ICPAU PAPER 15

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AUDIT AND ASSURANCE SERVICES - PAPER 15

ANSWERS NOVEMBER 2013

Answer 1 Dokolo Shoe Leathers Ltd

(a) Assessing the key risks in the general and application controls operated by the computer department of DLTIL.

The main weaknesses in general controls and application controls in the data processing department are described below;

General controls (i) Organizational controls.

There is a lack of segregation of duties between systems analysts, Programmers and computer operators.

There is the possibility that Ms. Alele and Mr Ssewanonda could both corrupt data since both of them are skilled computer programmers and operators. They could do this by creating fictitious purchase ledger balances which might then be paid by the company. The purchase ledger record could then be eliminated from the ledger.

There is evidence that the programmers and operators are rotated or go for annual leave. Duties should be rotated and the duties of programming and operating should be segregated.

(ii) Developmental controls. Angola modifies the computer software without consultation with user

departments and without authority for the modifications made. Results of tests on modified programs are not reviewed by someone

independent of Angola. These weaknesses raise the possibility that Angola could corrupt programs without the knowledge of anyone else in the organization

With a computerized debtors system, he could program the computer in such a way that certain debtor account details are not printed out-computerised debtors system could be corrupted by the programmer.

There is a risk of fictitious invoicing through shell companies, i.e. via a fictitious company he could order goods for himself but avoid paying for them by preventing the relevant balances being printed out.

There is evidently been a lack of consultation with user departments to ensure that their needs are met.

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(iii) Data security. There is a risk of unauthorised and unrestricted access to the computer

room. The computer should be situated in a separate computer room in order to ensure inaccessibility by unauthorised person to computer installation.

Lack of procedure restricting access to the computer installation.

Access to data and programs should be controlled with different users having the necessary level of access according to their needs for example for particular data, a user might have no access, read only access, or read and amend access according to their legitimate requirements.

The securities of copies of disks made in the process of dumping data is limited if both disks are stored in the same location. Both disks could be destroyed in a fire.

Copies of disks could be both destroyed and stolen without noticing. Besides, there is a risk of the CDs being corrupted.

Copies of disks should be kept in fireproof cabinets. It will be a good idea to keep a second backup disk as well as using the grandfather- father-son method, so that if the copy disk becomes corrupted, another disk is available.

Application controls Input controls.

Lack of validation check on data input before files are updated.

There should be validation checks of data input before disk files are updated. Although exception reports are produced, they are produced too late to prevent corruption data.

There is no evidence that editing is done on master files.

Edit checks should take place to ensure that the master files, customer number stock item codes and ranges of values are tested by the validation program. Exceptions would be printed out and input again as appropriate.

Lack of evidence on control total when processing record accounts, value total and harsh total. Control totals should be calculated prior to processing record counts, value total and harsh total may be taken. Such controls serve to check that all valid transactions are input.

Lack of continuity as control totals are not generated when disks are dumped.

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Processing controls should include run to run controls. Control totals could be generated when the contents of a disk are dumped, in order to ensure continuity of processing. Father and son records should be compared and the differences checked. Output controls.

There is no evidence that output control is agreed with those recorded by the user department.

Output control totals should be agreed with those recorded by user department. For these to be meaningful, proper input controls are necessary.

(b) Discussing the improvements that could be made to the purchases and creditors system of DLTIL.

The weaknesses in the purchases are creditors system and the improvements which could be made to the system as described below.

Mr Okello has an excess amount of control over the activities of his department. He has authority to place orders.

He receives goods received notes and authorizes purchases invoices. He also checks output of the purchase ledger and exception reports, and

decides which creditors should be paid. Okellos access control over his department activities should be limited The system could be improved by the introduction of a greater degree of

segregation of duties. The routine job of agreeing purchases invoices to GRNs and orders could be carried out by another member of staff in the department.

Authorisation of payments to suppliers could then be carried by another responsible official in the accounts department.

The purchase ledger printout and exception report can also be sent to the accounts department for processing of any amendments.

The current system whereby Angola has authority to set up new purchase ledger accounts is unsatisfactory and increases the possibility that Angola could create fictitious accounts and defalcate payments made in respect of such an account.

