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a) Final or completed audit;
Usually done at the end of the year on the balance sheet and the profit and loss account. A report is written to the shareholders regarding the true and fair view.
Advantages
• Eliminates note taking during the process.
• It is flexible.
• Ideal for small businesses.
• It does not disrupt work.
• Plan used can be recycled as in every year the same details are checked.
Disadvantages
• Errors and frauds are discovered too late.
• The auditor has to schedule many companies at around the same time.
• Takes a long time.
b) Interim Audit;
It is usually done mid-way the year. It is important to companies that usually declare interim dividends. The balance sheet transactions are left out and only profit and loss account is dealt with.
Advantages
• It is ideal for dynamic businesses.
• Compared to continuous audits it is cheaper.
• It facilitates final audits.
• Up to date accounts are kept.
• Errors and frauds are prevented and detected at an early stage compared to final audits.
• Essential in a partnership in which some partners are retiring or when a new partner is being admitted into the business.
• Essential when mergers and take-overs are being contemplated.
• Facilitates the calculation of interim dividends.
Disadvantages
• Errors are at an advanced stages compared to continuos audits.
• Managers may manipulate accounts so as to conceal profit if they do not want to pay interim dividends.
• Over dependence on audit staff to solve accounting problem.
• Figures already checked can be altered by audit staff or management.
c) Continuous Audit;
Done at intervals of one, two or three months. They are ideal for:
• Banking businesses whose transactions must be up to date to prevent errors and frauds.
• Manufacturing or trading concerns with numerous transactions.
• Businesses without strong internal control system.
• Businesses operating in risky areas.
Advantages
• They facilitate interim audits.
• Accounts are usually kept up to date.
• Errors and frauds are discovered at an early stage.
• The auditor gathers sufficient knowledge of the business as a result of his frequent visits.
• Saves time during final audits.
• Better report is developed as time spent is more.
Disadvantages
• It is expensive to have a continuos audit system.
• Frequent disruptions of the clients work during the audit.
• Tendency to over depend on auditing staff to solve accounting problems.
• Consumes a lot of time.
• Interference of work which has already been audited by the client’s staff.
d) Balance sheet audits
Tests the strength of the internal control system by working backwards to get the initial transactions. It is based on verification of assets by checking;
• Description: Mainly of recording entries.
• Ownership: Prove of ownership either by use of logbooks for cars or title deeds for land.
• Value: Cost and method of depreciation.
• Existence: Is the asset really there?
Advantages
• It is cheap compared to other audits.
• A balanced opinion can be reached.
Disadvantages
• It is a partial audit.
• Applied only to business with strong internal control system.
Musyoxx answered the question on March 14, 2018 at 16:57
- During the course of the audit, the auditor may need to consider audit evidence in the form of reports, opinions, valuations or statements from specialists.
Required:
a) List...(Solved)
During the course of the audit, the auditor may need to consider audit evidence in the form of reports, opinions, valuations or statements from specialists.
Required:
a) List four examples of situations where an auditor may wish to rely upon the report of a specialist.
b) Describe the principles or factors which the auditor should consider when placing reliance on audit evidence provided by specialists.
Date posted: March 14, 2018. Answers (1)
- Petty Shops Ltd. operates a large number of small retail outlets selling newspapers, sweets, cigarettes and sundry items. The internal control system provides for...(Solved)
Petty Shops Ltd. operates a large number of small retail outlets selling newspapers, sweets, cigarettes and sundry items. The internal control system provides for all books to be kept at head office with a branch stock account at selling price. Each outlet is required to bank receipts daily and intact; and to make a weekly stock report. All stock other than newspapers and magazines required by an outlet must ordered from the company’s central warehouse and is delivered twice weekly. Each outlet receives daily deliveries of newspapers and magazines direct from the supplier.
There are usually two members of staff on duty at each outlet at any one time with a considerable number of the staff being employed on a part-time basis. Petty Shops Ltd. employs a small internal audit department who visit each outlet at least twice each year.
Required:
a) State and explain four criteria which should be employed in assessing the effectiveness and the relevance of an internal audit function.
b) Identify three types of fraud to which Petty Shops Ltd. may be particularly vulnerable in operating a large number of small outlets. In circumstances where the auditors have identified high risk areas within an audit, give five keyelements which should exist in the general audit approach to these areas.
c) State with reasons whether the external auditors would be expected to visit outlets every year.
