Possible Questions Your Answer May Include/Consider

CHAPTER 1
1. What is the purpose of an external audit?  Involves examination of
financial statements
 In order to express a
statutory opinion
 On the truthfulness and
Fairness
 Of the view they depict
about the financial
position and
performance of an entity
 So as to increase the
confidence of the readers
of the financial
statements.
 This is because audited
financial statements are
deemed more credible
and thus reliable.
2. What is meant by true and fair presentation? It is the requirement that
information presented by the
financial statements be true, that
is;
 Factual
 Conforming to reality
 Conforming to the laws
and relevant rules and
standards
AND fair, that is;
 Free from bias and
discrimination
 Prudent
 Reflecting the substance
of the transactions over
the legal form
 Based on reasonable
estimates
3. What is meant by reasonable assurance? It is the highest practical level of
assurance an auditor can offer in
which he attests that, to the best
of his knowledge and on the basis
of the evidence collected, the
financial position and
performance of the audit client
as professed/claimed in the
financial statements is true and
fair. In effect, he acknowledges
that, due to inherent limitations
of external auditing and financial
reporting, some misstatements
may have remained undetected in
the financial statements though

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 however are likely to be
immaterial.
4. Why do auditors provide only reasonable and not Generally because of the inherent
absolute assurance? limitations related to the process
of financial reporting and that of
auditing. More specifically,
because:
 Audit and financial
reporting involve
judgment, which is ever
always prone to error
 Auditors do not verify all
transactions and balances
but rather test often on a
sample basis
 Audit evidence, on which
the auditor basis his
opinion, is persuasive
rather than conclusive
 Possible existence of high
level fraud adequately
calculated such that it may
not be easily detected by
audit procedures
5. Explain and distinguish between fraud and error. Fraud is an intentional act in
which the perpetrator uses
deception to gain unjustly,
either by siphoning business
assets or intentionally
misrepresenting financial
statements while error as
unintentional contravention of a
rule, principle, and concept or
even a miscalculation that non-
the-less results in a
misstatement in the financial
statements.
6. Outline the responsibilities of external auditors in  First and foremost, it is
relation to fraud as per ISA 240. worth mentioning that
the responsibilities of
fraud prevention and
detection are that of those
charged with governance
and not that of the
external auditor.
 However, External
auditors are required by
ISA 240 to obtain
reasonable assurance
that financial
statements are free from
material misstatements
whether caused by fraud
and/or error. To this end,

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 auditors have to:
 Maintain an attitude of
professional scepticism
throughout the audit
 Members of the audit
engagement team are
required to discuss the
susceptibility of the
entity’s financial
statements to material
misstatement due to
fraud throughout the
audit assignment process
 ISA 240 (Redrafted)
requires auditors to
perform risk assessment
procedures to obtain
information for use in
identifying the risks of
material misstatement
due to fraud
 To perform procedures
which offer a reasonable
expectation of
uncovering/detecting
any existing fraud
 To report fraud to
management if it involves
lower level staff, to
shareholders and possibly
even external authorities
if the fraud perpetrated
involves high level
management

CHAPTER 2
1. What are the duties of auditor’s?  The primary
responsibility of auditors
is that of expressing an
opinion on the truth and
fairness of the financial
statements
Additionally, they have to confirm
that:
 A statement of director’s
responsibilities is
included with the
financial statements
 Each branch of the
business has given
sufficient information
 Underlying records
match and are
consistent to the

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 financial statements
 Adequate accounting
records have been kept
 Directors report is
consistent to the
financial statements

2. What matters are implied in an unmodified An unmodified report implies:

report?  Each branch of the
business has given
sufficient information
 Underlying records
match and are
consistent to the
financial statements
 Adequate accounting
records have been kept
 Directors report is
consistent to the
financial statements
 All necessary
information and
explanations have been
received by the auditor
 Details of directors’
emoluments and other
benefits have been
correctly disclosed in the
financial statements

3. What are the responsibilities of directors? Amongst others, directors are

expected to:
 To protect the
shareholder’s
investment by putting in
place an effective system
of internal control and
establishing appropriate
risk management policies
 Select suitable
accounting policies and
then apply them
consistently
 Make reasonable and
prudent judgements and
estimates
 Prepare financial
statements on the going
concern basis unless it is
inappropriate
 State whether
applicable accounting
standards have been
followed, subject to any

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 material departures being
disclosed and explained.

4. What are the prerequisites of instigating a The instigator should prove the
successful lawsuit against an external auditor? auditor;
 owed him/her a duty of
care (i.e. was legally
bound to exercise
adequate caution to
protect his interests
and/or rights)
 was negligent (did not
perform the external
audit in line with the
requirements of the
ISAs)
And lastly prove damages
(monetary loss) suffered as a
result of relying on the auditor’s
report.
5. Under what circumstances can an external Ordinarily, due to a lack of
auditor be sued successfully by a third part? contractual relationship
between the auditor and a third
party, an auditor may not be
found to owe a third party a
duty of care. However, in
exceptional cases, such duty of
care MAY BE proven to exist if the
auditor:
 Was aware the a third
party existed
 Was aware the third party
had intention of relying
on his report conclude
economic decisions
 But did not disclaim
liability
Under a different avenue of law
other than the contract law, such
as the law of delict, the auditor
MAY BE perceived as owing a
third party a duty of if the above
are proven and found to be
existing. Of course, other
elements may need to be proven
to render a lawsuit successful.
CHAPTER 3
1. What is meant by: The act of being honest and
A. Integrity straight forward in all
professional and business
dealings
B. Objectivity The state of mind that restricts
bias, discrimination or any form
of undue influence affect

