Question One (1) (a) Based on ISA 200 what are the general principles governing an audit of financial

statements? (8marks)

Independence - Auditor is independent of management i.e. he is not under the control or influence of management Integrity and Objectivity fair dealing and truthfulness with respect to audit clients Professional competence and due care performing audit and other attestation services with due care, competence and diligence and maintaining professional knowledge and skill Confidentiality - Auditor neither discloses the information obtained during the course of his audit without permission of his client (except when required in a court of law) nor uses that information himself. Professional behavior acting in a manner consistent with the good reputation of the profession and refraining from any conduct that might discredit it. Prohibited ethical conflict avoiding a situation which may involve potential conflicts affecting directly or indirectly auditor independence and its performance. Basic requirement for compliance with ethical standard the audit firm should establish policies and procedures for the use of its staff, and communicate these to those who are in a position to influence the conduct and outcome of the audit.
(b) Discuss ethics, professional skepticism, audit scope, business risk and audit risk (12 marks) Ethics -

Professional Skepticism - 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. Audit Scope - refers to the audit procedures that, in the auditors judgement and based on the Auditing Standards, are deemed appropriate in the circumstances to achieve the objective of the audit. Business Risk The possibility that a company will have lower than anticipated profits, or that it will experience a loss rather than a profit. Business risk is influenced by numerous factors, including sales volume, per-unit price, input costs, competition, overall economic climate and government regulations. A company with a higher business risk should choose a capital structure that has a lower debt ratio to ensure that it can meet its financial obligations at all times. OR

A business risk is a circumstance or factor that may have a negative impact on the operation or profitability of a given company. Sometimes referred to as company risk, it can be the result of internal conditions or some external factors that may be evident in the wider business community. When it comes to outside factors that can create an element of risk, one of the most predominant is that of a change in demand for the goods and services produced by the company. If the change is a positive one, and the demand for the offerings of the company increase, the amount of risk is decreased a great deal. When consumer demand for the offerings decreases, however, either due to loss of business to competitors or a change in general economic conditions, the amount of risk involved to investors will increase significantly. Audit Risk - The risk that an auditor will not discover errors or intentional miscalculations (i.e. fraud) while reviewing a company's or individual's financial statements, that is, the risk that auditors will draw an invalid conclusion from their work, is made up of three elements namely inherent, control and detection risk. Inherent risk describes the susceptibility of an assertion to material misstatement assuming that there are no related controls. It will vary between different account items and different types of industry. Control risk is the risk that material misstatements will not be prevented or detected by internal control. Detection risk is the risk that material misstatements will not be detected by audit procedures.
Question Two (2)

(a) Outline eight examples of specific operational audits that could be conducted by

1. Examine employee time cards and personnel records to determine if sufficient information is available to maximize the effective use of personnel. 2. Review the processing of sales invoices to determine if it could be done more efficiently. 3. Review the acquisitions of goods, including costs, to determine if they are being purchased at the lowest possible cost considering the quality needed. 4. Review and evaluate the efficiency of the manufacturing process. 5. Review the processing of cash receipts to determine if they are deposited as quickly as possible.
(b) Discuss the services external auditors can provide for their clients (apart from auditing their final accounts)?(10 marks)

an internal audit in a manufacturing company (10 marks)

Aside auditing financial accounts, auditors can be involved in managements consulting. A practice of helping organizations to improve their performance, primarily through the analysis of existing organizational problems and development of plans for improvement. Here the auditors may also provide organizational change management assistance, development of coaching skills, technology implementation, strategy development, or operational improvement services. Consultants (auditors) can function as bridges for information and knowledge, here they dont just give advice or information but give vivid descriptions on how to implement such plans or directions to ensure the growth of business.

Question Three (3) (a) Confidential client information may generally be disclosed only with the permission of the client. What are the exceptions to this rule?

(b) Explain how an auditor may be independent in fact but not appear to be Independent

Obligatory disclosure - If a member knows or suspects his client to have committed an offence of treason his is obliged to disclose all the information at his disposal to a competent authority. Local legislation may also require auditors to disclose other infringements, for example, money laundering Voluntary disclosure - in certain cases voluntary disclosure may be made by a member where: Disclosure is reasonable required to protect the members interest Disclosure is required by process of law There is a public duty to disclosure

Independence in fact exists when an auditor is able to maintain an unbiased attitude throughout the audit, so being objective and impartial, whereas independence in appearance is the results of others interpretations of this independence. For instance, ownership of 10 shares of an audit client does not, in fact, jeopardise an auditors independence, but any ownership of shares will give the impression that the auditor is not independent. An auditors independence in fact refers to his objectivity, to the quality of not being influenced by regard to personal advantage.
Question Four (4)

(a) Define these terms: reliability of evidence, persuasiveness of evidence, and relevance of evidence

Reliability of evidence is the quality of evidence when it is free from material error and bias and can be depended upon by users to represent faithfully that which it either purports to represent or could reasonably be expected to represent. Persuasiveness of evidence is the degree to which the auditor is convinced that the evidence supports the audit opinion. Relevance of evidence is the appropriateness (pertinence) of the evidence to the audit objective being tested.
(b) Arrange the following people as sources of information from most reliable to least reliable and explain your reasoning: 1) New company employee 2) Company employee with 5 years experience, 3) Company lawyer 4) Internal auditor, 5) External auditor, 6) Auditors lawyer, 7) Banker, 8) Top management, 9) Board of directors, 10) Company supplier, 11) Company customer

(5)External Auditor (11)Company Customer (10)Company Suppliers (7)Bankers (6)Auditors lawyers (4)Internal Auditor (9)Board of directors (8)Top management (3)Company lawyer (2)Company employee with 5 years experience (1)New company employee The reasoning behind this is because evidence obtained from a source outside the entity is more reliable than that obtained from within. That is to say the information sourced from outside the organization or entity would be devoid of bias as compared to that obtained from within.

Question Five (5)

(a) i. List four things an auditor must consider when establishing professional fees. ii. What is meant by lowballing?

i.

the size of the auditee and geographical dispersion the quality of the auditees internal control system the level of consulting the size of the audit firm ii. Lowballing is when an auditing firm charges a lower fee when a client is signed up. This normally caused by the need to stay competitive with other firms.
(b) i. Define a contingency fee. ii. Why should a contingency fee not be used?

iii. What are the two exceptions for using contingency fees?

Contingency fee is an arrangement whereby no fee will be charged unless a specified finding or result is obtained. In other words, contingency fees are based on the success achieved or chopped by an auditor A contingency fee should not be used when rendering or offering a client a professional service. The two exceptions are: Firstly, Fees are not contingent if fixed by a court or other public authority Secondly, in those countries where charging contingent fees is permitted either by statute or by professional member body such engagement should be limited to those for which independence is not required.