CPA INTERMEDIATE LEVEL – AUDITING AND ASSURANCE REVISION KIT (QUESTION AND ANSWER)

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CONTENT 

  1. Nature and purpose of an audit
  • Nature and objectives of an audit
  • Development of audit (early audit and modern audit)
  • Users of audited financial statements
  • Features of audits
  • Distinction between auditing and accounting
  • Types and classification of audits
  • Situations when different audits are performed (interim, continuous, final, operational)
  • Advantages and disadvantages of various types of audits
  • Nature of work done for different audits
  • Inherent limitations of an audit

 

  1. Assurance and non- assurance engagements
  • Definition and objectives of assurance engagements
  • Audit as an assurance engagement
  • Elements of an assurance engagement
  • Types of assurance engagements (Audit, Review assignments)
  • Differences between audit and review engagements
  • International Standard on Assurance Engagement-ISAE 3000
  • Accepting appointment to perform assurance engagement
  • Review of interim financial information – ISRE 2410
  • Levels of assurance and reports issued on assurance engagements
  • Non-assurance engagements (Agreed upon procedures engagement -ISRS 4400 and compilation assignments-ISRS 4410
  • Attestation and direct reporting engagements

 

  1. Legal and professional framework
  • Regulatory framework for external audits
    1. Appointment of the auditors
    2. Qualifications and disqualifications of auditors
    3. Removal and resignation of auditors
    4. Remuneration of the auditors
    5. Rights and duties of auditors
  • Mechanisms of regulations of auditors-role of professional bodies, Audit committee, rotation of audit firms
  • Professional ethics/code of ethics for professional accountants
  1. Importance of the professional ethics
  2. Basic/fundamental principles for Code of Ethics for accountants
  3. Other professional guidelines on audit fees, conflict of interest, advertising and publicity and opinion shopping by clients
  4. Auditors independence /objectivity and its importance
  5. Threats to independence and safeguards.
  • Threats on adherence to other fundamental principles and safeguards to the threats
  • Development and status of ISAs in execution of audits
  • Relationship between International Standards of Auditing and National Auditing Standards
  • Purposes/importance of adoption of ISA in the audit.

 

  1. Planning and Risk Assessment
  • Obtaining, accepting and retention of an audit engagement
  1. Matters to consider before and after acceptance of nomination
  2. Pre-conditions of an audit
  3. Engagement letter, procedure of sending letter, purposes and contents of the letter-ISA 210
  4. Circumstances for revision of engagement terms
  5. Understanding the entity and its environment
  6. Background information about the entity or client.
  7. Ways of gathering knowledge about the business
  8. Reasons/importance of information gathered about the client
  9. Reasons of review of previous audit files and communication with previous auditors
  10. Overview of audit process

 

  1. Audit risk assessment
  • Components of audit risk (Inherent, Control and Inherent risks)
  • Assessment of different types of audit risks
  • Factors leading to increase or decrease of inherent, control and detectionRisks
  • Adoption of risk based audit, reasons and procedure
  • Advantages and Disadvantages of the approach
  • Evaluating and prioritising risk and control factors
  • Mechanisms to minimise the risks associated with client audits.

 

  1. Audit planning
    • Purpose and challenges in audit planning
    • Planning for new and existing clients
    • Development of the overall audit strategy
    • Contents of audit planning memorandum/ overall plan
    • Relationship between audit strategy and audit plan
    • Design of audit programs, importance and problems of the programs
    • Impact of material misstatements on audit strategy and degree of work done
    • Influence of interim audit work on the year end/final audit.

