NOVEMBER 2021 PROFESSIONAL EXAMINATIONS

ADVANCED AUDIT & ASSURANCE (PAPER 3.2)

CHIEF EXAMINER’S REPORT, QUESTIONS AND MARKING SCHEME

STANDARD OF THE PAPER

The standard of the paper was very high. The questions were well within the syllabus
in terms of structure and balanced in weightings. The paper was relatively free from
errors, and each question was very clear, without any ambiguity. The requirements of
each question were also easy to understand. Candidates were tasked to analyse and
evaluate practical situations Auditors in practice meet in their day-to-day duties.

A question on the Public Sector Audit Standards (F: Audit of Public Sector) and the
Exposure Draft on Audit of Less Complex Entities (I. Current Developments) were
poorly answered. However, each question was within the syllabus in the section
stated against them.

PERFORMANCE OF CANDIDATES
Candidates’ performance was relatively high. 46.51% passed compared to
performances in the previous sitting, where only 24.12% passed the May 2021
examinations and 39.28% passed the November 2020 examination.

The common mistakes were what appeared to be too much time spent on the first few
questions, leaving little time for the last couple of questions. Candidates from large
centres performed better probably due to the availability of tuition centres than those
from small centres outside the large cities.

NOTABLE STRENGTHS AND WEAKNESSES OF CANDIDATES

Generally, candidates performed better in typical syllabus areas like Audit Procedures
and Audit Evidence, Auditor's Report, Ethics, Risks and Quality Management.

Candidates need to prepare themselves better for questions on topical issues

(especially the issue of new or revised standards and legislation) in the profession and
not rely solely on issues discussed in the Study Manual under Current Developments.
There also appeared to be inadequate preparation for the Public Sector Auditing
Standards questions.

DETAILED QUESTION ANALYSIS

Looking at all five questions, the candidates understood the questions clearly. Except
for poor performance in topics stated above, the general performance in all the
questions was acceptable.

RECOMMENDATION
Looking ahead, candidates should make covering the entire syllabus a must and
remember that the examination papers strictly follow the mark allocation to the
various topics published in the syllabus.

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QUESTION ONE

a) Although auditors can incur civil liability under various statutes, it is more likely that they
will incur liability for negligence under common law, as most cases against auditors have
been in this area. Therefore, auditors must be fully aware of the extent of their
responsibilities to minimise the danger of professional negligence claims.

Required:
Discuss FIVE (5) steps that auditors should take to minimise the danger of claims against
them for professional negligence. (5 marks)

b) Your firm has recently completed the audit of Jackson Company. After extensive
discussion with the company's management, the audit opinion has been qualified in respect
of the auditors’ inability to agree with management on the appropriateness of a provision
for obsolete inventory.

The Managing Director has informed you that the company intends to change its auditors
and engage the services of a small local firm of accountants. He informed you verbally that
the reason for their decision is the disagreement over the provision for inventory
obsolescence.

Jackson Company is convinced that the new auditors are more likely to accept the
accounting policies of management. You have received a letter from the new auditors
enquiring if there are any professional reasons why they should not accept appointment as
auditors of Jackson Company.

Required:
i) In view of the attitude of management towards your firm, discuss the factors which the new
auditors need to consider before accepting the appointment. (3 marks)
ii) Explain the ethical implications for the new auditors if they accept the appointment as
auditors. (2 marks)

c) Aglebe Ltd manufactures surgical instruments which are sold to hospitals and clinics. Due
to the increased use of laser surgery in the last four years, demand for a traditional metal
surgical instrument, which provided 75% of revenue in the year ended 30 June 2007, has
declined rapidly.
You have been recently appointed auditor of Aglebe Ltd, and during preliminary
discussions with some senior management, the following matters came to light:

Aglebe Ltd is expanding into laser surgery equipment, but research and development are at
an early stage. However, the directors feel confident that the laser instruments being
currently designed will eventually receive the necessary license for commercial production,
and that the laser product will replace surgical instruments as a leading source of revenue.
There is currently one scientist working on the laser instrument, subcontracted by Aglebe
Ltd, on a freelance basis. In addition, the building in which the research is being carried out
has recently been significantly extended by the construction of a large laboratory.

