KASNEB Audit & Assurance - Question 1b

Discuss FOUR differences between “internal audits” and “external audits”. ... [Click to view full question and step-by-step solution]

KASNEB Audit & Assurance - Question 2c

Describe SIX stages involved in the development of an audit strategy. ... [Click to view full question and step-by-step solution]

December 2024

1a

Assurance and non- assurance engagements

In deciding on whether to accept a new audit client or not, the auditor must consider a number of factors. International Standard on Auditing (ISA) 210 “Agreeing on the Terms of Engagement”, further requires that, before commencement of the audit, the auditor should carry out procedures to ensure that the pre-conditions of an audit are present.

Required:

(i) Highlight SIX matters to be considered by an auditor before accepting a new audit engagement.

(ii) Describe the THREE preconditions of an audit that an auditor must ensure are present before accepting an audit assignment.

1b

Internal control systems and Internal Audit Function

Discuss FOUR differences between “internal audits” and “external audits”.

2a

Overview of Forensic Accounting, Errors, Frauds and Irregularities

Explain the following terms in relation to fraud in an organisation:

(i) Teeming and lading.

(ii) Ghost employees.

(iii) Window dressing.

2b

Legal and professional framework

You are an audit manager at Miheso and Mali Associates, an audit firm. You are planning the audit of Mitambo Ltd.,a company that manufactures and distributes smart phones, laptops and their accessories. Mitambo Ltd. has been your audit client for the past 5 years. During the planning of the audit, the following information has come to your attention:

Employees of Mitambo Ltd. purchase goods from the company at discounted prices. Members of staff at Miheso and Mali Associates have in the previous years been offered the same level of discount as the employees of Mitambo Ltd.
During the year ended 30 September 2024, the finance director was hospitalised and an audit senior from Miheso and Mali Associates was seconded to the client for four months.
From review of the correspondence files, you note that the chief accountant of Mitambo Ltd. and one of the partners at Miheso and Mali Associates have known each other for many years. You discover that the chief accountant was very instrumental in the appointment of your audit firm.

Required:

(i) Identify ethical threats which might affect the independence of Miheso and Mali Associates in the audit of Mitambo Ltd.

(ii) For each ethical threat identified in (b) (i) above, recommend how the threat can be mitigated.

2c

Planning and Risk Assessment

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

3a

Internal control systems and Internal Audit Function

Usafi Enterprises is an organisation that provides home cleaning services. The organisation’s policy is that 50% of the charged fee is paid in advance before the cleaning service is provided and the other 50% is paid after the service has been completed. The customers pay by cheque or mobile money. The cheques are supposed to be delivered by the customers to Usafi Enterprises office during working hours. However, some customers have been paying the cleaners by cash and at times giving cheques to cleaners to deliver to the office on their behalf.

Usafi Enterprises’ accountant has noted that the accounts receivable balance in the books has been increasing while revenue collection has been declining in the past few months. The organisation has also lost many customers due to disagreements on payment for services rendered. Usafi Enterprises has approached you as an audit firm to advise them on how they can improve their operations and manage receivables.

Required:

(i) Identify FOUR weaknesses in Usafi Enterprises’ internal control system.

(ii) Propose THREE controls that the management of Usafi Enterprises could implement to address each deficiency.

3b

Audit risk assessment

According to International Standards on Auditing (ISA) 315, “Identifying and Assessing the Risks of Material Misstatement”, the auditor should use assertions for classes of transactions, account balances and presentation and disclosure in sufficient detail to form a basis for the assessment of risk of material misstatements.

Required:

Explain FIVE assertions relating to:

(i) Account balances.

(ii) Transactions and events.

4a

Audit risk assessment

International Standard on Auditing (ISA) 315, “Identifying and Assessing the Risks of Material Misstatement Through Understanding the Entity and Its Environment”, gives extensive guidance to auditors about audit risk assessment.

Required:

(i) Explain the term “audit risk”.

(ii) Describe THREE components of audit risk.

4b

Assurance and non- assurance engagements

Job Juma has recently been declared redundant. He is considering setting up a care home for the elderly, as he is aware of an increasing need for this service with the ageing population. He has identified a large house, which he plans to convert into the care home. Each resident will have a bedroom, there will be a common sitting room and all meals will be provided in a dining room. No long-term nursing care will be provided. The large house is in a poor state of repair and will require considerable structural alterations and repairs to make it suitable for use as a care home for the elderly. This includes purchase of new furniture and fittings, decoration of the whole house and specialised equipment to allow mobility of the clients.

Job Juma and his wife propose to work full time in the business, which he expects to be running six months after the purchase of the house. Job Juma has already obtained some estimates of the conversion costs and information on the income and expected running costs of the care home.

Job Juma has received about Sh.10,500,000 from his redundancy and expects to receive about Sh.17,000,000 from the sale of his house. The owners of the house he proposes to buy are asking for Sh.12,000,000 for it, and Job expects to spend Sh.7,500,000 on conversion. Conversion includes: building work, furnishing, decorations and equipment. Job would like to obtain additional finance from the bank to undertake this project. He has prepared a draft capital expenditure forecast, profit forecast and cash flow forecast which he has asked you to check before he submits them to the bank.

Required:

Advise Job Juma on SIX elements that the bank credit department would verify in the:

(i) Capital expenditure forecast

(ii) Profit forecast

5a

Contemporary and emerging issues in audit

The auditing profession has had to adjust to the rapid technological advancements. Several processes and procedures are now carried out using these advancements.

Required:

Analyse how each of the following technologies is used in the auditing profession:

(i) Robotic process automation (RPA).

(ii) Data analytics.

(iii) Distributed ledger technology (DLT).

5b

Overview of Forensic Accounting, Errors, Frauds and Irregularities

Borabora Ltd., a manufacturer of fast-moving goods within Nairobi, planned to construct a warehouse in Mombasa to serve as a distribution point for the coast region. The company intended to make a saving on transportation costs by using rail transport to move the finished goods to the coastal warehouse, instead of the traditional road transport.

The chief finance officer of Borabora Ltd., Eric Mambo, recommended Ujenzi. Ltd., a construction company for the contract to construct the warehouse. However, when the contract was signed, Ujenzi Ltd. was not authorised to conduct business. This is because the government had revoked Ujenzi Ltd.’s license indefinitely, based on recent bidding irregularities and failure to observe construction standards. Eric Mambo knew that Ujenzi Ltd.’s license had been revoked yet recommended the company because he was receiving a commission and had some beneficial interest in the company.

The cost of the warehouse was also overstated deliberately to pass some of the money back to Eric Mambo. Eric Mambo recommended an adjustment to the accounting records to make the extra payments appear like transaction fees payable to a consultancy company that he owns.

Required:

Advise the management of Borabora Ltd. on THREE illegal activities that may necessitate a forensic investigation in the company.

5c

Audit evidence

At the planning stage, the auditor of Kidato Ltd., while assessing the risk of material misstatement came across a disagreement amongst the directors on the going concern status of the company. Some of the directors felt that since the company’s bankers were recalling the loan which was the financial base for most of the company’s assets, the company might be forced into receivership and liquidation unless they find another financier. The Board of Directors’ minutes indicate that the bank manager had already canceled the overdraft facility since Kidato Ltd. was facing challenges in repaying the overdraft on a timely basis. The matter had not been concluded when the financial statements were prepared and despite the assets of the company being slightly higher than liabilities in the statement of financial position, the threat to the going concern is clear.

Required:

Evaluate FOUR audit procedures that the auditor could carry out in order to obtain sufficient audit evidence to be able to form an opinion on the going concern status of Kidato Ltd.

December 2024

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