Professional and ethical considerations

August 2025

2 Questions

Question 2a

You are the audit engagement partner of Integrity and Integrity Associate, a firm of Certified Public Accountants.Your firm has launched an aggressive marketing campaign, which includes online advertisements with the assertive message: “We guarantee your company will pass any audit with us by your side”.

In a separate matter, one of your audit clients, Tangaza Holdings Ltd., a family-owned telecommunications company has offered your audit team all-expenses-paid trips to Dubai as a gesture of appreciation for their work during the audit. However, you are aware that Tangaza Holdings Ltd.’s recent press reports have raised concerns about possible regulatory violations in the company’s mobile money operations.

Required:

(i) Evaluate THREE ethical implications of the firm's advertising campaign, with reference to the International Ethics Standards Board for Accountants (IESBA) Code of Ethics and Institute of Public Accountants of Kenya (ICPAK) guidelines on advertising and publicity.

(ii) Summarise THREE ethical threats arising from the client’s gift offer.

(iii) Recommend THREE appropriate safeguards as a response to the threats identified in (a) (ii) above.

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Question 3c

You are the audit manager in the audit of Fresh Start Ltd. a manufacturing firm, for the year ended 31 March 2025. The final audit for the year is almost complete and your team is reviewing the working papers. The audit senior has raised an issue of a major supplier to the company who fraudulently inflated invoices. This led to a Sh. 200 million overstatement in inventory and payables. Fresh Start Ltd. has sued your audit firm for negligence, breach of contract and statutory liability, arguing:

Contractual duty breached: The auditors failed to detect and report material misstatements despite having an obligation to exercise professional skills and due care (established in contract via the engagement letter).
Negligence: (Tort): Their duty extends to the company (“third-party” in tort) and failure to detect fraud constitutes negligence, causing foreseeable financial loss.
Statutory Liability under Companies Act: Civil Liability: Responsible officers (including auditors) risk damages for misuse of position or breach of trust under Section 206. Criminal Liability: Under Section 46, making a materially false audit statement with intent to deceive attracts up to 7 years’ imprisonment.

Required:

Discuss the potential legal liabilities of the auditors in relation to each of the claims by Fresh Start.

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April 2025

1 Questions

Question 3b

You are the audit manager in John Bosco and Associates, a firm of Certified Public Accountants, responsible for the audit of Cider hospital for the year ended 31 March 2025. You recently visited the audit team, who are currently on site performing the field work, to review the work performed and to discuss their progress. During your visit the audit senior brought forward the following matter for your action.

During the review of medical inventories, which included medicines used in a variety of treatment at the hospital, it was noted that a number of medicines had passed their recommended use by dates. These were recorded on an inventory spreadsheet maintained by the financial controller and were easy to spot because they were highlighted in red. One of the audit team members inspected a sample of the inventories in question and confirmed that their use by date had expired. The audit team requested to look at the spreadsheet again, but they were denied access.

The following day, the finance director confronted the audit team accusing them of extending their investigation ‘beyond their scope of audit’. He also threatened to remove them from the premises if they continued to ask questions which were not relevant to the audit of the hospital’s financial statements. Since then, the audit team was unable to complete their audit of medical inventories. They also noted that the room where the inventories were previously kept had been emptied.

Required:

With reference to the above matter raised by the audit senior, describe:

(i) TWO ethical and professional issues surrounding this matter.

(ii) THREE ways that you could report the non-compliance to the management of Cider hospital.

(iii) The impact of the matter on the financial statements of Cider Hospital.

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December 2024

2 Questions

Question 4a

You are the audit engagement partner in the audit of Somesha Ltd. An audit trainee assigned to you is keen to understand how an audit firm can reduce its exposure to claims of negligence and how the auditor can restrict liability by making a liability limitation agreement with an audit client.

Required:

(i) Discuss THREE negative implications that a liability limitation agreement may have on the auditor or the client.

(ii) Suggest FOUR strategies that an audit firm may employ in order to reduce exposure to litigation claims.

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Question 2a

Tech Solutions Ltd. is a mid-sized technology firm that has recently faced scrutiny due to various financial discrepancies. Cato Emily, the company's Chief Financial Officer (CFO) and a Certified Public Accountant, has been with Tech Solutions for over ten years. During an external audit, several breaches of the fundamental principles that professional accountants are expected to uphold were discovered.

Cato Emily maintained a close personal relationship with the Chief Executive Officer (CEO), Jack Jones, which compromised her objectivity in financial decision-making. She approved multiple transactions that directly benefited Jack Jones, including a lucrative contract awarded to a business owned by Jack’s sibling, without following proper procurement procedures or disclosures.
In a casual conversation with a friend employed at a competing firm, Emily disclosed Tech Solutions Ltd.’s strategic financial plans, including sensitive information about upcoming product launches and financial forecasts. This information ultimately leaked, causing considerable harm to Tech Solutions Ltd.’s competitive advantage.
Under pressure from Jack to enhance the company's financial performance prior to a merger negotiation, Emily directed the accounting team to inflate the revenue figures for the most recent quarter. She also failed to record certain liabilities, making the statement of financial position appear stronger than it actually was.
As Tech Solutions Ltd. sought to enter new, heavily regulated markets, Emily neglected to pursue the necessary training or hire external consultants with knowledge of the new regulatory requirements. Consequently, several regulatory violations occurred, placing the company at risk of fines and legal actions.