Angola should not be solely responsible for the creation of rejected account and re-inputting data

Any request for new purchase; made by Okello should be authorised at least by a director

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The current system of telephoning orders being confirmed by fax is not wholly satisfactory, since no sequential written records of orders is available for setting disputes with suppliers and checking orders with invoice.

Sequential numbered records of orders should be introduced for settling any disputes that might arise with suppliers/ checking orders with invoice.

Orders should be recorded on pre-numbered Local purchase order sets, with copies to the suppliers should be distributed to the supplier, the warehouse and the accounts department.

Rejected payment should be referred to accounts other than to okello.

The procedure of updating the stock file from a weekly listing of orders is unsatisfactory and will clearly lead to inaccuracies in the stock file. The stock records will be largely meaningless and for audit purposes the records of a full physical stock count will have to be relied upon exclusively.

The procedure of updating the stock file from a weekly listing of orders should be done physically; physical stock count should be carried out

Accurate information about stock levels is an important form of management information. GRNs should be authorized by a responsible official, probably the stock officer and not Okello.

Improvements to the stock recording system should be implemented before the final audit. This is because stock has a direct effect on the profit, accurate valuation should be carried out.

There appears to be no procedure to ensure that goods received are as ordered and are of acceptable quality. Currently goods received are not checked until the accounts department receives the invoice and sends to Okello. Okello then checks the invoice to the order and to the GRN. By this time, it is likely to be too late to rectify any problem.

Procedure to ensure that goods received are as ordered and are of acceptable quality.

A copy of the pre-numbered order should be sent to the stores officer. The stores officer should inspect goods to LPO on receipt and should

agree goods received to the orders in respect of quality, type of goods and quantity.

Okello should not alter invoices by hand. Any alteration to invoices should be checked/ authorised by independent/ responsible officer

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Invoices should be numbered sequentially on receipt before processing by the accounts department. That department should contact suppliers to request credit notes where necessary.

Under the current system, the credit notes received from suppliers are received by Okello. Besides, at present, the accounts department maintains no records for the goods returned for which credit notes are expected.

Instead, credit notes together with copies of goods returned notes (GRN) should be received in the accounts department for control purposes before being sent to Okello for approval.

The listing of payments sent to the cashier and reviewed by the cheque signatories is not sufficient to check whether payments made are valid.

Directors should review authorised invoices, orders and GRNs when signing suppliers cheques.

Rejections of cheque payments should be referred back to accounts department.

Control totals should be recorded by the accounts department of records input. The value of invoiced amounts input together with the harsh total, when input is sent to the data processing department.

The purchase ledger balances should be reconciled with supplier statements periodically. This procedure will highlight errors and many irregularities. Control account will assist in ensuring that all input is processed completely and accurately.

The accounts department should consider maintaining a manual control account as well.

It is unsatisfactory that purchase ledger is only printed once a month, and as a result audit trail will be lost. The auditor will lack information on many settled transactions on items purchased and paid for within the month.

The monthly purchase ledger print out should detail all transactions occurring in the month, rather than just consisting of an analysis of the balance outstanding for creditors.

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(c) (i) Drafting a memo to the engagement partner outlining the key points to be discussed at the planning meeting.

Key points for discussion at the planning meeting

To: The Engagement Partner From: Audit Manager Date: 30 November 2013 Subject: Engagement Planning Meeting

The purpose of the meeting is to brainstorm the susceptibility of the entitys financial statements to material misstatements due to fraud and other factors

(a) Emphasis of the importance of professional skepticism and the need to incorporate unpredictability into the audit procedures.

(b) Exchange of ideas about how and where the entitys financial statements may be susceptible to material misstatement.

(c) Consideration of industry and economic changes. (d) Consideration of internal and external factors affecting the entity (e) Discuss prior period experience with clients, other client in similar

industry the results of acceptance and continuance procedures. (f) Consider risk based approach

Consideration of factors that may create and incentive or exert pressure on management.

Staffing - Unusual or unexplained changes in behaviour or lifestyles of employees

Management involvement in overseeing employees. Circumstances that could be indicative of fraudulent financial

reporting Opportunities to perpetrate fraud Attitudes in the organisation Risks of management override of controls Any allegations of fraud in the organisation Review of PAF/ points forward if its a continuing client, Letter of professional clearance if its a new engagement, Review of a engagement letter/ drafting the Engagement letter,

(g) Brainstorm possible responses to the fraud risks.