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 professional judgement
C. Professional competence and due care The possession of the relevant
skills and knowledge of the
contemporary rules, laws,
standards and other
requirements relating to the
work of the member. Due care
refers to the need of the member
to exercise adequate
professional scepticism and
caution when discharging
his/her duties
D. Confidentiality The requirement that a member
should not disclose nor use the
client’s information for his/her
personal benefit.
E. Professional Behaviour Members should refrain from
any such actions/conduct which
may discredit or disrepute the
profession. Members are also
expected to adhere to the
relevant laws and regulations
2. What is meant by independence? The absence of any other link,
interest or relationship with an
audit client other than being its
auditor
3. What is the relationship between independence The absence of any such
and objectivity? association empowers the
auditor to be objective when
expressing his opinion on the
client's financial statements.
Once the auditor’s independence
is lost, his objectivity is likely to
be impaired.
Furthermore, it is important for
the auditor to be seen as
independent so that users of his
report can be convinced that he
observed the principle of
objectivity in all his decisions.

4. What is meant by: The existence of a personal

A. Self interest threat interest, whether financial or
otherwise, in the affairs of the
client.
B. Self review threat The auditor having to examine
his own work/judgement
C. Advocacy threat The auditor making
representations to third parties
promoting/supporting the
client’s interests
D. Intimidation threat When the auditor or an individual
engagement team member is
placed under duress, i.e.,

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 threatened the client
E. Familiarity threat Refers to the assurance team
members being too acquainted
on a personal level with the
client’s staff
CHAPTER 4
1. What should an external auditor do before To assess the engagement risk,
accepting nomination to act as auditors of a first and foremost, the
limited liability? prospective auditor should
communicate with the out-
going auditors provided the
client avails consent. If not, the
auditor should decline
nomination
 However, if consent is
given, such
communication can ensue
so as to acquire all such
information that can
help the auditor
conclude whether or not
to accept nomination
Additionally, the auditors should:
 Ensure they are
professionally qualified
to act as auditors of the
client, i.e., acting as
auditors will not
contravene relevant laws
and regulations as well as
applicable ethical codes.
 Ensure they have
adequate and available
resources to effectively
carry out the audit
 Ensure that they have or
can mobilise an
engagement team
possessing knowledge
and technical expertise
relevant to the audit of
the prospective client
2. When screening a client, what factors can an Examples of factors that may be
external auditor consider? considered in client screening
are:
 Type of reports issued by
previous auditor(s)
 Financial well-being of
the client
 The organisation
structure of the client
 Integrity of management
 Strength of the internal
controls of the client

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  Availability of adequate
and suitable resources to
take up the client
 Whether the firm is
ethically and
professionally cleared to
be the client’s auditor
 The financial reporting
framework adopted by
the client

3. After accepting appointment, what procedures After accepting nomination, the

should an external auditor perform? auditor should:
 Ensure that the
predecessor auditors
have been properly
removed by reviewing
minutes of the
shareholder’s meetings
for a resolution to that
effect.
 Ensure that he has been
properly appointed by
reviewing the same for a
resolution to effect his
appointment.
 Issue an
engagement/appointmen
t letter
4. What is the purpose of the It serves as a formal and legally
engagement/appointment letter? binding agreement to act as the
auditor, stipulating the terms and
conditions of the audit
5. What are the normal contents of an engagement  Addressee: Typically
letter? addressed to the senior
management (e.g. CEO)
of the client.
 Identification of the
service to be rendered:
One type of service is a
financial statement audit.
Provided in this section
is a brief description of
the nature of the
particular service. Other
services that are planned
for the audit (e.g.
evaluation of internal
control, preparation of
regulatory reports) are
also identified in this
section.

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  Specification of the
responsibilities of the
auditor of the company:
This section refers to the
specific professional
standards and
responsibilities of the
auditor.
 Constraints on the
accounting firm: For
example, timing of
access to client facilities
and accounting records
may delay the
engagement.
 Deadlines: This section
lays out the estimated
date of completion and
release of the financial
statements, as well as the
general guidelines for the
timing of the audit work.
 Description of any
assistance to be provided
by the client: Typically,
the client’s personnel
will prepare some
schedules (e.g. bank
reconciliations) and
retrieve documents from
files.
 Interactions with
specialists, internal
auditors, and the
predecessor auditor
needed to conduct the
audit
 A disclaimer: Describing
the limits of the audit.
Typically this expresses
that an audit is not
designed to detect all
forms of fraud or illegal
acts; rather, an audit
checks the financial
position of a client with
reference applicable
financial reporting
framework.

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  A description of the
basis for fees: This may
include a fixed fee or an
estimate of fees based on
expected completion
time and billing rates of
firm employees assigned
to the engagement.

