1. CHAPTER QUIZ
1) What is the objective of auditing According to the International Standard on Auditing (ISA)
2) An auditor is felt to have committed a criminal offence if:
3) What are the Qualities of an Auditor or Professional Accountant
4) Name two types of auditing.
5) It is the purpose of an …………… to deine clearly the extent of the auditor’s responsibilities and so minimize the possibility of any misunderstanding between the client and the auditor

2. Answers
ANS 1
To enable the auditor to express an opinion whether the financial statements are prepared, in all material respects, in accordance with an identified financial reporting framework.
ANS 2
(a) He advises his client to commit a criminal offence
(b) Aids the client in devising or examining a crime
(c) If he agrees with a client to conceal or destroy evidence or mislead the police with false statements

3. Answers ANS 3 Competence, integrity, independence ANS 4
Statutory and non-statutory
ANS 5
Engagement letter

4. Question two
You are the auditor of City Premises Kenya Ltd., a company which manages premises including letting and rent collections on behalf of landlords.
Your firm has recently acquired an audit retrieval software package with the following capabilities:
1. General:
• Mathematical (Multiply, divide, add, deduct and summarize).
• Direct data access.

5. Question two 2. Specific: • Sorting out records.
• Stratification of population
• Frequency of analysis.
• Statistical sampling
• Greater then/less than selection
• Comparison with a norm.
• Identifying duplications
• Matching.
• Comparison

6. Question two Reporting (including graphics).
The company utilizes a computerized system to record and process all transactions relating to its lease portfolio.
The system incorporates a database in which all the lease agreement details and rentals received are recorded.
The system contains the following fields:
• Current monthly rental.
• Lease agreement number.
• Description of premises.
• Names of landlords.
• Names of tenants.
• Lease commencement date.
Lease period.
• Initial rent.
• Escalation percentages.
• Total outstanding rent receivable.

7. Question two • Collection commission percentage. • Termination date.
• Renewal date.
• Journal entry adjustments
Required:
(a) List the audit objectives that you would wish to achieve when auditing the accuracy of the information in the database.
(b) Describe how the audit retrieval software package could be used to achieve the objectives detailed in (a) above.

8. Answers (A) The following are the objectives:
i) To establish whether input data is validated and edited as close to the point of origination as possible.
ii) To ensure that the growth date and percentages are reasonable
iii) To identify any duplications or unreasonable items that may have occurred during processing
iv) To ensure that the calculated amounts as reflected in the system are reasonable
v) To ensure that all documents produced by the system are accounted for, to the invoices on the rent due for collection.

9. Answers
(b) The audit retrieval software package could be used as follows:
i. Calculation checks
ii. Detecting violations of system rules
iii. Detecting irrational items
iv. Conducting frequency of analysis:
v. Selection of items for audit testing:
vi. Completeness Checks:
vii. Recalculation checks:

10. Question three
For many years the law had adopted an approach whereby no action for negligence could be brought if the parties concerned had no contractual relationship with each other, unless the negligent act caused physical injury or was fraudulent misrepresentation.
Thus, the auditor had a contractual relationship with his client or clients’ shareholders only and owed a duty of care to them alone.
However, the courts have increasingly sought to extend the liability of the auditor to other (even potential) users of financial statements.
The view of the judiciary appears to be that the time is ripe for the auditing profession to assume a greater responsibility for its actions.

11. Question three
A) Explain how the auditor can ensure that the risk attaching to an audit is reduced to a minimum.
Ans (A)
(i) Dispatch notes should be pre-numbered and a register kept of them to relate to sales invoices and orders.
(ii) Goods dispatch notes should be authorized as goods leave and checked periodically to ensure they are complete and that all have been invoiced.

12. CHAPTER Two QUIZ 1. Define risk assessment.
2. What are the possible indicators of irregularities during auditing?
3. As described in ISA 200, what are the Objectives and General Principles Governing an .Audit of Financial Statements?
4. What are the stages in system development?

