1. a) Internal control systems are designed, amongst other things, to prevent error and misappropriation.




Describe the errors and misappropriations that may occur if the following are not properly controlled:


  • Receipts paid into bank accounts; (2 marks)
  • Payments made out of bank accounts; (3 marks)
  • Interest and charges debited and credited to bank accounts. (2 marks)


(b) A book-selling company has a head office and 25 shops, each of which holds cash (banknotes, coins, and credit card vouchers) at the balance sheet date. There are no receivables. Accounting records are held at shops. Shops make returns to head office and head office holds its own accounting records. Your firm has been the external auditor to the company for many years and has offices near to the location of some but not all of the shops.




List the audit objectives for the audit of cash and state how you would gain the audit evidence in relation to those objectives at the year-end. (8 marks)


  1. c) The external auditors of companies often write to companies‘ bankers asking for details of bank balances and other matters at the year-end.



Explain why auditors write to companies‘ bankers and list the matters you would  expect banks to confirm. (5 marks)

(Total: 20 marks)




  1. a) Errors and misappropriations – cash


  • Receipts

Money paid into the bank may be stolen. If cash is not properly controlled it is possible to falsify documentation in relation to receivables, and to pay company receipts into     private bank accounts. This is sometimes known as ‗teeming and lading‘.

Money paid into the bank may be incorrectly accounted for, either by the bank or by the company, if there are no controls to check the accuracy of the company‘s records or the bank statements. This could mean that the internal records and the     financial statements are incorrect.


  • Payments

Money paid out of the bank may be paid to incorrect suppliers, or may be paid for incorrect amounts resulting in operational difficulties with cash and supplier



Money paid out of bank accounts may also be misappropriated by payments for goods and services that are not received, or simply by payments into private bank accounts if   there are no controls to prevent this.


(iii) Interest and charges


Banks make errors in calculating interest and charges. If the company does not check these, it may lose money and the amounts appearing in the financial statements may be incorrect. This is particularly important for companies that hold high levels of cash.


(b) Principal audit objectives of cash audit and related audit evidence


Audit objectives are dealt with in ISA 500 ‗Audit Evidence‘


  • Existence: to ensure that the cash actually exists at a given date. The related evidence will include cash counts. Cash counts need not necessarily be conducted at each location (unless the amounts are material), the firm might consider conducting counts on a rotational basis, year on year. The decision as to which sites to visit might be determined on the basis of materiality and analytical procedures. Cash balances should be reconciled to records held at the shop and records held at head office. Any shortfalls in cash, or IOUs‘ should be thoroughly investigated.


  • Completeness: to ensure that there is no unrecorded cash. This means reconciling cash balances to records held at the shop and records held at head office, as above, ensuring that proper sales cut-off has been achieved.


  • Rights and obligations: to ensure that the company has a right to the cash. This means checking to ensure that credit card vouchers are correctly made payable to the company, and not to third parties.


  • Occurrence: to ensure that the cash belongs to the company at the year-end date. This means checking to ensure that no credit card vouchers are post-dated.


  • Measurement: to ensure that amounts are correctly recorded in the proper period.

This means ensuring that cut-off is correct and consistent between the records held at  shops, the returns to head office, and the records held at head office.

  • Presentation and disclosure: to ensure that the cash balance and related income statement entries are correctly disclosed in the financial statements in accordance with legislation and accounting standards.


(c) Why auditors seek bank confirmations – matters confirmed


This matter is noted in ISA 505 External Confirmations‘.

Auditors seek bank confirmations in order to provide third party, written evidence in relation to the balance sheet disclosure of cash, liabilities and related items.


The matters typically confirmed by the bank include:


(i) Details of all bank balances, overdrafts and loans held at all branches.

( ii) The charges or restrictions over any such accounts.

( iii) The terms and repayment conditions of loans and overdrafts.

(iv) Any right of set-off between accounts in credit and other balances.

( v) Any securities held by the bank (such as fixed assets charged as security). (vi) Any relationships with other banks the bank is aware of.




Towards the end of an audit, it is common for the external auditor to seek a letter of representation (written representations) from the management of the client company.



