Planning and Risk Assessment

​​Your firm has been engaged in auditing micro small and medium entities (MSMEs) for the last five years. In a recent development, your firm has been appointed to conduct an audit of Maua Ltd., a large public listed company. This is the first assignment of such magnitude. You are required to undertake an interim audit and a final audit. 

​​You are a trainee auditor working on the audit of Urembo Ltd., a medium-sized retail company that sells women’s clothes and accessories. During the planning stage of the audit, your audit manager has emphasised the importance of fully understanding the client’s business environment and internal controls. 

​​Describe SIX stages involved in the development of an audit strategy.

​​Propose FOUR matters you would consider when establishing the overall audit strategy for an upcoming external audit.

​​Auditors obtain knowledge about the audit client through the planning process, which also ensures an effective control and review of audit work. 

​​You are the audit manager at Jirani and Associates, Certified Public Accountants. Your firm has been appointed to audit Madawa Ltd., a company that deals with manufacture and distribution of pharmaceutical equipment, for the year ended 31 December 2023. The company has been the main supplier of pharmaceutical equipment in the region. During the last one year, a competitor who is a low-cost producer has emerged and has taken up most of the customers of Madawa Ltd. Pona Ltd., who is the main supplier of raw materials to Madawa Ltd., has been declared bankrupt by a court of law. Due to the stiff competition the company has been facing, the directors have issued a profit warning to the shareholders. During the year ended 31 December 2023, three top level managers resigned. The company has since, not managed to replace them due to the specialist nature of their roles. It is anticipated that a new manufacturing tax of 10% per annum will take effect from 1 July 2024. 

​​You are the partner responsible for the audit of Jengo Traders Ltd. During your visit in September 2023 to plan for the interim audit for the year, one of the directors expressed concern that an interim audit so close to year end is of little value to the company and the person benefiting is the audit firm by charging audit fees for such an “unnecessary activity”. 

​​During the audit of Lami Ltd, Daudi Muli, one of the audit partners in Muli and Associates held a meeting with the audit team after the risk assessment procedures had been completed. The meeting was held to discuss the susceptibility of the financial statements to material misstatements. 

​​Jamila and Juma Associates have been appointed as the incoming auditors for Kibuyu Kirefu Ltd., a company that manufactures and sells various plastic items in East Africa. The client is the largest the firm has ever engaged in offering their audit services. Jamila and Juma Associates are required to conduct the interim audit and the final audit for the client’s financial internal control system. 

​ ​​Your new client Haraka Upesi Ltd. assembles and sells tuk tuks in the local market. The average selling price per unit in the year ended June 2023 was Sh.450,000 each. The company sold 500 units during the year thus generating an equivalent number of sales invoices. Sales invoices were completed manually with the director signing all invoices to confirm the sales value is correct. You are the Audit Manager of the audit exercise working together with an Audit Senior and Audit Junior; as part of the audit team. 

​​In the recent past, many market regulators and organisations have adopted the risk-based audit model. 

​​In recent years, there has been a substantial increase in cybercrime occasioned by the reliance placed on technology by business entities. As a result, the effect of cybercrime on organisations is becoming highly significant in relation to financial statement audits. 

​​You have been provided with the following independent scenarios:

1. H Ltd. is a fast-growing company that operates in the animal feeds industry. It is quoted on the Securities Exchange but its founder, Kazi Tele and his family still control about 60% of the company’s voting shares. Kazi Tele personally makes all the major decisions and the Board of Directors just “rubber stamps” them. There is a nomination committee of the Board but this notwithstanding, a majority of the Board members of H Ltd. are either members of Kazi Tele’s extended family or have some connection to him.
2. Tech Up Ltd. is a private company engaged in the development and manufacture of computer accessories. The industry in which the company operates is very competitive and subject to rapid changes in technology. The company ranks third or fourth in the market in which it operates and its products are rated slightly behind the market leaders in terms of performance.

Required:

(i) For each of the scenarios in (1) and (2) above, evaluate how the risk of material misstatement should be assessed.

(ii) Explain what effect the evaluation in (i) above will have on the detection risk.

