Auditors Reports – Questions and Answers
Subject Title: Auditing and Assurance Revision Kit
Topic: Auditors Reports
QUESTION 1
August 2022 Question One A
Describe five Auditor’s responsibilities for the Audit of Financial Statements as provided by the International Standard on Auditing 700 (Revised): Forming an opinion and Reporting on Financial Statements. (10 marks)
QUESTION 2
August 2022 Question One B
Explain four items of information that the auditor should disclose in the opinion section of the auditor’s report. (4 marks)
QUESTION 3
August 2022 Question Four B
International Standard on Auditing (ISA): “Going Concern”, deals with the auditor’s responsibilities in the audit of financial statements relating to going concern and the implications for the auditor’s report.
Required:
(i) Explain six indicators that would cast doubt to an auditor about the going concern status of a company. (6 marks)
(ii) Discuss for audit procedures that an auditor would carry out in order to obtain sufficient audit evidence to be able to form an opinion on the going concern status of a company. (4 marks)
QUESTION 4
April 2022 Question Four B
With reference to ISA 700 (Forming an Opinion and Reporting on Financial Statements); distinguish between an “adverse opinion” and a “disclaimer of opinion”. (4 marks)
QUESTION 5
December 2021 Question Three B
The auditor should consider the risk that the going concern assumption may no longer be appropriate. With reference to the above statement, identify four financial indicators that shows that the going concern assumption may not be appropriate in the preparation of a company’s financial statements. (8 marks)
QUESTION 6
December 2021 Question Five A
The International Standards on Auditing 700 (Revised) – Forming an opinion and Reporting on financial statements deals with the auditors responsibility to form an opinion on the financial statements.
Required:
Describe five auditor’s responsibilities for the audit of the financial statements section of the auditors report. (5 marks)
(ii) Itemise three additional auditors responsibilities for audit of financial statements when auditing accounts for a group of companies. (3 marks)
(iii) Summarise four matters that an auditor should include in the “Basis of opinion” section of the auditors report. (4 marks)
QUESTION 7
December 2021 Pilot Papers Question Five A
You are an auditor of Baraka Constructers Limited, a listed company which distributes materials to the real estate industry. You are finalising the audit for the year ended 31 March 2021. Your audit junior has identified the following matters and brought them to your attention:
1. The four directors have each borrowed Sh.100,000 from the company. These loans, which total Sh.400,000 have been included in the statement of financial position as at 31 March 2021 within the total accounts receivable under the heading “other accounts receivable – due within one year”. No separate disclosure about the loan has been made in the director’s report or the financial statements. The audit junior has investigated this further and concluded that, whilst the loans are illegal, they are genuine collectible current assets of the company.
2. The accounts of Baraka Constructers Limited did not contain a statement of changes in equity.
3. The physical inventory count sheets for two deposits of construction materials were lost before they were made available to you and you have not been able to confirm the inventory amount using alternative audit procedures. The amount of inventory for the two deposits is considered to be material.
Required:
Explain the audit opinion you will issue in each of the cases above. (15 marks)
QUESTION 8
September 2021 Question Two B
International Standard on Auditing (ISA) 705, “Modifications to the Opinion in the Independent Auditor’s Report”, sets out the different types of modified opinions.
Required:
With reference to the above Standard, discuss three ways in which an auditor’s opinion may be modified. (6 marks)
QUESTION 9
September 2021 Question Two C
(i) Define the term “going concern” as per International Standard on Auditing (ISA) 570, “Going Concern”. (2 marks)
(ii) Propose four responsibilities of auditors with respect to going concern. (4 marks)
QUESTION 10
May 2021 Question Four A
At the end of the audit process, an auditor prepares an audit report expressing his opinion on the financial statements.
As an auditor, summarise four matters that you would include in the introductory paragraph of your audit report. (4 marks)
QUESTION 11
May 2021 Question Five A
Assess five potential indicators that a client’s company Is not a going concern. (10 marks)
QUESTION 12
November 2020 Question Three B
Any work delegated to audit assistants should be directed, supervised and reviewed in a manner which provides reasonable assurance that such work is performed competently.
Required:
Examine four matters that might be taken into consideration when reviewing the work performed by audit assistants in an audit engagement. (4 marks)
QUESTION 13
November 2019 Question One B
In relation to audit investigations:
i. Highlight six characteristics of audit investigations (6 marks)
ii. Evaluate eight reasons why audit investigations might be conducted (8 marks)
QUESTION 14
November 2019 Question Three A
Your firm, JM and Associates, has just concluded at external audit on Familia Medical Services Ltd. Based on the audit findings, JM and Associates issued an unqualified report to the company.