(a) Explain why auditors seek letters of representation.                                 (5 marks)

( b) List the matters commonly included in the letter of representation.        (6 marks) (c) Explain why it is important to discuss the content of the letter of representation at an              early stage during the audit. (3 marks)

(d) Explain why management is sometimes unwilling to sign a letter of representation and              describe the actions an external auditor can take if management refuses to sign a letter of

representation.                                                                                   (6 marks)

(Total: 20 marks)





Auditors seek a letter of representation in order to obtain written audit evidence on matters that are material to the financial statements when other sufficient appropriate audit evidence cannot reasonably be expected to exist (ISA 580 Management     Representations‘).


Representations may be the only evidence, which can reasonably be expected to be available, but they cannot be a substitute for other audit evidence that could reasonably be expected to be available. Such matters may include management‘s intention to hold     an item for long-term appreciation.


The letter also ensures that directors acknowledge their collective responsibility for the presentation and approval of the financial statements. The letter is signed by those with   knowledge of the matters concerned, on behalf of management.


(b) Common categories of matters included in the letter of representation


  • Confirmation of responsibility for, and approval of, the financial statements.


Confirmation that all of the accounting records, and all related documentation

  • (such as minutes of management and shareholder meetings) have been made  available, and that company transactions have been properly reflected therein.

Confirmation of the expected outcome of legal claims.

  •  Confirmation of company plans in relation to certain tax provisions.
  • Confirmation of the completeness of disclosure of related party transactions.


Confirmation that there have been   no post-balance sheet events that require revisions to the financial statements.


(c) Discussion of the content of the letter


It is important to discuss the contents of the letter at an early stage because directors   may disagree with what the auditors wish them to sign.


It is important in such cases for negotiations to take place and the letter to be redrafted until     it is acceptable to both auditor and client.


The management representation letter is often regarded as a critical piece of audit evidence and if it is left to a late stage in the audit, when there is pressure on     auditors and clients alike, negotiations may be difficult.

(d) Management unwilling to sign and actions if management refuses to sign


Management is sometimes unwilling to sign because they feel that auditors should be able to obtain independent evidence in relation to the relevant matters.

Alternatively, they may feel that the   auditors are trying to shift responsibility for the audit to them;


Sometimes, management is genuinely uncertain about whether it is sure of the matters  

  • However, there are occasions on which management is trying to

‗hide‘ from the auditors the fact that the income recorded is incomplete, or the fact   that there is an outstanding undisclosed legal claim against the company, for example;


Auditors should attempt to negotiate an agreement, as noted above. A formal letter may not be necessary, if management is able to provide some other written confirmation, such as a note of a meeting. Alternatively, a list of issues may be taken to the client to establish exactly which representations are causing the problem, and the letter redrafted;


If management still refuses to sign, and the auditor feels that the matter is critical to the     financial statements, it may be necessary to qualify the audit report with an except for‘ (or even disclaimer of) opinion, on the basis of a limitation in the scope   of the audit.





The responsibilities of external auditors are not always well understood, especially with regard to the detection and reporting of fraud. When external auditors provide non-audit services to their audit clients, it is essential that the auditors make a clear distinction between their audit and non-audit responsibilities.



  1. Explain the responsibilities of external auditors to directors and shareholders. (5 marks)
  2. Describe the limitations of the external audit in relation to the detection and reporting of fraud.         (5 marks)
  3. Explain why it is essential for external auditors to be independent of their clients.

(5 marks)

  1. Explain the advantages and disadvantages of external auditors providing consulting services to their audit clients.             (5 marks)

(Total: 20 marks) 


  1. a) Responsibilities of external auditors to directors and shareholders


The external auditors are required to prepare a report to shareholders on the truth

for the benefit of shareholders, and fairness (or fair presentation) of financial statements prepared by management

The auditors, if appointed by shareholders, act as agents for the shareholders in the     same way as directors act as agents for the company.

Auditors have no specific duties to directors although it is clearly necessary that an adequate working relationship is formed in order that the audit can be performed properly. Directors generally have a duty to provide auditors with the information     and explanations they require to perform the audit.


Auditing standards require that auditors report weaknesses in systems that they discover during the course of their audit to management (ISA 400 Risk   Assessments and Internal Control‘).


(b) Limitations of the external audit – fraud


  • Auditing standards require that auditors plan and perform their audits with a reasonable expectation of detecting fraud and error if they are material to the     financial statements (ISA 240 Fraud and Error‘).
  • It is commonly believed that the purpose of the external audit is to detect, and report, fraud and error. The detection and reporting of such matters is secondary to     forming an opinion on the financial statements.
  • Material fraud is often very difficult to detect, however, and an auditor has not necessarily     failed in his duty if he fails to detect such a fraud.
  • Most frauds are small, and immaterial to the financial statements. If auditors detect frauds,   they have a duty to report such matters to the management of the company regardless of whether they are material or immaterial. Only matters that are material need to be reported in the financial statements.


