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MIA QE/ /MAC 2009
ANSWER 1 (15 MARKS)
i.
An engagement to perform agreed-upon procedures may involve the auditor to perform
certain procedures concerning individual items of financial data (for example, accounts
payable, accounts receivable, purchases from related parties and sales and profits of
segment of an entity), a financial statement (for example, a balance sheet) or even a
complete set of financial statements.
(1.5 mark)
Procedures carried out are at the request of the client to meet its specific needs. The
auditor does not have to give an assurance, but provides a statement that lists the
procedures carried out together with the findings. Hence, the objective of an agreedupon procedures engagement is for the auditor to carry out procedures of an audit
nature to which the auditor and the entity and any appropriate third parties have agreed
and to report on factual findings.
(1.5 mark)
ii.
General principles of an agreed-upon procedures engagement that need to be
observed by auditors include:
a. Compliance with the Code of Ethics for Professional Accountants which are:
• Integrity;
• Objectivity;
• Professional competence and due care;
• Confidentiality;
• Professional behavior; and
• Technical standards
(½ mark x 4 points = maximum 2 marks)
b. Conducting the agreed-upon procedures engagement in accordance with
standards and the terms of the engagement.
(maximum 1 mark)
iii.
iv.
Procedures for total revenue accounts include:
a.
Obtain a schedule prepared by the client reflecting total revenue as defined in the
lease agreements between the lessee and your client as the lessor.
b.
Compare monthly summarization of cash reports with the schedule of gross sales
to ensure completeness and existence.
c.
Agreed a sample of the daily cash net receipts shown with the bank statements to
ensure all cash receipts are accounted for.
(Any 1 point is 1 mark x 3 points = 3 marks)
Matters to be agreed upon and to be included in the engagement letter:
a.
Nature of the engagement including the fact that the procedures performed will
not constitute an audit or a review
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MIA QE/ /MAC 2009
b.
Statement of the purpose of the engagement
c.
Identification of the financial information to which the agreed-upon procedures will
be applied
d.
Nature, timing and extent of the specific procedures to be applied
e.
The anticipated form of the report of factual findings
f.
Limitations on distribution of the report of factual findings
(Any 1 point is ½ mark x 6 points = 3 marks)
Six (6) main items that must be included in the report of factual findings are:
a.
Title & addressee
b.
Identification of financial and non-financial information
c.
Statements that procedures performed in accordance with applicable auditing
standards
d.
Identification of purpose & listing of procedures
e.
A description of factual findings
f.
A statement that the report relates only to elements, accounts, items, financial
and non-financial information specified.
g.
Date of report
h.
Auditors’ signature
(1/2 mark each x 6 = 3 marks)
(Total: 15 marks)
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MIA QE/ /MAC 2009
ANSWER 2 (10 MARKS)
i.
Quality control comprises methods used to ensure that audit firms meet their
professional responsibilities to clients and others. The control includes the aspects of
organizational structure of audit firm and procedures established by the firm. The
structure must ensure among others that the technical review of every engagement is
carried out by a partner who has expertise in the client’s industry. Procedures must be
established by the firms to sure that they follow specific quality control procedures that
help them meet the standards consistently on every engagement.
(Any 2 points for 2 marks)
The firm should establish a system of quality control designed to provide it with
reasonable assurance that the firm and its personnel comply with professional
standards and regulatory and legal requirements, and that reports issued by the firm or
engagement partners are appropriate in the circumstances.
(2 marks)
ii.
Elements of a system of quality control according to ISQC 1 are:
1.
Leadership responsibilities for quality within the firm – to establish policies and
procedures designed to promote an internal culture based on the recognition that
quality is essential in performing engagements.
2.
Ethical requirements – to provide the firm with reasonable assurance that the firm
and its personnel comply with relevant ethical requirements.
3.
Acceptance and continuance of client relationships and specific engagements.
4.
Human resources – reasonable assurance of sufficient personnel with the
capabilities, competence, and commitment to ethical principles.
5.
