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Auditing And Assurance Section 2 December Year 2002 Question Paper

Auditing And Assurance Section 2 December Year 2002

Course:Cpa

Exam Year:2002

Answer any FIVE questions. All questions carry equal marks.
QUESTION ONE
The National Metal Works Limited manufactures and retails door and window frames. The company recently dismissed their external auditors. The directors have approached your firm of accountants to act as their auditors and the directors have proposed a fee of KShs. 1,000, 000 plus a bonus of 1% of profits after tax.
Required:
a) Describe the steps you would take before advising the partners of your firm whether to accept the appointment as auditors or not.(8 marks)
b) State with reason whether professional auditors should accept the method of remuneration as proposed by the directors of the client company. (6 marks)
c) Explain the implications of fixing the audit fee by negotiation between the directors and the external auditors on the independence of the auditor. (6 marks)
(Total: 20marks)
QUESTION TWO
a) Briefly explain the meaning of the following terms as used in auditing:
i. The materiality concept.(3 marks)
ii. The going concern concept.(3 marks)
b) Explain five factors which would indicate to the auditor that the going concern assumption of the business entity he is auditing is threatened. (10 marks)
c) What is the form of audit opinion you would give if you concluded that the client company was experiencing going concern problems and:
i. you have established that the financial statements give sufficient disclosure of the going concern problems?(2 marks)
ii. you have established that there is no disclosure of the going concern problems in the financial statements?(2 marks)
(Total: 20 marks)
QUESTION THREE
You are the auditor of Bei Nafuu Supermarkets Limited across the country. The management has informed you that they intend to set up an internal audit function.
Required:
a) Identify and explain the function to be performed by the internal audit department in Bei Nafuu Supermarkets Limited.(8 marks)
b) List four factors that you would consider before placing reliance on the work of the auditors of Bei Nafuu Supermarkets Limited.(4 marks)
c) Explain four controls that you would expect to find in Bei Nafuu Supermarkets Limited.(4 marks)
d) Explain how the quality of the internal audit department of Bei Nafuu Supermarkets Limited can be assessed.(4 marks)
(Total: 20 marks)
QUESTION FOUR
a) You are a senior member of the audit team at Grain Millers Ltd., a company whose business is milling maize, wheat and other products for local consumption. The annual turnover for the year ended 30 September 2002 amounted to Sh. 1.5 million and most of its sales were on credit. The audit team leader has assigned you the audit of the provision for bad and doubtful debts which has been set at Sh. 4.75 million; out of which Kshs 3.25 million relates to the provision against specific bad and doubtful debts and the balance of Sh. 1.5 million is a general provision determined as a percentage of overdue debtors with a higher percentage being applied against the longest overdue accounts.
Required:
i. Outline the audit procedure you would apply in verifying the general provision for bad and doubtful debts.(10 marks)
ii. Explain how you would verify the specific provision for bad and doubtful debts.(3 marks)
b) What is meant by the following terms as used in auditing:
i. Cut off procedure? (3marks)
ii. Audit in depth?(4 marks)
(Total: 20 marks)
QUESTION FIVE
A very important aspect of the audit of the financial statements by an external auditor is the observation of the physical stock taking.
Required:
a)Why does the auditor need to attend a stock-take of the company that he audits?(6 marks)
b) List four procedures that an auditor would need to undertake prior to attending a company’s stock-take.(4 marks)
c) Explain the audit tests that the auditor would apply to establish the physical qualities of stock and their ownership.(4 marks)
D) How does the auditor satisfy himself that the procedure adopted by the management with regard to stocks have been applied throughout the financial period? (6 marks)
(Total: 20 marks)
QUESTION SIX
State the evidence, which you, as the auditor, would like to find in place and pay attention to when vouching the following payments made by RR Paper Mills Ltd., during the financial year ended 31 October 2002.
a) Loans to three employees totaling Sh. 6 million.(4 marks)
b) The last call on 5, 000 ordinary shares at Sh, 15 per share.(4 marks)
c) Fire insurance premiums amounting to Sh. 10, 000 paid for the office block. (4 marks)
d) A loan amounting to Sh. 30 million obtained from a local bank and secured by the factory building.(4 marks)
e) Salesmen’s commissions amounting to Sh. 3, 000, 000.(4 marks)
(Total: 20 marks)
QUESTION SEVEN
a) State the basic element of the scope paragraph of an audit report. (4 marks)
b) Explain how auditors distinguish their responsibility from those of the directors in respect of financial statements.(4 marks)
c) Explain the meaning of each of the following terms in relation to audit reports:
i. Circumstances of uncertainty.(4 marks)
ii. Circumstances of disagreement.(4 marks)
d) Distinguish between the “except for” and the “subject to” audit opinions. (4 marks)
(Total: 20 marks)
QUESTION EIGHT
Your firm of accountants has been the auditors of Leather Merchants Limited, a company that exports both raw and semi-finished leather products to European and Asian markets. The company has decided to introduce a comprehensive computer system to manage its accounting and administrative functions.
Required:
a) Outline the practical difficulties you would encounter as an auditor as a result of the proposed introduction of a computerized accounting system. (10 marks)
b) Explain how you would overcome the difficulties identified in (a) above. (5 marks)
c)Identify and explain the benefits that the company would derive as a result of putting in place a comprehensive computerized accounting system. (5 marks)
(Total: 20 marks)

Auditing And Assurance Section 2 December Year 2002 Question Paper

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