ADVANCED AUDITING AND ASSURANCE - KASNEB NOTES

1 ADVANCED AUDITING AND ASSURANCESTUDY TEXTD ownload more free NOTES at AUDITING AND ASSURANCEiiSTUDY TEXTC opyrightALL RIGHTS RESERVED. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise without the prior written permission of the copyright owner. This publication may not be lent, resold, hired or otherwise disposed of in anyway of trade without the prior written consent of the copyright NO: 9966-760-26-1 2009 STRATHMORE UNIVERSITY PRESSF irst Published 2009 STRATHMORE UNIVERSITY Box 59857, 00200, Nairobi, : +254 (0) 20 606155 Fax: +254 (0) 20 607498 Design Concept & Layout - Simplicity Ltd - Box 22586-00400 Nairobi.

2 Email: more free NOTES at TEXTA cknowledgmentWe gratefully acknowledge permission to quote from past examination papers of Kenya Accounts and Secretaries National Examination Board ( KASNEB ).ACKNOWLEDGMENTD ownload more free NOTES at AUDITING AND ASSURANCEivSTUDY TEXTD ownload more free NOTES at TEXTTABLE OF CONTENTSACKNOWLEDGMENT ..iiiTABLE OF CONTENTS ..vCHAPTER ONE ..3 INTRODUCTION TO AUDITING ..5 CHAPTER TWO ..47 ACCOUNTING AND INTERNAL CONTROL SYSTEMS: THEORY AND PRACTICE ..49 CHAPTER THREE ..119 THE AUDIT PROCESS: PLANNING AND QUALITY CONTROL ..121 CHAPTER FOUR ..147 AUDIT EVIDENCE AND DOCUMENTATION.

3 149 CHAPTER FIVE ..193 THE AUDIT PROCESS: VERIFICATION OF ASSETS AND LIABILITIES ..195 CHAPTER SIX ..263 THE AUDIT PROCESS: FINAL REVIEW OF AUDIT OF FINANCIAL STATEMENTS ..265 CHAPTER SEVEN ..279 SPECIALIZED AUDIT SITUATIONS ..281 CHAPTER EIGHT ..305 EXTERNAL AUDITORS REPORTS AND OTHER REPORTS ..307 CHAPTER NINE ..359 AUDIT INVESTIGATIONS, RECEIVERSHIPS, LIQUIDATIONS AND CURRENT ISSUES IN AUDITING ..361 CHAPTER TEN ..425 ANSWERS TO THE EXAM QUESTIONS ..427 REFERENCES ..483 GLOSSARY ..487 INDEX ..493 Download more free NOTES at AUDITING AND ASSURANCEviSTUDY TEXTD ownload more free NOTES at TEXTCHAPTER ONEINTRODUCTION TO AUDITINGSTUDY TEXTSTUDY TEXTCHAPTER ONED ownload more free NOTES at AUDITING AND ASSURANCE2 STUDY TEXTD ownload more free NOTES at TEXTCHAPTER ONEINTRODUCTION TO AUDITINGOBJECTIVESWhen you have studied this chapter you should be able to.

4 Explain and discuss the nature of AUDITING Describe and discuss the regulatory framework for AUDITING and related services internationally and in Kenya Describe the provisions of the Accountants Act, Cap 531 in relation to professional misconduct. INTRODUCTIONThe chapter covers the basic concepts and regulation that affects the AUDITING profession. AUDITING is a key part of good corporate governance but the directors are responsible for maintaining a system of control that will safeguard the companies assert thus it gives guidelines of the facts that auditors must be aware of as part of their planning for carrying out a true and fair reportDEFINITION OF KEY TERMS1.

5 AUDITING the independent examination of and expression of opinion on, the financial statements of an enterprise by an appointed auditor in pursuance of that appointment and in compliance with any relevant statutory obligation:2. An engagement letter defines clearly the extent of the auditor s responsibilities and so minimise the possibility of any misunderstanding between the client and the auditor. Non-statutory audits performed by independent auditors because the owners, proprietors, members, trustees, professional and governing bodies or other interested parties desire them, not because the law requires them.

6 EXAM CONTEXTA complete understanding of the introduction to audit and ASSURANCE is essential as it helps the examinee tackle technical terms and have a deeper understanding of the questions. Nearly all questions will have something on the introduction to AUDITING and assuranceINDUSTRIAL CONTEXTA uditing as a profession plays an important role in ensuring that companies present a true and fair view of the financial statements to the different shareholders. Public Companies are required to publish audited financial statements at the end of the financial more free NOTES at AUDITING AND ASSURANCE4 STUDY TEXT DEFINITION OF AUDITING According to the International Standard on AUDITING (ISA) No.

7 200 Objective and General Principles Governing an Audit of Financial Statements, the objective of an audit of financial statements is to enable the auditor to express an opinion whether the financial statements are prepared, in all material respects, in accordance with an identified financial reporting framework. The phrases used to express the auditor s opinion are give a true and fair view or present fairly, in all material respects, which are equivalent terms. A similar objective applies to the audit of financial or other information prepared in accordance with appropriate Institute of Certified Public Accountants of Kenya (ICPAK) defines AUDITING as the independent examination of and expression of opinion on, the financial statements of an enterprise by an appointed auditor in pursuance of that appointment and in compliance with any relevant statutory obligation: RELATED SERVICESIn addition to audit services, auditors provide other services.

8 These can be classified as: ASSURANCE engagements Audits ReviewsNon- ASSURANCE Engagements (related services) Agreed upon Procedures Compilations ReviewsThe objective of a review of financial statements is to enable an auditor to state whether, on the basis of procedures which do not provide all the evidence that would be required in an audit, anything has come to the auditor s attention that causes the auditor to believe that the financial statements are not prepared, in all material respects, in accordance with an identified financial reporting framework. A similar objective applies to the review of financial or otherInformation prepared in accordance with appropriate more free NOTES at TEXTA review comprises inquiry and analytical procedures, which are designed to review the reliability of an assertion that is the responsibility of one party for use by another party.

9 While a review involves the application of audit skills and techniques and the gathering of evidence, it does not ordinarily involve an assessment of accounting and internal control systems, tests of records and of responses to inquiries by obtaining corroborating evidence through inspection, observation, confirmation and computation, which are procedures ordinarily performed during an the auditor attempts to become aware of all significant matters, the procedures of a review make the achievement of this objective less likely than in an audit engagement, thus the level of ASSURANCE provided in a review report is correspondingly less than that given in an audit report.

10 Agreed-upon Procedures (ISRS4400)The objective of these procedures is to report on the factual findings of procedures as agreed with the clientIn an engagement to perform agreed-upon procedures, an auditor is engaged to carry out those procedures of an audit nature to which the auditor and the entity and any appropriate third parties have agreed and to report on factual findings. The recipients of the report must form their own conclusions from the report by the auditor. The report is restricted to those parties that have agreed to the procedures to be performed since others, unaware of the reasons for the procedures, may misinterpret the results.