a third party, in paper form, electronic form or by other medium.
Re-performance
Re-performance involves the auditor’s independent execution of procedures or controls which were originally
performed as part of the entity’s internal control.
Sir Athar Mehmood
SKANS Rawalpindi
Practice to pass session
December 2021
26.
Identify what a key audit matter (KAM) is and explain how the auditor determines and communicates
KAM. (5 marks)
Mar-June 2017
Key audit matters (KAM) are those matters which, in the auditor’s professional judgement, were of most
significance in the audit of the financial statements of the current period. Key audit matters are selected from
matters communicated with those charged with governance.
The purpose of including key audit matters in the auditor’s report is to help users in understanding the entity,
and to provide a basis for the users to discuss with management and those charged with governance about
matters relating to the entity and the financial statements. A key part of the definition is that these are the most
significant matters. Identifying the most significant matters involves using the auditor’s professional judgement.
ISA 701 Communicating Key Audit Matters in the Independent Auditor’s Report suggests that in
determining key audit matters the auditor should take the following into account:
i) Areas of higher assessed risk of material misstatement, or significant risks.
ii) Significant auditor judgements relating to areas in the financial statements which involved significant
management judgement.
iii) The effect on the audit of significant events or transactions which occurred during the period.
The description of each KAM in the Key Audit Matters section of the auditor’s report should include a reference
to the related disclosures in the financial statements and covers why the matter was considered to be one of
most significance in the audit and therefore determined to be a KAM; and how the matter was addressed in the
audit.
27. Describe FOUR different types of control activities and, for each type, provide an example control a
company may implement. (4 marks)
Mar-June 2017
Segregation of duties – assignment of roles or responsibilities to ensure the tasks of authorising and recording
transactions and maintaining custody of assets are carried out by different people, thereby reducing the risk of
fraud and error occurring.
For example, the purchase ledger clerk recording invoices onto the purchase ledger, and the finance director
authorising the payment of those purchase invoices.
Information processing – controls including application and general IT controls, which ensure the completeness,
accuracy and authorisation of information being processed. For example, use of batch control totals when entering
transactions into the system.
Authorisation – approval of transactions by a suitably responsible official to ensure transactions are genuine. For
example, authorisation by a responsible official of all purchase orders.
Physical controls – restricting access to physical assets as well as computer programs and data files, thereby
reducing the risk of theft. For example, cash being stored in a safe which only a limited number of employees are
able to access.
Performance reviews – comparison or review of the performance of the business by looking at areas such as
budget versus actual results. For example, the review by department heads of monthly results of actual trading to
budget and prior year, with analysis of variances.
Sir Athar Mehmood
SKANS Rawalpindi
Practice to pass session
December 2021
28. Describe the process Audit firm should have undertaken to assess whether PRECONDITIONS for an
audit were present when accepting the audit of Client. (3 marks).
Sep-Dec 2017
ISA 210 Agreeing the Terms of Audit Engagements states that auditors should only accept a new audit
engagement when it has been confirmed that the preconditions for an audit are present.
To assess whether the preconditions for an audit are present, audit team should have determined whether the
financial reporting framework to be applied in the preparation of Prancer Construction Co’s financial statements
is acceptable. In considering this, the auditor should have assessed the nature of the entity, the nature and
purpose of the financial statements and whether law or regulation prescribes the applicable reporting
framework.
In addition, the firm should have obtained the agreement of client management that it acknowledges and
understands its responsibility for the following:
i)
Preparation of the financial statements in accordance with the applicable financial reporting framework,
including where relevant their fair presentation;
ii) For such internal control as management determines is necessary to enable the preparation of financial
statements which are free from material misstatement, whether due to fraud or error; and
iii) To provide auditor with access to all relevant information for the preparation of the financial statements,
any additional information which the auditor may request from management and unrestricted access to
personnel within client from whom the auditor determines it necessary to obtain audit evidence.
29. Identify THREE main areas, other than audit risks, which should be included within the audit
strategy document for Prancer Construction Co, and for each area provide an example relevant to
the audit. (3 marks)
Sep-Dec 2017
Areas to be included in Strategy Document
The audit strategy sets out the scope, timing and direction of the audit and helps the development of the audit
plan. ISA 300 Planning an Audit of Financial Statements sets out areas which should be considered and
documented as part of the audit strategy document and are as follows:
Main characteristics of the engagement
The audit strategy should consider the main characteristics of the engagement, which define its scope. The
following are examples of things which should be included:
i)
Whether the financial information to be audited has been prepared in accordance with the relevant
financial reporting framework.
ii) Whether computer-assisted audit techniques will be used and the effect of IT on audit procedures.
iii) The availability of key personnel at client
Sir Athar Mehmood
SKANS Rawalpindi
Practice to pass session
December 2021
Reporting objectives, timing and nature of communication
It should ascertain the reporting objectives of the engagement to plan the timing of the audit and the nature
of the communications required, such as:
i)
ii)
iii)
iv)
The audit timetable for reporting including the timing of interim and final stages.
