CPA Audit & Assurance – August 2026 Past Paper & Answers

Unit: Audit & Assurance

5 Questions

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Download CPA Audit & Assurance August 2026 past paper with detailed answers and marking scheme. This paper is based on KASNEB examination standards and is ideal for revision and exam preparation.

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Audit risk assessment Audit evidence Assurance and non- assurance engagements Legal and professional framework

Solar Cooperative Ltd. operates solar mini-grids in Turkana and Marsabit counties. The cooperative sells electricity to households through prepaid meters. It also receives part of its funding from the Green Energy Access Fund, a renewable energy grant programme established to support affordable electricity access in underserved communities. As a condition of the funding, Solar Cooperative Ltd. is required to report the number of connected households to the grant administrator.

You are the audit manager at Baraka & Associates, Certified Public Accountants, and you are responsible for the audit of the annual financial statements of Solar Cooperative Ltd. In addition to the audit of the financial statements, the board of Solar Cooperative Ltd. has requested your audit firm to consider undertaking a separate assurance assignment on the accuracy of the household connection numbers reported to the Green Energy Access Fund.

During client acceptance discussions, the marketing partner in Baraka & Associates proposed an advertisement stating that the firm is “the only audit firm approved for renewable energy audits in Kenya”. The partner also suggested charging a success fee based on the amount of grant funding released to Solar Cooperative Ltd.

Required:

(a) (i) Identify areas of risk of material misstatement that Baraka & Associates should consider when planning the audit of Solar Cooperative Ltd.’s annual financial statements.

(ii) Explain audit procedures that could be performed to verify revenue generated from the prepaid electricity meters.

(b) (i) Explain matters that Baraka & Associates should consider when determining whether the grant has been properly recognised and disclosed in the financial statements.

(ii) Describe procedures that Baraka & Associates could perform during a separate assurance engagement on the accuracy of the reported household connection numbers.

(c) Discuss ethical and professional issues arising from the proposed advertisement and the success fee arrangement and recommend how Baraka & Associates should respond to each issue.

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Internal control systems and Internal Audit Function Auditing in a computerised system Internal Audit Function

Premium Ltd. manufactures cleaning detergents for supermarkets and public institutions. The company recently implemented an integrated production and inventory system that automatically records movements of raw materials, work-in-progress and finished goods. The system calculates standard material usage for each production batch and permits authorised adjustments where wastage, spoilage or rework occurs.

You are the audit senior at Tumaini & Co., Certified Public Accountants, the external auditors of Premium Ltd. You have been assigned to perform preliminary audit planning procedures and obtain an understanding of the new system before the year-end audit.

During your preliminary review, you noted the following matters:

1. User access rights have not been reviewed since the system was implemented.

2. Production supervisors can initiate and approve adjustments for wastage and rework.

3. Exception reports identifying unusual production quantities and inventory adjustments are generated but are not reviewed by management.

4. Finished goods may be released from the warehouse before dispatch documents are matched to approved customer orders.

5. The internal audit department has not undertaken a post-implementation review of the system.

Required:

(a) Explain THREE control deficiencies in the production and inventory system and, for each deficiency, state its possible effect on the financial statements of Premium Ltd.

(b) Recommend TWO information technology controls that Premium Ltd. should implement to ensure that access to the system and changes to inventory data are properly restricted and monitored.

(c) Describe THREE tests of controls that Tumaini & Co. should perform to determine whether wastage and rework adjustments are independently authorised, exception reports are reviewed and followed up, and finished goods are dispatched only against approved customer orders.

(d) Explain TWO benefits that Premium Ltd. would obtain from a post-implementation review of the new production and inventory system.

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Auditing in the public sector Audit evidence Internal Audit Function Auditors Reports

Apex Water Services Corporation is a county-owned entity responsible for supplying water to urban and rural households. The corporation is implementing a meter replacement project funded through the county budget. Internal audit reports indicate delayed follow-up of recommendations, weak monitoring of contractors and possible overpayments for meters that were never installed. The county executive committee has requested guidance on public sector roles, internal audit monitoring and possible recovery of public funds if irregularities are confirmed.

