Auditing Exam

This document provides study material and solved assignments for an Auditing Exam. It covers topics such as subsequent events, contingencies, major areas of controversy relating to independence, ethical issues raised, sources of evidence, and more. The document also includes questions and answers related to the ownership of vehicles, disposals of vehicles, reasonableness of depreciation, and the existence of newly built bungalows. It is suitable for students studying auditing and related courses.

AUDITING EXAM

Table of Contents
Question 1........................................................................................................................................3
a)..................................................................................................................................................3
b)..................................................................................................................................................3
Question 2........................................................................................................................................4
a) The major areas of controversy relating to independence identified by the Profession..........4
b) Ethical issues raised.................................................................................................................4
Question 3........................................................................................................................................4
a) Sources of evidence.................................................................................................................4
b)..................................................................................................................................................5
c) FIVE sources of audit evidence...............................................................................................5
Question 4........................................................................................................................................5
a) Points for inclusion..................................................................................................................5
b) Recommendation for improvement.........................................................................................5
Question 5........................................................................................................................................6
a) The ownership of the vehicles.................................................................................................6
b) The disposals of the vehicles...................................................................................................6
c) The reasonableness of depreciation.........................................................................................6
d) The existence of the two newly built bungalows....................................................................6
Question 6........................................................................................................................................6
a) Five potential problems of using audit software at Cycling Friends Ltd................................6
b) Concept of auditing around the computer...............................................................................7

Question 1
a)
Subsequent event: A subsequent event is an event that occurs after a publication period, but
before budget reports for that period have been issued or made available. Depending on the
situation, such opportunities may need to appear in the summaries of the association's balance
sheet.
Contingencies: Ability occurs when there is a situation where the outcome is in doubt and should
be resolved at a later stage, possibly causing misfortune. The ability to represent basically sees
only those setbacks that are likely and from which it is possible to sensibly estimate the amount
of bad luck.
Implication for the audit process
Banks, evaluators and others are planning to use IFRS 9 and the ECL model. A unique
groundwork for these advances will enable accountants and researchers to overcome the
challenges posed by IFRS 9 and the ECL and consider smooth change.
In the event that the auditor disagrees with the basis for designing the minutes, or that there is
appropriate information that is similar to timing or conditions that may give rise to Feeling
skeptical about the great potential of the material to bring forward as an ongoing activity, the
auditor submits an amended auditor's report.
b)
1. A provision for loss of £15,000 will be made. In disclosure; the accurate value of machine
need to disclosed. Loss is acceptable to get relief in paying taxes, thus it will be considered for
provision.
2. A provision of £43,000 will be made. Like in the previous case, this will also be provisioned
for the losses report by auditors.
3. A provision for redundancy payments amounting £450,000 will be made and it will not
disclosed due to transaction done after September.

4. A provision of £120,000 will be recorded and disclosed in audit report.
Question 2
a) The major areas of controversy relating to independence identified by the
Profession
The independence of Profession can only be accepted only if the member’s don’t hold a position
of influencing other members or auditors. Auditor should be free from anything that can lead him
to take advantageous position.
In the auditing profession, there are five potential risks to negotiating an examiner's experience.
Before committing to an audit, it is important that all members of the audit body review the five
risks to independence. If an investigator is not exposed to a particular risk, the defendant must
form a defense to reduce the risk to an acceptable level or leave the audit commitment.
b) Ethical issues raised
1. Here, Sam Smith is already hold the position of audit manager and worked for the company
Carter Ltd. Hence, if he gets the position of Finance Director, then ethical issue in the form of
recording modified audit report in Carter Ltd. might be possible. In action, Sam Smith should not
allow to audit the report of Carter Ltd.
2. Here, Ethical issue can be raised if Sharon goes for auditing the report of J&J; as a result
Sharon should not allow auditing her husband’s company. In this case, the independence of
auditor is not followed and biasness due to influence of married couple make this situation
unethical and need immediate action.
3. There is difference of £1,000 from Billing amount and actual total fee income, which is ethical
issue in audit reporting.
4. Here, there is direct ethical issue, because an audit staff member holds the interest in Focus
Bank in the form of mortgage loan. Hence, any loss to the Bank could directly impact their loan
interest amount. As an action, staff members should not be allowed to audit Focus Bank.