Required:

In each of the scenarios above, discuss:

(i) The professional code of ethics violated.

(ii) The ethical issue arising.

(iii) How each of the ethical issues arising may impact the audit.

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August 2024

3 Questions

Question 3b

You are the audit engagement partner in the audit of Alina Ltd. An audit trainee assigned to you is considering ending his internship programme after he learnt that auditors are potentially liable for both criminal and civil offences in the conduct of an audit.

Required:

(i) Citing relevant examples in each case, distinguish between auditors “criminal liability” and “civil liability”.

(ii) Highlight FOUR conditions that the company must prove under criminal liability in order to succeed against the auditor in damages.

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Question 2b

You are the Audit Manager of Maharabu and Maharabu Associates, a firm of Certified Public Accountants, responsible for the audit of Madeni Ltd. You are currently reviewing the working papers of the audit for the year ended 31 December 2023. While reviewing the working papers on the payroll with the audit junior, he mentioned the following:

“A number of new employees were hired during the year, with Sh.1.35 million being paid to them. No documentation is available to show that the board had authorised the hiring of additional members of staff. When I questioned the payroll supervisor, she mentioned that she made the additions. She said that no authorisation was required from the board, because the new employees were hired on a temporary basis. Conversely, when making enquiries about the staffing levels from the management, it was stated that no new employees had been taken on board for the year under review”. Other than the tests of controls planned, no other audit work has been performed.

Required:

(i) Explain the meaning of the term "professional skepticism".

(ii) In relation to the audit of Madeni Ltd.’s payroll, recommend FOUR actions that should be taken by the auditor.

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Question 4a

Auditor independence is part of the foundation of the auditing profession. An independent, reliable and ethically sound audit gives a company credibility and allows the public to trust in the accuracy of the results and the integrity of the accounting profession.

With reference to the Institute of Certified Public Accountants of Kenya (ICPAK) ethical guidelines, justify FIVE reasons why professional independence is considered important to the auditor.

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April 2024

1 Questions

Question 1b

You are an audit manager in Koki and Kioko Associates, a firm of Certified Public Accountants with five offices and 14 partners. 70% of the clients of Koki and Kioko Associates are audit clients and 30% are clients that Koki and Kioko provides with taxation services, accounting services and business advisory services. The firm is exploring ways of expanding business to boost its revenue. The business development manager at Koki and Kioko Associates has come up with the following two proposals to increase brand visibility and attract new clients:

(i)

An advertisement can be placed in two National Newspapers to attract new clients. The draft advertisement given to you reads “Koki and Kioko Associates is the largest and the most professional accountancy and audit services provider in the country. We offer a wide range of services in addition to audit which are guaranteed to improve your business efficiency and save on tax. If you are dissatisfied with your auditor, we can offer a second opinion on the report that has been issued. For all new clients we have an introductory offer of 30% discount when both audit and other services are provided. Our rates are approved by the Institute of Certified Public Accountants of Kenya (ICPAK)”.

(ii)

A new experienced partner in the banking sector has joined Koki and Kioko Associates. The business development manager has proposed that the partner should specialise in offering corporate finance services to clients. Specifically, the partner should advise the clients on how to raise finance through debt and would negotiate with the client’s bank or the finance provider on behalf of the client. The fee charged for this service will depend on the client obtaining finance.

Required:

For each of the proposals given by the business development manager, advise the partners at Koki and Kioko Associates on FIVE potential ethical and professional issues that could arise.

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August 2023

2 Questions

Question 4a

According to the International Federation of Accountants (IFAC):

“Skepticism is not just at the heart of auditing, it is in the heart of most auditors, a fact that is not obvious to outsiders given the various calls for auditors to exercise more skepticism, particularly when the pressures of deadlines and budgets are brought to bear and doing the right thing becomes more of a challenge”.

Other experts have gone further to postulate that professional skepticism has three elements; attributes, mindset and action.

Required:

(i) Explain your understanding of each of the THREE elements of professional skepticism identified above.

(ii) Describe any THREE auditable areas in which professional skepticism requires to be exercised.

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Question 3b

The following is an extract from a leading journal in auditing: “The main responsibility of auditors is to report to the members on whether the financial statements of the company show a ‘true and fair view’ or ‘present fairly’ the financial position. Of course the report should consider whether management have kept proper accounting records and complied with recognised accounting framework. Responsibilities also applies when problems happen”.

In the context of the above statement, describe FIVE practical situations in which auditors may be held liable.

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April 2023

1 Questions

Question 2a

You are responsible for the audit of Spheres Ltd. and are currently reviewing the working papers of the audit for the year ended 31 December 2022. In the working papers dealing with payroll, the audit junior has commented as follows:

“A number of new employees have been added to the company’s payroll during the year, with combined payments of Sh.1.35 million being made to them. There does not appear to be any authorisation for these additions. When I questioned the payroll supervisor who made the additions, he said that no authorisation was needed because the new employees were hired on a temporary basis. Conversely, when making enquiries about the staffing levels from the management, it was stated that no new employees have been taken on this year. Other than the tests of controls planned, no other audit work has been performed”.