​​Your audit team is planning to adopt statistical sampling to analyse big data from a client operating in the banking sector. 

​​Your firm has been appointed as incoming auditors of Taratibu Motors Ltd. Part of the agreement is a proposal of undertaking of continuous audits on the company’s financial statements. 

​​Your audit team is in the process of preparing the annual audit plan. You have been allocated the task of undertaking risk assessment. Mike Ogola, a newly recruited audit trainee, argues that there is no need for a risk assessment or even the whole audit planning process. He is convinced that the two exercises add absolutely no value to the output of the audit assignment. 

​​Your audit firm was recently appointed the auditor of Jisifu Ltd. The company has a subsidiary based in western part of the country and its auditors had retired the previous year.

Required:
Assess four factors that would influence you in determining whether or not to send a separate engagement letter to the subsidiary.

​ ​​You are the manager responsible for the audit of Jamii Retail Ltd., a public quoted company, which has a number of stores that sell household products including; furniture, electrical equipment, iron sheets, cement, vehicle spare parts. cooking equipment and carpets to the general public. Jamii Retail Ltd. is highly respected by investors across East Africa.

The company has an average annual turnover of Sh.20 billion. In the previous year's audit, there have been problems, some of which were highlighted in recent media coverage. The problems related to:

1. Pilferage of stock by employees and customers.

2. Slow moving and damaged stock which was worth less than cost.

3. Incomplete recording of sales when the customer pays in cash (these represent 65% of all sales).

The company has a small internal audit department. The internal audit staff occassionally visit branches and perform appropriate audit work at the head office.

Required:
(a). Describe the work you would carry out and the matters you would consider in planning the audit prior to the commencement of the detailed audit work, including consideration of the timetable for the audit.

​​ISA 320 Audit Materiality" states that "The auditor should consider materiality and its relationship with audit risk when conducting an audit".

Required:
Discuss the relationship between materiality and audit risk both when planning for an audit and when evaluating audit evidence.

​​In line with ISA 220 "Quality Control for an Audit of Financial Statements", describe four responsibilities of an audit supervisor in relation to supervising and reviewing the audit assistant's work during an audit

​​List the audit procedures which auditors should carry out when planning a company’s physical inventory count.

​​International Standard on Auditing (ISA) 500 "Audit Evidence" requires auditors to obtain sufficient, appropriate audit evidence.
Discuss five matters that auditors should consider with regard to the reliability of audit evidence.

​​Planning for a specific audit includes strategic and operational aspects.
Distinguish between "strategic" and "operational" aspects of audit planning.

​​The auditor should consider the risk that the going concern assumption may no longer be appropriate.

​​You are the auditor of Sharoh Ltd. which was incorporated in December 2018. The company's main business is in real estate. Over the last two years, the company has recorded increased profits as a result of the Property Market-boom in the country. Due to the increased number of transactions, you as the auditor feel that it is prudent to have an interim audit. The management are however hesitant about your proposal.

Required:
Explain three reasons to the management of Sharoh Ltd. why an interim audit is necessary and how it could be of benefit to the client.

​​E-commerce is the buying and selling of goods online. Propose five elements of inherent risks associated with operating an E-Commerce platform.

​​(i) Define the term "going concern" as per International Standard on Auditing (ISA) 570, "Going Concern".

(ii) Propose four responsibilities of auditors with respect to going concern.

​​Mali Company Associates (CPA) have been the auditors of Karibu Limited for the past three years. The company is in the business of electricity generation. At the beginning of the current financial year ended 31 December 2020, the company decided to diversify its operations to natural gas supply. The auditors were informed about this decision by the company at the time of planning for the interim audit of the current financial year. The directors of the company have appointed Mali Company Associates as the auditors of the new business line.

Examine five actions that Mali Company Associates should take in respect of the new assignment.

​​Evaluate four methods of ascertaining a client's accounting and control system.

​​Antony Wanga has joined your audit team as an intern. He has not been engaged in external auditing processes before. Summarise eight critical stages of an external audit to Antony.

An overall audit strategy guides the auditor in developing an audit plan. 