Organizing meetings with management to discuss any audit issues arising.
Any discussions with management regarding the reports to be issued.
The timings of the audit team meetings and review of work performed.
Significant factors affecting the audit
The strategy should consider the factors which, in the auditor’s professional judgement, are significant
in directing audit team’s efforts, such as:
i) The determination of materiality for the audit.
ii) The need to maintain a questioning mind and to exercise professional skepticism in gathering
and evaluating audit evidence.
Preliminary engagement activities and knowledge from previous engagements
It should consider the results of preliminary audit planning activities and, where applicable, whether knowledge
gained on other engagements for Client Co is relevant, such as:
i) Results of any tests over the effectiveness of internal controls.
ii) Evidence of management’s commitment to the design, implementation and maintenance of sound
internal controls.
iii) Volume of transactions, which may determine whether it is more efficient for the audit team to rely
on internal controls.
Nature, timing and extent of resources
The audit strategy should ascertain the nature, timing and extent of resources necessary to perform the
audit, such as:
i) The selection of the audit team with experience of this type of industry.
ii) Assignment of audit work to the team members.
iii) Setting the audit budget
30. Explain the steps the auditor should take to confirm the accuracy of the purchases and payables
flowcharts and systems notes currently held on file. (5 marks)
Dec 2017
Steps to confirm prior year flowcharts and system notes
•
•
•
•
Obtain the system notes from last year's audit and ensure that the documentation on the purchases and
payables system covers all expected stages and is complete.
Review the audit file for indications of weaknesses in the system and note these for investigation this year.
Review the prior year report to management to identify any recommendations which were made over
controls in this area as this may highlight potential changes which have been made in the current year.
Obtain system documentation from the client, potentially in the form of a procedure manual. Review this
to identify any changes made in the last 12 months.
Sir Athar Mehmood
SKANS Rawalpindi
Practice to pass session
December 2021
•
•
•
Interview client staff to ascertain whether systems and controls have changed including the stores and
warehouse to ensure that the flowcharts and notes produced last year is correct.
Perform walk-through tests by tracing a sample of transactions through the purchases and payables system
to ensure that the flowcharts and systems notes contained on the audit file are accurate.
During the walk-through tests, confirm the systems notes and flowcharts accurately reflect the control
procedures which are in place and can be used to identify controls for testing.
31. Describe substantive procedures the auditor should perform to confirm the redundancy provision at
the year end. (5 marks)
Dec2017
Substantive procedures to confirm the redundancy provision
•
•
•
•
•
•
•
•
Discuss with the directors of Dashing Co as to whether they have formally announced their intention to
close the production site and make their employees redundant, to confirm that a present obligation exists
at the year end.
If announced before the year end, review supporting documentation to verify that the decision has been
formally announced.
Review the board minutes to ascertain whether it is probable that the redundancy payments will be paid.
Obtain a breakdown of the redundancy calculations by employee and cast it to ensure completeness and
agree to trial balance.
Recalculate the redundancy provision to confirm completeness and agree components of the calculation
to supporting documentation such as employee contracts.
Review the post year-end cash book to identify whether any redundancy payments have been made,
compare actual payments to the amounts provided to assess whether the provision is reasonable.
Obtain a written representation from management to confirm the completeness of the provision.
Review the disclosure of the redundancy provision to ensure compliance with IAS 37 Provisions,
Contingent Liabilities and Contingent Assets.
32. Explain the safeguards which your firm should implement to ensure that this conflict of interest is
properly managed. (4 marks)
Dec 2017
i)
ii)
iii)
iv)
v)
vi)
vii)
Both client and its competitor should be notified that your audit firm would be acting as auditors for
each company and, if necessary, consent obtained.
Advising one or both clients to seek additional independent advice.
The use of separate engagement teams, with different engagement partners and team members; once an
employee has worked on one audit, then they would be prevented from being on the audit of the
competitor for a period of time. This separation of teams is known as building a ‘Chinese wall’.
Procedures to prevent access to information, for example, strict physical separation of both teams,
confidential and secure data filing.
Clear guidelines for members of each engagement team on issues of security and confidentiality.