6. Under what circumstances can an auditor re-  There is evidence that

issue an engagement letter to those charged with management of the client
governance? do not understand the
terms and conditions of
the audit
 There has been a
significant change in the
composition of
management
 There has been a drastic
change in the nature of
the business altering
significantly the scope of
the audit
CHAPTER 5
1. What is meant by?
A. Inherent risk The likelihood of assertions to
be misstated BECAUSE of the
nature of items to which they
relate or the nature of the
business or the nature of the
environment/ conditions or
circumstances within which the
business operates
B. Control risk The likelihood that internal
controls will fail to prevent,
correct and detect material
misstatement
C. Risk of material misstatement The likelihood of financial
statements to contain a
misstatement of material
nature
D. Detection risk The likelihood of the auditor not
becoming aware of
misstatements contained in
financial statements
E. Audit risk The likelihood of an auditor
expressing an inappropriate
opinion on the financial
statements
2. Explain the relationship between the risk of Audit risk is the product of the
material misstatement, detection risk and audit risk of material misstatement
risk. multiplied by detection risk. For
the auditor to lower audit risk to

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 an appropriately low level, the
risk of material misstatement
needs to be low, giving room for a
slight increase in detection risk
level but if the risk of material
misstatement is relatively high,
the auditor needs to lower
detection risk accordingly to
negate the effects of a higher risk
of material misstatement

3. Define the following: An efficient audit approach in

A. Risk based approach which the auditor assigns most of
his attention and resources to
areas identified as having a
high risk of containing material
misstatements. By so doing,
audit risk is decreased in the
most efficient manner as
resources are focused mostly
where they are needed.
B. System based approach In this approach, the auditor tries
to minimise as much as possible
the work load of the audit by
performing few substantive
procedures, i.e., those meant to
confirm/verify assertions.
However, since fewer substantive
procedures imply a higher
detection risk and consequently a
higher audit risk, this will only be
acceptable provided the risk of
material misstatement is low,
which will in turn be low
provided the controls are strong
enough to prevent, detect and
correct material misstatements.
The auditor thus seeks to place
reliance on the controls. He tests
them to confirm they are strong
enough, in terms of design and
operational functionality, to
prevent, detect and correct
material misstatement.
C. Direct verification approach In this approach, no reliance is
sought on the internal controls by
the external auditor for whatever
reasons, perhaps because the
controls are not expected to be
effective in the first place or that
the entity is too small in size thus
the auditor finds it unnecessary
to rely on the internal controls so
as to lower the level of

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 substantive testing. Instead, the
auditor directly verifies the
assertions of the financial
statements to confirm whether
they are true and fair. Limited to
none test of controls are
performed. If at all they are
executed, it is with the intension
of acquiring evidence to add on to
that already collected from
substantive testing provided it is
deemed not to be sufficient
D. Balance sheet approach The auditor focuses on the
balances reported in the balance
sheet and substantiates them on
the notion that if the balances are
found to be free from material
misstatements, it would imply
that transactions recorded in the
statement of profit or loss are
also free from any such
misstatements. Comparisons
between the opening and closing
balance sheet balances can reveal
significant variations and/or
unexpected movements on which
the auditor can focus more on in
an attempt to verify if such
movements are valid or just
effects of material misstatements.
4. What matters are considered by external auditors Typical examples of matters
in obtaining an understanding? considered by the auditor in
obtaining an understanding of the
entity are:
 The nature of the entity –
the operations, ownership
and governance, investing
and financing activities of
an entity, amongst others,
comprise its nature.
 Strategies and objectives
and related risks
 Measurement and review
of the entity’s financial
performance
 Internal controls
 The entity’s selection and
application of accounting
policies including the
reasons for the changes
thereto.

5. Explain how auditors obtain understanding of the Amidst many options; auditors
entity and its environment? can:

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  Inquiry of management
and others within the
entity about matters of
relevance in acquiring
information about the
client’s affairs and
environment
 Perform of analytical
review procedures
 E.g. Comparisons
of FSs with:
budgets and
forecast, mgt
accounts, past FSs,
major resolutions
recorded in board
meetings minutes,
industry averages
etc
 Observe the performance,
by the client’s staff, of
different procedures
 Inspect of relevant
records and documents
 Consider previous
experience which
essentially serves as a
crucial source of
knowledge

6. Why is it important for auditors to obtain  To identify conditions

understanding of the entity and its environment? within or outside the
entity which may cause
the financial statements
to contain material
misstatements so that
such may be adequately
addressed in the process
of audit
 To form a frame of
reference for decision
making and the
conclusion of audit
judgement. E.g. When
deciding on materiality
 To facilitate the execution
of an efficient and
effective audit exercise
guided by adequate
knowledge of the entity
and its environment

7. What is audit evidence? Any information accumulated and

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 used by the external auditor to
form audit conclusions about
different audit matters, with the
ultimate conclusion being that of
whether financial statements give
a true and fair view
8. In the context of audit evidence, explain what is Sufficient means that audit
meant by the requirement that audit evidence evidence should be
should be “sufficient and appropriate” adequate/enough to form a
basis for the conclusion of an
audit opinion or decision about
an audit subject matter.
On the other hand, appropriate
means that it is a suitable and
proper basis for forming an audit
opinion or conclusion about an
audit subject matter. Additionally,
evidence is deemed appropriate
provide it is relevant (that it
relates directly to the audit
matter the auditor seeks to
confirm or acquire a conclusion
about) and reliable (it is from a
source which is trustworthy, a
source which the auditor can vest
adequate confidence in when
forming his conclusion about the
audit matter in question)
9. Explain the five generalisations related to  Written evidence is more
reliability of audit evidence as per ISA 500 reliable than oral
 Third party evidence is
more reliable than that
acquired from within the
client
 Originals are more
reliable than copies
 Evidence acquired
directly by the auditor is
more reliable than that
availed by the client
 Evidence from an area
where strong internal
controls operate is more
reliable than that from an
area of weak internal
controls

10. In deciding on the sufficiency of audit evidence,  Materiality – the greater

what factors can be considered? the materiality hence
importance and item is,
the more evidence is
needed to support it.
 Availability of other
alternative source of

