April 2025 Advanced Auditing and Assurance Past papers with answers

Description

QUESTION ONE
(a) The integration of blockchain technology and data analytics into auditing processes represents a transformative shift in how audits are conducted, offering a range of benefits from enhanced security to increased efficiency and transparency.
Required:
Evaluate THREE applications of data analytics and THREE applications of block chain technology in the audit process. (6 marks)

(b) International Standards on Auditing (ISA) 570 Going Concern, highlights both the auditor’s and the management’s responsibility with regard to the company’s going concern.
Required:
Contrast the responsibility of the management with that of the auditor in the assessment of the going concern of a company. (6 marks)

(c) You are the audit manager of Kiki and Kiki Associates, a firm of Certified Public Accountants, responsible for the audit of ABC Manufacturing Company for the year ended 31 December 2024. The audit work has been completed and reviewed and the audit report is going to be issued in three days. The following is the summary extract data from the financial statements:
Sh.
Revenue 150,000,000
Net profit after tax 50,000,000
Total assets 120,000,000

You have just been informed that a resolution has been passed to close one of the factories and relocate the largest factory in the next 6 months. These changes will lead to lay off of staff and the estimated cost of redundancies is Sh.30,000,000. The financial statements have not been amended to reflect the changes.
Required:
(i) Comment on the implications of the above changes in the financial statements. (2 marks)
(ii) Describe FOUR further audit procedures that you might need to perform. (4 marks)
(iii) Recommend the actions to be taken by the auditor if the financial statements are not amended. (2 marks)
(Total: 20 marks)

QUESTION TWO
(a) Summarise SEVEN auditor’s responsibilities with regard to subsequent events. (7 marks)

(b) You are the audit manager responsible for the audit of Zambalau Ltd. For the year ended 31 December 2024. The final audit for the year is almost complete and you are reviewing the audit working papers. The draft financial statements recognise profit before tax of Sh.110 million. The following matters have been raised by the audit senior for your attention.

1. In January 2025, one of the major customers of Zambalau Ltd. was declared bankrupt. The customer had a balance of Sh.950,000 which is included in the financial statements under accounts receivable.
2. In December 2024, a case against the company by a competitor, with claims of defamation because of an advertisement that the company placed in the media, is yet to be determined. The company’s legal lawyers have estimated the damages that are probable to be Sh.1,000,000.

The following extract from the draft auditor’s report has been given to you for your review:
Basis for opinion and disclaimer of opinion
We have performed our audit based on a materiality level of Sh.15 million. Our audit procedures have proven conclusively that trade receivables are materially misstated. The finance director of Zambalau Ltd., John Kigen, has refused to adjust the accounts receivable to write off the uncollectible amount from a significant customer who has been declared bankrupt. Therefore, in our opinion, the financial statements are materially misstated and consequently we express a disclaimer of opinion.

Emphasis of the matter paragraph
Zambalau Ltd. has a current legal case with claims of Sh.1,000,000 from a competitor. In our opinion, this amount should be recognised as a provision of which the financial statements have not provided for.

Required:
(i) In relation to the ongoing legal claim against Zambalau Ltd., recommend FIVE additional audit procedures that may need to be performed. (5 marks)

(ii) Without redrafting the auditor’s report, critique the proposed auditor’s report for Zambalau Ltd. for the year ended 31 December 2024. (8 marks)
(Total: 20 marks)

QUESTION THREE
(a) Hinga Auditors is a medium-sized audit firm that has been operating for over 15 years. The firm has a diverse client base. Kayote Ltd. is a privately owned rapidly growing company based in Kenya with a turnover of over Sh.50,000,000. Kayote Ltd. has expressed interest in Hinga Auditors to audit their books for the year ended 31 March 2025.

The company’s management is currently considering having either a full audit or limited assurance review of their financial statements.
Required:
As the audit senior at Hinga auditors:

(i) Analyse THREE differences between an audit of historical financial statements and a limited assurance review. (6 marks)
(ii) Discuss THREE advantages and THREE disadvantages to Kayote Ltd. of having an audit of their historical financial statements as opposed to a limited assurance review. (6 marks)

(b) You are the audit manager in John Bosco and Associates, a firm of Certified Public Accountants, responsible for the audit of Cider hospital for the year ended 31 March 2025. You recently visited the audit team, who are currently on site performing the field work, to review the work performed and to discuss their progress. During your visit the audit senior brought forward the following matter for your action.