13. ANSWERS
ANS1
1. This is the series of tasks and records of an entity by which transactions are processed as a means of maintaining financial records.
Such systems identify, assemble, analyze, calculate, classify, record, summarize and report transactions and other events.

14. ANSWERS
ANS 2.
(a) Missing documents or vouchers, these have been deliberately destroyed to conceal an irregularity
(b) Evidence of altered documents: alterations can take place after the transaction has been approved
(c) Unsatisfactory explanation: these are explanations that are vague and are unsupported
(d) Evidence of disputes
(e) Existence of suspense accounts or unexplained differences on reconciliations
(f) Evidence that internal control is not operating as it is intended to
(g) Unduly lavish life styles of employees and officers
(h) Figures not agreeing with expectations

15. ANSWERS
ANS 3.
The objective of an audit of financial statements is to enable the auditor to express an opinion whether the financial statements are prepared, in all material respects, in accordance with an identified financial reporting framework.
An audit conducted in accordance with ISAs is designed to provide reasonable assurance that the financial statements taken as a whole are free from material misstatement, whether caused by fraud or error.
The fact that an audit is carried out may act as a deterrent, but the auditor is not and cannot be held responsible for the prevention of fraud and error.
ANS 4.
feasibility, system analysis, program testing, parallel running, file conversion

16. Question one
(a) State the respective responsibilities of the directors and management of a company and its external auditors with respect to the financial statements.
(b) Describe the significant types of judgments made by auditors in:
i. Gathering evidence
ii. Arriving at an opinion on the financial statements

17. Answers
ANS 1.
The responsibility for the preparation and presentation of the financial statements in accordance with the applicable financial reporting framework is that of the management of the entity with oversight from those charged with governance.
The auditor is responsible for forming and expressing an opinion on the financial statements.
The audit of financial statements does not relieve management or those charged with governance their responsibility.

18. Answers (c) Significant types of judgments made by auditors in:
iii) Gathering audit evidence
The work undertaken by the auditor to form an audit opinion is permeated by judgment in particular regarding the gathering of audit evidence
iv) Arriving at an opinion in the financial statements
In expressing an audit opinion, the auditor provides uses of financial statements with reasonable assurance that the financial statements are free from material misstatements

19. Question two
You are the auditor of Fixit Ltd. The company consists of a head office and a chain of 200 shoe repair and key-cutting kiosks. These kiosks are located in supermarkets and shopping centers and each is run by a single staff member who repairs shoes and cuts keys while customers wait.
In an attempt to increase turnover, Fixit Ltd recently advertised that all workmanship in the kiosks would be guaranteed for three months. However, this additional service has not resulted in the expected additional sales.
Management believes incremental revenue is being misappropriated by certain kiosk operators.

20. Question two
In addition, it has come to your attention that various components, namely heels, soles and keys are being removed from kiosks by certain operators and sold to competitors.
Instances have also been found where operators regularly repair shoes for friends without charging them.
Although each kiosk has a register, controls and procedures in the chain are currently weak and head office management has asked for your advice on desirable internal control procedure.
Required:
Detail the internal control procedure you would expect to find that would provide adequate control over:
(a) Cash sales
(b) Stock

21. Answers A) STOCK SYSTEM
Stocks may be as susceptible to irregularities as cash and, indeed, in some circumstances the risks of loss may be materially higher. Arrangements for the control of stocks should be framed with this in mind.
The stock control procedures should ensure that stocks held are adequately protected against loss or misuse, and are properly applied in the operations of the business.
Stock should be duly accounted for by appropriate recording and authorization of all movements.