These guidelines could be included within the audit engagement letters.
Potentially the use of confidentiality agreements signed by employees and partners of the firm.
Regular monitoring of the application of the above safeguards by a senior individual in audit firm not
involved in either audit.
Sir Athar Mehmood
SKANS Rawalpindi
Practice to pass session
December 2021
33. Describe auditor’s responsibilities in relation to the prevention and detection of fraud and error.
(4 marks) Mar-June 2018, Sep-Dec 2019
Auditor must conduct an audit in accordance with ISA 240 The Auditor’s Responsibilities Relating to Fraud in
an Audit of Financial Statements and is responsible for obtaining reasonable assurance that the financial
statements taken as a whole are free from material misstatement, whether caused by fraud or error.
In order to fulfil this responsibility, auditor is required to identify and assess the risks of material misstatement of
the financial statements due to fraud.
They need to obtain sufficient appropriate audit evidence regarding the assessed risks of material misstatement
due to fraud through designing and implementing appropriate responses. In addition, auditor must respond
appropriately to fraud or suspected fraud identified during the audit.
When obtaining reasonable assurance, auditor is responsible for maintaining professional skepticism throughout
the audit, considering the potential for management override of controls and recognizing the fact that audit
procedures which are effective in detecting error may not be effective in detecting fraud.
To ensure that the whole engagement team is aware of the risks and responsibilities for fraud and error, ISA 240
requires that a discussion is held within the team. For members not present at the meeting, audit engagement
partner should determine which matters should be communicated to them.
34. Explain why analytical procedures are used during THREE stages of an audit. (3 marks) Sep-Dec 2018
Analytical procedures can be used at all stages of an audit, however, ISA 315 Identifying and Assessing the Risks
of Material Misstatement through Understanding the Entity and Its Environment and ISA 520 Analytical
Procedures identify three particular stages.
During the planning stage, analytical procedures must be used as risk assessment procedures in order to help the
auditor to obtain an understanding of the entity and assess the risk of material misstatement.
During the final audit, analytical procedures can be used to obtain sufficient appropriate evidence. Substantive
procedures can either be tests of detail or substantive analytical procedures.
At the final review stage, the auditor must design and perform analytical procedures which assist them when
forming an overall conclusion as to whether the financial statements are consistent with the auditor’s
understanding of the entity.
Sir Athar Mehmood
SKANS Rawalpindi
Practice to pass session
December 2021
35. Explain why it is important for auditors to communicate throughout the audit with those charged with
governance; and Identify TWO examples of matters which the auditor may communicate to those
charged with governance. (4 marks)
Sep-Dec 2018
Importance of communicating with those charged with governance
In accordance with ISA 260 Communication with Those Charged with Governance, it is important for the auditors
to report to those charged with governance as it helps in the following ways:
i)
It assists the auditor and those charged with governance in understanding matters related to the audit, and in
developing a constructive working relationship. This relationship is developed while maintaining the auditor’s
independence and objectivity.
ii) It helps the auditor in obtaining, from those charged with governance, information relevant to the audit. For
example, those charged with governance may assist the auditor in understanding the entity and its
environment, in identifying appropriate sources of audit evidence and in providing information about specific
transactions or events.
iii) It helps those charged with governance in fulfilling their responsibility to oversee the financial reporting
process, thereby reducing the risks of material misstatement of the financial statements.
iv) It promotes effective two-way communication between the auditor and those charged with governance.
Matters to be communicated to those charged with governance
i)
ii)
iii)
iv)
v)
vi)
vii)
viii)
ix)
x)
xi)
xii)
The auditor’s responsibilities with regards to providing an opinion on the financial statements and that they
have carried out their work in accordance with International Standards on Auditing.
The auditor should explain the planned approach to the audit as well as the audit timetable.
Any key audit risks identified during the planning stage should be communicated.
In addition, any significant difficulties encountered during the audit should be communicated.
Also significant matters arising during the audit, as well as significant accounting adjustments.
During the audit, any significant deficiencies in the internal control system identified should be communicated
in writing or verbally.
How the external auditor and internal auditor may work together and any planned use of the work of the
internal audit function.
Those charged with governance should be notified of any written representations required by the auditor.
Other matters arising from the audit which are significant to the oversight of the financial reporting process.
If any suspected frauds are identified during the audit, these must be communicated.
If the auditors are intending to make any modifications to the audit opinion, these should be communicated
to those charged with governance.
For listed entities, a confirmation that the auditors have complied with ethical standards and appropriate
safeguards have been put in place for any ethical threats identified.
