Question Tag: Financial audit

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  • 10 Marks

AAA – Dec 2023 – L3 – Q4b – Public Sector Audit

Explain the preliminary engagement activities that a Public Sector Auditor must consider when conducting a financial audit.

b) Preliminary Engagement Activities in Public Sector Financial Audits
The purpose of performing preliminary engagement activities in Financial Audit in the public sector is to help ensure that the auditor has considered any events or circumstances that may adversely affect the auditor’s capability to plan and perform the audit engagement to reduce audit risk to an acceptably low level.

Required:
Explain FIVE (5) preliminary engagement activities a Public Sector Auditor must consider in Financial Audit. (10 marks)

Preliminary Engagement Activities in Public Sector Financial Audits

  1. Understanding the Entity and Its Environment:
    • The auditor must gain a comprehensive understanding of the audited entity’s operations, organizational structure, and the environment in which it operates. This includes reviewing the entity’s governance, its objectives, strategies, and the legal and regulatory framework it operates within. This understanding helps identify areas of potential risk that could impact the financial statements and informs the auditor’s planning and risk assessment procedures.
  2. Assessing the Integrity of Management and Those Charged with Governance:
    • The auditor should evaluate the integrity of the entity’s management and those charged with governance. This includes considering their ethical values, commitment to transparency, and responsiveness to audit queries. If the auditor identifies concerns about management’s integrity, this could significantly impact the audit approach, including the extent of testing and the need for additional safeguards.
  3. Establishing the Terms of the Audit Engagement:
    • It is essential to establish and document the terms of the audit engagement, typically in an audit engagement letter. This document should outline the scope of the audit, the responsibilities of the auditor and the entity’s management, the audit timeline, and any specific requirements. This step ensures that both parties have a clear understanding of the audit’s objectives and the auditor’s role, reducing the risk of misunderstandings later in the engagement.
  4. Evaluating the Auditor’s Independence and Objectivity:
    • The auditor must assess their own independence and objectivity before accepting the engagement. This includes identifying and addressing any potential conflicts of interest, such as prior relationships with the entity or its management. Maintaining independence is crucial to providing an unbiased audit opinion, and any threats to independence must be mitigated through appropriate safeguards or documented in the audit file.
  5. Understanding Internal Controls and Assessing Risk of Material Misstatement:
    • The auditor should gain an understanding of the entity’s internal controls, particularly those related to financial reporting. This involves evaluating the design and implementation of controls and assessing their effectiveness. Understanding the internal control environment helps the auditor identify areas where material misstatements might occur and informs the development of the audit strategy, including the nature, timing, and extent of audit procedures.
  6. Consideration of Continuing Engagement:
    • For recurring audits, the auditor should consider whether to continue the engagement, taking into account any significant issues encountered in previous audits, such as disagreements with management or changes in the entity’s circumstances that could impact the audit. This decision should be based on the auditor’s ability to perform the audit effectively and within the ethical and professional standards.
  7. Preliminary Analytical Procedures:
    • The auditor may perform preliminary analytical procedures as part of the engagement planning process. These procedures involve comparing the entity’s financial information with prior periods, industry benchmarks, or expected results. Significant variances or trends identified through these procedures can highlight areas of potential risk that require further investigation during the audit.

Conclusion

These preliminary engagement activities are crucial in ensuring that the auditor can plan and execute the audit effectively, with a clear understanding of the entity’s risks and challenges. They help the auditor reduce audit risk to an acceptably low level and ensure that the audit is conducted in accordance with professional standards.

  • 10 Marks

AAA – May 2019 – L3 – Q3b – Assurance services

Discuss the matters to include in training material on professional scepticism in audit based on IAASB guidelines

You are the audit manager in charge of training in one of the audit firms in Ghana. The Institute of Chartered Accountants (Ghana) invited you to be a resource person of a Continuing Professional Development (CPD) programme to be organised. You are to talk on Professional Scepticism in an audit of Financial Statements.

Required:
Identify and discuss the matters that you will include in your training material.
NB: Your answer should consider the IAASB Q & A paper on professional scepticism.

The matters to be considered in the training material are;

  • The meaning of Professional scepticism
  • The importance of professional scepticism
  • What can firms do to enhance awareness of professional scepticism’s importance?
  • At what stage of the audit is professional scepticism necessary?
  • How does this relate to fraud?
  • Where else is professional scepticism important, other than fraud.
  • How can professional scepticism be evidenced?