A considerable revenue is derived from agents who Aglebe Ltd does not employ. The
agents earn a commission based on the value of sales they have secured for Aglebe Ltd

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 during the year. There are many suppliers in the market, and agents are used by all
manufacturers to market and distribute their products.
The company's manufacturing facility is located in another country, where operating costs
are significantly lower. The facility is under the control of a local Manager who visits the
head office of Aglebe Ltd annually for a meeting with senior management. Products are
imported by air. The overseas plant and equipment is owned by the company and was
constructed 12 years ago specifically to manufacture metal surgical instruments.

The company has a bank overdraft facility and utilises it throughout the credit period. In
addition, a significant bank loan that will carry a variable interest rate is currently being
negotiated. The terms of the loan will be finalised once the bank has viewed the audited
financial statements.

The Managing Director of Aglebe Ltd owns a supply chain company that supplies surgical
instruments. He is known to be a disciplinarian and members of staff of the company
including management would do everything possible to avoid any form of conflict with
him.

Required:
Explain FOUR (4) principal audit risks facing Aglebe Ltd. (10 marks)

(Total: 20 marks)

QUESTION TWO

a) You are the Audit Manager responsible for the audit of Meggs Chops Ltd, a company that
runs a chain of fast food restaurants. You are aware that a major risk of this sector is that
poor food quality might result in damages claimed by customers.

You had satisfied yourself at the interim audit that the company's control risk as regards
purchases of food and its preparation in the kitchen was low. However, during your final
audit, it comes to your attention that one month before the year-end, a customer has sued
the company for personal injury caused by food poisoning, claiming an amount of GH¢
100,000 in compensation. This amount is material to the stated profit of the company, but
management believes that it has good defences against the claim.

Required:
i) Recommend TWO (2) controls that the company should have in place to reduce the risk
associated with food purchases and their preparation in the kitchen. (2 marks)
ii) State TWO (2) audit procedures you should carry out during controls testing to satisfy
yourself that control risk in this area is low. (2 marks)
iii) Explain TWO (2) assertions relevant to accounts payable at the year-end date. (4 marks)
iv) In respect of the potential claim, state THREE (3) items of evidence you should obtain and
explain how they might enable you to form a conclusion on the likelihood of the claim
being successful. (6 marks)

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b) Following your audit, you have concluded that there is a possibility, but not a probability,
that the claim will be successful. However, management has decided not to make a
provision or disclosure in the financial statements regarding this matter.

Required:
Describe how the matter should be reported in the financial statements and explain the
effect on your audit report. (6 marks)

(Total: 20 marks)

QUESTION THREE

You are the Audit Manager of Integrity & Associates. You are currently reviewing the audit
files for several of your clients for which the audit fieldwork is completed. The Audit
Seniors have raised the following issues:

Gaint Ltd (Gaint)

Gaint was incorporated over two decades ago. Due to the leadership philosophy of the
founders, the company has expanded significantly. As a result, it has won many local and
international awards for the quality of services to customers.

However, after the Government announced the outbreak of the Corona Virus in March
2020, it negatively impacted the company's operations. Gaint has experienced difficult
business conditions due to the impact of the Corona Virus and has lost significant market
share. The prior year's financial statements showed a profit before tax of GH¢1.2 million;
however, the current year loss before tax is GH¢ 4.4 million. The forecast net cash outflow
for the next 12 months is GH¢3.2 million.

The cash flow forecast has been reviewed during the audit fieldwork, and it shows a
significant net cash outflow. Management is confident that further funding can be obtained
and has prepared the financial statements on a going concern basis with no additional
disclosures. However, the audit senior is highly sceptical about this.

Falcon Ltd (Falcon)

Falcon’s year end is 30 September, however, subsequent to the year end the company’s
purchases ledger has been corrupted by a computer virus. Falcon’s Finance Director was
able to produce the financial statements prior to this occurring. However, the audit team
has been unable to access the sales ledger to undertake detailed revenue or year-end
receivables testing. All other accounting records are unaffected, and there are no backups
available for the sales ledger. Falcon’s revenue is GH¢15.6 million. Its receivables are
GH¢3.4 million and profit before tax is GH¢2 million.

The company's directors have provided the external audit firm with an oral representation
confirming that the bank overdraft balances included within current liabilities are complete.
An associate of your team approached you if the oral representation could be relied on or a
written representation is needed.

