Audit evidence

​​You are part of an external audit team reviewing the inventory records of Kubwa Wholesalers. The client uses a manual stock recording system, and you observed discrepancies between physical stock counts and recorded quantities during your visit to the warehouse. 

​​Analyse FOUR considerations before an auditor can rely on written representations as audit evidence.

In forming his opinion, the auditor should obtain relevant and reliable audit evidence sufficient to enable him draw reasonable conclusions thereon which forms the basis of his opinion. 

​​At the planning stage, the auditor of Kidato Ltd., while assessing the risk of material misstatement came across a disagreement amongst the directors on the going concern status of the company. Some of the directors felt that since the company’s bankers were recalling the loan which was the financial base for most of the company’s assets, the company might be forced into receivership and liquidation unless they find another financier. The Board of Directors’ minutes indicate that the bank manager had already canceled the overdraft facility since Kidato Ltd. was facing challenges in repaying the overdraft on a timely basis. The matter had not been concluded when the financial statements were prepared and despite the assets of the company being slightly higher than liabilities in the statement of financial position, the threat to the going concern is clear. 

​ ​​Plastiki Ltd. is a company that manufactures various plastic household goods. Kelly Mwenza is an audit supervisor at Kari, Mwari and Associates, the external auditors of Plastiki Ltd. Kelly Mwenza prepared the audit program for the year-end audit of Plastiki Ltd. Kelly held a meeting with her audit manager and was notified of the following issues identified during the audit risk assessment process: 

​​International Standard on Auditing (ISA) 500 - Audit Evidence, requires the auditor to obtain sufficient and appropriate audit evidence to support his conclusions on test of transactions and therefore his report. Appropriate evidence is reliable evidence. 

​​International Standard on Auditing (ISA) 560 – Subsequent Events, defines subsequent events as events occurring between the date of the financial statements and the date of the auditor’s report. 

​​The auditor is of the opinion that the audit evidence obtained is not sufficient to support the audit opinion after carrying out tests of control. 

​​(i) Define the term “third-party certificate.”

​​You have been auditing Fruitly Ltd., a large national grocery store chain for the first time. Towards the end of the audit, your audit manager demands that you seek a letter of representation from the management of the client company. Upon follow up with the client’s management, you are informed that the management is unwilling to sign the letter of representation.

Required:
(i) Examine the need for seeking a letter of representation from the client’s management.

(ii) Outline SIX matters that you expect the management of Fruitly Ltd. to include in the letter of representation.

(iii) Highlight TWO reasons for the management to be unwilling to sign a letter of representation.

​​You are a senior auditor in the audit of Baisiko Ltd., a company which manufactures bicycles. The company has numerous suppliers due to the fact that its products are manufactured from a wide range of materials and components. During discussion with the audit team about further audit procedures to be adopted, one of the trainees raised the question of whether it would be appropriate to circularise creditors to confirm their balances. Although your firm had not carried this procedure in prior years, you decide to perform a positive circularisation on creditors listed as at 31 December 2022.

Required:
Evaluate FIVE creditors that you could include in the sample of creditors to be positively circularised.

​​Mahindi Safi Millers operates a milling business that procures maize supplies from local farmers as a community empowerment program. The company also recruits permanent and casual labour from the community who are paid salaries and wages respectively. You have been requested to undertake a verification of salaries and wages paid in the month of November 2022.

Required:
Propose NINE procedures that you would review to verify the salaries and wages before proceeding to verify payments made on account of salaries and wages.

​​Smart Elec Ltd., one of your new clients, deals in locally manufactured and imported electric appliances targeting middle level income customers. Your Audit Manager has assigned you the task of verification of inventory which includes attending a stock take at your client’s premises. 

​​International Standards on Auditing 500, "Audit Evidence", permits an auditor to place reliance on information produced by a management's expert in the course of audit work.

Required:
Propose six factors that the auditor might consider before relying on the work of a management's expert.

