AUDITING – CUAC 202

ASSIGNMENT 1

1(a) Explain the importance of audit planning and state two matters that would be included in an audit
plan.  (6)
(b) List factors that influence reliability of audit evidence.  (4)
(c) You are the senior-in-charge of the audit of TH Limited, a company which produces sophisticated
electronic laboratory equipment.  The company imports a high proportion of the components it uses
from the far East.  The equipment is used by some laboratories dealing with hazardous chemicals.
As the audit draws to a close, the partner in charge has asked you to ensure that all procedures relating
to subsequent events and going concern are properly performed.  You are to consider the audit work to
be performed in relation to subsequent events and going concern.
Required

 (1) List the responsibility of the auditor for detecting errors in the accounts during the following
periods.
 (i) From the balance sheet date to the completion of the detailed audit work.  (2)
 (ii) From the completion of the detailed audit work to the date the directors sign the financial
statements.  (2)
 (iii) From the date the directors sign the financial statements to the meeting where shareholders
approve the accounts. (2)
 

(2) Briefly explain the auditor’s responsibility regarding the going concern and state the audit
procedures to be undertaken where the entity’s going concern status is doubtful.  (3)

 (3) Explain what is meant by the following:

i) Audit risk
ii) Inherent risk
iii) Control risk
iv) Detection risk
v) Explain how an auditors approach might be affected if he concludes that there is a high inherent
risk.

ASSIGNMENT 2

 (a) DP Co is a wholesaler of furniture (such as chairs, tables and cupboards).  DP buys the furniture from
six major manufacturers and sells them to over 600 different customers ranging from large retails chain
stores to smaller owner-controlled businesses.  The receivables balance therefore includes customers
owing up to $125,000.00 to smaller balances of about $5,000.00, all with many different due dates for
payments and credit limits.  All information is stored on DP’s computer systems although previous audits
have tended to adopt an ‘audit around the computer’ approach.
 

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You are the audit senior-in-charge of the audit of the receivables balance.  For the first time at this
client, you have decided to use audit software to assist with the audit of the receivables balance.
Computer staff at DP are happy to help the auditor, although they cannot confirm completeness of
systems documentation, and warn that the systems have very old operating systems in place, limiting
file compatibility with more modern programs.

 The change in audit approach has been mainly to fully understand DP’s computer systems prior to new
internet modules being added next year.  To limit the possibility of damage to DP’s computer files, copy
files will be provided by DP’s computer staff for the auditor to use with their own audit software.
 
Required
 

i) Explain the audit procedures that should be carried out using audit software on the
receivables balance at DP Co.  For each procedure, explain the reason for that procedure. 
(9)
ii) Explain the potential problems of using audit software at DP Co.  For each problem, explain
how it can be resolved.  (8)
iii) Explain the concept of ‘auditing around the computer’ and discuss why this increases audit
risk for the auditor.  (3)

ASSIGNMENT 3

 You are the senior-in-charge of the audit of Sparks Company, a distributor of electrical
components.  A member of the audit team had undertaken a review of the accounting and control
systems and had identified and confirmed the following significant points of deficiency;

(i) Purchases
Purchase Ledger Clerks amend the payables master file with details of new suppliers on verbal
authority of the financial controller.  No printouts of amendments is obtained.
(ii) Sales
Credit limit parameters within the sales order processing software are unrealistically low,
resulting in a high volume of items being rejected as exceptions.
(iii) Cash at Bank
The monthly reconciliations prepared by the assistant accountant are not reviewed.
(iv) Contingency Planning
There is no formal disaster recovery plan.
Required

 (i) Set out in a manner suitable for inclusion in a report to management, the possible consequences of
the above deficiencies and the recommendations to remedy the deficiencies.  Your recommendations
should clearly describe how the control procedures should operate. (10)
 (ii) Explain how a report on these matters written by internal audit would differ from the external
auditors. (10)

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ASSIGNMENT 4
The office of the Auditor General is that of a public servant. What are the factors that help to achieve
Independence of the auditor general in the public service as he carries his function as Chief Internal
Auditor.