Sir Athar Mehmood
SKANS Rawalpindi
Practice to pass session
December 2021
36. Define and explain materiality and performance materiality. (4 marks)
Mar-June 2019
Materiality and performance materiality are dealt with under ISA 320 Materiality in Planning and Performing an
Audit. Auditors need to establish the materiality level for the financial statements as a whole, as well as assess
performance materiality levels, which are lower than the overall materiality for the financial statements as a
whole.
Materiality
Materiality is defined in ISA 320 as follows: ‘Misstatements, including omissions, are considered to be material
if they, individually or in the aggregate, could reasonably be expected to influence the economic decisions of
users taken on the basis of the financial statements.’
If the financial statements include a material misstatement, then they will not present fairly (give a true and fair
view) the position, performance and cash flows of the entity.
A misstatement may be considered material due to its size (quantitative) and/or due to its nature (qualitative) or
a combination of both. The quantitative nature of a misstatement refers to its relative size. A misstatement which
is material due to its nature refers to an amount which might be low in value but due to its prominence and
relevance could influence the user’s decision, for example, directors’ transactions.
As per ISA 320, materiality is often calculated using benchmarks such as 5% of profit before tax or 1% of total
revenue or total assets. These values are useful as a starting point for assessing materiality, however, the
assessment of what is material is ultimately a matter of the auditor’s professional
judgement. It is affected by the auditor’s perception of the financial information, the needs of the users of the
financial statements and the perceived level of risk; the higher the risk, the lower the level of overall materiality.
In assessing materiality, the auditor must consider that a number of errors each with a low value may, when
aggregated, amount to a material misstatement.
Performance Materiality
Performance materiality is defined in ISA 320 as follows: ‘The amount set 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 materiality for the financial statements as a whole.’
Hence performance materiality is set at a level lower than overall materiality for the financial statements as a
whole. It is used for testing individual transactions, account balances and disclosures. The aim of performance
materiality is to reduce the risk that the total of all of the errors in balances, transactions and disclosures exceeds
overall materiality.
Sir Athar Mehmood
SKANS Rawalpindi
Practice to pass session
December 2021
37. List Four Control Objectives of Sales and Dispatch System. (4 marks)
Sep-Dec 2019
i) To ensure that orders are only accepted if goods are available to be processed for customers.
ii) To ensure that all orders are recorded completely and accurately.
iii) To ensure that goods are not supplied to poor credit risks.
iv) To ensure that goods are dispatched for all orders on a timely basis.
v) To ensure that the correct quantity of goods is dispatched and they are of an adequate quality.
vi) To ensure that all goods dispatched are correctly invoiced at authorised prices.
vii) To ensure completeness of income for goods dispatched.
viii) To ensure that sales discounts are only provided during the valid period.
38. Define internal control in the context of a limited liability company.
(3marks)
Sep2019
Internal Control
It is the process designed, implemented and maintained by those charged with governance, management and other
personnel to provide reasonable assurance about the achievement of the company objectives with regard to
reliability of financial reporting, effectiveness and efficiency of operations and compliance with applicable laws
and regulations.
39. Explain the nature and purpose of the following:
(i) Walk-through tests; and
(ii) Tests of controls.
(4 marks)
Sep2019
Walk-Through Tests
These involve tracing a small number of transactions applicable to a specific area of the financial statements, from
beginning to end and entry in the accounting records. They are used primarily as a means of confirming the
auditor’s understanding of the relevant system, including the control activities.
Tests of Controls
These are audit procedures designed to evaluate the operating effectiveness of controls in preventing or detecting
and correcting material misstatements at the assertion level. They are performed where the auditor intends to rely
on controls in determining the nature, timing and extent of substantive procedures or where substantive procedures
alone cannot provide sufficient appropriate evidence
Sir Athar Mehmood
SKANS Rawalpindi
Practice to pass session
December 2021
40. Identify and explain ONE problem associated with the use of test data by auditors. (3 marks)
Sep2019
Problems associated with the use of test data include:
•
Costs – there may be considerable up-front costs in developing test data relevant for testing specific
controls in a client’s system.
•
Audit training – specialist staff, trained in the use of test data and interpretation of test results may be
required.
•
Corruption of data files – test data may corrupt data files, which could be difficult to correct.
•
Limitations of testing – test data may be used to test the operation of a system for a particular point in
time, possibly during a special run arranged specifically for audit testing. Therefore, conclusions drawn
as to the operation of the system throughout the accounting period could be flawed.
41. In the context of audit planning, define the following terms:
(i) The overall audit strategy; and
(ii) The audit plan.