Required:

(i) Explain the meaning of the term “professional skepticism”.

(ii) In relation to the audit of Spheres Ltd.’s payroll, recommend further actions that should be taken by the auditor.

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December 2022

3 Questions

Question 1b

(i) Describe THREE circumstances under which a professional auditor may reveal confidential information relating to the client.

(ii) “Independence threats” are likely to affect an auditor’s ability to comply with the fundamental principles of ethics.

Required:

With relevant examples, justify the above statement.

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Question 2b

Analyse FOUR ways in which auditors might reduce the risk of professional liability in their dealings with clients.

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Question 5b

You are the auditor of Saidia Development Trust (SDT), a not-for-profit entity supporting charitable activities. SDT has three major donors one of whom contributes over 80% of the entity’s budget.

The major donor has placed a condition that operating cost must not exceed 10% of the total budget. Funding from each of the donors is designated and restricted to specific projects. In some instances, donor funds have not been disbursed in time making it necessary for SDT to seek for bank overdrafts to continue meeting fixed costs and ongoing projects. The Executive Director has requested you not to mention the loans in the financial statements or management letter as the donors may raise concerns. Furthermore, the overdraft has been fully repaid by period end.

Two employees have sued SDT for wrongful dismissal and claimed Sh.10 million. In order to demonstrate to the courts that SDT does not have money to meet such a claim, Sh.11 million was withdrawn from the entity‘s account and banked in the Executive Director’s personal account. The director is not ready to give you his bank statement as he claims it is personal.

In an effort to reflect that SDT is not overly reliant on the major donor, a material amount has been included as “other income”. This constitutes cash injections by the Executive Director from his own sources. In order to meet the 10% operating cost requirements, actual operating costs are understated materially by crediting them and debiting the director’s loan account. Most expenses are paid by cash even though the SDT’s policy is that amounts beyond Sh.15,000 should be paid by cheque. To achieve this, two petty cash floats are maintained, one by the receptionist which is subject to stringent controls and general cash maintained by the Executive Director where no cash count is ever done and no independent control is exercised.

Required:

Prepare a memorandum to the non-executive directors of SDT detailing issues noted, their implications and how to correct them.

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August 2022

4 Questions

Question 2a

Radar Ltd. is a large private company that organises conferences, meetings and celebrations for other companies. The company was set up ten years ago by S and J who are the majority shareholders. The company employs over 300 staff in its 25 offices.

Your firm, XYZ CPA, where you are the Manager - Business Advisory, has been hired to provide internal audit services to Radar Ltd. In discussing with S, you discover that there is a small audit team headed by W, a recently qualified accountant. Before heading the internal audit, W was a junior finance manager in the company. Members of the internal audit team at Radar Ltd. would be redeployed to the finance department once XYZ CPA starts provision of the internal audit services.

S has briefed you of many instances where management policies were ignored. In addition, J has recently discovered a fraud in one office whereby an accounts manager was authorising payments of invoices received from fictitious suppliers, with the payment being channelled to the accounts manager’s personal bank account.

(i). Evaluate the benefits to Radar Ltd. from outsourcing its internal audit function.

(ii). Explain the potential impact on the external audit of Radar Ltd. if the internal audit function is outsourced

(iii). Recommend procedures that could be used by XYZ CPA to quantify any financial loss suffered by Radar Ltd. due to the above fraud.

(iv). Compare responsibilities of external auditors and of management in relation to the prevention and detection of fraud.

(v). Assess two benefits and one limitation that may arise from setting up an audit committee in Radar Ltd.

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Question 4b

You are the auditor of Zambezi Ltd., a manufacturer of handcrafts. 40% of the sales are exported to a foreign country. You are about to commence the audit of the accounts for the year ended 31 October 2021. Account receivables are included in the statement of financial position at the year end net of Sh.3,000,000 debt provision (5%) at Sh.57 million. In the past audits, there has been a poor response to the trade receivables circularisation and a decision has been taken not to circularise or circulate them this year. In an attempt to reduce the exposure to the foreign currency, Zambezi Ltd. sells 50% of the foreign currency trade receivable forwards.

Required:

(i) Explain the substantive procedures that you would perform as an auditor to verify the accuracy of account receivables.

(ii) Describe the audit tests you would carry out in order to form an opinion on the doubtful debts provision and the action you would take if you concluded that it was materially misstated.

(iii) State what adjustment, if any, you would make to the foreign currency account receivables on the basis that they have all been recorded at the actual exchange rate ruling on the date of sale.

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Question 3a

Annlisa Keya is the financial controller of a leading church organisation in the country. Recently, the chief cashier in the church was suspended for misappropriating cash amounting to Sh.2 million over a period of six months.

The church’s Board of Deacons and the Finance Committee are of the view that though Annlisa Keya was not directly responsible for the loss, she failed by not discovering the fraud in time. They have recommended her suspension and possible dismissal. There are also worries that, because of the high cash volumes transacted in the church, the risk of errors and fraud in cash management is significant.

Annlisa has suggested to the Board of Deacons and Finance Committee to engage an independent auditor to carry out an investigation.

Your audit firm has been invited to a preparatory meeting of the Board of Deacons as the potential auditor for the assignment.

Required:

(i) Highlight the issues you would raise during this meeting regarding the entire investigation process.

