CPA Advanced Level – Advanced Auditing And Assurance Revision Kit

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TOPIC 1

 ASSURANCE AND NON-ASSURANCE ENGAGEMENTS

QUESTION 1

December 2025 Question Four B

With reference to International Standard on Related Services (ISRS) 4410 (Revised), Compilation Engagements, discuss FOUR documents that a professional accountant is required to prepare during a compilation engagement.  (8 marks)

MASOMO MSINGI ANSWER

Four Documents Prepared in a Compilation Engagement (ISRS 4410)

1. Engagement Letter
   The engagement letter is a formal document that outlines the terms and conditions of the compilation engagement. It sets out the scope of the work to be performed, the responsibilities of both the accountant and the client, and the expected deliverables.
2. Compilation Report
   The compilation report is the primary document issued by the professional accountant upon completion of the compilation engagement. It summarizes the work performed, confirms that the financial information has been compiled in accordance with the applicable financial reporting framework, and clarifies that the accountant does not provide any assurance on the information.
3. Client-prepared Financial Information
   The accountant should document the financial information or records provided by the client, which serves as the basis for the compilation. This could include trial balances, general ledgers, or other financial records prepared by the client’s internal staff.
4. Working Papers
   Working papers are the internal documentation prepared and maintained by the accountant during the compilation engagement. These may include notes, calculations, and records that show how the compilation was conducted, along with any adjustments made to the client’s financial information.

 

QUESTION 2

August 2025 Question Three A

Explain THREE differences between “assurance engagements” and “non-assurance engagements”.  (6 marks)

 

MASOMO MSINGI ANSWER

Differences between “assurance engagements” and “non-assurance engagements

Feature	Assurance Engagement	Non-Assurance Engagement
Purpose	To provide a formal opinion or a conclusion that enhances the degree of confidence of intended users about the outcome of the evaluation or measurement of a subject matter against criteria.	To assist a client by performing specific procedures or services agreed upon, without providing an independent opinion or conclusion that enhances user confidence.
Level of Assurance	Provides a reasonable or limited level of assurance. The practitioner is required to obtain evidence to support their conclusion.	Provides no assurance. The practitioner is not required to express an opinion or conclusion on the subject matter.
Type of Report/Output	A formal, written report containing an independent opinion or conclusion (e.g., an audit opinion on financial statements). The report is typically for external users.	A report of factual findings from the work performed, or a compilation of information (e.g., a tax return or compiled financial statements). The output is generally for the client’s use.

 

QUESTION 3

August 2025 Question Five B

An agreed-upon procedures engagement is a type of engagement where the auditor is not required to provide assurance. However, certain conditions must be met for the engagement to take place and there is a shared responsibility regarding the performance and outcomes of the procedures.

 

Required:

Summarise FIVE conditions and shared responsibilities involved in an agreed-upon procedures engagement, considering the auditor does not provide assurance.  (10 marks)

 

MASOMO MSINGI ANSWER

FIVE conditions and shared responsibilities involved in an agreed-upon procedures engagement, considering the auditor does not provide assurance

1. Agreement on Procedures and Purpose: The auditor and the engaging parties must agree in advance on the specific procedures to be performed and the objective of the engagement. The engaging parties are responsible for deciding if the procedures are sufficient for their needs; the auditor must only perform what is agreed, without modifying scope later.
2. No Assurance Provided: The auditor does not express an opinion or conclusion; they only report factual findings based on the procedures performed. Users of the report (typically the specified parties) are responsible for interpreting the results and drawing their own conclusions.
3. Ethical and Professional Requirements: The auditor must follow ethical guidelines such as integrity, objectivity, and professional competence. Independence is not required, but if the auditor is not independent, this must be disclosed. The auditor must be transparent about their ethical compliance; the engaging parties should acknowledge and accept any limitations.
4. Restriction of Use: The report is restricted to the specified parties who agreed to the procedures—it is not intended for general use. Both auditor and engaging parties must ensure the report is only distributed to intended users.
5. Clear and Measurable Subject Matter: The subject matter of the procedures must be objectively verifiable—the results should be consistent if repeated by another professional. The auditor ensures procedures are performed correctly; the specified parties confirm that the subject matter is appropriate and relevant to their needs.

