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THE PUBLIC ACCOUNTANTS EXAMINATIONS BOARD
A Committee of the Council of ICPAU
CPA(U) EXAMINATIONS
LEVEL ONE
AUDIT THEORY – PAPER 7
WEDNESDAY, 26 AUGUST 2015
INSTRUCTIONS TO CANDIDATES
1. Time allowed: 3 hours 15 minutes.
The first 15 minutes of this examination have been designated for reading
time. You may not start to write your answer during this time.
2. This examination contains Sections A, B and C.
3. Section A is bound separately from Sections B and C.
4. Attempt all the 20 multiple-choice questions in Section A. Each question
carries 1 mark.
5. Attempt the compulsory question in Section B carrying 30 marks.
6. Attempt two of the three questions in Section C. Each question carries
25 marks.
7. Write your answer to each question on a fresh page in your answer
booklet.
8. Please, read further instructions on the answer booklet, before attempting
any question.
© 2015 Public Accountants Examinations Board
Audit Theory – Paper 7
26 August 2015 Page 2 of 5
SECTION B
This section has one compulsory question to be attempted
Question 2
APE & Co., a firm of certified public accountants, has been auditing Fox Ltd, a
microfinance institution for the last two years. In the pre-audit meeting for the
year ended 31 December 2014, the following issues were discussed:
Fox Ltd has upgraded all its manual operations to computerized systems.
These include accounting systems, payrolls, loan tracking, and
management information systems. The audit firm will therefore need to
use Computer-Assisted Audit Techniques (CAATs) to interrogate the
client’s computer systems to enable them carry out comparative and
analytical tests.
Fox Ltd management had earlier requested APE & Co. to review their
information technology (IT) systems before the actual audit could be
carried out. This was done and the findings discussed in the meeting were
as follows:
1. Employees were not aware of the need for internal controls and the
procedures to be followed.
2. Employees had not been made aware of the control procedures.
There had been no training on how to use the systems and the
controls were not documented.
3. The suppliers of the software systems have not provided full
documentation for the programme in use and had not done any
backstopping.
4. There were no restrictions on access of data in the computer
systems and some employees had used this opportunity to
manipulate the system.
5. The computerised systems had viruses and other intrusions which
had corrupted some of the data.
6. The systems had passwords but these had not been changed since
the systems were acquired. The passwords are known to all staff.
7. The system does not leave a trail of the employees who logged into
the system.
8. Review of data input into the system is not usually done as there are
no authorizations of input data.
The managing director reminded the audit engagement partner of the
fundamental ethical principles expected from a professional accountant.
This arose from complaints raised by Fox Ltd management about the audit
Audit Theory – Paper 7
26 August 2015 Page 3 of 5
team that carried out the previous year’s audit. Some of the audit team
members of the previous year’s audit were biased; incompetent; lazy;
abusive; and portrayed a negative image for the profession and were
involved in conflict of interest issues. Company information was leaked out
to competitors and it was rumored that the auditors had a hand in it.
Required:
(a) Advise the engagement partner on the fundamental ethical principles
expected of accountants in relation to the audit of FOX Ltd.
(10 marks)
(b) Explain the auditor’s purpose of reviewing FOX Ltd’s computer systems.
(4 marks)
(c) Advise Fox Ltd on how they can overcome the findings from the review of
its computer systems.
(8 marks)
(d) APE & Co. has decided to use the approach of understanding and
interrogating the management information systems. Explain the various
types of CAATs that the audit firm can adopt to audit the computerised
systems of Fox Ltd.
(8 marks)
(Total 30 marks)
Audit Theory – Paper 7
26 August 2015 Page 4 of 5
SECTION C
Attempt two of the three questions in this section
Question 3
ISA 610: Using Work of Internal Auditors; deals with the external auditor’s
responsibilities relating to the work of internal auditors when the external auditor
has determined that the internal audit function is likely to be relevant to the
audit.
Required:
(a) Identify the types of audits carried out by an internal audit department.
(5 marks)
(b) Identify the major areas of work done by an internal auditor which an
external auditor finds most relevant.
