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I1.4 Auditing-Answ
I1.4 Auditing-Answ
I1.4 Page 1 of 16
SECTION A
QUESTION ONE
Marking guide
Maximum Marks
a. Advise to Kamali at least 5 the advantages of a non-statutory audit 5
Total 20
Model answers
a) Advantages of a non-statutory audit to a small or medium business include:
• The audit can provide a means of settling accounts between the partners.
• Kamali & Brothers Company Ltd would benefit from better access to loan and overdraft
facilities may be facilitated if his business is able to produce audited accounts.
• An audit is very useful for other brothers’ partners since they are not involved in the
management of the business. This can assist in ascertaining the share of profits due to them.
• Audited accounts provide a good indication of a fair valuation for shares particularly
unquoted shares.
• An audit provides management with an independent check on the accuracy of their
financial statements. Also, some auditors do provide decent management letters.
• Revenue Authority can rely on audited accounts to back up tax returns.
b) Explaining the concept of corporate governance and its pillars and why KBC should
adopt them
Corporate Governance refers to the way in which companies are governed and to what
purpose. It identifies who has power and accountability, and who makes decisions. It is, in
essence, a toolkit that enables management and the board to deal more effectively with the
challenges of running a company. Corporate governance ensures that businesses have
appropriate decision-making processes and controls in place so that the interests of all
stakeholders (shareholders, employees, suppliers, customers and the community) are
balanced. (CGI UK)
There are mainly four fundamental pillars of corporate governance which include
Accountability, Transparency, Responsibility and Fairness. All these are critical for
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successfully running of an organization such as KBC and forming better relationship with
different stakeholders.
Corporate governance pillars are explained here below:
• Accountability: is the quality or state of being accountable; that is, being required or
expected to justify actions and decisions. It suggests an obligation or willingness to accept
responsibility for one’s actions.
• Fairness: Fairness means “equal treatment of all stakeholders”. Establishing effective
communication mechanism is important in ensuring just and timely protection of resources.
• Transparency: Transparency “means having nothing to hide” that allows its processes
and transactions observable to outsiders. It also makes necessary disclosures, informs all
stakeholders affected about its decisions and how they are likely to be affected by those
decisions. Transparency is a critical component of corporate governance because it ensures
that all of entity’s actions can be checked at any given time by an outside observer.
• Responsibility: Those charged with governance are given authority to act on behalf of
the entity. They should therefore accept full responsibility for the powers that is given to them
and the authority that it exercises. Those charged with governance are responsible for
overseeing the management of the business, affairs of the company, appointing the chief
executive and monitoring the performance of the company. In doing so, it is required to act
in the best interests of the entity putting aside their own interests.
Excellent management
Company practicing good governance allows peo-
ple not inked to it to be able to assess its gover-
nance due to transparency.
2. High level of transparency
Companies following a set of best practices are
• Excellent management: Company practicing good governance allows people not linked
to it to be able to assess its governance due to transparency.
• High level of transparency: Companies following a set of best practices are encouraged
to be highly transparent about their business.
• Stakeholder benefits: Under corporate governance, companies tend to act in the best of
itself and its stakeholders.
• Reputation and recognition: good governance allows companies to gain the trust of the
investors, customers and the community at large.
• Reduced wastage: Employees that are trained to follow a good ethical practice will avoid
excess wastage of company resources.
• Reduced risks: mismanagement and corruption an amount of transparency applied in
companies following good governance practices has reduced amount of risks of corruption
and mismanagement.
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• Economic benefit: A company following a good governance practice will be able to
achieve the trust of the community and thus gaining success in the long run.
• Regulating the accounting profession in Rwanda (This is the Institute's overall purpose.)
• Preserving the integrity of the accounting profession
• Promoting the competence and capacities of its members
• Providing its members with professional education in accounting and other related
disciplines
• Issuing regulations to promote the functioning of the Institute
• Taking disciplinary measures against members unable to perform their duties and guilty
of misconduct
• Promoting and preserving the professional independence of its members while exercising
their profession
QUESTION TWO
Marking guide Maximum Marks
a) Clearly explain the procedures to appoint auditors in Rwanda 4
Total 20
I1.4 Page 4 of 16
Model answers
a) The procedures to appoint auditors in line with Rwanda’s Company Act are:
• Should ensure that BCD Partners CPA ltd is professionally qualified to be the Company’s
auditor by considering whether they could be disqualified on ethical or legal grounds.
• Ensure availability of resources (staff, technical expertise and time) to conduct the
assignment.
• Ensure that the outgoing auditor’s removal or resignation has been properly conducted
in accordance with national legislation. The new auditors should see a valid notice of the
outgoing auditor’s resignation or confirm that the outgoing auditors were properly removed.