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 evidence – where there
are no other sources of
corroborative evidence,
more evidence should be
acquired from the
available evidence source
 Risk of material
misstatement – the higher
the risk, the more the
evidence required or is
necessary
 Assurance required – the
greater the level of
assurance/confidence
pursued by an auditor
about truthfulness and
fairness of an audit
subject matter, the more
the evidence required
 Reliability of evidence
source – if evidence is
collected from an
relatively unreliable
source, the more
additional evidence from
better sources of evidence
should be sought after

11. Explain and distinguish between substantive Both are activities performed by
procedures and test of control? the external auditor to acquire
evidence. However, test of
controls are meant to uncover
evidence about the design and
operational functionality of
internal controls, whereas
substantive procedures unearth
evidence about the truthfulness
and fairness of financial
statements assertions
12. What are the different methods of obtaining audit A –nalytical procedures: which
evidence and what do they entail? involve conducting
comparisons between two
sets of data, with the object of
identifying whether they
relate in the manner expected
or deemed logical. If the
anticipated/probable
relationship between the two
sets of data does not exist, it
infers that perhaps a
misstatement exist and as
such the auditor performance
additional procedures until
reasonably convinced as to

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 whether the misstatement
exists or not
E – nquiry: being the act of
directing questions to the
management and staff of the
client the answers to which
will be a form of evidence
about the matters to which
the questions relate
I – nspection: which involves
physical examination of
documents/records/assets
with the intention of acquiring
evidence about a matter of
audit relevance
O – bservation: monitoring the
client staff perform a
procedure and/or process so
as to gather evidence about
how it conducted
U – recalcUlation and
reperformance: re-doing a
calculation/computation
which has already been done
by the client to confirm its
accuracy while reperformance
refers to executing a
procedure/process already
done by the client’s staff to
confirm whether the same
outcome as that of the client
will be achieved
13. In the context of a statutory audit exercise, Engagement materiality refers to
explain and distinguish between engagement and the amount(s) set out by the
performance materiality. external auditor which define the
maximum level of misstatements
that may be present in the
financial statements without
having an adverse impact on the
decisions made by stakeholders
based on the audited financial
statements. Any misstatement(s)
equivalent to or above this
amount(s) are to be considered
as having a detrimental effect on
such decisions thus may warrant
the modification of the audit
report. An external auditor, in
determining the level of
engagement materiality, uses his
experience and judgement
guided of course, by generally
accepted and adopted
benchmarks and percentages.

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 On the other hand, performance
materiality refers to amount(s)
lower than the actual materiality
as defined by the set engagement
materiality amount(s). Audit
procedures are performed on the
basis of this lower materiality.
Different classes of transactions,
balances and disclosures will also
have a lower level of materiality
as compared to the engagement
materiality, which relates to the
financial statements as a whole.
14. Items reported in the financial statements may be Materiality, broadly defined,
deemed to be material by amount or by nature. relates to the importance of an
Explain and distinguish between the two forms of item reported in the financial
materiality, making a clear example of each. statements as judged by its
ability to influence economic
decisions of the readers of the
financial statements when
omitted or misstated. An Item
may be deemed as being material
by amount, that is, significantly
important to users by virtue of its
relatively sizable amount/value.
For example, if the pre-
determined level of materiality
for account balances, say
receivables, is $10, 000.00,
receivables with balances
equivalent to and/or above such
amount shall be taken to be
material by amount.

However, the interests of the

users are not confined to items of
significant monetary value. Some
items may be of interest/serve
the needs of the users or be of
relevance and importance by
virtue of their
qualities/attributes and not
because of their amounts. Any
such item important for any
other reason other than its
amount is said to be material by
nature. For example, if the law
requires any form of disclosures
to be made in the notes to the
financial statements, such
disclosures would be material
even if the related amounts are
below the materiality amount.

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15. When conducting an audit exercise, why do Using performance materiality, it
auditors perform procedures based on being lower than engagement
performance rather than engagement materiality, ensures that audit
materiality? procedures are targeted at
classes of transactions, balances
and disclosures which, as a
matter of fact, are not material,
but all the same may contain
misstatements which are
individually immaterial but in
aggregate could add up to a
material misstatements.
Effectively, this increases the
chances of the auditor to detect
material misstatements, lowering
detection risk and thus lowering
the chances of expresses an
inappropriate opinion, this being
the auditor’s ultimate objective.
16. Explain what the process of risk assessment in an The process of risk assessment
external audit entail. involves the following:

 Identifying the risk of

material misstatement,
i.e. The conditions that
could result in material
misstatement
 Ascertaining the
assertion(s) that may be
misstated and how
 Establishing the
likelihood of the risk to
materialize
 Determining the
significance of the impact
if the risk materialises, i.e.
The extent to which the
assertion(s) will be
misstated
 Deciding on appropriate
responses to the risk that
will ultimately contribute
to the lowering of the
audit risk to an acceptable
level
17. If the initial risk assessment indicates a relatively  Engagement partner
high risk of material misstatement, identify Five should emphasis to the
general responses an auditor may employ to audit engagement team,
combat the high risk. the need to exercise
adequate professional
scepticism
 Building up the audit
team with relatively more

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 experienced staff
 Rigidly supervising work
done by juniors
 Engaging the services of
experts on high risk areas
especially on areas where
acquiring audit evidence
requires knowledge
 Incorporating more
unpredictability into the
audit procedures
18. What is meant by professional scepticism and Professional scepticism refers to
what is its importance? the auditor’s attitude and mental
state, which predominantly
presumes that financial
statements most likely contain
material misstatements. It relates
to a questioning mind that an
external auditor should have and
not be too trusting of the financial
statements prepared by
management and as such
investigate error and fraud
diligently, especially when put on
enquiry, i.e., when suspicions are
aroused. It helps ensure areas
likely to be misstated are
identified, adequately scrutinised
and tested and thus decreases
concurrently, the level of
detection and audit risk.