During the review of medical inventories, which included medicines used in a variety of treatment at the hospital, it was noted that a number of medicines had passed their recommended use by dates. These were recorded on an inventory spreadsheet maintained by the financial controller and were easy to spot because they were highlighted in red. One of the audit team members inspected a sample of the inventories in question and confirmed that their use by date had expired. The audit team requested to look at the spreadsheet again, but they were denied access.

The following day, the finance director confronted the audit team accusing them of extending their investigation ‘beyond their scope of audit’. He also threatened to remove them from the premises if they continued to ask questions which were not relevant to the audit of the hospital’s financial statements. Since then, the audit team was unable to complete their audit of medical inventories. They also noted that the room where the inventories were previously kept had been emptied.

Required:
With reference to the above matter raised by the audit senior, describe:
(i) TWO ethical and professional issues surrounding this matter. (2 marks)

(ii) THREE ways that you could report the non-compliance to the management of Cider hospital. (3 marks)

(iii) The impact of the matter on the financial statements of Cider Hospital. (3 marks)
(Total: 20 marks)

QUESTION FOUR
(a) Describe FIVE areas of focus in an environmental audit. (5 marks)

(b) International Standards on Auditing (ISA) 315 Identifying and Assessing the Risk of Material Misstatements Through Understanding of The Entity and Its Environment, requires auditors to obtain an understanding of the entity and its environment, including its internal controls.
Required:
Explain FIVE reasons why obtaining an understanding of the entity and its environment is important for the auditors. (5 marks)
(c) Joan and Jim Associates, a local audit firm, were the auditors of Dhawabu Bank Ltd. that recently went under receivership. Dhawabu Bank Ltd. has been sued for negligence by investors who lost up to Sh.40.3 million through a fake corporate bond issuance programme.
The investors claim that the audit firm failed to verify the bank’s claim that it operated a Sh.17.6 million account with the Central Bank. However, it turned out that the non-existent bank account played a major role in inflating the banks financial position, thereby enticing investors to pump Sh.40.3 million into the company through a corporate bond issuance programme. The investors lost their money.

Required:
Evaluate Joan and Jim Associates’ legal liability in relation to the above claim. (10 marks)
(Total: 20 marks)

QUESTION FIVE
(a) You have just completed the forensic investigation where some funds were stolen from your client. You are now preparing to present your evidence in court against the identified fraudsters.
Required:
Enumerate THREE rules of evidence you will require to observe in court when representing your client. (3 marks)

(b) International Standards on Auditing (ISA) 720 provides guidance on the auditor’s responsibilities relating to other information in documents containing audited financial statements. You are the audit engagement partner in audit of Afucako Ltd. You have an audit trainee assigned to you, who has read the notes taken at your meeting with the managing director of Afucako Ltd. The audit trainee is seeking to know from you about the implications of corporate social responsibility (CSR) expenditure being disclosed as a different figure in the financial statements compared with other information published in the annual report.

Required:
(i) Explain to the audit trainee THREE responsibilities of the auditor in relation to other information in documents containing audited financial statements. (3 marks)

(ii) Analyse FOUR actions that the auditor could take if the figure relating to the CSR expenditure figure disclosed in the financial statements is different from the other information published in the annual report and the management has not amended this even after the matter having been highlighted to them. (4 marks)

(c) You are a senior auditor in the audit of Cashew Ltd., a wholesale company, for the year ended 31 March 2025. The company intends to determine the quantity and value of each line of inventory at a physical inventory check to be held on 22 February 2025 and then adjust the movements between 23 February 2024 and 30 December 2024. The purchases and sales ledgers will be closed. The company has a fast-moving stock, but operates a satisfactory recording system which incorporates goods inwards and dispatch records.

Required:
Describe FIVE audit procedures that you would adopt to satisfy yourself that the company’s cut off discipline is adequate. (10 marks)
(Total: 20 marks)
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