 

  1. Audit documentation
  • Reasons and importance of audit documentation
  • Sources, features and purposes of working papers
  • Storage of working papers-permanent audit file and current audit file, auditors note book or diary
  • Lien or custody on working papers
  • Standardisation of working papers
  • advantages and disadvantages
  • Safe custody and retention of working papers
  • Form and content of working papers
  • Automated working papers
  • Quality control policies and procedures implemented by audit firm
  • Objectives of quality controls to the audit firm/ auditors
  • Peer review and its objectives

 

  1. Internal control systems (ICS)
    • Objectives of internal control system
    • Component of internal control system
    • Features of Internal control system
    • Designing of internal control system.
    • Auditors and management responsibility over ICS
    • Advantages and disadvantages /inherent limitations of ICS
    • Indicators of weaknesses in ICS and actions taken by management
    • The evaluation of internal control systems by auditors using Internal Control Questionnaire, Flow charts and narrative notes
    • Tests of controls on specific control environments
    • Internal controls theory and practice-sales and debtors, purchases and creditors, inventories and work in progress, fixed assets, salaries and wages
    • Communication of improvements on ICS weaknesses/ risks associated – Management letter.

 

  1. Internal Audit Function
  • Scope and objectives of internal audit
  • Criteria of using internal audit work
  • Areas of support on external auditors’ work
  • Internal audit review reports and actions by management and those charged with governance
  • Design of risk based internal audit plan
  • Internal audit key performance indicators
  • Managing and monitoring follow up of audit recommendations made to board/ management.
  • Outsourcing internal audit function-advantages and disadvantages.
  • Audit committee-functions, merits and demerits.
  • Internal check systems-scope, features, advantages and disadvantages
  • Information technology threats and control
  • Auditors duty on compliance with laws and regulations.

 

  1. Overview of Forensic Accounting
    • Nature, purpose and scope of forensic accounting
    • Types of forensic investigations: corruption, asset misappropriation, financial statement fraud, others
    • Asset Recovery process and legal framework

 

  1. Errors, Frauds and Irregularities
    • Differences between error and frauds
    • Types of errors-omission, commission, principle, reversal of entries
    • Types of Frauds-Teeming and lading, ghost employees, window dressing, misappropriation of goods and fraudulent financial reporting
    • Causes of frauds and fraud triangle
    • Indicators of errors and frauds
    • Detection and prevention of errors and frauds and deterrence-role of internal audit
    • Materiality and Implications of errors and frauds in the financial statements
    • Impact of errors and frauds on the audit plan
    • Reporting on error and frauds
    • External auditors and Management responsibility on error and frauds
    • Auditors professional skepticism.

 

  1. Audit evidence
  • Financial statement assertions and audit evidence
  • Types and features of audit evidence (sufficiency, reliability and relevance)
  • Audit evidence gathering procedures/ techniques
  • Materiality and limitations of audit evidence
  • Financial statement assertions and audit evidence
  • Audit sampling techniques – statistical and non-statistical
  • Analytical reviews procedures- nature, objectives, timing and extent of support evidence
  • Types of analytical Procedures-Variance analysis, reasonableness tests, trend analysis
  • Using the work of experts- areas of support and considerations
  • Using management representations (importance, procedures adopted and matters covered).

 

  1. Auditing in the public sector
    • Introduction to auditing in the public sector and regulatory provisions
    • Objective and scope of public sector audit (compliance, performance, financial, value for money)
    • Establishment, mandate and functions of public sector auditors
    • The parties to audit in public sector-auditor, responsible party and intended users
    • Role of internal audit function in public entities
    • Relationship between external and internal auditors in the public sector
    • Audit reports by office of Auditor General.
    • Functions of audit advisory board and executive committee in Auditor General office.

 

  1. Auditors Reports
    • Purposes of auditors’ report and concept of true and fair view
    • Legal /Statutory provisions on audit reports
    • Basic elements contents of audit reports
    • Emphasis of the matter paragraph and key audit matters
    • Types and Consequences of different types of audit reports issued.
    • Features of unqualified and qualified audit reports
    • Reasons for qualifications of audit reports (Limitation of scope, inherent uncertainties, disagreements)
    • Types of qualifications-disclaimer, except for and adverse opinions.
    • Overall audit review and finalisation
    • Subsequent events/Post balance sheet events review (adjusting and non – adjusting events, auditor’s responsibility and audit procedures)
    • Going concern review (Auditors and management responsibility, indicators of going concern difficulties, audit procedures, mitigation plans and reporting)
    • Management representations on contentious matters affecting financial statements like guarantees made, capital commitments, borrowings, unusual accounting adjustments.
    • Review of compliance with accounting policies, opening balances, prior period audits by other auditors
    • Format for presentation of independent auditor’s report.