ASSIGNMENT 5
What are the fundamental principles needed to achieve the objectives of the auditing profession?

ASSIGNMENT 6
Why should the company waste resources to have Management Auditors when it is already paying for
external auditing services?

ASSIGNMENT 7
Generally Accepted Government Auditing Standards (GAGAS) consists of 32 standards compared to only
10 for GAAS. Why is this case?

ASSIGNMENT 8
Explain the term “audit risk” and the three elements that contribute to total audit risk. (4)

The CD charity was established in 1960. The charity’s aim is to provide support to children from
disadvantaged backgrounds who wish to take part in sports such as tennis and football.

CD has a detailed constitution which explains how the charity’s income can be spent. The constitution
also notes that administration expenditure cannot exceed 10% of income in a year.

The charity’s income is derived wholly from voluntary donations.

Sources of donations include:

i. Cash collected by volunteers asking public for donations in shopping areas.

ii. Cheques sent to charity’s head office.
iii. Donations from generous individuals. Some of these donations have specific clauses attached
to them indicating that the initial amount donated (capital) cannot be spent and that the
income (interest) from the donations must be spent on specific activities, e.g. provision of
sports equipment.

The rules regarding the taxation of charities in the country CD is based are complicated, with only
certain expenditure being allowable for taxation purposes and donations of capital being treated as
income in some situations.

Required

a) Identify areas of inherent risk in the CD charity and explain the effects of these risks on the
audit. (12)

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 b) Explain why the control environment may be weak at the charity CD. (4)

ASSIGNMENT 9
SM Co provides scientific to a wide range of clients. Typical assignments range from testing food for
illegal additives to providing forensic analysis on items used to commit crimes to assist law enforcement
officers.

The annual audit in nearly complete. As audit senior you have reported to the engagement partner that
SM is having some financial difficulties. Income has fallen due to the adverse effect of two high profile
court cases, where SM’s services to assist the prosecution were found to be in error. Not only did this
provide adverse publicity for SM, but a number of clients withdrew their contracts. A senior employee
then left SM, stating lack of investment in new analysis machines was increasing the risk of in correct
information being provided by the company.

A cash flow forecast prepared internally shows SM requiring significant additional cash within the next
12 months to maintain even the current level of services. SM’s auditors have been asked to provide a
negative assurance report on this forecast.

Required

a) Define “going concern” and discuss the auditor’s responsibility in respect of going concern.(4)
b) State the audit procedures that may be carried out to try to determine whether or not SM Co is
a going concern. (8)
c) Explain the audit procedures the auditor may take where the auditor has decided that SM co is
unlikely to be going concern. (4)
d) In the context of cash flow forecast, define the term “negative assurance” and explain how this
differs from the assurance provided by an audit report on statutory financial statements. (4)

ASSIGNMENT 10

a) Contrast the roles of internal and external auditors. (10)

b) What is the importance of audit committees? (10)

ASSIGNMENT 11

a) State the audit objectives associated with verification of fixed assets. (8)
b) Outline the substantive testing procedures you would perform to achieve the objectives in (a)
(12)

ASSIGNMENT 12

Your firm which has eight partners has been invited by Mr. G, the managing director and majority
shareholders of Bs by co to accept appointment as statutory auditors of the company. The present firm
of auditors will not be reappointed when its term of office expires.

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The principal activity of Bs by co is the manufacture and distribution of healthcare products. Your firm
has several companies operating in the healthcare sector in its client portifolio.

Mr. G has requested that your firm assists with the preparation on the company’s corporation tax
computation and provides consultants services on an on going basis in connection with his plans to grow
the business. He has also suggested that a partner in your firm joins the board of Bs by Co as a non
executive director.