High risk areas will be documented and followed up during the audit.

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(ii) Using non-statistical sampling in selecting the audit sample: This means selecting a sample of appropriate size on the basis of the auditors judgment of what is desirable.

Advantages of Non- Statistical sampling are; The approach has been used for many years. It is well understood and

refined by experience The auditors can bring their judgement and expertise into play No special knowledge of statistics is required No time is spent on struggling with mathematics.

There are however serious disadvantages which are;

It is unrealistic Often sample sizes are too large, which can be wasteful, or too small, which

renders the test invalid. There is no consistency of results- two different auditors will produce two

different samples. No quantitative results are obtained Personal bias in the selection of the sample is unavoidable There is no logic to the selection of the sample or its size The sample selection can be slanted to the auditors needs, e.g. selection

of items near the year end to help with cut off evaluation, may invalidate the test if it is to be used to validate transactions for the entire period.

(d) How Auditors and accountants can minimize their potential liabilities for

professional negligence.

Auditors and accountants can minimize their potential liabilities for professional negligence in the following ways:

By not being negligent i.e. having a effective quality control system Ensuring that the audit procedures are in accordance with IAS 315:Identifying

and assessing the risks of material misstatements through understanding the entity and its environment are carried out properly

Carrying out audit work in accordance with the international standards on auditing

Agreeing the duties and responsibilities in the engagement letter. o This should specify tasks to be undertaken and exclude specifically those

that are not to be undertaken. It should also define the responsibilities to be undertaken by the client and specify any limitations on the work to be carried out.

o The engagement letter should state the purpose for which the report has been prepared and that the client may not use it for any purpose.

o By identifying the authorized recipient of reports in the engagement letter and in the auditors report.

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o By limiting or excluding liability by a term in the engagement letter or to third parties, by a disclaimer in the auditors report. This requires any auditors report to state the purpose of the report and that it may not be relied on for any other purpose (the so called Bannerman wording).

Defining in their audit report the precise work undertaken, the work not undertaken and any limitations to the work. This is so that any third party will have knowledge of the responsibility accepted by the auditor for the work done.

By operating as a limited liability partnership By making an agreement with the directors and approved by the shareholders

as to the extent of any damages which may be claimed- a liability limitation agreement.

Having professional indemnity insurance just in case they are sued as required by ICPAU.

Answer 2 Mpoma Thermal Power Ltd (MTPL)

(a) Describing the audit evidence one would expect to find in undertaking the review of the audit working papers and financial statements of MTPL

(i) Intangible Assets.

Matters

However true it may be that money is spent in the hope of future benefits, staffs training costs do not usually meet the definition of an asset as there is insufficient control over them (IAS 38 Intangible Assets) they cannot therefore be intangible assets.

Control might be claimed if Mpoma had legal rights over the staff trained, to use and obtain future benefits expected from them. However, whilst this might apply to key individuals it would not apply to its entire technical staff.

Whether any of the Shs 120 million is a cost which can be deferred, for example:

Pre-payments for any part of the training program both run until after the year end.

Training manuals (bound volumes or software programs) which can be used over a future period of time.

The audit evidence

A breakdown of 120 million analysed between external and internal training costs

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Test checking the largest invoices for training

Physical inspection and review of training report or training records, certificates, or course content.

The standard terms of the contracts with technical staff confirming that Mpoma Thermal does not have sufficient control over them

Details of leavers contrary to argument to the chief executive officers claims that future benefits are not protected as Mpoma Thermal cannot prevent technical staff from taking up alternative employment elsewhere.

Details of facilitators/ consultants who delivered the training.

Review of training requirements in line with the companys strategic plan,

Selection procedures for facilitators/ consultants.

(ii) Provision for decommissioning

Matters

Mpoma Thermal has a legal obligation to incur Shs 920 million in dismantling/ decommissioning costs should be recognized, in full, as a liability (IAS 37 Provisions, Contingent Liabilities and Contingent Assets) and as part of the cost of the laboratory(IAS 16 Property, Plant and Equipment).

