SOLUTION: AUDIT AND INTERNAL REVIEW, MAY 2014

Transcription

1 SOLUTION 1(a) (a) The Auditing guideline points out that the amount or quantity of audit evidence required for the auditor to achieve the level of assurance is a matter of professional judgment. The factors influencing the decision as to quantity of evidence obtained by an auditor are as follows: (i) (ii) (iii) (iv) The materiality of the item under review The relevance and reliability of the evidence available The cost and time involved with obtaining evidence The degree to which evidence from one source combines with or corroborates and the appropriate adjustment made. (b) Accounting standards are principles, concepts, bases used in the preparation of the financial statement. Examples are the going concern concepts, consistency and the accrual concepts, Accounting policies on the other hand are accounting bases selected and consistently applied in the preparation of the financial statements by weighted average method of stock valuation, foreign exchange translation or straight line method of depreciation. SOLUTION 2 (a) This means the auditor treats the computer as a black box. He does not touch the computer, instead the auditor looks at input and output but ignores what goes on in the computer. It is described as not an efficient and effective means of auditing because the computer may have virus, program default. These may all affect the output. (b) The internal control system in a computerized environment are divided into General Controls and Application Controls. General Control are defined as controls apart from application controls which relate to an environment within which computer systems are. It includes the following: (i) (ii) (iii) Control over system desired and implementation Control over data integrity Control over program and programmer. The objective or general controls are: to ensure the proper development and implementation of applications, integrity of program and data files and of computer operations. Examples of general controls include the following: - System/program development controls - Control over program changes Page 1 of 7

2 - Control over program changes - Control over program testing - Security controls - Operating (operator) control - Maintenance of standing data controls - Operating system/software controls - Documentation controls - Backup and file retention controls Application controls: These are defined as those that relate to the transaction and standing data appertaining to EACH computer-based accounting system and are therefore specific to each application. The objectives of application controls are to ensure the completeness, accuracy and validity of the entries made therein resulting from both manual and programmed processing. (c) This is where the auditor place more reliance on the existence of programmed checks with his main assurance coming from compliance and substantive checks using the computer (CAATS) which investigate the integrity of the programmed controls and assist the auditor in examining sample transaction data. There are several types of CAAT for example, audit software which examines the company s computer files, test data which is submitted by the auditor for processing by the computer and other techniques such as embedded audit facilities. CAAT can be used for the following: - Select samples for testing - Conduct sequential or numerical check - Stimulate program controls - Check system violation rules - Conduct analytical review - Print special report example variance analysis SOLUTION 3 (a) Internal Audit is a monitory and appraisal activity established by management to review or examine the internal control system and the accounting systems as a service to the organization. The activities or role of the internal audit department may include one or more of the following: - Monitoring of internal control: The internal audit function may be assigned specific responsibility for review and controls, monitoring their operation and recommending improvements thereto. Page 2 of 7

3 - Examination of financial and operating information. The internal audit function may be assigned to review the means used to identify, measure, classify and report financial and operating information including detailed testing of transactions, balances and procedures. - Review of operating activities: Internal audit department may be assigned to review the economy, efficiency and effectiveness of operating activities. - Review of compliance with Laws and regulations: They may include management policies and directions. - Risk management: The internal audit may assist the organization by identifying and evaluating significant exposures to risk and contributing to the improvement of risk management and control systems. - Governance: The internal audit function may assess the governance process in its accomplishment of objectives on ethics and values, performance management and accountability and control information to appropriate areas of the organization and effectiveness of communication management, external and internal auditors etc. (b) The following are the test the auditor can use to confirm ownership of freehold land and building: (i) (ii) (iii) (iv) (v) (vi) (vii) Reading of board minutes to confirm authorization of acquisition of the property. Inspection of land registry certificate If inspected at an earlier date and sealed in an envelope ensure that the seal is not broken If in doubt re-inspection of the document If the title document are with third parties seeking confirmation with the third parties If in doubt about the independence and reliability of the third party arranging to physically inspect the documents at the third parties premises Conduct physical inspection of the property Page 3 of 7

