KASNEB Audit & Assurance - Question 1a

Highlight SIX inherent limitations of an audit of historical financial statements. ... [Click to view full question and step-by-step solution]

KASNEB Audit & Assurance - Question 3c

Discuss THREE differences between a “review engagement” and an “external audit”. ... [Click to view full question and step-by-step solution]

April 2025

1a

Nature and purpose of an audit

Highlight SIX inherent limitations of an audit of historical financial statements.

1b

Auditing in the public sector

Describe SIX challenges that the Office of the Auditor General encounters in its efforts to deliver on its mandate.

1c

Internal control systems and Internal Audit Function

Analyse FOUR factors that an external auditor could consider before placing reliance on the work of an internal auditor.

2

Legal and professional framework

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.

3a

Audit documentation

Auditors record their work in audit working papers. This includes the audit plan, the work allocation to team members and the record of the audit work done by the audit team. The working papers include copies of draft financial statements and the final audited financial statements.

Required:

(i) Explain who between the auditor and the client:

Has the right to the working papers.
Custody of the working papers.

(ii) State the expected retention time of the working papers.

3b

Audit documentation

Auditors are required to document their understanding of the client’s internal controls. There are various options available for recording the internal control system. Two of these options are narrative notes and internal control questionnaires.

Required:

Describe TWO advantages and TWO disadvantages to the auditor of:

(i) Narrative notes.

(ii) Internal control questionnaire.

3c

Assurance and non- assurance engagements

Discuss THREE differences between a “review engagement” and an “external audit”.

4a

Audit risk assessment

During the engagement team meeting for the audit of the 2024 financial statements of Lima Ltd., the engagement partner emphasised to his audit team that special attention needs to be focused on significant risks.

Required:

(i) Explain the term “significant risks”.

(ii) Describe factors that the auditors could consider to determine whether a risk is significant risk or non-significant.

4b

Auditors Reports

You have been the partner in charge of the audit of Bora Ltd., a company dealing with the sale of electronic items countrywide. During the year ended 30 September 2024, the company made a profit before tax of Sh.80,000,000.

The following matters were identified by the audit team during the audit:

The company has been sued in court for breach of a warranty. The case has been ongoing and is unlikely to be resolved until the year ending September 2025. The estimated legal penalty of losing the case is Sh.40,000,000. The company management has not recognised this figure in the financial statements stating that they have adequate evidence to enable them win the case.
There was an attack on the system by a computer virus that resulted to the loss of supporting documents on all non-current assets. The company had not maintained a backup and therefore reconstruction of the data is impossible.
The company’s goodwill has not been tested for impairment for the last four years. The management feel that testing for impairment is an exercise in futility since the value of impairment is not material. On your team’s assessment you discover that impairment is only material to a portion of the financial statements.
There has been a loophole in the internal controls over wages and salaries. There are suspicions that there may be ghost workers. Further investigations need to be undertaken to establish the extent of misstatements over wages and salaries. However, no misstatements in the salaries and wages were discovered during the audit.

Required:

For each of the matters raised above, discuss the audit opinion you would issue.

5a

Nature and purpose of an audit

There are circumstances where auditors may be held responsible for failure to detect errors and frauds depending on certain factors.

Explain FIVE factors that determine whether the auditor is responsible for non-detection of errors and frauds

5b

Auditors Reports

Kemikali Ltd. manufactures various industrial chemicals. You are the audit supervisor in the firm that audits Kemikali Ltd. At the inventory count at the year-end, you were responsible for work-in-progress (WIP) and were part of the team attending the count as well as the final audit. Work-in-progress constitute partly manufactured chemicals at the year-end, and this balance is material. Kemikali Ltd. values work-in-progress according to percentage of completion and standard costs are then applied to these percentages. During the audit, your team has identified an error in the valuation of work-in-progress, as a number of assumptions contain out of date information. The directors of Kemikali Ltd. have indicated that they do not wish to amend the financial statements.

Required:

Explain the steps the audit firm could now take in relation to the directors’ refusal to amend the financial statements.

5c

Audit evidence

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

Required:

Evaluate FIVE factors that might influence the judgement of the auditor in regards to sufficiency of audit evidence.

April 2025

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