The audit evidence The terms of Mpoma municipal council grant as documented in the

permanent audit file Physical inspection of the site to confirm the contraction of the

laboratory was done during the year and the obligation, for settling in 2041, thereby created.

Breakdown and calculation of the Shs 920 million by PTPLs management or an independent consultant.

Assumptions made in estimating the future cost (e.g. concerning degree of contamination), whether they are reasonable, appropriate and are applied consistently.

An appropriate discount rate to calculate the adjustment that management should make (or quantify the impact of disagreement if the financial statement are not adjusted).

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Methods used in making the accounting estimate & reasonableness of the estimate

Review disclosures related to the accounting estimate to determine whether they comply with IAS 37.

(b) The issues that the auditor of MTPL would consider in establishing the liability of the figure taken as work in progress by management, before one can rely on it include;

Examination of contracts to ensure that salient features such as time scales and penalty clauses are known.

Enquiry into the costing system from which work in progress is ascertained. Review the reliability of the costing system. In particular a costing system

integrated with the financial accounting system will prima facie be more reliable because of the discipline of double entry and the inherent checks imposed by external data such as creditors statements.

Enquiry into statistical data concerning input of materials and output products and expectations e.g. for given tonnages of, materials purchased there should be some identifiable outcome in the contract. Actual progress can be matched with theoretical models.

Enquiry into the system of inspection and reporting to enable due allowance to be made for scrapping and rectification work.

Enquiry into the basis on which overheads are included in costs. This should be based on IAS 2.

Enquiry into the basis on which any element of profit is dealt with. Profit should be eliminated from work in progress. The calculation of the amount of profit to be taken should be treated with extreme caution.

Any losses identified on contracts in progress must be recognized immediately in the valuation. This is to reduce the valuation of work in progress to its estimated realizable value. Auditors have to review not only the costs already included in the calculation of work in progress but also to complete the particular contract. This requires them to form a judgement on the assumptions used by management to calculate such costs.

Auditors should where possible inspect the work in progress in order to familiarize and to provide basic evidence that the items exist.

Need for written representation from management. Documentation of indicators of potential management bias identified during the

audit. Evidence of technical supervision Provision on spoilage during manufacturing, Confirmation of materials used to standard specification, Sample job card details and composition to product/ WIP value, Estimate of staff time and costs.

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Answer 3 Kayanja Group Ltd

(a)

(i) Why intra-group balances should agree and the consequences of not agreeing.

Intra group balances should agree, in the preparation of consolidated accounts, If not cancel them out. If they do not cancel out then the group accounts will be displaying an item which has no value outside of the group and profits may be correspondingly under or overstated.

(ii) The audit work I would perform to check that intra-group balances agree is as follows.

Obtain and review a copy of the holding companys instructions to all group members relating to the procedures for reconciliation and agreement of year end intra-group balances. Particular attention should be paid to the treatment in transit items to ensure that there is a proper cut off.

Obtain a schedule of intra- group balances from all group companies and check the details therein to the summary prepared by the parent company. The details on these schedules should also be independently confirmed in writing by the other auditors involved.

The details on the schedules should also be agreed to the details in the financial statements of the individual group companies which are submitted to the parent company for consolidation purposes.

Nil balances should be confirmed by both the group companies concerned and their respective auditors.

(iii) The audit work I would perform to verify that intra-group profit in inventory has been correctly accounted for in group accounts.

Where one company in group supplies goods to another company at cost plus a percentage, and such goods remain in inventory at the year end, the group inventory will contain an element of unrealised profit. In the preparation of the group accounts, best accounting practice requires that a provision should be made for this unrealised profit.

In order to verify that intra-group profit in inventory has been correctly accounted for in the group accounts, the audit work required would be as follows.

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Confirm the groups procedure for identification of such inventory and their notification to the parent company that will be responsible for making the required provision.

Obtain and review schedules of intra- group inventory from group companies and confirm that the same categories of inventory have been included as in previous years.

Select a sample of invoices for goods purchased from group companies and check to see that where necessary, these have been included in yearend intra- group inventory.

Obtain confirmation from other auditors that they have satisfactorily completed a similar exercise.

check that the calculation of the provision for unrealised profit has been arrived at on a consistent basis with that used in earlier years, after making due allowance for any known changes in the profit margins operated by various group companies.