 

QUESTION 4

December 2024 Question Two A

After completing the audit of Maneno Company Ltd. for the year ended 31 December 2023, the auditor identified several material misstatements in the financial statements that management has refused to correct. Some of these misstatements could lead to a qualification of the audit opinion.

 

Required:

(i) Explain TWO types of audit opinion that the auditor is likely to give in this case. (2 marks)

(ii) Describe SIX ways on how the auditor would communicate the misstatements in his audit report. (6 marks)

 

MASOMO MSINGI ANSWER

 (i) Two types of audit opinion the auditor is likely to give in this case:

1. Qualified Opinion: A qualified opinion is issued when the auditor concludes that the financial statements as a whole are fairly presented, except for a specific area or areas where there is a material misstatement or limitation of scope. In this case, if the auditor believes that the misstatements are material but not pervasive to the overall financial statements, a qualified opinion would be appropriate. The auditor would specify in the report the nature of the misstatement or limitation and the impact on the financial statements.
2. Adverse Opinion: An adverse opinion is issued when the auditor concludes that the financial statements as a whole are materially misstated and do not present a true and fair view. If the misstatements are both material and pervasive (i.e., they significantly affect the financial statements as a whole), the auditor would issue an adverse opinion, indicating that the financial statements do not comply with the applicable financial reporting framework such as IFRS or GAAPs

 (ii) Six ways the auditor would communicate the misstatements in his audit report:

1. Basis for Qualified or Adverse Opinion:
   The auditor would include a section titled “Basis for Qualified Opinion” or “Basis for Adverse Opinion” where they would describe the misstatements and the reasons for their qualification or adverse opinion. This section explains the nature of the misstatements and how they depart from the financial reporting framework.
2. Emphasis of Matter Paragraph:
   If the auditor believes that the misstatements, while material, may still be acceptable under certain circumstances, they may include an “Emphasis of Matter” paragraph to highlight the specific issues and ensure that users are aware of them.
3. Disclosure of Specific Misstatements:
   The auditor may include specific details about the identified misstatements, such as the amount of the misstatements, the accounts affected, and their implications on the financial statements. This level of detail helps users understand the impact of the misstatements.
4. Recommendation for Corrections:
   The audit report could include a recommendation for the management of Maneno Company Ltd. to make the necessary corrections to the financial statements, ensuring transparency and accountability.
5. Management’s Responsibility Section:
   The report would typically include a section outlining management’s responsibility for the accuracy and fairness of the financial statements. It can emphasize that management has refused to correct the identified misstatements, highlighting their accountability.
6. Communication with Those Charged with Governance:
   The auditor may communicate the misstatements directly to the board of directors or the audit committee. This can be included as part of a discussion in the management letter or mentioned in the report, emphasizing the need for governance to act on these issues.

 

QUESTION 5

December 2024 Question Three B

Describe FOUR benefits that accrue to businesses as a result of applying auditing and assurance services in their operations as per the provisions of ISA 210.  (8 marks)

 

MASOMO MSINGI ANSWER

Benefits that accrue to businesses as a result of applying auditing and assurance services in their operations as per the provisions of ISA 210

ISA 210 (International Standard on Auditing 210) deals with the agreeing the terms of audit engagements and outlines the auditor’s responsibility to establish a mutual understanding with the client about the terms of the audit engagement, including the objective and scope of the audit. Applying auditing and assurance services based on the provisions of ISA 210 provides several benefits to businesses. Below are four key benefits:

