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Auditing And Investigation Question Paper
Auditing And Investigation
Course:Accounting
Institution: Meru University Of Science And Technology question papers
Exam Year:2000
KENYA ACCOUNTANTS AND SECRETARIES NATIONAL EXAMINATIONS BOARD
CPA PART III
AUDITING AND INVESTIGATION
DECEMBER 2000
Answer All questions. Marks allocated to each question are shown at the end of the question.
QUESTION ONE
Your firm is the auditor of Nairobi Special Supermarket Ltd. which sells a variety of goods to the general public from a single retail supermarket shop. The company has recently installed a bar coding system for recording the movement of stock sales and purchases.
The system comprises:
A main computer located in the offices above the shop, where all the standing and transaction data are held.
Details of goods received are entered into the computer by the goods received department. Normally, the items are identified by scanning the bar code on the box containing the products, and the quantity of the items in the box is input manually.
Cash check pouts which:
read the bar code on the product and identify it
read the goods being sold
reduce the stock by the quantities being sold
include a description of the item and the selling price on the customer’s bill
record the total sum owed by the customer and the payment received. Payment can be made by cash, cheque or credit card.
The accounts office can change the selling price of the products, which are recorded on the computer’s standing data file. The systems records purchase prices from purchase invoices.
The system allows the addition of new products namely, bar code number, description, selling price and purchase price, amendment of details of existing products and deletion of products the company has discontinued.
Stock quantities on the computer can be amended manually.
The managing director of Nairobi Special Supermarket Ltd. has asked your advice on the controls which should be established to ensure that the system provides reliable information. You will use information provided by the system, including stock levels and sales in your audit of the company’s accounts.
Required:
Describe the controls which should be in operation in this computer system in order to:
minimize the risk of failure or breakdown of the system. Your answer should include consideration of measure to minimize the delay between the breakdown and the time when the system is operating satisfactorily again.
Ensure that product details on the computer’s standing data file are correct over the addition, amendment and deletion of product details.
Ensure that the selling prices of the company’s products on the computer’s standing data file are correct and the same as those on the shelves and racks containing the products in the shop.
Ensure that the quantities of stock recorded by the computer accurately reflect the actual stock in the shop. (7 marks)
(Total: 25 marks)
QUESTION TWO
Rural and Urban Housing Ltd. is a large company whose main activities relate to the house building market. Your firm has audited Rural and Urban Housing Ltd. for several years. During the audit for the year ended 30 September 2000, the audit manager has come across two items that he feels require discussing with the audit engagement partner. Details of the relevant items are:
During statistical testing of delivery notes, an observant audit assistant had noticed that the delivery address of several items of purchase materials was that of the managing director. Using the costing records, these materials were traced to job spoo-l which was the construction of a swimming pool. No sales invoice had been raised for this job. On investigation the audit manager discovered that the job as the construction of a ‘demonstration’ swimming pool which prospective purchasers could view. It has been included in Rural and Urban Housing Ltd.’s balance sheet as a fixed asset. The maintenance and running costs of the pool have been charged to the profit and loss account as promotion and selling costs.
Several large payments have been made to unidentified agents and described as commissions in respect of obtaining building contracts. Most of these payments have been made in cash, some of which were in foreign currencies, however, some payments have been made by cheque. Enquiries relating to the payee of the cheques have revealed that they are in the name of a nominee and the beneficiary cannot be identified. There is no supporting documentation for any of the payments. The finance director of Rural and Urban Housing Ltd. Has said that such commissions are common practice and the agents represent valuable contracts whose identity must be kept confidential as otherwise Rural and Urban Housing Ltd.’s competitors would be able to ‘poach’ work from them.