(2 marks)
(c) Differentiate between internal and external auditing.
(5 marks)
(d) Explain the criteria to be considered by an external auditor when relying
on work done by an internal auditor.
(8 marks)
(e) Discuss the factors that should be considered when designing an internal
audit department.
(5 marks)
(Total 25 marks)
Question 4
ISA 501: Audit Evidence–Specific Considerations for Selected Items, deals with
specific considerations by the auditor in obtaining sufficient appropriate audit
evidence in accordance with ISA 330: Auditor’s Responses to Assessed Risks; ISA
500: Audit Evidence and other relevant ISA’s with respect to certain aspects of
inventory, litigation and claims involving the entity and segment information in
an audit of financial statements.
Required:
(a) Apart from gathering audit evidence to support audit opinion, identify the
other reasons that would make the auditor attend physical inventory
count.
(6 marks)
(b) Identify the objectives of auditing inventory.
(4 marks)
Audit Theory – Paper 7
26 August 2015 Page 5 of 5
(c) Describe the different types of inventory you would look for when carrying
out an audit of inventory.
(3 marks)
(d) Describe the audit procedures that an auditor would carry out in respect to
the audit of inventory.
(12 marks)
(Total 25 marks)
Question 5
You are an audit senior in Katindo & Co., a firm that has been appointed to audit
the books of Miky Mama for the first time. In the pre-audit meeting with the
client, the following issues were discussed:
Management does not understand the difference between audit and
accountancy work.
Management has neither read the engagement letter nor signed it off.
Some of the information may not be readily availed to the team.
The finance director threatened that if the audit team did not tread carefully
their payment would not be forthcoming.
Required:
(a) Explain the terms ‘engagement letter’ and ‘letter of representation’.
(5 marks)
(b) Discuss the importance of using an engagement letter to the auditor as
highlighted in ISA 210: Terms of an Audit Engagement.
(10 marks)
(c) Explain the rights of an auditor.
(10 marks)
(Total 25 marks)
http://www.accountingpdfbooks.com
THE PUBLIC ACCOUNTANTS EXAMINATIONS BOARD
A Committee of the Council of ICPAU
CPA(U) EXAMINATIONS
LEVEL ONE
AUDIT THEORY – PAPER 7
WEDNESDAY, 26 AUGUST 2015
INSTRUCTIONS TO CANDIDATES
1. Time allowed: 3 hours 15 minutes.
The first 15 minutes of this examination have been designated for reading
time. You may not start to write your answer during this time.
2. This examination contains Sections A, B and C.
3. Section A is bound separately from Sections B and C.
4. Attempt all the 20 multiple-choice questions in Section A. Each question
carries 1 mark.
5. Attempt the compulsory question in Section B carrying 30 marks.
6. Attempt two of the three questions in Section C. Each question carries
25 marks.
7. Write your answer to each question on a fresh page in your answer
booklet.
8. Please, read further instructions on the answer booklet, before attempting
any question.
© 2015 Public Accountants Examinations Board
Audit Theory – Paper 7
26 August 2015 Page 2 of 5
SECTION B
This section has one compulsory question to be attempted
Question 2
APE & Co., a firm of certified public accountants, has been auditing Fox Ltd, a
microfinance institution for the last two years. In the pre-audit meeting for the
year ended 31 December 2014, the following issues were discussed:
Fox Ltd has upgraded all its manual operations to computerized systems.
These include accounting systems, payrolls, loan tracking, and
management information systems. The audit firm will therefore need to
use Computer-Assisted Audit Techniques (CAATs) to interrogate the
client’s computer systems to enable them carry out comparative and
analytical tests.
Fox Ltd management had earlier requested APE & Co. to review their
information technology (IT) systems before the actual audit could be
carried out. This was done and the findings discussed in the meeting were
as follows:
1. Employees were not aware of the need for internal controls and the
procedures to be followed.
2. Employees had not been made aware of the control procedures.
There had been no training on how to use the systems and the
controls were not documented.
