May 2017

Explain why each of the following matters which you have noted during the audit should or should not be included in the letter to the management and those charged with governance:

(i) The company upgraded the accounting system which upon testing you noted that the system did not carry over all the balances accurately. The differences in credit and debit balances considered separately were materíal to the financial statements but when offset against each other, they were immaterial.

(ii) The new accounting system had a functionality that allows online approval of transactions by the various signatories but it had not been activated. The signatories continued to approve transactions manually and all the transactions sampled were duly approved.

(iii) The company supplying stationery to Fanaka Limited was owned by the wife of the procurement manager. However, you confirmed that the appropriate procurement procedures were followed.

(iv) The bank reconciliations were required to be signed by the preparer (Financial Accountant) and approved by the finance manager. You noted that 6 out of the 12 bank reconciliation statements were not signed by the Financial Accountant but had been approved by the Finance Manager. However. you confirmed that the reconciliation statements were accurate.

(v) The company was involved in a restructuring exercise that resulted in the discharge of 25% of the staff. You got to learn that the affected staff had filed a suit in court to challenge their dismissal but the matter had not been heard. However, the management was keen to have the suit heard in order for them to present the issue for reporting in the next financial year when it would be possible to establish if there was a reputable contingent liability. 

(i) Emphasis of matter paragraph.

(ii) Contingent liability.

(iii) Audit committee.

(iv) Assurance engagement risk.

(i) Operationalaudit.

(ii) Financial audit.

(iii) Agreed upon procedures engagement.

(iv) Positive assurance. 

(i) The books of the client were taken away by the regulator for investigations and were not available for audit.

(ii) The provision for doubtful debts was not adequate. The debtors in the financial statement were misstated but the financial statements gave a true and fair view.

(iii) There was no provision for depreciation and the directors were unwilling to provide for any amounts during the financial year. The amount if provided for would reduce the reported profit by 30%.

(iv) There was a legal suit filed by a customer who was unsatisfied with the goods supplied but no provisions were made in the books. The assessment of the case by the company lawyers indicate that the customer has very slim chances of success.