(4 marks) Sep2019
Overall Audit Strategy
The overall audit strategy sets out the scope, timing and direction of the audit and guides the development of the
audit plan.
Audit Plan
The audit plan describes the nature, timing and extent of risk assessment procedures, further audit procedures to
be carried out at the assertion level, and other procedures required for the execution of an effective audit.
42. Identify and explain TWO financial statement assertions, about transactions and events and related
disclosures. (4 marks)
Sep2019
Assertions about transactions and events and related disclosures
•
•
•
•
•
•
Occurrence – transactions and events which have been recorded or disclosed have occurred, and such
transactions and events pertain to the entity.
Completeness – all transactions and events which should have been recorded have been recorded, and all
related disclosures which should have been included in the financial statements have been included.
Accuracy – amounts and other data relating to recorded transactions and events have been recorded
appropriately, and related disclosures have been appropriately measured and described.
Cut-off – transactions and events have been recorded in the correct accounting period.
Classification – transactions and events have been recorded in the proper accounts.
Presentation – transactions and events are appropriately aggregated or disaggregated and clearly
described, and related disclosures are relevant and understandable in the context of the requirements of
the applicable financial reporting framework.
Sir Athar Mehmood
SKANS Rawalpindi
Practice to pass session
December 2021
43. For each of the following types of letter, explain its purpose and identify TWO matters which should
be included in it:
(i) Audit engagement letter; and
(ii) Written representations from management.
(10 marks) Sep2019
Audit Engagement Letter
The purpose of the audit engagement letter is to formally record the agreed terms of the audit engagement between
the auditor and the audit client. It helps to avoid misunderstandings with respect to the audit.
For a limited liability company, the letter should include the following:
• The objective and scope of the audit of the financial statements.
• The responsibilities of the auditor.
• The responsibilities of management.
• Identification of the applicable financial reporting framework for the preparation of the financial statements.
• Reference to the expected form and content of any reports to be issued by the auditor.
• A statement that there may be circumstances in which a report may differ from its expected form and content.
Written Representations from Management
The purpose of obtaining written representations from management is to provide the auditor with written
confirmation that management has fulfilled its responsibilities for the preparation of the financial statements and
for the completeness of the information provided to the auditor. The letter may also serve to provide further
written representations, to support other audit evidence relevant to the financial statements for one or more
specific assertions in the financial statements.
The letter should include confirmation that:
•
•
•
•
•
•
•
Management has fulfilled its responsibilities for the preparation of the financial statements in accordance
with the applicable financial reporting framework; in particular, the financial statements are fairly
presented (or give a true and fair view).
Management has provided the auditor with all information and access which is relevant to the preparation
of the financial statements.
All transactions have been recorded and are reflected in the financial statements.
All known actual possible litigation and claims have been disclosed.
Significant assumptions used by management in making accounting estimates are reasonable.
All events subsequent to the date of the financial statements which require adjustment or disclosure have
been adjusted for or disclosed.
The effects of uncorrected misstatements are immaterial.
Sir Athar Mehmood
SKANS Rawalpindi
Practice to pass session
December 2021
44. Identify and explain TWO reasons why auditors can provide only reasonable assurance that a
company’s financial statements are free from material misstatement. (5 marks)
Sep2019
Reasonable Assurance
Resources – auditors do not have unlimited resources to complete their audit procedures, so they depend on
sample testing rather than testing every transaction and account balance. This leads to sampling risk.
Judgement – irrespective of their training and professional experience, auditors may come to different
conclusions when applying the professional judgement, they exercise on an audit.
Internal Control Limitations – auditors often rely on an entity’s internal control when evaluating the risk of
material misstatement, but there are inherent limitations of internal control, for example, the possibility of human
error and management override. Inconclusive audit evidence – much of the audit evidence gathered by auditors,
to support their audit opinion, is persuasive rather than being conclusive. For example, when obtaining
representations from a third party about the existence of a liability owed to it, the reliability of the evidence is
dependent on the integrity of the third party.
45. Identify TWO financial indicators of going concern problems in a company. (2 marks)
Financial indicators of going concern problems include:
•
•
•
•
•
•
•
•
•
•
Sep2019
Net liability or net current liability position.
Fixed-term borrowings approaching maturity without realistic prospects of renewal or repayment; or
excessive reliance on short-term borrowings to finance long-term assets.
Indications of withdrawal of financial support by creditors.
Negative operating cash flows indicated by historical or prospective financial statements.
Adverse key financial ratios.
Substantial operating losses or significant deterioration in the value of assets used to generate cash flows.
Arrears or discontinuance of dividends.