Date posted: March 14, 2018. Answers (1)
- Explain the following terms: a. Materiality; b. The duty of confidentiality; c. Professional indemnity insurance;...(Solved)
Explain the following terms:
a. Materiality;
b. The duty of confidentiality;
c. Professional indemnity insurance;
d. Peer review;
e. Quality Control;
Date posted: March 14, 2018. Answers (1)
- a. Describe the principal purpose of a management letter. b. Your audit firm has acted for many years as auditors of Western Fishing Products Ltd. In the course of your audit(Solved)
a. Describe the principal purpose of a management letter.
b. Your audit firm has acted for many years as auditors of Western Fishing Products Ltd. In the course of your audit, you have come across the following matters, which you believe should be brought to the attention of the directors through a management letter.
• The company banks all its cheques and cash once a week; usually on a Friday afternoon.
• Unbanked cash is held in a petty cash box which is kept in the drawer of a desk in the general office. Only the financial controller and the general manager have access to the keys for the drawer and petty cash box.
• Suppliers statements once received are passed on to the purchases ledger clerk for checking against creditors account and subsequent filing. No further controls are implemented after the filing.
• The company’s stock taking instructions require that pre-numbered stock sheets be issued by and returned to the financial controller. During the stock take attendance you noted that the stock sheets in use were not pre-numbered as required.
Required.
Draft a management letter to the managing director highlighting the above weakness, their implications and suitable recommendations to overcome them.
Date posted: March 14, 2018. Answers (1)
- You are the auditor of a manufacturing company which makes and sells ladies clothing. While checking the accounts at the date of the balance...(Solved)
You are the auditor of a manufacturing company which makes and sells ladies clothing. While checking the accounts at the date of the balance sheet you receive from management a certificate showing the value of stock and work in progress. You feel that additional work is necessary to confirm the correctness of the figures.
Required:
a. Describe the procedure you would carry out when checking the stock sheets.
b. Indicate the additional work that must be carried out on the work in progress.
c. State three factors that could affect the accuracy of the figures given by the management.
Date posted: March 14, 2018. Answers (1)
- Tamu Tamu Limited is a general trading company. It has presented its annual accounts for audit for the year ended 31 December 1996.
Required:
a) State how you...(Solved)
Tamu Tamu Limited is a general trading company. It has presented its annual accounts for audit for the year ended 31 December 1996.
Required:
a) State how you would verify the following assets:
• Short term deposit with the bank:
• Motor vehicles;
• Disposal of plant;
• Loans given to employees;
b) With reference to the annual general meeting of the company, list the items that you woulbe recorded in the resolutions of the shareholders.
Date posted: March 14, 2018. Answers (1)
- a. Briefly explain two practical circumstances when the auditor may be liable for damages arising from material misstatements in published financial statements on which the auditors...(Solved)
a. Briefly explain two practical circumstances when the auditor may be liable for damages arising from material misstatements in published financial statements on which the auditors have expressed an audit opinion.
b. List the classes of persons who may make a successful legal action against the auditors negligence.
c. Explain how an audit firm can minimise its potential legal liability for professional negligence.
Date posted: March 14, 2018. Answers (1)
- Restmount Kenya Ltd. was formed on 1 October 2002 in order to export tea and coffee to European markets. The Directors are unsure as...(Solved)
Restmount Kenya Ltd. was formed on 1 October 2002 in order to export tea and coffee to European markets. The Directors are unsure as to their responsibilities and the nature of their relationship with the external auditors. The audit partner has asked you to visit the client and explain to the directors, the fundamental aspects of the accountability of the directors and their relationship with the auditor.
Required:
Explain to the directors of Restmount Kenya Ltd.
a. The need for an audit
b. Procedures for the appointment of an auditor of a public company under the Companies Act.
c. Directors responsibilities in relation to the accounting function of the Company
d. Auditors’ statutory responsibilities in relation to the audit of the company’s financial statements
Date posted: March 14, 2018. Answers (1)
- a. Explain the meaning of the following phrases:-
• Qualified audit report
• Fundamental uncertainty
b. State the matters that the Companies Act requires to be...(Solved)
a. Explain the meaning of the following phrases:-
• Qualified audit report
• Fundamental uncertainty
b. State the matters that the Companies Act requires to be contained in an audit report
c. What types of audit opinion would normally follow from a limitation in the scope of the audit?
Date posted: March 14, 2018. Answers (1)
- The Auditors Operational Standard requires the auditor to obtain ‘relevant and reliable audit evidence sufficient to enable him to draw reasonable conclusions therefrom.’
Required:
a. What is audit...(Solved)
The Auditors Operational Standard requires the auditor to obtain ‘relevant and reliable audit evidence sufficient to enable him to draw reasonable conclusions therefrom.’
