Auditing::PastPapers

 MAY 2005 

3 hours

Answer any FIVE questions. ALL questions carry equal marks.

QUESTION ONE

(a) You have recently been appointed as the external auditor of XYZ Ltd. Explain the stages you would take in the conduct of your audit. (4 marks)
(b) In the context of the Companies Act (Cap. 486), outline the procedure for the removal of an auditor. (6 marks)
(c) The auditor should obtain sufficient and appropriate audit evidence to be able to draw reasonable conclusions on which to base the audit opinion.

Identify and briefly explain any three procedures for obtaining audit evidence.
(6 marks)
(d) Briefly explain the meaning of the following terms in relation to audit reports:
(i) “Except for” opinion. (2 marks)
(ii) Disclaimer of opinion. (2 marks)
(Total: 20 marks)

QUESTION TWO

(a) “The auditor must not only be independent, but must be seen to be independent.” Briefly comment on this statement. (4 marks)
(b) Suggest how the independence of an auditor may be strengthened (4 marks)
(c) Explain the challenges that auditors face in the process of being independent.
(4 marks)
(d) Outline the ways in which an auditor may be held criminally liable in the course of his audit duties. (6 marks)
(e) Briefly explain what is meant by “the auditor’s duty of due professional care.”
(2 marks)
(Total: 20 marks)

QUESTION THREE

(a) The information acquired by the auditor from his client in the course of his professional work should not be disclosed to any third party except where consent has been obtained from the client.

Required:
Explain five circumstances under which an auditor can disclose such information to an appropriate authority without client’s permission (5 marks)

(b) (i) Explain the meaning of the term “audit committee” (2 marks)

(ii) List and briefly explain the main functions of an audit committee. (8 marks)

(c) Explain the purpose and principal contents of a letter of engagement (5 marks)
(Total: 20 marks)

QUESTION FOUR

(a) Identify and explain the functions of the internal audit department in an organization. (4 marks)
(b) Outline and briefly explain the procedures that the internal auditor can conduct on behalf of the external auditor. (6 marks)
(c) State the factors that the external auditor should consider before placing reliance on the work of the internal auditor. (5 marks)
(d) Briefly explain the methods which an auditor might use to ascertain a client’s internal control system. (5 marks)
(Total: 20 marks)

QUESTION FIVE

The auditor should prepare working papers which are sufficiently complete and detailed to provide an overall understanding of the audit.

Required:
(a) State four benefits that an auditor would obtain from working papers that satisfy the above requirement. (4 marks)
(b) List five items of information you would expect to be contained in a permanent audit file and explain why each of these items of information should be readily available. (10 marks)
(c) In the audit of purchases, list four examples of the type of information that would be contained in the detailed audit working papers. (4 marks)
(d) Give any two reasons why an auditor should examine the directors’ minute book.
(2 marks)
(Total: 20 marks)

QUESTION SIX

(a) Cash in hand and cash at bank are commonly referred to as liquid assets. Because of this liquidity, these assets represent the most vulnerable of all the assets of an entity. You have recently been employed by Korir and Associates (Certified Public – Accountants) as an audit assistant. During your first audit assignment at Viwanda Ltd you have been allocated the audit of cash in hand and cash at bank.

Required
(i) State and explain the audit procedures you would undertake in order to
determine whether or not there has been any misappropriation of cash.
(6 marks)
(ii) Explain any five controls over cash you would expect to be instituted by a business entity in order to minimize cases of embezzlement of cash.
(5 marks)

(b) List the procedures you would follow to verify the following items:
(i) Petty cash balance. (3 marks)
(ii) Revaluation reserve. (3 marks)
(iii) Copyrights. (3 marks)
(Total: 20 marks)

QUESTION SEVEN

In the context of ISA 240 (The Auditor’s Responsibility to Consider Fraud and Error in, an Audit of Financial Statements):

(a) Define: -
(i) Fraud (3 marks)
(ii) Error (3 marks)

(b) Outline the respective responsibilities of an entity’s management and the external auditor with respect to the prevention and detection of fraud and error. (8 marks)

(c) Outline the procedures an external auditor should follow if he suspects that fraud; or error have been perpetrated. (6 marks)
(Total: 20 marks)

QUESTION EIGHT

Your are currently engaged in planning the audit of the payroll system of Ujenzi Ltd a manufacturing company, for the year ending 30 June 2005, Ujenzi Ltd’s payroll system is fully computerized.