Inability to pay creditors on due dates.
Inability to comply with the terms of loan agreements.
Change from credit to cash-on-delivery transactions with suppliers.
Inability to obtain financing for essential new product development or other essential investments.
46. State the type of audit opinion which should be expressed, when the auditor concludes that a company’s
financial statements have been inappropriately prepared on the going concern basis, and explain
the reason why such an opinion is appropriate. (3 marks)
Sep2019
The audit opinion would be modified, because there is material misstatement. An adverse opinion should be
expressed in such circumstances. This is because the extent of misstatements arising, as a consequence of the
financial statements being inappropriately prepared on a going concern basis, is both material and pervasive to
the financial statements.
47. Identify ONE component of internal control, other than control activities. (1 mark)
The components of internal control other than control activities are:
•
•
•
•
Sep2019
Control environment.
The entity’s risk assessment process.
The information system.
Monitoring of controls.
Sir Athar Mehmood
SKANS Rawalpindi
Practice to pass session
December 2021
48. State ONE objective of internal control over a purchases and trade payables system. (2 marks)
Sep2019
The internal control objectives of a purchases and trade payables system include:
•
•
•
•
•
To ensure that goods and services are purchased only when needed.
To ensure that all goods and services purchased are for the benefit of the entity.
To ensure that goods and services are purchased at competitive prices on the best possible trading terms,
taking into account quality issues.
To ensure that all purchase transactions are recorded promptly, accurately and completely in the
accounting records.
To ensure that the entity obtains credit for goods returned to suppliers and sub-standard services received.
49. Describe ONE control activity which should be in place over the RECEIPT OF GOODS PURCHASED
into the warehouse by a manufacturing company. (2 marks)
Sep2019
The following control activities should exist:
•
•
•
•
Goods should be examined by individuals independent of the purchases and stores functions, and checked
to the supplier delivery note for description, quantity and quality. The delivery note should be signed to
evidence this review.
Goods received should be matched to the purchase order to confirm that only valid goods ordered are
accepted in to inventory.
Multi-part pre-numbered sequential goods received notes (GRNs) should be raised for goods which are
accepted against purchase orders. One copy should be retained in the warehouse and regular sequence
checks performed with investigation of any missing GRNs.
A copy of the GRN should be forwarded to the purchasing department and unfulfilled orders monitored.
A copy should be forwarded to the finance (payables ledger) department and matched to supplier invoices.
50. Explain the Purpose of an audit Engagement Letter. (2 marks)
March 2020
An engagement letter provides a written agreement of the terms of the audit engagement between the auditor and
management or those charged with governance.
It confirms that there is a common understanding between the auditor and management, or those charged with
governance, of the terms of the audit engagement helps to avoid misunderstandings with respect to the audit.
Sir Athar Mehmood
SKANS Rawalpindi
Practice to pass session
December 2021
51. Describe four matters the auditor may consider in determining whether a deficiency in Internal
Controls is significant. (4 marks)
March 2020
Consideration points should include;
i)
ii)
iii)
iv)
v)
vi)
evidence of ineffective aspects of the control environment, such as management fraud not mitigated by
internal controls, not sufficient oversight of significant management interests by those charged with
governance, and no implementation of remedial actions against significant deficiencies communicated
absence or inefficiency of a risk assessment process
evidence of ineffective responses to identified significant risks
misstatements detected by the auditor’s procedures, which were not prevented, detected and corrected by
the internal controls
restatement of previously issued financial statements to reflect the correction of a material misstatement
due to error or fraud
evidence of management’s inability to oversee the preparation of the financial statements.
52. Describe THREE control activities that should form part of the company’s continuous (perpetual)
inventory counting system, if it is to be considered effective. (6marks)
June2020
Control Activities – Inventory
The following control activities should form a part of the company’s continuous (perpetual) inventory counting
system:
•
The count team members should be sufficiently independent, skilled and resourced so that their work can
be relied upon.
•
All inventory lines should be counted and physically inspected at least once annually, with high value lines
being subject to more regular counts and inspections, as deemed appropriate by management.
•
Inventory count teams should check for, identify, and formally record damaged or obsolete inventory items
on a monthly basis and report findings to management for follow-up and write-down of value in the
accounting records.
•
Inventory count teams should formally report discrepancies and anomalies found, immediately after counts,
for prompt investigation and appropriate action by management
•
Including appropriate adjustments in the accounting records.
