Question Tag: Audit

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  • 5 Marks

AA – Nov 2019 – L2 – Q1a – Introduction to Audit and Assurance Engagements

Explaining the difference between audit and assurance engagements, with a focus on statutory requirements and value to clients.

Accounting firms offer a wide range of professional services to their clients, including audit, other assurance, and related services. These services are regulated, with many jurisdictions requiring compliance with international standards and local regulations. The type of service delivered depends both on the statutory requirements and what will provide the most value to the client and users of the financial information.

Required:
Explain the difference between audit and assurance engagements. (5 marks)

  • An audit of financial statements is the examination of historical financial statements to enable the auditor to express an opinion whether the financial statements are prepared fairly, in all material respects or give a true and fair view, in accordance with an applicable financial reporting framework. An audit is a higher form of an assurance engagement performed only on historical financial information or statements.
  • An audit of financial statements is an assurance engagement.
  • Assurance engagement means an engagement in which a practitioner expresses a conclusion designed to enhance the degree of confidence of the intended users other than the responsible party about the outcome of the evaluation or measurement of a subject matter against criteria. The outcome of the evaluation or measurement of a subject matter is the information that results from applying the criteria to the subject matter. Here, a professional accountant evaluates a subject matter, which is the responsibility of a third party, and forms a conclusion about the subject matter’s conformity with an identified criterion to provide the intended user a level of confidence about the subject matter.
  • Not all assurance engagements are audits. An example of non-audit assurance engagements is a Review assignment.
  • Audit engagement gives reasonable assurance– low level of risk. Non-audit assurance gives limited assurance – the risk is limited to the circumstance surrounding the engagement.
  • More time is spent on audit assurance than other non-audit assurance, and it is more costly too.

(5 points for 5 marks)

  • 5 Marks

AA – Dec 2022 – L2 – Q2b – Planning and Approach for Audit and Assurance Engagements

Outlines the mandatory terms that must be included in an engagement letter according to ISA 210.

The nature of the relationship between the audit firm and the client is specified in an engagement letter, which helps reduce the possibility of misunderstanding the auditor’s position. This letter should be reviewed, updated, and signed on an annual basis.

Required:
Explain FOUR (4) mandatory terms contained in an engagement letter.

Mandatory terms in an engagement letter:

  • The objective and scope of the audit, specifying the nature of the work to be performed.
  • The auditor’s responsibilities, outlining what the auditor is expected to do during the audit.
  • The responsibilities of management, indicating their role in providing financial statements and access to information.
  • Identification of the applicable financial reporting framework that will be used for the audit
  • 5 Marks

AA – Dec 2022 – L2 – Q1a – Introduction to Audit and Assurance Engagements

Explains the concept of self-regulation and outlines the roles of ICAG in regulating the accountancy profession in Ghana.

Institute of Chartered Accountants, Ghana (ICAG) is established by the Institute of Chartered Accountants, Ghana, Act 2020 (Act 1058). Its mission is to train professional accountants of the highest quality, ready to provide cutting-edge services to their clients at all times, upholding the ethical values of the accountancy profession. In addition, all companies must have their financial statements audited by accountants regulated by ICAG as it is the sole regulator of the accountancy practice in Ghana.

Required:

i) Define the concept of self-regulation.
ii) Outline THREE (3) roles of a regulatory body such as ICAG in regulating the accountancy profession in Ghana.

i) Self-regulation is a system where the regulation of auditors is carried out by their own professional bodies, such as ICAG, instead of another governmental agency.
(2 marks)

ii) Role of ICAG in regulating the accountancy practice in Ghana:

  • Offering professional qualifications for auditors to provide evidence that auditors possess a minimum level of technical competence.
  • Establishing procedures to ensure that the professional competence of auditors is maintained by ensuring that audit work is performed only by fit and proper persons.
  • Maintaining a list of registered auditors, which is made available to the public.
    (3 marks)
  • 5 Marks

AA – Nov 2016 – L2 – Q1a – Types of Audit and Assurance Engagements

Explain the differences between audit and review engagements.

