Q4

Part A

You are a newly appointed audit training manager and your first job assignment is to brief the new intake of audit trainees on the concepts of audit reports. Besides, you also need to lead the discussion on this topic based on some fictitious cases with the audit trainees.

Required:

(a) Briefly describe the differences between the responsibilities of auditors versus the responsibilities of directors in respect to financial statements. (4 marks)

(b) Suppose the auditor found an error on the financial statements. How does the materiality of the error affect the auditors choice of the types of audit report? (4 marks)

(c) Based on the following independent circumstances, comment on the appropriate types of audit report to be issued. (12 marks)

(i) On 2 January 2015, the Retail Auto Parts Company received a notice from its primary supplier that effective immediately, all wholesale prices would be increased by 10%. On the basis of the notice, Retail Auto Parts Company revalued its 31 December 2014 inventory to reflect the higher costs. The inventory is considered a major item of total assets; however, the effect of the revaluation was material to current assets and net income but not to total assets. The increase in valuation is adequately disclosed in the notes to the financial statements.

(ii) During the course of his audit of the financial statements of a company for the purpose of expressing an opinion on the statements, an auditor is refused permission to inspect the minute books - The company secretary instead offers to give the auditor a certified copy of all resolutions and actions involving accounting matters but the auditor is not allowed to look at all the minutes.

(iii) The client holds a significant investment in a foreign country. Due to recent political instability sparked off by a series of terrorist acts by militants, the foreign countrys communication to the outside world was completely cut-off. The auditor is unable to obtain sufficient competent evidence regarding the clients foreign investment.

Part B

The following questions deal with the important issue of independence of auditors:

Required:

(a) Why is independence so essential for auditors? (4 marks)

(b) Distinguish between independence in fact and independence in appearance. Describe two examples where an auditor may be independent in fact but not in appearance. (8 marks)

(c) Compare the importance of independence of auditors with that of other professionals, such as lawyers. (2 marks)

(d) During the year, you conducted a feasibility study to advise the management of Low-tech Ltd. the best way the company can implement a computerized accounting system and which computer system and configuration would best meet the needs of the company. The company in turn accepted and implemented your recommendations. Discuss the effect of accepting this management services engagement upon your independence in expressing an audit opinion on the financial statements of Low-tech Ltd. for this fiscal year. (6 marks)

Part C

(a) An auditor is required to obtain sufficient understanding of each component Of a companys internal control system in order to plan the audit of the companys accounts and to assess control risk for the assertions embodied in the account balances and transactions. (10 marks)

(i) What are the elements or components of a companys internal control system? Briefly describe each or give examples.

(ii) What are the auditors documentation requirements concerning a companys internal control system and the assessed level of control risk? Explain the choices of methods of documentation.

(b) An internal control feature is considered weak if the feature permits error or fraud to occur. For each of the following independent weak internal control situations, indicate the error or fraud that could occur: (10 marks)

(i) No credit approval is undertaken before sales are made to the customers.

(ii) Cancellation stamps/chops are not placed on purchase invoices.

(iii) Employees are paid in cash.

(iv) Extensions on sales invoices are not checked by another person.

(v) The cashier reconciles the bank statement.