CHAPTER 6
1. Explain the purpose of audit planning. Audit planning is a preparatory
exercise meant to assist an
auditor to navigate through an
audit successfully, using
minimum possible resources
while all the same achieving the
intended audit objective of
expressing an appropriate
opinion about the client’s
financial statements
2. What are the benefits of planning an audit?  Ensures the audit is done
in an efficient and
effective manner as much
as possible
 Ensures that adequate
attention and resources
are dedicated to high risk
areas
 Helps foresee potential
problems likely to be
encountered during the

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 audit so that they can be
addressed beforehand
 Helps identify the skills
and resources required to
perform the audit
 Helps assign different
aspects of the audit work
to members of the
engagement team

3. Explain and distinguish between audit strategy Audit strategy sets the scope,
and audit plan? timing and direction of the audit.
It is the general approach the
auditor is to adopt in performing
an audit exercise, defining
specifically what the auditor is to
focus on, the general time-table
for the audit and the course of
action to be followed in the audit.
On the other hand, the audit plan
sets the nature, timing and extent
of the audit procedures required
to collect sufficient and
appropriate evidence . The plan
determines what procedures are
to be performed, by whom, when
and how.
It is essentially a detailed
translation on how the audit
strategy can be fulfilled and as
such should be consistent to the
selected strategy.
4. Explain the use of analytical procedures in Analytical procedures are very
planning useful in obtaining an
understanding of the entity and
its environment in identifying the
risk of material misstatements.
Particularly, draft financial
statements can be compared
against:
 Past financial statements
 Management accounts
 Budgets
 Forecasts
 Industry averages
 Competitor’s financials
Such comparisons will help
identify areas in the financial
statements which are likely to
contain material misstatements
5. What matters are considered in evaluating The following are key
whether rely on an expert as a source of audit considerations of an auditor
evidence? when deciding whether or not to
rely on an auditor expert, in

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 accordance with ISA 620:
 Competence – the expert
should have the capacity
in terms of knowledge,
experience and skills, to
successfully and
appropriately carry out
the task which he is called
upon to perform on the
external auditor’s behalf.
Competence is normally
signified by the following:
 Qualification held by
the expert
 Experience of the
expert
 The expert’s
reputation
 Membership to the
relevant professional
body
 The writing of
articles and books
And
 Objectivity – The expert
should have a state of
mind that shall permit
him, without any
restrictions, to exercise
appropriate judgement in
his work and report to the
auditor, information that
is factual, honest and not
at all distorted by bias,
discrimination, self-
interest or any form of
undue influence. The
prevalence of objectivity
is determined by the
absence of relations with
or interest in the client,
that is, the extent to
which the expert is
independent of the client

6. What matters are considered in evaluating The auditor needs also to

whether to rely on the work of an auditor expert? perform certain procedures on
the work of the expert to confirm
that it can be relied upon. The
following are examples of such
procedures
 Review the source of data
used and confirm that its
reliable

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  Obtain knowledge about
the assumptions and
methods used by the
expert and ascertain
whether they are
reasonable and sound in
the context of the
auditor’s own knowledge
about the client
 If the assumptions and/or
methods of the expert
change, enquire about the
reasons for such
change(s) and assess the
reasonableness of the
explanations received.
 Evaluate the expert’s
report in the light of the
auditor’s own knowledge
about the client and
enquire where there are
some inconsistencies
and/or contradictions.
 If need be, engage another
expert to review the work
done by the original
auditor expert
7. Explain audit sampling Audit sampling is:
 The application of audit
procedure(s) to less than
100% of a population
 To estimate some
characteristic of the
population

8. Why do auditors normally test on a sampling The alternative, that is, testing
basis that to review all transactions and/or the whole population would be:
balances of an entity?  Impractical because
 there can be too
large volumes of
transactions to
make it possible for
the auditor to test
them all
 the auditor is likely
not to have
adequate resources
to test the whole
population
 Too costly
 Consume too much time
 Unnecessary as not all
items are significant
enough to influence

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 decision of the users of
the financial statements
9. Explain sampling and non-sampling risk. Sampling risk is the likelihood
that the auditors’ conclusions
about the population based on a
sample may be different from the
conclusion they would reached if
they examined every item in the
population as the sample tested
was not representative of the
population while non-sampling
risk is the likelihood that the
auditors’ conclusions about the
population may be wrong for
any other reasons other than
having tested an
unrepresentative sample
10. Explain the following sample selection methods:
A. Random sampling Selecting a sample using random
number tables or random
number generators such that
every member of the population
stands an equal chance of being
selected. It is thus unbiased so the
sample is likely to be
representative of the population
B. Haphazard sampling Involves the auditor HIMSELF
selecting a sample from the
population on an arbitrary basis
and following no order and
direction. It is highly prone to
bias and thus the sample is at risk
of not representing the
population
C. Systematic sampling The first item is selected
randomly or haphazardly and
then selecting items after a
predefined interval until the
desired sample size is achieved.
The interval is defined by the
following formula:
Population/Desired sample size
D. Block/Sequential sampling Entails the selection of sample
items in their numerical or
alphabetic sequence, the first
item being selected randomly or
haphazardly
E. Monetary-unit sampling The method of sampling is a
value-weighted selection
whereby sample size, selection
and evaluation will result in a
conclusion in monetary amounts.
The objective of monetary unit
sampling (MUS) is to determine