22. Answers (b) Receipts by post
1. Safeguard to prevent interception of mail between receipt and opening
2. Appointment of responsible person to supervise mail
3. Protection of cash and cheques (restrictive crossing)
4. Amounts received listed when post opened
5. Post stamped with date of receipt

23. CHAPTER THREE QUIZ 1) What are the stages of a modern audit
2) What are the stages of audit planning
3) Name the seven Audit approach
4) What are the indicators of normal audit risk

24. Answers to QUIZ ANS 1. i. Ascertainment
ii. Planning and subsequently controlling the audit.
iii. Ascertaining, evaluating and testing the client’s accounting systems and internal
controls.
iv. Carrying out tests on the systems to determine if they are effective and are consistently
applied at all relevant times.
v. Verifying the existence, title and amounts included in the balance sheet in respect of
assets, liabilities and capital

25. Answers to QUIZ
ANS 1.
vi. Checking the financial statement with the accounting records.
vii. Examining the income statement to confirm that it reflects the results of the operations
of the enterprise.
viii. Examining the financial statements for conformity with acceptable accounting practices
and for compliance with legal and other disclosure requirements.
ix. Considering the financial statements as a whole and reviewing the audit work and
conclusions drawn there from in order to determine whether such statements give a
true and fair view
x. The drafting of an auditor’s report giving the auditor’s opinion on the truth and fairness
and compliance with statute of the accounts

26. Answers to QUIZ ANS 2. Ensure that
• That appropriate attention is devoted to important areas of the audit,
• That potential problems are identified
• That work is completed expeditiously.
• Proper assignment of work to assistants
• Coordination of work done by other auditors and experts.

27. Answers to QUIZ ANS 3. • Substantive procedures
• Balance sheet Approach
• Audit Risk Approach
• Business Risk Approach
• Systems Based Audit approach
• Directional Testing
• Analytical Procedures

28. Answers to QUIZ
ANS 4.
(a) The client having management and staff who are competent and have integrity;
(b) Where the client has an accounting system that is well designed, works and is
subject to strong internal controls;
(c) Where the client has no special financial problems;
(d) The auditor’s past experience;
(e) Where the client is old, well established and the business of the entity is not subject
to rapid change;

29. Answers to QUIZ
ANS4
(f) If the client’s board of directors are actively engaged in the company and they provide
control and leadership of a good quality;
(g) If the board of directors has competent non-executive directors;
(h) If the organization has an audit committee.

30. Question one Chapter three
You are the audit manager at Zainabu and Associates responsible for the audit of the books
of account of Ziwani Spares Ltd. In the course of the audit of the financial statements for the
year ended 30 June 2004, your preliminary evaluation of the internal controls indicated that
reliance could be placed on the system. However, compliance tests carried out during the audit
disclosed that the system was not operating effectively. This situation has necessitated various
amendments and additions to your original audit plan.
Required:
Describe the changes to be effected:
a) During the interim audit. (13 marks)
b) After the end of the financial year.

31. Answer to Q1

32. Question two
The Board of D Ltd., a company quoted on the stock exchanger, has decided to introduce an
internal audit function. As a first step, the Board wishes to outsource the service and has invited
your audit firm to tender for the contract. The terms of reference will entail a range of activities
including:
• Review accounting, internal control and risk management systems.
• Examination of financial and operating information.
Your firm has provided a number of services to this client for many years including, he statutory
audit of he annual financial statements and on-going consultancy work.
Required:
(a) Explain the importance of the concept of independence to external auditing.
(6 marks)
(b) Identify and discuss the threats to your audit firm’s independence which may arise from
he provision of all the services outlines above and suggest how these treats may be
resolved by your firm.

33. Answer to Q2

34. Question three
You are the manager responsible for the audit of BCD Stores Ltd. which has a number of stores
which sell household products to the general public, including furniture, electrical equipment,
cooking equipment and carpets. The company has annual sales of about Sh.1,600 million. In
previous years’ audits, there have been problems with:
1. Misappropriations of inventory by employees and customers.
2. Slow moving and damaged goods which are worth less than cost, and
3. Incomplete recording of sales when the customers pay by cash (these represent 55%
of all sales)
The company has a small internal audit department, the staff of which visit branches and perform
appropriate audit work at the head office.

35. Question three Required:
(a) Describe the work you will carry out and the matters you will consider in planning the
audit prior to the commencement of the detailed audit work, including consideration of
the timetable for the audit. (12 marks)
(b) Describe the procedure you will carry out to control the audit including reviewing the work
of the audit staff.

36. Answer to Q3