(c) External auditor independence

 External auditors are unable to fulfill their duties to shareholders if they   are not independent   of the entity on which they are reporting.


If external auditors have an interest in the financial statements on which they are reporting, they may not be objective. For example, if, in the case of a listed company, they have prepared the financial statements on which they are reporting,     their view may not be considered objective.


If they have financial or employment connections with the company on which they are     reporting they will not be objective.


If they provide a significant level of additional services to the entity, it is argued that   they cannot report objectively as auditors to shareholders.


(d) Advantages and disadvantages of external auditors providing consulting services


  • The principal advantage of providing consulting services lies in the fact that auditors are best placed to provide such services, because they have an intimate knowledge     of the operations of the company.
  • Equally, if they provide consulting services, the knowledge so obtained will be useful in conducting the audit, and experience in general of consulting better enables auditors to conduct their duties as auditors, because knowledge of other industries     can be brought to bear on the client.
  • The principal disadvantage is that auditors often make a lot of money from such work, and it is argued that auditors are not objective in these circumstances because they would be unwilling to challenge directors or issue a qualified audit report for     fear of losing the fees for consulting work.
  • The other disadvantage is that if they have implemented systems that produce the financial statements, they are unlikely to give a qualified audit report on the   information that those systems produce.




You are carrying out the audit of ACB Computers limited for the year ended 31 December 2003. The company assembles microcomputers purchased from the Far East and sells them to retailers, and to individuals and other businesses. In the current year, there has been a recession and strong competition, which has resulted in a fall in sales and the profits. This has led to a trading loss and the company is experiencing going concern problems.



  1. Describe the factors, which indicate that a company may not be a going concern. Your list should include all factors and not just those, which relate to ACB Computers

Limited.                                                                                              (10 Marks)

  1. Consider the form of audit report (i.e. qualified or unqualified) you would issue of ACB

Computers limited if you conclude that the company is experiencing serious going  concern problems, in the following two situations:

  1. You conclude that the financial statements give sufficient disclosure of the going concern problems.
  2. There is no disclosure of the going concern problems in the financial statements and you believe there is a serious risk that the company will fail in the foreseeable

future                                                                                        (6 marks)

State the parties who may successfully sue you as auditor for negligence, and consider the arguments you could include in your defense when:


  1. The financial  statements  of  ACB  Computers  Limited  for  the  year  ended  31 December 2003 do not mention any going concern problems and your audit report  on these financial statements was unqualified and
    1. rding to ISA 700 the auditors report on financial statements, the going concern problem is a fundamental uncertainty i.e. it is uncertain whether the company will continue to trade to 31 December 2004, and if the company failed, the consequences of the failure would have a fundamental effect on the financial statements. Since the financial statements have given adequate disclosures about the uncertainty created by the going concern problem the auditor should issue an unqualified opinion with an emphasis of matters paragraph. The emphasis of matters paragraph will disclose the going concern problems and refer to the relevant notes in the financial statements. Normally, the paragraph will say that the continuation of the business will depend on thehe company fails on 15 February 2004 (4 marks)
      1. a) The indications or risk that continuance as a going concern may be questionable could come from financial statements or from other sources


      Financial indicators

      •  Liabilities are more than the assets of the company;


      Borrowings with fixed repayment dates approaching maturity without realistic

      • prospects of renewal or repayment, or excessive reliance on short -term borrowings to finance long-term projects undertaken by the company.
      • n Adverse key financial ratios e.g. current ratio below one;
      • n Substantial operating losses.   n Inability to pay creditors on due dates.


      Difficulty in complying with terms of loan agreements e.g. failure to pay interest and   principal on due dates.


      Operating Indicators

      • Loss of key management without replacement.




      Other Indicators

      Non-compliance with capital or other statutory requirements.   This could lead to the   company being wound up under the law.

      Pending legal cases against the entity that may, if successful result in judgments that could be met  

      Changes in legislation or government policy that adversely affects the client‘s business.


