AUD

MIA QE/MAC 2008

ANSWER 1
i.

Ethical principles governing auditors professional responsibilities are:

ii.

Independence
Integrity
Objectivity
Professional competence and due care
Confidentiality
Professional behavior; and
Technical standards
(1/2 mark each, maximum 4 principles = 2 marks)

Explanation and implication of non-compliance :

Principles
Independence

Explanations
Must be and should be seen to be
free of any interest which might be
regarded, whatever its actual
effect, as being incompatible with
integrity and objectivity.

Integrity

Straightforward, honest and

sincere in the approach to
professional work

Objectivity

Be fair and must not allow

prejudice, conflict of interest or
bias to override objectivity. When
reporting on financial statements
which come under auditors
review, they must maintain an
impartial attitude.
Must perform professional
services with due care,
competence and diligence.
Auditor has a continuing duty to
maintain professional knowledge
and skill to a level required to
ensure that a client or employer
receives the advantage of
competence professional services
based on up-to-date
developments in practice,
legislation and techniques.
Professional accountants should
refrain from performing any
services which they are not

Professional
competence
and due care

Implications
Auditors may compromise their
professional independence
because of outside pressures.
Without independence, the
auditors opinion is suspect,
hence, the credibility of financial
reports became questionable.
Implies non-existence of the
observance of accepted standards
of honesty which must underlie all
professional decisions and
actions.
A fair and impartial attitude is not
maintained. Auditors judgments
are influenced by bias.
This significantly affects auditors
independence

Auditors have duties (1) to

maintain level of competence
throughout professional career,
and (2) to do work that they are
competent.
Compliance is monitored by the
profession in order to maintain
memberships.

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competent to carry out unless

advice and guidance are obtained
to ensure the services are
performed satisfactorily.
Confidentiality

Professional/
ethical
behavior

Technical
standards

Must respect confidentiality of

information acquired in the course
of their work and must not
disclose any such information to a
third party without specific
authority, unless there is a legal or
professional duty to disclose it.
Must conduct in a manner
consistent with the goal reputation
of their profession and refrain from
any conduct which might bring
discredit to their profession. A
distinguishing feature of a
profession is acceptance of its
responsibility to the public ie the
notion of safeguarding the public
interest is paramount to ethical
conduct.
Must carry out professional work
in accordance with the technical
and professional standards
relevant to the work.

Auditors rely on personal integrity

and values to make the right
decision. Need to appreciate that
loyalty is owed to affected
stakeholders the profession,
public, client /employer, and
individual.
Lead to breach of contract,
dishonorable practice or conduct,
or failure to observe a proper
standard of professional care, skill
or competence.
Hence, disciplinary procedures
may be imposed on members.

Unacceptable professional
conduct. Non-compliance to
technical and quality control
standards may cause the audit
expectation gaps.

(1 mark for an explanation and 1 for the implication of each principle, maximum 4
principles = 8 marks)
(Total : 10 marks)

ANSWER 2
i.

The objective of an agreed-upon procedures engagement is for the auditor to

carry out procedures of an audit nature to which the auditor and the entity and
any appropriate third parties have agreed and to report on factual findings.
Unlike agreed-upon procedure engagement, review engagement aims to enable
an auditor to state whether, on the basis of procedures which do not provide all
the evidence that would be required in an audit, anything has come to the
auditors attention that causes the auditor to believe that the financial statements
are not prepared, in all material respects, in accordance with an identified
financial reporting framework (negative assurance).
(4 marks)

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ii.

MIA QE/MAC 2008

Procedures applied in performing an agreed-upon engagements include:

i.

ii.
iii.
iv.
v.

Inquiry and analysis on

Information on which agreed-upon procedures have been applied

The purpose of the procedures applied

Re-computation, comparison and other clerical accuracy checks
Observation
Inspection
Obtaining confirmation
(Any 4 procedures with explanations = 4 marks)

The evidence thereupon obtained may be used as the basis for the report of
factual finding only. No assurance is give.
In some cases it may be sufficient to enable the auditor to express moderate or
even high assurance on assertions. This can arise, for example, where a
regulatory agency specifies the nature of the procedures to be followed in an
engagement.
(2 marks)

iii.

The contents of a report to be issued on completion of an engagement to perform

agreed-upon services:
i.
ii.
iii.
iv.
v.
vi.
vii.
viii.
ix.
x.
xi.
xii.