 

  1. Auditing in a computerised system
  • Audit objectives in computerised systems
  • Differences between computerised and manual systems
  • Benefits and drawbacks of computerised accounting systems
  • Types of controls in computerised systems (Administrative, system development, processing controls, application controls, master files and standing data
  • Auditors use of computers in the course of audit
  • Planning the audit in computerised systems
  • Audit approaches – audit around, with and through the computer and circumstances when each is applied
  • Loss of audit trail, causes and measures to mitigate the loss of audit trail
  • Computer Assisted Audit Techniques (CAATS) – Audit software and test data
  • Types of audit software and functions and types of test data
  • Factors considered before using CAATS and steps in CAATS application
  • Advantages and disadvantages of CAATS
  • Use of embedded audit modules and integrated test facilities
    • Information security controls (Encryption, Firewalls, Passwords, Antivirus)

 

  1. Contemporary and emerging issues in audit
    • E- commerce auditing
    • Cloud documentation
    • Use of data analytics tools in audit (Anomaly detection, diagnostic analysis, predictive analysis.

 

 

 INTRODUCTION 

Following our continued effort to provide quality study and revision materials at an affordable price for the private students who study on their own, full time and part time students, we partnered with other team of professionals to make this possible.

This Revision kit book (Question and answers) contains kasneb past examination past papers and their suggested answers as provided by a team of lecturers who are experts in their area of training. The book is intended to help the learner do enough practice on how to handle exam questions and this makes it easy to pass kasneb exams.

 

Special appreciation and recognition goes to FA Kegicha William Momanyi (MBA Accounting, CPA, CISA and CCP), FA Bramwel Omogo (B.sc Actuarial Science, CIFA, CIIA, CFA) Johnmark Mwangi (MSc Finance, CPAK, BCom Finance), CPA Gregory Mailu (Bsc. Economics), CPA Dominic Rasungu, CPA Lawrence Ambunya, CPA Japheth Mutuku among others.

 

SAMPLE WORK

Complete copy of CPA AUDITING AND ASSURANCE Revision Kit is available in SOFT copy (Reading using our MASOMO MSINGI PUBLISHERS APP) and in HARD copy 

Phone: 0728 776 317

Email: info@masomomsingi.com

 

 

 

 

TOPIC 1

 

NATURE AND PURPOSE OF AN AUDIT

 

 QUESTION 1

April 2022 Question One A

Your firm has been engaged in auditing small entities for the last five years. In a recent development, your firm has been appointed to conduct an audit on a large entity; which is the first assignment of such magnitude. You are required to undertake an interim audit and a final audit of the large entity.

 Required:

(i)   Explain the objective of an external audit.       (2 marks)

(ii)  Highlight five audit procedures you could undertake during the interim audit of the large entity.  (5 marks)

(iii) Describe five audit procedures you would undertake during the final audit of the large entity.      (5 marks)

(iv) Present two drawbacks of conducting an interim audit.  (2 marks)

 

ANSWER

i) Objective of an external audit

  • It enhances the credibility of the financial statements prepared by the management
  • It protects the interests of the third parties who are involved the management of the business.
  • It acts as a preventive and detective measure against frauds and errors.
  • The audited accounts can be used by the company for negotiating for loans from banking institutions

 

ii) Audit procedures you could undertake during the interim audit of a large entity.

  1. Ascertaining and evaluating the accounting and internal control systems
  2. Recording and evaluating the systems.
  3. Limited analytical review procedures
  4. Limited substantive testing
  5. Notifying the weakness in the systems and providing recommendations for improvement.
  6. Planning the substantive procedures for the final audit

  

iii) Audit procedures you would undertake during the final audit of a large entity.

