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Auditing And Assurance Question Paper

Auditing And Assurance

Course:

Exam Year:2006

May 2006. Time Allowed: 3 hours.
Answer any FIVE questions. ALL question carry equal marks.

QUESTION ONE

(a) (i) Identify and explain the quality control procedures that a firm should implement to ensure its audit assignments are completed efficiently. (8 marks)
(ii) Highlight the matters taken into consideration to access the quality of audit work during an independent review. (6 marks)
(b) (i) Define the term “audit programme”. (2 marks)
(ii) List the disadvantages to an audit firm of using a standardized audit programme in its assignments. (4 marks)
(Total: 20 marks)

QUESTION TWO
(a) Your audit firm, Kinoti and Associates (certified Public Accountants) has scheduled a meeting with the directors of Safiner Solutions Ltd. with regard to the firm’s appointment as the auditor. The items listed for discussion during the meeting include:
1. Appointment of an auditor under the Companies Act.
2. Remuneration of an auditor under the Companies Act.

Required:
Prepare brief notes explaining each of the above items. (10 marks)
(b) In addition to performing audits, an audit firm can also perform other services fort its clients.
List the advantages and disadvantages of an audit firm offering other services to its clients. (5marks)
(c) Identify the maters an auditor would consider when evaluating a client firms’ integrity. (5 marks)
(Total: 20 marks)

QUESTION THREE
(a) The preparation of financial statements is the responsibility of a company’s directors.
List and explain the assertions made by the directors of a company pertaining to the accounts payable appearing in the balance sheet. (7 marks)
(b) Audit evidence refers to any information used by the auditor to enable him arrive at a reasonable conclusion necessary for his audit opinion.
(i) List the factors that influence the auditor’s judgment on the sufficiency of audit evidence. (5 marks)
(ii) Identify the presumptions used by an auditor in assessing the reliability of audit evidence. (5 marks)
(iii) Highlight the auditor’s limitations in the collection of audit evidence. (3 marks)
(Total: 20 marks)
QUESTION FOUR
(a) Explain the importance of as flow to an auditor. (5 marks)
(b) Identify the objectives of internal controls over the sales and debtors of a company. (5 marks)
(c) GMX Ltd. manufactures shoes which are supplied on a wholesale basis to its distributors within the East African region.
The company has established the following internal control system to monitor its credit sales.
1. Customer’s orders received by the company are recorded on a pre-numbered order in duplicate. One copy is sent to the customer to acknowledge receipt of the order and the second copy is used by the sales office to initiate action on the order.
2. The sales manager authorities the order after checking the customer’s account balance with the accounts departments to ensure that the credit limit is not exceeded.
3. The order is then forwarded to the warehouse where shoes are packed for dispatch as per order.
4. The order form is then passed to the accounts department for the preparation of an invoice in triplicate.
5. The top copy of the invoice is given to the customer on the collection of shoes. The second copy id retained by the accounts department and eh third copy is filed by the sales department in the customer’s file.

Required:
(i) Explain the weakness of the above system of internal control. (4 marks)
(ii) Describe the audit procedures that an auditor would perform to verify the company’s trade debtors. (6 marks)
(Total: 20 marks)

QUESTION FIVE
(a) XYZ Ltd is a company quoted on the stock exchange. In order to finance its expansion plans, the company raised capital through a new issue of shares the year ending 30 June 2006. You have been assigned the responsibility of auditing the company’s share capital for the year ending 30 June 2006.

Required:
(i) Describe the audit procedures you would perform in verify the new issue of shares. (8 marks)
(ii) Outline the audit would carry out if the company had not issued new shares during the year ending 30 June 2006. (4 marks)
(b) (i) State how an organization should account for a contingent liability in its financial statements. (3 marks)
(ii) Explain how an auditor verifies the existence of a contingent liability in the course of his audit work. (5 marks)
(Total 20 marks)

QUESTION SIX
(a) In the contest of International Standard on Auditing (ISA) 700 (The Auditor’s Report on Financial Statements):
(i) Explain the basis of an auditor’s opinion in the audit report. (5 marks)
(ii) Identify the matters in a company’s accounts that may lead to a qualified audit report. (5 marks)
(b) The directors of a company should carefully consider whether the going concern basis is appropriate in the preparation of financial statements.
Summarize the considerations that the directors of a small retail company would take into account when reviewing the going concern basis. (8 marks)
(Total: 20 marks)

QUESTION SEVEN
(a) The presence of fraud in corporate collapse often results in litigation against the auditors involved.
Required:
(i) Explain the reasons why fraud poses a threat to auditors. (6 marks)
(ii) List the possible indications of the existence of fraud in a client company. (4 marks)
(b) Describe the audit procedures an auditor would adopt if he suspects that the following types of fraud have been perpetrated by the client.
(i) Payment for fictitious procurements. (5 marks)
(ii) The existence of dummy employees on the payroll. (5 marks)
(Total: 20 Marks)

QUESTION EIGHT
(a) When auditing in an electronic data processing (EDP) environment, it is necessary for the auditor to employ computer assisted audit techniques (CAATs).
(i) Define the term “test packs”. (2 marks)
(ii) Describe how an auditor utilizes a test pack in examining a client’s computerized fixed asset register. (8 marks)
(b) Outline the benefits to an auditor of automating his audit working papers. (4 marks)
(c) Identify the controls which should be instituted by a client in an on-line system. (6 marks)
(Total:20 marks)

Auditing And Assurance Question Paper

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