(a) Four situations under which the Act requires auditors to qualify their report.
1. If the auditors are unable to obtain all the information and explanations they consider
necessary for the purpose of their audit, for example, if they are unable to obtain satisfactory evidence:
• Of the existence of ownership of material assets or of the amounts at which they have been stated on the basis adopted.
• Of the validity of payments
• That the records properly reflect all transactions of the business because the evidence has been lost or destroyed or is otherwise not forthcoming or has never existed.
2. If in the opinion of the auditors:
• Proper books of accounts have not been kept in accordance with the Companies Act;
• Proper returns adequate for their audit have not been received from branches nor visited by them.
• The balance sheet and the profit and loss account are not in agreement with the accounting books and returns.
3. If in the opinion of the auditors the accounts though based on proper books of account
fail to give the information required by the act for example, a failure to comply with specific disclosure requirements of the Companies Act in material respects.
4. If in the opinion of the auditors the accounts though otherwise complying with the
disclosure requirements fail to disclose a true and fair view for example.
Because in the auditor’s opinion the underlying accounting policies do no conform to accounting principles appropriate to the circumstances and nature of the business;
• Because they are prepared on principles inconsistent with those previously adopted and without adequate explanation and disclosure of the effects of the change;
• Because the auditors are unable to agree with the amounts at which an asset or a liability is stated;
• Because the auditors are unable to agree with the amount at which income or expenditure or profit is stated;
• Because the accounts do not disclose information though not specifically required by the companies act, is necessary for the presentation of a true and fair view;
• Because the additional information given in a note or in the director’s report materially alters the view otherwise given by the accounts.
(b) Circumstances in which the auditors may qualify their report owing to inherent uncertainty.
Uncertainty: this was described earlier in the study pack.
Uncertainty of 2 levels material and not fundamental and material and fundamental.
• Material and not Fundamental
If the auditor has reservations on only a particular aspect of the accounts and not on the accounts as a whole. In this situation the auditor is able to form an opinion on the accounts as a whole with particular reservation on a specific matter. He therefore disclaims opinion on only an aspect of the accounts and not the accounts taken as a whole.
• Material and Fundamental
This is when the impact on the accounts taken as a whole is to make them meaningless for any decision making purposes and to reduce their informational value. In this situation, the auditor is unable to form an opinion on the accounts taken as a whole and he therefore disclaims his opinion altogether by stating he is unable to form an opinion as to when the financial statements give a true and fair view.
(c) Four circumstances in which the auditors may qualify their report as a result of disagreement with directors.
Departure from accepted accounting practices where:
• There has been failure to comply with the relevant IAS and the auditor does not concur.
• An accounting policy not the subject of a IAS is adopted which auditor’s opinion is not appropriate to the circumstances of the business or;
• Exceptionally an IAS has been followed with the result that financial statements do not present a true and fair view.
• Disagreement as to the facts or amounts included in the financial statements
• Disagreements as to the manner or extent of disclosure of facts or amounts in the financial statements
• Failure to comply with the relevant legislation or other requirements.
Disagreements is material but not fundamental
Indicate that the auditor indicates that he has exceptions against reservations noted under
uncertainty and he will mention in his report that to the extent of the exception the accounts do
not give a true and fair view.
Disagreement is material and fundamental.
Its impact on financial statements is to make them misleading as a whole. In this situation
the auditor will state that the accounts taken as a whole do not give a true and fair view.
Musyoxx answered the question on March 16, 2018 at 16:45
- The principle objective of the verification of liabilities, commitments and contingencies is to form an opinion as to their completeness, existence, valuation and presentation in...(Solved)
The principle objective of the verification of liabilities, commitments and contingencies is to form an opinion as to their completeness, existence, valuation and presentation in the financial statements.
Required:
a. Why does the auditor examine statements received from suppliers of goods and services?
b. How would the auditor ensure that at the year end all goods received by a client were included in both inventories and creditor balances?
c. How would the auditor ensure that the amounts accrued for wages and salaries due but unpaid were properly calculated and recorded in the books?
d. What tests would the auditor need to undertake in order to ensure that capital commitments at the year end were fairly stated in the books?