Required:

(a) (i) Explain THREE responsibilities of a public sector auditor when auditing the meter replacement project.

(ii) Describe THREE audit procedures that should be performed to verify whether meters paid for under the project were actually installed.

(b) (i) Recommend THREE matters that should be included in a risk-based internal audit plan for the meter replacement project.

(ii) Explain THREE internal audit key performance indicators that the audit committee could use to monitor whether audit recommendations on contractor supervision and meter installation are being followed up.

(c) (i) Discuss TWO asset recovery actions that the county government should consider if the suspected overpayments are confirmed.

(ii) Analyse TWO financial reporting actions that management should take where the confirmed irregularities materially affect the financial statements.

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Audit evidence Audit risk assessment Auditors Reports

Mac Insurance Plc underwrites commercial motor insurance policies for corporate clients. Premiums collected from policyholders are used to settle claims and meet operating costs. Any surplus funds are invested in government securities and listed shares to generate investment income for the company.

During the audit of the year-end financial statements, the audit team identified the following matters requiring careful review:

1. The financial statements include significant estimates for outstanding insurance claims.

2. Management has provided a valuation report prepared by an external investment valuation specialist engaged by the company.

3. The company has disclosed capital commitments for a new claim processing centre.

4. A director has issued a guarantee to support a subsidiary's bank facility.

5. Management is reluctant to provide written confirmation of all guarantees, capital commitments and unusual accounting adjustments.

Required:

(a) In relation to audit risk assessment for Mac Insurance Plc:

(i) Explain THREE audit risks arising from the outstanding insurance claims provision.

(ii) Outline TWO audit procedures that could be performed to assess the reasonableness of the outstanding claims provision.

(b) (i) In relation to the investment portfolio held by Mac Insurance Plc explain TWO audit concerns that may arise from relying on the valuation report provided by management.

(ii) State TWO audit procedures that could be performed to obtain evidence on the ownership of the government securities and listed shares.

(c) Recommend TWO audit procedures that should be performed to verify the completeness and disclosure of the capital commitments and director guarantee.

(d) Identify TWO matters arising from the case that could affect the auditor’s report and explain the possible reporting consequence of each matter.

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Auditing in a computerised system Auditors Reports

Times Ltd. operates an e-commerce payment gateway used by small traders to receive customer payments. Before a trader is permitted to use the platform, Times Ltd. reviews and approves the trader’s merchant application and creates merchant standing data in the system, including bank account details, settlement terms and authorised users.

Customer payments, refunds and settlement instructions are processed through a cloud-based platform. Most transaction evidence is maintained electronically and transaction logs are retained for six months unless specifically archived.

During the audit of the financial statements for the year ended 31 December 2025, the following matters came to the auditor’s attention:

1. On 20 January 2026, a major merchant entered liquidation. At the reporting date, the merchant owed Times Ltd. a substantial amount arising from refunds processed on its behalf.

2. In February 2026, management discovered unauthorised refunds that had been processed before the reporting date through the user account of an employee who had left the company.

3. Times Ltd. has experienced persistent operating losses and delayed settlement of amounts due to merchants. Management has prepared cash flow forecasts based on obtaining additional financing from its shareholders.

4. Management is reluctant to provide written representations concerning the completeness of merchant liabilities, unauthorised transactions and its plans for obtaining additional financing.

Required:

(a) With reference to the cloud-based payment gateway, distinguish between “audit through the computer” and “audit withthecomputer”.

(b) Explain THREE audit procedures that the auditor could perform using audit software to identify unusual refunds, transactions involving inactive merchants and duplicate settlements.

(i) Explain TWO financial statement implications of the liquidation of the major merchant and outline ONE audit procedure that should be performed.

(ii) Discuss TWO effects of the unauthorised refunds on the financial statements and outline ONE audit procedure that the auditor should perform.

(d) Assess TWO matters that the auditor should consider when evaluating the adequacy of management’s going concern assessment and obtaining written representations from management.

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CPA Audit & Assurance – August 2026 Past Paper & Answers

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