AUD689 Advanced Auditing

Test November 2020

Suggested Solution

QUESTION 1

QUESTION 1

i. Justification for compliance with MIA By-Laws:

 Enhance reliability of the financial statements - To ensure that the
stakeholders/users of financial statements would have confidence in relying on
the financial statements for their decision making.
 Promote standardization of ethical values, professional conduct and practice
among the accountants/auditors – all accountants/auditors should have used MIA
By-Laws as a single point of reference in making sure that they act ethically and
professionally.
 As a basis of monitoring the audit quality – Compliance with MIA By-Laws is one
of the basis used in the evaluation of audit quality spearhead by the Audit
Oversight Board and MIA Practice Review.
 Foster improved audit quality concerning the ethical values that auditor should
embrace, as well as defining the conduct and practice of auditors.
 Any other relevant answers.
C3 (Any 3 answers with explanation X 2 marks each = 6 marks)

ii & iii. Threats to independence & safeguards:

Threats to independence Safeguards

1. The auditor and the financial director are ET should have turned down the
good friends. This may give rise to appointment to audit Victory.
familiarity threat due to long-term
personal/close relationship. ET may feel
obligated to do whatever that JC asked her
to do especially for the investigation that ET
undertook.
2. The investigation is a non-assurance An auditor should not accept an
service that is allowed for audit firm to engagement if the fee is too significant.
undertake. However, the fee could be
significant as it is 25% of the total fee for an
annual audit. This may give rise to potential
self-interest threat.
3. JC asked ET to come up with justification Auditor should report her findings on the
on the over-pricing of the raw materials for overpricing and not following the instruction
a project. This may give rise to intimidation of the financial director. Auditor should be
threat where ET may feel intimidated due clear that he is not in the position to provide
to long-term relationship with JC and the the justification.
significant amount of the fee. This situation
may lead ET not to report certain
information from her findings as requested
by JC.
4. ET had to complete the investigation and ET should have come to an agreement with
the report in a short period of time. Even JC prior to the commencement of the
though ET added two more people to the investigation on the deadline for the report
investigation team, the quality of the to be submitted, and adhere to the
investigation work and the report may be agreement.
 questionable. This may give rise to
intimidation threat because ET was under
pressure to complete the service quickly.

C5 (2 marks each for threats with explanation = 8 marks)

C4 (1.5 marks each for safeguards with explanation = 6 marks)
Total marks: 20 marks)

QUESTION 2

A. i. The auditor had been negligent for the following reasons:

The auditor is obligated to examine the client’s financial statements and issue the
appropriate opinion in accordance with the auditing standards.
In this case, the auditor did not carry out adequate procedures√ to verify the non-current
assets and had relied mainly on the management representations.√
A management representation is not a substitute for the audit evidence that is
reasonably expected to be available√. They should evaluate √ the reliability of the
management representation by obtaining corroborative audit evidence from sources
inside or outside the entity√.
Due to that, the firm is probably liable for negligence√. The failure to adhere to the
auditing standards generally indicates negligence in the conduct of audit. √
Although the courts do not always recognize adherence to auditing standards as a
defense, they invariably hold that the failure to follow the customary practice constitute
negligence. √

State any related case√ and citing the nature of negligence in that case√.
C6 (any 6√ x 1 marks for assessing negligence for Jentayu case = 6 marks
+ 2 marks for the cited case)

ii. Conditions must be met in order to establish duty of care:

 Whether the damage or loss is foreseeable

 Whether there existed a relationship of proximity between the parties
 Whether it is fair, just and reasonable that the law should be impose the duty of
care on the party for the benefit of the other.
C6 (3 answers with explanation X 2 marks each = 6 marks)

B. Elements for audit quality:

1. Leadership Responsibilities for Quality on Audits – As a leader I must emphasizes:
(a) The importance to audit quality of:
 Performing work that complies with professional standards and applicable legal
and regulatory requirements;
 Complying with the firm’s quality control policies and procedures as applicable;
 Issuing auditor’s reports that are appropriate in the circumstances; and
 The engagement team’s ability to raise concerns without fear of reprisals; and
(b) that quality is essential in performing audit engagements.

