auditing and assurance revision kit

MASOMO MSINGI PUBLISHERS

2021

AUDITING AND

ASSURANCE

REVISION KIT www.masomomsingi.co.ke

0728 776 317

KASNEB REVISION KIT

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AUDITING AND ASSURANCE REVISION KIT

www.masomomsingi.co.ke Contact: 0728 776 317

CPA

INTERMEDIATE LEVEL

AUDITING AND ASSURANCE

REVISION KIT

Updated with September 2021 Past paper Questions and Answers

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CONTENT

1. Nature and purpose of an audit

- Nature and objectives of an audit

- Development of audit (early audit and modern audit)

- Users of audited financial statements

- Features of audits

- Distinction between auditing and accounting

- Types and classification of audits

- Situations when different audits are performed (interim, continuous, final,

operational)

- Advantages and disadvantages of various types of audits

- Nature of work done for different audits

- Inherent limitations of an audit

2. Assurance and non- assurance engagements

- Definition and objectives of assurance engagements

- Audit as an assurance engagement

- Elements of an assurance engagement

- Types of assurance engagements (Audit, Review assignments)

- Differences between audit and review engagements

- International Standard on Assurance Engagement-ISAE 3000

- Accepting appointment to perform assurance engagement

- Review of interim financial information - ISRE 2410

- Levels of assurance and reports issued on assurance engagements

- Non-assurance engagements (Agreed upon procedures engagement -ISRS 4400 and

compilation assignments-ISRS 4410

- Attestation and direct reporting engagements

3. Legal and professional framework

- Regulatory framework for external audits

a) Appointment of the auditors

b) Qualifications and disqualifications of auditors

c) Removal and resignation of auditors

d) Remuneration of the auditors

e) Rights and duties of auditors

f) Mechanisms of regulations of auditors-role of professional bodies, Audit

committee, rotation of audit firms

- Professional ethics/code of ethics for professional accountants

a) Importance of the professional ethics

b) Basic/fundamental principles for Code of Ethics for accountants

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c) Other professional guidelines on audit fees, conflict of interest, advertising

and publicity and opinion shopping by clients

d) Auditors independence /objectivity and its importance

e) Threats to independence and safeguards.

- Threats on adherence to other fundamental principles and safeguards to the threats

- Development and status of ISAs in execution of audits

- Relationship between International Standards of Auditing and National Auditing

Standards

- Purposes/importance of adoption of ISA in the audit.

4. Planning and Risk Assessment

- Obtaining, accepting and retention of an audit engagement

- Matters to consider before and after acceptance of nomination

- Pre-conditions of an audit

- Engagement letter, procedure of sending letter, purposes and contents of the letter-

ISA 210

- Circumstances for revision of engagement terms

- Understanding the entity and its environment

a) Background information about the entity or client.

b) Ways of gathering knowledge about the business

c) Reasons/importance of information gathered about the client

d) Reasons of review of previous audit files and communication with previous

auditors

e) Overview of audit process

5. Audit risk assessment

- Components of audit risk (Inherent, Control and Inherent risks)

- Assessment of different types of audit risks

- Factors leading to increase or decrease of inherent, control and detection Risks

- Adoption of risk based audit, reasons and procedure

- Advantages and Disadvantages of the approach

- Evaluating and prioritising risk and control factors

- Mechanisms to minimise the risks associated with client audits.

6. Audit planning

- Purpose and challenges in audit planning

- Planning for new and existing clients

- Development of the overall audit strategy

- Contents of audit planning memorandum/ overall plan

- Relationship between audit strategy and audit plan

- Design of audit programs, importance and problems of the programs

- Impact of material misstatements on audit strategy and degree of work done

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- Influence of interim audit work on the year end/final audit.

7. Audit documentation

- Reasons and importance of audit documentation

- Sources, features and purposes of working papers

- Storage of working papers-permanent audit file and current audit file, auditors note

book or diary

- Lien or custody on working papers

- Standardisation of working papers

- advantages and disadvantages

- Safe custody and retention of working papers

- Form and content of working papers

- Automated working papers

- Quality control policies and procedures implemented by audit firm

- Objectives of quality controls to the audit firm/ auditors

- Peer review and its objectives

8. Internal control systems (ICS)

- Objectives of internal control system

- Component of internal control system

- Features of Internal control system

- Designing of internal control system.

- Auditors and management responsibility over ICS

- Advantages and disadvantages /inherent limitations of ICS

- Indicators of weaknesses in ICS and actions taken by management

- The evaluation of internal control systems by auditors using Internal Control

Questionnaire, Flow charts and narrative notes

- Tests of controls on specific control environments

- Internal controls theory and practice-sales and debtors, purchases and creditors,

inventories and work in progress, fixed assets, salaries and wages

- Communication of improvements on ICS weaknesses/ risks associated -

Management letter.