(ii) Describe the essential principles that you must observe to conduct an effective investigation.

(iii) Recommend an effective internal control system for cash handled by the church.

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Question 2b

You are in charge of the audit of Sawala Ltd. and are planning the audit of financial statements for the year ended 31 December 2021. Sawala Ltd. has suffered decline in sales and profits in the last two years mainly due to loss of key customers. Many of Sawala Ltd.’s non-current assets are impaired in value and substantial receivables have been written off in the last six months.

Sawala Ltd’s. management have decided to restructure the business by reducing the manufacturing capacity by 75% and investing in new technology to make operations more efficient and widen the variety of components produced. Sawala Ltd. has applied for a bank loan to finance the restructuring. Without the loan, Sawala Ltd. is unlikely to restructure successfully raising doubts on its ability to continue as a going concern.

Your firm has been asked to advise on forecasts and projections that the bank would need to decide on the finance requested. Management has also requested your firm to attend a meeting with the bank during which the forecasts would be discussed.

Required:

Advise on ethical and other implications to guide your firm on the request to provide advice on forecasts and attend the meeting with the bank.

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April 2022

3 Questions

Question 1a

The regulatory body for professional accountants in your country has approached you to draft professional standards of practice in conduct and reporting on attestation engagements. These are engagements in which a professional accountant reports on the reliability of information, usually of a financial nature, presented by one party to another to assist the latter make inferences on the former.

Required:

With reference to International Standards on Auditing (ISAs) and any other acceptable standards of global practice, prepare a proposal paper on the required standards of professional practice.

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Question 3a

The following information relates to Vitenge Supplies Ltd.:

1	At monthly intervals, the purchases ledger clerk of the company, Anna Mbole, lists the ledger balances. She then compares them with the file of suppliers' statements. Those statements that agree with the list of the balances are extracted and placed in the file. Those that do not agree with the listed balances are left in the original file.
2	Anna Mbole then prepares a list of the payments for all the suppliers who have sent the statements follows:

2	(i)	Where the statement agrees with the balance, the statement is attached to the list.
	(ii)	Where the statement disagrees with the balance, Anne Mbole computes a round sum amount (which is slightly less than the balance on the ledger) and enters this amount on the list of the payments. She then leaves the statement in the file.

3	The list of the payments is then passed to Peter Dawa the assistant accountant, who writes out the cheques. The cheques, lists and the statements are then sent to Lucia Kawa, the Finance Director, who signs them after checking against the statements (where these are attached) and the list of balances.
4	The cheques are then passed to the Managing Director, William Sinai, the other signatory, who signs the cheques and sends them back to Peter Dawa, who then posts them to the parties concerned.
5	The auditors of the company have previously made comments regarding the poor quality of the accounting controls.

Required:

(i) Isolate the areas which could have attracted adverse comments from the auditors.

(ii) Design a programme for the substantive tests which would provide reassurance that the cheque payments are not made improperly to creditors.

(iii) Describe the controls to be instituted over the custody and authorisation of the cheque payments.

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Question 2b

You are a newly appointed internal auditor of Zito Ltd., a company that is currently experiencing financial difficulties. As a condition for obtaining bank loans, the company management has agreed to maintain certain liquidity ratios, asset to liquidity ratios and gross profit margins.

The draft financial statements for the current period appear to show that the company has not succeeded in complying with some of the set targets. The profit figures are significantly affected by the calculation of bad debts and depreciation charges. There has beena suggestion to the effect that these could be changed in order to meet the bank's lending conditions.

You are informed that there is a real danger that if the bank withdraws its funding, the company would become insolvent and thus will have to cease trading. The Chief Accountant has asked you to sign certain internal records that have been altered in order to show the bank that the set targets have been met.

Required:

Analyse the above scenario and explain the courses of action that you would take.

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Pilot December 2021

3 Questions

Question 1

You are a manager in XYZ and Co., an international firm of auditors with specific responsibility for the quality of audits. The firm was appointed auditor of Masaku Savings and Credit Cooperative (MSCC) a provider of savings and credit services to its employees located in all parts of the country. You have just visited the audit team at MSCC head office. The audit team comprises of the manager and two audit assistants.

MSCC’s draft accounts for the year ended 31 December 2020 are summarised as follows:

Masaku Savings and Credit Co-operative Society Ltd.
Annual report and financial statements for the year ended 31December 2020
Statistical information as at 31 December:
	2020 "000"	2019 "000"
Membership - Active	65	62
Membership.- Dormant	0	0
	65	62
	Sh.“000”	Sh.“000”
Financial
Total assets	11,283,668	10,910,696
Members' deposits	10,301,544	9,528,044
Loans to members	10,692,984	9,540,914
Share capital	116,000	111,000
Total revenue	393,713	843,070
Total interest income	382,113	827,970
Total expenses	116,773	139,674
Current assets	11,279,009	10,904,040
Current liabilities	354,256	758,884
Working capital	10,924,753	10,145,156
Capital employed	10,929,412	10,151,812
Interest rate on members' deposits	267,840	400

Employees of the Sacco	521	400
Key ratios
Liquidity ratio	31.84	14.37
Return on capital employed	(2)%	12%
Interest rate on members' deposits	2.6%	7.0%
Dividend rate on members share capital	1%	7%