​​Describe the process that an auditing firm should undertake to assess whether pre-conditions for an audit are present when accepting an audit assignment.

​​Identify three main areas, other than audit risk, which should be included within the audit strategy document an audit of a client and for each area, provide a relevant example.

​​ Highlight six reasons why an auditor might need to understand the entity and its environment before undertaking an audit assignment.

​​Discuss four factors that might influence the extent of substantive tests carried out during an audit.

​​Outline two benefits ofthe auditor communicating with those charged with governance.

You have been appointed the lead auditor in charge of the audit of Sky Computer Limited. The financial year ended on 31 January 2016 and the audit was concluded on 1 March 2016. The audit report was signed on 15 May 2016 and the financial statements issued on 20 June 2016. The following material events occurred between the balance sheet date and 30 June 2016: 

​​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 applicable financial reporting framework. 

​​In the context of International Standard on Auditing (ISA) 260 -"Communicating with those charged with governance". describe three matters that the auditor should communicate to those charged with governance in relation to auditor independence.

​​Describe the impact of each of the following situations on the sample sıze:

(i) An increase in the extent to which the auditor's risk assessment takes into account relevant controls.

(ii) An increase in the use of other substantive procedures directed at the same assertion.

(iii) An increase in the auditor's assessment of the risk of material misstatement.

​​Explain four purposes of an audit program.

​​Explain four ways in which the auditor might minimise risk during a particular audit.

​​In the context of International Standard on Auditing (ISA) 220-Quality Control for an Audit of Financial Statements.discuss the quality control procedures the engagement partner might consider in each of the following:

(i) Client acceptance.

(ii) Engagement team.

(iii) Direction. 

​​ Your audit firm was recently appointed the auditor of ABC Ltd. for the first time. ABC Ltd. requires that the audit be concluded within two months after the end of the financial year.

​ ​ ​ ​​​​​Fitness Ltd. (fitness) is a client of your firm and runs both fitness and leisure centres all over your country. You are the audit senior on assignment and the audit field work for the year ended 31December 2015 has just been completed. The following figures have been extracted from the draft financial statements:

​​Describe the steps an audit firm should perform prior to accepting a new audit engagement.

​​(i) A Junior colleague working at your firm is uncertain as to why on every audit all of the work carried out by the audit team is regularly reviewed by the audit manager.

Required:

Explain the purpose of the review carried out by the audit manager.

(ii) List examples of subsequent events that may provide confirming evidence when auditing the financial statements of a large manufacturing company.

(iii) State the auditor's responsibility for reporting on the going concern assumptions of a company.

​​You are an audit manager in Ujima & Co. One of the your audit clients, Shangilia Africa Ltd. is a specialist supplier of African literature books with over 120,000 customers. The company owns one large warehouse which holds about 1 million books of up to 80,000 different titles. Customers place orders for books either over the internet. or by mail order. Books are dispatched on the day of receipt ofthe order.

Returns are allowed up to 30 days from the dispatch date provided the books look neat and unread.

Due to high inventory turnover, Shangilia Africa Ltd. maintains a perpetual inventory system using standard purchased software. Ujima Co. has audited the system for the last five years and has found no error within the software.

Continuous inventory checking is carried out by Shangilia Africa Ltd.'s internal audit department.

You are currently reviewing the continuous inventory checking system with an audit junior. The audit junior needs experience in auditing continuous inventory checking systems and some basic knowledge on the code of ethics for professional accountants.

Required:

(a) Explain four advantages of usingaperpetual inventory system. 

(b) Summarise the audit procedures you would perform to confirm the accuracy of the continuous inventory checking at Shangilia Africa Ltd. Justify each of the procedures. 

(c) Explain five fundamental principles set out in the Code of Ethics for professional accountants.

(d) During preliminary audit planning you note that the engagement letter has been returned unsigned by the directors of Shangilia Africa Ltd. When asked to explain their action, the directors indicate that they cannot allow you access to information on the company's new website development as this contains various trade secrets. You would not, therefore, be able to perform audit procedures on the research and development expenditure incurred on the website and included in non-current assets.

Brietly explain four actions you would take as a result of directors not signing the engagement letter.