Sir Athar Mehmood
SKANS Rawalpindi
Practice to pass session
December 2021
53. Explain why audit evidence in the form of external confirmation is generally deemed to be more reliable
than evidence generated internally by the audit client. (3 marks)
June 2020
Audit Evidence
By its very nature, audit evidence provided by way of an external confirmation, a direct written response to the
auditor from a third party, is deemed to be reliable, on the basis that third parties are considered to be impartial
and objective, with no motivation to provide untruthful and inaccurate confirmations to the auditor. In contrast,
audit evidence generated internally by the audit client may have been produced by individuals who are not
objective, who have a self-interest in falsifying accounting records and concealing errors and omissions. That
evidence obtained from external confirmation is sent directly to the auditor, so reducing the opportunity to
intercept and alter the representations made, adds to its reliability as compared to evidence obtained indirectly
through the client or by inference. Finally, it is generally accepted that audit evidence is more reliable when it
exists in documentary form; a pertinent point when determining the extent of reliance to be placed on external
confirmations as compared to evidence sourced from the audit client.
54. Explain the differences between a positive and a negative confirmation request, as applied to a trade
receivables circularisation. (3 marks)
June 2020
Trade Receivables Circularisation
A positive confirmation request consists of letters being sent, directly by the auditor, to a sample of trade
receivables. The letters request addressees to respond directly to the auditor indicating whether they agree or
disagree with the balance owed by them or to them, as reflected in the client’s accounting records. A negative
confirmation request consists of similar letters being sent to a sample of trade receivables, but it requests
addressees to respond only if they disagree with the balance shown as owed by them or to them.
Positive confirmation requests are preferable to negative confirmation requests because they provide a higher
degree of certainty to the auditor.
55. Define audit independence. (4 marks)
June2020
Auditor Independence
Auditor independence includes independence of mind and independence of appearance. Independence of mind is
the state of mind which permits the expression of a conclusion without being affected by influences which
compromise professional judgement, thereby allowing an individual to act with integrity, and exercise objectivity
and professional scepticism. (Independence in appearance is the avoidance of facts and circumstances which are
so significant that a reasonable and informed third party would be likely to conclude that a firm’s, or an audit
team member’s, integrity, objectivity or professional scepticism has been compromised.
Sir Athar Mehmood
SKANS Rawalpindi
Practice to pass session
December 2021
56. Identify THREE aspects in respect of which auditors would be expected to exercise their professional
judgement, when auditing the financial statements of a company operating a hotel chain. (6 marks)
June 2020
Professional Judgement
An auditor may be expected to exercise their professional judgement in such a situation on a very broad range
and high volume of aspects including:
•
In determining materiality at the planning stage for the financial statements as a whole, and also that set
at a lower level or levels for particular classes of transactions, account balances or disclosures
(performance materiality).
•
In assessing inherent risk, control risk and determining acceptable levels of detection risk in the various
areas of the financial statements.
•
In deciding on the nature, timing and extent of substantive procedures to carry out in the area of room
hire, to reduce audit risk to an acceptable level.
•
In selecting appropriate members of the audit team to carry out testing and in the delegation of specific
responsibilities and duties to them.
•
In selecting the hotels to be visited to carry out tests and the tests to carry out.
•
In evaluating the reasonableness of the company’s depreciation policies and rates pertaining to its various
categories of non-current assets.
•
In determining the extent of use of computer-assisted audit techniques to obtain audit evidence. In
evaluating management’s judgements in applying the applicable financial reporting framework.
•
In determining the type of audit opinion to be expressed in the auditor’s report.
57. Define the term ‘general IT controls’ in the context of a computer environment. Provide TWO examples
of general IT controls to ensure continuity of operation. (5 marks)
June 2020
General IT controls
In the context of a computer environment, general IT controls are policies and procedures which relate to many
applications, and support the effective functioning of applications controls by helping to ensure the continued
proper operations of information systems.
Examples of general IT controls General IT controls to ensure continuity of operations include:
•
•
•
•
•
Disaster recovery procedures.
Off-site storage of programs and data files.
Back-up power sources.
Repair service and maintenance agreements.
Break-down insurance agreements.
Sir Athar Mehmood
SKANS Rawalpindi
Practice to pass session
December 2021
58. Explain the purpose of communicating, formally, with a prospective client’s existing auditors. (2 marks)
June 2020
Purpose of Communication
As a matter of professional courtesy, auditors are required to communicate formally with a prospective client’s
existing auditor, prior to accepting instruction to act as their new auditor. The main purpose of the communication
is to find out if there is any professional reason as to why the instructions to act should not be accepted.
59. Identify TWO sources from which an auditor may obtain information about a prospective audit client,
other than the existing auditor. (3 marks)
June 2020
Prospective audit clients Other sources from which an auditor may obtain information about a prospective audit
client include:
•
The client’s management and employees.