During your visit, a review of the audit working papers revealed the following:

One audit trainee is concerned with the ratios presented and has sought the manager’s guidance with regards to the implication.
On the audit planning checklist, the audit manager has crossed through the analytical procedures section and written ‘not applicable – new client’. The audit planning checklist has not been signed off as having been reviewed. The audit manager last visited MSCC’s office when the final audit commenced three weeks ago.
The audit manager has since completed the audit of total assets. The Audit manager spends most of his time working from the firm’s office and is currently allocated to seven other assignments as well as MSCC’s audit.
As at 30 June 2020, trade receivables amounted to Sh.11.3 billion (2019 – Sh.10.2 billion). One of the trainees has just finished sending out first requests for direct confirmation of customers’ balances as at the end of the reporting period.
The audit trainee is concerned with the growth in loan to members and the response provided for by management is not satisfactory.

Required:

Identify and comment on the implications of these findings for XYZ and Co. quality control policies and procedures.

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Question 3

You are responsible for the audit of Mariba and Co. Club and have found some potential causes of concern that could indicate fraudulent activity or financial misconduct within the company.

In particular:

52% of the products on sale by Mariba and Co. Club are supplied through one of the major international companies with a special finance arrangement deal.
Bank reconciliations were last done 11 months ago.
3. There has been a big turnover of staff heading the finance docket with 5 persons having been replaced over the last 6 months.
There are huge unreconciled balances in the accounts receivable and payables running into millions of shillings.
The current head of finance has taken sick leave for the last four weeks due to stress.

Required

(a) Comment on the need for ethical guidance for accountants on money laundering.

(b) Explain the difference between fraud and error and how the issues shown here could be categorised as fraud or error.

(c) Discuss the role of management and the role of the auditor in the prevention and detection of fraud and error.

(d) Describe what steps you would take to further investigate and then report on the matters referred to above.

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Question 5

As the lead auditor in the audit of XYZ Limited, a company with sole distributorship rights of a new brand of vehicles, the following issues are raised at the closing meeting with management:

The company’s working capital has been negative for the last 3 years and financing of company operations has been through an overdraft facility.
The financing bank is reluctant to extend further credit to the company due to its’ inability and long delays in servicing the overdraft which has fallen into huge arrears running into Sh.900 million.
The supplier of the vehicles is only providing vehicles upon receipt of full payment.
Three suppliers have moved to court to have the company put under administration for its’ inability to pay their debt totalling to Sh.800 million.
Senior management staff in finance and human resource have recently quit for reasons they were not willing to provide.
Salaries to staff are in arrears for over five months and staff are demotivated.

Required:

(a) Draft the audit opinion you would give under the circumstances.

(b) What audit risks are evident from the narration above and what further audit procedures would you perform for each of the issues discussed above.

(c) From the issues identified above, draft a management letter clearly highlighting the issue, implication and recommendation to management.

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December 2021

6 Questions

Question 1c

Explore the potential threats to an auditor's independence.

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Question 2a

You are the Audit Manager at Milele Associates, a firm of Certified Public Accountants. You are assigning staff to the final audit of Melrose Ltd., a company listed on the Securities Exchange, for the year ended 30 September 2021. You are aware of the following critical matters:

Melrose Ltd. has recently issued a profit warning. The company has announced that significant synergies expected from the acquisition of Atalanta Ltd., a former competitor company, have not materialised. Moreover, it has emerged that some of Atalanta Ltd.'s assets are significantly impaired.
Your firm's Corporate Finance Department assisted by two audit trainees carried out due diligence on behalf of Melrose Ltd. before the purchase of Atalanta Ltd. was completed in September 2020.

Required:

Comment on the ethical and other professional issues raised by the above matter and their implications, if any, for staffing the final audit of Melrose Ltd. for the year ended 30 September 2021.

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Question 5a

Explain the main rules of evidence in court proceedings relating to audit issues.

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Question 3c

The International Standards on Auditing (ISAs) address various professional standards of practice for auditors. In particular, ISA 240 - "The Auditor's Responsibilities Relating to Fraud in an Audit of Financial Statements" requires the auditor to focus on areas where there is risk of material misstatements due to fraud, including management fraud.

Required:

Explain the actions that an auditor should take to effectively deal with issues of fraud during an audit.

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Question 2c

Explain the case against the rotation of auditors by a client. (Hint: Approach from both the auditor's and client's perspective).

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Question 2b

You are the Audit Manager at ABC & Co., a firm of Certified Public Accountants. Currently, you are responsible for the audit of two companies, L Ltd. and M Ltd. The year end for each of the companies is 30 June. You are currently reviewing the audit working papers, files and the audit seniors' recommendations for the auditors' reports. The details are as follows:

1

L Ltd. is a subsidiary of K Ltd. Serious going concern problems have been noted during this year's audit. L Ltd. will be unable to trade for the foreseeable future unless it continues to receive financial support from the parent company. L Ltd. has received a letter of support (comfort letter) from K Ltd.

The Audit Senior has suggested that due to the seriousness of the situation, the audit opinion must at least be qualified "except for".

2

M Ltd. has changed its accounting policy for goodwill during the year from amortisation over its estimated useful life to annual impairment testing. No disclosure of this change has been made in the financial statements. The carrying amount of goodwill in the statement of financial position as at 30 June 2021 is the same as at 30 June 2020 as management's impairment test shows that it is not impaired.