Engagement performance – engagements are performed in accordance with
professional standards and regulatory and legal requirements, and to issue
reports that are appropriate in the circumstances.
6.
Monitoring – the system of quality control are relevant, adequate, operating
effectively and complied with in practice.
(1 mark for each element, maximum 6 marks)
(Total: 10 marks)
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MIA QE/ /MAC 2009
ANSWER 3 (25 MARKS)
A.
i.
Audit adjustments:
Date
31 Dec 08
31 Dec 08
Accounts
Accounts receivable
Sales
(Item 6 + 8 – 4) = (30,000 + 40,000 – 20,000)
(11/2 mark)
Cost of Goods Sold
Inventory
(Item 6 + 8 – 4) = (20,000 + 27,500 – 12,000)
(11/2 mark)
Dr
50,000
Cr
50,000
35,500
35,500
Eliminate the misstatements of sales, cost of goods sold, and asset (accounts
receivable) as at 31 December 2008 as the cut-off date for the basis of recognition of
sales and cost of goods sold.
(5 marks)
ii.
Audit Objectives:
i.
ii.
iii.
iv.
v.
B.
Existence of accounts receivable
Completeness ie accounts receivable are not misstated
Ownership ie the right over the accounts receivable
Valuation ie allowance for doubtful debt is adequately provided
Disclosure to present sufficient details
(1 mark each, maximum 5 marks)
Confirmation of accounts receivable
i.
Circumstances to omit the procedure
•
•
•
•
ii.
The response rates would be inadequate.
The responses are expected unreliable.
The use of voucher system that show the amount owed on individual
transactions but not the total amount – hence, debtors would be
unable to confirm balance.
Inadequacy of information.
(1/2 marks each, maximum 2 marks)
Alternative procedures
•
•
Examination of subsequent collections to obtain evidence of existence
and collectability ie the receipt of payment from the customer.
Vouching open invoices comprising customer balances ie vouch the
receivables to underlying customer orders and shipping
documentation.
(2 x 1 mark each, maximum 2 marks)
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iii.
Factors affecting reliability
Independence of the source
Obtain directly by the auditor
Written document
Original document
Internal control over internal information
Consistency of evidence from differing sources.
(1 mark each, maximum 3 marks)
•
•
•
•
•
•
iv.
MIA QE/ /MAC 2009
Audit procedures
i) Substantive tests on account receivable balances
•
Trace total sales to the general ledger to ensure the total sale amount
is being recorded correctly in the ledger.
•
Perform alternative procedures for dealing with non-response- eg
subsequent receipt test.
•
Prepare an aging schedule for account receivables balances and
analyze the age of accounts receivables balances and evaluate
adequacy of the provision of bad debts
•
Cast the list of debtors in the receivable ledger
•
Reconcile the sub ledger balances to the control account in general
ledger
•
Perform account cut off test – agreed sales invoices recorded before
and after the year end to the subsidiary ledger
•
Investigate and consider unusual items in the sub ledger such as
transferring balance from one account to another, contrast, or round
sums figure, significant adjustments
•
Identify related party transactions from subsidiary ledger
•
Confirm accounts receivable
a. Determine the selection of sample debtors for confirmation
procedures to ensure its representativeness.
b. Debtors with large balances may be selected 100% and those with
smaller balances may be selected at certain determined
percentages.
c. Perform positive confirmation or negative confirmation accordingly
(1 mark for any one point with maximum 8 marks).
(Total 25 marks)
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MIA QE/ /MAC 2009
ANSWER 4 (10 MARKS)
A.
A sampling approach to testing would not be appropriate in the following
circumstances:
(i)
Where there is a statutory requirement to disclose specific items in the
financial statements, for example directors’ remuneration.
(ii)
Where the population is very small and the results from sampling could not be
relied on, for example when conducting certain tests of controls.
(iii)
Where the population is small in number but comprises material individual
balances or transactions, for example property additions.
(iv)
Where the population is not homogenous and requires subdivision before
sampling can be attempted, for example purchase invoices and credit notes.