1. Enhanced Credibility and Trust: An independent audit provides assurance to stakeholders that the financial statements are reliable and free from material misstatement. This enhances the credibility of the financial information and builds trust with investors, lenders, and other stakeholders.
2. Improved Decision Making: The audit process involves a thorough review of the company’s financial controls and operations. This can help identify areas of weakness and inefficiency, leading to improved decision-making and operational effectiveness.
3. Reduced Risk of Fraud and Error: The audit process helps to detect and prevent fraud and errors in financial reporting. By identifying and addressing weaknesses in internal controls, the audit can help to reduce the risk of financial loss and reputational damage.
4. Improved Compliance: The audit process helps ensure compliance with relevant laws, regulations, and accounting standards. This can help businesses avoid costly fines and penalties and maintain a positive image with regulators and stakeholders.

 

QUESTION 6

August 2024 Question One C

You are a senior auditor in the audit of Bayeti Ltd., a medium-sized company which sells a limited range of industrial products. While performing reviews on Bayeti Ltd.’s audit files, you have noted that a number of creditors have withdrawn their financial support to your client and that your client has defaulted on a number of loans. The working papers conclude that the going concern assumption is inappropriate and recommends that a note explaining the cash flow challenges your client is facing be included in the financial statements. However, the directors are reluctant to include the note in the financial statements.

 

Required:

In each case, discuss THREE implications on the audit report if:

(i) The directors refuse to disclose the note.   (3 marks)

(ii) The directors agree to disclose the note. (3 marks)

 

MASOMO MSINGI ANSWER

Implications on the Audit Report

(i) If the directors refuse to disclose the note:

1. Qualified Opinion or Adverse Opinion: If the directors do not include the necessary disclosures regarding cash flow challenges and going concern issues, the auditor may need to issue a qualified opinion or an adverse opinion. A qualified opinion indicates that there are material misstatements in the financial statements due to lack of disclosure, while an adverse opinion suggests that the financial statements as a whole are misleading. This can significantly affect stakeholders’ perception of Bayeti Ltd.’s financial health.
2. Increased Risk of Legal Liability: By refusing to disclose critical information about going concern issues, the directors may expose themselves and the company to legal risks. If stakeholders (such as investors, creditors, or regulators) suffer losses due to reliance on incomplete financial statements, they may pursue legal action against both the company and its auditors for failing to provide adequate disclosures.
3. Impact on Stakeholder Trust and Future Financing: The refusal to disclose significant financial challenges can erode trust among stakeholders, including investors and creditors. This lack of transparency could hinder future financing opportunities as potential lenders or investors may view Bayeti Ltd. as a high-risk investment due to undisclosed liabilities and cash flow problems.

(ii) If the directors agree to disclose the note:

1. Unmodified Opinion with Emphasis of Matter Paragraph: If the directors agree to include a note about cash flow challenges and going concern issues, the auditor is likely to issue an unmodified opinion but may include an emphasis of matter paragraph in their report. This paragraph would draw attention to the disclosed uncertainties without altering the overall opinion on fairness of presentation, thus providing clarity while still indicating potential risks.
2. Enhanced Transparency and Credibility: Including such disclosures enhances transparency regarding Bayeti Ltd.’s financial situation. It demonstrates that management is aware of its challenges and is taking steps to communicate them effectively. This can help maintain credibility with stakeholders who appreciate honesty about financial difficulties.
3. Potential for Restructuring or Support Opportunities: By acknowledging cash flow challenges in their financial statements, Bayeti Ltd. may open doors for restructuring discussions with creditors or attract new investors who are willing to support a turnaround strategy. Transparent communication can foster collaboration with stakeholders who might be more inclined to assist if they understand the company’s situation clearly.