​​Analyse three categories of financial statements assertions that may be used by the auditor to test the financial statements of a company

​​Describe six substantive tests that you would undertake over accounts receivable.

​​State the key financial statement assertions applicable to tangible non-current assets.

​​Discuss five factors which an auditor should consider when assessing the quality of audit evidence

​​You are the audit manager of Bev and Associates. You are currently briefing your team on the approach to adopt in gathering evidence for the audit of inventory. During the briefing, you inform the team that the auditor is required to design audit procedures to obtain sufficient and appropriate evidence from the sample items. You also explain to the team that the auditor could rely on the work of internal auditors.

Required:
In accordance with International Standard on Auditing (ISA) 610, Using the Work of Internal Auditors, describe five factors Bev and Associates should consider when placing reliance on the work of internal auditors.

​ (i).​ ​​Distinguish between a "positive confirmation" and a "negative confirmation".

International Standard on Auditing (ISA) 230 - Audit Documentation, provides guidance to auditors in respect of audit working papers. 

​​Distinguish between 'tests of control" and "substantive tests",

​Any work delegated to audit assistants should be directed, supervised and reviewed in a manner which provides reasonable assurance that such work is performed competently. 

​​Describe five audit assertions you would test in the conduct of an audit of office furniture and equipment.

​The completeness assertion is always the most difficult for the auditor to assess, particularly in relation to provisions and contingent liabilities.​

​​The financial reporting year of Kipengo Ltd., ends on 31 October. The financial statements of the company for the year ended 31 October 2019 are due to be approved on 15 December 2019. You were appointed to carry out the audit assignment and arising from your audit work, the following events have come to your attention:

1. On 5 November 2019, Kipengo Ltd. sold inventory for a price which was less than its cost price. (The inventory had been recorded in the financial statements as closing inventory).
2. Kipengo Ltd. issued new shares on 7 November 2019.
3. A fire in the warehouse destroyed all of Kipengo Ltd.'s inventory on 10 November 2019.
4. A major customer who owed Kipengo Ltd. Sh.3,000,000 as at 31 October 2019 was declared bankrupt on 12 November 2019.
5. On 23 November 2019, Kipengo Ltd. Purchased an asset worth Sh.1,600,000.

Required:

Review each of the events above. Advise, with reasons, if the event is an adjusting or non-adjusting event and the action to be taken (if any) on Kipengo Ltd.'s financial statements.

​​In the context of International Standard on Auditing (ISA) 620 relating to reliance on the work of an expert:

(i) Describe two situations where an auditor might need to rely on the work of an expert.

(ii) Explain three factors taken into consideration by an auditor when placing reliance on the work of an expert.

​​ Describe two types of errors that could arise from sampling risk.

​​With reference to International Standard on Auditing (ISA) 520 - "Analytical Procedures", explain four different types of analytical procedures available to the auditor.

​​International Standard on Auditing (ISA) 510, "Initial Audit Engagements - Opening Balances" requires auditors to undertake additionalaudit procedures for confirming opening balances for new audit engagements. In addition, the ISA gives guidance on audit report implications if auditors are unable to confirm opening balances or if they contain misstatements. 

​​Some companies have a substantial portion of their total assets comprising investments in stocks and shares of other entities.

Required:

Outline three audit objectives sought by an auditor when examining a client's investments in stocks and shares. 

​​Auditors should obtain written confirmation of representations from management on matters material to the financial statements.

Required:

(i) Explain four reasons why an auditor should discuss the contents of the letter of representation with the directors of a client at an early stage in the audit.

(ii) Analyse three responsibilities of an auditor on receipt of written representations from management.

​​You have been appointed the lead auditor of CBC Ltd. and you have held a meeting with management where certain representations were orally given and others implied.

Required:

With reference to International Standard on Auditing (ISA) 580 "Written Representations", discuss the circumstances that might lead you to require management to confirm in writing the oral and implied representations.

​​Highlight the substantive procedures that might be performed by an auditor to verify the payroll.

​​Citing a relevant example in each case, distinguish between "adjusting events" and "non-adjusting events".