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 Required:
a) For each of the two issues:
i) Discuss the issue, including an assessment of whether it is material;
ii) Recommend procedures the audit team should undertake at the completion stage to resolve
the issue; and
iii) Discuss the impact on the audit report if the issue remains unresolved. (14 marks)

b) Explain the purpose of and procedures for obtaining written representations. (3 marks)

c) Explain the relevance and reliability of this oral representation as a source of evidence to
confirm the completeness of the bank overdraft balance. (3 marks)

(Total: 20 marks)

QUESTION FOUR

a) ISSAI 1705 provides supplementary guidance on ISA 705 (Revised): Modifications to the
opinion in the Independent Auditor's Report for public sector auditors. ISA 705 deals with
the auditor’s responsibility to issue an appropriate report in circumstances when, in forming
an opinion in accordance with ISA 700 (Revised), the auditor concludes that a modification
to the auditor’s opinion on the financial statements is necessary.

ISA 705 establishes three types of modified opinions: a qualified opinion, an adverse
opinion, and a disclaimer of opinion. The decision regarding which type of modified
opinion is appropriate depends upon:

i) The nature of the matter giving rise to the modification, that is, whether the financial
statements are materially misstated or, in the case of an inability to obtain sufficient
appropriate audit evidence, maybe materially misstated; and

ii) The auditor’s judgment about the pervasiveness of the effects or possible effects of the
matter on the financial statements.

Required:
Discuss THREE (3) other factors public sector auditors consider before modifying their
audit opinion in accordance with ISSAI 1705. (10 marks)

b) Risk assessment is a major component of audit planning. It is, therefore, necessary for
inherent risk, control risk, and audit risk to be identified at the planning stage before the
commencement of the audit work.

Required:
Explain FIVE (5) risks of material misstatements for entities in the public sector and how
to audit the risk identified. (10 marks)

(Total: 20 marks)

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QUESTION FIVE

a) The International Auditing and Assurance Standards Board (IAASB) has developed a
separate standard for an audit of financial statements of a Less Complex Entity (LCE).
These standards are based on the same underlying concepts as ISAs.

Required:
Discuss FOUR (4) of the underlying concepts clearly explaining this separate standard's
advantages to the Auditing Profession. (10 marks)

b) Fitman Ltd (Fitman) operates a chain of health and fitness clubs. Audit of Fitman is yet to
commence for the year ending 31 October 2020. You are the Audit Manager in charge of
the audit and you have received an electronic mail from the Partner to commence the
planning of the audit. The partner drew your attention to the following matters:

Reorganisation
The company recently announced its plans to reorganise its health and fitness clubs. This
will involve closing some clubs for refurbishment, retraining some existing staff and
disposing off surplus assets. These plans were agreed upon at a board meeting in October
and announced to their shareholders on 29 October 2020. Fitman is proposing to make a
reorganisation provision in the financial statements. (5 marks)

Receivables
Fitman's trade receivables have historically been low as most members pay monthly in
advance. However, during the year under review, a number of companies have taken up
group membership package at Fitman and hence the receivables balance is now material.
The audit senior has undertaken a receivables circularisation for the balances at the year
end. However, there were some non-responses and a number of responses with differences.
(5 marks)
The company intends to sign the audit report on 20 November 2020.

Required:
Describe substantive procedures you would perform to obtain sufficient and appropriate
audit evidence in relation to the above matters.
(Total: 20 marks)

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SOLUTION TO QUESTIONS

QUESTION ONE

a) Steps to minimise the danger of claims against negligent work includes;

 Agreements concerning the duties of the auditor should be:
 Clear and precise
 In writing
 Confirmed by a letter of engagement, including matters specifically
included
 Audit work should be:
 Relevant to the system of internal control, which must be ascertained,
evaluated and tested. Control cannot be entirely ignored: for the auditor to
have any confidence in an accounting system, there must be evidence and
the existence of minimum controls to ensure the completeness and accuracy
of records.
 Adequately planned before the audit commences.
 Reviewed by a senior member of the firm to ensure quality control of the
audit and to enable a decision to be made on the form of audit report
 Any queries arising during the audit should be:
 Recorded on the current working papers
 Cleared and filed
 A management letter should be:
 Submitted to the client or the boss of directors in writing immediately
following an audit
 Seen to be acted upon by the client
 All members of an auditing firm should be familiar with:
 The standards expected without the firm
 The standard of the profession as a whole by means of adequate training,
which should cover the complementation of the firm’s audit manual and
the recommendation of the professional accountancy bodies
 Insurance should take out to cover the firm against possible claims.
 Others that can be added:
(i) Auditor and Partner Rotation
(ii) Adherence to Auditing Standards
(iii) Adherence to Quality Management Standards
(iv) Adding a Disclaimer Clause
(5 points @ 1 mark each =
5 marks)