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 the accuracy of financial
accounts. The steps involved in
monetary unit sampling are to:
 determine a sample size
 select the sample
 perform the audit
procedures
 evaluate the results and
arrive at a conclusion
about the population
11. Explain the relation between sample size and the
following: The higher the risk of material
A. Risk of material misstament misstatement then the higher the
sample size
B. Strength of internal controls The higher the strength of
internal controls then the lower
the sample size
C. Assurance required The higher the assurance
required by the auditor then the
higher the sample size
D. Tolerable misstatement The higher the tolerable
misstatement then the lower the
sample size
E. Expected misstatement The higher the expected
misstatement level then the
higher the sample size
F. Detection risk The higher the sample size then
the lower the detection risk
12. Explain and distinguish between statistical Statistical sampling refers to an
sampling and judgmental/non-statistical approach to sampling that has the
sampling following characteristics:
 Random selection of the
sample items, and
 The use of probability
theory to evaluate sample
results, including
measurement of sampling
risk
While non-statistical sampling
refers to a sampling method in
which selection does not permit
all population units to have an
equal opportunity of being
selected and results are
evaluated, not on the basis of
probability but rather the
employment of judgment
13. Explain the use of CAATs in an audit including the These are tools used to perform
use of audit software and test data an audit when the accounting
function of the client is
computerised. There are two
types, namely:
Audit software: computer
program used to perform audit

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 procedures when the accounting
system of the audit client is
computerised. Maybe bought off-
shelf or custom made so as to be
compatible to the client’s system.
Test data: data input by the
auditor into the client’s system
for one of two reasons, either
inputting valid data to confirm it
is properly processed or
inputting invalid data to confirm
it is rejected by the system. It may
however corrupt the client’s data
files thus has to be used with the
necessary precautions in place.
14. Describe the reasons for maintaining audit It is necessary for the following
documentation. reasons:
 Facilitates adequate
planning
 Facilitates supervision
and review of audit work
 To provide a basis of the
audit report
 Allows discussions of
audit findings with
management
 Provides defence against
negligence charges
 Serves as guide for
succeeding auditors
 Encourages a methodical
approach to auditing,
which often results in
higher audit efficiencies
and effectiveness
 Retaining a record of
matters of continuing
significance to future
audits
15. Explain the purpose and contents of the current The permanent file contains
file and the permanent file. information of continuing
importance affecting more than
one audit assignment. E.g.:
 Legal documents –
memorandum and
articles of association,
deeds, certificate of
incorporation
 Questionnaires
 Engagement letter
 Copies of long-term
contracts
 Internal control
documentation

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 The current file contains
information of relevance and/or
audit significance only in the
period under review. E.g.:
 Trial balance
 Draft financial statements
 Sampling plans
 Audit programmes
 Major observations and
conclusions
 Audit notes
 Draft auditor’s report for
the year
CHAPTER 7- 9
1. What is the internal control system and what It is a system designed and
purpose does it serve? effected by those charged with
governance and members of the
client’s staff intended to provide
reasonable assurance in the
attainment of the predefined
objectives
2. What are the objectives pursued by the internal Internal controls are meant to
control system? ensure:
 Reliable financial
reporting – financial
reporting which yields
financial statements free
from material fraud
and/or error
 Efficient and effective
operations – operations
achieving the desired
outcomes using minimum
resources
 Financial reporting that
adheres to the relevant
financial reporting
framework – complying
to the relevant laws,
regulations, standards
and other guidelines
 Safeguarding of business
assets from theft and/or
loss
 Prevention and detection
of fraud and error
3. What are the components of an internal control An internal control system is
system? made up of the following
elements:
 Control environment
 The entity’s risk
assessment process
 The information system
relevant to financial

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 reporting
 Control activities
 Monitoring as a control
4. What is meant by the following:
A. Control environment It is the framework within which
internal controls operate. It is the
sum of all prevalent conditions in
the entity which either support or
disrupt the effective functioning
of the control activities. It is
influenced by the attitudes,
actions and
awareness of management
towards internal controls
B. The entities own risk assessment process It is the sum of all activities
performed by those charged with
governance and/or management
of an entity in which they:
 Identify the risks of FSs
being materially
misstated
 Ascertain the assertions
to be affected if the risks
materialise
 Establish the
likelihood/probability of
the risk to materialise
 Determine the
significance of the
resulting misstatements if
the risks were to
materialise
 Decide on actions to
manage/mitigate the
risks to an acceptable
level.
C. Information system relevant to financial This is the system responsible for
reporting the initiation, recording,
processing and ultimately
reporting of:
 Transactions
 Events
 Occurrences
 And any other reportable
incidences
Flaws in this system will
normally result in inaccurate,
incomplete or otherwise
misstated financial statements
D. Control activities These are policies and
procedures in place meant to
secure the achievement of
specific control objectives
E. Monitoring as a control Relates to the continuous review

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 of the internal controls in place to
ensure they are properly
functioning, identifying and
rectifying any flaws or
deficiencies
5. What are the different types of control activities?  P – physical controls –
controls restricting
physical access to assets
and records
 A – authorisation – pre-
approval of the
occurrence of a
transaction or any
incident by a senior
official
 R – performance Review
– examination of a
transaction or incident
after it has happened to
ensure it was properly
carried out and/or met its
desired objective.
 I – information
processing – attempts to
ensure financial data is
accurately, completely
and appropriately
processed and authorised.
 S – segregation of duties –
division of work among
the staff members such
that no one person
initiates and processes a
transaction, keeping
custody of resulting
assets.
6. Upon evaluation of an entities control Evaluation of the control
environment, identify and explain matters that environment entails assessing its
can be considered. elements, which namely are:
 Communication and
enforcement of integrity
and ethical values –
attempts made by client’s
management to make
known to the staff
members the need to be
morally upright and
refrain from unethical or
unjust conduct
 Participation by those
charged with
governance – the level of
management’s
involvement in and