 

QUESTION 7

August 2024 Question Five B

In the context of audit assurance engagements, describe how “attestation engagements” differ from “direct reporting engagements”. (4 marks)

 

MASOMO MSINGI ANSWER

In audit assurance engagements, attestation engagements and direct reporting engagements are two types of engagements that differ in terms of responsibility and reporting:

1. Attestation Engagements
   In attestation engagements, the auditor provides an opinion on a subject matter (like financial statements) based on assertions made by the responsible party, typically the management of the client. Here, the client prepares the information or statements, and the auditor assesses whether these assertions align with established criteria. Examples include audits or reviews of financial statements, where the auditor provides assurance on management’s prepared financial statements.
2. Direct Reporting Engagements
   In direct reporting engagements, the auditor takes a more direct role by evaluating or measuring a subject matter against specific criteria without relying on management-prepared assertions. The auditor reports their findings directly based on their own evaluation, often when management does not prepare the subject matter or assertions independently. Examples include internal control reviews or performance audits, where the auditor directly assesses and reports on the subject matter.

In summary, attestation engagements rely on verifying management’s assertions, while direct reporting engagements involve the auditor independently assessing and reporting on the subject matter without relying on client-prepared information.

Key Differences:

Feature	Attestation Engagements	Direct Reporting Engagements
Management Assertion	Present	Absent
Auditor’s Role	Evaluate management’s assertion	Directly evaluate the subject matter
Auditor’s Conclusion	Opinion on management’s assertion	Conclusion on the subject matter

 

QUESTION 8

December 2023 Question One A

You are the Audit Manager of Baraka and Company LLP, who are the auditors of Miradi Ltd. for the year ended 30 June 2023. The company has net assets of Sh.150 million. The audit has been completed but there is a matter that has not yet been resolved on depreciation of buildings. The directors of Miradi Ltd. have resolved that depreciation on buildings will not be provided for in the financial statements. The buildings were acquired in the year 2020 and no depreciation has been provided since.

 Required:

(i)  Describe SIX additional audit procedures and actions that you could take with respect to the above matter.      (6 marks)

(ii) Assume that, according to your workings, the depreciation charge on the buildings for the year ended 30 June 2023 should be Sh.4,200,000 based on the straight line method of depreciation at an annual rate of 5%.

 Required:

Discuss the implications of the above on the financial statements, clearly indicating its effect on the audit report. (8 marks)

Answer

(i) Additional Audit Procedures and Actions:

1. Review of Documentation:

• Examine the documentation related to the acquisition of buildings in 2020 to ensure the accuracy of the cost and useful life estimates.
• Confirm the basis on which the useful life was determined and whether it aligns with industry standards and the company’s historical practices.

2. Physical Inspection and Condition Assessment:

• Physically inspect the buildings to assess their current condition and determine if there are any indicators of impairment or changes in the expected useful life.
• Consider engaging a building or construction expert if needed.

3. Compare Depreciation Policy:

• Compare the company’s depreciation policy with industry benchmarks and accounting standards to assess its reasonableness.
• Evaluate whether the company’s policy aligns with the requirement to reflect the consumption of the buildings’ economic benefits over time.

4. Subsequent Events Review:

• Evaluate subsequent events occurring after the balance sheet date to identify any developments or conditions that may impact the decision on providing or not providing depreciation.
• Specifically, inquire about any plans for major renovations, changes in use, or technological obsolescence that could impact the buildings’ economic usefulness.

5. Assess Management’s Intentions:

• Engage in discussions with management to understand their rationale for not providing depreciation and assess whether their intentions are reasonable and consistent with the company’s long-term strategy.
• Document the discussions to have a clear understanding of management’s perspective.

6. Evaluate the Impact on Financial Ratios:

• Assess the impact of not providing depreciation on key financial ratios, such as return on assets and profitability.
• Consider the potential effects on the company’s compliance with debt covenants, if applicable.

Advanced Auditing and Assurance Revision Kit Hard Copy (Printed and Bound)

(ii) Implications on Financial Statements and Audit Report:

 Financial Statements:

• Overstatement of Net Assets: The exclusion of depreciation will lead to an overstatement of net assets by Sh.4,200,000, misrepresenting the financial position of Miradi Ltd.
• Distortion of Profitability: The omission of depreciation expense will result in an understatement of expenses and an overstatement of profit for the year, misleading users about the company’s performance.
• Non-compliance with Accounting Standards: The financial statements will not be prepared in accordance with applicable accounting standards, raising concerns about their reliability and comparability.

