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Auditing And Investigation Theory Question Paper
Auditing And Investigation Theory
Course:Bachelor Of Commerce
Institution: Kca University question papers
Exam Year:2009
UNIVERSITY EXAMINATIONS: 2009/2010
SECOND YEAR STAGE 2 EXAMINATION FOR THE DEGREE OF
BACHELOR OF COMMERCE
CAA 306-A AUDITING AND INVESTIGATION THEORY
(EVENING CLASS)
DATE: DECEMBER 2009 TIME: 2 HOURS
INSTRUCTIONS: Answer Question ONE and Any other TWO Questions
QUESTION ONE
The International Auditing Practices Committee requires that doubts about the going concern
presumption be detected and adequately disclosed in the financial statements and auditors’ reports.
Required:
a) Explain the term “going concern” in relation to the preparation of financial statement.
(4 Marks)
b) Describe the audit procedures the auditor should undertake in order to obtain sufficient audit evidence to be able to form an opinion on the going concern status of the company. (9 Marks)
c) List six factors which might cast doubt on the going concern status of a company. (8 Marks)
d) Discuss briefly how the present responsibilities of the auditor regarding the going concern status of company could be extended. (4 Marks)
QUESTION TWO
Kenya meat Company has been in operation since early 2000’s buying live animals for slaughter and sale of meat and meat products. Due to stiff competition from small and medium meat companies, the company experienced loses. In December 2002 a receiver was appointed by a creditor under powers in a loan agreement, which gave a floating charge. A resolution to wind up the company voluntarily was passed on 10 January 2003, when the liquidator was appointed.
You were subsequently appointed to audit the liquidation and receivership accounts mainly the receiver’s and liquidators statements of accounts.
You have discovered that:
1. Assets were sold at below market value through an appointed auctioneer. The auction firm
belongs to the wife of one of the directors of Kenya meat Company.
2. A year ago, some of the assets, mainly Mercedes Benz and Pajero cars, were sold to the
directors at net book values, which were much below the realizable market values.
Required:
a) State your audit responsibilities in the audit of liquidation and receivership. (15 Marks)
b) Indicate the action you would take to verify the values of the assets in the cases above.
(10 Marks)
QUESTION THREE
You are the auditor of FM Ltd. The company consists of a head office and a chain of 300 shoe repair and key-cutting kiosks. These kiosks are located in supermarkets and shopping centers and each is run by a single staff member who repairs shoes and cuts keys while customers wait.
In an attempt to increase turnover, FM Ltd recently advertised that all workmanship in the kiosks would be guaranteed for three months. However, this additional service has not resulted in the expected additional sales. Management believes incremental revenue is being misappropriated by certain kiosk operators.
In addition, it has come to your attention that various components, namely heels, soles and keys are being removed from kiosks by certain operators and sold to competitors. Instances have also been found where operators regularly repair shoes for friends without charging them.
Although each kiosk has a register, controls and procedures in the chain are currently weak and head office management has asked for your advice on desirable internal control procedure.
Required:
Detail the internal control procedure you would expect to find that would provide adequate control over:
a)Cash sales (15 Marks)
b)Stock (10 Marks)
QUESTION FOUR
The Board of K Ltd, a company quoted on the stock exchanger, has decided to introduce an internal audit function. As a first step, the Board wishes to outsource the service and has invited your audit firm to tender for contract. The terms of reference will entail a range of activities including:
• Review accounting, internal control and risk management systems.
• Examination of financial and operating information.
Your firm has provided a number of services to this client for many years including, the statutory audit of the annual financial statements and on-going consultancy work
Required:
a) Explain the importance of the concept of independence to external auditing. (11 Marks)
b) Identify and discuss the threats to your audit firm’s independence which may arise from the provision of all the services outlines above and suggest how these treats may be resolved by your firm. (14 Marks)
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