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Auditing And Assurance Question Paper

Auditing And Assurance

Course:

Exam Year:2005

KENYA ACCOUNTANTS AND SECRETARIES NATIONAL EXAMINATION BOARD
CPA PART I
AUDITING
December 2005. Time Allowed: 3 hours.
Answer any FIVE questions. ALL question 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 defences 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 moulded 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 a 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 stocktake 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)

Auditing And Assurance Question Paper

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