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Legal and professional framework

Unit: Audit & Assurance

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Practice CPA Audit & Assurance Legal and professional framework questions with detailed answers and explanations.

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April 2026

 1 Questions
Question 1
​​Bora Ltd. is a public limited company. Following the resignation of its previous external auditor, the company is in the process of appointing a new auditor. The board of directors has shortlisted three audit firms and intends to recommend one of them to the shareholders for appointment at the forthcoming Annual General Meeting. 
 
During preliminary discussions with one of the shortlisted firms, management requested the firm to assist in designing Bora Ltd.’s new internal control system over revenue. The proposed auditor also indicated that, if appointed, it would issue an engagement letter in line with the requirements of International Standards on Auditing (ISA). 
 
Required: 
(a) As the advisor to the board of Bora Ltd., outline SIX matters that should be considered before one of the shortlisted audit firms is recommended to shareholders for appointment as the company’s external auditor at the Annual General Meeting.  
 
(b) In relation to management’s request that the proposed auditor assist in designing Bora Ltd.’s new internal control system over revenue, explain THREE ethical threats that may arise and, in each case, recommend ONE appropriate safeguard. 
 
(c) Assuming that the shareholders appoint the recommended audit firm as Bora Ltd.’s external auditor, evaluate FOUR elements that should be included in the engagement letter to be issued to Bora Ltd. in accordance with ISA 210. 


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December 2025

 1 Questions
Question 1b
​​Your firm, Zawadi and Associates, has been the auditor of Magari Ltd.,which has been dealing in motor vehicle spare parts for the past 10 years. Due to the long association, a partner in your audit firm has been requested to sit in Magari Ltd.’s board meeting to provide advisory services. The company is one of your key clients and for the past five years approximately 30% of your firm’s gross revenue has been obtained from Magari Ltd. from assurance and taxation services. Last year, Magari Ltd. poached two audit managers from your firm to support the internal audit and finance departments. 

 In September 2025, Magari Ltd. issued shares during an Initial Public Offer (IPO). Zawadi and Associates was involved in promoting the shares of the company. 

Required: 
Evaluate FIVE ethical threats from the engagement between Zawadi and Associates and Magari Ltd.


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August 2025

 1 Questions
Question 4a
​​Taraji and Wema Associates is a registered audit firm and currently the auditor of Shamba Farm Ltd., an agricultural company. During the course of the audit, the managing partner, Alice Wema, attended Shamba Farm Ltd.’s board meetings and assisted in drafting parts of the company’s financial statements. A few months after the audit, Shamba Farm Ltd. was declared insolvent due to undisclosed financial liabilities. The shareholders are suing Taraji and Wema Associates for negligence, arguing that the auditors failed in their professional responsibilities. 

 Required: 

 (i) Explain THREE ethical threats that Taraji and Wema Associates could have faced in their engagement with Shamba Farm Ltd. 

 (ii) Analyse THREE ways in which Taraji and Wema Associates could be held liable for professional negligence in the context of this case.


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April 2025

 1 Questions
Question 2
​ ​ ​You are the audit manager in KK and Associates an audit firm that specialises in the audit of retailers. The firm currently audits Mida Food Co. (MF) a food retailer. MF’s main competitor, Rupa Foods Ltd. (RFL) has approached KK and Associates audit firm to act as its auditors. MF is concerned that if KK and Associates audits both companies, then confidential information could pass to RFL. 

Ann Muli has been the audit engagement partner for MF for the last eight years. Her daughter Rachel Njoki has just accepted a job offer from MF as a manager. Rachel’s employment contract states that if a bonus is to be paid it will be awarded as shares in MF rather than cash. 

MF has also offered KK and Associates a 5% bonus on top of the audit fee if this year’s audit can be completed three weeks earlier than last year. This is to reduce the demands on the finance director’s time as he is busy working on other projects. 

Required: 

(a) Describe safeguards that KK and Associates could apply to manage the conflict of interest that might arise if the firm accepts the appointment by RFL as their external auditors. 

(b) Evaluate potential risks to independence in respect of the audit of MF and in each case state the type of threat arising from the risk. 

(c) You are the audit senior in charge of the audit of Deni Ltd. Your audit manager has informed you that during the year, a fraud occurred in the wages department of Deni Ltd. A payroll clerk set up fictitious employee accounts and the wages were paid into the clerk's own bank account. This clerk has subsequently left the company, but the audit manager is concerned that additional fraud could have taken place in the wages department. 

   Required: 
   Describe procedures which you could undertake during the audit of the wages department as a result of the audit manager’s assessment of the increased risk of fraud.