Required

Set out matters to be considered and the procedures to be performed in order to determine whether to
accept the appoint as auditor. (10)

Identify and explain the threats for independence and objectivity which may arise from the provision of
the services requested by Mr. G and state how these threats should be resolved. (10)

Set out benefits to audit firms and their clients of having audit and non audit services provided by the
same firm of accountants. (5)

Assignment 13

Big Blocks (BB) based in Harare, offers design solutions to architectural, construction and engineering
customers using concrete. BB create products tailored to customer specifications using computer
controlled machinery and coating materials. BB’s customer base is varied from well known multinational
companies, to individual customers with a design idea. Typical products include dining room tables,
landscape seating, spa and pool features and garden planters. BB’ s workshop in Bulawayo contains
computer-controlled machines that have the capability to cut blocks of concrete into virtually any shape
or size.

In previous years, BB maintained a manual accounts system. This year BB has purchased a new
Computerized Accounts System (CAS) which records purchases and sales transactions and maintains
records of trade receivables, trade payables and inventory.

You, Ian Chiva, as BB’s audit engagement supervisor have decided to adopt a risk based audit strategy in
the audit of BB.

Whilst BB now maintains records of Inventory (in both quantity and value) on its new CAS, you and your
audit team will be observing the physical inventory count in BB at year end to ensure the proper cut off
of purchases and sales.

Required

a)

i) Explain why observation of the physical inventory count is essential in ensuring the proper cut off of
purchases and sales. (4)

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ii) What information should the auditor obtain during the physical count to ensure that cut off for sales
is accurate? (4)

iii) What information should the auditor obtain during the physical count to ensure that cut off for
purchases is accurate? (2)

b) Tim Kamwe, Managing director of BB, has a number of concerns regarding tha audit. She knows that
you plan to adopt a risk based auditing strategy and does not know what this means. She asked that you
send a letter explaining:

i) What is meant by risk based auditing strategy; and (4)

ii) Advising on the steps that you propose to take arising from BB’s implementation of its new
computerized accounting system. (4)

Assignment 14

Spring Valley (SV) is a bar in Chinhoyi. The premises was built in the 60s and still has some of its original
features. It serves bar food as well as drinks. SV’s financial year end is 30 June 2012.

SV does its banking with CBZ Bank Magamba way Branch.

On 15 January 2012, SV took out a 20 year mortgage for USD $5 200 000 to acquire the building
adjoining the bar, with the intention of expanding. SV used the bar and ground on which the bar stands
as collateral. Every month since the loan was obtained a payment of USD $ 40 000 (principal and
interest) has been paid to CBZ.

As the responsible audit manger, you are in charge of the current year audit for SV. SV is an existing
client of your firm but this is the first time SV has had a mortgage.

Required

a)

i) Explain why it would be necessary to record information on the mortgage for inclusion in the
permanent file. (2)

ii) Identify what type of information in relation to the mortgage should be included in the permanent
file. (2)

iii) Identify and explain and THREE key financial statement assertions for the mortgage, interest expense,
and interest payable accounts i.e. ONE assertion for each. (3)

b)

i) List the audit procedures you should perform to audit the internal control components of the
mortgage. (5)

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ii) List the substantive audit procedures to verify:

 The issue of the mortgage; (1)

 The balance of the mortgage at 30 June 2012; (1)
 Interest payable accounts at 30 June 2012 (1)
 And the balance in the interest expense account for the period ended 30 June 2012. (1)

c) Briefly explain why the audit procedures on mortgage payable, interest expense, and interest payable
should be conducted together. (4)

Assignment 15

Zim Tours (ZT) is a company which markets Zimbabwe as a destination for business tourism. ZT operates
six convention centres in various locations around Zimbabwe. ZT’s office premises are located in Harare.
The company’ directors, central administration and accounts department are located at its premises and
wages payments to all employees, together with all company supplier payments, are made from there.

The company’s accounting system comprises of a fully integrated nominal, trade payables, trade
receivables ledgers, together with an online, real time Internet Based booking system that enables
convention organizers to book convention centres through the company website. Convention organizers
use the link to the ZT’s website to view the various convention centres and prices. Prices for, and
availability of, the various rooms in each convention centre are automatically updated on the system
weekly. Convention organizers make bookings through the online system and provide credit card
information for payment. After the credit card details are verified the sales ledger is automatically
updated. Then an electronic copy of the booking is sent to relevant convention centre. Convention
organizers may cancel a booking made online within 30 days are by going through an online cancellation
process.

