CPA INTERMEDIATE LEVEL AUDITING AND ASSURANCE
WEDNESDAY: 21 August 2024. Afternoon Paper. Time Allowed: 3 hours.
Answer ALL questions. Marks allocated to each question are shown at the end of the question. Do NOT write anything on this paper.
QUESTION ONE
(a) Highlight FIVE inherent limitations of an audit. (5 marks)
(b) (i) Explain the term “peer review” as pertains to the audit profession. (2 marks)
(ii) State THREE benefits of peer review for the audit profession. (3 marks)
(c) Distinguish between “reasonable assurance engagements” and “limited assurance engagements”. (4 marks)
(d) Enumerate SIX contents of an audit engagement letter. (6 marks)
(Total: 20 marks)
QUESTION TWO
(a) The future of auditing in an evolving landscape is being shaped by emerging technologies and changing business practices. Auditors are therefore expected to understand how technology can better their audit processes.
Required:
(i) Describe FOUR challenges associated with auditing a computerised information system. (4 marks)
(ii) Explain the concept of “auditing around the computer”. (2 marks)
(iii) Discuss TWO reasons why auditing around the computer increases audit risk for the auditor. (4 marks)
(b) The audit engagement reviewer is required to review the audit documentation (working papers) prepared by the audit team.
Required:
(i) In reference to International Standard on Auditing (ISA 230) “Audit documentation”, explain the TWO
main objectives of preparing audit working papers. (4 marks)
(ii) Discuss THREE other purposes that audit documentation serves. (6 marks)
(Total: 20 marks)
QUESTION THREE
(a) Curate Ltd. has been experiencing challenges in its internal audit department with a high staff turnover rate. There are also glaring cases of fraud being identified by the external auditors which the internal auditors had not identified. The chief executive officer has suggested to the board of directors that they should consider outsourcing the internal audit function.
Required:
(i) Advise the board of directors of Curate Ltd. on FIVE benefits that could accrue to Curate Ltd. from outsourcing the internal audit function. (10 marks)
(ii) Analyse FOUR implications of outsourcing the internal audit function on the work of the external auditor.
(4 marks)
(b) You are an auditor at Bima and Wali Associates. You have been approached by your client, Ann Mino, who has recently restructured her medium-sized wholesale business to make it more structured in terms of roles and responsibilities of each employee. Ann Mino has structured the roles as follows:
(i) Customer care supervisor: Responsible for both collection and record maintenance of accounts receivable.
(ii) Inventory co-ordinator: Responsible for purchasing, receiving and storing inventory.
(iii) Payroll manager: Responsible for all payroll matters including personnel records keeping timecards, preparation of payrolls and distribution of payroll cheques.
Required:
Advise Ann Mino on the implication of each of these duties on the internal control system of the business.
(6 marks)
(Total: 20 marks)
QUESTION FOUR
Plastiki Ltd. is a company that manufactures various plastic household goods. Kelly Mwenza is an audit supervisor at Kari, Mwari and Associates, the external auditors of Plastiki Ltd. Kelly Mwenza prepared the audit program for the year-end audit of Plastiki Ltd. Kelly held a meeting with her audit manager and was notified of the following issues identified during the audit risk assessment process:
1. Land and buildings: Plastiki Ltd. operate on a policy of revaluing land and buildings once every five years. During the year ended 30 June 2024, Plastiki Ltd. requested an independent valuer to value a number of properties including a warehouse purchased in January 2024. Depreciation is charged on a pro-rata basis per annum.
2. Work-in-progress (WIP): Plastiki Ltd. undertakes continuous production, 24 hours a day, seven days a week. A physical inventory count was undertaken on 30 June 2024. Kelly Mwenza and her team were responsible for the audit of work-in-progress and were part of the team attending the physical inventory count.
Required:
(a) Advise Kari, Mwari and Associates on FIVE factors that they could consider when placing reliance on the work of the independent valuer. (5 marks)
(b) Describe the substantive procedures Kelly Mwenza performed to obtain sufficient and appropriate audit evidence in relation to:
(i) The revaluation of land and buildings and recently purchased warehouse. (6 marks)
(ii) The valuation of work-in-progress (WIP). (4 marks)
(c) (i) Explain the term “detection risk”. (2 marks)
(ii) Analyse the relationship between detection risk and the other two elements of audit risk; inherent risk and control risk. (3 marks)
(Total: 20 marks)
QUESTION FIVE
(a) Propose FOUR matters you would consider when establishing the overall audit strategy for an upcoming external audit. (4 marks)
(b) In the context of ISA 240 “Auditors responsibility relating to fraud in audit of financial statements”, discuss FOUR
responsibilities of the auditor in detecting errors, frauds and irregularities in an audit engagement. (8 marks)
(c) In May 2024, the office building of Daraja Ltd. was damaged by a fire. Many of the company’s accounting records were destroyed before the audit for the year ended 30 June 2024 took place. The company’s financial accountant prepared financial statements for the year ended 30 June 2024 on the basis of estimates and the information he was able to salvage. You were the lead auditor in the audit of Daraja Ltd. and have completed the audit of these financial statements.
Required:
Draft for inclusion in the auditor’s report, a summary appropriate to Daraja Ltd. in the current situation under the following headings:
• Introductory paragraph.
• Opinion.
• Auditor’s responsibility.
• Basis of opinion.
……………………………………………………..…………
(8 marks)
(Total: 20 marks)