•
The client’s most recent financial statements The client’s website.
•
Promotional publications and literature distributed by the client.
•
Business magazines, journals and newspaper articles.
•
Television and radio mediums.
•
Credit reference agencies.
•
References from existing clients
60. With reference to an unmodified auditor’s report relating to the financial statements of a limited
liability company with issued share capital:
(a) State what should be clearly indicated by the title of the report. (1 mark)
(b) State who the report should be addressed to. (1 mark)
(c) Identify TWO matters that must be confirmed in the basis for opinion paragraph. (3 marks)
June 2020
Title of Auditor’s Report
The title should clearly indicate that the report is of an independent auditor, to distinguish it from reports issued
by others.
Addressee of Auditor’s Report
The report should be addressed to the shareholders of the company.
Matters in the basis of opinion paragraph
The matters which must be confirmed in the basis of opinion paragraph comprise: – That the audit was conducted
in accordance with the ISAs.
− That the auditor is independent of the company.
− Whether the auditor believes the audit evidence obtained is sufficient and appropriate to provide a basis
for the audit opinion.
Sir Athar Mehmood
SKANS Rawalpindi
Practice to pass session
December 2021
61. Explain the purpose of audit software. State TWO benefits of using audit software. (5 marks)
June 2020
Purpose of Audit Software
The purpose of audit software is to assist the auditor in carrying out substantive procedures on data processed
through a computer-based accountancy system.
Benefits of Audit Software
Benefits of using audit software comprise:
•
•
•
•
Speed of calculations and comparisons as compared to manual testing.
Increased complexity of testing, for example, by way of exception and search checks.
Ability to carry out higher volumes of testing.
Longer term cost savings may arise for the auditor if the same audit software is used for testing over a
number of years.
62. Explain what is meant by 'professional scepticism' and why it is so important that the auditor maintains
professional scepticism throughout the audit. (3 marks)
mock examination
Professional Scepticism
Professional scepticism is an attitude that includes having a questioning mind, being alert to conditions
which may indicate possible misstatement due to error or fraud, and subjecting audit evidence to a critical
assessment rather than just taking it at face value (ISA 200). It is important that professional scepticism is
maintained throughout the audit to reduce the risks of overlooking unusual transactions, of over generalising
when drawing conclusions, and of using inappropriate assumptions in determining the nature, timing and
extent of audit procedures and evaluating the results of them. Professional scepticism is necessary to the
critical assessment of audit evidence. This includes questioning contradictory audit evidence and the
reliability of documents and responses from management and those charged with governance.
63. Define 'professional judgement' and describe TWO areas where professional judgement is applied
when planning an audit of financial statements. (3 marks)
mock examination
Professional judgement
Professional judgement is the application of relevant training, knowledge and experience in making
informed decisions about the appropriate courses of action in the circumstances of the audit engagement.
The auditor must exercise professional judgement when planning an audit of financial statements (ISA 200).
Professional judgement will be required in many areas when planning. For example, the determination of
materiality for the financial statements as a whole and performance materiality levels will require
professional judgement.
Professional judgement will also be required when deciding on the nature, timing and extent of audit
procedures.
Sir Athar Mehmood
SKANS Rawalpindi
Practice to pass session
December 2021
64. Describe the substantive procedures the auditor should perform to obtain sufficient and appropriate
audit evidence in relation to the valuation of work in progress. (4 marks)
mock examination
Substantive procedures for work in progress (WIP)
i.
ii.
iii.
iv.
v.
vi.
vii.
viii.
Prior to attending the inventory count, discuss with management how the percentage completions are
attributed to the WIP. For example, is this based on motor cars passing certain points in the production
process?
During the count, observe the procedures carried out by Vieri staff in assessing the level of WIP and
consider the reasonableness of the assumptions used.
Agree for a sample that the percentage completions assessed during the count are in accordance with
Vieri's policies communicated prior to the count.
Discuss with management the basis of the standard costs applied to the percentage completion of WIP,
and how often these are reviewed and updated.
Review the level of variances between standard and actual costs and discuss with management how these
are treated.
Obtain a breakdown of the standard costs and agree a sample of these costs to actual invoices or payroll
records to assess their reasonableness.
Cast the schedule of total WIP and agree to the trial balance and financial statements.
Agree sample of WIP assessed during the count to the WIP schedule, agree percentage completion is
correct and recalculate the inventory valuation.
Sir Athar Mehmood
SKANS Rawalpindi
Practice to pass session
December 2021