Required:
a. What is audit evidence?
b. Explain the meaning of the following terms;
• Relevant audit evidence
• Reliable audit evidence
• Sufficient audit evidence.
c. Explain whether the following types of audit evidence meets the standards of relevancy, reliability
and sufficiency as required by the auditors operational standard with regard to:
• Written confirmation of a trade debtor circularised at year end;
• Work-in-progress stocks identified during the annual physical stock count;
• Solicitor’s letter confirming pending legal action;
Date posted: March 14, 2018. Answers (1)
- During the final stages of the first audit of Nairobi National Bank Ltd. you request the client to provide you with...(Solved)
During the final stages of the first audit of Nairobi National Bank Ltd. you request the client to provide you with a letter of representation. The client reads the representations you are requesting and refuses to furnish the letter. The client states its position to be as follows:
“You are asking us to tell you all manner of things which we appointed you to find out. You are requesting us to say such things as ‘all the transactions undertaken by the bank have been properly reflected in the accounting records’ and yet we pay you to carry out the audit. You should know whether these statements are true or not.”
Required:
a. Explain to the client the purpose of the letter of representation
b. Describe the nature of the content of a letter of representation. Your answer should be illustrated
c. With specific examples of items which may appear in a letter of representation
d. Explain the reliability of a letter of representation as audit evidence and the extent to which the
e. auditors could rely on this evidence.
f. (d) Explain the consequence of your client’s refusal to furnish a letter of representation.
Date posted: March 14, 2018. Answers (1)
- a. Explain why auditors carry out circularisation of debtors
b. Distinguish between ‘positive’ and ‘negative’ debtors circularisation procedures
c. Describe in...(Solved)
a. Explain why auditors carry out circularisation of debtors
b. Distinguish between ‘positive’ and ‘negative’ debtors circularisation procedures
c. Describe in detail the work you would carry out in scrutinising the replies tothedebtors circularisation and in confirming whether the debtors balances are collectable in the following situations:
• Where the debtor does not agree with the balance and states a difference;
• Where the debtor reports that he cannot confirm the balance;
• Where no reply is received from the debtor
Date posted: March 14, 2018. Answers (1)
- Members of the accounting profession in common with other professions have taken steps to reduce professional risk as far as possible.
Required:
a. With reference to accounting profession,...(Solved)
Members of the accounting profession in common with other professions have taken steps to reduce professional risk as far as possible.
Required:
a. With reference to accounting profession, what is audit risk?
b. Outline the steps that the Institute of Certified Public Accountants of Kenya as taken to reduce the individual auditor’s exposure to risk.
c. Suggest specific actions an individual auditor or audit firm could take to minimise liability arising from audit risk.
Date posted: March 14, 2018. Answers (1)
- Your firm is the auditor of Mavoko Engineering Company Ltd. and you have been asked to suggest the audit work you would carry out in...(Solved)
Your firm is the auditor of Mavoko Engineering Company Ltd. and you have been asked to suggest the audit work you would carry out in verifying trade creditors at the end of the financial year. You also attended the company’s annual stock take at the end of the year 31 December 1996.
Required:
Describe in detail the audit work you would carry out to verify:
a. The suppliers statements against the balances on the purchase ledger;
b. That purchases cut-off has been correctly carried out at the end of the year.
Date posted: March 14, 2018. Answers (1)
- a) Describe the reasons for maintaining proper audit working papers.
b) The documents, records and related information listed below are normally maintained in ‘permanent’ audit...(Solved)
a) Describe the reasons for maintaining proper audit working papers.
b) The documents, records and related information listed below are normally maintained in ‘permanent’ audit file.
In each case indicate the importance of maintaining the respective document, record and
information.
• Memorandum and articles of association:
• Principal activities and locations;
• Specific legislation and regulations
• History including summary of results;
• Key staff;
• Description of accounting systems and internal control
• Organisation charts;
• Copy of letter of engagement
Date posted: March 14, 2018. Answers (1)
- Your firm has been approached by the directors of UB Bank Ltd. a newly formed commercial bank to undertake the audit for its first complete...(Solved)
Your firm has been approached by the directors of UB Bank Ltd. a newly formed commercial bank to undertake the audit for its first complete financial year ended 31 December 1996. Your manager has assigned you the responsibility for leading the team. You have had various discussions with the directors about the timetable and the respective responsibilities of management and the auditor. You have drafted a letter of engagement and have sent it to the managing director for approval and acceptance but the management has not yet responded to your letter.
Required:
a) Explain why a letter of engagement is sent before any new audit appointment is accepted.
b) Set out the main contents of a letter of engagement.
c) Itemise the actions you would take in response to the non-reply by the management to your draft engagement letter.
d) State when it might be necessary to re-draft an engagement letter and have it re-affirmed by the client’s management.
Date posted: March 14, 2018. Answers (1)
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