DECEMBER 2025 CPA Auditing and Assurance Past Paper answers

Description

QUESTION ONE
(a) Continuous auditing signifies an important shift in how audits are conducted. This approach aims to transform audits from periodic, manual reviews into fast, agile operations that can keep pace with modern demands.

Required:
(i) Discuss THREE benefits that might arise from the conduct of continuous audits as opposed to traditional audits. (6 marks)
(ii) Explain TWO challenges of continuous auditing. (4 marks)

(b) Your firm, Zawadi and Associates, has been the auditor of Magari Ltd.,which has been dealing in motor vehicle spare parts for the past 10 years. Due to the long association, a partner in your audit firm has been requested to sit in Magari Ltd.’s board meeting to provide advisory services. The company is one of your key clients and for the past five years approximately 30% of your firm’s gross revenue has been obtained from Magari Ltd. from assurance and taxation services. Last year, Magari Ltd. poached two audit managers from your firm to support the internal audit and finance departments.
In September 2025, Magari Ltd. issued shares during an Initial Public Offer (IPO). Zawadi and Associates was involved in promoting the shares of the company.
Required:
Evaluate FIVE ethical threats from the engagement between Zawadi and Associates and Magari Ltd. (10 marks)
(Total: 20 marks)

QUESTION TWO
(a) Explain the following terminologies as used in contemporary audit:
(i) Social engineering. (2 marks)
(ii) Embedded audit facilities. (2 marks)
(iii) Integrated test facilities. (2 marks)

(b) When an auditor uses audit sampling, the objective is to provide a reasonable basis to draw conclusions about the population from which the sample is selected.

Required:
(i) Distinguish between “statistical sampling” and “non-statistical sampling”. (4 marks)
(ii) Describe FOUR methods of random sample selection. (4 marks)

(c) Discuss the auditor’s responsibility in detecting errors, frauds and irregularities in an audit engagement. (6 marks)
(Total: 20 marks)

QUESTION THREE
(a) With reference to International Standard on Auditing (ISA) 230, Audit Documentation:
(i) Describe FIVE roles of audit documentation in supporting the auditor’s opinion and accountability.(5 marks)
(ii) Analyse FIVE implications of inadequate documentation during quality reviews of regulatory inspections.(5 marks)

(b) You have recently been appointed as the auditor for Mboga Tamu Enterprises Ltd., a medium sized company that deals in the export of fruits and vegetables. During your opening meeting with the management, you informed them that you have a responsibility to communicate to them on the deficiencies in the internal control system.

Required:
With reference to International Standard on Auditing (ISA) 265, Communicating Deficiencies in Internal Control to those charged with Governance and Management, explain FIVE matters you need to consider in determining whether a deficiency in internal control is significant. (10 marks) (Total: 20 marks)

QUESTION FOUR
(a) The directors of Karibu Ltd. have prepared a cash flow forecast for submission to Fedha Bank. They have requeted you as their auditor, to provide a negative assurance report to this cash flow forecast.

Required:
(i) Distinguish between “positive assurance” and “negative assurance”. (4 marks)
(ii) Evaluate TWO advantages the directors of Karibu Ltd. could derive from the negative assurance on their cash flow forecast. (4 marks)

(b) Johanna Ltd. aims to be listed in the Nairobi Securities Exchange. Benjamin Mutie is the chief executive officer and chairman of Johanna Ltd. He appoints and maintains a board of only five executive directors. While the board sets the performance targets for the senior management in the company, no formal targets are set for each director and no review of the board policies is carried out.
Board salaries are set and paid by Benjamin Mutie based on his assessment of all board members, including himself and not their actual performance.
Internal controls in Johanna Ltd. are monitored by the senior accountant, although the company assumes that, as external auditors, your firm will carry out a detailed review of internal controls. Johanna Ltd. does not have an internal audit department or an audit committee. Annual financial statements are prepared, providing detailed information on past performance.
Required:
(i) Advise Mutie on TWO changes that need to be made to the composition of the board of directors of Johanna Ltd. in order to comply with the corporate governance requirements. (4 marks)
(ii) Explain to Benjamin Mutie FOUR benefits of setting up an audit committee. (4 marks)
(iii) Benjamin Mutie would like to set up an internal audit department, but is not sure about measuring the performance of this department.
Describe FOUR key performance indicators of an internal audit department. (4 marks)
(Total: 20 marks)

QUESTION FIVE
(a) You are the Audit Manager planning the audit of Ukweli Ltd., a new client in your firm. Your firm employs the risk-based audit approach in auditing its clients. In assessing the risk of material misstatement, you need to obtain an understanding of Ukweli Ltd.’s business and its environment.
Required:
Describe FOUR methods that your audit team could use to gather knowledge about the business of Ukweli Ltd.
(8 marks)

(b) You are the audit manager at Maneno and Associates, a firm of Certified Public Accountants. You are finalisng the audit of Matata and Matata Limited, a large agricultural company, for the year ended 30 June 2025.

During the audit, the following issues were identified:

1. Going concern uncertainty:
The company has incurred consecutive losses for the last three years and is heavily dependent on a short- term bank loan that is due for repayment within three months. Management has not yet secured alternative financing, but has prepared financial statements on a going concern basis.
2. Post-balance sheet event:
August 2025, after the reporting date but before the audit report was signed, heavy flooding destroyed the company’s main plantation. The loss was material and will significantly affect the company’s ability to generate future cash flows. Management has disclosed this in the notes to the financial statements but has not adjusted the figures.
3. Legal dispute:
There is an ongoing court case against the company for alleged environmental pollution. Management believes it will not lose the case and therefore has not made any provision. The auditor, however, considers the likelihood of losing the case as probable and the amount involved is material.

Required:
(i) For each of the three issues mentioned above, identify and justify the type of audit opinion that should be expressed. (9 marks)

(ii) Explain how the auditor should communicate each of these matters in (b) (i) in the auditor’s report, specifying whether it should be included under a Key Audit Matter, Emphasis of Matter or Basis for Modified Opinion section. (3 marks)
(Total: 20 marks)
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