(v)
When the auditor is put ‘on enquiry’ for example when testing for fraud.
(vi)
Where the costs of sampling outweigh the benefits as compared to 100%
testing.
(Any 4 circumstances for 4 marks)
B.
i.
i.
iii.
Observation
1.
Observation of the opening of the mail of an entity to ensure that at
least two persons are present to receive and witness the receipt of
monies received by the entities.
2.
Observation of the counting of inventories by an entity’s personnel to
ensure that they are counted in accordance with procedures
authorized by the management of the entity.
Recalculation
1.
The checking of the depreciation calculations as applied to noncurrent assets to ensure that depreciation rates are in accordance with
the stated policy of the company.
2.
The checking of the accuracy of the extensions of year end inventory
calculations to verify the accuracy of the valuation of reported
inventories.
Analytical procedures
1.
The calculation of an entity’s trade receivables ratio to help assess the
reasonableness of allowance for doubtful debts, the effectiveness of
credit control and the possibility of under/over statement of reported
sales.
2.
The calculation of the average remuneration paid to the employees of
an entity, to assess the reasonableness of the reported wages and
salaries costs as compared to a previous equivalent period.
(6 marks)
(Total: 10 marks)
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MIA QE/ /MAC 2009
ANSWER 5 (20 MARKS)
5 A.
i.
ii.
Audit planning activities comprise:
Establishing an overall audit strategy.
Developing an audit plan for the audit in order to reduce audit risk to an
acceptably low level.
Continuously updating the overall audit strategy and the audit plan throughout the
course of the audit assignment.
Directing and supervising the audit team and reviewing their work.
Documenting the overall audit strategy and the audit plan.
Communicating with those charged with governance and management of the
organization being audited.
(Any 4 activities for 4 marks)
The audit risk model expresses the relationship among the audit risk components as
follows:
Audit Risk = Risk of Material misstatement (Inherent Risk X Control Risk) X Detection
Risk
Audit risk is the risk the auditor is willing to accept that the financial statements may
be materially misstated after the audit is completed and an unqualified opinion has
been given.
Inherent Risk
This is the susceptibility of an assertion to a misstatement that could be material,
either individually or when aggregated with other misstatements, assuming that there
were no related controls.
Control Risk
This is the risk that a misstatement that could occur in an assertion and that 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
This is the risk that the auditor’s procedures fail to detect material misstatements
exceeding the tolerable amount, should such errors exist.
(4 marks)
Inherent risk and control risk are the entity’s risks and they exist independently of the
audit of the financial statements. The auditor is required to assess both of these
components of audit risk. For a given level of audit risk, the acceptable level of
detection risk bears an inverse relationship to the assessment of the risk of material
misstatement at the assertion level. Thus at planning stage, the audit risk model can
be used to determine detection risk and therefore the appropriate level of substantive
procedures to be carried out.
(2 marks)
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5B
i.
ii.
Cash receipt function: Receptionist is the only person responsible to open the
mail containing cheque received from customers.
o Two persons should be involved in the opening of mail and a prelisting of
cash receipts should be prepared.
Posting to accounts receivable: Accounts receivable clerk is responsible in
preparing listing of cheque received and posting to the accounts receivable
ledger
o It is recommended that the clerk should not be involved in preparing a listing
of cheques received. In fact he should not have access to cash and cheques
at all.
Deposits of cheque by the same receptionist responsible in opening the
cheque received from customers.
o The receptionist should not be given the cheques back to deposit with the
bank. A cashier who was not involved in receiving the cheques should deposit
the cheques in the bank. The cashier should prepare the deposit slip and
banking should be done on a daily basis.
Discounts: Accounts receivable clerk is responsible to authorized special
discounts.
o All special discounts should be approved by a higher authority not involved
with sales before being given or posted to customer’s account. They should
not be written off against the accounts receivable balance by using a credit
note. They should be recorded in a separate account.
Reconciliations: The reconciliation of cheque listing and subsidiary ledger is
done by the same Accounts Receivable clerk.
o The general accounting section should prepare the reconciliation and must be
prepared by someone not responsible in handling cash or posting to accounts
receivable.