  1. Updating auditor’s knowledge on the client business and systems
  2. Determining whether the internal control systems have changed during the interim up to the year end
  3. Carrying out compliance testing
  4. Final analytical review procedures
  5. Final substantive testing
  6. Vouching transactions
  7. Assessing the appropriateness of accounting policies
  8. Assessing the reasonableness of accounting estimates

 

iv) Drawbacks of conducting interim audit

  1. It may be expensive for an average business
  2. it may be disruptive
  3. Figures already audited may be altered by the client staff
  4. Client staff may depend on the auditor to solve their accounting problems.

 

QUESTION 2

December 2021 Question Three C

You are the auditor of Sharoh Ltd. which was incorporated in December 2018. The company’s main business is in real estate. Over the last two years, the company has recorded increased profits as a result of the Property Market-boom in the country. Due to the increased number of transactions, you as the auditor feel that it is prudent to have an interim audit. The management are however hesitant about your proposal.

 Required:

Explain three reasons to the management of Sharoh Ltd. why an interim audit is necessary and how it could be of benefit to the client.       (6 marks)

 

ANSWER

Reasons to the management of Sharoh Ltd why an interim audit is necessary and how it could be of benefit to the client.

Interim audit is necessary since it helps in increasing the efficiency and effectiveness of the management functioning concerning the accounting and the financial part of the business.

It involves preliminary audit work that facilitates faster completion of the final audit.

 

Benefits to the Client

  1. It facilitates declaration of interim dividends
  2. It is less expensive as compared to the other audits that are required to be conducted
  3. Errors and frauds are detected at an early stage.
  4. It is less disruptive than continuous audit
  5. Act as a preventive and detective measure against fraud and errors.

 

QUESTION 3

December 2021 Question Four C

Examine six factors that would lead to change in the inherent risk of Relax lintels and Cottages Ltd.       (6 marks)

 

ANSWER

Factors that lead to change in the inherent risk of relax hotels and cottages ltd.

  1. Management integrity
  2. Management knowledge, competence and experience
  3. Any recent changes in management especially in the finance and accounting function.
  4. Unusual pressure on the management and staff
  5. Nature of the clients business for example some business models are complex
  6. Factors affecting the industry such as the regulatory framework.
  7. Significant related party transactions and balances.

 

QUESTION 4

December 2021 Pilot Paper Question One A and B

(a) Explain the meaning of the term “inherent risk”.    (2 marks)

(b) State with reasons five factors that would affect the initial assessment of inherent risk at the financial statement level.         (10 marks)

 

ANSWER

a)Inherence risk – This is the susceptibility or likely hood of account balances either individually or where aggregated with other 40 material misstatement assuming that there are no related controls.

 

b) Factors that would affect the initial assessment of inherent risk at the financial statement level

  1. Management integrity – How the management are honest and straightforward in providing information
  2. Management knowledge, competence and experience – the level of knowledge and skills posed by the management
  3. Any recent change in management especially in the finance and accounting function.
  4. Nature of the client business for example some business models are very complex.
  5. Significant related party transactions and balances – those transactions that have being done by directors or related parties generally.

 

QUESTION 5

September 2021 Question One C

Highlight two features of a non-statutory audit.      (2 marks)

 

ANSWER

Features of non statutory audit

  • Nature and scope of audit is determined by the client
  • Audit is conducted within the limits determined by the client
  • Conducted any time.

 

QUESTION 6

May 2021 Question One A

Wakulima Supermarket Ltd. has appointed your firm as their external auditors for the current financial year. One of the company’s directors feels that there is no need to undertake an interim audit during the year. He argues that an interim audit is only a way of increasing your firm’s audit fees and adds no value to the company.

 

Required:

(i)  Advise the director on the need to undertake an interim audit.      (8 marks)

(ii) Explain four audit assignments to be undertaken during the interim audit.  (4 marks)

 

ANSWER

i) The need to undertake an interim Audit

  • It facilitate declaration of interim dividends
  • It enables the auditor to prepare the management letter at an early stage
  • It facilitates faster completion of the final audit
  • It acts as a preventive and detective measure against frauds and errors
  • Errors and frauds are detected at early stage
  • It enables the auditor to plan for the audit
  • It is less costly compared to the other audit
  • It is less costly compared to the other audit
  • It helps in increasing the efficiency and effectiveness of the management functioning the accounting and financial part of the business.