You have become aware that some convention organizers have expressed concerns about doing
business online with ZT.

As on line computer systems lend themselves very well to the use of Computer Assisted Audit
Techniques (CAATS), it is proposed to use CAATS as part of the audit.

Required

You, as Audit Manager, are asked to:

a) Briefly discuss the potential advantages from an internal control perspective for a company like
ZT having a computerized accounting system as opposed to using a manual accounting
system. (4)
b) Identify and explain TWO inherent risks and TWO controls risks for accounting systems that rely
heavily on IT systems. (8)
c) Give two reasons justifying why convention organizers might have concerns about doing
business online with ZT. (4)

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 d) List FOUR factors that would affect the auditor’s use of CAATS. (4)

Assignment 16

SBP distributes and sells baby products across Zambia. Jill, the audit junior, with responsibility for both
sales and receivables performed a preliminary evaluation of the company’s internal control over sales
transactions and concluded that the system of internal controls over sales is in general good and control
risk is low. Therefore, Jill decides to test controls to confirm her assessment of control risk. SBP raised
approximately 650 sales invoices during the year, whose recorded total is $ 750 000. SBP’s profit before
taxes for the year is $ 180 000.

Deciding to use judgmental (non statistical) sampling Jill randomly selects a sample of 40 copy sales
invoices from the recorded sales. She examines each sample invoice by conducting the following tests of
control:

 Checks the invoice is correctly coded with customer and nominal codes.
 Checks that the prices on the invoice are consistent with SBP’s official price list.
 Checks the invoice for arithmetic, prices and calculations including VAT.
 Traces the invoices details to the customer sales order.
 Traces the invoice amount to SBP’s day books, ledger and inventory records.

After performing the above tests of control, Jill notes a few minor control deviations, for which the SBP’s
sales staff give her plausible explanations. Jill therefore confirms her assessment of control risk as low.
Consequently, Jill decides to confirm receivables at year end and to limit her sample size to 15 accounts
selected haphazardly from the population of 250 receivables accounts.

Required

a) Briefly explain the concept of sampling risk, indicating why such risk exists and what measures
Jill should take to minimize such risk. (5)
b) Critically evaluate Jill’s audit approach with respect to the truth and fairness of sales and
receivables. (6)
c) Jill decide to determine the sample size judgmentally (non statistically). Identify FOUR
advantages of using statistical sampling instead of using judgmental sampling (non statistical
sampling). (6)
d) In the event that customers of SBP do not respond to Sharon’s request explain THREE
alternative procedures that Jill should perform to gain assurance as to the truth and fairness of
these balances. (3)

Assignment 17

Proper Print (PP) is an indoor and outdoor short run digital print house specializing in small and large
format digital signage and display. It has fully integrated creative studio to take a project from
concept right through to completion. You are the audit Manger for PP and are now at stage in the

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 audit of PP that precedes the audit reporting stage. You ask your Audit junior, Abel, to draft the
audit report and below is a paragraph he has drafted:

“we planned and performed our audit to obtain assurance as to whether the statements are free of
misstatement. We examined evidence to support the amounts used by management. An audit also
includes assessing the accounting standards as used by the directors, as it is the Director’s
responsibility to prepare the statements.”

Required

a) List SIX basic elements of an auditor’s report. Briefly explain why each element is included in the
report. (6)
b) Identify errors and deficiencies in the above paragraph drafted by Abel. (9)
c) Explain the audit process stage that precedes the audit reporting stage and follows the financial
statements testing stage. (5)

Assignment 18

Your firm is the auditor of Recoveries IT (RI) a Chivhu based company that sells security tags for items
such as laptops and mobile phones. Their turnover last year was $1,7m.