Required
ii) Explain the term “unqualified report” (2 marks)
ii) Suggest five matters that could be included in your unqualified report to the company
(5 marks)
QUESTION 15
November 2019 Question Four A
In the context of International Standard on auditing (ISA) 560 – subsequent Events:
i) Distinguish between “adjusting events” and “non-adjusting event” giving an example in each case (4 marks)
ii) Analyse the relationship between “going concern” and “non-adjusting event”
(2 marks)
QUESTION 16
November 2019 Question Four B
The financial reporting year of Kipengo Ltd. ends on 31 October. The financial statements of the company for the year ended 31October 2019 are due to be approved on 15 December 2019. You were appointed to carry out the audit assignment and arising from your audit work, the following events have come to your attention.
1. On 5 November 2019, Kipengo Ltd. sold inventory for a price which was less than its cost price. (The inventory had been recorded in the financial statements as closing inventory)
2. Kipengo Ltd. issued new shares on 7 November 2019
3. A fire in the warehouse destroyed all of KipengoLtd’s inventory on 10 November 2019
4. A major customer who owed Kipengo Ltd. Sh. 3,000,000 as at 31 October 2019 was declared bankrupt on 12 November 2019
5. On 23 November 2019, Kipengo Ltd. purchased an asset worth Sh. 1,600,000
Required
Review each of the events above. Advise, with reasons, if the event is an adjusting or non-adjusting event and the action to be taken (if any) on KipengoLtd’s financial statements. (10 marks)
QUESTION 17
May 2019 Question One
The Finance Director of Usonga Ltd. has informed you that some fraud took place during the year in the company’s payroll department. A number of fictitious employees were set up on the payroll and wages were paid into one bank account that belonged to two supervisors who have recently resigned. One of the supervisors had the sole responsibility for setting up new entrants in the payroll system, while the other supervisor processed and authorised bank transfer requests for wages and supplier payments.
The finance director has requested your audit firm for recommendations on how to improve controls in this area to prevent this type of fraud recurring. Usonga Ltd. has recently established a Human Resources department.
Required:
(a) Explain three types of control that Usonga Ltd. could put in place to reduce the risk of the above fraud recurring. For each control, describe how it would mitigate the risk.
(12 marks)
(b) Describe four procedures which you would perform to assess whether Usonga Ltd. is a going concern. (8 marks)
QUESTION 18
May 2019 Question Four A
With reference to an auditor’s report, examine the matters that are included in the following paragraphs:
(i) Basis for opinion. (3 marks)
(ii) Key audit matters. (3 marks)
QUESTION 19
November 2018 Question One D
With reference to an auditor’s report, discuss five matters that should be included in the “auditor’s responsibilities for the audit of the financial statements” paragraph. (10 Marks)
QUESTION 20
November 2018 Question Three C
International Standard on Auditing (ISA) 510, “Initial Audit Engagements – Opening Balances” requires auditors to undertake additional audit procedures for confirming opening balances for new audit engagements. In addition, the ISA gives guidance on audit report implications if auditors are unable to confirm opening balances or if they contain misstatements.
Required:
(i) Describe the procedures the auditor should undertake to confirm opening balances for a new audit engagement. (3 marks)
(ii) Explain the impact on the audit report if the auditor is unable to confirm the opening balances or if the opening balances contain misstatements. (3 marks)
QUESTION 18
November 2018 Question Three D
Citing two areas and with relevant examples in each case, explain the purpose of a value for money audit. (4 marks)
QUESTION 21
May 2018 Question Five A
A suitable criteria is the benchmark used to evaluate a subject matter for the purpose of presentation and disclosure.
Required:
Describe three characteristics of a suitable criteria. (6 marks)
QUESTION 22
November 2017 Question Two C
Analyse five circumstances that might lead to qualification of financial statements.
