CAT L2.5 AUDITING Revision Guide

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CAT
Certified Accounting Technicians Examination
Stage:
Level 2 L2.5
Subject Title: Auditing

Revision Guide

LOSSARY

INSIDE COVER - BLANK

CONTENTS

Title

Page

Study Techniques

Examination Techniques

Assessment Strategy

Learning Resources

Sample Questions

Sample Solutions

Page 2

STUDY TECHNIQUE
What is the best way to manage my time?
•

Identify all available free time between now and the examinations.

•

Prepare a revision timetable with a list of “must do” activities.

•

Remember to take a break (approx 10 minutes) after periods of
intense study.

What areas should I revise?
•

Rank your competence from Low to Medium to High for each topic.

•

Allocate the least amount of time to topics ranked as high.

•

Allocate between 25% - 50% of time for medium competence.

•

Allocate up to 50% of time for low competence.

How do I prevent myself veering off-track?
•

Introduce variety to your revision schedule.

•

Change from one subject to another during the course of the day.

•

Stick to your revision timetable to avoid spending too much time on one topic.

Are study groups a good idea?
•

Yes, great learning happens in groups.

•

Organise a study group with 4 – 6 people.

•

Invite classmates of different strengths so that you can learn from one another.

•

Share your notes to identify any gaps.

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EXAMINATION TECHNIQUES
INTRODUCTION
Solving and dealing with problems is an essential part of learning, thinking and intelligence.
A career in accounting will require you to deal with many problems.
In order to prepare you for this important task, professional accounting bodies are placing
greater emphasis on problem solving as part of their examination process.
In exams, some problems we face are relatively straightforward, and you will be able to deal
with them directly and quickly. However, some issues are more complex and you will need to
work around the problem before you can either solve it or deal with it in some other way.
The purpose of this article is to help students to deal with problems in an exam setting. To
achieve this, the remaining parts of the article contain the following sections:
•

Preliminary issues

•

An approach to dealing with and solving problems

•

Conclusion.

Preliminaries
The first problem that you must deal with is your reaction to exam questions.
When presented with an exam paper, most students will quickly read through the questions
and then many will … PANIC!
Assuming that you have done a reasonable amount of work beforehand, you shouldn’t be
overly concerned about this reaction. It is both natural and essential. It is natural to panic in
stressful situations because that is how the brain is programmed.
Archaeologists have estimated that humans have inhabited earth for over 200,000 years. For
most of this time, we have been hunters, gatherers and protectors.
In order to survive on this planet we had to be good at spotting unusual items, because any
strange occurrence in our immediate vicinity probably meant the presence of danger. The
brain’s natural reaction to sensing any extraordinary item is to prepare the body for ‘fight or
flight’. Unfortunately, neither reaction is appropriate in an exam setting.
The good news is that if you have spotted something unusual in the exam question, you have
completed the first step in dealing with the problem: its identification. Students may wish to
use various relaxation techniques in order to control the effects of the brain’s extreme
reaction to the unforeseen items that will occur in all examination questions.

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However, you should also be reassured that once you have identified the unusual item, you
can now prepare yourself for dealing with this, and other problems, contained in the exam
paper.

A Suggested Approach for Solving and Dealing with Problems in Exams.
The main stages in the suggested approach are:
1. Identify the Problem
2. Define the Problem
3. Find and Implement a Solution
4. Review

1. Identify the Problem
As discussed in the previous section, there is a natural tendency to panic when faced with
unusual items. We suggest the following approach for the preliminary stage of solving and
dealing with problems in exams:
Scan through the exam question
You should expect to find problem areas and that your body will react to these items.
PANIC!!
Remember that this is both natural and essential.
Pause
Take deep breaths or whatever it takes to help your mind and body to calm down.
Try not to exhale too loudly – you will only distract other students!
Do something practical
Look at the question requirements.
Note the items that are essential and are worth the most marks.
Start your solution by neatly putting in the question number and labelling each part of your
answer in accordance with the stated requirements.
Actively reread the question
Underline (or highlight) important items that refer to the question requirements. Tick or
otherwise indicate the issues that you are familiar with. Put a circle around unusual items that
will require further consideration.
Page 5

2. Define the Problem
Having dealt with the preliminary issues outlined above, you have already made a good start
by identifying the problem areas. Before you attempt to solve the problem, you should make
sure that the problem is properly defined. This may take only a few seconds, but will be time
well spent. In order to make sure that the problem is properly defined you should refer back
to the question requirements. This is worth repeating: Every year, Examiner Reports note that
students fail to pass exams because they do not answer the question asked. Examiners have a
marking scheme and they can only award marks for solutions that deal with the issues as
stipulated in the question requirements. Anything else is a waste of time. After you have reread the question requirements ask yourself these questions in relation to the problem areas
that you have identified:
Is this item essential in order to answer the question?
Remember that occasionally, examiners will put ‘red herrings’ (irrelevant issues) into the
question in order to test your knowledge of a topic.
What’s it worth?
Figure out approximately how many marks the problem item is worth. This will help you to
allocate the appropriate amount of time to this issue.
Can I break it down into smaller parts?
In many cases, significant problems can be broken down into its component parts. Some parts
of the problem might be easy to solve.
Can I ignore this item (at least temporarily)?
Obviously, you don’t want to do this very often, but it can be a useful strategy for problems
that cannot be solved immediately.
Note that if you leave something out, you should leave space in the solution to put in the
answer at a later stage. There are a number of possible advantages to be gained from this
approach:
1) It will allow you to make progress and complete other parts of the question that you are
familiar with. This means that you will gain marks rather than fretting over something
that your mind is not ready to deal with yet.
2) As you are working on the tasks that you are familiar with, your mind will relax and you
may remember how to deal with the problem area.
3) When you complete parts of the answer, it may become apparent how to fill in the
missing pieces of information. Many accounting questions are like jigsaw puzzles: when
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you put in some of the parts that fit together, it is easier to see where the missing pieces
should go and what they look like.

3. Find and Implement a Solution
In many cases, after identifying and defining the problem, it will be easy to deal with the
issue and to move on to the next part of the question. However, for complex problems that
are worth significant marks, you will have to spend more time working on the issue in order
to deal with the problem. When this happens, you should follow these steps:
Map out the problem
Depending on your preferred learning style, you can do this in a variety of ways including
diagrams, tables, pictures, sentences, bullet points or any combination of methods. It is best
to do this in a working on a separate page (not on the exam paper) because some of this work
will earn marks. Neat and clearly referenced workings will illustrate to the examiner that you
have a systematic approach to answering the question.
Summarise what you know about the problem
Make sure that this is brief and that it relates to the question requirements. Put this
information into the working where you have mapped out the problem. Be succinct and
relevant. The information can be based on data contained in the question and your own
knowledge and experience. Don’t spend too long at this stage, but complete your workings as
neatly as possible because this will maximise the marks you will be awarded.
Consider alternative solutions
Review your workings and compare this information to the question requirements. Complete
as much of the solution as you can. Make sure it is in the format as stipulated in the question
requirements. Consider different ways of solving the problem and try to eliminate at least one
alternative.
Implement a solution
Go with your instinct and write in your solution. Leave extra space on the page for a change
of mind and/or supplementary information. Make sure the solution refers to your workings
that have been numbered.