5. In this situation, discounting received by Elis Wright is an ethical issue and for action auditing
of the company should be done.
Question 3
a) Sources of evidence
In all three situations (i – iii); two sources that an auditor would use are Bank loan paper and
Interest schedule or quoted papers. Bank loan paper will give evidence about total amount
sanctioned to applicant and total amount of interest payable by him in the form of EMI could use
as a evidence. Quoted papers is useful to reveal the data about quoted amount filled by bank at
specific interest rate.
b)
Sufficiency of audit evidence is the measure of the quantity of audit evidence. Appropriateness
of evidence is the quality of the evidence, i.e., its relevance and reliability to support the auditor's
opinion. Audit evidence includes information provided in books of accounts as well as
information from other sources.
c) FIVE sources of audit evidence
1. Confirmation letters: These letters are in the form of bills, cheques, payments and receipt
during transactions between suppliers and buyers.
2. Original source documents: Information shown in financial statement are just reflection and
cannot authorize because figure can be modified by accountants. Thus the original source is
important to verify any information.
3. Physical observations: In this source, auditors personally verify the existence of particular
assets as mentioned by company in Balance sheet.
4. Comparisons to external market data: Auditors verifies the value of assets by matching it with
external market value of particular assets.
5. Recalculations: The Balance sheet, Income statement and cash inflows provided by companies
are recalculated by auditor to verify if there’s any gap between actual calculations and data
provided by the firm.

Question 4
a) Points for inclusion
i. Insufficient background information related to past history of employment is the deficiencies
and it is recommended to cross check with previous companies references by employees by
manually asking them.
ii. Overstatement of revenue and profits are the deficiencies and it is recommended that Offices
should follow accounting policies to show universal treatment of various transactions.
iii. Not performing supplier statement is the main deficiency and Nera is recommended to
perform supplier statement reconciliations to match with Purchase account.
b) Recommendation for improvement
 Defining and agreeing the program and project team roles.
 Agreeing on the core program and extended project team member responsibilities.
 Documenting the roles and responsibilities to ensure that all team members understand
their role and what is expected of them to ensure program success.
 Creating a set of operating rules to ensure all meetings are well managed.
Question 5
a) The ownership of the vehicles
Procedure:
1. Title problem check with Audit vehicle history report
2. Odometer checking of vehicle to check mileage
3. Car ownership check; who were the past owners.
4. Vehicle accident check
5. Active theft check
6. Aibag deployment check

b) The disposals of the vehicles
Checking complete information about the vehicle; also checking whether its useful life ends or
not.
c) The reasonableness of depreciation
1. Review Depreciation rate
2. Recalculate the depreciation expenses
d) The existence of the two newly built bungalows
Here, the enquiry and confirmation directly from third party procedure will be applied.
Question 6
a) Five potential problems of using audit software at Cycling Friends Ltd.
1. Theft of data: By using high secured software’s and personal servers can solve this problem.
2. Controlling access to unauthorized person: By adopting personalized security keys to
authorized person can solve this problem.
3. Manipulation of programs: By adopting standardized and fixed accounting structures which
requires owners authorization to modify it; can solve this problem.
4. Security for Backup: Building own servers for backup files can solve such problem.
5. Stealing Software by convict: Using cloud computing can safeguard software from stealing.
b) Concept of auditing around the computer
Auditing around the PC is one of the few strategies that inspectors can use to assess a customer's
PC controls. It includes picking source reports aimlessly and confirming the comparing yields
with the information sources. The customer's mechanized data framework measures the 'test
exchange'.
Reason behind increasing audit risk for auditor
a) The genuine PC records and projects are not tried hence examiner has no immediate proof that
the projects are working advertisement anticipated.

b) Where blunders are found in accommodating contributions to yields it could be troublesome
or even difficult to decide why those mistakes happened.