Question Tag: Audit Objectives

Search 500 + past questions and counting.
Professional Bodies Filter
Program Filters
Subject Filters
More
Tags Filter
More
Check Box – Levels
Series Filter
More
Topics Filter
More
  • 20 Marks

AA – Nov 2019 – L2 – Q3 – Audit and Assurance Evidence

Discusses the audit objectives, sources of evidence for inventory audit, and why stocks present high audit risk.

The information in the financial statements of your client, Honesty Company Limited, represents claims by management in relation to its responsibility to prepare financial statements that give a true and fair view of the company’s state of affairs and results of operations for the year under review. These claims are referred to as financial statement assertions.

Required:
a) Outline the audit objectives for the audit of stock (inventories) in the financial statements. Your answer should relate to the financial statement assertions. (8 marks)

b) Discuss FOUR (4) sources from which evidence can be obtained to confirm the quantities and value of stocks. (8 marks)

c) Explain why stocks present high audit risk. (4 marks)

a) Audit Objectives for Stock (Inventories):
The audit objectives of stock (inventory) are based on ensuring the following financial statement assertions:

  1. Completeness:
    • The objective is to ensure that all stocks belonging to the client at the balance sheet date have been reported or included in the financial statements.
  2. Existence:
    • The objective is to confirm that the stocks physically exist at the balance sheet date.
  3. Rights and Obligations:
    • The objective is to verify that the client has legal title to the stocks, or the entity holds or controls the rights to the stocks.
  4. Valuation and Allocation:
    • The objective is to ensure that stocks are included in the financial statements at appropriate amounts, reflecting any necessary valuation or allocation adjustments, such as net realizable value or obsolescence.
  5. Presentation and Disclosure:
    • The objective is to confirm that stocks are properly classified, presented, and adequately disclosed in the financial statements according to the applicable reporting framework.

(Each assertion for 2 marks, totaling 8 marks)

b) Sources of Evidence for Stock (Inventory):

Evidence on the quantity and value of stocks can be obtained from the following sources:

  1. Observation of Stock Taking:
    • The auditor can attend the client’s physical stock count to observe the process and verify the quantities of stock counted. This provides direct evidence of the existence of stock.
  2. Stock Summary Sheets and Valuation:
    • The stock summary sheets prepared by the client, and their reconciliation with inventory records, can provide evidence on stock quantities and their valuation. Checking the calculations on these sheets ensures accurate valuation.
  3. Client’s Stock Systems:
    • For clients with perpetual inventory systems, evidence can be obtained from the continuous records maintained in these systems, which track stock movements in real time.
  4. Third-Party Confirmations:
    • Where stock is held by third parties, confirmation from these third parties will provide evidence about the existence and quantity of stock held on behalf of the client.

(Each source of evidence for 2 marks, totaling 8 marks)

c) Why Stocks Present High Audit Risk:

Stocks present high audit risk for the following reasons:

  1. Lack of Double Entry Records:
    • For most clients, stock quantities and values are not derived from double-entry bookkeeping but through physical stock counts and valuation, which can be manipulated by management to engage in fraudulent financial reporting.
  2. Materiality of Stocks:
    • For many entities, stock represents a large proportion of the company’s assets. The materiality of such assets significantly increases the audit risk as errors or fraud can have a substantial impact on the financial statements.

(Each point for 2 marks, totaling 4 marks)

 

  • 5 Marks

AA – Nov 2020 – L2 – Q5a – Regulatory Framework and Audit Responsibilities

Explain the purpose of an engagement letter and key information it should contain.

ISA 210: Agreeing the terms of audit engagements requires that auditors should issue a letter of engagement before commencement of the audit.

Required:
i) What is the purpose of an engagement letter?
(1 mark)

ii) Identify FOUR (4) important pieces of information that the engagement letter should contain.
(4 marks)

i) Purpose of an Engagement Letter:
The purpose of an engagement letter is to set clear expectations on both sides (the client and the audit firm) regarding the terms of the audit engagement, ensuring that both parties understand their respective responsibilities and the scope of the audit.

ii) Important Information in an Engagement Letter:

  1. Objective of the Audit: This should detail the purpose of the audit and what the audit aims to achieve.
  2. Responsibilities of the Auditor: The letter should specify the auditor’s responsibilities, including the scope and nature of the audit work.
  3. Management’s Responsibilities: It should outline management’s responsibilities for preparing the financial statements and maintaining effective internal controls.
  4. Scope of the Audit: This includes references to applicable legislation, regulations, or pronouncements of professional bodies, as well as the form of any reports or communications that will result from the engagement.

(1 mark for the purpose, 1 mark for each of the four pieces of information – 5 marks total)

  • 4 Marks

AA – May 2016 – L2 – Q5a – Audit and Assurance Evidence

This question explains the purpose and objectives of a value for money (VFM) audit.

(a) Explain the purpose of value for money audit. (4 marks)

The purpose of a value for money (VFM) audit is to assess whether an entity is obtaining the best possible combination of services for the lowest level of resources used. VFM audits focus on the 3 Es:

  1. Economy:
    • Ensuring that resources (such as labor, materials, and equipment) are acquired at the lowest possible cost without compromising quality.
  2. Efficiency:
    • Evaluating the relationship between the resources used (inputs) and the outputs achieved. An efficient operation is one that maximizes outputs while minimizing the resources used.
  3. Effectiveness:
    • Determining whether the intended goals and objectives of the entity are being achieved. This involves assessing whether the activities of the entity are producing the desired outcomes.

In summary, a VFM audit aims to ensure that an organization is managing its resources in a way that delivers the highest value for money, balancing cost, productivity, and outcomes.

Take control of your business data with insight and in-depth understanding by taking this course. 

Services

Contact Info

  • +233203701923
    +233543919232
  • info@noohrabusiness.com

Get In Touch

Follow us on our social media and get daily updates.

Facebook-f Twitter Linkedin-in Envelope