      1. b) Where there is adequate disclosure in the financial statements


  2. company becoming profitable and the bank and creditors   continuing support to ACB Computers Limited.
    1. If there is no disclosure of the going concern problem in the financial statements then the financial statements are misleading since the effect of the disagreement is so material and pervasive. The auditor should issue an adverse opinion. The opinion paragraph should give details that have led to the qualification i.e. the need for the company to become profitable and obtain support from the creditors and the bank and also because of the failure to include details of the going concern problems, the financial statements do not show a true and fair view of the company‘s affairs as at 31 December 2003 and of its loss for the year then ended.


    1. c) Since ACB Computers Limited has failed within a year and the auditor had given an unqualified report, certain parties may be able to successfully sue him for negligence. The decision in the Caparo case is that only the company and the shareholders as a body can bring a claim for negligence against the auditor. It is possible that the court will refer to the ISA that indicates that the audit report should have mentioned the going concern problems. As the auditor did not mention them, the claim for negligence could be successful. In the situation, the going concern problems were apparent during the audit and this reduces the strength of the auditor‘s defense. There are a variety of arguments the auditor could make in defense against a negligence claim, but these depend on the circumstances. If ACB failure was caused by a sudden event or one that occurred after the audit report was signed and was not expected to occur at the time the audit report was signed, then the auditor may have a good defense against the negligence claim. These could include a legal claim against ACB, a substantial loss on a contract entered into after 31 December 2003. If the failure was not foreseen as at 31 December 2003 then the auditor can avoid a claim for damages.




Your firm is the auditor of Shah Engineering Ltd, and you have been asked to suggest the audit work you will carry out in verifying trade creditors and purchase accruals at the company‘s year-end of 31 December 2003. You attended the stock take at the year-end.


The Company operates from a single site and all raw materials for production are received by the goods inwards department. When the materials are received they are checked for quantity and quality to the delivery note and purchase order, and a multi—part goods received note is made out and signed by the storekeeper. If there are any problems with the raw materials, a discrepancy note is raised which gives details of the problems (e.g., incorrect quantities or faulty materials)




The purchase accounting department receive the purchase invoice, check them to the purchase order and goods received note and post them to the purchase ledger. At the end of each month, payments are made to suppliers. The purchase ledger is maintained on a microcomputer.


The main sundry creditors and accruals at the year-end include:


  1. Wages accruals and PAYE;
  2. VAT;
  3. Interest on loans overdrafts, telephone and electricity. Most employees‘ wages are paid weekly in arrears.


You are required to describe in detail the audit work you will carry out to:


  1. Check suppliers‘ statements to the balances on the purchases ledger; (8 marks)
  2. Verify that purchases cut-off has been correctly carried out at the year end (5 marks)
  3. Ensure that sundry creditors and accruals are correctly stated; (7 marks)QUESTION FIVE
    1. a) The work I will perform in checking supplier‘s statements to the balances on the purchase ledger will include:


    I will assess the system of control in the purchases system and its credibility. This will be   based on the results of my tests of control, other investigations an my




    experience in previous years. Where the purchases system is reliable, I will check fewer items than if it is unreliable. If I find discrepancies in my audit tests, I will increase the sample of items I check. I will check fewer suppliers‘ statements to the purchase ledger balances if the company perform these checks and corrects



    Generally I will check a larger proportion of suppliers where the balances are large, or where there are a large number of transactions. Where there is no supplier‘s statements for one of these important accounts, I will either contact the supplier to

    • confirm the balance, or ask for a statement at the year end;


    Where the balance on the supplier‘s statement is the same as the purchase ledger balance, I  

    • will record this in my working papers and carry out no further work;


    Where there are differences, these could have resulted from either goods in transit, cash in  

    • transit or other differences;


    Goods in transit are invoices on the supplier‘s statement, which are not on the client‘s purchases ledger. If these invoices have been included in the accruals, I may perform no further audit tests. However, for large value items, I will check the goods received note (GRN) to ensure they were received before the year-end. If there is no purchase accrual, I will check the date on the GRN. If the date on the GRN is after the year-end, the treatment is correct. However, if it is before the year end there is a cut off error, and management should be advised to include the value     of these goods in the current years closing stock and accrual the amount payable;


    For cash in transit, I could check to the next month‘s supplier‘s statement that the cheque was on the supplier‘s sales ledger just before the year-end. An alternative procedure is to check to the bank statement the date the cheque is cleared by the bank after the year-end. If there is a significant delay in clearing the cheque, this could indicate that the cheque might have been sent to the supplier after year- end. If this has been happening, the value of these cheques should be added to the year end bank balance and added to creditors at the year end since the payment was

    • made after the year end;


    For other differences, if they are small they can be ignored. However, if they are significant I will discuss them with the client. The year end accounts should include

    • appropriate provision to allow for such differences;


    Based on these tests, I will assess whether they provide sufficient evidence that the trade creditors and purchase accruals are correctly stated at the   year-end.