4. Review
After dealing with each problem and question, you should spend a short while reviewing your
solution. The temptation is to rush onto the next question, but a few moments spent in

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reviewing your solution can help you to gain many marks. There are three questions to ask
yourself here:
Have I met the question requirements?
Yes, we have mentioned this already. Examiner Reports over the years advise that failure to
follow the instructions provided in the question requirements is a significant factor in causing
students to lose marks. For instance, easy marks can be gained by putting your answer in the
correct format. This could be in the form of a report or memo or whatever is asked in the
question. Likewise, look carefully at the time period requested. The standard accounting
period is 12 months, but occasionally examiners will specify a different accounting period.
Is my solution reasonable?
Look at the figures in your solution. How do they compare relative to the size of the figures
provided in the question?
For example, if Revenue were 750,000 and your Net Profit figure was more than 1 million,
then clearly this is worth checking.
If there were some extraordinary events it is possible for this to be correct, but more than
likely, you have misread a figure from your calculator. Likewise, the depreciation expense
should be a fraction of the value of the fixed assets.
What have I learned?
Very often in exams, different parts of the solution are interlinked. An answer from one of
your workings can frequently be used in another part of the solution. The method used to
figure out an answer may also be applicable to other parts of your solution.
Conclusion
In order to pass your exams you will have to solve many problems. The first problem to
overcome is your reaction to unusual items. You must expect problems to arise in exams and
be prepared to deal with them in a systematic manner. John Foster Dulles, a former US
Secretary of State noted that: The measure of success is not whether you have a tough
problem to deal with, but whether it is the same problem you had last year. We hope that, by
applying the principles outlined in this article, you will be successful in your examinations
and that you can move on to solve and deal with new problems.

Page 8

ASSESSMENT STRATEGY
Stage: Level 2
Subject Title: L2.5 Auditing
Examination Duration: 3 Hours

Examination Approach
The skills examined include comprehension, detailed application, synthesis, evaluation,
effective communication, the analysis of audit issues and the ability to propose appropriate
solutions thereto. All questions are scenario-based. The compulsory questions examine the
students’ competence over a range of issues and they are asked to show how elements of the
syllabus interact and overlap. The remaining questions seek to ascertain the students’
knowledge of the practical application of the theoretical concepts studied.
Students are also required to demonstrate, in the context of the scenario presented, the ability
to exercise professional judgment (including appropriate professional scepticism and
consideration of legal and ethical issues) in drawing conclusions.
Examination Format
The examination is by an unseen closed-book examination of 3 hours’ duration. The
examination paper consists of 7 questions divided between Section A and Section B.
There are 3 compulsory questions in Section A. Students are required to answer 2 of the 4
questions in Section B.
All questions carry equal marks, split between practical application and theory.

Marks Allocation
Section A
Question 1 (Compulsory)
Question 2 (Compulsory)
Question 3 (Compulsory)

Marks
20
20
20

Section B
Questions 4 to 7
(choice of any 2 out of 4 20 marks each)

Total

100

Page 9

Learning Resources
Core Texts:
Modern Auditing, 3rd Edition 2008 /
Cosserat and Rodda/ Wiley/ ISBN 978
0470319734
Guide to Using International Standards on Auditing in the Audits of Small-and Medium
Sized entities /2nd Edition 2010/IFAC/ISBN 978-1-60815-076-2 556
Published in two volumes freely available for download from:
Volume 1:
http://web.ifac.org/media/publications/5/guide-to-using-internationa-1/guide-tousinginternationa-1.pdf
Volume 2:
http://web.ifac.org/media/publications/5/guide-to-using-internationa-1/guide-tousinginternationa-2.pdf

Manuals
L2.5 Auditing – Institute of Certified Public Accountants of Rwanda

Technical Material:
1. Auditing and Quality Control
Standards
- International Standards on Auditing
- International Standard on Quality Control
(ISQC 1)
CPA Syllabus 2012: Audi
2. Financial Accounting and Reporting
Standards
International Financial Reporting Standards
(IFRSs)
The International Auditing Standards (IASs)
are available from the International
Accounting Standards Board website at
www.iasb.org

Page 10

Supplementary Texts and
Journals
Principles of External Auditing 3rd ed / Porter,
Hatherby, Simon / Wiley 2008 / ISBN 978-0470-01825-5
The Audit Process, Principles, Practice &
Cases 5th edition/Gray and Manson /
Cengage 2011 / ISBN 9781408030493

Useful Websites
(at date of publication)
www.icparwanda.com
www.iaasb.org – International Auditing &
Assurance Standards Board.
www.ifac.org – The International Federation of
Accountants.
www.ifrs.org/ - The International Financial
Reporting Standards Foundation.
www.frc.org.uk/ - The Financial Reporting Council.
www.frc.org.uk/pob/ - The Professional Oversight
Board.

Page 11

BLANK

Page 12

L2.5 AUDITING
REVISION QUESTIONS

Page 13

REVISION QUESTIONS
Question 1
Lifts Ltd. is a leading name within the specialist stair lift industry, based in Kigali. Lifts Ltd.
has a strong reputation for customer care and quality of service. Lifts Ltd. is committed to
improving accessibility for its elderly and disabled customers by providing custom built
solutions. Lifts Ltd. outsources the manufacturing of all parts to a large number of suppliers
and then assembles the custom-made lifts from the parts procured in its plant in Kigali. Lifts
Ltd. has a fully integrated Computerised Accounting System (CAS). You are Mrs Ayim CPA
and it is two weeks before Lifts Ltd.’s financial year end. As part of the interim audit work
you have been given responsibility for identifying the relevant internal control issues and
testing the procurement, receiving and payable systems.

Procurement, receiving, and payables activity
Lifts Ltd.’s Store Manager has sole responsibility for procurement. The Directors of the
company have the utmost confidence in the Store Manager and therefore see no necessity in
being involved in the procurement process. The Store Manager selects suppliers based on the
suppliers having the necessary certification by Certification Africa (CA) Limited and on price
in a competitive tender process.
The inventory control part of the CAS generates a numerically sequenced Purchase
Requisition (PR), when the quantity of a particular part falls below re-order level. The PR
details the part required and the quantity to order is electronically forwarded to the
Procurement Department. Staff in the Procurement Department review the PR, allocate a
Purchase Order (PO), identified by a unique sequential order number, to an authorised
supplier and send the PO to that supplier using Electronic Data Interchange (EDI). A copy of
which is filed in the PO database by the CAS. Large or out of the ordinary purchases require
authorisation by the Store Manager.
When parts are received, the Store Clerk confirms that the inventory agrees to the bill of
lading and checks the PO database to ensure that the inventory were in fact ordered by Lifts
Ltd. Delivery is refused where goods do not have a bill of lading. The CAS is updated to
confirm receipt of goods, an electronic numerically sequenced Good Received Note (GRN) is
generated and the inventory records are updated to show the receipt of inventory. The
physical goods are added to the parts store and the bill of lading is stamped with the PO
number and GRN number and is filed in the Goods Inwards Department.