An assurance engagement is an evaluation or measurement of a subject matter by a professional accountant that is the responsibility of another party, against identified suitable criteria to express a conclusion that provides the intended user with a level of assurance about that subject. Both audit and review work are assurance engagements.

Required:
Describe FIVE differences between an audit and a review engagement.

Aspect Audit Review
Scope of Work Determined by statute (law) Can be commissioned by anyone
Amount of Work Determined by the auditor as deemed necessary to give positive opinion Determined by the reviewer as deemed necessary to give negative opinion
Type of Assurance Reasonable assurance Limited assurance
Level of Assurance High level Moderate level
Type of Opinion Positive assurance – “The financial statements show a true and fair view” (Opinion) Negative assurance – “Nothing has come to our attention” (Conclusion)
  • 5 Marks

AA – May 2020 – L2 – Q1a – Introduction to Audit and Assurance Engagements

Define and explain the concept of "true and fair view" in the context of ISA 700/701.

The main objective of an audit is to enable the auditor express an opinion on the financial statements being audited. ISA 700/701 requires that the auditors’ opinion should state whether the financial statements give a true and fair view and are fairly presented in all material respects in accordance with applicable financial reporting framework where an unmodified opinion is expressed.

Required:
Explain what is meant by true and fair view. (5 marks)

There is no formal (legal or professional) definition of the term “true and fair view.” However, from general usage, the meaning of the term can be looked at from its components, namely:

  • True: The accounts are free from material misstatements and reflect the underlying records.
  • Fair: Implies that there is no undue bias in the financial statements or the way they have been presented.

Additionally, it suggests that judgment exercised in the preparation and auditing of the financial statements is properly aligned with appropriate financial reporting standards. Both directors and auditors must exercise judgment to ensure that the financial statements provide a “true and fair” or “present fairly” assurance, in line with financial standards, and that they can be relied upon.

(5 marks)

  • 5 Marks

AA – April 2022 – L2 – Q1b – Audit and Assurance Evidence

Explain five factors that determine reliance on analytical procedures.

ISA 520: “Analytical Procedures” provides guidance to auditors on the use of analytical procedures during the course of an external audit.

Required:
Explain FIVE (5) factors to consider when determining the extent of reliance that can be placed on the results of such procedures. (5 marks)

The five factors to consider when determining the extent of reliance are:

  1. The degree to which information can be disaggregated – Analytical procedures are more effective when applied to specific segments rather than the whole entity.
  2. The relevance of the financial information.
  3. The comparability of the information.
  4. The auditor’s knowledge of the business.
  5. The use of analytical review by the client itself.
  6. Information must be calculated on a consistent basis for comparison.
  7. There must be a logical relationship between the two figures being compared.
  8. The usefulness of the analytical procedure depends on the quality of the information.
  • 5 Marks

AA – April 2022 – L2 – Q1a – Introduction to Audit and Assurance Engagements

State the primary and secondary objectives of an audit.

Audit is the examination or inspection of various books of accounts by an auditor to certify that the accounts have been prepared according to the principles of accounting and to determine whether the Financial Statements prepared reflect a true and fair view of the state of affairs of a business.

Required:
i) State the Primary objective of an audit.
ii) State the Secondary objectives of an audit. (5 marks)

i) The primary objective of an audit is to express an independent opinion on the financial statement.

ii) The secondary objectives of an audit are:

  • To fulfill legal requirements.
  • To add credibility to the financial statement.
  • To confirm the accuracy of figures, schedules, and notes that form part of the financial statements.
  • To prevent and detect fraud and errors.
  • 10 Marks

BCL – Nov 2023 – L1 – Q3b – Accounts and Audit

Explain the rights, duties, and powers of an auditor under company law.

An Auditor is a person or a firm appointed by a company to execute an audit. To act as an auditor, a person should be licensed by the Institute of Chartered Accountants, Ghana. Generally, to act as an external auditor of the company, a person should have a certificate of practice from the regulatory authority.