The Audit Senior has concluded that a qualification is not required but suggests that attention could be drawn to the change by way of an emphasis of matter paragraph.

Required:

Discuss, with justification, whether you would agree with the Audit Senior's conclusions in each of the cases above.

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September 2021

7 Questions

Question 1a

Maisha Bora Welfare Group was established in the year 2015. The organisation's aim is to provide support to children from disadvantaged backgrounds who wish to take part in athletics.

The organisation has a detailed constitution which explains how the income of the welfare group can be spent. The constitution also notes that administration expenses should not exceed 10% of income in any one year.

The income ofthe organisation is derived wholly from voluntary donations. The sources of income include:

Cash collected by volunteers seeking donations from the public.
Cheques sent to the welfare group's head office.
Donations from generous individuals. Some of these donations have specific clauses attached to them indicating that the initial amount donated (capital) cannot be spent and that the interest income from the donation must be spent on specific activities, for example, provision of sports shoes.

Required:

In the context of the above information:

(i) Explain the term "audit risk", clearly indicating three elements of risk that contribute to total audit risk.

(ii) Explore the areas of inherent risk in Maisha Bora Welfare Group, explaining the effect of each of these risks on the audit approach to be adopted.

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Question 3c

Most auditing practitioners agree that legal liability is part of the risk associated with their work. However, they argue that practising auditors may also take specific action to minimise their liability.

Required:

Evaluate the measures that auditors may take to minimise the possibilities of legal liability.

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Question 3b

Describe how the following factors are posing risks to internal audit in the new dispensation:

(i) Cyber security in the remote world of work.

(ii) Changing regulatory risks.

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Question 3a

Following the outbreak of the Covid-19 pandemic with its associated uncertainty and crisis management requirements, internal audit is now in an interesting position to guide organisations through a completely new landscape of risk. It is evident that new trends have emerged in internal audit that will change the way audit is perceived for years to come.

Required:

In the context of the above statement, explain how the following recent trends are transforming the audit landscape:

(i) Artificial intelligence.

(ii) Soft controls and company culture.

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Question 2a

You are a manager at Dundee Associates, a firm of Certified Public Accountants. Your specific responsibility is for the quality of audits.

Your firm was appointed the auditor of Taka Ltd., a provider of waste management services, in January 2020. You have visited the audit team at Taka Ltd.'s head office. The team comprises an audit senior, an audit assistant and two trainees.

Taka Ltd.'s draft accounts for the year ended 31 December 2019 show revenues of Sh.118 million (2018 Sh.8.3 million) and total assets of Sh.40 million (2018 Sh.30 million). During your visit, a review of the audit working papers revealed the following:

(i)

On the planning checklist, the audit senior has crossed through the analytical procedures section and written "Not applicable-New client". The audit planning checklist has not been signed off as having been reviewed.

(ii)

The audit senior last visited Taka Ltd.'s office when the final audit commenced two weeks earlier on I February 2020. The audit senior has since completed the audit of tangible non-current assets including property and service equipment which amount to Sh.8 million as at 31 December 2019 (2018 Sh.8 million). The audit senior spends most of his time at your firm's office and is currently allocated three other assignments in addition to the audit of Taka Ltd.

Required:

Discuss the implications of the two findings above for Dundee Associate's quality control policies and procedures.

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Question 1c

You are a senior audit manager in M and M Associates Certified Public Accountants. Recently, you were assigned specific responsibility for undertaking annual reviews of existing clients. The following situation has arisen in connection with one of the clients, Reward Ltd., an exporter of specialist equipment.

The Chief Executive Officer of Reward Ltd. has requested for advice on the accounting treatment and disclosure of payments being made for security consultancy services. The payments, which aim to ensure that consignments are not impounded in the destination country of a major customer, may be material to the financial statements for the year ending 31 December 2021. Reward Ltd. does not treat these payments as tax deductible.

Required:

Explore the ethical and other professional issues raised by the above matter and indicate the action, if any, that your firm should now take.

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Question 5c

Identify the practical steps that auditors might take to ensure independence and objectivity in their work.

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May 2021

2 Questions

Question 5a

You are the audit partner at Utopia Certified Public Accountants operating in country Z. You have been invited to а stakeholders' forum attended by officers from the registrar of companies, the revenue authority, donors, profit making entities, government entities, non-governmental organisations (NGOs), professional institutes and other interested parties. All profit making entities have their financial year end on 31 December and have to file returns (including audited accounts) on or before 31 March of the following year.

Key issues of concern to some of the stakeholders are:

1. The three month period between the year end and filing deadline is too short, limiting entities' ability to provide accurate financial statements.

2.Auditors sometimes issue disclaimers of opinion, which in their opinion is of no value. It would be better if they declined appointment.

3.Audit fees are too high and are charged even when businesses are making losses causing unnecessary financial burden on entities.

4.In an attempt to attract clients, some auditors charge very low fees hence there is need for the institute of accountants to set minimum fees.

5.Whenever clients are penalised for non-compliance with regulations, the auditor goes scot-free even when the penalties are based on audited accounts. There is need for the auditor to bear part ofthe penalties.