Address of the client

Identification of information on which agreed-upon procedures have been
applied
A statement that procedures applied are those agreed by clients
A statement that the engagement is performed in accordance with
auditing standards applicable to agreed-upon engagement
Identification of the purpose of agreed-upon procedures
A statement of responsibility of clients on the adequacy of procedures as
agreed
List of specific procedures performed
Description of factual findings
A disclaimer that no assurance is expressed
A statements of the agreed use of report
A statement that the procedures do not extend to the entitys financial
report as a whole
Date, signature & address of auditors
(1/2 mark for any correct answer, maximum of 10 points = 5 marks)
(Total : 15 marks)

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ANSWER 3
A. Main audit objectives for (i) sales transactions and (ii) receivable balances
Assertions
Existence

(i) Sales transactions

(ii) Receivable balances
objectives
objectives
Recorded sales transactions
Accounts receivable represent
represent goods shipped during
amounts owed by customers at
the period
the balance sheet date
Recorded cash receipts
transactions represent cash
received during the period
Recorded sales adjustment
transactions represent
authorized discounts, returns
and allowances, and bad debts
applicable to the period

Completeness

All sales, cash receipts and

sales adjustment transactions
occurred during the period
have been recorded

Accounts receivables includes

all claims on customers at the
balance sheet date

Ownership

The entity has rights to the

accounts receivables and cash
resulting from recorded sales
transactions

Accounts receivables at the

balance sheet date represent
legal claims of the entity on
customers for payment

Valuation

All sales, cash receipts and

sale adjustment transactions
are correctly journalized,
summarized and posted

Accounts receivable represent

gross claims on customers at
the balance sheet date and
agree with the sum of the
accounts receivable subsidiary
ledger
The provision for bad debts
represents a reasonable
estimate of the difference
between gross accounts
receivable and their net
realizable value

Disclosure

The details of sales, cash

receipts and adjustment
transactions support their
presentation in the financial
report, including their
classification and related
disclosures

Accounts receivable are

properly identified and
classified in the balance sheet
Appropriate disclosures have
been made concerning
accounts receivable that have
been factored or otherwise
assigned

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(Any one objective: mark for sales transactions and mark for receivable balances)
(Total ( + ) x 5 = 5 marks)

B. Main inherent risk factors affecting (i) sales transactions and (ii) receivable balances
Inherent risk factors sales transactions
1. Pressure to overstate sales in order to
report the sales target is achieved, eg
fictitious sales, improper cut-off,
shipping unordered goods to customers
near the year-end and recording them
as sales in the current period only to
have them returned in the subsequent
period

Inherent
risk
factors
receivable
balances
1. Pressure to overstate cash and accounts
receivable or understate the provision for
bad debts in order to report a higher level
of working capital in the face of liquidity
problems or going-concern doubts

2. The volume of sales, cash receipts and

sales adjustment transactions, resulting
in opportunities for errors to occur

2. Potential misclassification of accounts

receivable as current when payment of
some or all of the balance may be
deferred for more than a year

3. Contentious issues relating to the

timing of revenue recognition, eg
effects of purchasers rights of return

3. Contentious classification of accounts

receivable, which are factored with
recourse

4. Use of sales adjustment transactions to

conceal thefts of cash received from
customers by overstating discounts,
recording fictitious sales returns, or
writing off customers balances as
uncollectible

4. Susceptibility of misappropriation of
liquid assets generated by cash receipts

(Any one objective: 1 mark for sales transactions and 1 mark for receivable balances)
(Total (1 +1) x 2 = 4 marks)
C. Audit procedures
i.

Substantive tests on sales revenue

Comparison of monthly sales with the corresponding months in the previous

year to evaluate the reasonableness of recorded sales, monthly performance,
and to provide explanation for any fluctuation.

Perform procedures to provide evidence pertaining to the existence or

occurrence, completeness, and valuation or measurement assertions of sales
revenue

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a.

Vouch debits to customers accounts to supporting sales invoices

and matching documents to provide evidence on the
existence/occurrence, rights and obligations, and valuation or
measurement assertions.

b.

Vouch credits to remittance advices and sales adjustment

authorizations to provide evidence relevant to the completeness
assertions for accounts receivable that reductions in customer
balances are legitimate.

Perform sales cut-off test

a.

Sales cut-off test as of balance sheet date by agreeing do few days

before and after with respective invoices to obtain reasonable
assurance sales are recorded in the accounting period in which the
transactions occurred and that the corresponding entries for
inventories and cost of goods sold are made in the same period.

b.

Check credit note issued few days before and after year end to
detect the possibility of the sales return is recorded in the correct
accounting period.

Obtain assurance that sales are recorded in the accounting period in which
goods are delivered and to ensure correct presentation of both sales and
accounts receivable.

Cast the list of invoices in the ledger for any month to ensure that total sales
for the month are accordance.

Cast the list of invoices in the receivable ledger for any month to ensure that
the total sales for the month are accurate.
(1 mark for any one point with maximum 8 points=8 marks)

ii. Substantive tests on trade debtors balances

Trace total sales to the general ledger to ensure the total sale amount is
being correctly in the ledger.