    1. b) The best place to start purchases cut-off test is from goods received notes issued immediately before and after the year- end. Generally, the test should cover a sample of items during the period of two weeks before to two weeks after the year -end.


    At the stock take, I should have recorded the last goods received note number issued before the year-end. This will assist in confirming that all items purchased before the year-end are included in the stock and the liability disclosed. I will select a sample of goods received notes issued before the year- end, and follow through to the purchase invoice. For these goods I will check that:



    Either the purchase invoice has been posted to the purchase ledger before the year end or    a purchase accrual has been made;


    If there are book stock records, I will check that the goods have been included in the   records before the year -end.


    There will be a purchases cut off error where either:



    The purchase invoice has not been posted to the purchase ledger before the year end and   there is no purchase accrual; or





    The purchase invoice has been posted to the purchase ledger before the year end and there   is a purchase accrual at the year end.


    For goods received after the year- end, I will select a sample of goods received notes issued after the year-end, and follow through to the purchase invoice. For these goods I will check that:



    Neither the purchase invoice has been posted to the purchase ledger before the year end nor  

    • a purchase accrual been made;


    If there are perpetual stock records, I will check that the items received have not been   included in the stock records before the year- end.


    There will be cut off error where either:

    • The purchase invoice has been posted to the purchase ledger before the year end,; or;
      • There is a purchase accrual made.


    1. c) I will perform the following work in checking sundry creditors and accruals



    I will assess the level of accruals and the system of control. If the company‘s system of determining accruals is good, I will perform less work than if the     controls were not present


    • will compare this year‘s accruals with the previous year. I will investigate any significant variances e.g. where there was an accrual in the previous year but none this year;


    The wages accrual will be checked to the payroll, the    accrual should be equivalent to one

    • weeks gross wages;


    The PAYE should be checked back to the payroll. The accrual should equal the

    December PAYE payable. I will check to the cash book that the accrual is equal to


    The VAT creditor will be checked as being the net of out put VAT (VAT on sales) and Input VAT (VAT on purchases). This should be checked against the VAT paid

    • over to the government in January 2004;


    Accrued interest on the bank loan and overdraft will be checked to be bank

    • confirmation received. For loans, the accrued interest should be the product of the  amount outstanding, the current interest rate and the time since the last charge;
    • n Other accruals will be checked to invoices received after the year end;


    will consider whether there are any circumstances which have arisen during the year which   may result in new accruals and I will check if these have been made

    weak; the payment made to the government in January 2004;


(a)        Briefly explain the meaning of the term “control procedures”.                    (4 marks)

( b)      What is the importance of segregation of duties as a control procedure’?     (4 marks)

  • In carrying out an audit, the auditor appraises and tests the system of internal control in order to ascertain that it is capable of processing transactions or determining quantities and values completely and accurately. The auditor further carries out substantive tests in an attempt to ensure that the transactions, assets and liabilities recorded in the accounting records upon which the figures in the financial statements are based, are completely and accurately recorded.




List and briefly explain the substantive tests the auditor would carry out to verify      the values attributed to:

  • Trade debtors in a company’s financial statements.(6 marks)(ii)Trade creditors in a company’s financial statements.(6 marks)

                                                                                                   (Total: 20 marks) 


  1. You are required to briefly explain the meaning of the term “control procedures”.


Control procedures are the detailed policies and procedures established by management within the control environment. Control procedures put together constitute an internal control system. For example the requirement that all purchase orders must be authorised by a senior responsible company official is an example of a control procedure. Control procedures are aimed at achieving a desired control objective. For example the above requirement that purchase orders should be authorised is an example of a preventive control aimed at ensuring that all purchase transactions have received the necessary approval which will assist in the prevention of errors and frauds.