3. The suppliers of the software systems have not provided full
documentation for the programme in use and had not done any
backstopping.
4. There were no restrictions on access of data in the computer
systems and some employees had used this opportunity to
manipulate the system.
5. The computerised systems had viruses and other intrusions which
had corrupted some of the data.
6. The systems had passwords but these had not been changed since
the systems were acquired. The passwords are known to all staff.
7. The system does not leave a trail of the employees who logged into
the system.
8. Review of data input into the system is not usually done as there are
no authorizations of input data.
The managing director reminded the audit engagement partner of the
fundamental ethical principles expected from a professional accountant.
This arose from complaints raised by Fox Ltd management about the audit
Audit Theory – Paper 7
26 August 2015 Page 3 of 5
team that carried out the previous year’s audit. Some of the audit team
members of the previous year’s audit were biased; incompetent; lazy;
abusive; and portrayed a negative image for the profession and were
involved in conflict of interest issues. Company information was leaked out
to competitors and it was rumored that the auditors had a hand in it.
Required:
(a) Advise the engagement partner on the fundamental ethical principles
expected of accountants in relation to the audit of FOX Ltd.
(10 marks)
(b) Explain the auditor’s purpose of reviewing FOX Ltd’s computer systems.
(4 marks)
(c) Advise Fox Ltd on how they can overcome the findings from the review of
its computer systems.
(8 marks)
(d) APE & Co. has decided to use the approach of understanding and
interrogating the management information systems. Explain the various
types of CAATs that the audit firm can adopt to audit the computerised
systems of Fox Ltd.
(8 marks)
(Total 30 marks)
Audit Theory – Paper 7
26 August 2015 Page 4 of 5
SECTION C
Attempt two of the three questions in this section
Question 3
ISA 610: Using Work of Internal Auditors; deals with the external auditor’s
responsibilities relating to the work of internal auditors when the external auditor
has determined that the internal audit function is likely to be relevant to the
audit.
Required:
(a) Identify the types of audits carried out by an internal audit department.
(5 marks)
(b) Identify the major areas of work done by an internal auditor which an
external auditor finds most relevant.
(2 marks)
(c) Differentiate between internal and external auditing.
(5 marks)
(d) Explain the criteria to be considered by an external auditor when relying
on work done by an internal auditor.
(8 marks)
(e) Discuss the factors that should be considered when designing an internal
audit department.
(5 marks)
(Total 25 marks)
Question 4
ISA 501: Audit Evidence–Specific Considerations for Selected Items, deals with
specific considerations by the auditor in obtaining sufficient appropriate audit
evidence in accordance with ISA 330: Auditor’s Responses to Assessed Risks; ISA
500: Audit Evidence and other relevant ISA’s with respect to certain aspects of
inventory, litigation and claims involving the entity and segment information in
an audit of financial statements.
Required:
(a) Apart from gathering audit evidence to support audit opinion, identify the
other reasons that would make the auditor attend physical inventory
count.
(6 marks)
(b) Identify the objectives of auditing inventory.
(4 marks)
Audit Theory – Paper 7
26 August 2015 Page 5 of 5
(c) Describe the different types of inventory you would look for when carrying
out an audit of inventory.
(3 marks)
(d) Describe the audit procedures that an auditor would carry out in respect to
the audit of inventory.
(12 marks)
(Total 25 marks)
Question 5
You are an audit senior in Katindo & Co., a firm that has been appointed to audit
the books of Miky Mama for the first time. In the pre-audit meeting with the
client, the following issues were discussed:
Management does not understand the difference between audit and
accountancy work.
Management has neither read the engagement letter nor signed it off.
Some of the information may not be readily availed to the team.
The finance director threatened that if the audit team did not tread carefully
their payment would not be forthcoming.
Required:
(a) Explain the terms ‘engagement letter’ and ‘letter of representation’.
(5 marks)
(b) Discuss the importance of using an engagement letter to the auditor as
highlighted in ISA 210: Terms of an Audit Engagement.
(10 marks)
(c) Explain the rights of an auditor.
(10 marks)
(Total 25 marks)
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