Perform alternative procedures for dealing with non-response- eg subsequent

receipt tax

Prepare an aging schedule for account receivables balances and analyze the
age of accounts receivables balances evaluate adequacy of the provision of
bad debts

Cast the list of debtors in the receivable ledger

Reconcile the sub ledger balances to the control account in general ledger
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Perform account cut of test agreed sales invoices recorded before and after
the year end to the subsidiary ledger

Investigate and consider unusual items in the sub ledger such as transferring
balance from one account to another, contrast, or round sums figure,
significant adjustments

Identify related party transactions from subsidiary ledger

Confirm accounts receivable

a. Determine the selection of sample debtors for confirmation procedures
to ensure its representativeness.
b. Debtors with large balances may be selected 100% and those with
smaller balances may be selected at certain determined percentages.
c. Perform positive confirmation or negative confirmation accordingly
(1 mark for any one point with maximum 8 points = 8 marks)

ANSWER 4
i.

Purposes of a management representation letter

The letter is useful for the directors to acknowledge their collective

responsibility for the preparation of the financial statements and to confirm
that they have approved the financial statements.

To provide written audit evidence on matters that are material to the

financial statements when other audit evidence cannot reasonably be
expected to exist. (ISA 580).

Management representation letter do not necessarily constitute sufficient

appropriate audit evidence. They cannot be a substitute for other evidence that
should be available, and auditors should ensure representations are reasonable
and consistent with their knowledge of the business and their reliability in forming
an opinion.
Even though representations may be the only evidence, which can reasonably be
expected to be available, but they can never constitute sufficient appropriate audit
evidence. In this situation the auditor will need to consider the impact on the audit
report of this limitation in the scope of work of the auditors.
(4 marks)
ii.

a.

Third parties evidence is more reliable to the extent that it is obtained

from independent sources. Its reliability will be reduced if it is obtained
from sources which are not independent, or if there is a risk that client
personnel may be able to and have reason to suppress or manipulate it.
Examples include confirmation of bank balances, circularization of trade
payables or receivables. (Or any other acceptable examples)
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b.

Evidence originated by the auditors is generally the most reliable type of

audit evidence considering there is little risk that it can be manipulated by
the management.
Examples include analytical procedures, physical inspection or
observation, such as attendance at physical inventory counts, re
performance of calculations. (Or any other acceptable examples)
(6 marks)
(Total:10 marks)

ANSWER 5
A.
i.

The auditor must obtain reasonable assurance that the financial statements as a
whole are free from material misstatements, whether caused by fraud or error. In
doing so, the auditor should maintain an attitude of professional skepticism
throughout the audit recognizing the possibility that a material misstatement due
to fraud could exist, not withstanding the auditors past experience with the entity
about the honesty and integrity of the management and those charged with
governance.
The auditors professional skepticism would not normally lead to an unhealthy
suspicion of the documents and other materials and explanation provided as
audit evidence. It would mean, however, that the auditor should pursue any
suspicions raised by evidence that is not totally persuasive. For example, if
information provided by two parties on the same matter are not consistent, then
the auditor should consider the possibility of one or both parties provided the
information are lying and that there could be some underlying issue that is being
concealed.
(4 marks)

B.
i.

Auditing round the computer is where the auditor does not verify the processing
of the computer, but instead verify the input into and output from the companys
software which processes accounting data. For example the auditor traces
transactions recorded on documents to the point of entry into the computer and
picks up those transactions as part of the output and continues from that point to
the entry in the ledger. Any processing performed by the computer is verified by
agreeing the input to the expected output. This procedure does not use any
computer assisted audit techniques.
Auditing through the computer is where the auditor also verifies the processing of
the transactions by the computer. This is where the actual computer files and
programs are tested by the auditor using the computer assisted audit techniques.
(4 marks)

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ii.

MIA QE/MAC 2008

Test data is data used by the auditor for processing by the clients accounting
system to test the operation of the system and controls. Test data comprises
both valid and invalid data. Test data may be processed during a normal
production run or during a special run at a point in time outside the normal cycle.
(2 marks)
The procedures to be carried out using test data to check the operation of the
companys computerised sales and accounts receivable system are:
A sample of test data comprises of valid and invalid data will be input into
the system.
Valid data will include inputting, for a sample of accounts, sales details,
credit notes, cash received, discounts and adjustments and print-outs
from input of this information will be retained, and the contents of the
computers data files will be printed out.
Results of processing are then checked to ensure they are consistent with
expectations and record any cases when errors occur.
(2 marks)

The invalid data which could be input into the sales system would include:


An invalid customer account number. The computer is expected to reject
an account number which is not on the computers standing data file. This
should ensure that the operator enters the correct account number.


A part number which is not on the standing data file which is expected to
be rejected by the computer.