Page 14

When the supplier submits an invoice by EDI, it is matched by the CAS against Lifts Ltd.’s
PO and GRN for all relevant data and the CAS is updated to confirm receipt of the invoice.
The invoice is added to the purchases database on the CAS.

REQUIREMENT:
(a) Prepare a Management Report, clearly identifying the recipient, listing THREE
weaknesses in internal control. For each weakness state the impact and recommend a control
to overcome that weakness.
(10 marks)
(b) Identify FIVE audit procedures that an auditor would normally carry out on the
procurement, receiving and payables systems at LiftsLtd, describing the reason for each
procedure.
(10 marks)
[Total: 20 Marks]

Page 15

Question 2
Design Jewellery (DJ) is a retailer of jewellery based in Kigali.
With reference to the audit of the bank balance, you, the Audit Manager, are given the
following client prepared bank reconciliation by your Audit Junior. Your Audit Junior has
already performed some audit work as indicated by the symbols below:

Prepared by: Client/DED – 7 April 2011

Approved by: Client/SW – 8 April 2011

Design Jewellery Bank Reconciliation at 31 March 2011
Balance per bank

17,174

+ Cash deposit in transit (not yet recorded by bank)

450
17,624

- Outstanding cheques (not yet recorded by bank)

2,000

= Balance per cash ledger

15,624

◊

◊- Traced to Bank Statement at 31 March 2011
T- Total checked for accuracy

REQUIREMENT:
a) ISA 500 Audit Evidence, “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 risks of material misstatement and the design and
performance of further audit procedures”.

Identify and explain FOUR assertions that the auditor would be concerned with in
relation to the bank balance.
(4 marks)

ii.

Identify and explain FOUR risk factors relating to bank balance.
(4 marks)
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iii.

In addition to the two audit procedures already performed on the bank reconciliation
above, list FOUR other audit procedures that an auditor should perform.
(4 marks)

b) Explain, why in verifying bank reconciliations, auditors will be more concerned with
the possibility of a non-existent deposit in transit being included in the reconciliation
and an outstanding cheque being omitted rather than the omission of a deposit in
transit and the inclusion of a non-existent outstanding cheque.
(4 marks)
c) Explain why it is important for the auditor to confirm all bank accounts held and
operated by the client during the year.
(4 marks)
(Total: 20 marks)

Page 17

Question 3
Operating out of Kigali and Gitarama, Transport Ltd. (TL), a freight forwarding company,
aims to provide its customers with a reliable and competitively priced freight service, both
nationally and internationally. At any one time TL has approximately 100 large trade
receivables balances. Each of these balances can fluctuate between RWF50k to RWF200k. At
year end, the average large balance is RWF110,000. The remaining accounts have on average
a balance of RWF5,000. The trade receivables balances have different due dates for payments
and credit limits. The trade receivables are maintained alphabetically in a master file of trade
receivables.
Freight Service document data is keyed into a computerised system that simultaneously
produces a freight services invoice, income journal and an updated trade receivables master
file.
Customers submit cheques and remittance advices to clear their debt. On opening the post, a
member of the accounts staff records the list of cheques. Computer services staff carry out a
comparison of the remittance advices with this listing. After computer services staff enter the
cash receipts information, a cash receipts journal and an updated trade receivables master file
are simultaneously prepared.
Summary totals are produced on a monthly basis by the computer services department for
updating the general ledger master file accounts i.e. cash, income and trade receivables.
You are Mr Muller, Audit Senior, responsible for the audit of TL’s trade receivables balance
for 2011. Although previous audits of trade receivables have tended to adopt an ‘audit around
the computer’approach, you have decided to use audit software to assist with the audit of the
trade receivables balance.
REQUIREMENT:
a) List SIX specific risks posed by information technology to an entity’s internal control.
(6 marks)
b) Explain the concept of ‘auditing around the computer’ and discuss why this increases
audit risk for the auditor.
(4 marks)
c) Explain the FIVE audit procedures that could be carried out using audit software on
the trade receivables balance at TL. For each procedure, explain the reason for that
procedure.
(10 marks)
(Total: 20 marks)
Page 18

Question 4
Kigali Meat Company (KMC) is an Kigali registered company that offers premium
meat to its customers at wholesale prices. As part of the planning process the recently
appointed auditor is preparing an Overall Audit Strategy, with one of its principal sections
being an overview of KMC’s business and industry resulting from his acquisition of an
understanding of it.

REQUIREMENT:

a) Describe THREE benefits an auditor derives from planning audits.
(3 marks)
b) Outline the responsibilities of the new and previous auditors when a company is
changing auditors.
(3 marks)
c) Identify the factors the auditor should have considered before accepting appointment
as auditor of a company.
(4 marks)
d) With regard to the auditor obtaining an understanding of a client’s business and
industry:
i.

Explain TWO reasons why an auditor needs an understanding of the client’s business
and industry.
(2 marks)

ii.

identify FOUR major aspects of understanding the client’s business, industry, and
sources commonly used by auditors to acquire such an understanding for each of the
FOUR aspects.
(8 marks)
(Total: 20 marks)

Page 19

Question 5
Made in Marble (MiM) based in the North of Rwanda, offers design solutions to
architectural, construction and engineering customers using marble. MiM create products
tailored to customer specifications using computer-controlled machinery and coating
materials. MiM’s customer base is varied from well-known multinational companies, to
individual customers with a design idea. Typical products include dining room tables,
landscape seating, spa and pool features and garden planters. MiM’s workshop in Kigali
contains computer-controlled machines that have the capability to cut blocks of marble into
virtually any shape or size.
In previous years, MiM maintained a manual accounts system. This year MiM has purchased
a new Computerised Accounts System (CAS) which records purchases and sales transactions
and maintains records of trade receivables, trade payables, and inventory.
You, Mr Osei, as MiM’s Audit Engagement Supervisor have decided to adopt a risk-based
audit strategy in the audit of MiM.
Whilst MiM now maintains records of inventory (in both quantity and value) on its new CAS,
you and your audit team will be observing the physical inventory count in MiM at year-end to
ensure the proper cut-off of purchases and sales.

REQUIREMENT:
a)
i.

Explain why observation of the physical inventory count is essential in ensuring the
proper cut-off of purchases and sales.
(4 marks)

ii.

What information should the auditor obtain during the physical count to ensure that
cut-off for sales is accurate?
(4 marks)

iii.