• Ensure that the BCD Partners CPA ltd appointment is valid. BCD Partners CPA ltd
should obtain a copy of the resolution passed at the general meeting appointing them as the
company’s auditors.
• Set up and submit a letter of engagement to directors of Byukusenge Company ltd
detailing the scope and terms of the engagement.
In accordance with article 140 of the Company’s Act, an auditor shall not be removed from
office, unless:
i) at least ten (10) working days’ written notice of a resolution to do so;
ii) has been given a reasonable opportunity to make representations to the shareholders on
the removal, either in writing or by the auditor or his/her representative speaking at a
shareholders' general assembly, whichever the auditor may choose.
A company shall not propose to appoint a new auditor in place of an auditor who is
disqualified for re-appointment, unless:
i) at least ten (10) working days' written notice of intention to do so has been given to the
auditor;
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ii) the auditor has been given a reasonable opportunity to make representations to the
shareholders on the appointment of another auditor, either in writing or by the auditor or
his/her representative speaking at a shareholders' general assembly whichever the auditor may
choose.
Where an auditor has given the member of the Board of Directors a written notice of
unwillingness to be reappointed, the member of the Board of Directors, if requested to do so
by the auditor:
i) distribute to all shareholders at the expense of the company a written statement of the
auditor's reasons for unwillingness to be reappointed;
ii) permit the auditor or his/her representatives to explain at a shareholders' general assembly
the other reasons for his/her unwillingness to be reappointed.
QUESTION THREE
Marking guide Maximum Marks
a) State the steps you should take as an auditor to identify and assess the 4
risks of material misstatement (1 mark each)
b) Discuss your responses to the risks of material misstatements identified 10
at Kalembure Co Ltd during your audit planning (1 mark per risk with a max of 2)
NB: There are no marks for identifying the risks since they are already
Given.
c) Describe at least 4 audit procedures to be conducted while reviewing 4
the work of junior audit team members
Total 20
Model answers
a) ISA 315: Identifying and Assessing the Risks of Material Misstatement requires the
auditor to take the following steps:
• Identify risks throughout the process of obtaining an understanding of the entity and its
environment
• Assess the identified risks and evaluate whether they relate more pervasively to the
financial statements as a whole
• Relate the risks to what can go wrong at the assertion level
• Consider the likelihood of the risks causing a material misstatement
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b) Suggested responses to the risks of material misstatements identified at Kalembure
Co Ltd during your audit planning.
• The work has been performed in accordance with the audit plan.
• The work performed and the results obtained have been adequately documented.
• Any significant matters have been resolved or are reflected in audit conclusions.
• The objectives of the audit procedures have been achieved.
The conclusions expressed are consistent with the results of the work performed and support
the audit opinion.
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SECTION B
QUESTION FOUR
Marking guide Maximum Marks
a) Explain at least 5 substantive audit procedures to be conducted over 5
acquisition of the loan.
b) i) Define what is provision and contingent liability (1 mark each) 2
ii) Clearly explain the audit procedures to be carried audit provisions 10
and contingent liabilities (2 marks each)
iii) Give other examples of accounting provisions and contingent liabilities 3
(0.5 marks each)
Total 20
Model answers
a) The following are substantive audit procedures to be conducted over ABC
Manufacturing Company ltd Company’s acquisition of the loan:
• Obtain/prepare schedule of loans outstanding at the period end date showing, for each
loan: name of lender, date of loan, maturity date, interest date, interest rate, balance at the end
of the period and security.
• Compare opening balances to previous year's papers to confirm that these have been
carried forward accurately.
• Compare balances to the general ledger and investigate any differences.
• Agree name of lender etc., to register of debenture holders or equivalent (if kept).
• Trace additions and repayments to entries in the cash book to confirm the accuracy of the
closing balance.
• Confirm repayments are in accordance with loan agreement to determine whether there
may be any unrecognized penalties.
• Examine cancelled cheques and memoranda of satisfaction for loans repaid to confirm
that there are no unrecognized liabilities.
• Verify that borrowing limits imposed either by the company's constitution or by other
agreements are not exceeded.
• Examine signed Board minutes relating to new borrowings/repayments to ensure that
transactions are authorized.
• Obtain direct confirmation from lenders of the amounts outstanding, accrued interest and
what security they hold.
• Verify interest charged for the period and the adequacy of accrued interest to confirm
that interest is not misstated.
• Review restrictive covenants and provisions relating to default:
– Review any correspondence relating to the loan.
– Review confirmation replies for non-compliance.
– If a default appears to exist, determine its effect, and schedule findings.
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• Review minutes and cash book to confirm that all loans have been recorded.