6.Some auditors have audited the same clients for too long. There is need for mandatory auditor rotation periods specified by regulators for all clients.

Required:

Evaluate each of the issues raised above and provide an informed opinion, justifying your position with relevant facts and examples.

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Question 4b

The Board of Directors of Jaribu Ltd. are considering a proposal from the Chief Internal Auditor to establish an audit committee. The committee would consist of one executive director, the Chief Internal Auditor as well as three new appointees. One appointee would have a non-executive seat on the Board of Directors.

Required:

Argue the case for the establishment of the Audit Committee by Jaribu Ltd.

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November 2020

2 Questions

Question 1b

Professional scepticism is fundamental to the role and performance of auditors.

Required:

Describe four examples of auditable areas that might require an auditor's professional scepticism.

Some scholars have identified the three elements of professional scepticism as attributes, mindset and action.

Required:

Evaluate how each of the three elements above relate with professional scepticism.

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Question 4a

The audit committee is created as part of the corporate governance process, which is the cornerstone of shareholder protection.

Required:

Citing three areas, discuss the role and place of the audit committee within the corporate governance structure.

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May 2019

1 Questions

Question 5a

Identify four principles of ethics that are applicable to internal auditors and for each principle, explain how an internal auditor could demonstrate adherence.

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November 2018

2 Questions

Question 3a

DD Electronics designs, develops, manufactures and markets a wide range of personal computing products including desktop computers, portable computers, network servers and peripheral products that store and manage data in network environments. The company markets its products primarily to businesses, homes, government and education customers.

The company operates in one principal industry segment across geographically diverse markets. The company is subject to legal proceedings and claims which have arisen in the ordinary course of its business. The management does not believe that the outcome of any of these matters will have a material adverse effect on the company's consolidated financial position or operating results.

Required:

With reference to the above scenario and introducing other relevant information as may be applicable, discuss four issues that an audit firm should consider before accepting to audit DD Electronics.

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Question 2a

You are the audit manager in Triple P Associates. One of the application files you are reviewing is that of Buru Ltd. The Managing Director of Buru Ltd. has invited your firm to quote or tender for its audit. Buru Ltd. is a small owner-managed company providing financial services such as arranging mortgages and advising on pension plans.

The company's previous auditors recently resigned. The Managing Director of Buru Ltd. states that this was due to "a disagreement on the accounting treatment of commission earned and further because they thought their controls were not very good".

You are aware that Buru Ltd. has been investigated by the Financial Services Authority for alleged non-compliance with its regulations.

As well as performing the audit, the Managing Director would like your firm to give business development advice.

Required:

Discuss six ethical and other professional issues raised in the above scenario and recommend any actions that should be taken.

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May 2018

2 Questions

Question 3b

An audit of directors' remuneration at Funika Ltd., a listed company has established that the Managing Director, Mr. Anson Mweni, is the highest paid director of the company with an annual pay of Sh.36 million.

As you peruse some of the company's recent purchase invoices, you notice that part of the invoices totaling Sh.12 million relate to repair works undertaken at Mr. Mweni's house. Although Mr. Mweni authorised these payments, there were no Board minutes approving the same. You further establish that Mr. Mweni has ignored internal advice to include the Sh.12 million as part of his annual benefit and for the financial statements to be amended to reflect the proposed change in treatment of the item. The company's profit before tax for the year before any adjustments amounted to Sh.640 million.

The company's Annual General Meeting (AGM) is due to be held soon.

Required:

(i) Assess whether the undisclosed remuneration is material in the above context. Justify your conclusion.

(ii) Assume further that Funika Ltd. has an Audit and Risk Committee and that Mr. Mweni owns less than 1% of the issued shares. You have gathered hints that Mr. Mweni intends to push for replacement of your firm as auditors for the current financial year should you attempt to qualify the audit report.

Describe, indicating any other institutions that you will involve, the matters that you will consider and the actions that you will take to protect the interests of the company's shareholders and the integrity of your firm.

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Question 1a

International Standard on Auditing (ISA) 200 - Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with ISAs:

Requires an auditor to recognise that circumstances may exist that can cause financial statements to be materially misstated.
Recognises that maintaining professional skepticism throughout the audit is necessary if the auditor is to reduce the risk of overlooking unusual circumstances.

In addition, the International Auditing and Assurance Standards Board (IAASB) in one of its recent publications observes that the importance of professional skepticism to the public interest is underscored by the increasing complexity of financial reporting and changes in business models.

Required:

(i) In the context of the above brief, discuss with practical examples how you would apply professionat skepticism during an audit. Your response should include the following key audit processes:

Performing risk assessment procedures.
Obtaining audit evidence.
Evaluating evidence.
Forming the audit opinion.

(ii) Evaluate three possible challenges to your application of professional skepticism as discussed under (a) (i) above.

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December 2017

2 Questions

Question 3a

You are the audit manager responsible for the audit of Kampuni Kubwa (KK) Ltd., a manufacturing company listed on the securities exchange. You are assigning staff to the final audit of KK Ltd. for the year ended 30 September 2017.

You are aware ofthe following matters:

Janice Tuli, the assistant manager assigned to the interim audit of KK Ltd. recently discovered that some senior managers in the company have been defrauding the organisation. She has since received some threatening e-mails and calls from the managers.
Alex Baricho, an audit senior has been auditing KK Ltd. for the last three years. He has confided in you that his father owns 2,000 shares in KK Ltd.