What information should the auditor obtain during the physical count to ensure that
cut-off for purchases is accurate?
(2 marks)

b) Mrs Keita, Managing Director of MiM, has a number of concerns regarding the audit.
She knows that you plan to adopt a risk-based auditing strategy and does not know
what this means. She has asked that you send her a letter explaining:

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What is meant by a risk-based auditing strategy; and
(4 marks)

ii.

Advising on the steps that you propose to take arising from MiM’s implementation of
its new computerisedaccounting system.
(4 marks)
Format and Presentation (2 marks)
(Total: 20 Marks)

Page 21

Question 6

The Wine Tavern (TWT) is a bar in Kigali. The premises were built in the 15th Century and
still have some of its original features. It serves bar food as well as drinks. TWT’s financial
year-end is 30 June 2011.
TWT does its banking with the Kigali Remera branch of Commercial Bank of Rwanda
(CBR).
On 15 January 2011, TWT took out a 20 year mortgage for RWF5,200,000 to acquire the
building adjoining the pub, with the intention of expanding. TWT used the pub and the
ground on which the pub stands as collateral. Every month since the loan was obtained a
payment of RWF40,000 (principal and interest) has been paid to CBR.
As the responsible audit manager, you are in charge of the current year audit for TWT. TWT
is an existing client of your firm but this is the first time TWT has had a mortgage.

REQUIREMENT:
a)
i.

Explain why it would be necessary to record information on the mortgage for
inclusion in the permanent file.
(2 marks)

ii.

Identify what type of information in relation to the mortgage should be included in the
permanent file.
(2 marks)

iii.

Identify and explain any THREE key financial statement assertions for the mortgage,
interest expense, and interest payable accounts i.e. ONE assertion for each.
(3 marks)

b)
i.

List the audit procedures you should perform to audit the internal control components
of the mortgage.
(5 marks)

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ii.

List the substantive audit procedures to verify:

•

The issue of the mortgage;
(1 mark)
the balance of the mortgage at 30 June 2011;
(1 mark)

•

interest payable accounts at 30 June 2011;
(1 mark)

•

and the balance in the interest expense account for the period ended 30 June 2011.
(1 mark)

c) Briefly explain why the audit procedures on mortgage payable, interest expense, and
interest payable should be conducted together.
(4 marks)
(Total: 20 Marks)

Page 23

Question 7

Soothing Baby Products (SBP) distributes and sells baby products across Rwanda. Karim, the
audit junior, with responsibility for both sales and receivables performed a preliminary
evaluation of the company’s internal control over sales transactions and concluded that the
system of internal controls over sales is in general good and control risk is low. Therefore,
Karim decides to test controls to confirm her assessment of control risk. SBP raised
approximately 650 sales invoices during the year, whose recorded total is RWF7,500,000.
SBP’s profit before taxes for the year is RWF1,800,000.

Deciding to use judgemental (non-statistical) sampling Karim randomly selects a sample of
40 copy sales invoices from the recorded sales. She examines each sample invoice by
conducting the following tests of control:

•

Checks the invoice is correctly coded with customer and nominal codes.

•

Checks that the prices on the invoice are consistent with SBP’s official price list.

•

Checks the invoice for arithmetic, prices and calculations including VAT.

•

Traces the invoice details to the customer sales order.

•

Traces the invoice amount to SBP’s day books, ledgers and inventory records.

After performing the above tests of control, Karim notes a few minor control deviations, for
which the SBP’s sales staff give her plausible explanations. Karim therefore confirms her
assessment of control risk as low. Consequently, Karim decides to confirm receivables at
year-end and to limit her sample size to 15 accounts selected haphazardly from the population
of 250 receivable accounts.

REQUIREMENT:
a) Briefly explain the concept of sampling risk, indicating why such risk exists and what
measures Karim should take to minimise such risk.
(5 marks)

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b) Critically evaluate Karim’s audit approach with respect to the truth and fairness of
sales and receivables.
(6 marks)
c) Karim decided to determine the sample size judgmentally (non-statistically). Identify
FOUR advantages of using statistical sampling instead of using judgemental sampling
(non-statistical sampling).
(6 marks)
d) In the event that customers of SBP do not respond to Karim’s request explain THREE
alternative procedures that Karim should perform to gain assurance as to the truth and
fairness of those balances.
(3 marks)
(Total: 20 Marks)

Page 25

Question 8

Digital Select (DS) is an indoor and outdoor short run digital print house specialising in small
and large format digital signage and display. It has a fully integrated creative studio to take a
project from concept right through to completion. You are the Audit Manager for DS and are
now at stage in the audit of DS that precedes the audit reporting stage. You ask your Audit
Junior, Abi, to draft the audit report and below is a paragraph she has drafted:
“We planned and performed our audit to obtain assurance as to whether the statements are
free of misstatement. We examined evidence to support the amounts used by management.
An audit also includes assessing the accounting standards as used by the Directors, as it is the
Director’s responsibility to prepare the statements.”

REQUIREMENT:

a) List SIX basic elements of an auditor’s report. Briefly explain why each element is
included in the report.
(6 marks)
b) Identify the errors and deficiencies in the above paragraph drafted by Abi.
(9 marks)
c) Explain the audit process stage that precedes the audit reporting stage and follows the
financial statements testing stage.
(5 marks)
(Total: 20 Marks)

Page 26

Question 9

Your firm is the auditor of Lost Get IT Returned (LGIR) a Kigali-based company that sells
security tags for items such as laptops and mobile phones. Their turnover last year was
RWF17m.
You, the Audit Supervisor, are now at the planning stage of the audit and have made some
notes for your audit junior in relation to the International Standards on Auditing (ISAs UK
and Ireland). Amongst the notes you have given your audit junior are the following:

ISA 300 Planning an audit of financial statements requires that the planning stage of the audit
should be used to establish an overall strategy for the audit and to develop an audit plan.
ISA 330 The auditor's procedures in response to assessed risks notes that it is essential that
the auditor documents the nature, timing and extent of audit procedures that have been
performed.
ISA 315 Obtaining an understanding of the entity and its environment and assessing the risks
of material misstatement directs that the auditor must gain an understanding of internal
control within an entity that is relevant to the audit.
The audit junior has come back to you and asked you to clarify a number of items for him as
outlined in the REQUIREMENT section below.

REQUIREMENT:
(a)

List FOUR key matters that should be contained in an overall strategy for the audit.
(4 marks)

(b)

Should the overall strategy for the audit and other planning documents, like the audit
plan, be revised during the course of the audit? Justify your answers.
(6 marks)

(c)

List FIVE items or pieces of information that should be included in the audit
documentation to demonstrate that the required audit was conducted according to the
International Auditing Standards.
(5 marks)

Page 27

(d)

There are various methods for recording the control systems in the preliminary
evaluation of internal control. One method is to use a narrative.