• Review draft financial statements to ensure that disclosures for non-current liabilities are
correct and in accordance with accounting standards. Any elements repayable within one year
should be classified as current liabilities.
ii) The following are the audit procedures to be carried audit provisions and contingent
liabilities for ABC Manufacturing Company ltd:
• Obtain details of all provisions which have been included in the financial statements and
all contingencies that have been disclosed.
• Obtain a detailed analysis of all provisions showing opening balances, movements and
closing balances.
• Determine for each material provision whether the company has a present obligation as
a result of past events by:
- Review of correspondence relating to the item
- Discussion with the directors. Have they created a valid expectation in other parties that
they will discharge the obligation?
• Determine for each material provision whether it is probable that a transfer of economic
benefits will be required to settle the obligation by:
– Confirming whether any payments have been made after the end of the reporting period
in respect of the item, or whether any events occurring up to the date of the auditor's report
provide evidence regarding the provision
– Review of correspondence with lawyers, banks, customers, insurance company and
suppliers both pre and post period end
– Sending a letter to the lawyer to obtain their views (where relevant)
– Discussing the position of similar past provisions with the directors. Were these
provisions eventually settled?
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– Considering the likelihood of reimbursement
• Recalculate all provisions made to confirm accuracy.
• Compare the amount provided with any payments after the period end and with any
amount paid in the past for similar items to obtain evidence of valuation.
• In the event that it is not possible to estimate the amount of the provision, confirm that
this contingent liability is disclosed in the financial statements.
• Consider the nature of the client's business to determine whether other provisions may be
required e.g. for warranties.
• Consider adequacy of disclosure of provisions, contingent assets and contingent
liabilities in accordance with IAS 37.
- Potential lawsuits (Local community and the client shown in the case study)
- product warranties
- pending investigation
- Etc.
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QUESTION FIVE
Marking guide Maximum Marks
a) Describe any three considerations that were made by your audit manager 3
Give examples of other areas where a work of expert can be used in audit 3
ii) Discuss the subsequent events identified at GCK Rwanda ltd and show 6
their effect on the Company’s financial statements (1 mark for each effect
with a maximum of 2 marks under each subsequent event)
c) Explain the content of the GCK Rwanda ltd management representation 6
(2 marks each)
Total 20
Model answers
a) The considerations that were made by your audit manager in determining the use
of expert on inventory valuation and examples of other areas where a work of expert
can be used in audit:
When determining the need to use an expert, your audit manager should have considered the
following:
• The engagement team’s knowledge and previous experience of the matter – just in case
you have experience such as GCK Rwanda ltd.
• The risk of material misstatement based on the nature, complexity and materiality of the
matter being considered (inventory).
• The quantity and quality of other audit evidence expected to be obtained from the work
of expert.
• Knowledge of the expert’s qualifications, membership of professional body or industry
association or licence to practice.
• Your audit firm’s quality control policies and procedures provisions – particularly on use
of work of expert.
Examples of other areas where a work of expert can be used in audit are
• Adjusting events are those that provide evidence of conditions that existed at the balance
sheet/ year end.
• Non - adjusting events are those which are indicative of conditions that arose after the
balance sheet date/ year end.
ii) The subsequent events identified at GCK Rwanda ltd and their effect on the
Company’s financial statements for the year ended 31 December 2021:
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c) Written representations from GCK Rwanda ltd management should have the
following content as required by ISA 240.
• They acknowledge their responsibility for the design, implementation and maintenance
of internal control to prevent and detect fraud.
• They have disclosed to the auditor management's assessment of the risk of fraud in the
financial statements.
• They have disclosed to the auditor their knowledge of fraud/suspected fraud involving
management, employees with significant roles in internal control, and others where fraud
could have a material effect on the financial statements.
• They have disclosed to the auditor their knowledge of any allegations of fraud/suspected
fraud communicated by employees, former employees, analysts, regulators or others.
• Address the going concern risks by showing that they will support GCK Rwanda ltd for
its operations in Rwanda.
QUESTION SIX
Marking guide Maximum Marks
Model answers
a) The mission of the Office of Auditor General as per the constitution and law no.
79/2013 of 11/09/2013.
The Office shall have the following mission:
b) As a CPA student, identify the main audit issues that are generally reported by the
Auditor General and discuss how concerned public institutions can address them.
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Audit issues Recommendations to address them.
Abandoned works not • Ensure proper planning of projects
yet resumed, cases of• Ensure proper follow up of works from inception to
idle assets, stalled
completion.
• Ensure that all contract provisions are adhered to, including
projects, and failure to
seize or recover advance
those relating to delays.
payment • Ensure timely payment of contractors since some delays are
and
performance guarantees
caused by the government delay in payment.
Poor compliance with • More qualified accountants (CPA/CAT) should be hired by
financial management the governments to fix these loopholes in financial
procedures. management.
• Ensure compliance with financial management procedures.
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