You, the audit supervisor, are now at the planning stage of the audit and have made some notes for
your audit junior in relation to the International Standards on Auditing (ISA). Amongst the notes you
have given your audit junior are the following:

ISA 300 Planning an audit of financial statements requires that the planning stage of the audit should be
used to establish an overall strategy for the audit and develop an audit plan.

ISA 330 The auditor’s procedures in response to assessed risks notes that it is essential that the auditor
documents the nature, timing and extent to audit procedures that have been performed.

ISA 315 Obtaining an understanding of the entity and its environment and assessing the risks of material
misstatement directs that the auditor must gain an understanding of internal control within an entity
that is relevant to the audit.

The audit junior has come back to you and asked you to clarify a number of items for him as outlined in
the REQUIREMENT section below:

a) List FOUR key matters that should be contained in an overall strategy for the audit. (4)
b) Should the overall strategy for the audit and other planning documents, like the audit plan, be
revised during the course of the audit? Justify your answers. (6)
c) List FIVE items or pieces of information that should be included in the audit documentation to
demonstrate that the required audit was conducted according to the International Standards.(5)
d) There are various methods for recording the control systems in the preliminary evaluation of
internal control. One method is to use a narrative.

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 i) State two other methods (2)
ii) For the narrative method and for each of the other two methods in your answer to part
(i), list the advantage of each of the three methods. (3)

Assignment 19

One of your responsibilities with your audit firm, Dan and Partners, CPAs, is developing new clients. Dan
and Partner is a small audit firm. AMC motors is based in Mvuma where they sell new and used cars.
AMC also service cars. You are currently in discussions with AMC in relation to the possibility of Dan and
Partners becoming AMC’s new auditors. If your firm consents to be their Auditor, AMC has offered to
service your car free of charge and the cars of the three audit partners of the audit firm. Normal charge
for a service of one of these cars is $600. You plan to communicate with the previous auditor before
making your recommendation.

Required:

a) State with reasons whether you and the audit partner should accept the offer of free car
services from AMC in the event they are accepted as an audit client. (6)
b) In addition to communicating with the previous auditor, explain FOUR factors that you should
consider in determining whether it is feasible for Dan and Partner to accept this engagement.(8)
c) Identify THREE items of information you should obtain from AMC’ previous auditor. (6)

Assignment 20

Meat shop (MS) is a South African registered company that offers premium beef to its customers at
wholesale prices. As part of planning process the recently appointed auditor is preparing an Overall
Audit Strategy, with one of its principal sections being an overview of MS’s business and industry
resulting from his acquisition of an understanding of it.

Required

a) Describe THREE benefits an auditor derives from planning audits. (3)

b) Outline the responsibilities of the new and previous auditors when a company is changing
auditors. (3)
c) Identify the factors the auditor should have considered before accepting appointment as auditor
of a company. (4)
d) With regard to the auditor obtaining an understanding of a client’s business and industry:
i) Explain TWO reasons why an auditor needs an understanding of the client’s business
and industry. (2)
ii) Identify FOUR major aspects of understanding the client’s business, industry and
sources commonly used by auditors to acquire such an understanding for each of the
FOUR aspects. (8)

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Assignment 21

Dunlop Tyres (DT) is an established client of your firm. The audit work has been completed for the year
ended 31 March 2010, but there is one outstanding matter. On 2 April 2010, one of the main suppliers
of tyres to DT notified DT that, with immediate effect, all prices would be increased by 15%.

Consequently, the directors of DT decided to revalue its 31 March 2010 inventory to show the higher
costs. Inventory accounts for a material amount of total assets but whilst the effect of the revaluation is
material to current assets, it is not material in relation to total assets or net income. The increase in
valuation is disclosed in notes to the financial statements.