Check the schedules of intra-group inventory against the various inventory sheets and consider whether the level of intra-group inventory appears to be reasonable in comparison with previous years, ensuring that satisfactory explanations are obtained for any material differences.

(b)

(i) Stating why the group auditors of Kayanja Group Ltd would wish to review the work of the auditors of the subsidiaries of the group

The main consideration which concerns the audit of all group accounts is that the holding companys auditors are responsible to the members of that company for the audit opinion on the whole of the group accounts.

To ensure notes to the financial statements state that the financial statements of certain subsidiaries have been audited by other firms

To ensure that the Audited financial statements show a true and fair view. The auditors of a holding company have to report to its members on the truth and fairness of the view given by the financial statements for the company and its subsidiaries dealt with in the group accounts.

Group auditors have to confirm that information and explanations reasonably required from the subsidiary companies and their auditors have been obtained. The group engagement team should have powers to obtain such information and explanations as they are reasonably require from the subsidiary companies and their auditors, or from the parent company in the case of overseas

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subsidiaries, in order that they can discharge their responsibilities as holding company auditors.

Group auditors have to confirm that attention was paid to the requirements of International Auditing Standard, ISA 600 Special Considerations - Audit of Group Financial Statements (including the work of component auditors) .This standard clarifies how the group auditors can carry out a review of the audit of components including subsidiaries in order to satisfy themselves that, with the inclusion of figures not audited by themselves, the group accounts give a true and fair view.

To ensure that the scope, standard and independence of the work carried out by the auditors of subsidiary companies (the component auditors) are the most important matters which need to be examined by the group auditors before relying on financial statements audited by them.

The group auditors need to be satisfied that sufficient appropriate audit evidence has been obtained and that all material areas of the financial statements of subsidiaries have been audited satisfactorily and in a manner compatible with that of the group auditors themselves.

(b) (ii) Describing the procedures the group auditors would carry out in performing a review of the work of the auditors of the subsidiaries. Audit procedures the group auditor would carry out:

Send a questionnaire to all other auditors requesting detailed information on other work including, an explanation on the general approach, details of accounting policies, the component auditors opinion, limitation placed on the scope of auditors work and any qualifications and reasons for them made or likely to be made on their reports.

Carry out a detailed review of the component auditors working papers on each subsidiary whose results materially affect the view given by the group financial statements

Establish whether an up-to-date permanent file exists with details of the nature of the subsidiarys business, its staff organization, its accounting records, previous years financial statements and copies of important legal documents

Establish that a system of examination has been properly completed, documented and reports to management after discussion

Establish that tests of controls and substantive procedures have been properly and appropriately carried out, and audit programmes properly completed and signed.

Establish that all working papers are comprehensive and explicit

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Establish that the overall review of the financial statements has been adequately carried out, as adequate use of analytical procedures has been undertaken throughout the audit.

That the financial statements agree in all respects with the accounting records and concur with all relevant legal requirements and accounting standards

Confirm that minutes of the board and general meetings have been scrutinized and important matters noted.

The audit work has been carried out in accordance with approved auditing standards.

The financial statements agree in all respects with the accounting records and comply with all relevant legal and professional requirements.

The audit work has been properly reviewed within the firm of auditors and any laid down quality control procedures adhered to.

Any points requiring discussions with the holding companys financial statements have been done/ documented.

Adequate audit evidence has been obtained to form a basis for the audit opinion on both the subsidiaries financial statements and those of the group.

If the engagement partner is not satisfied as a result of the above review, he should arrange for further audit work to be carried out either by the component auditors on their behalf, or join with them. The component auditors are fully responsible for their own work, any additional tests are those required for the purpose of the audit of the group financial statements.

Answer 4 Clarity Project

(a) (i) Describing the risks that the paper referred to in the scenario points to;

Problems of alignment with the underlying assumptions implicit in the standards- in some countries values and norms may not be fully aligned with those on which the standards are based, for example there may be an exception that certain audit procedures are carried out regardless of assessed risk because that is how we do it here.