9. Internal Audit Function

- Scope and objectives of internal audit

- Criteria of using internal audit work

- Areas of support on external auditors’ work

- Internal audit review reports and actions by management and those charged with

governance

- Design of risk based internal audit plan

- Internal audit key performance indicators

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- Managing and monitoring follow up of audit recommendations made to board/

management.

- Outsourcing internal audit function-advantages and disadvantages.

- Audit committee-functions, merits and demerits.

- Internal check systems-scope, features, advantages and disadvantages

- Information technology threats and control

- Auditors duty on compliance with laws and regulations.

10. Overview of Forensic Accounting

- Nature, purpose and scope of forensic accounting

- Types of forensic investigations: corruption, asset misappropriation, financial

statement fraud, others

- Asset Recovery process and legal framework

11. Errors, Frauds and Irregularities

- Differences between error and frauds

- Types of errors-omission, commission, principle, reversal of entries

- Types of Frauds-Teeming and lading, ghost employees, window dressing,

misappropriation of goods and fraudulent financial reporting

- Causes of frauds and fraud triangle

- Indicators of errors and frauds

- Detection and prevention of errors and frauds and deterrence-role of internal audit

- Materiality and Implications of errors and frauds in the financial statements

- Impact of errors and frauds on the audit plan

- Reporting on error and frauds

- External auditors and Management responsibility on error and frauds

- Auditors professional skepticism.

12. Audit evidence

- Financial statement assertions and audit evidence

- Types and features of audit evidence (sufficiency, reliability and relevance)

- Audit evidence gathering procedures/ techniques

- Materiality and limitations of audit evidence

- Financial statement assertions and audit evidence

- Audit sampling techniques - statistical and non-statistical

- Analytical reviews procedures- nature, objectives, timing and extent of support

evidence

- Types of analytical Procedures-Variance analysis, reasonableness tests, trend

analysis

- Using the work of experts- areas of support and considerations

- Using management representations (importance, procedures adopted and matters

covered).

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13. Auditing in the public sector

- Introduction to auditing in the public sector and regulatory provisions

- Objective and scope of public sector audit (compliance, performance, financial,

value for money)

- Establishment, mandate and functions of public sector auditors

- The parties to audit in public sector-auditor, responsible party and intended users

- Role of internal audit function in public entities

- Relationship between external and internal auditors in the public sector

- Audit reports by office of Auditor General.

- Functions of audit advisory board and executive committee in Auditor General

office.

14. Auditors Reports

- Purposes of auditors’ report and concept of true and fair view

- Legal /Statutory provisions on audit reports

- Basic elements contents of audit reports

- Emphasis of the matter paragraph and key audit matters

- Types and Consequences of different types of audit reports issued.

- Features of unqualified and qualified audit reports

- Reasons for qualifications of audit reports (Limitation of scope, inherent

uncertainties, disagreements)

- Types of qualifications-disclaimer, except for and adverse opinions.

- Overall audit review and finalisation

- Subsequent events/Post balance sheet events review (adjusting and non - adjusting

events, auditor’s responsibility and audit procedures)

- Going concern review (Auditors and management responsibility, indicators of going

concern difficulties, audit procedures, mitigation plans and reporting)

- Management representations on contentious matters affecting financial statements

like guarantees made, capital commitments, borrowings, unusual accounting

adjustments.

- Review of compliance with accounting policies, opening balances, prior period

audits by other auditors

- Format for presentation of independent auditor’s report.

15. Auditing in a computerised system

- Audit objectives in computerised systems

- Differences between computerised and manual systems

- Benefits and drawbacks of computerised accounting systems

- Types of controls in computerised systems (Administrative, system development,

processing controls, application controls, master files and standing data

- Auditors use of computers in the course of audit

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- Planning the audit in computerised systems

- Audit approaches - audit around, with and through the computer and circumstances

when each is applied

- Loss of audit trail, causes and measures to mitigate the loss of audit trail

- Computer Assisted Audit Techniques (CAATS) - Audit software and test data

- Types of audit software and functions and types of test data

- Factors considered before using CAATS and steps in CAATS application

- Advantages and disadvantages of CAATS

- Use of embedded audit modules and integrated test facilities

- Information security controls (Encryption, Firewalls, Passwords, Antivirus)

16. Contemporary and emerging issues in audit

- E- commerce auditing

- Cloud documentation

- Use of data analytics tools in audit (Anomaly detection, diagnostic analysis,

predictive analysis.

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INTRODUCTION

Following our continued effort to provide quality study and revision materials at an

affordable price for the private students who study on their own, full time and part time

students, we partnered with other team of professionals to make this possible.

This Revision kit book (Question and answers) contains kasneb past examination past

papers and their suggested answers as provided by a team of lecturers who are experts in

their area of training. The book is intended to help the learner do enough practice on how

to handle exam questions and this makes it easy to pass kasneb exams.