b)
(i) Factors to consider before accepting an appointment:
 The nominee auditors should be aware of the attempted manipulation on the part
of the directors. If the new auditors feel that they will not be able to act within the
IESBA Code of Ethics for Professional Accountants, they should not o accept the
appointment.

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 The auditors should ensure that the code guidelines on fee income are observed.
Jackson plc should not represent more than 15 % of the practice fee income.
 Other ethical matters also need to be considered. For example, it should be ensured
that there are no personal relationships between auditor and client that are
restricted by the code.
(3 points @ 1 mark each = 3 marks)

(ii) Ethical implications for nominee auditor.

 The new auditor must be and be seen to be independent. In this particular case,
care should be taken that the directors do not attempt to influence the audit
opinion.
 The new auditor must communicate with the outgoing auditors before accepting
the appointment. Permission will need to be sought from Jackson plc before
marking such communication, and if permission is refused, new auditors cannot
accept the appointment.
 The outgoing auditors may also need permission from Jackson plc before they can
share any matters that they feel should be brought to the attention of the new
auditors before responding to any request for information. If permission is refused,
the new auditors must carefully consider whether to accept the appointment.
 The new auditors should also ensure that they can cope with the client's size of
Jackson plc, and it is the sort of clients that will 'fit' with their current portfolio.
 The auditor should ensure that they are in compliance with or is aware of the
following ethical principles/threats against independence:
(i) Integrity
(ii) Objectivity
(iii) Intimidation
(Any 2 points @ 1 mark each = 2 marks)

(c) The principal audit risks include the following:

 Product life cycle. Demand is declining for the main revenue-generating product.
The market is moving such that the demand for laser surgical instruments is
increasing, while demand for the traditional metal instrument is declining. The
continued loss of the main revenue stream will have significant detrimental profit
and cash flow implications. Demand has been declining for four years, yet it seems
that research has only recently commenced into a new source of revenue. The
management appears not to focus on the long-term strategy needed for survival in
this competitive market.

 Research is at an early stage. It may take many years for the development stage to
be reached. Research the development necessitates a significant cash outflow, and
this is happening at the same time as the loss of cash inflows from the main revenue
stream. As the company is already short of liquid funds, as evidenced by the
ongoing use of an overdraft facility, it could be that the will be insufficient funds
to continue to develop the new product.

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 The research is being conducted by only one scientist, who the company does
not employ. The scientist is critical for the successful development of a placement
revenue stream. If the scientist were to leave, would lose Aglebe Ltd, the
knowledge base of the new technology, hindering progress into the new market.
This is a very specialist role, so it may be a lengthy and challenging process to find
a new scientist to work on the project. It is a significant risk to rely so heavily on a
person not employed by the company for such a crucial role in the business's future
success.

 There may also be confidentiality issues. If the scientist is freelancing for any
competitor of Aglebe Ltd, the new laser equipment designs could be copied and
used unless Aglebe Ltd secures protection of the design e.g. by taking out a patent.

 The industry is highly regulated, and licenses are necessary to take medical
instruments to market. If the license is not granted, the research and development
funds will have been wasted, and the continuation of the business as a going
concern could be jeopardised.

 Use of agents for marketing and distribution. Aglebe Ltd appears to rely heavily
on agents to secure sales to hospitals and clinics. If the agents are unsuccessful or
decide to reduce the effort they put into promoting Aglebe Ltd products in
preference for products from an alternative supplier, then the company will face a
substantial reduction in revenue and cash inflows.
A second risk associated with the use of agents is that there is a scope for fraud –
the agents could deliberately overstate the value of sales to maximise the
commission they receive. When the point is linked to the poor internal system and
control, as indicated by Andy, such frauds would likely be detected.