Quality of economic governance. Basically the legal and political environment and its attitude to matters such as property rights and corporate governance. In some countries rules based systems may make it appear that auditing should be confined to simple box ticking for compliance and the role does not attract individuals with the right qualities. Political consideration and the willingness of countries to accede to demands to limit corporate disclosure can discourage questioning and enquiry, as can corrupt regimes and those dominated by one party politics.

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The nature of business relationships: In some countries, business relationships may be complex and built on trust. Employment of family members and relationships with related parties may be beneficial for trading purposes but may present auditors with huge problems in complying with the standards.

Strength of the legal system. In particular, property ownership rights of the right of the government to seize property may be an issue, as well as the liability of the legal system to act as a regulator for audit purposes.

Quality of record keeping. Not all countries have the quality of accounting and audit staff in depth or the ability to distinguish substance over form in the recording of transactions.

Extent of management authority. There are cultural differences between countries in managements ability to communicate at all levels in an organization and also in the ability of an auditor to challenge management decisions or actions. It may be difficult for members of an audit team to question senior management as any challenge to management may be interpreted as criticism of their ability to do their job rather than as a process of an audit review.

Expectations of secrecy. Some cultures have an expectation that financial and other matters should be kept secret and there is unwillingness to adopt measures which might lead to greater transparency of reporting.

Professionalisation of auditing. Auditing is an art not a science and in some countries with poor education systems, lack of opportunity to develop financial expertise or limitations on cross boarder experience, it may be difficult to recruit a sufficient number of auditors to the profession, particularly if there is a poor perception of what auditors actually do.

However these risks should not detract from the intentions behind ISA standardisation as global businesses need global standards and this is a big step in that direction.

(ii) Why attitude of Professional scepticism is important in an audit of financial statements.

Professional scepticism is an attitude that includes a questioning mind, being alert to conditions which may indicate possible misstatement due to error or fraud and a critical assessment of audit evidence.

Professional scepticism is necessary to reduce the risks of:

(a) Overlooking unusual circumstance (b) Over generalising when drawing conclusion from audit observation

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(c) Using appropriate assumptions in determining the nature, timing and extent of audit procedures and evaluating results thereof.

(b) (i) Describing the matters I would consider and action I will take to ensure my firm remains independent as the external auditor of the financial statements while providing an internal audit service

The auditor should consider the following factors when assessing their independence.

The level of fee income from Nyamuranga Grain millers should not exceed say 15% of the practice total income. This figure would be so material and make independence of the firm impaired.

As external auditor, the firm will be reviewing the work of internal audit. If the same staff were acting as external and internal auditors, they would be judging their own work. This is an obvious threat to objectivity. This obvious threat to objectivity can be lessened by different staff carrying out the detailed work, and different partners and managers being in charge of providing both services.

If Nyamuranga Grain Millers is a listed company, the audit firms staff should not be involved in providing internal audit services.

If Nyamuranga Grain Millers is not listed, it must accept responsibility for its accounts and accounting records, and the practice must carry out sufficient audit work on the accounting records.

Similarly there is a threat to independence if the internal auditors become involved in the management of the company, because as external auditor the audit firm is reporting on the stewardship of management. However part of the internal audit service could be making recommendations about the design of systems and controls. The audit firm should thus ensure that the directors take responsibility for implementation of any recommendations and their decisions are clearly recorded in board minutes.

Internal audit staff may breach other independence guidelines that are applicable to them as employees for the firm carrying out the external audit. They should be reminded that they should not own shares in the client, accept a loan from the client and obtain goods or services on more favourable terms than offered to Nyamuranga Grain millers own staff.

If Nyamuranga Grain Millers does fail to pay fees, there may be greater danger of the amounts owing being akin to a loan because of their size and because they are amounts owed for continuing service rather than an annual audit.

The engagement letter should set out clearly the respective responsibilities of the audit firm and Nyamuranga Grain Millers. It should separately identify the work that the audit firm should carry out as external and internal auditors and

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how fees will be calculated for each service. It should make clear to whom the audit firms internal audit team will report.

The firm should consider as part of its annual review of independence whether it is still sufficiently independent to be able to continue to act as external auditors.