Special appreciation and recognition goes to FA Kegicha William Momanyi (MBA

Accounting, CPA, CISA and CCP), FA Bramwel Omogo (B.sc Actuarial Science, CIFA,

CIIA, CFA) Johnmark Mwangi (MSc Finance, CPAK, BCom Finance), CPA Gregory

Mailu (Bsc. Economics), CPA Dominic Rasungu, CPA Lawrence Ambunya, CPA

Japheth Mutuku among others.

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CONTENT PAGE

PART A: PAST EXAMINATION QUESTIONS

Topic 1: Nature and purpose of an audit ……………….….….………………..……11

Topic 2: Assurance and non- assurance engagements ………………………………13

Topic 3: Legal and professional framework ……………….……….…….…………18

Topic 4: Planning and Risk Assessment …………………………...………..………23

Topic 5: Audit risk assessment ………………………………………………………27

Topic 6: Audit planning ……………………………………………….………..……31

Topic 7: Audit documentation ………………………………………………….……32

Topic 8: Internal control systems (ICS)….……………………………………………34

Topic 9: Internal Audit Function ………………………………………….….….…...41

Topic 10: Overview of Forensic Accounting…………………………………………43

Topic 11: Errors, Frauds and Irregularities………………………….………….….....46

Topic 12: Audit evidence………………………………………………………..……48

Topic 13: Auditing in the public sector………………………………………….……57

Topic 14: Auditors Reports……………………………………………………………59

Topic 15: Auditing in a computerised system…………………………………………70

Topic 16: Contemporary and emerging issues in audit……………………………..…73

PART B: SUGGESTED ANSWERS TO PAST EXAMINATION QUESTIONS

Topic 1: Nature and purpose of an audit ……………….….….………………………76

Topic 2: Assurance and non- assurance engagements ……………………………..…79

Topic 3: Legal and professional framework ……………….……….…….……..……88

Topic 4: Planning and Risk Assessment …………………………...…………..……100

Topic 5: Audit risk assessment ………………………………………………………109

Topic 6: Audit planning ………………………………………………….……..……115

Topic 7: Audit documentation ……………………………………………….………118

Topic 8: Internal control systems (ICS)….……………………………………...……120

Topic 9: Internal Audit Function …………………………………………….….…...134

Topic 10: Overview of Forensic Accounting…………………………………...……139

Topic 11: Errors, Frauds and Irregularities………………………….…………..…...143

Topic 12: Audit evidence……………………………………………………….……146

Topic 13: Auditing in the public sector……………………………………..….……164

Topic 14: Auditors Reports……………………………………………………..……170

Topic 15: Auditing in a computerised system……………………………….………192

Topic 16: Contemporary and emerging issues in audit………………………………197

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TOPIC 1

NATURE AND PURPOSE OF AN AUDIT

QUESTION 1

September 2021 Question One C

Highlight two features of a non-statutory audit. (2 marks)

QUESTION 2

May 2021 Question One A

Wakulima Supermarket Ltd. has appointed your firm as their external auditors for the

current financial year. One of the company's directors feels that there is no,need to

undertake an interim audit during the year. He argues that an interim audit is only a way

of increasing your firm's audit fees and adds no value to the company.

Required:

(i) Advise the director on the need to undertake an interim audit. (8 marks)

(ii) Explain four audit assignments to be undertaken during the interim audit. (4 marks)

QUESTION 3

May 2021 Question One B

Antony Wanga has joined your audit team as an intern. He has not been engaged in

external auditing processes before.

Summarise eight critical stages of an external audit to Antony. (8 marks)

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QUESTION 4

May 2017 Question Four B

In the context of auditing, define the following:

(i) Operational audit. (2 marks)

(ii) Financial audit. (2 marks)

(iii) Agreed upon procedures engagement. (2 marks)

(iv) Positive assurance. (2 marks)

QUESTION 5

May 2016 Question Two A

Highlight two limitations of external audits. (2 marks)

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TOPIC 1

NATURE AND PURPOSE OF AN AUDIT

QUESTION 1

September 2021 Question One C

Features of non statutory audit

• Nature and scope of audit is determined by the client

• Audit is conducted within the limits determined by the client

• Conducted any time.

QUESTION 2

May 2021 Question One A

i) The need to undertake an interim Audit

• It facilitate declaration of interim dividends

• It enables the auditor to prepare the management letter at an early stage

• It facilitates faster completion of the final audit

• It acts as a preventive and detective measure against frauds and errors

• Errors and frauds are detected at early stage

• It enables the auditor to plan for the audit

• It is less costly compared to the other audit

• It is less costly compared to the other audit

• It helps in increasing the efficiency and effectiveness of the management

functioning the accounting and financial part of the business.

ii) Audit assignments to be undertaken during interim Audit

1. Ascertaining and evaluating the accounting and intern control systems- the auditor

understands the entity’s internal controls to determine the extend of reliance on the

systems

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