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Audit Exam Review
SCENARIO QUESTIONS
Ethics scenario - Identify threats and suggested safeguards (what, why, and safeguard)
Threat types:
● Self-interest; having financial interest in the client
● Self-review; auditing own work
● Advocacy; representing the client at tribunal
● Familiarity; getting ‘too close’ to the client
● Intimidation threat; bullying by client, threats to withdraw, etc
...
Need to say the impact on the accounts and what the
auditor can do do reduce these risks (example - use a bigger test sample, or change the audit staff)
Detection risk;
- Define: Auditor fails to detect the misstatements or errors in the company’s financial statements
- Response: choose a larger sample size, have more qualified audit staff
Control risk:
- Define: the risk that the accounts could contain an error/misstatement that has gone undetected by the client’s
system of internal controls
...

Internal controls scenario - Identify controls weakness/deficiencies and suggest recommendations/controls
*see sample answers
Recommendation:
● What needs to be done; ex
...

● Purchase Invoices/Orders
○ Sequence check / numbering - calculations check, account coding, initials, signed
○ Evidence of approval (signature)
○ Adherence to authority limits
● Sales invoices
○ sequencing/numbering
○ Matching dispatch note and order
○ Initials / signature
● Goods received notes

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○ Sequence check / numbering
○ Check suppliers’ delivery note copies
○ Check delivery notes to purchase ledger (via invoices)
● Credit notes
○ Evidence of goods returned - match to goods returned notes
● Payables ledger
○ Evidence of reconciliation to control account
○ Evidence of reconciliation to supplier’s statements
○ Evidence of an authorisation for adjustments
Remember PACAMACS/ SOAPSPAM

Substantive tests scenario - Suggest audit procedures in a particular situation
a
...
Remember AEIOU, DADA3, CODRACE (financial assertions)
*insert assertions lists

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THEORY QUESTIONS
→ list the benefits / consequences tables for each topic
1-2 sentences per mark
Elements of assurance engagement, level of assurance and limitations of an audit

Types of Assurance Engagement
1
...
)
● The level of assurance given is high

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● E
...
statutory audit
2
...
g
...
g
...
If they were to ask for their own independent audits this
might increase costs to the entity
...


Auditors can help protect creditors
...


An audit can reinforce financial discipline
...


Banks and other lenders, including suppliers, can
make their own conditions for lending and don’t
There may be shareholders who are not involved in the business
really need historical audited accounts
...

example:
- banks will lend on security and personal
It provides reassurance for directors that the figures they are using
guarantees; they’ll monitor bank a/c
are reliable
...

(i
...
cash before supply) until a depth of
An audit is useful to company management
...
limited disclosure requirements, are of little
Compliance audit - check if rules of an outside regulator followed
...

Audit Issues
● Problems faced by auditors and accountants in producing consolidated financial info in compliance with an
appropriate accounting framework where the component info is prepared under a range of differing standards of
quality and disclosure
...
This creates conflict of interest
...

(ii) Based on test checks: Generally an auditing exercise is based on test checking
...

(iii) Insufficient Time: Generally an auditor needs to release the report up to a specified timeline
...
This time constraint may
affect the amount of evidence that can be obtained concerning events and transactions after the balance sheet date that
may have an effect on the financial statements
...
For
example, an architect’s certificate of valuation for a newly constructed building of a client may not be conclusive
evidence of the correct value of building
...
Estimate range from the allowance for doubtful accounts and an inventory
obsolescence reserve to impairment tests of fixed assets and goodwill
...

(vi) Based on the Information provided by the Management: The audit opinion is based on the information provided by
the management
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Auditors rights and duties
Rights
● Information and explanations
● Access to company records
● Receive notice of meetings, attend, and speak
● In case of removal
● Make representations to stay
● Attend meetings

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Duties
Report to shareholders whether accounts show a true and fair view and comply with Companies Act and other relevant
legislation
...