A negative, zero or very large quantity of goods sold. If the quantity is
unusually large, the system should give a warning and ask the operator to
confirm that the quantity is correct.


An invoice which would put the customer over the credit limit. If the sale
would take the customer over the credit limit, the computer system should
either reject the data or ask for authorization by a senior person.
(2 marks)
Following the input of this data, the computer data files are printed out
and are checked to see whether the results are as expected. Also, the
action taken by the computer system when invalid data are entered is
recorded and any exceptions are noted.
Based on this work, the auditor decides whether the companys sales and
accounts receivable system is reliable in processing the data.
Any weaknesses or errors found are reported to the management of the
company and to consider whether any of these errors will lead to material
misstatements in recording sales and accounts receivable transactions.
(2 marks)

iii.

The control procedures that should be in place over the standing data on the
accounts receivables master file include:
Any amendment (addition, amendment or deletion) to the accounts
receivable master file should be authorised by a responsible official.
A responsible person should authorize deletion of customers but the
computer system should not allow or reject deletion of a customer where
there is an outstanding balance.

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An authorisation for amendments to the accounts receivable master file

can be by a manual form being signed by an authorized person or by the
authorized person having restricted access password to amend the
standing data.
The computer system should records details of any amendments to the
accounts receivable master file and to be reviewed on a regular basis by
a responsible official.
A comparison should be made regularly between the authorised list of
customers on the computerized list of customers and the accounts
receivable ledger.
A review of the computer control log regarding access to the accounts
receivable standing data should be made on a regular basis and any
unauthorized access identified and further action taken.
Any other acceptable answers.
(Any 4 for 4 marks)

(Total: 20 marks)
ANSWER 6
A.
i.

Business failure is the risk that a business will fail financially and, as a result, will
be unable to pay its financial obligations. Audit risk is the risk that the auditor will
conclude that the financial statements are fairly stated and an unqualified opinion
can therefore be issued when, in fact, they are materially misstated.
When there has been a business failure, but not an audit failure, it is common for
financial statement users to claim there was an audit failure, even if the most
recently issued audited financial statements were fairly stated. Many auditors
evaluate the potential for business failure in an engagement in determining the
appropriate audit risk.
(4 marks)

ii.

An engagement letter might affect an auditors liability to client as follows:

a.

b.

10

A well-written engagement letter can be useful evidence in the case of a

lawsuit, given that the letter spells out the scope and terms of the
engagement agreed to by both parties. Without an engagement letter, the
terms of the engagement are easily disputed.
An engagement letter from the auditor to the client specifies the
responsibilities of both parties including responsibilities for the prevention
of fraud and error. The auditor may use this as an opportunity to inform
the client that the responsibility for the prevention of fraud is that of the
client.
(4 marks)

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iii.

MIA QE/MAC 2008

Some of the ways in which the profession can positively respond and reduce
liability in auditing are:
1.
2.
3.
4.
5.
6.

Continued research in auditing.

Standards and rules must be revised to meet the changing needs of
auditing.
Establish new peer review requirements.
CA firms should oppose all unfounded lawsuits rather than settling out of
court.
Users of financial statements need to be better educated regarding the
attest function.
Improper conduct and performance by members must be sanctioned.
(Any 3 ways for 3 marks)

B.
1.

To make recommendations is outside the scope of the work of internal auditors.

Disagree with the statement

An effective internal audit department has a formal charter that defines its
purpose,
authority
and
responsibility
which
includes
making
recommendations on management systems and practices.

Internal auditors should make recommendations to improve management
systems and practices. This is in fact the best way to contribute to the
organization and serve management

Internal auditing is a way of ensuring managerial accountability and
protecting the interests of all stakeholders. In addition, management audit
brings independent professional judgment to bear on managerial practices.

Cost-effective recommendations are also keys to cost-effectiveness of audits.

2.

To make recommendations can be detrimental to the independence of the

auditors.

Partially agree with the statement considering the fact that they are
employees of the companies they audit.

When making recommendations, auditors should act as consultants to
management

Auditors make recommendations, but it is up to the management whether to
accept or reject them. Management is ultimately responsible for determining
how a particular problem should be corrected.

Management is also responsible for implementing corrective actions in
meeting the objectives of the company

To remain independent, internal auditors has direct communication with the
board of directors or its audit committee.

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3.

MIA QE/MAC 2008

Auditors do not have the expertise to determine what corrective action should be
taken by the management.

Should disagree with this statement

Through practice, auditors have acquired knowledge of the organization and
of management systems and practices

Auditors can apply knowledge obtained in various situations to a particular
problem

Many auditors have acquired expertise in various kinds of activities through
education and experience

Many auditors have developed skills similar to those of management
consultants.
(Any 3 points for each statement for 9 marks)
(Total: 20 marks)

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