TAX AUDIT AND INVESTIGATION - CITN EXAM QUESTIONS AND ANSWERS 

INTRODUCTION TO AUDIT AND INVESTIGATION 

SUGGESTED QUESTIONS AND ANSWERS

1. It appears from a number of studies in recent years that the role of an Auditor in relation to the detection of fraud is widely misunderstood. These studies have found that a high proportion of investors and of company management believe that the detection of fraud is one of the main objectives of an audit required. 

a) Discuss what you consider to be the auditor’s responsibilities in the course of the normal annual audit, in relation to the detection of fraud

Solution:

1a) The legal position is that it is not the auditor’s primary responsibility to detect or prevent frauds and other irregularities. 

The auditor’s Duty is to state whether a set of accounts gives a true and fair view and comply with the relevant legislation. However, the auditor has a secondary responsibility in relation to fraud etc. in that he should design and evaluate his work with a view to detecting those errors and irregularities which might impair the truth and fairness of the financial statements. Therefore, in obtaining audit evidence the auditor should satisfy himself that those errors or irregularities which may be material for the financial statement have not occurred or that if they have occurred they are either corrected or properly accounted for in the financial statements. 

In carrying out this responsibility the auditor should exercise reasonable care and skill and apply current auditing standards because it is expected that if the auditor plans his work well and applies current standards he should come across all material errors and irregularities in the normal course of his audit.

b) Explain the way in which the auditor should approach and perform his work in order to meet those responsibilities.

Solution:

1b) The auditor should conduct a normal audit in accordance with the auditor operational standards. This involving the following steps:

i. Plan, control and record the audit.

 ii. Evaluate the test internal controls.

 iii. Design substantive tests which takes into account weakness in internal controls. 

iv. For the major items in the account, obtain relevant, reliable and sufficient audit evidence.

 v. Review the financial statements checking the consistency of related items looking at trends and investigating unusual variations. 

vi. If he comes across anything suspicious he should investigate it thoroughly. That is, he may need to amend his audit programme to enable him to investigate and follow up the errors and irregularities.

c) Briefly outline the action which the auditor should take if, during the audit he suspects that his client has carried out fraudulent trading.

Solution:

1c) In the course of his audit the auditor may discover a fraud or irregularities perpetrated by his demerits client. Normally, his duty of confidentiality prevents him from reporting any matters to third parties without his client’s permission. However, in certain circumstances the auditor may disregard the duty of confidentiality for example; he may be legally bound to disclose the commission of a criminal offence if ordered to do a court or by government officials empowered to request such information. 

Further, an auditor may elect to disclose information voluntarily where there is a public duty involved. A public duty arises if the auditor is aware of an actual or intended criminal offence likely to cause harm to an individual or effect a large number of people where the auditor is not sure of his position he should seek legal advice and if his efforts are frustrated by his client he may consider resigning his appointment under the provisions of the companies and allied matter act.

2. What are the expectations of the users of audited accounts of the external auditor? And explain the steps to be taken to bridge the audit expectation gap.