2. Relevant Ethical Requirements - Independence

 I shall remain alert, through observation and making inquiries as necessary,
for evidence of non-compliance with relevant ethical requirements by members
 of the engagement team: (a) Integrity; (b) Objectivity; (c) Professional
competence and due care; (d) Confidentiality; and (e) Professional behavior.
 I shall determine the appropriate action on members of the engagement team
whom have not complied with relevant ethical requirements.

3. Acceptance and Continuance of Client Relationships and Audit Engagements -

I will ensure that appropriate procedures have been followed regarding the acceptance
and continuance of client relationships and audit engagements. I need to consider:
 integrity of the principal owners, key management and those charged with
governance of the entity;
 whether the engagement team is competent to perform the audit engagement and
has the necessary capabilities, including time and resources;
 whether the firm and the engagement team can comply with relevant ethical
requirements;
 significant matters that have arisen during the current or previous audit
engagement, and their implications for continuing the relationship.

OR ANY OTHER ANSWERS such as:

4. Assignment of Engagement Teams

5. Engagement Performance
6. Monitoring
7. Documentation
C3 (Any 3 answers with explanation = 6 marks)

QUESTION 3

i. Roles of external auditors in CG:

1. Protect the interest of the shareholders

 This is possible because external audit reports are conducted independent of
the company’s influence. External auditors report the state of a company's
financial statements and attest to the validity of financial reports – deliver the
report on true and fair view of the financial statements to the shareholders.

2. Promote independence and accountability

 Perform audit without undue influence and safeguard against threats to
independence. Hence, would be able to achieve accountability in the part of
the board and senior management of the clients in making sure that financial
statements are presenting true and fair reporting.

3. Assist in establishing good internal control and risk management framework

 Provide assurance on the reliability and integrity of the internal control and risk
management systems of the clients. This in turn would help to uphold good
governance in the organization.

4. Minimise the risk of fraud

 Auditors review the security measures that a company has in place against
corporate fraud, and by detecting misstatements the auditor would be able to
protect the organization from unnecessary risk.
 5. Ensure good audit quality
 Perform audit work observing the quality criteria to ensure that the audit
results would be able to contribute towards overall governance in the
organization.

6. Reduce expectation gap

 Auditor would be able to promote awareness to the stakeholders - on who
should be ultimately responsible on the financial statements.

7. Maintain strong relationship with regulators

 External auditors evaluate the organization of a company for compliance with
regulations. Regulators are also more likely to trust company disclosures after
an auditor attests to them.
C3 (Any 2 answers with explanation X 2 marks each = 4 marks)

ii. Areas focused by audit committee on financial statements:

1. monitoring the integrity of the company’s financial information, particularly by

reviewing the relevance and consistency of the accounting principles used
(including criteria and principles used for consolidation) and understanding the
effects of any changes in the accounting policies and practices, either as a result of
changes in regulatory requirements or mooted by management for better
accounting treatment;
2. understanding the methods used to account for any complex and unusual
transactions where their treatment may be open to different approaches and any
significant accounting policy issues or audit adjustments recommended by auditors
(those agreed by management and those waived);
3. ensuring any significant accounting policy issues or audit adjustments
recommended by auditors are communicated early enough to enable appropriate
actions to be taken, as needed;
4. assessing the company’s financial position/condition and considering the question
of going concern;
5. assessing the process of how transactions are recorded in the system to ensure
accuracy, completeness and consistency of financial information, including
compliance with the relevant accounting standards and other legal requirements;
6. considering related party transactions, the financial reality of such transactions and
whether they have been entered into according to terms as stipulated in the
shareholders’ mandate or in the best interest of the company;
7. requesting the external auditors to present their findings on internal control
weaknesses noted during their statutory audits and highlighting findings which are
disputed by management or where management has not agreed to implement
remedial actions to rectify the reported weaknesses; and
8. understanding non-financial information which is relevant in assisting the audit
committee to gain further insights on the company’s performance and enhance the
integrity of financial reporting (e.g. capacity utilisation and actions by competitors).
C4 (Any 3 answers with explanation X 2 marks each = 6 marks)

End of suggested solution