Required:
(a) Explain four ways in which the use of a computerized payroll system by Ujenzi Ltd would affect your work as the auditor. (8 marks)
(b) Explain three controls which should be instituted by Ujenzi Ltd to ensure that only authorized persons are allowed access to information on personal files and to input updates for the calculation of wages. (6 marks)
(c) Outline how audit tests could be performed “around the computer” in relation to Ujenzi Ltd’s payroll (4 marks)
(d) List any two fraudulent activities likely to be perpetrated in relation to Ujenzi Ltd’s payroll (2 marks)
(Total: 20 marks)

December 2005

 Time allowed: 3 hours
Answer any FIVE questions ALL questions carry equal marks

QUESTION ONE

a) In order to conduct an audit effectively and efficiently, an auditor should properly plan for the assignment.

i) Explain the matters that an auditor should take into account at the planning stage of an audit exercise. (8 marks)
ii) Outline the ways in which an auditor acquires knowledge about the client’s business and industry. (4 marks)

b) The final stage of an audit includes an overall review of the financial statements. Explain the procedures that the auditor should adopt for the final review. (4 marks)
c) Highlight the qualities required of the final accounts prepared by a client company.
(4 marks)
(Total: 20 marks)

QUESTION TWO

a) The auditor must exercise due care and skill before he certifies that the financial statements show a true and fair view.

Explain the ways in which an auditor can minimize his potential liability for professional negligence. (10 marks)

b) Highlight the possible defenses available to an auditor in a court of law who has been sued for failure to detect fraud in client’s company. (5 marks)

c) In the context of the Companies Act, state the duties of an auditor. (5 marks)
(Total: 20 marks)

QUESTION THREE

a) Briefly explain how the auditor can use each of the following methods of sample selection when carrying out his audit assignment;
i) Stratified sampling (2 marks)
ii) Cluster sampling (2 marks)
iii) Haphazard sampling (2 marks)
iv) Block sampling (2 marks)
b) Explain the reasons why an auditor is not required to carry out a complete check of all the transactions and balances of a business. (4 marks)
c) Identify the cases where an auditor is required to conduct a complete check of all the transactions and balances of a business. (4 marks)
d) Explain two reasons why an auditor should consider materiality when selecting a sample size. (4 marks)
(Total: 20 marks)

QUESTION FOUR

a) Explain the purpose of an internal control questionnaire to an auditor. (4 marks)

b) Explain the factors an auditor should consider when determining the adequacy of a client’s internal control system. (6 marks)

c) Kenya Cans Ltd. manufactures cans which are stamped from sheets of metal molded and supplied to Selmont Ltd for packing fruits. After stamping the sheets of metal, scrap metal is produced as residue. During the year 2004, revenue from scrap metal amounted to Sh.500,000.

The company has established the following system to monitor the sale of scrap metal;

i) Scrap metal is placed by employees in a large bin outside the workshop.
ii) At the of the week a local scrap dealer collects the scrap metal leaving the bin empty.
iii) The scrap dealer takes the scrap metal to the gatekeeper who measures and records the weight in a register before it exits the factory.
iv) The scrap dealer sends cheques the following week with a statement showing the weight collected, price and cheques amount. The company’s cashier on receiving the cheques, compares it with the statement to ensure that they both agree with the gatekeeper’s registers.

Required;
i) Explain the weaknesses of the above system. (4 marks)
ii) Suggest recommendations to improve on the above system. (6 marks)
(Total: 20 marks)

QUESTION FIVE

Your audit senior has assigned you the responsibility of auditing the stock of your client, XYZ Supermarket Ltd. for the year ending 31 December 2005.

The company’s stock take is carried out once a year in the month of November simultaneously for all the retail outlets.

Required:
a) State the audit assurances you would seek to obtain in the audit of stock. (4 marks)

b) Describe the audit procedures that you would perform in order to be satisfied as to the validity of the amount attributed to stock in the balance sheet of XYZ Supermarket Ltd.
(12 marks)
c) Define the word “bar coding” and explain its importance to XYZ Supermarket Ltd.
(4 marks)
(Total: 20 marks)

QUESTION SIX

a) Your audit firm, Kimani and Associates has been contracted by the government to audit the procurement system followed by the government.

Required:
i) Identify the likely risk areas that your firm may encounter in the audit.(5 marks)

ii) Suggest possible measures the government can implement to strengthen the internal control system on procurements. (5 marks)

b) Outline the audit procedures an audit firm should follow in the verification of a manufacturing company’s liabilities. (10 marks)
(Total: 20 marks)

QUESTION SEVEN

a) An auditor should form an opinion on the adequacy of the accounting treatment of an inherent uncertainty disclosed in the financial statements of a company.

i) What is meant by the term “inherent uncertainty”? (2 marks)
ii) Explain the treatment of inherent uncertainties in the auditor’s report. (6 marks)

b) Summarise the principal contents of a statement of directors’ responsibilities to be included in financial statements. (8 marks)

c) Explain the steps an auditor should take if he concludes that the client has made a departure from an accounting standard in the preparation of the financial statements.
(4 marks)
(Total: 20 marks)

QUESTION EIGHT

a) The computerization of business operations has posed many challenges to the auditor.

Explain the difficulties experienced by an auditor in each of the following situations:

i) In the use of test packs. (4 marks)
ii) In on-line systems. (4 marks)
iii) When auditing the output of a complex computerized system. (6 marks)

b) Briefly explain how an auditor verifies the following items in a computerized system.

i) Standing data in a master file (3 marks)
ii) Alterations made in the computer programs. (3 marks)
(Total: 20 marks)