Question 1

According to International Standard on Auditing (ISA) 315: Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and Its Environment, a proper understanding of internal controls is essential to auditors so that they understand the business and are able to effectively plan and execute tests of control and an appropriate level of substantive procedures. Drizzle Ltd is a small manufacturing firm whose internal control systems for financial reporting are ineffective. There are separate departments (finance, administration, procurement and human resource) but run by the same staff. For example, procurement at all levels is carried out by the administrative officer and suppliers are paid cash by the same person. You are the audit associate of Drizzle Ltd and it's evident to you that there are limitations in the effectiveness of the internal controls owing to the small number of employees.

Required: (a) Define the term 'internal control system' (b) Explain the components of an internal control system. (c) Explain to the procurement department of Drizzle Ltd: (i) what their internal control objectives should be. (ii) the internal control procedures that should be in place to achieve the internal control objectives.

Question 2 (a) Define the term 'auditor's liability'. (2 marks) (b) Explain circumstances under which the auditor can be held liable under the Companies Act. (c) Identify the steps an auditor can take to reduce their liability. (d) Identify any four accounting requirements under the Companies Act.

Question 3 International Standard on Auditing (ISA) 610 (Revised): Using the Work of Internal Auditors, states the objectives of the external auditor as to: 1. determine whether the work of the internal audit function can be used, and if so, in which areas and to what extent; and having made that determination: 2. if using the work of the internal audit function, to determine whether that work is adequate for purposes of the audit; and 3. if using internal auditors to provide direct assistance, to approximately direct, supervise and review their work.

Required: (a) Define the term 'outsourcing'. (1 mark) (b) A number of organisations are opting to outsource the internal audit function. Required: Explain the: (i) advantages; and (5 marks) (ii) shortcomings of outsourcing the internal audit function. (4 marks) (c) Explain the factors external auditors should consider before relying on the work of internal auditors. Question 4 International Standard on Auditing (ISA) 500: Audit Evidence, states that the objective of the auditor is to design and perform audit procedures in such a way as to enable the auditor to obtain sufficient appropriate audit evidence to be able to draw reasonable conclusions on which to base the auditor's opinion.

Required: (a) Explain what is meant by 'sufficient appropriate audit evidence'. (2 marks) (b) Explain the factors that determine the reliability of audit evidence. (8 marks) (c) Discuss any five methods of obtaining audit evidence.

Question 5 International Standard on Auditing (ISA) 200: Overall Objectives of the Independent Auditor and the Conduct of an Audit In Accordance With International Standards on Auditing, states that 'the auditor shall obtain sufficient appropriate evidence to reduce audit risk to an acceptable low level'. Auditors do this by way of carrying out risk assessment procedures and then further audit procedures to respond to the risk assessment.

Required: (a) Define the term 'audit risk'. (2 marks) (b) Explain why an auditor should gain an understanding of the entity and its environment. (6 marks) (c) Explain any six aspects of the business the auditor must obtain an understanding of in order to identify the relevant risks.

Question 6 You are an auditor with Omoro & Co. The audit manager has assigned you the task of drafting an audit plan for the audit of Akimbo Transporters' Ltd. One of the audit trainees is supposed to assist you in the drafting of the audit plan but he is not conversant with this area of auditing.

Required: Explain to the audit trainee the: (a) difference between an audit strategy and an audit plan. (b) need for audit planning. (c) contents of an overall audit strategy and audit plan.