 Overseas location of the manufacturing facility. The fact that the products are
manufactured abroad could lead to problems in controlling and monitoring
production. Decisions made locally may not be compatible with the overall
operating strategy of the company. Also, if communication channels are not
operating efficiently then decisions made at the head office may take time to be
relayed to the foreign manager. This could lead to production inefficiencies. For
example, e.g. if an agent secures a contract to supply a particular product, it may
take time for this to be communicated to the manufacturing facility, and delays in
fulfilling the order will be inevitable, leading to loss of agent and customer
goodwill.

 Monitoring the quality of output overseas. Having the production facility

operation abroad could also lead to problems with monitoring the quality of
output. This is a highly regulated industry, where suppliers of faulty equipment
could face fines and bad publicity in the event of supplying a poor quality item.
Agents would withdraw their support for the products immediately in preference
to those of competitors.

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 Fluctuating overhead costs as fuel prices and freight costs. Importing goods
using airplanes exposes the company to fluctuating overhead costs as fuel prices
and freight costs are notoriously difficult to predict. Higher levels of tax could also
be imposed on imported goods.

 Exposure to exchange rate risk. As the company manufactures abroad, it would

inevitably make foreign currency payments and be exposed to exchange rate risk.

 Capital expenditure and financial management. Plant and equipment appear to

be fairly old, constructed twelve years ago. If the research and development into
the new laser equipment is successful, then capital expenditure will be needed to
create the capacity to manufacture the new products. The risk is that finance may
not be available to invest in new plant.

 The company appears to have a problem managing liquidity. Continually

operating using an overdraft is expensive in terms of the financial cost. In addition,
a bank loan carrying a variable interest rate exposes the company to the economic
risk of fluctuations in the interest rate, making planning and budgeting cash flows
difficult.

 Risk of overstatement of revenue

 Risk of overstatement of non-current assets
 Risk of understatement of liability
 Failure to comply with the requirements of specified accounting standards
(Any 4 points @ 2.5 marks each = 10 marks)

(Total: 20 marks)

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QUESTION TWO
a)
i) Controls ii) Procedures
Overall authority for food purchasing Review the company’s organisation
should be in the hands of a chart and identify the person
designated person to ensure that the responsible for food purchasing.
food purchased is of the desired Purchases is of the desired quality.
quality. This is often in the hands of
the head chef.

There should be a list of approved Examine the list of approved supplies

supplies to ensure that the food of food and check that there are no
comes from sources known for its purchases of food from other parties.
quality.
On receipt of food, whether meat, Examine a sample of GRNs to ensure
fish, or vegetables and fruit, it should that all bear an approved signature
be carefully inspected by informed indicating that food has been inspected
people, including those responsible for quality on receipt.
for food preparation. This would be
to ensure that it was of the desired
quality (as well as quantity). Goods
received note (GRN) should be
signed to provide evidence of receipt
and inspection.
Food purchased should be kept in a Examine the food storage areas,
clean place and refrigerated, if including refrigerators, on a surprise
necessary. This would be to ensure basis to ensure they are clean and tidy.
that it has kept its quality. Ensure that the refrigerators are
maintained at the correct temperature.
Another test in this area might be
to examine reports of local authority
and other inspectors to ensure they
were happy that the food was being
properly stored.

Strict adherence to use-by dates to Check that there is no food on the

ensure that no poor quality food is premises which is past its use-by date.
prepared. Then, discuss with management what
happens to food that is past its use-by
date how it is disposed off.
(2 controls @ 1 mark each = 2 marks)
(2 procedures @ 1 mark each = 2 marks)

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iii) Regarding accounts payable, many different assertions have to be addressed.
Some relevant assertions are set out below:
 Rights and obligations – Accounts payable represent amounts due by the
company, that is, there is an obligation, taking into account:
 the actual performance of services for the company; or
 transfer of title in goods transferred to the company; and
 cash payments or other genuine debit entries.
 Valuation and allocation – Accounts payable have been correctly valued, taking
into account original transaction amounts and such matters as trade discounts and
local sales tax.
 Existence – The original transaction amounts are valid, and the liability exists.
 Completeness – All accounts payable are recorded in the accounting records.
(Any 2 points @ 2 marks each = 4 marks)

iv) Evidence collected by the auditor to enable a conclusion to be formed on the

likelihood of the claim being successful (that is, whether a provision would be
necessary according to IAS 37: Provisions, Contingent Liabilities and Contingent
Assets) includes:
Evidence Explanation
Obtain the written claim by the This would tell you the reason why the
customer. claim was being made and provide
other relevant details, such as whether
the customer dined in the restaurant or
purchased
carry-out food, and the date when the
alleged food poisoning took place.