(i)

State two other methods.
(2 marks)

(ii)

For the narrative method and for each of the other two methods in your answer to part
(i), list the advantage of each of the three methods.
(3 marks)
(Total: 20 Marks)

Page 28

Question 10

One of your responsibilities with your audit firm, XYZ Ltd., member firm of ICPAR, is
developing new clients.
XYZ Ltd. is a small audit firm. Motor Ltd. is based in Kigali where they sell new and used
cars. Motor Ltd. also service cars. You are currently in discussions with Motor Ltd. in
relation to the possibility of ABC Ltd.becoming Motor Ltd.’s new auditors. If your firm
consents to be their Auditor, Motor Ltd. has offered to service your car free of charge and the
cars of the three audit partners of the audit firm. Normal charge for a service of one of these
cars is RWF6000. You plan to communicate with the previous auditor before making your
recommendation.

REQUIREMENT:

(a)

State with reasons whether you and the audit partners should accept the offer of free
car services from Motor Ltd. in event they are accepted as an audit client.
(6 marks)

(b)

In addition to communicating with the previous auditor, explain FOUR factors that
you should consider in determining whether it is feasible for XYZ Ltd. to accept this
engagement.
(8 marks)

(c)

Identify THREE items of information you should obtain from Motor Ltd.’s previous
auditor.
(6 marks)
(Total: 20 marks)

Page 29

BLANK

Page 30

L2.5 AUDITING
REVISION SOLUTIONS

Page 31

REVISION SOLUTIONS

Solution 1
(a)

Management Letter To the Audit Committee of Lifts Ltd.:

Please find attached the various internal control weaknesses we identified in our assessment
of your procurement, receiving and payables internal control systems:
Internal Control Weakness 1
Weakness: The directors do not monitor procurement activity.
Impact: The Stores Manager has sole responsibility for selecting suppliers and could be
receiving kickbacks from suppliers.
Recommendation: The directors should identify risks associated with its
procurement/receiving/payables activity and should implement a strategy to monitor such
risks and for example another member of staff outside the procurement department along
with Stores Manager should be involved in selecting suppliers.
Internal Control Weakness 2
Weakness: Lack of proper criteria for selecting suppliers as volume criteria is not specified
and nor are any credit references sought.
Impact: Purchases may be made from unacceptable suppliers who may not represent a
reliable source of supply because of production inability or financial constraints.
Recommendation: Volume requirements should be considered when selecting a supplier as
well as their financial stability (credit reference checks) by the finance department.
Internal Control Weakness 3
Weakness: Stores clerk does not count and inspect goods received.
Impact: Goods may be inaccurately entered into the CAS (quantities and type).
Recommendation: The stores clerk should count the parts and inspect them before entering
this information into the CAS.
(b)

Audit procedures procurement, receiving and payables systems:

Procedure 1
Obtain a sample of authorised suppliers and check for CA certification
Page 32

Reason for Procedure 1
To confirm that all authorised suppliers have the requisite certification
Procedure 2
Obtain a sample of POs in the CAS, record details of the PO and trace to the bill of lading
filed in the goods inwards department.
Reason for Procedure 2
To confirm that all goods ordered were received.
Procedure 3
For the sample of POs above, agree to the inventory records in the CAS.
Reason for Procedure 3
To confirm that goods received were completely and accurately recorded in the inventory
records.
Procedure 4
Obtain a sample of bills of lading and agree to the CAS.
Reason for Procedure 4
To confirm that inventory received has been recorded in Lifts Ltd.’s CAS and that liabilities
are therefore not understated.
Procedure 5
For a sample of POs, agree details to trade payables, confirming details against the supplier
invoice.
Reason for Procedure 5
To confirm complete and accurate recording of the inventory liability in trade payables.
Procedure 6
For a sample of invoices in the CAS, agree details to the bills of lading for items on that
invoice.
Reason for Procedure 6
To confirm that the purchase liability has been recorded only for goods actually received.

Page 33

Procedure 7
For a sample of supplier invoices, tot and cross tot invoice price and quantities confirming
price to the original order.
Reason for Procedure 7
To confirm the arithmetical accuracy of invoices and ensure the company was charged the
correct price for goods received.

Page 34

Solution 2
(a)
i)

Assertions:

existence – does the recorded bank balance exist at the balance sheet date.

rights and obligation – does DJ have the rights to all bank balances shown at the
balance sheet date.

valuation – is the bank balance recorded in its correct amount.

completeness – are all bank balances recorded in the correct period and included in the
financial statements.

accuracy – are all bank balances accurately recorded in the financial statements.

cut-off – have all transactions been accounted for in the correct accounting period.

classification – are all bank balances properly classified and disclosed in the balance
sheet and are all lines of credit, loan guarantees and other restrictions on bank balance
appropriately disclosed.

ii)

Risk factors relating to bank include:

Complexity of the item, as in the case of foreign exchange transactions and hedges.

Lack of segregation of incompatible duties facilitating the misappropriation of cash.

Reliability of cash recording system.

Frequency of bank reconciliation (e.g. how often does the DJ receive bank statements
and when are the reconciliations prepared).

Physical controls over cash and its susceptibility to theft.

Risks due to fraud: False bank accounts, fraudulent or erroneous payments.

Rights over Bank accounts (does DJ own the account or does it belong to another
company within the group).

Does DJ have rights to all cash in the bank accounts or do the directors of DJ have
some personal cash in the client bank account.

Are all payments and receipts recorded in the correct period.
Page 35

iii)
1.

Agree the total as per the reconciliation to the cash ledger and the bank confirmation
letter.

Trace outstanding lodgements to post year bank statements.

Trace outstanding cheques to post year-end bank statements.

For a sample of items included within outstanding cheques and lodgements test to
ensure the items have been treated appropriately in year-end trade receivables and trade
payables i.e. items included in outstanding lodgements have been removed from the
trade receivables ledger, and items included with outstanding cheques have been
removed from the accounts payable ledger.

Cross-reference totals to lead sheet.

Verify bank account reconciliation properly prepared and reviewed on a timely basis.

(b)
The risk of material misstatements that are of the greatest concern to auditors in bank
reconciliations are intentional ones to cover up a shortage of cash, generally arising from
fraud. A fraudulent deposit in transit or an omitted outstanding cheque will both conceal a
shortage of cash. Omitted deposits in transit or inclusion of a non-existent outstanding cheque
are likely misstatements only in the event that the bank balance, after reconciling items are
accounted for, is greater than the ledger balance, which would be highly unusual.

(c)
The bank confirmation is a very important part of the audit of bank as it provides the
auditor with reliable independent third party audit evidence. In addition, the bank
confirmation should identify cash on deposit, loans and details of all accounts in the name of
the audit client at the balance sheet date.

Page 36

Solution 3
(a)
1.

Reliance on systems or programs that are inaccurately processing data, processing
inaccurate, data or both.

Unauthorised access to data that may result in destruction to data or improper changes
to data.

The possibility of computer services personnel gaining access privileges beyond those
necessary to perform their assigned duties thereby breaking down segregation of duties.

