JAN 2013 QUESTION 5 a) Explain two (2) audit procedures that you would conduct to confirm the problems

mentioned by TBSB management. (2 marks) Inspection inspection involves having the audit staff examining records, documents or tangible items of the audit client Observation observing clients staff performing a process or procedure in relation to area of audit concerns Inquiry and confirmation this procedure is an evidence gathering activity by seeking information and getting confirmation or information from persons inside and outside of the company Re-calculation and re-performance checking the arithmetical accuracy or perform independent calculation Analytical procedures this involves identifying and investigating unusual fluctuations and items especially in the BS and P&L accounts. This requires analysis of significant ratios and trends that are inconsistent with known information

b) From the above case, identify and explain the situations which violated the MIA By- Laws (indicate the MIA By-Laws that have been violated) (6 marks) Professional competence and due care - A professional accountant shall take reasonable steps to ensure that those working under the professional accountants authority in a professional capacity have appropriate training and supervision. Referral fees or commission - A professional accountant in public practice may also pay a referral fee to obtain a client, for example, where the client continues as a client of another professional accountant in public practice but requires specialist services not offered by the existing accountant. The payment of such a referral fee may also creates a selfinterest threat to objectivity and professional competence and due care.

 Integrity - The principle of integrity imposes an obligation on all professional accountants to be straightforward and honest in all professional and business relationships. Integrity also implies fair dealing and truthfulness. c) Describe the risk of material misstatements (RMM) to be addressed by the auditor in planning the audit of TBSB for the financial year ended 31 October 2012. marks) Audit risk is defined as the risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated. Audit risk is a function of the risks of material misstatement and detection risk. Hence, audit risk is made up of two components risks of material misstatement and detection risk. Risk of material misstatement is defined as the risk that the financial statements are materially misstated prior to audit. Inherent risk is the susceptibility of an assertion about a class of transaction, account balance or disclosure to a misstatement that could be material, either individually or when aggregated with other misstatements, before consideration of any related controls. Control risk is the risk that a misstatement that could occur in an assertion about a class of transaction, account balance or disclosure and that could be material, either individually or when aggregated with other misstatements, will not be prevented, or detected and corrected, on a timely basis by the entitys internal control. Detection risk is defined as the risk that the procedures performed by the auditor to reduce audit risk to an acceptably low level will not detect a misstatement that exists and that could be material, either individually or when aggregated with other misstatements. (12

d) Advice management on the potential benefits and risks of computerized information system to an entity's internal control system. marks) (6

Benefits Ability to handle tremendous volumes of complex business

transactions cost effectively Ability to improve internal control by incorporating computer-performed controls in day-to-day transaction processing activities can reduce human error Greater potential for reducing misstatements because computers process information consistently High quality information available due to IT environment administered effectively Risks Risk to hardware and data weak protection of hardware and loss of data Reduce audit trail elimination of source documents and records does not allows company to trace accounting information Need for IT experience and separation of IT duties IT personnel with access to master file might steal assets and costly to hire consultants with appropriate technology knowledge and skills

e) The presence of automated processing for significant accounting applications affects how an entity implements its internal control. There are some factors within the control environment that are affected by information technology. Identify two (2) control environment factors in TBSB and explain how Identify two (2) control environment factors in TBSB and explain how environment should be implemented. the control (4 marks)

General controls Administration of IT function chief information officer or IT manager report to senior management and board Segregation of IT duties responsibilities for programming, operations and data control are separated Systems development teams of users, system analysts, and programmer develop and thoroughly test the software Physical and online security restricted access, passwords and IDs limit access to software and data files and firewalls protect data Backup and contingency planning written back up plans are prepared and tested regularly throughout the year Hardware control memory failure or hard drive failure causes error messaged on the monitor Application controls Input controls preformatted screes prompt data input personnel for information to be entered Processing controls reasonableness test review unit selling prices used to process a sale Output controls sales department performs post-processing review of sales transactions