FACULTY OF MANAGEMENT SCIENCES

DEPARTMENT OF ACCOUNTING, ECONOMICS AND FINANCE

QUALIFICATION: BACHELOR OF ACCOUNTING

QUALIFICATION CODE: 07 BOAC LEVEL: 7

COURSE CODE: GAU 711S COURSE NAME: AUDITING 310

SESSION: Semester 1, 8th MAY 2018 PAPER: THEORY

DURATION: 11/2 Hours MARKS: 50

TEST 3 QUESTION PAPER

EXAMINER(S) K BOAMAH, A SIMASIKU, I AMUTENJA

MODERATOR: MIRIAM DIKUUA

INSTRUCTIONS
1. This test paper is made up of three (3) questions
2. Answer ALL Question in blue or black ink
3. Start each question on a new page in your answer sheet
4. Questions relating to this paper may be raised in the initial 30 minutes after the
start of the paper. Thereafter, candidates must use their initiative to deal with any
perceived error or ambiguities & any assumption made by the candidate should
be clearly stated.

THIS QUESTION PAPER CONSISTS OF 6 PAGES (excluding this cover page)

 QUESTION 1 (MULTIPLE CHOICE) (10 marks)

1. Which of the following is stated in the last paragraph of an unmodified (unqualified)

auditor’s opinion which has neither a report on other legal or regulatory requirements
or an emphasis of a matter paragraph?

A. Audit was planned and performed to obtain reasonable assurance that the
statements are free from material misstatement.
B. Identification of auditing standards or practices followed in conducting the audit
by reference to International Standards for Auditing (ISA) or to standards or
practices established within a country.
C. The financial statements conform to International Financial Reporting Standards
(GAAP in the US).
D. Financial statements are the responsibility of the company’s management.

2. What type of opinion is issued when the auditor, having obtained sufficient
appropriate audit evidence, concludes that misstatements, individually or in the
aggregate, are both material and pervasive to the financial statements?
A. Qualified.
B. Disclaimer.
C. Adverse.
D. Reserved.

3. Which of the following topics are not covered in the ‘Auditor Responsibilities’
paragraphs?

A. A statement that the standards require that the auditor comply with ethical
requirements.
B. Reference to the financial accounting standards followed in conducting the audit.
C. Wording indicating that the audit evidence is sufficient to provide the basis for the
audit opinion.
D. A statement that the standards require that the auditor plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement.

4. Based on ISA 700, there are at least two circumstances where the auditor may not be
able to express an unqualified opinion:

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 A. Limitation of scope and fraud.
B. Disagreement with management and limitation of scope.
C. Disagreement with management or inconsistent application of accounting standards.
D. Disagreement with management and fraud.

5. Which of the following considerations of fraud and error by the auditor is not required by
ISA 240?

A. When the auditor encounters circumstances that may indicate that there is a material
misstatement in the financial statements resulting from fraud or error, the auditor
should inform regulatory institutions.
B. The auditor should be satisfied that those charged with governance have been
informed of any material weaknesses in internal control related to the prevention and
detection of fraud.
C. Based on the risk assessment the auditor should design audit procedures to obtain
reasonable assurance that material misstatements arising from fraud and error are
detected.
D. The auditor should communicate to management any material weaknesses in
internal control related to the prevention or detection of fraud and error.

6. Which of the following is not a section of the ISA 700 auditor’s unmodified (unqualified)
opinion?

A. Auditor’s responsibility.
B. Opinion.
C. Management’s responsibility for the financial statements.
D. Report on other audit activities.

7. ISA 620 suggests that the auditor should not refer to the work of an expert in their report
as such a reference might be misunderstood to be a qualification of the auditor’s opinion or
a division of responsibility when expressing what type of opinion?

A. Disclaimer.
B. Qualified.
C. Unmodified (unqualified).
D. Adverse.

8. Which of the following uncertainties will not lead to an auditor’s report containing a
qualification of opinion in many countries?
A. Lack of consistency.

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 B. Material uncertainties.
C. Independence of auditor.
D. Reports in reference to economic conditions.