Unauthorised changes to data in master files.

Unauthorised changes to systems or programs.

Failure to make necessary changes to systems and programs.

Inappropriate manual intervention.

Potential loss of or inability to access data as required.

(b)

Auditing around the computer

This term means that audit activity is focused primarily on ensuring that the source
documentation is processed correctly and the auditor verifies this by checking the source
documentation to the output documentation. The ‘internal’ software of the computer is not
documented or audited by the auditor.
This method of auditing increases audit risk because:
–

The actual computer files and programs are not tested; the auditor has no direct
evidence that the programs are working as documented.

–

Where errors are found in reconciling inputs to outputs, it may be difficult or even
impossible to determine why those errors occurred. Useful amendments to clients’
systems cannot be made and there is an increased possibility of audit report
qualifications.

(c)

Audit procedures using audit software

Procedure 1
Tot the trade receivables ledger to ensure it agrees with the total on the trade receivables
control account.

Page 37

Reason for Procedure 1
To ensure the completeness and accuracy of recording of items in the trade receivables ledger
and control account.
Procedure 2
Compare the balance on each trade receivables account with its credit limit to ensure this has
not been exceeded.
Reason for Procedure 2
To check for breach of system rules.
Procedure 3
Review the balances in the trade receivables ledger to ensure no balance exceeds total freight
services to that customer.
Reason for Procedure 3
To check for unreasonable items in the ledger.
Procedure 4
Calculate trade receivables days for each month end to monitor control of trade receivables
over the year.
Reason for Procedure 4
To obtain new/relevant statistical information and ensure that there are no cash flow
problems.
Procedure 5
Stratify trade receivables balances to show all material items and select appropriate sample
for testing.
Reason for Procedure 5
To select items for audit testing and trade receivables confirmation.
Procedure 6
Produce an aged trade receivables analysis to assist with the identification of bad debts.
Reason for Procedure 6
To assist with trade receivables valuation testing.

Page 38

Solution 4
(a)

Benefits from planning audits

There are three main benefits from planning audits: it helps the auditor obtain sufficient
appropriate evidence for the circumstances, helps keep audit costs at a reasonable level, and
helps avoid misunderstandings with the client.

(b) If the client has been audited previously, under ISA 300 the new auditor should contact
the previous auditor, in compliance with relevant ethical requirements, in order to evaluate
whether to accept the engagement. Permission must be obtained from the client by both the
new auditor and the previous auditor before communication can be made because of the
confidentiality requirement in the Auditors Code. The new auditor should be wary of
accepting the client if the client does not give permission for this communication to the new
auditor and/or the previous auditor. The previous auditor in compliance with relevant ethical
requirements is required to respond to the new auditor’s request for information if given
permission by the client.

(c)
Prior to accepting a new client, the auditor should investigate the client before
accepting them. The auditor should evaluate the client’s standing in the business community,
financial stability, and relations with its previous auditor. The main purpose of investigating a
new client is to ascertain the integrity of the client and the possibility of fraud. The auditor
should be especially concerned with the possibility of fraudulent financial reporting since it is
difficult to uncover. The auditor does not want to needlessly expose himself or herself to the
possibility of legal liability for failure to detect fraud. The auditor should also assess whether
they are competent to perform the audit and have the capabilities, time and resources to do so.
In addition, before accepting a new audit client, the auditor should evaluate whether there are
any circumstances which could comprise their independence with respect to the client.
(d)
(i)
Reasons for obtaining an understanding of the client’s business and its industry. ISA
310 requires a reasonable understanding of the client’s business and industry. The nature of
the client’s business and industry affects client business risk and the risk of material
misstatement in the financial statements. Auditors use the knowledge of these risks to
determine the appropriate amount of audit evidence to gather. Auditors have been exposed to
problems resulting from the auditor’s failure to fully understand the nature of transactions in
the client’s industry.

Page 39

(ii)
The major aspects of understanding the client’s business and industry, along with
potential sources of information that auditors commonly use for each of the areas are as
follows:
1.

Industry and External Environment – Read industry trade publications, and regulatory
requirements.

Business Operations and Processes – Tour the plant and offices, identify related parties,
and inquire of management.

Management and Governance – Read the memorandum and articles of association, read
minutes of board of directors and shareholders, and inquire of management.

Client Objectives and Strategies – Inquire of management regarding their objectives for
the reliability of financial reporting, effectiveness and efficiency of operations, and
compliance with laws and regulations; read contracts and other legal documents, such
as those for share options, and pension plans.

Measurement and Performance – Read financial statements, perform ratio analysis, and
inquire of management about key performance indicators that management uses to
measure progress toward its objectives.

Page 40

Solution 5
(a)
i)

A proper cut-off of purchases and sales is heavily dependent on the physical inventory
observation because a proper cut-off of sales requires that finished goods inventory
included in the physical count be excluded from sales and all inventory received be
included in purchases.

ii)

To make sure the cut-off for sales is accurate, the following information should be
obtained during the taking of the physical inventory:

The last despatch note number should be recorded in the working papers for subsequent
follow- up to sales records.

A review should be made of despatches to test for the possibility of inventory set aside
for despatch and not counted or other potential cut-off problems.

When pre-numbered despatch notes are not used, a careful review of MiM's method of
getting a proper sales cut-off is the first step in testing the cut-off.

A list of the most recent despatches should be included in the working papers for
subsequent follow-up to sales records.

iii)

For the purchase cut-off, the following information should be noted:

The last goods received note number should be noted in the working papers for
subsequent follow-up to purchase records.

A review should be made of the goods inwards department to make sure all inventory
has been properly included in the physical inventory.

Page 41

(b)

Letter to Mrs Keita
ABC Certified Public Accountants
Avenue du Commerce
Kigali
8 September 2011

Made in Marble
Unit 12
Kigali Industrial Park
Kigali

Dear Mrs Keita,
Queries with reference to the forthcoming audit
You have requested that I clarify a number of issues concerning the forthcoming audit as
follows:
Risk-based audit approach
Using a risk-based audit approach; we will carry out a limited amount of testing of
transactions and balances and concentrate our efforts on analysing the business risks facing
MiM. These then become the focus of our attention. This strategy necessitates that we utilise
our most experienced and skilled staff and highlights our considerable confidence in MiM’s
underlying systems. It is an efficient and cost effective way of auditing companies such as
MiM where misstatements have to be fairly material to have an impact on the financial
statements. We will therefore not be concerned with individual routine transactions, although
we will still be concerned with material non-routine transactions.
Implementation of new computerised accounting system
As MiM has purchased a new system we will as part of our audit carry out the following
procedures:
Internal control system review
1.

Ascertain the system - determine the flow of documents and extent of controls in
existence in MiM’s new computerised accounting system
Page 42

Record the system - prepare a comprehensive record (flowcharts, questionnaires) of the
system to facilitate evaluation of the systems

Corroborate that record with staff at MiM

Assess the systems and internal controls
4.