4 (viii) If the document are still in preparation stage, communicate with the company s solicitors for confirmation (ix) Indirect evidence of ownership can be obtained through document on property rate payments, receipt of rent income from tenants and insurance documents. (c) A letter of engagement is prepared by the auditor to the audit client at the initial stage or planning stage of the audit. It is a statutory and professional requirement. It serves as a means of educating the client about the work of the auditor. It contains information such as: - The objective of the audit of the financial statement - The scope of the audit - Management s responsibility for the preparation of the financial statement - Audit responsibility with regard to expression of opinion - The form of any report or communication of the result of the engagement - Arrangement regarding the planning and performance of the audit - Basis on which fees are charged The management letter also called letter of weakness is prepared by the auditor at the final stage of the audit to the client communicating weakness, deficiencies, noncompliances, wrong application of accounting policies and recommendation. (d) (i) The auditor shall disclaim an opinion when the auditor is unable to obtain sufficient appropriate audit evidence on which to base the opinion and the auditor concludes that the possible effects on the financial statement of undetected misstatement if any, could be both material and pervasive. (ii) The auditor shall express an adverse opinion when the auditor having obtained sufficient appropriate audit evidence, concludes that misstatements individuals or in the aggregate are both material and pervasive to the financial statements. It relates to disagreements which are both material and pervasive to the financial statements. SOLUTION 4 (a) Page 4 of 7

5 (b) SOLUTION 5 (a) The following are the internal control measures an organization will incorporate over its sales and receipts functions: - Customers should be approved before a credit facility is granted. The credit limit granted should be formally authorised by an authorised officer of the company. - Dispatches should only be made against approved customers orders. - All dispatches and returns should be invoiced and recorded accurately in order to ensure that goods cannot be dispatched without being invoiced. There should be a register of all dispatch notes. - Invoices and credit notes should be accurately prepared from approved price lists and all trade discounts should be properly authorised. - Invoices should only be prepared against dispatch notes. The use of multi-part sets will ensure that all orders notified to stores and dispatch are potentially invoiced. Page 5 of 7

6 - Credit notes and other adjustment should only be prepared against authorised returns to protect against fraud. There should be sufficient segregation of duties to ensure that someone who authorised sales is not also able to authorised the issue of credit note. - All bad debts written off should be properly authorised and recorded. - Stock records should be accurately be updated for all dispatches and returns. - Only authorised sales ledger transactions including invoice, returns, receipts etc should be posted accurately to the ledger. - Sales ledger balances should be regularly be reconciled to the sales ledger control. There should be periodically aged analysis of debtors. - All receipts must be controlled to ensure that their banked intact. - All receipts are properly identified, recorded and posted to the right debtor s account. - Bank reconciliation should be regularly prepared and independently reviewed - Adequate security should exist over all cash and cheque holdings - There should be segregation of duties over cash functions - There should be effective supervision and review measures. (b) (i) The use of capital budgeting for acquisition of fixed assets together with careful monitoring and follow-up procedures. (ii) The use of detailed fixed asset registers which are regularly updated or reconciled to the financial statement. (iii) The use of identification tags in pre-numbered order attached to the assets and reconciled regularly to the fixed assets register. (iv) A formal policy for capitalization of purchased amount, depreciation and disposals (v) Adequate physical safeguard and security of fixed assets Page 6 of 7

7 (c) (d) It represents conscious efforts by an auditing firm to ensure that the professional services it provides are of consistently high quality confirm with established professional standards and meet any external monitoring requirements. There is a risk that if standard are allowed to drop then audit judgments may be unreliable and if this occurs there is a possibility that the firm may be sued for negligence. Quality control procedures include the following: - Client evaluation and acceptance - Education and adherence to professional ethics - Recruitment of competent personnel - Review and supervision and monitoring - Assignment of competent staff and engagement Page 7 of 7

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