Required:

Analyse the ethical threats raised by the above matters.

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Question 1c

Argue three cases for and two cases against the use of global corporate governance standards.

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May 2017

3 Questions

Question 5

A newspaper article contains the following:

"The role of statutory auditors is often misunderstood. In particular, there is confusion over the auditor's responsibilities in respect to fraud and the nature of the assurance provided by an audit. Furthermore, following a number of corporate collapses and the revelation of fraud perpetrated by management, it is the auditors who may be sued for large sums of money. This trend is threatening the future of the auditing profession. The majority of auditors would prefer the current legislation to be changed to enable auditors agree on a contractual cap on liability (that is, a limit on the monetary amount which the auditors could pay out in damages)".

Required:

(a) Compare and contrast the responsibilities of auditors and directors of a company in relation to the prevention and detection of fraud.

(b) Explain why the statutory audit cannot provide absolute assurance that the financial statements are free from misstatement whether caused by fraud, error or other irregularity.

(c) Discuss in each case, four arguments for and against changing the legislation to allow auditors to agree on a contractual cap on liability in respect to the statutory audit.

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Question 3a

Periodically, there arises debate within and outside the accountancy profession on the independence of auditors. One suggestion floated to improve auditor independence is to have compulsory rotation of audit firms after a pre-determined period.

Required:

(i) Discuss four ethical threats created by a long association with an audit client.

(ii) Evaluate three advantages and three disadvantages of compulsory rotation of audit firms.

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Question 2b

Your firm has been invited by Mr. Abdalla Juma, the Managing Director of Msingi Bora Ltd., to accept appointment as auditors ofthe company. You establish that the present firm of auditors will not be reappointed when their term of office expires as Msingi Bora Ltd. is dissatisfied with their services.

Mr. Juma has further requested that:

An employee of your firm assumes responsibility of preparing monthly management accounts on tight deadlines. The continuation of the overdraft facility by the company's banker is dependent on the receipt of these accounts by the bank within ten days of each month end.
The audit partner in your firm attends the monthly board meetings, mainly to explain the management accounts to the other directors.

Required:

Describe the matters that you would consider in deciding whether to accept the above appointment as auditor and to provide the additional services as requested.

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November 2016

2 Questions

Question 5

You are the partner responsible for providing direction to more junior members of the audit department of your firm on technical matters. Several recent recruits have asked for guidance in the area of auditor's liability. They are keen to understand how an audit firm can reduce its exposure to claims of negligence. They have also heard that in some countries, it is possible to restrict liability by making a liability limitation agreement with an audit client.

Required:

(a) Discuss the civil liabilities of an auditor under common law.

(b) Assess the potential implications to the audit profession of audit firms that sign a liability limitation agreement with their audit clients.

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Question 3a

Your audit client, Informat Solutions Ltd., has requested your audit firm to undertake a forensic investigation related to a suspected payroll fraud at the company.

Analyse how the code of ethics for professional accountants would be applied in undertaking the forensic investigation of the suspected fraud in Informat Solutions Ltd.

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May 2016

2 Questions

Question 5b

Zakayo and Associates were invited to tender for the audit of Premier Enterprises Ltd. for the financial year ended 31 December 2015. The firm was awarded the tender as it was the most competitive. The firm had used a low balling strategy when submitting their tender. During the course of the audit, the auditors have suspected the company is involved in money laundering activities.

Required:

(i). Explain the term "low balling" citing the potential threat of low balling to the auditor's independence.

(ii) Define the term "money laundering".

(iii) With reference to the code of ethics and conduct for professional accountants, advise the action the auditors should take with respect to the suspected money laundering activities by the company.

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Question 5a

Discuss the matters that a professional accountant should consider before accepting an engagement to report on prospective financial information of a company.

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November 2015

2 Questions

Question 2b

Summarise the role played by the audit committee in enhancing corporate governance in an organisation.

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Question 5

You are a manager in an audit firm and double up as the head of the forensic investigation department. Your audit firm has recently been appointed the auditors of Afrokeen Manufacturers Ltd. for the year ending 31 December 2015. The directors of Afrokeen Manufacturers Ltd. have contacted your audit firm regarding a suspected fraud relating to the company's payroll. You have been assigned to undertake a forensic investigation and have held preliminary discussions with the finance director of the company.

The finance director suspects that the accountant, who had been absent from work after the finance director queried the increasing costs of overtime and casual workers payments, could be involved in some fraudulent activities.

Required:

(a) Describe three objectives of a forensic investigation.

(b) Explain the procedure you would follow to gather evidence on the suspected payroll fraud.

(c) Assess how the code of ethics for professional accountants should be used in the provision of the forensic investigation service to Afrokeen Manufacturers Ltd.

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Pilot September 2015

2 Questions

Question 1a

Your audit firm has tendered for the audit of Hekima Group of Companies.

Required:

Evaluate six matters that should be considered before accepting the audit engagement in the event your firm is successful in the tender.

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Question 4b

Explain the factors which have contributed to the increased number of lawsuits against auditors from third parties in recent years.

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Professional and ethical considerations

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