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 scrutiny of daily
operations and activities
 Management’s
philosophy and
operating style – the
overall understanding
and orientation of
management which
underpin the way in
which they are to run the
business entity
 Organisational
structure – the general
set-up and configuration
of the entity which those
charged with governance
believe will secure
attainment of corporate
objectives at different
levels.
 Commitment to
competence – the
devotion of management
to appoint staff with the
appropriate level of
competence and
possessing the required
capabilities to
satisfactorily discharge
their obligations in their
area of work
 Assignment of authority
and responsibility – the
manner in which
power/authority has
been allocated to different
staff members in different
hierarchical levels and the
attached
responsibilities/obligatio
ns
 Human resource policies
and practices – relates to
the recruitment,
orientation, induction,
training and
development, counselling
and other practices aimed
at securing the welfare of
employees and ensuring
that the available labour
force as productive and
effective as possible.

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7. Describe the inherent limitations of an internal  Human error: The
control system effectiveness of the
internal control
system depends on
the competence,
reliability and due
care of the people
responsible for its
operation.
Mistakes/errors
threaten the
effectiveness of any
internal control
system.
 Override by
management and/or
executives: Because
of the authority and
responsibility of
officials high up in
the organisational
structure, the risk
pervades that they
can easily override
the internal control
system.
 Cost consideration:
Internal controls must
be cost effective - the
result of a cost-benefit
analysis. This leads
to the
implementation of
the best system
that can be
afforded, which is
not necessarily the
best available
internal control
system for a
specific situation.
 Focus on routine
activities: Most
internal controls tend
to focus primarily on
routine activities,
leaving abnormal,
extraordinary or ad-
hoc
activities/operation
s largely
unattended.
 Unresponsive to
changing
circumstances:
Conditions within

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 organisations are not
static, e.g. internal
control systems
that don’t change in
reaction to new
control techniques,
or to changes in
the organisational
environment are
left exposed.
 Controls may be by-
passed: Lack of
integrity and
dishonesty of
employees and
officials can lead to
collusion amongst
two or more people
to circumvent the
internal control
system.
 Complexity: An
increasingly complex
internal control
system can lead to
operational
inefficiencies,
because employees
are unable to cope
with the system.
 Improper design
incapable of preventing,
detecting and correcting
material misstatements
even if applied
8. State the typical control problems encountered in  Lack of planning over
small computer-based systems acquisition and use of
personal computers –
Acquisition of programs is
usually not looked into
deeply nor is it
authorised. No
considerations are often
made regarding
suitability of purchased
softwares, securing
support facilities etc.
 Lack of documentary
evidence – the systems
are often not documented
so too are the updates
and modifications that
may be made later on
 Lack of segregation of
duties – as often the same

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 person prepares the data,
inputs it into the
computer, processes it
and acts as its end user.
 Lack of control over users
– Terminals are often
readily available to any
user though this may be
mitigated by the use of
IDs and passwords upon
system access.
 Lack of control over
alterations to programs –
Programs are often
altered without prior
approval and due to lack
of expertise and record,
these changes may go
undetected
9. Explain the importance of internal control to Internal controls are important to
auditors auditors for the influence audit
risk, which is the auditor’s
greatest concern. This is because
the strength of internal controls
impacts on the level or degree of
control risk which in turn
influences the level of risk of
material misstatement which is a
component of the overall audit
risk.
10. What are the different techniques used in Controls may be recorded by way
recording the internal control system of the client of:
by the order?  Narrative notes - written
description of the entity’s
internal control system
 Flowcharts - pictorial
representation of the flow
of
documents/information
within an entity,
reflecting applicable
controls at each different
stage
 Internal Control
Questionnaires (ICQs) - a
list of questions answers
to which will help the
auditor determine the
presence or existence of
ideal internal controls.
 Internal Control
Evaluation
Questionnaires (ICEQs) -
similar to ICQ’s except

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 that they are a check as to
whether the existing
internal controls are
effective, i.e., achieving
the intended control
objectives.
11. What is the purpose of the letter on internal It brings to management’s
control and what does is it comprise of? attention and for their
consideration, weaknesses in the
internal control system of the
entity which have being
discovered by the auditor,
detailing the possible
consequences of those weakness
and lastly providing
recommendations as to how they
can be rectified.
12. Distinguish between application controls and Application controls are controls
general IT controls and identify the objectives of over the input, processing, and
each control type output functions, meant to
prevent, detect and/or correct
errors that may occur.
General IT controls on the other
hand are controls that apply to all
systems components, processes,
and data for a given organization
or information technology (IT)
environment with the objective of
ensuring continued proper
functioning of the IT systems.
They support the effectiveness of
applications.
13. Explain and distinguish between control activity Control objectives are desirable
and control objective? outcomes a system is expected to
attain while control activities are
the actions and measures taken
to provide assurance that system
objectives will be achieved
14. What is the relationship between control A control objective is refers to the
objective, control activity and test of control? end pursuit, control activity
serves as a means to such an end,
while test of controls are
procedures performed by
auditors over control activities to
assess their operational
functionality, that is, whether
they are adhered to and used in
day to day operation of the entity
and whether they are effective.