Review the overall system for reliability and formulate a basis for testing their
effectiveness in practice

Test the system and internal controls
5.

Test the system with some sample checks

Evaluate its reliability; and

After evaluating the systems and testing controls, we will send you a management letter
identifying any weaknesses and recommending improvements.

I hope this answers you queries but please feel free to contact me should you have any further
queries.
Yours sincerely,

Mr Osei
On behalf of ABC Certified Public Accountants

Page 43

Solution 6
(a)
(i)

The permanent file for The Wine Tavern (TWT) will contain documents and matters of
continuing importance which will be required for more than one audit. Information on
the mortgage should be placed in the permanent audit file so that the appropriate
information concerning the mortgage will be conveniently available for future years'
audits of TWT.

(ii) This information should include all the provisions of the mortgage as well as the
purchase price, date of purchase, and a list of items pledged as collateral. It may also
contain an amortisation schedule of principal and interest (especially if the auditor has
access to CAATs for preparation of such a schedule).
(iii)

As companies in general have a natural bias/inclination to understate/hide related
liabilities and related expenses, the financial statement assertions that should be focused
on most in the performance of substantive procedures are: (1) completeness: are all
mortgages disclosed in full – implying the need to test all balances, large or small; (2)
classification: are mortgage amounts properly broken down on the financial statements
between current and non-current (3) Accuracy and cut-off interest expense: has interest
expense been correctly calculated and included in the correct accounting period. (4)
Accuracy and cut-off interest payable: has interest payable been correctly calculated
and included in the correct accounting period. Although TWT has only one mortgage
the above still applies.

(b)

Specific Audit Procedures

Internal control
1

Obtain an understanding of TWT’s mortgage authorisation and repayment system

Obtain a copy of the mortgage agreement and place on the permanent file, and review
terms and conditions (including the face amount, payments, interest rate, restrictions,
and collateral.)

Verify if mortgage was approved by TWT’s Board [key control activity performed]

Review of bank reconciliation [verify that TWT senior management monitor key
control
activities]

Verify that TWT’s senior management / Board have system in place to identify and
monitor (business)risks that adversely impact TWT’s cash flows (and its ability to
repay mortgage)

Page 44

Financial Statements balances
6

Trace CBR mortgage amount and disclosure to bank agreement terms and conditions
and cash inflow to bank statement year-end balances

Confirm the mortgage amount, terms, and collateral with the confirmation replies
received from CBR

Test interest expense for reasonableness through analytical review and knowledge
acquired from CBR

Recalculate interest payable at the balance sheet date and reconcile interest expense to
the decrease in principal and the payments made.

Review appropriateness of financial statement presentation and disclosure

(c)

The audit of mortgage payable, interest expense, and interest payable should all be done
together since these accounts are related and the results of testing each account have a
bearing on the other accounts. The likelihood of misstatement in the client's records
(TWT) is determined faster and more effectively by doing them together.

Page 45

Solution 7
(a)

Sampling risk arises from the possibility that the auditors’ conclusion based on the
sample may be different from the conclusion reached if the entire population was
subject to the same procedure: risk that the sample indicates that a material error exists
when in fact one does not and vice-versa.
Sampling risk exists because it is not economically feasible to audit the entire
population in order to provide the level of audit assurance sought.
Karim should take the following measures to minimise such risk:

Ensure population is appropriate and complete

Ensure auditor is adequately trained in sampling theory and techniques

Adopt statistical sampling methods (like MUS) over judgmental methods, as they are
more rigorous.

(b)

Karim first assessed the quality of internal control system design over sales transactions
and found it to be good. Karim then performed tests of control, finding few deviations,
and then judgmentally selected a sample of customer account balances at year-end for
purposes of confirmation. While this overall approach is a valid way for Karim to
obtain assurance in the area, there are several weaknesses with his approach:

•

Karim only evaluated controls over sales transactions but there is no mention of
evaluation of controls over cash receipts. The truth and fairness of year-end receivables
will depend upon both systems.

•

Karim accepted explanations from the SBP’s sales staff about the deviations she noted
in her tests of controls, but she does not appear to have corroborated those explanations
with any other audit evidence.
While Karim’s sample size of 15 customer confirmation requests at year-end is
relatively small, this is a judgment call and appears reasonable. In addition, the fact that
she selected the sample haphazardly from the population is acceptable since she is
using a judgmental sampling approach. Overall, Karim’s conclusions are questionable
because of her failure to evaluate and test controls over cash receipts and her failure to
corroborate explanations for deviations with other evidence.

(c)

The advantages of using statistical sampling rather than judgemental sampling (nonstatistical sampling) include:

(1)

The size of the sample is determined objectively having regard to the degree of risk
associated with the area being tested.

(2)

Bias is eliminated.
Page 46

(3)

Results of statistical sampling can be more easily justified as being representative of the
population as a whole, thus increasing the level of confidence in the results of testing
the sample. Because of this, the conclusion drawn from the results of sample testing are
more easily justified where an audit client disputes the audit conclusions.

(4)

The emphasis on risk assessment by the auditor in the determination of the sample size
encourages the auditor to concentrate on significant issues (for example a high degree
of control risk), which may not otherwise be considered.

(5)

In instances when there is a large population, the use of statistical sampling techniques
may reduce the sample size, and therefore the amount of audit work required, as
compared to the sample size that would be selected using judgement-sampling
methodology.

(6)

The auditor may justifiably conclude with a definite level of confidence that the
conclusions drawn from the sampling test are within stated precision limits.

(d)

In the event of SBP’s customers not responding to Karim’s correspondence seeking
confirmation then Karim should undertake the following procedures:

–

agree year-end receivables balance to invoice/sales invoices/dispatched note

–

vouch post balance year-end payment of the receivables balance by agreeing payment
to SBP’s cash receipts book and bank statement and verify that the post balance year
end payment is in respect of invoices included on the receivables ledger at the year-end

–

determine whether it is necessary to confirm existence of the customer for example by
telephoning the customer or by visiting the premises of the customer

Page 47

Solution 8
(a)

Audit report element

Title of ‘independent auditor’
To identify this as an audit report and distinguish it from other reports on financial statements
that might be issued by others, directors, etc. Using the word “independent” distinguishes the
independent auditor’s report from reports issued by others.
Addressee
To identify the person(s) who may use or rely on the report. It is usually addressed to the
shareholders or those charged with governance of the entity being audited
Introductory paragraph identifying
– the financial statements audited and
To make it clear which pages of an annual report have been audited.
– responsibilities of entity’s directors and the auditors
To make clear that the directors prepare financial statements and the auditors audit them
following international standards on auditing (ISAs) (UK and Ireland).
Scope paragraph describing the nature of the audit in terms of ISAs followed and the
workperformed by the auditor
To explain the scope of the audit so the standard of theauditors work is clear (ISAs UK and
Ireland) have been followed and other factors such as limitation of audit testing (for example,
not tested all items) is known.
Opinion paragraph referring to the financial reporting framework followed and
expressing the auditors opinion
To provide the auditors’ opinion on the financial statements in terms of the true and fair view,
to assure the reader that the audit has been carried out in accordance with the requirements of
the Companies Act.
Other Matters
To elaborate on matters that provide further explanations of the auditor’s responsibilities in
the audit of financial statements or of the auditor’s report thereon. Such matters may be
addressed in a separate paragraph following the auditor’s opinion.