9. Which of the following is not an example of uncertainties that might be emphasised in an

emphasis of matter paragraph?
A. Matters affecting the comparability of financial statements with those of previous
years.
B. Internal control deficiencies.
C. Important accounting matters occurring subsequent to the balance sheet date.
D. The existence of related party transactions.
10. The auditor must communicate to management in writing significant deficiencies in
internal control that are of sufficient importance to merit management’s attention. The
communication should include:
A. Sufficient information to enable those charged with governance and management to
understand the context of the communication.
B. The general approach and overall scope of the audit.
C. Questions regarding management integrity.
D. Auditor independence.
11. The relevance of the audit evidence relates to
A. Its degree of reliability
B. Its suitability as corroborative evidence
C. Its logical connection to an assertion
D. the scope of the audit

. 12. The reliability of the audit evidence is influenced by

A. The source and nature of the evidence
B. The quality and source of the evidence
C. The source and nature of the evidence and the circumstances under which it is
obtained
D. The level of experience of the audit team

13. In terms of ISA 500, audit evidence is obtained by performing

A. Risk assessment procedures and substantive tests

B. Test of controls and substantive procedures
C. Risk assessment procedures and further audit procedures
D. Tests of controls, substantive procedures and analytical review

14. The engagement letter must contain

A. The names of the engagement team

B. The name of the designated auditor
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 C. The qualifications of the designated auditor
D. The name and qualification of the partner who will conduct the quality control review
of the audit

15. The engagement letter must make reference to

A. The scope of the engagement

B. The audit strategy to be adopted
C. The audit plan to be adopted
D. None of the above

16. Planning materiality for the audit should be

A. Approved by the audit committee

B. Approved by the clients chief audit executive( Head of internal audit)
C. Laid out and explained in the engagement letter
D. None of the above

17. Selecting samples for testing from a population without following a structured technique
is termed as

A. Random selection
B. Systematic selection
C. Haphazard selection
D. Stratification selection

18. For audit sampling purposes, the individual items making up the population which is
being sampled are referred to

A. Sampling units
B. Sampling blocks
C. Sampling stratifications
D. Sampling transactions

19. The risk that the auditor’s conclusion based on a sample may be different from the
conclusion if the entire population were subjected to the same procedure is termed

A. Statistical risk
B. Inherent risk
C. Sampling risk
D. Non-sampling risk
20. A misstatement or deviation in a population which is clearly not representative of
the population is termed as a

A. Sampling error
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 B. Constituent of sampling risk
C. Tolerable misstatement
D. An anomaly

QUESTION 2 (20 marks)

(a) Explain the going concern assumption (2 marks)

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 (b) Briefly explain the responsibilities of management and the auditor with regard to the
decision to prepare the financial statements on the going concern basis (3 marks)
(c) State the broad categories of events or conditions which the auditor should consider
in his assessment of the appropriateness of the adoption of the going concern
concept(2 marks)
(d) Discuss whether auditing procedures relating to going concern should be regarded
as ‘risk assessment procedures’, ‘further audit procedures’ or ‘other audit
procedures’
(5 marks).
(e) In the context of the going concern assumption, what period does the foreseeable
future cover ( 1 mark)
(f) List four operating conditions or events that may cause doubt about the going
concern ability of a manufacturing company (2 marks)
(g) Provide two examples of changes in the law which may directly affect the going
concern ability of a company (2 marks)
(h) What is a mitigating factor? Provide two examples to illustrate your description
(3 marks)

QUESTION 3 (10 marks)

Internal audit has become an important element in the assurance environment of many
organisations and a valuable tool and contributor to managing risks more effectively. It is
also a generally accepted principle that the external auditor may consider the information
provided by the internal auditor during the audit plan of an organisation

a) Briefly explain the differences between external and internal auditors (4 marks)

b) Briefly explain what the external auditor should do to determine whether or not to rely on
Information provided to him/her by the internal auditor. (6 marks)

End of test paper

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 MARKING SCHEME TEST 3

QUESTION 1 (20 marks)

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 1 C√
2 C√
3 B√
4 B√
5 A√
6 D√
7 C√
8 D√
9 B√
10 A√
11 C√
12 C√
13 C√
14 B√
15 A√
16 C√
17 C√
18 A√
19 C√
20 D√

QUESTION 2 (20 marks)

a. Going Concern assumption:

The going concern assumption is an assumption made on whether it is appropriate to present the
financial statements on the basis that the entity will continue in business for the foreseeable
future. √