Discussion

In February 2012, the IAASB issued a Q & A paper on Professional Scepticism. Professional scepticism is a crucial aspect of audit, defined in ISA 200. The Paper can be summarised by the following points.

  • What is professional scepticism?
    It is hard to define, but is fundamentally a ‘mind-set’ which is linked to the ethical principles of objectivity and independence. It means ‘being alert’ to evidence that contradicts evidence already obtained, or which casts doubts on the reliability of documents or explanations provided, or which may indicate fraud.
  • Why is professional scepticism important in audits?
    It is part of the auditor’s ‘skill set’, and is part of professional judgement. It affects decisions about: the procedures to be performed; the sufficiency & appropriateness of evidence obtained; the validity of management’s financial reporting judgements; and the conclusions drawn based on audit evidence.
  • What can firms do to enhance awareness of professional scepticism’s importance?
    It is a matter of education, training and experience, as well as the culture of the firm. At a firm-wide level, this means establishing policies and procedures, promoting a quality-oriented culture, and establishing training and CPD schemes.
    At an engagement level, this means that the partner must communicate the importance of quality, and that the audit team is able to raise concerns without fear of reprisals.
  • At what stage of the audit is professional scepticism necessary?
    Throughout the audit! E.g., at engagement acceptance, when considering the integrity of management and owners.
  • How does this relate to fraud?
    The fact that fraud involves deception and concealment makes professional scepticism particularly important in relation to it. ISA 240 emphasises professional scepticism, particularly in the form of ‘an on-going questioning’ of whether there has been a fraud: There are also areas where there is a required presumption that there is a risk of fraud; revenue recognition, risks of management override of controls as a result of fraud, and accounting estimates.
  • Where else is professional scepticism important, other than fraud?
    Significant or judgemental areas, such as:

    • Accounting estimates (e.g., are assumptions reasonable?)
    • Going concern (e.g., are management’s plans really feasible?)
    • Related party relationships & transactions (e.g., transactions outside the normal course of business – misappropriation of assets?)
    • Law & regulations (e.g., where non-compliance may call into question going concern)
  • How can this be evidenced?
    Audit documentation should enable an experienced auditor to understand significant decisions made during the audit and any conclusions drawn. As the auditor should be professionally sceptical when making these decisions, the documentation would provide evidence of this. For example, it should document the discussions the auditors have about possible non-compliance with laws & regulations, or possible management bias in relation to accounting estimates.
  • 10 Marks

AAA – May 2019 – L3 – Q3a – Audit evidence

Discuss the risks encountered in the audit of a company involved in possible money laundering activities, specifying the risk format and actions required.

Musah Diara is a Malian resident in Ghana. He has established Tagoe Company Ltd (Tagoe) which engages in trading in West African countries; Ghana, Nigeria, and Mali. Musah is always funded by his brother who is also a resident in Ghana. Musah’s brother does not have a bank account in Ghana. He always gives huge cash to Musah who buys goods in Ghana and sells it in Nigeria or Mali. He pays the profit into Tagoe’s account in Ghana and bank the amount given to him by his brother into his brother’s account in Mali.

Required:
You have been engaged to audit Tagoe. Discuss the risk you are likely to encounter in this audit, specifying your expectation of the risk format and the action you have to take.

Likely risk to be encountered by the auditor

The scenario fits Money Laundering activity.

  • Musah is given huge cash to buy his goods by his brother
  • Musah’s brother does not have a bank account in Ghana
  • The proceeds of the transaction is not paid to his brother in Ghana, but paid into his account in foreign country.
  • Though we are not sure how his brother get his money, the modus oprandi, fit money laundering.

Expectation of the risk format

In Money Laundering,

  • There’s placement of illegal funds into the financial system. Here huge cash is given to Musah to buy goods and sell outside Ghana.
  • Layering-Passing the money through a number of transactions, selling the good outside the country which is engagement of economic activity
  • Integration-Integrating the proceeds into legitimate economy by banking in other countries.

Actions to be taken by the auditor
The auditor is then exposed to money laundering activity

  • The auditor has an obligation to know the source of the money being given by Musah’s brother.
  • The auditor must perform due diligence on the customer and the brother to confirm the activity of the brother.
  • If the suspicion is confirmed, the matter should be reported to the authorities.
  • The auditor should avoid tipping of the client during his investigation to confirm the suspicion.

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