AUD 339 Test 2 - Suggested Solution
June 2018
QUESTION 1
a. (ISA 520) Analytical procedures defined as ‘evaluations of financial information
through analysis of plausible relationships among both financial and non-
financial data’. Example: comparison between item in FS, computation of trend and
calculation of ratios √√
(2 marks)
b. Preliminary analytical review – risk assessment (required by ISA 315)
Preliminary analytical reviews are performed to:
- obtain an understanding of the business and its environment (eg financial
performance relative to prior years and relevant industry and comparison groups) √
- to help assess the risk of material misstatement in order to determine the nature,
timing and extent of audit procedures, √
- to help the auditor develop the audit strategy and programme.
(Any 2 √ x 2 marks = 4 marks)
c. Materiality is defined as: Information is material if its omission or misstatement could
influence the economic decisions of users taken on the basis of the financial statements
(IASB Framework). √√
(2 marks)
d. Any THREE (3) qualitative bases for materiality
- Use of inappropriate/inadequate accounting policy √
- Cumulative small amount of misstatement √
- Non-compliance with laws & regulations √
- Amounts that affect trend in earnings.
(Any 3 √ x 1 mark = 3 marks)
e. Relationship between Materiality and sampling and audit evidence
- inverse relationship between materiality level and sampling. When the ML is
low, thus the auditor needs to increase the sampling size √
- inverse relationship between materiality level and audit evidence. When the
ML is set at low level, the auditors need to accumulate more evidence to
ensure the sufficiency of evidence before arriving at any opinion. √
(2 √ x 2 marks = 4 marks)
(Total: 15 marks)
QUESTION 2
a. Audit risk model – AR = IR x CR x PDR
AR = risk that the auditor gives an unmodified audit opinion when the financial report is
materially misstated √
IR = the susceptibility of an assertion to a misstatement that could be material, either
individually or when aggregated with other misstatement, assuming that there are no
related controls. √
CR = the susceptibility of an assertion to a misstatement that could be material, either
individually or when aggregated with other misstatement, will not be prevented or
detected or corrected on a timely basis by the entity’s internal control. √
1
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DR = risk that the auditor will not detect a misstatement that exists in an assertion that
could be material. √
(4 √ x 1 mark = 4 marks)
b.
NO ILLUSTRATIONS TYPE OF AUDIT RISK
1 The auditor failed to be present during the stock- DR √
take at the end of the year
2 Confirmation of payables by an auditor fails to DR √
detect a material misstatement
3 Cash disbursements have occurred without CR √
proper approval
4 Re- computation of information on supplier’s DR √
invoice is omitted
5 There is an inadequate segregation of duties CR √
between recording and safe-guarding of cash
receipts.
(5 √ x 1 mark = 5 marks)
c. Any THREE (3) methods to reduce audit risk:
Plan and delegate the audit with due care √
Audit evidence are properly documented √
Audit staff selected are competent to perform the audit √
Sample selected should represent the population
Avoid misunderstanding with client
(Or any other acceptable answer)
(Any 3√ x 1 mark = 3 marks)
d. Random sampling - A sampling method in which all members of a group (population
or universe) have an equal and independent chance of being selected √
Systematic sampling - In systematic sampling (also called systematic random
sampling) every Nth member of population is selected to be included √
(2√ x 1.5 marks = 3 marks)
(Total: 15 marks)
QUESTION 3
A.
a.Any TWO (2) types of property, plant and equipment transactions:
i. Acquisition of capital assets by cash/cheque or other non-monetary
considerations. √
ii. Disposition of capital assets through sale, exchange, retirement or
abandonment. √
iii. Depreciation of capital assets over their useful economic life.
iv. Leasing of capital assets.
(Any 2√ x 1 mark each = 2 marks)
b. Any TWO (2) factors to be considered:
i Complex accounting issues such as lease accounting, self-constructed
assets and capitalized interest. √
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ii Difficult to audit transactions such as transactions involving donated
assets, non-monetary exchanges and self-constructed assets. √
iii Misstatements detected in prior audits, thus likelihood of misstatements in
the current year is higher.
(Any 2 √ x 1.5 marks = 3 marks)
c.Any THREE (3) of control objectives for PPE:
i. PPE are correctly recorded, adequately safeguarded and properly
maintained. √
ii. All acquisitions and disposal of PPE are properly authorized. √
iii. All acquisitions are for the use of the entity. √
iv. All acquisitions and disposals of PPE are for the best price.
v. PPE are properly recorded, appropriately depreciated and written down
where necessary.
(Or any other acceptable answer)
(Any 3√ x 1 mark each = 3 marks)
d.Audit procedures to verify the ‘ownership’ of PPE:
Examine or confirm the title deeds or documents for proof of ownership of
PPE. √
(1√ x 2 marks = 2 marks)
B. a. Audit of cash is important because:
almost all business transactions will ultimately pass through the cash account,
so that the audit of cash also assists in the verification of other asset and
liability accounts.√
cash being the most liquid of all the assets, there is a higher relative risk of
defalcation than other assets; it is an area of high inherent risk.
(1√ x 2 marks = 2 marks)
b. Identify the specific audit objectives for the following audit procedures in verifying
the cash account:
Audit Procedures Specific audit
objective
Example Review the financial statement to make sure Presentation and
that bank overdrafts are recorded as current disclosure
liabilities.
1. Counts the cash on hand on the last day of the Cut-off√
year and subsequently trace to deposits in
transit and the cash receipts journal.
2. Prove the bank reconciliation as to additions Detail tie-in√
and subtractions, including all reconciling
items.
(2√ x 1 mark = 2 marks)
c. Any FOUR (4) control activities for cheque receipts:
i. Segregation of duties in the handling of cheque receipt and recording. √
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ii. Immediate preparation of incoming cheque listing and endorsement of incoming
cheques. √
iii. Timely deposit of cheques receipts, preferably on daily basis. √
iv. Cash receipt journal vouchers prepared from cheque listing and pay-in slips and
approved by senior accounting staff before input into cash book. √
v. Periodic bank reconciliation prepared by independent accounting staff members.
vi. Independent review of bank reconciliation.
(Or any other acceptable answer)
(Any 4√ x 1 mark = 4 marks)
d. Physical count of cash needs to be done in the presence of the fund custodian because
it can protect the auditor against allegations of impropriety if a shortage of cash occurs
later. √
(1√ x 2 marks = 2 marks)
(Total: 20 marks)
TOTAL: 50 MARKS
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