(5 marks)
QUESTION 23
November 2017 Question Three B
Citing a relevant example in each case, distinguish between “adjusting events” and “non-adjusting events”. (6 marks)
QUESTION 24
November 2017 Question Four C
You are the audit manager in charge of the audit of Lenga Ltd. You have come across the following matters which you consider to be material. Explain how you would report each matter in the audit report:
(i) A major customer owing the company a substantial amount, has filed for bankruptcy. No provision for this has been made in the financial statements. (2 marks)
(ii) Some of the company’s inventory is of a special nature. The expert you were relying on to value them might not be available to carry out the valuation in time for issuance of an audit report. You have to rely on management representation. (2 marks)
(iii) A major supplier has gone out of business and there is no immediate alternative for the raw material in question. (2 marks)
(iv) After the financial year end, a major fire broke out destroying machinery that had been purchased at the end of the year. (2 marks)
QUESTION 25
May 2017 Question One A
Discuss five disclosure requirements that should be made in an audit report as specified in the Companies Act. (10 marks)
QUESTION 26
May 2017 Question Three A i
Explain the following terms as used in auditing:
(i) Emphasis of matter paragraph. (2 marks)
QUESTION 27
May 2017 Question Five A
State the opinions you would give in each of the following situations:
(i) The books of the client were taken away by the regulator for investigations and were not available for audit. (2 marks)
(ii) The provision for doubtful debts was not adequate. The debtors in the financial statement were misstated but the financial statements gave a true and fair view.
(2 marks)
(iii) There was no provision for depreciation and the directors were unwilling to provide for any amounts during the financial year. The amount if provided for would reduce the reported profit by 30%. (2 marks)
(iv) There was a legal suit filed by a customer who was unsatisfied with the goods supplied but no provisions were made in the books. The assessment of the case by the company lawyers indicate that the customer has very slim chances of success.
(2 marks)
QUESTION 28
November 2016 Question Two A
You have been appointed the lead auditor in charge of the audit of Sky Computer Limited. The financial year ended on 31 January 2016 and the audit was concluded on I March 2016. The audit report was signed on 15 May 2016 and the financial statements issued on 20 June 2016. The following material events occurred between the balance sheet date and 30 June 2016:
1. 25 February 2016 – A sudden flood resulted in damage of an uninsured equipment worth Sh. 12 million.
2. 1 May 2016 – A customer owing Sh.4 million was declared bankrupt and no recovery of the amount was expected.
3. 15 June 2016 – The company lost a law’ suit amounting to Sh.6 million which was filed in 2013 by a customer due to a defective computer software.
4. 25 June 2016 – The Board of directors approved the closure of a division that had been making losses consistently for the last four years.
Required:
Explain the appropriate treatment of each of the above events. (8 marks)
QUESTION 29
November 2016 Question Two B
Describe four audit procedures necessary to aid in obtaining evidence relating to subsequent events. (8 marks)
QUESTION 30
November 2016 Question Two C
Explain the responsibility of an auditor with regard to events occurring between the date the financial statements aresigned and the annual general meeting. (4 marks)
QUESTION 31
May 2016 Question One B
During the audit of Bamboo Ltd., you suspect that there might have been some irregularities in the procurement
In the context of International Standard on Auditing (ISA) 260 – “Communicating with those charged with governance describe three matters that the auditor should communicate to those charged with governance in relation to auditor independence.
(6 marks)
QUESTION 32
May 2016 Question Two C
Describe four types of audit opinions that an auditor could issue. (8 Marks)
QUESTION 33
May 2016 Question Five A
In the context of International Standards on Auditing (ISA) 560 – “Subsequent Events”:
(i) Define the term “subsequent event”. (2 marks)
(ii) Discuss two objectives of the auditor in relation to subsequent events. (4 marks)
QUESTION 34
May 2016 Question Five C
You have been appointed the auditor of Fadhili Ltd. and as pan of the audit, you have requested management to provide you with a letter of representation.
Required:
Discuss three matters you would expect to find in the letter in relation to management’s responsibilities. (6 marks)
QUESTION 35
November 2015 Question One C
In the context of International Standard on Auditing (ISA) 220-Quality Control for an Audit of Financial Statements, discuss the quality control procedures the engagement partner might consider in each of the following:
(i) Client acceptance. (4 marks)
(ii) Engagement team. (4 marks)
(iii) Direction. (4 marks)
QUESTION 36
November 2015 Question Three A
(i) Explain the meaning of the term “going concern”. (2 marks)
(ii) State eight factors that might indicate doubt in the ability of an entity to continue as a going concern. (8 marks)
QUESTION 37
September 2015 Question Two C
(i) A Junior colleague working at your firm is uncertain as to why on every audit all of the work carried out by the audit team is regularly reviewed by the audit manager.
Required:
Explain the purpose of the review carried out by the audit manager. (5 marks)
(ii) List two examples of subsequent events that may provide confirming evidence when auditing the financial statements of a large manufacturing company.
(2 marks)
(iii) State the auditor’s responsibility for reporting on the going concern assumptions of a company. (3 marks)