CHAPTER 10
1. Define analytical review procedures in the Analytical procedures are
context of auditing. procedures performed by the
external auditor involving the

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 evaluation of relations between
two sets of data, either financial
and/or non-financial, in attempt
to identify where expected
relations do not ensue possibly as
a result of material misstatement.
Once such unexpected and/or
odd relations have been
identified, further audit
procedures are devoted to such
areas so as to establish whether
the cause is justifiable and
acceptable or a result of a
material misstatement

Analytical procedures are used

2. In what ways are analytical review procedures for the following purposes:
useful in the audit of a set of financial
statements?  To assist the auditor in
planning the nature,
timing, and extent of
other auditing procedures
by helping obtain
understanding of the
entity and its
environment and
assessing the risk to
material misstatements
 As a substantive test to
obtain evidential matter
about particular
assertions related to
account balances or
classes of transactions
 As an overall review of
the financial information
in the final review stage of
the audit

 Under what circumstances is the use of analytical When dealing with large
procedures deemed suitable? volumes of data, that is
predictable and sourced from a
reliable source, preferably
disaggregated as working with
totals may hide significant but

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 counteractive movements is the
data tested.
 What is an accounting estimate? An approximation of a monetary
amount in the absence of a
precise means of measurement
CHAPTER 11-13
1. What is an assertion and its relevance to the audit Assertions are representations of
of financial statements? management that are embodied
in all financial statement
components or classifications.
Specific audit objectives are
developed in each audit area to
evaluate the appropriateness and
reasonableness of relevant
financial statement assertions.
2. Explain the following assertions:
A. Occurrence This assertion means that
transactions and events and other
matters that have been recorded
actually took place – and relate to
this organisation
B. Completeness This means that all transactions
have been recorded in the
financial statements – ie all
assets, liabilities, equity interests
(capital and reserves) and other
disclosures have been included in
the financial statements
C. Accuracy Accuracy means that amounts
and other data relating to
transactions and events have
been recorded at the correct
amounts – ie at the amounts
appearing in the source
documents
D. Cut-off This means that transactions and
events have been recorded in the
correct accounting period – for
example, if goods are delivered
prior to year end, they are
included in the cost of goods sold,
not inventory
E. Classification and understandability Financial information is
appropriately presented and
disclosed, and disclosures are
clearly expressed so as to make
them understandable to the
users. For this, the disclosures
should use simple language and
state matters clearly and
concisely
F. Valuation and allocation This means that all items have
been included in the financial
statements at appropriate

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 amounts according to company
policy and the relevant financial
reporting framework.
Furthermore, any allocations or
valuation adjustments required
(like impairment) have been
made and financial and other
information is disclosed fairly
and at appropriate amounts
G. Existence This means that assets, liabilities
and equity interests (capital and
reserves) are physically
present/belong to the entity on
the reporting date
H. Rights and Obligations This means that the entity has a
right to its assets – ie it is free to
use or dispose of the assets as it
sees fit. Furthermore, the entity is
obliged to pay off the liabilities
that are shown in the statement
of financial position

CHAPTER 14
1. Identify matters considered by an external  Opening Balances and
auditor at the completion of an audit. Comparatives
 Related Party
Transactions
 Subsequent Events
 Going Concern
 Possible Contingencies
and provision
 Management’s
representations
 Evidential Evaluation
 Working Papers Review
 Compliance and
Reasonableness Checks

CHAPTER 15
1. Describe the form and content of unmodified  Addressee – specification
audit reports as to whom the report is
addressed.
 Management
Responsibility
Paragraph – confirming
the responsibility of the
company’s management
with regard to the
financial statements.
 Auditor’s Responsibility
Paragraph – confirming
the auditor’s
responsibility with regard

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 to the financial
statements.
 Auditor’s Opinion
Paragraph – confirming
the auditor’s opinion on
the financial statements
subject to audit.
 Paragraph detailing
additional reporting
responsibilities of the
auditor under specified
legislation or
Regulations – where the
auditor has these.
 Auditor’s Opinion
Paragraph –Mentioning
that the financial
statement give a true and
fair view.
 Signature of the Auditor
– the auditor’s signature
is either in the name of
the audit firm, the
personal name of the
auditor or both, as
appropriate for the
particular jurisdiction.
 Date of the Auditor’s
Report – this is the date
to which the auditor
should have considered
all transactions and
matters relating to the
company, which affected
the disclosures made in
the financial statements
subject to audit.
 Auditor’s address – the
name of the location in
the jurisdiction where the
auditor practices
2. State the circumstances where an auditor shall It would be appropriate for
issue a modified audit report auditors to modify their report on
the audited financial statements
of a limited liability company in
the following circumstances:
Where the auditor is unable to
obtain sufficient appropriate
audit evidence to conclude that
the financial statements as a
whole are free from material
misstatement (i.e. where there is
a limitation on the scope of the
audit).

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  Qualified opinion –
where the effect of the
subject matter on the
financial statements is
material but not
pervasive.
 Disclaimer of opinion –
where the effect of the
subject matter on the
financial statements is
material and pervasive.
Where the auditor concludes that,
based on the audit evidence
obtained, the financial
statements as a whole are not
free from material
misstatement.
 Qualified opinion –
where the effect of the
subject matter on the
financial statements is
material but not
pervasive.
 Adverse opinion – where
the effect of the subject
matter on the financial
statements is material
and pervasive.

3. Clarify what an “emphasis of matter paragraph” is As per ISA 706, it is defined as a

and the purpose it serves paragraph included in the
auditor's report that refers to a
matter appropriately presented
or disclosed in the financial
statements that, in the auditor's
judgment, is of such importance
that it is fundamental to users'
understanding of the financial
statements. It is intended to bring
any such matter to the attention
of the readers of the financial
statements, however, without
qualifying his opinion.

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