​​Kisomo Kizuri is a charity organisation that raises funds for educational projects. Charities in the country from which Kisomo Kizuri operates have recently become subject to new audit and accounting regulations.

Your firm has been appointed as Kisomo Kizuri's new auditors.

Required:

Analyse audit tests you might carry out on the income and expenditure from fund raising events.

​​International Standard on Auditing (ISA) 620 "Using the work of an expert" contains guidance to an auditor on using the work of an expert to provide knowledge relevant to the audit which the audit firm does not possess.

Evaluate four procedures that an audit firm might apply before relying on such an expert.

​​ Highlight four substantive procedures you would perform on the year end trade payables.

​​Your firm has been appointed as the auditor of Fanaka Limited for the year ended 31 December 2016.

Explain why each of the following matters which you have noted during the audit should or should not be included in the letter to the management and those charged with governance:

(i) The company upgraded the accounting system which upon testing you noted that the system did not carry over all the balances accurately. The differences in credit and debit balances considered separately were materíal to the financial statements but when offset against each other, they were immaterial.

(ii) The new accounting system had a functionality that allows online approval of transactions by the various signatories but it had not been activated. The signatories continued to approve transactions manually and all the transactions sampled were duly approved.

(iii) The company supplying stationery to Fanaka Limited was owned by the wife of the procurement manager. However, you confirmed that the appropriate procurement procedures were followed.

(iv) The bank reconciliations were required to be signed by the preparer (Financial Accountant) and approved by the finance manager. You noted that 6 out of the 12 bank reconciliation statements were not signed by the Financial Accountant but had been approved by the Finance Manager. However. you confirmed that the reconciliation statements were accurate.

(v) The company was involved in a restructuring exercise that resulted in the discharge of 25% of the staff. You got to learn that the affected staff had filed a suit in court to challenge their dismissal but the matter had not been heard. However, the management was keen to have the suit heard in order for them to present the issue for reporting in the next financial year when it would be possible to establish if there was a reputable contingent liability. 

​​Explain the responsibility of an auditor with regard to events occurring between the date the financial statements are signed and the annual general meeting.

​​Describe four audit procedures necessary to aid in obtaining evidence relating to subsequent events.

​​Explain four factors which might influence an auditor while assessing the reliability of evidence gathered during an audit.

​​Summarise four substantive procedures that you would perform in respect of bank overdraft.

​​You have been appointed the auditor of Fadhili Ltd. and as part of the audit, you have requested management to provide you with a letter of representation.

Required:

Discuss three matters you would expect to find in the letter in relation to management's responsibilities.

​​In the context of International Standards on Auditing (ISA) 560 - "Subsequent Events":

(i) Define the term "subsequent event".

(ii) Discuss two objectives of the auditor in relation to subsequent events.

​​ (i) Define the term "sampling risk". 

​​During the audit of Faida Ltd., you noticed the following:

1. There were material deposits in the bank just before the year end and subsequent withdrawals thereafter.
2. Many debtors disputed the amount alleged by management after circularisation. There were also inconsistencies between the dates when the debtors made their payments and the dates when the records were updated, noting that all the payments were in cash.

Required:

(i) Explain the impact of each of the two aspects above.

(ii) Examine four audit procedures that could help you in arriving at an audit opinion in each of the two aspects above. 

​​Discuss five factors that could influence the extent to which an auditor might use analytical review to collect audit evidence.

​​You are the auditor responsible for the audit of Yummy Foods Ltd., a company that operates a chain of fast food outlets. It has come to your attention that a customer has sued the company claiming an amount often million shillings for food poisoning. The amount is material, but management believes there is good defence against the claim and thus no provision or disclosure has been made in the books.

Required:

(i) Evaluate five items of evidence that might enable you form a conclusion on the likelihood of the claim being successful.

(ii) Describe how the matter could be reported in the financial statements if your conclusion is that there is a possibility, but not a probability that the claim would be successful.

​​Explain four assertions relevant to accounts payable at year end.