 Audit Report:

• Qualified Opinion: If the directors refuse to adjust the financial statements for depreciation, the auditor will be unable to express an unqualified opinion due to the material misstatement.
• Emphasis of Matter Paragraph: The auditor will likely include an emphasis of matter paragraph in the audit report, highlighting the issue and its impact on the financial statements.
• Disclaimer of Opinion: If the directors’ decision significantly impairs the auditor’s ability to form an opinion on the fairness of the financial statements, the auditor may disclaim an opinion altogether.

 Additional Considerations:

• Auditor’s Responsibility: The auditor has a responsibility to report material misstatements discovered during the audit and ensure the financial statements are presented fairly in accordance with accounting standards.
• Communication and Transparency: The auditor should clearly communicate the implications of the directors’ decision to Miradi Ltd.’s stakeholders, including the potential legal and financial consequences.

 

QUESTION 9

August 2023 Question Two B

Discuss FIVE types of audit opinions, specifying the circumstances under which each opinion may be ideal. (10 marks)

Answer

Types of audit opinions, specifying the circumstances under which each opinion may be ideal

Audit opinions represent the auditor’s conclusion on the fairness of the financial statements and the reliability of the underlying financial information. Here are five types of audit opinions, along with the circumstances under which each opinion may be ideal:

1. Unqualified Opinion (Clean Opinion):

• Circumstances: An unqualified opinion is issued when the auditor concludes that the financial statements present fairly, in all material respects, the financial position, results of operations, and cash flows of the company in accordance with the applicable financial reporting framework (e.g., Generally Accepted Accounting Principles – GAAP).
• Ideal Circumstances: The financial statements are free from material misstatements, and the auditor has obtained sufficient appropriate audit evidence to support their opinion. This opinion provides the highest level of assurance to stakeholders and indicates a high level of confidence in the company’s financial reporting.

2. Qualified Opinion:

• Circumstances: A qualified opinion is issued when the auditor concludes that overall the financial statements are fairly presented, except for a specific departure from GAAP or a limitation in the scope of the audit.
• Ideal Circumstances: The departure from GAAP or limitation in scope is material but not pervasive enough to require a disclaimer of opinion or an adverse opinion. The auditor can provide a qualified opinion after disclosing the nature and extent of the departure or limitation in the audit report.

3. Adverse Opinion:

• Circumstances: An adverse opinion is issued when the auditor concludes that the financial statements as a whole are materially misstated, and the misstatements are both material and pervasive, meaning they affect the overall fairness of the financial statements.
• Ideal Circumstances: The misstatements identified by the auditor are significant and widespread throughout the financial statements, such that they cannot be adequately corrected or disclosed. An adverse opinion alerts users that the financial statements are not reliable and should not be relied upon for decision-making.

4. Disclaimer of Opinion:

• Circumstances: A disclaimer of opinion is issued when the auditor is unable to obtain sufficient appropriate audit evidence or is unable to complete the audit due to significant limitations in scope, such as lack of access to records or restrictions imposed by management.
• Ideal Circumstances: When the auditor encounters circumstances beyond their control that prevent them from forming an opinion on the financial statements, such as when management refuses to provide necessary information or when there are significant uncertainties that cannot be resolved.

5. Qualified Disclaimer of Opinion:

• Circumstances: A qualified disclaimer of opinion is issued when the auditor is unable to obtain sufficient appropriate audit evidence to form an opinion on the financial statements as a whole due to a pervasive limitation in the scope of the audit, but the auditor concludes that the financial statements are not materially misstated.
• Ideal Circumstances: When there is a pervasive limitation in the scope of the audit that prevents the auditor from obtaining sufficient audit evidence to form an opinion on the financial statements, but there is no evidence of material misstatements. This opinion provides limited assurance and indicates that users should exercise caution when relying on the financial statements.