Required:
As the engagement partner for the audit of Rural and Urban Housing Ltd., discuss the matters you would consider including any further inquiries you would make, in determining the appropriate treatment of:
a) job spoo-1; (7 marks)
b) the payments of the commissions (8 marks)
(Total: 15 marks)
QUESTION THREE
Commercial Sales Ltd. was a growth-oriented company that was dominated by its managing director, Mr. A Chongo. The company sold quantity music systems direct to the public. A large number of sales person were employed on a commission only basis. The music systems were sent to the sales agents who then sold them direct to the public using telephones sales techniques. The music systems were sent to the sales agents on a sale or return basis and commercial sales ltd. recognized the sale of the equipment when it was received by the sales agents. Any returns of the music systems were treated as repurchases in the period concerned.
The company enjoyed a tremendous growth record. The main reasons for this expansion were as follows:
Mr. A Chongo falsified the sales records. He created several fictitious sales agents who were responsible for 25% of the company’s turnover.
At the year end, Mr. Chongo dispatched nearly all of his stock of music systems to the sales agents and repurchased those that they wished to return after the year end.
Twenty percent of the cost of sales were capitalized. This was achieved by the falsification of purchase invoices with the co-operation of the supplier company. Suppliers furnished the company with invoices for fixed assets but supplied music systems.
The directors of the company enjoyed a bonus plan linked to reported profits. Executives could earn bonuses ranging from 50% to 75% of their basic salaries. The directors did not query the unusually rapid growth of the company and were unaware of the fraud perpetrated by Mr. A Chongo.
Mr. A Chongo spent large sums of money in creating false records and bribing accomplices in order to conceal the fraud from the auditors. He insisted that the auditors should sign a ‘confidentiality’ agreement which effectively precluded the auditors from corroborating sales with independent third parties and from examining the service contracts of the directors. This agreement had the effect of preventing the auditors from discussing the affairs of the company with the sales agents.
The fraud was discovered when a disgruntled director wrote an anonymous letter to the Nairobi Stock Exchange concerning the reasons for Commercial Sales Ltd.’s growth. The auditors were subsequently sued by a major bank that had granted a loan to Commercial Sales Ltd. on the basis of interim accounts. These accounts had been reviewed by the auditors and a review report issued.
Required:
a) Explain the key audit tests would normally ensure that such a fraud as that perpetrated by Mr. A Chongo would be detected. (7 marks)
b) Discuss the implications of the signing of the ‘confidentiality’ agreement by the auditors.
(4 marks)
c) Explain how the ‘review report’ issued by the auditors on the interim financial statement differs of its level of assurance from the auditors’ report on the year end financial statements. (4 marks)
d) Discuss whether you think that the auditor is guilty of professional negligence in not detecting the fraud. (5 marks)
(Total: 20 marks)
QUESTION FOUR
Omega Furniture Ltd. is an audit client of Omega firm. It manufactures household furniture. It has a year-end of 31 December. On 13 June 2000, a fire destroyed the company’s factory complex, which included the area used for storing raw materials. The fire was caused by an electrical fault. The factory has now been rebuilt and the company commenced trading again in November 2000.
The finance director of Omega Furniture Ltd. produces monthly management accounts; in these stocks and cost of sales are estimated, based on sales figures less assumed margins. On 321 March and 30 September, the company conducts full stocktakes for its own purposes in addition to is year end stock count. The results of these stock counts are compared with the management accounts for March and September and adjustments are made to reflect the physical stock quantities and their appropriate values.
The finance director has contacted your firm to provide a certificate in support of his claim for loss of profits and loss of stocks arising as a result of the fire.
Required:
a) State what information you would seek and what procedures you would perform to reach an opinion on the company’s claim for loss of profits and loss of stocks. (12 marks)
b) Assuming you obtain all the information you require, draft your special report. Give brief reasons for the form of wording you have adopted. (8 marks)
(Total: 20 marks)
QUESTION FIVE
In an attempt to improve Corporate Governance of companies in Kenya banks and listed companies are now required to have audit committees.
Explain the composition and the role of audit committees and offer suggestions as to how their role can be strengthened. (Total: 20 marks)
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