Required: Explain FIVE (5) rights, duties, and powers of an auditor. (10 marks)

The company’s auditors under Section 142 of Act 992 are to be guided by the following functions, rights, powers, and restrictions:

  • Before one accepts an appointment to be an auditor, the prospective auditor shall communicate with the retiring auditor of that company, if any, to invite representations and information about the company.
  • Right of access at all times to the books, accounts, and documents of the company and to require the officers of the company such information and explanation that the auditor thinks necessary for the performance of the functions of the auditor.
  • Pursuant to any contract with the company, the auditor may expressly or impliedly undertake obligations to the company in relation to the detection of defalcation, and advise on accounting, costing, taxation, raising of finance, and other matters.
  • Right to attend any general meeting of the company and to receive notices of other communications relating to any general meeting.
  • Right to be heard at any general meeting on any business of the meeting which concerns auditors.
  • Right to apply to the court for directions in relation to any matters arising in connection with the performance of his functions. Unless the court otherwise directs, the costs of any such application brought by the auditor shall be paid by the company.
  • An auditor of a company while acting in the performance of his/her functions, is not an officer or agent of the company, but he or she stands in a fiduciary relationship to the members of the company as a whole, and shall act in a manner that a faithful, diligent, careful, and ordinarily skilful auditor would act in the circumstances.
  • An auditor of a company shall ensure that in carrying out the duties of an auditor under this Part, the personal judgment of the auditor is not impaired by reason of any relationship with or interest in the company or any of the subsidiaries of the company.
  • A person or firm that carries out the duties of an auditor shall not engage in any relationship with a client that will result in a conflict of interest between that person or firm and that client. Such relationships with a client that are debarred by law include situations where:
    • The person or firm is in the position of auditing work of that person or firm;
    • Result in that person or firm acting as management or an employee of the client; or
    • Place that person or firm in a position of being an advocate for the client.           (Any 5 points @ 2 marks each = 10 marks)
  • 10 Marks

AAA – Nov 2020 – L3 – Q1a – Rules of professional conduct | Professional responsibility and liability

Evaluate ethical issues in providing audit and advisory services, and assess auditor liability to a bank if the audit is negligently performed.

You are an audit manager with AA & Co. Chartered Accountants and Business Consultants. You have been assigned to the audit of Western Decors Ltd (WD), a long-established firm of event planning service in the city where your practice is located. The audit of the financial statements for the year ended 31 March 2019 is due to commence shortly. The audit firm is aware that the client has received a loan from the bank in April 2018 and that the bank will rely on the audited financial statements as part of the terms and conditions in the loan agreement.

The partner in charge of AA & Co. has just visited the client and made the following notes during his trip:

  • The firm has a number of individual and corporate clients outside Accra and has invested heavily in recording and broadcasting equipment to allow some events to be broadcasted over the internet. This facility is now available at all events conducted in WD’s premises and is proving to be very popular. To date, no specific extra charge has been levied for this service but the Chief Executive Officer (CEO) of WD has asked us to prepare a report for him advising on whether it would be practical to charge separately for it; and, if so, the level at which the charge should be set.
  • Unfortunately, WD’s main supplier of chairs went into liquidation during the year. The Partner said that they were fortunate to be able to find an alternative supplier with whom they entered into a three-year contract for the supply of chairs. At the time of signing the contract, WD considered the contract to be on very favourable terms. However, the supplier is based in Nigeria and the contract was denominated in Naira. Movements in the exchange rate now make the contract look far less attractive and the CEO has requested that we examine the contract to see if there is any way he can legally set it aside.

Required:

i) Critically evaluate any possible ethical issues arising from the client’s requests. (4 marks)

ii) Discuss whether the auditors may be liable to the bank in case the audit was negligently done. (6 marks)

i) Ethical Issues Arising from Client’s Requests:

  • Independence Threat: Providing advisory services such as recommending pricing strategies for broadcasting services and reviewing contracts for legal viability could impair the auditor’s independence. This is particularly relevant since these services may create a self-review threat where the auditor might be perceived as reviewing their own work.
  • Advocacy Threat: The request to provide a report on pricing for broadcasting services and the possibility of setting aside a contract denominated in Naira may create an advocacy threat, where the auditor might be seen as advocating for the client’s position rather than maintaining an objective stance.
  • Competence: The audit firm must consider whether it has the necessary competence to provide legal advice on setting aside a contract. Legal expertise may be required, and the audit firm must ensure that it does not overstep its professional boundaries.
  • Management Responsibility: The auditor should ensure that management, not the auditor, makes any final decisions regarding pricing or legal matters. The auditor can advise but should not assume management responsibilities.