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December 2024

 1 Questions
Question 2b
​​You are an audit manager at Miheso and Mali Associates, an audit firm. You are planning the audit of Mitambo Ltd.,a company that manufactures and distributes smart phones, laptops and their accessories. Mitambo Ltd. has been your audit client for the past 5 years. During the planning of the audit, the following information has come to your attention:

  • Employees of Mitambo Ltd. purchase goods from the company at discounted prices. Members of staff at Miheso and Mali Associates have in the previous years been offered the same level of discount as the employees of Mitambo Ltd.
  • During the year ended 30 September 2024, the finance director was hospitalised and an audit senior from Miheso and Mali Associates was seconded to the client for four months.
  • From review of the correspondence files, you note that the chief accountant of Mitambo Ltd. and one of the partners at Miheso and Mali Associates have known each other for many years. You discover that the chief accountant was very instrumental in the appointment of your audit firm.

Required:

(i) Identify ethical threats which might affect the independence of Miheso and Mali Associates in the audit of Mitambo Ltd. 

(ii) For each ethical threat identified in (b) (i) above, recommend how the threat can be mitigated. 


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April 2024

 1 Questions
Question 2a
​​Joe and Kim Associates, an audit firm, has been the auditor of Pikcha Ltd. for the past five years. The management of Pikcha Ltd. have been searching for a company to offer them tax consultancy services. They recently approached Joe and Kim Associates for these services. 

 Required: 

 (i) Enumerate FOUR types of tax consultancy services that Joe and Kim Associates might be able to offer Pikcha Ltd.

(ii) Discuss THREE possible threats to independence that Joe and Kim Associates might be exposed to by offering tax services to Pikcha Ltd.


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December 2023

 3 Questions
Question 5c
​​Analyse THREE strategies that an auditor could use to reduce exposure to professional liabilities.


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Question 2b
​​Describe FIVE threats to independence and objectivity as identified in the professional code of ethics for auditors.


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Question 1a
​​Describe THREE roles played by professional bodies in the regulation of auditors.


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August 2023

 1 Questions
Question 1c
​ ​​Your firm has been auditing Arial Bank which is listed in the securities exchange. As a policy, you are required to evaluate the independence of the firm and all the team members involved in the audit engagement. The audit team is assessing its independence in relation to Arial Bank’s audit. 

 Required: 

 Discuss FIVE factors that might compromise independence of the team members involved in this audit.


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April 2023

 1 Questions
Question 4b
​​Joyce Jamila runs an audit firm that recently completed the audit of SofaSeti Ltd., a manufacturer of exclusive home furniture. The audit fee amounted to Sh. 4,800,000. Having recently purchased a new house, Joyce proposed the following to SofaSeti Ltd. as a mode of settlement:

1. Instead of invoicing SofaSeti Ltd. a fee of Sh. 4,800,000, she would invoice the company an amount of Sh.2,800,000 for the audit fees.

2. SofaSeti Ltd. would then supply Joyce Jamila with free furniture with a cost value of Sh.2,000,000 for her new house.

3. SofaSeti Ltd. would not raise a sale in the company’s accounting records and would write off the amount of Sh.2,000,000 off as part of the allowance for obsolete inventory.

Required:
Discuss FIVE issues in terms of the code of professional conduct applicable in the situation above.


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December 2022

 1 Questions
Question 3b
​​Haki Yangu is an ordinary shareholder in Mizani Ltd. He has instituted a criminal liability case against the auditors of Mizani Ltd. as a result of his reliance on the information presented in the company’s audited financial statements.

Required:

(i) Highlight FOUR actions by an auditor that could make him criminally liable under the Companies Act in your jurisdiction.


(ii) Describe THREE circumstances that Haki Yangu is required to prove against the auditors for a successful criminal liability case under the Companies Act in your jurisdiction.


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August 2022

 1 Questions
Question 2a
​​Describe four strategies that an auditor may deploy to reduce exposure to professional liabilities.


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April 2022

 1 Questions
Question 4c
​​Highlight five threats to an external auditor's independence


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January 2022

 2 Questions
Question 1c
​​Describe six activities that an audit firm should perform prior to accepting a new audit engagement


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Question 2b
​​ Explain the following terms:

(i) Peer review.

(11) Hot review.


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December 2021

 2 Questions
Question 3a
​​According to International Standard on Auditing (ISA) 220. "Quality Control for an Audit of Financial Statements" the auditor should consider certain factors before accepting a new engagement or continuing an existing engagement.
With reference to the above standard, discuss three such factors.