When the use of the going concern assumption is appropriate, assets and liabilities are recorded
on the basis that the entity will be able to realise its assets and discharge its liabilities in
the normal course of business. √

b. Management’s responsibility is to assess the company’s ability to continue as a going concern

and to decide upon the appropriateness of preparing the AFS on the going concern basis. √

The auditor’s responsibility is to obtain sufficient appropriate audit evidence about the
appropriateness of management’s use of the going concern assumption in the preparation of the
financial statements and to conclude on whether there is a material uncertainty about the entity’s
ability to continue as a going concern. √√

c (Any two)
 Financial factors √
 Operating factors√
 Others√
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  Mitigating Factors√

d. 1. Auditing procedures relating to going concern could be classified as “risk

assessment” “further” or “other” procedures. It depends on what the auditor’s
objective is when concluding the procedure. √

2. At the planning stage the auditor will conduct procedures to obtain an

understanding of the entity being audited to enable him to assess the risk of material
misstatement. Certain of these procedures will relate to the company’s ability to
operate as a going concern and will assist the auditor in assessing whether the
company’s “going concern” ability is at risk, e.g. there may be pieces of information
which suggest that there is material uncertainty relating to going concern. So, at the
planning stage these procedures would be “risk assessment procedures”. √√

3. If the auditor assesses that there is risk of material misstatement he is obliged to

carry out “further” audit procedures to respond to the risk, so we have audit
procedures relating to going concern which are categorised as “further” audit
procedures. Essentially, they are further audit procedures designed to gather
sufficient appropriate evidence about “going concern”. √

4. Other audit procedures are procedures that are carried out to make sure that
the audit complies with the ISAs. In many cases the risk of material misstatement
arising from “going concern” will be assessed as very low (or lower!) and that further
audit procedures are not required. However, ISA 570 places a responsibility on the
auditor to carry out certain procedures regarding going concern. These other
procedures are not carried out in response to risk but rather to comply with the ISAs.
√

e. The foreseeable future, in terms of IAS 1 should be at least, but not limited to, twelve
months from the end of the reporting period. √

f. 1. Non-availability of raw materials for manufacture.

2. Loss of a major market/manufacturing company.
3. Ongoing disruptive labour problems.
4. Loss of key operating staff/specific skills which are difficult to replace.
5. Increased competition resulting in excessive machine idle
time/discontinuation of certain products.

g. 1. The introduction of higher import duties/tariffs. √

2. The banning of a company’s products e.g. products containing particular
chemicals. √
3. Increases in minimum wages. √
4. Introduction of (expensive) workplace safety measures. √
5. Changes in quotas e.g. fishing industry. √
(Any two)

h. A mitigating factor in the context of going concern is a condition or event which lessens the

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 effect of conditions or events which may cast doubt about a company’s going concern ability.
It is a factor which supports the going concern assumption. √

Example: The company is facing severe liquidity problems which threaten its going concern
ability but the company’s major shareholders have agreed to provide additional
finance. √
Example: The company’s major long-term supplier has been declared insolvent but another
source of supply has been found. √

QUESTION 3 (10 marks)

(a) There are multiple differences between IA and EA functions, which are as follows:

 The IAs are company employees, while EAs work for an outside audit firm.
 Internal auditors are hired by the company, while external auditors are appointed by a
shareholder vote.
 Internal auditors are responsible to the board, while external auditors are responsible to
the shareholders.
 Internal auditors can issue their findings in any type of report format, while external auditors
must use specific formats for their audit opinion and management letters.
 Internal auditors will examine issues related to company business practices and risks, while
external auditors examine the financial records and issue an opinion regarding the financial
statements of the company.
 Internal audits are conducted throughout the year, while external auditors conduct a single
annual audit.

[MARKS: Available 6 – MAX 4

(b) Using the Work of an Internal Auditor – ISA 610

The EA will use the work of the IA after assessing:

i. The objectivity of the internal audit function
ii. The status of the internal audit function
iii. Who the internal audit function report to
iv. Whether the internal audit function is free from conflicting responsibilities
iv. Whether there are restrictions placed on the internal audit function
v. The extent to which management act on the recommendations of the IA reports
vi. Technical competence of the internal auditors - Members of a professional body
(Certified Internal Auditor – Institute of Internal Auditors)

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vii. Due professional care - activities of internal audit are properly planned, supervised, reviewed
and documented
viii. Whether IA is free to communicate with the external auditor, Audit committee, and have regular
meetings with them.

Marks: available 8: Max: 6

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