Required

a) Set out in point form the potential implications for the audit report of DT for the year ended 31
March 2010. (6)
b) Describe the auditor’s reporting responsibility to members/shareholders comparing this
responsibility to other external financial statements users and external bodies, and THREE
specific scenarios where the auditor is bound by legislation to report to external bodies. (8)
c) Outline the period with which the auditor is normally concerned with regard to the audit of
subsequent events. Explain why the auditor in concerned with this particular period and briefly
describe the difference in the nature of work performed during and after this period. (6)

QUESTION 22

Koala Park Abattoir is a registered Zimbabwean Company that offers premium meat to it’s customers at
wholesale prices. As part of the planning process the recently appointed auditor is preparing an overall
Audit Strategy, with one of its principal sections being an overview of Koala Park’s business and industry
resulting from his acquisition of an understanding of it.

Required

a) Describe THREE benefits an auditor derives from planning audits. [3 marks]

b) Outline the responsibilities of the new and previous auditors when a company is changing
auditors. [3marks]
c) Identify the factors the auditors should have considered before accepting appointment as
auditor of a company. [4 marks]
d) With regard to the auditor obtaining an understanding of the client’s business and industry. [2
marks]
i) Explain two reasons why an auditor needs an understanding of the client’s business and
industry. [2 marks].
ii) Identify four aspects of understanding such an understanding for each of the four
aspects. [8 marks] [Total:20marks]

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QUESTION 23

TN company is a wholesaler of furniture (such as chairs, tables and cupboards). TN Harqe buys the
furniture from six major manufacturers and sells them to cover 600 different customers ranging from
large retailers to smaller owner – controlled businesses. The receivables balance therefore includes
customers owing up to $125 000 to smaller balances of about $5000 all with many different due dates
for payments and credit limits. All information is stored on TN’s computer systems although previous
audits have tended to adopt an audit around the computer approach.

You are the senior in charge of the audit of the receivables balance. For the first time at this client you
have decided to use audit software to assist with the audit of the receivables balance. Computer staff at
TN are happy to help the auditor, although they cannot confirm completeness of systems
documentation and warn that the systems have very old operating systems in place, limiting file
compatibility with more modern programs.

The change in audit approach has been mainly to fully understand TN’s computer systems prior to new
internet modules being added next year. To limit the possibility of damage to TN’s computer files, copy
files will be provided by TN’s computer staff for the auditor to use with their own audit software.

Required

i) Explain the audit procedures that should be carried out using audit software on the
receivables balance at TN. For each procedure, explain the reason for that procedure. [9
marks]
ii) Explain the potential problems of using audit software at TN. For each problem, explain
how it can be resolved. [8 marks]
iii) Explain the concept of “auditing around the computer” and discuss why this increases audit
risk for the auditor. [3 marks]

[Total: 20marks]

QUESTION 24

You are the manager responsible for the annual review of your firms audit engagements to identify
situations where independence may be at risk and where the appropriate safeguards should be applied.

From your review of your firms files relating to APPLE shop plc you ascertain the following:

The company is expanding rapidly following a number of acquisitions and preparing to apply for
admission to the Stock Exchange and to offer a proportion of its shares to the public. As a result of the
special investigations undertaken, total fees from APPLE shop Plc amount to 17 per cent of your firms
gross practice income for the current year.

The company is about to undertake a feasibility study, on a proposal to expand into Europe, which is to
be kept secret from employees. To keep the initial costs of the APPLE shop team’s European travel

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expenses a secret, a partner (who is not the engagement partner) has offered to have them put onto his
credit card. They would then be billed as professional fees.

Required

a) Explain the risks you would consider in deciding whether or not the appointment should
continue . [8]
b) Briefly describe the safeguards available.[8]
c) Come to a conclusion on whether you consider the appointment should continue.[4]

Question 25

ISA 500 Audit Evidence requires that ‘The Auditor should obtain sufficient appropriate audit evidence to
able to draw reasonable conclusions on which base the audit opinion’. The explanatory material
contained within ISA 500 identifies five procedures for obtaining audit evidence. ISA 500 also offers
guidance as to assessing the reliability of audit evidence.