Page 48

Other Reporting Responsibilities
To report on other matters such as performance of additional specified procedures or an
opinion on specific matters, such as the adequacy of books and records.
Auditor’s signature
This is normally the signature of the audit firm as the firm assumes responsibility for the
audit, not the individual engagement partner.
Date of the report
To inform the reader that the auditor has considered effects of transactions that the auditor
became aware of on the financial statements up to that date.
Auditor’s address
This is normally the city where the auditor responsible for the audit is located so he/she can
be contacted, if necessary.

(b)
•

There should be two separate paragraphs – basis of opinion and scope

•

Does not state “we conducted our audit in accordance with International Standards on
Auditing (UK and Ireland)”

•

Does not state “an audit includes examination, on a test basis of evidence relevant to
the amounts and disclosures”

•

“Statements” should be “financial statements” (2 occurrences)

•

Should refer to “significant estimates and judgements made by directors”

•

“Assessing generally accepted accounting principles as used” should be “whether the
accounting policies are appropriate to the company’s circumstances, consistently
applied and adequately disclosed”

•

Does not state, “reasonable assurance”

•

“Misstatement” should be “material misstatement”

•

“evidence” should be “Sufficient appropriate evidence”

•

Should refer to “evaluated the overall adequacy of the presentation of information in
the financial statements”
Page 49

•
(c)

Should not refer to “Director’s responsibility to prepare the statements”
This stage is known as the financial statements review stage, whereby financial
statements are examined when forming an overall conclusion as to whether the
financial statements as a whole are consistent with the auditor’s understanding of the
entity: assessment of their overall reliability.
This is achieved essentially through the performance of analytical procedures (critical
analysis) on the content and presentation of the financial statements.

Page 50

Solution 9
(a)

Factors that should be contained in the overall strategy for the audit of LGIR include:

Relevant characteristics of the audit engagement, such as the reporting framework used
in order to set the scope of the engagement.

ii)

Key dates for reporting and other communications

iii)

Setting of materiality

iv)

Preliminary risk assessment and whether internal controls are to be tested

Consideration of resources available and how they are to be used

(b)

Yes – the Overall Audit Strategy and Overall Audit Plan for LGIR should be updated
and changed as necessary during the course of the audit. We may need to revise the
Overall Audit Strategy and Overall Audit Plan (and thereby the planned nature, extent
and timing of further audit procedures) when unexpected events, changed conditions
or the audit evidence achieved from audit procedures lead to information that is
significantly different from information available to us (the auditors) when the audit
was first planned.

(c)

The following items and information should be included in the audit documentation of
LGIR:
•

Notes pertaining to planning including nature, extent, and timing of audit procedures

•

Description of audit evidence obtained

•

Evidence that the work performed by engagement team staff was supervised and
reviewed

•

Evidence that the financial statements or other information on which we (‘the
auditor’) are reporting agree with the accounting records underlying such statements
or information

•

Evidence of the evaluation and disposition of misstatements

•

Copies of letters (or notes) concerning audit matters reported to the LGIR

Page 51

(d)

Other methods for recording the control systems in the preliminary evaluation of
internal control systems include:

i)
•

Flowcharts

•

Questionnaires

•

Walk-through tests (test of one control)

ii)

The advantage of the narrative method and the each of the other methods in i) above
•
•
•
•

Describes the characteristics of the system (Narrative)
Provides an overview (Flowchart)
Describes control procedures and weaknesses (Questionnaire)
Verifies or updates accuracy of documentation of internal controls (Walk-through)

Page 52

Solution 10
(a)

Auditors must be independent and be seen to be independent at all times. XYZ Ltd.
must comply with the CPA Code of Ethics. If the free car service is deemed to have
significant value, it may compromise XYZ Ltd.’s, as auditor’s, objectivity because it
represents a threat to independence due to the self- interest threat. Gifts, hospitality or
services should only be accepted if the value of any benefit is modest, and therefore
does not present a threat to objectivity. The value of the free services offered to you and
the audit partners is RWF6000 each. This is clearly of significant value and,
irrespective of the Motor Ltd.’s motivation for making the offer, would represent a
threat to the objectivity and independence of XYZ Ltd. as auditor. The offer should be
politely refused.

(b)

In determining if it is feasible to accept this engagement the following factors should be
considered by XYZ Ltd:

–

the identity and business reputation of Motor Ltd.’s principal owners, key management,
related parties and those charged with governance

–

identify any indications that Motor Ltd. might be involved in money laundering or other
criminal activities

–

assess the level of independence between XYZ Ltd and Motor Ltd. and ensure
acceptance does not create an actual or perceived conflict of interest with an existing
audit client

–

obtain financial information from prior audited financial statements, interim financial
statements, and annual reports

–

ascertain Motor Ltd.’s business environment and who will use the financial statements

–

determine the likelihood that the scope of the audit will be restricted or subjected to an
unacceptable time constraint

–

communicate with Motor Ltd.’s bankers, customers, legal representatives, and others
who may be able to provide insights into the company’s management

–

conduct background searches of relevant databases

–

consider the increased business risk because Motor Ltd.’s industry is one that could
have significant implications in terms of financial losses due to current economic issues

–

Motor Ltd. operates in a specialized industry with which XYZ Ltd. does not appear to
have any relevant experience; therefore, the audit firm may not have the resources
necessary to complete the engagement.
Page 53

(c)

Items of information that XYZ Ltd. should obtain from the previous auditor would
include:
•

Any scope limitations imposed by Motor Ltd., the client

•

Significant differences over applicability of accounting standards

•

Difficulties in collecting audit fees from Motor Ltd., the client

•

Indications of unethical management practices at / by Motor Ltd.

•

Any attempt by Motor Ltd.’s Management’s to influence the audit report (such as
opinion shopping)

Page 54

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Create Date                     : 2012:09:19 00:04:03+01:00
Metadata Date                   : 2012:09:19 00:04:32+01:00
Creator Tool                    : Acrobat PDFMaker 10.1 for Word
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Instance ID                     : uuid:c078f7a6-dd96-4b32-b014-f57574b6e73e
Subject                         : 2
Format                          : application/pdf
Title                           : 
Description                     : 
Creator                         : Ashelina
Producer                        : Adobe PDF Library 10.0
Keywords                        : 
Source Modified                 : D:20120911140734
Company                         : Hewlett-Packard
Tagged PDF                      : Yes
Page Layout                     : OneColumn
Author                          : Ashelina

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