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ii) Audit assignments to be undertaken during interim Audit

  1. Ascertaining and evaluating the accounting and intern control systems – the auditor understands the entity’s internal controls to determine the extent of reliance on the systems
  2. Recording and evaluating the systems – The auditor documents the systems and evaluates and determine to what extent of reliance he can place on the systems.
  3. Limited analytical review procedures – This involves the computation of ratio analysis, trend analysis cross sectional analysis and reasonable checks.
  4. Limited substantive testing – This the test of details of transactions and account balances to prove the validity, accuracy, reliability and completeness of accounting information
  5. Notifying the weakness in the systems to the management and providing recommendation for improvement.

 

QUESTION 7

May 2021 Question One B

Antony Wanga has joined your audit team as an intern. He has not been engaged in external auditing processes before.

Summarise eight critical stages of an external audit to Antony.  (8 marks)

 

ANSWER

Critical stages of an external Audit

  1. Agreeing with terms of the engagement: The auditors begins by considering factors and matters before and after accepting an engagement.
  2. Gathering background knowledge about the client – The auditor obtains an understanding of the entity and its environment.
  3. Planning for the audit-the auditor develops an overall audit strategy and audit plan which sets out the nature, timing and extend of audit procedures
  4. Ascertaining and evaluating the systems: The auditor understands and evaluates the systems to determine the extend of reliance to place on the systems
  5. Substantive testing to gather audit evidence: This involves the test of details of transactions and account balances to prove validity, accuracy, completeness and reliability of the accounting information
  6. Final analytical review procedures – This involves the computation of significant account ratio’s trend analysis, cross-sectional analysis and reasonable checks
  7. Final review of the audit – This is a review that his done after the audit work is completed before the writing and issue of the audit report.
  8. Drafting and signing of the audit report
  9. This is the end product of the audit where the auditor express an opinion on the truth and fairness of financial statements.

 

QUESTION 8

May 2017 Question Four B

In the context of auditing, define the following:

(i) Operational audit.    (2 marks)

(ii) Financial audit.    (2 marks)

(iii) Agreed upon procedures engagement.    (2 marks)

(iv) Positive assurance.        (2 marks)

 

ANSWER

Definition of terms

  • Operational audit – this is a systematic review of the efficiency and effectiveness of operations within the organisation. The focus of the audit is on the processes which take place within the organisation to identify if they can be streamlined and performed more efficiently. The more efficient a process is the more profitable the organisation should be.
  • Financial audit – This is a type of audit whose aim is to ensure that the financial reporting information produced is reliable and produced in an efficient and timely manner. If not, executive decisions may be based on unreliable information.
  • Agreed upon procedures engagement – Is to perform the procedures requested by the client and report the findings on a factual basis. The client forms their own conclusion based on the results of the work.
  • Positive assurance – Is the type of assurance issued by auditor when sufficient evidence has been gathered to come to a conclusion that information is free from material error.

 

QUESTION 9

May 2016 Question Two A

Highlight two limitations of external audits.       (2 marks)

 

ANSWER

Limitations of external audits

  1. Financial statements include subjective estimates and other judgmental matters
  2. Internal controls may be relied on which have their own inherent limitations
  3. Representations from management may have to be relied upon as the only source of evidence
  4. Evidence is often persuasive not conclusive
  5. Do not test all transactions and balances (sampling risk)
  6. Audit report uses historical information and financial information may be different from the current one

SAMPLE WORK

Complete copy of CPA AUDITING AND ASSURANCE Revision Kit is available in SOFT copy (Reading using our MASOMO MSINGI PUBLISHERS APP) and in HARD copy 

Phone: 0728 776 317

Email: info@masomomsingi.com

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