Review the controls in force over This would be to ensure that the
purchases and food preparation company controls appeared to be
effective
Obtain written reports concerning any This would provide evidence about
inspections carried out by company any problems that had arisen affecting
staff or third parties in the food store food quality. Discuss with
and food preparation areas. management the actions that were
taken to correct any problems that
had arisen.

Discuss the matter with the company’s This would provide evidence from a
lawyers to obtain their on the professional third obtain party as to the
likelihood of the claim being successful likelihood of the claim succeeding and
the reasons why the lawyers had
reached their conclusion.

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 Obtain management representations This is internal evidence and should be
regarding the likelihood of the claim approached with professional
succeeding skepticism, but it would provide the
auditor with the views of an informed
group
(Any 3 points @ 2 mark each = 6 marks)

b) As you have concluded that the likelihood of the claim being successful is only
possible, it would be appropriate for the company to explain the contingent
liability by way of note as required by IAS 37, describing the nature of the
contingent liability, an estimate of its financial effect, an indication of the
uncertainties relating to the amount and timing and the possibility of any
reimbursement.

If the company includes a note of this nature, there would be no need to modify
your audit opinion; however, if the litigation is viewed as exceptional, then an
emphasis of matter paragraph might be appropriate. However, if the contingency
is not disclosed, the auditor would modify the audit opinion on the grounds of an
'except for': on the grounds that the Financial Statements are materially misstated
(do not contain all the information required). Again, this is material, but there is
no evidence suggesting it is pervasive.

The auditor should persuade management to include the disclosure to avoid

issuing the modified opinion.
(6 marks)

(Total: 20 marks)

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QUESTION THREE
a)
Gaint Ltd
i) Gaint Ltd faces going concern problems as it has experienced difficult trading
conditions and has a negative cash outflow. However, the financial statements
have been prepared on a going concern basis, even though it is possible that the
company is not a going concern. The prior year's financial statements showed a
profit of GH¢ 1.2 million profit, and the current financial statements show a loss
before tax of GH¢ 4.4 million. The net cash outflow of GH¢ 3.2 million represents
73% of this loss (3.2/4.4 million) and hence is a material issue.

ii) Management is confident that further funding can be obtained; however, the team
is skeptical, and so the following procedures should be adopted:
 First, discuss with management whether any finance has now been secured.
 Review the correspondence with the finance provider to confirm the level of
funding that is to be provided, and this should be compared to the net cash outflow
of GH¢ 3.2 million.
 Review the most recent board minutes to understand whether management’s view
on Gaint Ltd’s going concern has altered.
 Review the cash flow forecasts for the year and assess the reasonableness of the
assumptions adopted.

iii) If management refuse to amend the going concern basis of the financial statements
or at the very least make adequate going concern disclosures, then the audit report
will need to be modified. As the going concern basis is probably incorrect and the
error is material and pervasive, an adverse opinion would be necessary.
A basis for the adverse opinion paragraph will be required to explain the
inappropriate use of the going concern assumption. Accordingly, the opinion
paragraph will be an adverse opinion and state that the financial statements do not
give a true and fair view.
(7 marks)

Falcon Ltd
i) A computer virus has corrupted falcon Ltd's purchases ledger; hence no detailed
testing has been performed on revenue and receivables. The audit team will need
to see if they can confirm revenue and receivables in an alternative manner. If they
cannot do this, then two significant balances in the financial statements will not
have been confirmed. Revenue and receivables are both higher than the total profit
before tax (PBT) of GH¢ 2 million; receivables are 170% of PBT, and revenue is
nearly eight times the PBT; hence this is a very material issue.

ii) Procedures to be adopted include:

 Discuss with management whether they have any alternative records that detail
the year's revenue and receivables.
 Attempt to perform analytical procedures, such as proof in total or monthly
comparison to last year, to gain comfort in total for revenue and receivables.