Date posted: March 16, 2018. Answers (1)
- The auditing guideline on ‘planning, controlling and recording’ contains the following statement with regard to working papers: ‘audit working papers should always be sufficiently complete...(Solved)
The auditing guideline on ‘planning, controlling and recording’ contains the following statement with regard to working papers: ‘audit working papers should always be sufficiently complete and detailed to enable an experience auditor with no previous connection with the audit subsequently to ascertain from them what work was performed and to support the conclusions reached.’
Required:
a) Describe four benefits that the auditor will obtain from working papers that meet the above requirement.
b) If the auditor has discovered that a claim for damages is a significant item requiring exercise of judgement in the financial statements, show what type of evidence on the matter the auditor must record in the current file. Give reasons for the inclusion of such evidence in the current file.
c) List three types of information which is normally retained in the audit file and state why such information should be available for reference in the course of an audit.
d) Comment on the desirability of using standardised working papers and give an example of such working paper and its use.
Date posted: March 16, 2018. Answers (1)
- a. The external auditor of a company uses the system of internal control to determine the nature, extent and timing of his audit tests.
Required:
• Whose responsibility is...(Solved)
a. The external auditor of a company uses the system of internal control to determine the nature, extent and timing of his audit tests.
Required:
• Whose responsibility is it to ensure the existence of a strong system of internal controls?
• What value does a client obtain from the external auditor with respect to internal controls? Explain how the auditor provides that value.
b.
• What is the main role of the internal auditor with respect to internal controls?
• How does the external auditor assure himself that internal audit is effective?
Date posted: March 16, 2018. Answers (1)
- Three important aspects of an audit which must be planned for well in advance are:
a. Audit staffing requirements;
b. The timing of the audit field visits;
c. Clients use of...(Solved)
Three important aspects of an audit which must be planned for well in advance are:
a. Audit staffing requirements;
b. The timing of the audit field visits;
c. Clients use of computerised systems.
Required:
a. Explain the importance of each of the above matters for the successful conduct and completion of the audit.
b. Identify and list in point form the inputs to the planning process in respect of each of the three items stated above.
Date posted: March 16, 2018. Answers (1)
- Integrated Consulting Engineers Ltd. has undergone a period of substantial growth since its establishment ten years ago. Due to lack of accounting expertise within the...(Solved)
Integrated Consulting Engineers Ltd. has undergone a period of substantial growth since its establishment ten years ago. Due to lack of accounting expertise within the company, it has traditionally instructed its auditors, Shah & Company (CPA) to perform the two functions of accountancy and auditing. Shah & Company have also provided consultancy services to the company.
Arising from these responsibilities, Shah & Company earn 20% of their gross fees from Integrated Consulting Engineers Ltd.
Required:
a) Discuss the acceptability and desirability of Shah & Company continuing to act as accountants, auditors and consultants for the company.
b) If, despite having been re-elected as the company’s auditors, Shah & Company decide to resign during the year, state the procedures they should follow.
c) What action should Integrated Consulting Engineers Ltd. take on receipt of the letter of resignation from Shah & Company?
Date posted: March 16, 2018. Answers (1)
- Circumstances under which wages are treated as a capital expenditure(Solved)
Circumstances under which wages are treated as a capital expenditure.
Date posted: March 16, 2018. Answers (1)
- Advantages of maintaining control accounts(Solved)
Advantages of maintaining control accounts.
Date posted: March 16, 2018. Answers (1)
- Why should the name of a limited company contain the word limited?(Solved)
Why should the name of a limited company contain the word limited?
Date posted: March 15, 2018. Answers (1)
- Write brief notes on the following:
a. Final or completed audit:
b. Interim audit
c. Continuous audit;
d. Balance Sheet audit
(Solved)
Write brief notes on the following:
a. Final or completed audit:
b. Interim audit
c. Continuous audit;
d. Balance Sheet audit
Date posted: March 14, 2018. Answers (1)
- 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)