(ii) The advantages for Nyamuranga Grain Millers of having the external auditor providing internal audit services are as follows;

Independence of audit firms. Using audit firm would be less costly than establishing and maintaining an

internal audit function. The audit staff will be qualified or partly qualified accountants who are

subject to professional standards and guidelines Training costs will be saved as the audit firm not NGM will be responsible

for staff training. The audit firm may be able to provide a range or expertise which would not

be available to NGM without incurring considerable extra costs. The efficiency of external audit would be enhanced and hence its costs

lowered, because external auditors can be able to rely on the work performed by the internal auditors.

(c) Describing the benefits to the audit firm of using electronic audit systems.

The benefits are;

Previous years files are stored electronically, audit teams do not have to carry large amounts of paper with them.

You can create a backups so audit files are not lost You can link auditor files to accounts production software so that lead

schedules can be updated automatically. Data can be rolled forward into next year. Pre-set audit manuals and forms have to be completed properly and this

aids compliance. Files can be reviewed remotely if they are recorded on the firms network.

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Answer 5 Audit Committees

(a) (i) Describing the role of an audit committee in an organisation as a result of increasing fraud cases.

The role includes to;

monitor the integrity of the financial statements of the company and any formal announcements relating to the companys financial performance, reviewing significant reporting judgements contained in them;

review the companys internal financial controls and unless expressly addressed by a separate board risk committee composed of independent directors or by the board itself, the companys internal control and risk management systems.

monitor and review the effectiveness of the companys internal audit function.

make recommendations to the board for it to put the shareholders for their approval in general meeting, in relation to the appointment of the external auditor and to approve the remuneration and terms of engagement of external auditor.

review and monitor the external auditor independence and objectivity and the effectiveness of the audit process, taking into consideration relevant legal and regulatory and other company guidelines.

develop and implement policy on the engagement of the external auditor, supply non audit services, taking into account relevant ethical guidance regarding the provision of non-audit services by the external audit firm.

report to the board identifying any matters in respect of which it considers that action or improvement is needed and making recommendations as to the steps to be taken.

(ii) The advantages of having audit committee in an organisation:

Audit committee can; improve quality of management accounting as they are able to criticise

internal reporting which is not necessarily the responsibility of the external auditors.

facilitate communication between the directors, internal and external auditors and management.

help minimise any conflicts between management and the auditors facilitate the independence of the internal audit role if the internal

auditors report is made to the audit committee directly.

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(c) (i) Comments on suitability of the unqualified report.

Going concern is an underlying assumption of the conceptual framework. Hence it is assumed, unless an alternative basis of preparation is disclosed.

As Kitgum women cotton growers has liquidated certain assets and commenced a systematic winding down its operations, it appears that is no longer a going concern.

An adverse opinion should be expressed as required by ISA 570. All remaining assets and liabilities expected to be settled in the next 12 month

should be classified as current. However, the valuation of assets and liabilities may not be significantly affected

(especially if trade receivables and payables are stated at amounts expected to be settled in the normal course of business).

Financial statements should be prepared on an alternative authoritative basis An alternative (e.g. break-up) basis for the preparation and presentation of the

financial statements appears to be appropriate (as trading has ceased). The basis of preparation is not disclosed and in the absence of disclosure to the

contrary, users of KWCGs financial statements might assume that they have been prepared on a going concern basis.

In conclusion, KWCGs directors should be advised to disclose the basis in the notes to the financial statements.

(ii) Drafting an appropriate opinion paragraph for the auditors report on Kitgum Cotton Growers Group for the year ended 30 June 2013 Adverse Opinion:

As explained in note 1 and 2 to the financial statements, the ability of the entity to continue as a going concern is in doubt. In note 2 the directors have prepared the financial statements in accordance with the International Financial Reporting Standards which assume a going concern status.

In opinion, however, the going concern basis should not have been used. Had the going concern basis not been used, adjustments would be needed to the classification of recorded asset amounts, with these assets being written down to their recoverable amounts and classification of liabilities to reflect the fact that the company may be required to realise its assets and extinguish its liabilities other than in the normal course of business, additional assets may crystallise and the resulting amounts may differ materially from those stated in the financial statements.

In view of the significance of the matters referred to above, in our opinion the

financial statements do not reflect true and fair view of the financial position of the company as at 30 June 2013 and of its financial performance and its cashflows for the year then ended.

Documents

ICPAU PAPER 15