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iii) The auditors will need to modify the audit report as they cannot obtain sufficient
appropriate evidence in relation to two material and pervasive areas: receivables
and revenue. Therefore a disclaimer of opinion will be required.
A basis for the disclaimer of opinion paragraph will be required to explain the
limitation in the lack of evidence over revenue and receivables. The opinion
paragraph will be a disclaimer of opinion and state that we cannot form an opinion
on the financial statements.
(7 marks)
Marks are allocated as follows:
(i) The issue and its Materiality (2 marks)
(ii) Audit Procedures (Any 3 points @ 1 marks each = 3 marks)
(iii) Impact on Audit Report if not resolved (2 marks)

b) Written representations
Written representations are necessary information that the auditor requires in
connection with the audit of the entity’s financial statements. Accordingly, similar
to responses to inquiries, written representations are audit evidence.

The auditor needs to obtain written representations from management and, where
appropriate, those charged with governance that they believe they have fulfilled
their responsibility for preparing the financial statements and for the completeness
of the information provided to the auditor.

Written representations are needed to support other audit evidence relevant to the
financial statements or specific assertions in the financial statements if determined
necessary by the auditor or required by other International Standards on Auditing.
This may be necessary for judgmental areas where the auditor has to rely on
management explanations.

Written representations can be used to confirm that management have

communicated to the auditor all deficiencies in internal controls of which
management are aware.

Written representations are generally in the form of a letter, written by the

company's management and addressed to the auditor. The letter is usually
requested from management but can also be requested from the chief operating
officer or chief financial officer. Throughout the fieldwork, the audit team will note
any areas where representations may be required.

The auditors will produce a draft representation letter during the final review
stage. The directors will review this and then produce it on their letterhead.
It will be signed by the directors and dated as at the date the audit report is signed,
but not after.
(3 marks)

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c) Oral representation
A representation from management confirming that overdrafts are complete
would be relevant evidence. Overdrafts are liabilities, and therefore the main focus
for the auditor is completeness.

Regarding reliability, the evidence is oral rather than written, which reduces its
reliability. The directors could in the future deny having given this representation,
and the auditors would have no documentary evidence to prove what the directors
had said.

This evidence is obtained from management rather than auditor-generated and is,
therefore, less reliable. Management may wish to provide biased evidence to
reduce the amount of liabilities in the financial statements. The auditors are
unbiased, so evidence generated directly by them will be better.

External evidence obtained from the company's banks could be used to confirm
the bank overdraft balances, and this would be more independent than relying on
management's internal confirmations.
(3 marks)

(Total: 20 marks)

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QUESTION FOUR

a) Additional factors for public sector auditors’ considerations are:

(i) The audit mandate, or obligations for public sector entities, arising from
compliance to laws and regulations and pronouncements issued by Authorities
including the MMDAs, Ministers, the Act setting up the MMDA itself, legislation,
regulation, ministerial directives, government policy requirements, or resolutions
of the legislature which may result in additional objectives.

(ii) about any instances of management refusing to remove restrictions on access

to audit evidence due to official secrecy regulations.

(iii) non-compliance with provisions of PMA Act, Expenditure not in compliance

with budgetary allocation, and other financial maleficence.

(iv) there may be general public expectations in regard to public sector on

reporting on the effectiveness of internal control.

(v) there may be general public expectations in regard to the public sector on
reporting on value for money (economic, efficiency and effectiveness of
expenditure).

(Any 3 points @ 3.33 marks each = 10 marks)

b) The following are examples of additional conditions and events that may indicate
risks of material misstatement for entities in the public sector:
• Budget overspending due to weak budgetary controls
• Privatisations
• New programs
• Major changes to existing programs
• New financing sources
• New legislation and regulations or directives
• Political decisions such as relocation of operations
• Programs without sufficient allocated resources and funding
• Increased public expectations
• Procurement of goods and services in certain industries such as defense
• Outsourcing of government activities
• Operations subject to special investigations
• Changes in political leadership
• Indications of waste or abuse
• Higher than normal expectations to meet the budget; and
• Public and private partnerships

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Source of Identification:
Communication, directive, legislature, report, approval, analytical review of
financial statement as applicable to the factors above. On waste and abuse it could
be the frequency of use or the expenditure incurred on the item, dumping of a large
chunk of the item, left to lie idle unused. For changes in political leadership is a
question of event.

Audit work:

Budget overspending due to weak budgetary controls. Compare budget to

actuals, check the approval system, check expenditure documentation, check the
actual item and estimate the likely cost. Then, assess the relevance of the item.

Privatisations. Check whether implementation is in line with concept and

approval, Check expenditure involved compared to the intended. Check related
party transactions.