  1. You are required to discuss the importance of segregation of duties as a control procedure.

Segregation of duties refers to the separation of the various duties and responsibilities

such that one person cannot process and record complete transactions from beginning




to the end without being checked by another person. E.g. in the purchase of a company‘s fixed assets a single individual should not authorise the purchase, place the order, receive the asset and record the transaction in the accounting records, to minimise

the risk of error and/or intentional manipulation of information. Segregation of duties is important because:



It helps detect errors in processing transactions. This is because the work of one individual  

will be checked by another. Errors made will be detected;


Helps in deterring fraud. Segregation of duties would help in deterring people from perpetrating frauds. This is because the work of every individual is counter checked   by another person.


  1. c) You are required to List and briefly explain the substantive tests the auditor would carry out to verify the values attributed to:


  1. i) Trade debtors in a company’s financial statements.


Substantive tests are the tests that the auditor carries out to obtain evidence as to the completeness and validity of the balances reported in the financial statements i.e. procedures carried out to test the management assertions.


In regard to debtors the following substantive procedures will be necessary:



To carry out a trend analysis on the level of debtors by comparing the current year debtors with the previous two years and obtaining explanations for the reported trend. The evidence obtained from this analysis will assist the auditor in identifying     circumstances that could lead to the misstatement of debtors balances;


Compute the debtors‘ days, debtors‘ turnover and the ratio of provisions for doubtful debts to trade debtors‘ balances. Compare the ratios with the previous year and obtain explanations for any significant variations. Such an analysis will assist the auditor in evaluating the recoverability of the debtors‘ balances and   whether an adequate provision has been made;

  • Obtain a listing of balances as at the year end and agree the total to ledger balance;


  • confirming existence of the balances; Select a sample of debtors‘ balances and perform   This will assist in


Obtain a sample of significant balances and verify if any payments have been received after the year-end. This will provide good evidence as to the

  • recoverability of debtors balances;


Discuss with management accounts that appear doubtful. This will include accounts above the authorised credit limits, accounts with disputed balances and balances that have been outstanding for a long period of time. Ensure that an

  • adequate provision has been made for these balances;


Test the operation of the cut-off procedures by obtaining details of the last dispatch note processed during the year and ensure that all transactions that     relate to the current financial period have been recorded. (ii) Trade creditors in a company’s financial statements.


  1. Compare the current years creditors balance with the previous year and obtain explanations for any significant movements. Such an analysis will give indications for example on the completeness on creditors.
  2. Compute the creditors days and compare with the previous years and obtain explanations for any significant movements. Creditors days give an indication of the number of days it takes on average to pay creditors.




  1. Obtain a creditors listing and verify that the total per the listing agrees with the total per the ledger.
  2. From the listing select a sample of creditors and carry out the following  procedures:
  • Obtain or prepare a reconciliation of the creditors balance psuppliers‘ statements; er the ledger to the

Obtain explanations for all the reconciling items and where appropriate ensure that the reconciling items have been adjusted in the books of account. The reconciling items will mainly include suppliers invoices not   posted in the clients ledger or payments not reflected in the suppliers statements.  e) Obtain a sample of payments made to suppliers after year- end and verify that all

the invoices that related to the period under review had been accrued for.

  1. f) Obtain all the pending invoices that relate to the financial period under review and verify that these had been accrued for.




  1. a) In the context of a computer based accounting system, explain the meaning of the following terms:
  2. Application controls; (4 marks) ii. General controls (4 marks) b)  Explain the importance of having proper systems documentation(6 marks)


  1. c) A Company wishes to change from an old computerised system to a new computer based accounting system. Explain how and why both systems should run parallel

prior to the change over to the new system. (6 marks)

(Total: 20 marks) 


a)Application controls


These are control procedures over the accounting system designed to provide reasonable assurance that all transactions are authorised, recorded and processed completely, accurately on timely basis. Application controls may be manual or programmed and are include


  • Controls over input
  • Controls over processing
  • Controls over output
  • Controls over master files and standing data.


General controls


These are controls which relate to the environment within which computer based accounting systems are developed, maintained and operated aimed at providing reasonable assurance that the overall objectives of internal controls are achieved.

These controls could either be manual or programmed.

General controls include


  • Controls over systems development and maintenance
  • Controls over data files
  • Computer operations controls
  • Controls to ensure continuity operation.

  1. Importance of system documentation.


  1. Provides a basis for management to review the system prior to authorisation
  2. Staff training on the use of system.
  • Implements smooth personnel changes and avoiding the problem that key employees

          may take with them all knowledge about the way the system works.