Required

a) Identify and describe the procedures for obtaining audit evidence. [8 marks]
b) For each of these procedures describe an Audit test using that procedure to obtain evidence as
to the balance of plant and machinery shown in the statement o financial position including the
related balances of accumulated depreciation and depreciation charged in the statement of
comprehensive Income Statement [7 marks]
c) For each of the procedures, discuss considerations affecting your judgment as to the reliability
of the evidence with particular reference to the test described in your answer to (b). [10 marks]

Question 26

You are the senior in charge of the audit of Bakier’s Best a manufacturing Company You have been
talking with the payroll supervisor who has commented on the strength of the company’s payroll
internal control system. She has assumed that this internal system guarantees the completeness,
accuracy on validity of the payroll accounting records.

Required

a) State whether you agree with the supervisor’s assumption that an Internal Control System can
guarantee the completeness, accuracy and validity of the records, supporting your answer by
using examples from payroll system. [15 marks]
b) The supervisor has also asked you to explain some Internal Control terminology which she does
not understand. Explain the meaning of the following terms, using payroll examples different
from those you have given above.
i) Segregation of duties [5 marks]
ii) Arithmetical on accounting controls [5 marks]
[Total 25 marks]

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Question 27

ISAS 300 to 320 provide guidance on planning an audit of financial statements to ensure that the audit
can b performed in an effective manner. You are the manager responsible for the audit of TK
Supermarkets which has a number of stores selling household products to the general public, including
furniture, electrical equipment, cooking equipment and carpets. The company has annual sales revenue
of about fifteen million dollars. In previously year’s audits there have been problems with:

- Misappropriation of inventory by employees and customers

- Slow moving and damaged inventory which is worthless than cost
- Incomplete recording of sales when the customer pays in cash (there represent 55% of all sales)

The company has a small Internal Audit Department, the staff of which visit branches and perform
appropriate audit work at the head office.

Required

Describe the work you will carry out on the matters you will consider in planning the audit prior to the
commencement of the detailed work, Including Consideration of the timetable for the audit.
[25marks]

Question 28 [20 marks]

An Auditor’s Independence may be compromised by the provision of other non-audit services.

a) Some of the Zimbabwean audit firms provide additional services to their audit clients such as
- Calculating the company’s income tax liability and the director’s personnel tax liability, and
negotiating with tax authorities.
- Preparing the Company’s financial statements for audit, from the accounting records
- Advising on setting up systems of Internal Control.

Required
Consider for each of the services listed above:

i) The effect on the auditor’s Independence of providing these services

ii) The procedures the audit firm should instigate to minimize the risk of providing them
affecting their independence. [10 marks]

b) ’Research carried out in one African country has shown that the fees charged to listed companies by
audit firms for non audit work are, on average , about equal to the audit fee. It is alleged that:

- Audit firms are charging how audit fees in order to obtain lucrative non-audit work
- With large fees from non-audit, auditors will be relevant to qualify their audit report because of
the risk of loosing both the audit and non-audit fees.
- Auditors’ reluctance to qualify their audit report compromises their independence.

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 If these allegations are correct, then auditors of stock exchange listed companies should be
prevented from providing other services to client companies.

Required
You are required to discuss this statement, consider each of the matters raised, and come to a
conclusion on whether external auditors should be allowed to provide other services to listed companies
they audit. [10 marks]

Question 29
KC audit has been appointed auditor of a company JB Ltd when commenced trading on 1 January 2009
as a distributor of computer hardware. KC audit has completed the audit for the year ended 31
December 2010 in January 2011 and reported by February 2011.

Basic system of Internal Control were not in evidence in all areas until after the end of the first year. You
qualified your report in respect of the first year on the grounds of lack of evidence concerning the
completeness of recording. The company commenced business selling computer spares only, with a
total staff of five, and during the course of the year extended its activities into the sale of new
computers and the servicing and hire of computers. The total staff at the end of the year was 20,
including an accounts department of 4.

KC audit have contacted the client with a view to planning the audit for the year to 31 December 201. It
has established, from information provided by the Company\s Accountant, who joined the company in
July 2009, the total number of staff is expected to increase to over 40 by December 2011 and that sales
are broadly doubling every three months.

