Audit Risk Assessment – Questions and Answers

Subject Title: Auditing and Assurance Revision Kit

Topic: Audit Risk Assessment

QUESTION 1
December 2022 Question Two B
You have been provided with the following independent scenarios:
1. H Ltd. is a fast-growing company that operates in the animal feeds industry. It is quoted on the Securities Exchange but its founder, Kazi Tele and his family still control about 60% of the company’s voting shares. Kazi Tele personally makes all the major decisions and the Board of Directors just “rubber stamps” them. There is a nomination committee of the Board but this notwithstanding, a majority of the Board members of H Ltd. are either members of Kazi Tele’s extended family or have some connection to him.

2. Tech Up Ltd. is a private company engaged in the development and manufacture of computer accessories. The industry in which the company operates is very competitive and subject to rapid changes in technology. The company ranks third or fourth in the market in which it operates and its products are rated slightly behind the market leaders in terms of performance.

Required:
(i) For each of the scenarios in (1) and (2) above, evaluate how the risk of material misstatement should be assessed. (6 marks)

(ii) Explain what effect the evaluation in (i) above will have on the detection risk.
(6 marks)
QUESTION 2
December 2022 Question Three A
In recent years, there has been a substantial increase in cybercrime occasioned by the reliance placed on technology by business entities. As a result, the effect of cybercrime on organisations is becoming highly significant in relation to financial statement audits.

Required:
Citing FIVE factors, discuss the importance of cybersecurity in the context of ISA 315 (Identifying and Assessing the Risks of Material Misstatement). (10 marks)

QUESTION 3
August 2022 Question Two B
Analyse four factors that could result in an increase in the control risk within an organisation. (4 marks)

QUESTION 4
August 2022 Question Five
Your audit team is in the process of preparing the annual audit plan. You have been allocated the task of undertaking risk assessment. Mike Ogola, a newly recruited audit trainee, argues that there is no need for a risk assessment or even the whole audit planning process. He is convinced that the two exercises add absolutely no value to the output of the audit assignment.

Required:
a) Explain six justifications for undertaking audit planning (6 marks)
b) Distinguish between “qualitative risk assessment techniques” and “quantitative risk assessment techniques”. (4 marks)
c) Describe five possible risk assessment challenges that you are likely to encounter as you undertake the above assignment. (5 marks)
d) Recommend five risk management responses that could be deployed to mitigate risk.
(5 marks)
QUESTION 5
April 2022 Question Four A
Jenga Ltd. operates from fifteen separate depots providing plant and machinery hire service throughout the country.

The company offers hire services of a wide variety of tools and equipment to:
1. Builders and corporate customers on credit.
2. Members of the public on advance payment terms, including payment by cash.

In addition to the revenue generated from the hire of plant and machinery, the company also generates income from the sale of damaged or aged machinery and the hire of accessories and safety equipment.

Required:
(i) Explain the term “inherent risk”. (2 marks)
(ii) Evaluate three factors that could suggest that there might be a high inherent risk applying to plant and machinery income as reported in the financial statement of Jenga Ltd. (9 marks)

QUESTION 6
September 2021 Question Three A
International Standard on Auditing (ISA) 315, “Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and its Environment”; requires the auditor to perform risk assessment procedures which include obtaining an understanding of the entity and its environment, including its internal controls.

Required:
(i) Explain the purpose of risk assessment procedures. (2 marks)
(ii) Propose four sources of audit evidence the auditor might use as part of risk assessment procedures. (4 marks)

QUESTION 7
November 2019 Question Three D
i) Explain the term “inherent risk” (1mark)
ii) Highlight four factors that could result in an increase in inherent risk of a business
(4 marks)
QUESTION 8
May 2018 Question Three A
You have been appointed the lead auditor of CBC Ltd. and you have held a meeting with management where certain representations were orally given and others implied.

Required:
With reference to International Standard on Auditing (ISA) 580 “Written Representations”, discuss the circumstances that might lead you to require management to confirm in writing the oral and implied representations. (8 marks)

QUESTION 9
May 2018 Question Four B
Your firm has been appointed the auditor for Musoni Ltd., a company that distributes computer equipment. During the audit, the following matters came to your attention:

1. The depreciation rates had been reviewed and adjusted resulting in an increase in asset lives and a reduction in depreciation amounts.
2. Stock take across all the warehouses could not be undertaken due to lack of staff.
3. One of the warehouses caught fire and goods worth Sh.50 million got damaged. A claim had been lodged with the insurance company but the incident was still under investigation. The amount had however been included in the financial statements as expected income.
4. Bank reconciliation had not been completed even though there were material balances.

Required:
Describe four audit risks arising from the issues above and the proposed auditor’s response. (8 marks)

QUESTION 10
November 2017 Question Four A
Examine six factors that might influence inherent risk at the organisational level.
(6 marks)
QUESTION 11
September 2015 Question Two A
Outline the meaning of the following terms:
(i) Audit risk. (1 mark)
(ii) Inherent risk. (1 mark)
(iii) Control risk. (1 mark)
(iv) Detection risk. (1 mark)

QUESTION 12
September 2015 Question Two B
My-family Car Hire Limited has a large fleet of cars for hire. The firm operates from twelve separate depots providing national car hire services around the country. It offers car hire services to corporate customers on credit payment terms, including payment by cash.

In addition to the car hire revenue, the company categorises income from the sales of excess damage waiver insurance premiums, the hire of child seats and satellite navigation systems as car hire income.

Required:
Explain three factors that would contribute to the assessment of high inherent risks applying to car hire income as reported in the financial statements of My-family Car Hire Limited. (6 marks)

QUESTION 13
September 2015 Question Five
Fitness Ltd. (fitness) is a client of your firm and runs both fitness and leisure centres all over your country. You are the audit senior on assignment and the audit field work for the year ended 31 December 2015 has just been completed. The following figures have been extracted from the draft financial statements:
 Year ended 31 December 2014 2013 Sh.“000” Sh.“000 Revenue 5,000 5,300 Profit before tax 300 320 Taxation (96) (102) Profit after tax 204 211

1. Fitness received fees from customers in November 2014 as they ran a special gym offer for the four months period from 1 November 20)4 to 28 February 2015. The fees collected amounted to Sh.20,000 and the full amount had been recorded in revenue for the year ended 31 December 2014.
2. One of the directors is unwilling to disclose her interests in the shares of the company and currently this amount is not shown in the draft financial statements. The director holds 400 ordinary shares of the 200,000 issued ordinary shares of the company.
3. During the audit test of control performed on the revenue cycle, it was noted that the monthly prepared bank reconciliation had not been reviewed on a consistent basis by management.

Required:
(a) Set an appropriate materialist level for fitness, showing your calculation. (4 marks)
(b) Outline the testing you should perform on the revenue figure which arises from the gym membership fees. (4 marks)
(c) Draft a memorandum to the audit partner in which you evaluate the potential implications for the audit report of fitness for the year ended 31 December 2014 arising from each of the three issues (1) to (3) described above. (12 marks)
(Total: 20 marks)

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