  1. Revising existing systems and programs
  2. It is useful to the auditor for preliminary evaluation of the system and of its controls.
  3. Could assist in disaster recovery.


  1. How and why both systems should run parallel prior to the change over to the new system.







The client should continue to process the information using the old system while at the same time implement the new system. The output from the new system should be compared with the output from the new system.




  1. Parallel running assists in staff training. The users learn about the features of the

       new system and compare this with the old system ii. Assists in testing the new system.


Allows for the systems developers to make any necessary changes to the new system before being fully implemented.




You are the manager responsible for the audit of ABC Company, which has a turnover of KShs 750 million. The company has been audited by your firm for a number of years and this is the second year you have been responsible as manager for the audit. However, owing to your responsibilities for other audits you are only intending to make periodic visits to the company during the course of the audit and you will not be involved in any of the detailed audit work.



  1. State the matters you would consider in planning the audit, prior to the commencement       of the detailed audit work.           (13 marks)
  2. Describe the way in which you would control the audit from the commencement of the

work by the audit staff to the review stage by the partner immediately prior to him              signing the audit report   (7 marks)

(Total: 20 marks)



  1. a) Matters to consider when planning the audit


In planning the audit the auditor will need to consider the following:


  1. Understanding the accounting and internal control systems

The auditor‘s cumulative knowledge of the accounting and in ternal control systems and the relative emphasis expected to be placed on tests of control and substantive


  1. Reviewing matters raised in the previous year‘s audit, which may have continuing relevance in the current year. This is done by reviewing previous year‘s working papers.

The auditor will be able to identify areas noted as having weak controls or specific  accounting problems. Attention should be paid to such areas in the audit plan.

  1. Assessing the effects of any changes in legislation or accounting practice affecting the financial statements of the company. The audit plan should include a review of these

changes and whether the client has complied.

  1. The auditor should consult with management and staff of the organization about current trading circumstances and any significant changes in the business carried on and the management of the enterprise. E.g. changes in management might weaken the internal

control system.

  1. Identify any significant changes in the clients accounting procedures such as installation of a new computer information system. Changes to a computerized system could result

      in weak controls.

  1. Conditions requiring special attention such as the existence of related parties.
  2. Consider any current or impending financial difficulties, which could face the company. g. shortage of raw materials or failure to raise working capital.
  3. The auditor should check the nature and timing of reports and other communications with the client so that the audit plan accommodates such timings e.g. he should consider the dates of the annual general meeting, stock taking, dates when management reports

are available.

  1. Set materiality levels for audit purposes and in particular identify areas with material transactions, which call for more audit work.
  2. The assessment of internal audit department and level of reliance to be place on its work. The auditor should also determine the number of audit staff required, experience and special skills required and the timing of the audit visits.



  1. b) Ways to control the audit




  1. Scoping of the work and delegation


First I would determine the scope of the work to be carried out and our client‘s expectation. Basing on this I will identify the staff that I will require to carry out the work. In doing this I will need to consider, the complexity of the assignment and the level of experience required of the staff. I will delegate the work to a team that has appropriate training and experience to carry out the work


  1. Direction


  • would give appropriate instructions/directions to the staff I have delegated the work to. This involves informing assistants of their responsibilities and the objectives of the procedures they are to perform. This also involves informing them of matters such as the nature of the entity‘s business and possible accounting and auditing problems that may affect the nature, timing and extent of audit procedures to be performed. I would summarise such instructions in an audit programme.


  1. Supervision of the work


  • would supervise the work being carried out by the audit team. This will include:


  • Monitoring the progress of the audit to consider whether assistants have the necessary skills and competence to carry out their assigned tasks;
  • Establish whether assistants understand the audit instructions as documented in the audit programme;
  • Ensure that work is being carried out in accordance with the overall audit plan    and the audit program;
  • To identify and address any significant accounting and auditing questions raised       during the audit;
  • Resolve any differences of professional judgment between the audit team.

  1. Review


Before submitting the work to the partner I will need to review the work done. This is to ensure that:

  • The work has been performed in accordance with the audit program
  • The work performed and the results obtained have been adequately documented.
  • All significant audit matters have been resolved or are reflected in audit  conclusions.
  • The objectives of the audit procedures have been achieved; and
  • The conclusions expressed are consistent with the results of the work performed and support the audit opinion.
  • I would then submit the work done to the audit partner for review.




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