QUESTION 1
ABC Ltd is a used car and parts dealership operating from seven locations across Jamaica. Each branch has up to 10 staff working there, although most of the accounting systems are designed and implemented from the company’s head office located in Kingston. All accounting systems are computerized.
The company has an internal audit department of five staff headed by a Chief Internal Auditor (CIA). The CIA is appointed by the Chief Executive Officer (CEO) and reports administratively to the CEO but functionally to the Chief Financial Officer (CFO). The CFO assists the CIA in deciding on the scope of work of the Internal Audit Department.
The external auditors are AB Chartered Accountants which managing partner is the sister of the Managing Director of ABC Limited. In a meeting to discuss the audit fees, the CEO suggests that the external auditors should use the work of the Internal Auditors to reduce the level of testing and so reduce audit costs. He was upset at the external auditor’s reluctance in accepting his suggestion and pondered what his choices were to address his concerns. Does he need two set of auditors? It is paying twice to do the same thing!
Required:
a) Explain to the Managing Director the role of the internal and external auditor, highlighting differences and similarities. (Your response should include to whom the respective auditor reports, their relationship to the audited entity and the scope of their work)
b) Identify and explain to the CEO the main issue which the external auditor faces in relying on the work of the Internal Audit Department.
c) Corporate governance may be improved by having an Audit Committee. What is an Audit Committee and how can it be used to enhance the role of Internal Audit.
d) Identify and explain FOUR (4) fundamental principles of the Institute of Chartered Accountants of Jamaica (ICAJ’s) Code of Ethics and Conduct. (Note- The fundamental principles are common to other accounting bodies Code of Ethics)
e) An auditor should be perceived to be independent and objectivity. Do you consider the external auditor to be independent? What measures should be in place to enhance independence?
QUESTION 2
a) What are the FOUR (4) types of Audit Reports? Briefly explain the basis for issuing each type of report.
b) ISA 700 Forming an Opinion and Reporting on Financial Statements requires auditors to produce an audit report. Guidance is provided as to key elements of an audit report
Required:
Identify and explain the purpose of SIX (6) elements of an unmodified auditor’s report.
QUESTION 3
a) Explain the THREE (3) main characteristics of good quality audit evidence.
b) Identify and explain FOUR (4) techniques of obtaining audit evidence.
c) Audit evidence should be properly documented. ISA 230 Audit Documentation requires auditors to prepare audit documentation for an audit of financial statements on a timely basis.
Required:
Explain THREE (3) benefits of documenting audit work.
QUESTION 4
(a) Explain the concept of ‘auditing around the computer’ and discuss why this increases audit risk for the auditor.
(b) Explain the concept of ‘auditing through the computer’ and discuss how Computer Aided Auditing Techniques (CAATs) may be used to reduce audit risks.
(c) Information Technology is said to be an enabler and a driver of change. Briefly discuss these concepts in the context of the audit environment.
QUESTION 5
a) ISA 300 Planning an Audit of Financial Statements provides guidance to auditors. Planning an audit involves establishing the overall audit strategy for the engagement and developing an audit plan. Adequate planning benefits the audit of financial statements in several ways.
Required:
Briefly discuss three (3) ways in which audit planning is beneficial to the auditor.
(b) Risk assessment is an important aspect of planning the audit. What is audit risk?
(c) Identify the components of audit risk based on the Audit Risk Model.
(d) In the planning of an audit, the auditor wishes to reduce overall audit risk. Suggest an approach which the auditor may use.