ii) Auditor’s Liability to the Bank if the Audit was Negligently Done:

  • Duty of Care: The auditor owes a duty of care to the bank, especially since it is known that the bank will rely on the audited financial statements as part of the loan agreement. This establishes proximity and reliance, making it foreseeable that the bank would suffer a loss if the audit is negligently performed.
  • Breach of Duty: If the audit is performed negligently, for example, by failing to detect material misstatements or by not adhering to relevant auditing standards, the auditor would be in breach of this duty of care.
  • Causation: The bank would need to prove that the auditor’s negligence directly caused its financial loss. If the bank relied on the audited financial statements to make lending decisions and those statements were materially misstated due to negligence, causation would likely be established.
  • Financial Loss: The bank must demonstrate that it suffered a financial loss as a direct result of relying on the negligently audited financial statements. If these elements are proven, the auditor could be held liable for damages to the bank.

(6 marks)

  • 10 Marks

AAA – Nov 2019 – L3 – Q5a – Current Issues, Audit-related Services

Outline the purposes of a cyber security policy and explain what a cyber security audit is intended to achieve.

Recently one of your clients in the financial service sector has had its ICT system hacked and large sums of depositors’ funds stolen. He called and informed you about what happened. You intimated to him that his company needs a cyber security policy and cyber security audit. He requested a briefing on the issue.

Required:

i) Outline the purposes of a cyber security policy.

(5 marks)

ii) Explain cyber security audit and what it is intended to achieve.

(5 marks)

i) Purposes of Cyber Security Policy

  1. Information Protection Obligations
    Organisations using electronic systems for the conduct of business need to have a cyber security policy and strategy. By their design, cyber security policies serve many purposes, including informing organisation users and third parties of their obligations to protect the organisation’s digital assets.
  2. Asset Protection and Threat Awareness
    The policy describes what must be protected and outlines possible threats to those assets. Cyber security policies also provide information on what is acceptable usage. For example, employees cannot use the organisation’s internet outside office hours or for private work.
  3. Classification of Digital Assets
    Another element of a cyber security policy is the classification of digital assets, where system files, data, and equipment can be classified either as confidential or non-confidential.
  4. Mitigating Employee Risks
    A good cyber security policy recognises the fact that employees are the biggest security threat to an organisation because their wilful action or inaction can cause damage.
  5. Access Control and Monitoring
    The policy provides mitigations such as limited access to qualified persons only, logging the usage of the system, and making it mandatory for employees to change their passwords periodically.

(5 points for 5 marks)

ii) Cyber Security Audit and What It Is Intended to Achieve

A cyber security audit is a formal process of carrying out a cyber security assessment. It is an assessment carried out by a certified third party, an independent organisation, or a consultant. Cyber security audits usually involve an external assessment to ascertain the level of cyber risks an organisation is exposed to.

(2 marks)

What It Is Intended to Achieve:

  1. Risk Identification
    When done properly, a cyber security audit can help the organisation understand what risks to information systems and software exist in the situation.
  2. Prioritisation of Risks
    The audit can help prioritise these risks and align the information protection to that of the central authority, such as the Data Commission, Communication Authority, or even the Central Bank, and to external security frameworks such as the National Institute of Standards and Technology (NIST) cyber security framework of the USA, European Network and Security Agency (ENISA), as well as the ISO/IEC 27000 family on information security management systems.
  3. Gap Analysis
    Once the audit and assessment are completed, the reviewer will provide a detailed report articulating gaps or vulnerabilities in the organisation’s security profile.
  4. Roadmap for Improvement
    The tangible outcome of a cyber security audit is a clear-cut roadmap, which is expected not only to improve cyber security readiness but also to ensure long-term compliance and a robust system of risk management.

(3 points for 3 marks)

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