During the course of the year, as additional staff have been taken on, the basic system of Internal
Control have developed and altered to meet the needs of the rapidly expanding business.

Required

a) Identify, from the situation outlined above, circumstances particular to growing that should be
taken into account when planning the audit. Explain clearly why these matters should be taken
into account. [10 marks]
b) State audit procedures you would carry out in order to address the above matters [10 marks]

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Question 30

You are completing the audit of JB Ltd a company in the software industry. As a meeting with the
Directors you asked them for a letter of representation. They refused to sign the draft letter you
provided as they claimed it is your responsibility to conduct the audit and not theirs.

Required

a) Explain what a letter of representation is and describe its main purpose on contents. In your
answer you should address:
i) The purpose of the letter
ii) Its role as audit evidence
iii) AT what stage of the audit should it be obtained
iv) Any two typical contents of such a letter [10 marks]

b) Explain the arguments you would put forward to the Directors if they refuse to sign the letter of
representation, and the potential actions open to you in that case
[6 marks]
c) Consider the position of a letter of representation in relation to the possible legal liability of the
Directors of the Client Company for misrepresentation and the reliance an Auditor can place on
the letter [4 marks]

Question 31

You are the newly appointed auditor of Kumer Pvt Ltd. You have received a copy of a management letter
from the external auditors to the Board pointing out there is no Internal audit service to provide quality
assurance to Management and Consequently the systems of Internal Control are less than satisfactory.
You have also discovered a variety of practices carried out by staff which you consider as fraudulent.
These include pilferage of Inventory and abuse of the company’s computer facilities. The chairman of
Kuna (Pvt) Ltd stung by these criticisms has asked for your comments and you will “use the internal audit
to help us fight fraud and improve our systems”.

Required

Draft a memorandum to the audit Committee in order to comply with the Chairman’s request. [20
marks]

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Question 32

a) The External auditor must always consider the risk that the going concern assumption of an
enterprise may no longer be appropriate.

Required

Explain possible indicators that would be considered by the auditor when a firm’s continuance as a going
concern is questionable [20 marks]

Question 33

The board of Directors of PAX Ltd have bee for sometime considering setting up an audit committee but
are unsure of the roles and duties of such a committee. The Chief Executive of PAX Ltd Mr. Marufu who
is due to give presentation to the board at the next board meeting has asked for your assistance on the
issue.

Required

Write a letter to him stating the objectives and responsibilities of an audit committee. [20 marks]

QUESTION 34

Rubbie’s Motors has called you for the annual audit. There line of business is buying and selling motor
vehicles but they also have pool cars that the organization uses in their day to day running.

Required

c) State the audit objectives associated with verification of fixed assets. (8 Marks)
d) Outline the substantive testing procedures you would perform to achieve the objectives in (a)
(12 Marks)

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Question 35

You are the newly appointed auditor of Kumar Pvt Ltd. You have received a copy of a management letter
from the external auditors to the Board pointing out there is no Internal Audit service to provide quality
assurance to Management and consequently the systems of Internal Control are less than satisfactory.
You have also discovered a variety of practices carried out by staff which you consider as fraudulent.
These include pilferage of inventory and abuse of the company’s computer facilities. The chairman of
Kuna (Pvt) Ltd stung by these criticisms has asked for your comments and you will “use the internal audit
to help us fight fraud and improve our systems”.

Required

Draft a memorandum to the audit Committee in order to comply with the Chairman’s request. [20
marks]

Question 36

b) The External auditor must always consider the risk that the going concern assumption of an
enterprise may no longer be appropriate.

Required

Explain possible indicators that would be considered by the auditor when a firm’s continuance as a going
concern is questionable [20 marks]

Question 37

The board of Directors of PAX Ltd have been for sometime considering setting up an audit committee
but are unsure of the roles and duties of such a committee. The Chief Executive of PAX Ltd Mr. Marufu
who is due to give presentation to the board at the next board meeting has asked for your assistance on
the issue.

Required

Write a letter to him stating the objectives and responsibilities of an audit committee. [20 marks]

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