New programs. Check approvals and objectives, check expenditure involved in

line with intended and commensurate income. Establish its impact on the business.
Check related party transactions.

Major changes to existing programs. Seek authorisation and approvals, check

related expenditure and incomes. Assess the impact on the organisation. Check
related party transactions.

New financing sources. Check authorisation and approval, emphasing on the

rationale and the source of the fund, ensuring there are no strings attached and
that source of the fund is legal. Check at the receipts and usage.

New legislation and regulations or directives. Check the legitimacy, ensure that
the intended purpose is understood, check the application, check the impact.

Political decisions such as relocation of operations. Check the application and

approval. Ensure the directive is properly complied with.

Programs without sufficient allocated resources and funding. Check the sum
required, check the amount used, check the effect of the shortfall.

Increased public expectations. Check the expenditure incurred, check

authorisation and approval, check the reason for the overspending. Check related
party transactions.

Procurement of goods and services in certain industries such as defense. Check

correspondence to determine approval and authorisation, check the spending
process to establish whether due process was followed, cheque related party
transactions.

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Outsourcing of government activities. Check communication for authorisation
and approval, check the basis for the outsourcing, check expenditure incurred,
check benefit accruing to the organisation., due process, check related party
transactions.

Operations subject to special investigations. Check for report ensure the

recommendations of the report have been implemented.

Changes in political leadership. Check administration follows status quo, check

all changes and directives are communicated and approved, ensure internal
controls are working.

Indications of waste or abuse. Confirm the waste, seek explanation and approval
for the waste, quantify the waste

Higher than normal expectations to meet the budget. Check the control
environment, ensure that the internal controls are working, check incomes are not
over blotted, and expenditures are not influenced.

Public and private partnerships. Check approval, check the selection of the
partner conforms to the partnership structure, check timelines, check related party
transactions.
(Any 5 points @ 2 marks each = 10 marks)

(Total: 20 marks)

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QUESTION FIVE

a) Underlying concepts
 Maintaining confidence in financial reporting of Less Complex Entities (LCEs)
 Helping auditors of LCEs undertake consistent, effective, and high-quality audits
This requires the use of:
Risk-based approach (Principle-based)
Reasonable Assurance opinion
 Being responsive to stakeholder needs
Involving Maintaining Ethical Requirements and Independence of the Auditor

 Promoting a more consistent application of the auditing standards

Clear, consistent documentation
Use of Audit Objectives for auditor’s procedures
Professional Judgement and Professional Skepticism
Quality Management requirements
(Any 4 points @ 2½ marks each = 10 marks)

b) Reorganisation
 Review the board minutes where the decision to reorganise the business was taken,
ascertain if this decision was made pre year-end.
 Review the announcement to shareholders in late October to confirm that this was
announced before the year-end.
 Obtain a breakdown of the reorganisation provision and confirm that only direct
expenditure from restructuring is included.
 Review the expenditure to confirm that there are no retraining costs included.
 Cast the breakdown of the reorganisation provision to ensure correctly calculated.
 For the costs included within the provision, agree to supporting documentation to
confirm the validity of items included.
 Obtain a written representation confirming management discussions in relation to
the announcement of the reorganisation.
 Review the adequacy of the disclosures of the reorganisation in the financial
statements to ensure they are in accordance with IAS 37 Provisions, Contingent
Liabilities and Contingent Assets.
(Any 5 points @ 1 mark each = 5 marks)
Receivables
 For non-responses, the team should arrange to send a follow-up circularisation
with the client's permission.
 Suppose the customer does not respond to the follow-up, then with the client's
permission. In that case, the senior should telephone the customer and ask whether
they can respond in writing to the circularisation request.
 If there are still non-responses, the senior should undertake alternative procedures
to confirm receivables.
 For responses with differences, the senior should identify any disputed amounts
and determine whether these relate to timing differences or possible errors in
Fitman Ltd's records.

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 Any differences due to timing, such as cash in transit, should be agreed to post
year-end cash receipts in the cash book.
 The receivables ledger should be reviewed to identify any possible mispostings as
this could be a reason for a response with a difference.
 If any balances have been flagged as disputed by the customer, then these should
be discussed with management to identify whether a write-down is necessary.
(Any 5 points @ 1 mark each = 5 marks)

(Total: 20 marks)

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