Professional Competence and Due Care; A professional accountant has a continuing duty to maintain professional
knowledge and skill at the level required to ensure that a client or employer receives competent professional services
based on current developments in practice, legislation and techniques
...

Confidentiality; A professional accountant should respect the confidentiality of information acquired as a result of
professional and business relationships and should not disclose any such information to third parties without proper and
specific authority unless there is a legal or professional right or duty to disclose
...

Professional Behavior; A professional accountant should comply with the relevant laws and regulations and should
avoid any action that discredits the profession
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● Fees (15% or 10% for listed companies, no lowballing, no % fees allowed), legal action, conflicts of interest
Acceptance procedures (knowledge of the business, what's included in engagement letters)
If offered an audit role, the audit
transactions, or the training level of the accounting staff is low
...
If the risk level is too high, the auditor conducts additional procedures to reduce the risk to an
acceptable level
...
Conversely, when control risk and inherent risk are considered to be low,
it is safe for the auditor to reduce the sample size for auditing testing, which increases detection risk
...
Control Environment: The first component of internal control is control environment
...
Is management committed to an effective system of internal control? Is there some type of team
committed to internal auditing or compliance? How does management implement policies and procedures that
guide the organization? How does management create an atmosphere that addresses integrity, ethics, and
operating effectiveness?
2
...
Does the organization know where
assets live? Does the organization assess risks that are a threat to the achievement of internal control objectives?
Are controls fully understood? Are there tests performed to assess control?

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3
...
When there’s a system change, how does
management communicate that to internal employees and/or external users? What is the effectiveness of that
communication?
4
...
Existing Control Activities: The final component of internal control is existing control activities
...
Does the organization have documented policies and procedures? Is there a business
continuity plan? Is there a change management program?
Limitations of controls
Collusion
Two or more people who are intended by a system of control to keep watch over each other could instead collude to
circumvent the system
...

Human Error
A person involved in a control system could simply make a mistake, perhaps forgetting to use a control step
...
This may be caused by the assignment of the wrong person to a task
...

Missing Segregation of Duties
A control system might have been designed with an insufficient segregation of duties, so that one person can interfere
with its proper operation
...
There is always a way in which it can
fail or be circumvented
...


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The quantity of audit evidence needed is affected by;
- The risk of misstatement (the greater the risk the more evidence is required)
- The quality of such evidence (the higher the quality the less may be required)
This will vary according to the degree of audit risk, considering:
- Nature of the industry
- Past experience of the client
- Source of information
- Nature, materiality or sensitivity of account balances
- Financial position of business
- Quality of their controls
Appropriateness is the measure of the quality of audit evidence
...

Reliability of evidence:
- Auditor generated evidence is the most reliable evidence
- Written evidence is more reliable than oral evidence
- External evidence is more reliable than internally generated evidence
- Consistency of evidence enhances the reliability of all forms of evidence
- Auditors may require evidence from more than one source
- Original documents are more reliable than copies
**auditors need to approach their work with professional scepticism
Obtaining audit evidence
● Inquiry; simply asking questions
...
g
...

● Observation to determine if laid-down procedures are being followed, e
...
stock taking, wages pay-outs
...
g
...

● Computation (Re-calculation/Re-performance) to confirm amounts in accounting records or financial
statements, e
...
checking the calculation of debenture interest, preparing or checking a bank reconciliation
...
Ratio
analysis, benchmarking against prior years, etc
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***REVIEW ASSERTIONS
Designing, selecting and evaluating samples
Sampling definition: the application of audit procedures to less than 100% of items within a population of audit
relevance such that all sampling units have a chance of selection in order to provide the auditor with a reasonable basis
on which to draw conclusions about the entire population
...
Each item in the sample must have an equal chance of being selected from the population
2
...
The population must be homogenous - so all the same type of transaction
4
...
g
...

Set the level of assurance required i
...
95% confidence level
...
e
...

Set the tolerable rate of deviation – rate of deviation from prescribed internal control procedures

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