Reconciliation is only done at the end of the year.
o The prelist should be reconciled to the deposit slip and to the account
receivable summary report. This should be done on a monthly basis and
reviewed by the financial controller. Any discrepancies should be followed up
immediately.
(Any 4 for 8 marks)
Preliminary assessment of control risk is high. No reliance can be placed on this part
of the system in performing the audit. The auditor needs to make a number of
recommendations to the management to improve the system.
(2 marks)
(Total: 20 marks)
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MIA QE/ /MAC 2009
ANSWER 6 (20 MARKS)
A.
i.
Under the going concern assumption, an entity is ordinarily viewed as
continuing in business for the foreseeable future with neither intention nor the
necessity of liquidation, ceasing trading or seeking protection from creditors
pursuant to laws and regulations.
(2 marks)
ii.
Responsibilities of management are:
To make an assessment of the going concern status of the entity
IAS 1 (Revised) Presentation of Financial statements requires
that, along with the preparation of the financial statements,
management should make an assessment of an enterprise’s
ability to continue as a going concern.
Disclosure of the uncertainties
IAS 1 requires that when management is aware, in making its
assessment, of material uncertainties related to events or
conditions that may cast significant doubt upon the entity’s
ability to continue as going concern, those uncertainties should
be disclosed.
Disclosure of facts if financial statements are not prepared on a going
concern basis.
When the financial statements are prepared on a basis other
than going concern, management shall disclose the basis on
which the financial statements are prepared and the reason for
not preparing the financial statements on a going concern
basis.
(Explanation on any 2 for 3 marks)
Responsibilities of auditors are:
To evaluate the management’s assessment of the going concern status of
the entity.
o ISA 570 requires that an auditor should evaluate management’s
assessment of the entity’s ability to continue as a going concern.
iii.
To evaluate the appropriateness of the management’s use of the going
concern assumption in the presentation of the financial statements.
o When considering the appropriateness of the going concern
assumption in the preparation of financial statements, the auditor
should consider whether there are material uncertainties about the
entity’s ability to continue as a going concern that need to be
disclosed in the financial statements.
Document all procedures followed in evaluating management’s
assessment of the going concern status of entity.
(Explanation on any 2 for 3 marks)
The possible audit reports that can be issued where the going status of a
company is called into question are:
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When auditors find that there is a threat to the going concern status of the
entity and there is adequate disclosure regarding the same in its financial
statements, an unqualified opinion with emphasis of matter section will be
issued. If there are multiple events that can lead to the statements being
materially misleading, a qualified or adverse opinion would be appropriate.
If the disclosure of the significant uncertainty is inadequate, then a
qualified ‘except for’ opinion or an adverse opinion will be issued on the
ground of a lack of disclosure in accordance with acceptable accounting
standards.
If the auditor is not in a position to form an opinion due to limitation in the
scope of the audit, a disclaimer of opinion would be appropriate.
If it is highly probable that the entity will not continue as a going concern,
then an adverse opinion would be appropriate due to a disagreement with
the management regarding the appropriateness of the going concern
assumption in preparing the financial statements.
(Any 4 x 1.5 marks = 6 marks)
B.
i.
This is a going concern uncertainty and may result in one of the following
audit opinions.
If there is adequate disclosure of the going concern uncertainty, an
unqualified opinion with emphasis of matter section will be issued.
If the disclosure of the significant uncertainty is inadequate, then a
qualified ‘except for’ opinion or an adverse opinion will be issued on
the ground of a lack of disclosure in accordance with acceptable
accounting standards
If it were highly probable that the entity will not continue as a going
concern, then an adverse opinion would be appropriate.
(Any 2 for 4 marks)
ii.
There is a disagreement with management regarding the correct accounting
treatment for shares. The effect of the matter is material to the financial
statement. Except for opinion should be issued considering the effect of the
matter is material but not pervasive.
(2 marks)
(Total: 20 marks)
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