KASNEB Advanced Auditing & Assurance - Question 2a

Explain THREE steps in the process of conducting a forensic audit. ... [Click to view full question and step-by-step solution]

KASNEB Advanced Auditing & Assurance - Question 4b

Discuss FIVE factors that might have led to increased litigation against auditors. ... [Click to view full question and step-by-step solution]

April 2024

1a

Audit evaluation and reviews

You are the audit manager of Gabriel and Moses Associates, a firm of Certified Public Accountants, responsible for the audit of Saforer Ltd. The draft financial statements reported a profit of Sh.13,000,000 for the year ended 31 December 2023. The audit for the year-end is almost complete and the following matters have been raised by the audit senior for your attention:

On 2 November 2023, a major customer went into receivership. The balance owing from the customer was Sh.2,800,000 as at 31 December 2023. This amount has been included in the accounts receivable figure in the year-end financial statements. A former employee sued Saforer Ltd. for unfair dismissal during the month of December 2023.
The company’s lawyers estimate that damages amounting to Sh.65,000 are probably payable. A note has been included under the notes to the accounts describing the legal claim and the estimated damages. However, no adjustment has been made to the financial statements to recognise the probable loss.

After discussing the above matters with the management of Saforer Ltd, the managers decided not to adjust their financial statements. The audit senior then drafted the audit report. The following is an extract of the audit report:

Basis for opinion and disclaimer of opinion

We have performed our audit based on a materiality level of Sh.1,650,000. Our audit procedures have confirmed conclusively that trade receivables are materially misstated. The Finance Director, Philip Majuto, has refused to make an adjustment to write off a material trade receivable balance. Therefore, in our opinion, the financial statements of Saforer Ltd. are materially misstated and we therefore express a disclaimer of opinion.

Emphasis of matter paragraph

Saforer Ltd. is facing a legal claim for Sh.65,000 from a former employee. In our opinion this amount should be recognised as a provision in the financial statements of which this has not been done. We draw our attention to this breach of International Financial Reporting Standards (IFRSs).

Required:

Using the proposed audit report extract for the year ended 31 December 2023, evaluate FIVE matters that are not correctly presented in the report.

1b

Professional and ethical considerations

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.

2a

Forensic accounting

Explain THREE steps in the process of conducting a forensic audit.

2b

Audit framework and regulations

Describe EIGHT matters highlighted by International Standard on Auditing (ISA) 210 to which an audit engagement letter might make reference.

2c

Audit evaluation and reviews

According to International Standard on Auditing (ISA) 550, “Related Parties”, certain relationships, such as parent and subsidiary, investor and investee may be clearly evident. However, determining the existence of other related party relationships requires the application of specific audit procedures. The auditor could also devise detailed procedures intended to provide guidance for identifying material transactions with parties known to be related and for identifying material transactions that may be indicative of the existence of previously undetermined relationships.

Required:

Suggest SIX audit procedures that could be relied upon to ascertain the existence of related parties.

3a

Management of audit practice

Thermotech Boilers is an engineering company specialising in designing, fabricating, supplying, installing and servicing of boilers, incinerators and steam systems. The company has eight production plants in different parts of the country. The production process is capital intensive and requires a broad range of plant and equipment.

The finance director is responsible for the preparation of a detailed annual budget for property, plant and equipment (PPE) which is based on a five-year budget and approved by the board of directors after consultation with the audit committee. Once the budget is approved by the board it is held in a computer file, which is the basis of any purchase order. When equipment is delivered to the company, a pre-numbered goods received note (GRN) is raised and a copy is sent to the accounting and finance department. This note is used to update the PPE budget to reflect the movement. The equipment is carefully inspected by the production personnel and tested if operating properly. An operational certificate is prepared by the production department and is used by the accounting and finance department together with the GRN to check against the purchase invoice when it is received. At the same time as the purchase invoice enters the purchases system, the computerised PPE register is updated. Access to the PPE register is restricted to the personnel in the accounting and finance department. On a regular basis throughout the year, the PPE register is compared to plant and equipment on site by the accounting personnel using identification numbers in the register and permanently marked on to each item in the factory. The internal audit department also tests on a sample basis the operation of the system from the budget preparation to entry in the PPE register. Internal audit staff also compare a sample of entries in the PPE register with the equipment in the factories.

As part of your work as external auditors, you have reviewed the PPE audit programme of the internal auditors and come to the conclusion that the basis of their testing is a representative sample of purchases invoices.

Required:

(i). Identify THREE strengths in Thermotech Boilers control environment in the area of PPE and explain how each of the strengths reduces the control risk.

(ii). Citing FOUR reasons, explain why testing of a representative sample of purchases invoices to prove completeness of PPE records is not sufficient.

3b

Audit evaluation and reviews

When auditing consolidated financial statements, the auditor pays close attention to accounting policies as they have a significant impact on the presentation and disclosure of financial information.

Required:

Discuss FIVE areas of interest by an auditor in relation to the accounting policies related to consolidated financial statements.

4a

Concluding and reporting

You are the audit engagement partner in the audit of Cologne Ltd. You have an audit trainee assigned to you who has read the notes taken at your meeting with the managing director of Cologne Ltd. The audit trainee is seeking to know from you the implications of corporate social responsibility (CSR) expenditure being disclosed as a different figure in the financial statements compared with other information published in the annual report.

Required:

Describe FOUR actions that the auditor could take if the figure relating to the CSR expenditure disclosed in the financial statements is different from the other information published in the annual report and the management has not amended this even after the matter having been highlighted to them.

4b

Regulatory Environment

Discuss FIVE factors that might have led to increased litigation against auditors.

4c

Audit framework and regulations

International Standard on Auditing (ISA) 570, “Going Concern”, provides examples of events that individually or collectively might cast significant doubt on the going concern assumption.

Required:

Summarise SIX events that individually or collectively might cast significant doubt on the going concern of an organisation.

5a

Regulatory Environment

The anti-money laundering responsibility of accountants has become more significant in recent years. This is due to increased organised crime activities, making it necessary for governments around the world to initiate and implement actions aimed at preventing money laundering activities.

Required:

(i) Explain the term “money laundering”.

(ii) Using illustrations, describe FOUR money laundering offences, including those which could be committed by an accountant.

5b

Audit framework and regulations

Bizmogul Ltd., a manufacturer of tyres, is an audit client of Weste and Associates, a firm of Certified Public Accountants. The financial year of Bizmogul Ltd. ended on 30 June 2023. The audit report and the financial statements were to be signed on 14 September 2023. The following additional information on two material events were brought to the attention of the auditor:

Event 1 – Occurred on 15 July 2023

A new type of tyre innovated by Bizmogul was found to be defective and hence unsafe for use. No sales had been made as the product was scheduled to be launched towards the end of September 2023. The company had an insurance cover for inventories. The affected inventory was estimated to be worth Sh.1,500,000 and was included in the finished goods as at 30 June 2023. The insurers estimated the affected inventory to be worth Sh.500,000. The insurance company did not want to pay for the loss in the value of inventory as the company’s inventory was under insured.

Event 2 – Occurred on 8 August 2023

The equipment used for vulcanisation of rubber got damaged. Leakage of harmful gas into the atmosphere occurred. The environmental agency is investigating the extent of the emission and the breach of environmental legislation arising thereof.

Required:

For each of the events, Event 1 and Event 2:

(i). Explain whether the event is adjusting or non-adjusting according to International Accounting Standard (IAS) 10, “Events after the Reporting Period”.

(ii). Discuss the auditor’s responsibility and the audit procedures that should be carried out.

April 2024

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