Revision Class

Question 1

Name the steps or considerations in pre-engagement activities

Answer 1

1. Client’s business standing and integrity of management
2. Consider the existence of a vacancy in the position of the auditor
3. Communicate with the previous auditor to determine if there is any professional reason as to why you should not accept the engagement
4. Consider any changes in the entity
5. Consider the firm’s independence
6. Consider whether the client has the ability to pay the audit fee on time
7. Capacity to audit the client or group
8. Engagement letter

Question 2

Name the risk and risk response to the following risk indicators:
Company has branches that are widespread.

Answer 2

Risk = inconsistency of control
Response = obtain management representation of internal control at the branches and perform test of controls on the controls implemented at the branches

Question 3

Name the risk and risk response for the following scenario

Tight audit deadline

Answer 3

Risk = unrecorded liabilities at year end and post balance sheet events may not be detected and audited
Response = perform early verification procedures if you can rely on internal controls and perform subsequent events procedures in terms of ISA 560

Question 4

Name the risk and the risk response the third party reliance on audit report

Answer 4

Risk = third party liability 
Response = perform more detailed substantive procedures and increase extent of audit procedures

Question 5

List the primary assertions for inventory balances

Answer 5

1. Existence
2. Rights and obligations
3. Valuation

Question 6

List the primary assertions for provision for obsolete inventory

Answer 6

1. Completeness

2. Valuation

Question 7

List the decisions relate to audit strategy

Answer 7

1. The number of trainees to be allocated to the clients inventory account
2. Hours to be allocated to the various section of the audit in the budget
3. Scheduling the date, time and venue for engagement partner reviews
4. Engaging an expert to assist with the valuation of work in progress

Question 8

Explain the difference between audit approach and audit strategy

Answer 8

Audit approach rears to the timing, nature ad extent of the audit procedures.
Audit strategy includes audit approach, response to risk and other admin issues

Question 9

What is the link between audit risk and assertions?

Answer 9

The assertions are the representation of management in the financial statements on which the auditor gives an opinion. Audit risk is the risk that the auditor will not detect material misstatement in those assertions and will, as a result express an incorrect opinion on the financial statements.
To minimize audit risk, the auditor formulates an appropriate audit strategy and audit approach to audit the assertions

Question 10

If risk of a client is high, discuss the effect on materiality.

Answer 10

Set lower materiality figure

Question 11

If risk of a client is high, discuss the effect on audit approach.

Answer 11

Nature = more substantive approach 
Timing = perform year end procedures
Extent = increase sample size

Question 12

How does the auditor respond to a high level of risk at group financial statements?

Answer 12

Respond to these risks by:
- adjusting the materiality levels
- identify and audit significant and non significant components
- nature, timing and extent of procedures on the consolidation process
Response may further include:
- assign staff with appropriate experience and high level skills
- providing more supervision
- introducing elements of unpredictability into the audit
- emphasizing the need for professional skepticism by the audit team
- changing the way the audit was carried out compared to prior year
- changing the nature, timing and extent of testing

Question 13

When selecting a sample of credit notes received during the year and trace to the relevant creditors account, is this considered as test of control or substantive procedure? And what control objective or assertion is being tested?

Answer 13

It is considered as substantive procedures and it is testing the completeness

Question 14

Inspect the account payable balance was restated at the correct spot rate at year end by comparing the spot rate to an external source, would this be test of control or substance procedure and what is the assertion being tested?

Answer 14

Substantive procedures, valuation is tested

Question 15

Inspect internal purchase orders for signatures of management as evidence of approval of order, is this a test of control or substantive procedure and what is the assertion or control objective being tested?

Answer 15

Test of control, authorization is being tested

Question 16

Re-perform the creditors reconciliation at year end is a form of test of control or substantive procedure and what is the assertion or control objective being tested?

Answer 16

Substantive procedure and valuation is being tested

Question 17

Describe 5 audit procedures that you will perform during an inventory count in order to verify inventory on hand at year end. Also explain your direction of testing during the count as well as the assertion addressed.

Answer 17

1. Enquire whether the entity is closed during the inventory count, if not, tif there is a separate area for inventory movements
2. Observe clients procedures for establishing correct manufactured items transferred and sales cut offs at count date
3. Review count instructions for adequacy and obscene whether counting was done in teams of two
4. Report weakness to management
5. Perform test counts from records to floor to test existence and from floor to record to test completeness

Question 18

Provide 3 analytical review procedures you would perform on the inventory and production cycle.

Answer 18

1. Compare number of days of stock in hand to prior year
2. Compare inventory in total and per category to previous year
3. Compare budgeted gross profit markup to actual of the current year

Question 19

What financial indicators relates to going concern problem?

Answer 19

1. Operating losses
2. Adverse financial ratios
3. Strong competition
4. Withdrawal of suppliers support
5. Negative cash flows

Question 20

What operating indicators relates to going concern problem?

Answer 20

1. Loss of key management personnel
2. Labour difficulties
3. Shortage from crucial suppliers
4. Loss of major market

Question 21

What other indicators are there that relates to going concern problems?

Answer 21

1. Not meeting statutory regulations
2. Changes in legislation
3. Pending legal proceedings

Question 22

State vice audit procedures to address a going concern risk.

Answer 22

1. Enquiry from lawyers on any pending litigations and claims
2. Evaluate management’s assessment of going concern assumption used
3. Review terms of debenture and loans and assess whether they’ve been breached
4. Consider entity’s ability to fulfill clients orders
5. Obtain cash flow forecasts and budgets and assess reasonableness

Question 23

When there is a limitation of scope and results the audit to be material and pervasive what is the opinion to be expressed?

Answer 23

Disclaimer

Question 24

When there is a limitation of scope that does not results in material and pervasive what type of opinion is expressed?

Answer 24

Qualified

Question 25

When there is a disagreement with management that cause the audit to be material and pervasive, what opinion should be expressed?

Answer 25

Adverse

Question 26

When there is a disagreement with management which does not result in material and pervasive of the principle of the audit, what opinion will be expressed?

Answer 26

Qualified