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) Circumstances under which the auditors may be liable for damages arising from mater misstatements
in published financial statements on which the auditors have expressed an audit opinion.
The auditor is expected to exercise reasonable care and skill while carrying out an assignment. Failure to exercise that reasonable care and skill constitutes professional negligence on the accountants part therefore negligence is said to be the;
• Failure to detect material misstatements which, reasonably competent auditor or accountant would have be expected to detect. It follows therefore that failure to detect immaterial misstatements would not constitute negligence on the accountants part. Similarly failure to detect material misstatement which involve an ingenious scheme of fraud would also not be considered negligence on the accountants part.
• Performing an audit and failing to comply with approved auditing standards and guidelines or generally accepted accounting principles and practice e.g. attendance during stock take, bank letters, debtors circularisation and lawyers letters.
An accountant will be judged to be negligent and can suffer loss of reputation or
be required to make good the loss suffered by the complainant. But to suffer those
damages and to make good the loss the complainant must prove that theaccountant was negligent and two more conditions must be met;
• The auditor must have owed a duty of care to the plaintiff.
• The plaintiff must have suffered a loss as a result of the auditor’s negligence.
b) The parties to which the auditor may be liable.
• Any person/institution with whom the auditor has contractual relations.
• Client (individuals, companies or partnerships.
• Persons who may rely on the work of the auditor (providing the audit knew or ought to have known that the person would rely on the work.
c) Ways to minimise liability.
• By not being negligent.
• By following the precepts of auditing standards.
• By agreeing duties and responsibilities in an engagement letter. This should specify
• the specific asks to be undertaken. It should also define the responsibilities to be undertake by the client and specify any limitations to the work to be undertaken.
• By defining in his report the precise work undertaken, work not undertaken and any limitations to the work.
• By stating in the engagement letter the purpose for which the report has been prepared and that the client may not use it for any other purpose.
• By stating in any report the purpose of that report and that it may not be relied on for any other purpose.
• Authorising persons who can be recipients of reports in the engagement letter and in the report.
• By limiting or extending liability by a term in the engagement letter or third parties by a disclaimer in the report.
• Obtaining an indemnity from the client on third party.
• Defining the scope of professional competence to include only matters with auditor’s competence. Do not take work which you are not proficient at.
Musyoxx answered the question on March 14, 2018 at 16:18
- 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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