Nature and Purpose of an Audit – Questions and Answers

Subject Title: Auditing and Assurance Revision Kit

Topic: Nature and purpose of an audit

QUESTION 1
August 2022 Question Two C
Your firm has been appointed as incoming auditors of Taratibu Motors Ltd. Part of the agreement is a proposal of undertaking of continuous audits on the company’s financial statements.

Required:
Explain four disadvantages of conducting the proposed continuous audits. (4 marks)

QUESTION 2
April 2022 Question One A
Your firm has been engaged in auditing small entities for the last five years. In a recent development, your firm has been appointed to conduct an audit on a large entity; which is the first assignment of such magnitude. You are required to undertake an interim audit and a final audit of the large entity.

Required:
(i) Explain the objective of an external audit. (2 marks)
(ii) Highlight five audit procedures you could undertake during the interim audit of the large entity. (5 marks)
(iii) Describe five audit procedures you would undertake during the final audit of the large entity. (5 marks)
(iv) Present two drawbacks of conducting an interim audit. (2 marks)

QUESTION 3
December 2021 Question Three C
You are the auditor of Sharoh Ltd. which was incorporated in December 2018. The company’s main business is in real estate. Over the last two years, the company has recorded increased profits as a result of the Property Market-boom in the country. Due to the increased number of transactions, you as the auditor feel that it is prudent to have an interim audit. The management are however hesitant about your proposal.

Required:
Explain three reasons to the management of Sharoh Ltd. why an interim audit is necessary and how it could be of benefit to the client. (6 marks)

QUESTION 4
December 2021 Question Four C
Examine six factors that would lead to change in the inherent risk of Relax lintels and Cottages Ltd. (6 marks)

QUESTION 5
December 2021 Pilot Paper Question One A and B
(a) Explain the meaning of the term “inherent risk”. (2 marks)
(b) State with reasons five factors that would affect the initial assessment of inherent risk at the financial statement level. (10 marks)

QUESTION 6
September 2021 Question One C
Highlight two features of a non-statutory audit. (2 marks)

QUESTION 7
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 8
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)

QUESTION 9
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 10
May 2016 Question Two A
Highlight two limitations of external audits. (2 marks)