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Question 2a
​​International Standards on Auditing (ISA) 210 -Agreeing the terms of Audit engagements" requires that the auditor und the entity should agree on the terms of engagement in an audit engagement letter or other suitable form of contract.

Required:
(i) Explain two objectives of an engagement letter.

(ii) Highlight eight contents of an audit engagement letter.


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September 2021

 1 Questions
Question 5
​​The key element of the external audit and internal audit is the independence of the individual or the firm holding the appointment or in the case of internal audit, the status of the internal audit department in the organisation.

However, if the auditor is to carry out his function independently, he must be granted access to all the information he requires.

Required:
(a) Explain two reasons why the internal and external auditors need to be granted access to all information required.

(b) Discuss whether the right of access granted to internal and external auditors creates any obligations for the auditor.

(c) Evaluate seven circumstances which may give rise to auditor's legal liability.


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May 2021

 1 Questions
Question 2a
​​You have been invited by the accountancy professional body in your country as a guest speaker during their annual seminar. Your topic of presentation is "Professional judgement and professional scepticism in the conduct of external audits".

Required:
(i) Distinguish between "professional judgement" and "professional scepticism".

(ii) Analyse four decision areas whereby auditors should exercise professional judgement in the conduct of an audit.


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November 2020

 1 Questions
Question 4b
​​Discuss five mechanisms that the management of an audit firm could use to ensure compliance with the professional code of ethics by members of staff.


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November 2019

 1 Questions
Question 5b
​​Kaka Kimenju & Co. is an international audit firm with a number of clients listed on the securities exchange. Recently, the firm held a staff training session on quality control. During the meeting, the members of staff were invited to raise matters from their past experiences relating to the ethical code on independence. Some of the matters raised are outlined below: 

  1. Shortly before commencing the final audit of AKZ Ltd., a listed company, a junior staff member on the audit team inherited a substantial number of shares in that company. No action was taken because, although representing a large investment for the staff member concerned, the number of shares were totally immaterial with respect to the company. Moreover, the partner knew that when the company's results would be announced, the share price would rise and he did not think it was fair to require the staff member to sell them before hand. 
  2. The management accountant of ABC Ltd., a listed client, had an accident and was away from work for three months. At the time of the accident, the audit senior was winding up the prior year's audit. Given his familiarity with the company's management accounting system, it was agreed that he would take over as the management accountant for the three months. 
  3. Kaka Kimenju & Co. warned its client, MKN Ltd., that its computer system lacked essential controls. Subsequently, MKN Ltd., decided to install a totally new system and Kaka Kimenju and Co.'s management consultancy department was appointed to design the new system. 

Required: 
Evaluate whether Kaka Kimenju & Co. had complied with the ethical code on independence or had acted unprofessionally in any other way with respect to each of the above scenarios.


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May 2019

 2 Questions
Question 2d
​​Outline four safeguards that an audit firm could implement to address potential conflicts of interest when auditing two competing clients.


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Question 2a
​​Describe three responsibilities of an auditor in the audit of general purpose financial statements.


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November 2018

 3 Questions
Question 1a
​​Analyse two types of threats that might arise from an audit firm accepting to undertake non-audit related services to its client.


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Question 1b
​​In the context of the Companies Act, outline four statutory rights of an auditor.


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Question 4c
​​ Explain three ethical threats which might affect the independence of audit practitioners and for each threat, explain how it might be reduced to an acceptable level.


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May 2018

 1 Questions
Question 5c
​​Discuss four reasons why an auditor might decide not to seek for re-election.


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November 2017

 1 Questions
Question 4b
​​Discuss the importance of the following provisions of professional ethics:

(i) Audit fees.

(ii) Conflict of interest.

(iii) Due care and skilI.


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May 2017

 1 Questions
Question 3b
​​Your audit firm was recently appointed the auditor of Baraka Ltd. The company has a subsidiary based in Mombasa and its auditor had retired the previous year. 

Required: 
(i) Enumerate six factors that would influence you in determining whether or not to send a separate engagement letter to the subsidiary. 

(ii) If the audit of Baraka Ltd. was a recurring audit, suggest six factors that would make it appropriate for you to send a new engagement letter.


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November 2016

 1 Questions
Question 1a
​​ In the context of International Standards of Auditing (ISA) 210 "Agreeing the Terms of Audit Engagements", discuss six steps the auditor should undertake to establish whether the pre-conditions for an audit were present. 


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Pilot September 2015

 2 Questions
Question 4b
​​ Discuss the legal responsibilities of an auditor to shareholders and third parties during the course of their normal professional engagement and the mitigation measures that auditors may institute.


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Question 3c
​​ Explain the term "International Standards on Auditing".


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