WEDNESDAY: 6 December 2023. Afternoon Paper. Time Allowed: 3 hours.
Answer ALL questions. Marks allocated to each question are shown at the end of the question. Do NOT write anything on this paper.
QUESTION ONE
1. Describe THREE roles played by professional bodies in the regulation of auditors. (3 marks)
2. In the context of International Standard on Auditing (ISA 530) – Audit Sampling, use relevant examples to distinguish between “sampling risk” and “non-sampling risk”, citing relevant examples. (4 marks)
Highlight THREE strategies that an audit firm may use to control non-sampling risk. (3 marks)
3. Biggy Furnitures Ltd. is a high-end office furniture and equipment company. The company has grown
tremendously in its customer base in recent years and apart from selling furniture and equipment, it now has a maintenance and leasing department. The company has an elaborate internal audit function to enhance the internal control system. Biggy Furnitures Ltd. has appointed you as the external auditor and requested you to cooperate with the company internal auditor to keep the total audit costs down. The company would like you to rely on the work of the internal auditor.
The internal auditor provides the following services to the company:
• An audit of the operations of internal controls in the company’s major functions (operations, customer
support and information services).
• A review of the structure of internal controls in each major function every four years.
• An annual review of the effectiveness of measures put in place by the management to minimise the major risks facing the company.
In the year being audited, the company has had a major internal restructuring in its information services function.
The internal auditor was closely involved in the preparation of the plan for restructuring and in the related post implementation review.
Required:
Explain the extent to which you will seek to rely on the work of the internal auditor in each of the
operational areas of Biggy Furnitures Ltd. (6 marks)
Describe FOUR circumstances in which it would not be possible for an external auditor to rely on the
work of the internal auditor. (4 marks)
(Total: 20 marks)
QUESTION TWO
1. You are the partner responsible for the audit of Jengo Traders Ltd. During your visit in September 2023 to plan for the interim audit for the year, one of the directors expressed concern that an interim audit so close to year end is of little value to the company and the person benefiting is the audit firm by charging audit fees for such an “unnecessary activity”.
Required:
Citing FIVE reasons, explain to the director the need for an interim audit and its benefit to both the
company and the auditors. (10 marks)
Explain FIVE ways on how the performance of an interim audit could affect the conduct of the final audit
of Jengo Traders Ltd. (5 marks)
2. Describe FIVE threats to independence and objectivity as identified in the professional code of ethics for auditors. (5 marks)
(Total: 20 marks)
QUESTION THREE
1. During the audit of Lami Ltd, Daudi Muli, one of the audit partners in Muli and Associates held a meeting with the audit team after the risk assessment procedures had been completed. The meeting was held to discuss the susceptibility of the financial statements to material misstatements.
Required:
Discuss FIVE benefits of holding such a meeting. (10 marks)
2. Define the term “third-party certificate.” (2 marks)
Describe FOUR factors that might influence an auditor’s acceptance of third-party certificate as audit
evidence. (8 marks)
(Total: 20 marks)
QUESTION FOUR
1. Distinguish between a “permanent audit file” and a “current audit file”. (4 marks)
2. In relation to an audit report, explain the following terms:
“Emphasis of matter” paragraph. (2 marks)
“Other matter” paragraph. (2 marks)
3. Nguo Nzuri Company is a local manufacturer of office wear for both ladies and men. After the COVID-19 pandemic, the market of this line of clothes was adversely affected. Prior to the pandemic, the company had taken on a big loan from its bankers and invested in new manufacturing equipment and a fleet of delivery vans. The bank has written to the managing director of Nguo Nzuri Company threatening to petition for the liquidation of the company due to its difficulty in servicing the loan.
Required:
Describe FOUR operating conditions or events that cast doubt about the going concern ability of Nguo
Nzuri Company. (4 marks)
Advise the managing director on FOUR measures that Nguo Nzuri Company could take to mitigate the
threat of liquidation. (8 marks)
(Total: 20 marks)
QUESTION FIVE
1. The auditor is of the opinion that the audit evidence obtained is not sufficient to support the audit opinion after carrying out tests of control.
Required:
Recommend THREE actions that the auditor could take in response to the above problem. (3 marks)
2. International Standard on Auditing (ISA) 560 – Subsequent Events, defines subsequent events as events occurring between the date of the financial statements and the date of the auditor’s report.
Required:
Describe FOUR events that could be termed as subsequent events. (4 marks)
3. Analyse THREE strategies that an auditor could use to reduce exposure to professional liabilities. (3 marks)
4. Discuss FIVE components of an organisation’s internal control system. (10 marks)
(Total: 20 marks)
