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Auditing And Assurance Question Paper

Auditing And Assurance

Course:Cpa Part Ii

Institution: Strathmore Business School question papers

Exam Year:2005

Answer any FIVE questions. All questions carry equal marks.

QUESTION ONE
You have received a request form XYZ Ltd. to accept an appointment as their auditor for the financial year ending 31 December 2001.

Required:
a) Explain the preliminary procedures you would carry out upon your appointment.
(6 marks)
b) What is the importance of a preliminary review? (4 marks)
c) Why is it important for the auditor to hold discussions with the client’s senior staff?
(6 marks)
d) State why it is important for an incoming auditor to hold consultations with the outgoing auditor. (4 marks)
(Total: 20 marks)

QUESTION TWO
a) Why is an external audit necessary for companies registered under the Companies Act? (3 marks)
b) Under what circumstances is one ineligible for appointment as an auditor of a company?
(4 marks)
c) Explain the procedure a company has to follow when changing its auditors. In your discussion explain ‘dismissal’ and ‘appointment’ of auditors by a company? (8 marks)
d) List the rights and duties of an independent auditor. (5 marks)
(Total: 20 marks)

QUESTION THREE
a) What are the main objectives of an internal control system? (5 marks)
b) What are the disadvantages of rigidly adhering to a system of internal control? (5 marks)
c) Explain the matters that have to be considered in respect of a system of internal control for cash sales in a service station that sells petrol and repairs motor vehicles. (10 marks)
(Total: 20 marks)

QUESTION FOUR
In the course of the audit of ABC Stationers Ltd. for the year ended 30 June 2001, you have noted and recorded in the audit working papers, the following evidential matters:

1. Flowcharts of the company’s payroll prepared by your audit assistant backed up by tests of controls.
2. An oral statement by the production director that the expected working life of plant acquired during the year is ten years.
3. A letter to the managing director from the company’s bank manager indicating that the bank intends to extend overdraft facilities for a period of one year.
4. A list of items of inventory counted by a member of your audit team during observation of the company’s annual stock count.
5. A letter from a customer to your firm in reply to a confirmation request indicating agreement with the balance recorded in the books of ABC Stationers Ltd.

Required:
a) With respect to each matter listed above, explain its relevance to the overall audit objective of forming an opinion and reporting on the financial statements. (10 marks)
b) Explain your judgment on the reliability of the audit evidence obtained in five ways listed above. (10 marks)
(Total: 20 marks)

QUESTION FIVE
a) Define and explain the meaning of an audit programme. (4 marks)
b) List three disadvantages of using standardized audit programmes and how these disadvantages can be avoided. (6 marks)
c) Draft an online audit programme for the fixed assets of a large manufacturing company.
(10 marks)
(Total: 20 marks)

QUESTION SIX
You have been the auditor of Crossborder Trading Company Ltd. for a number of years. The company’s head office is in Nairobi, Kenya and if has considerable overseas operations. At each accounting year end, there are large debts due from overseas agents of the company (Sh. 270 million out of total debts of Sh. 680 million as at 31 December 2000). In the past, these debts have always been settled after year end but you have insisted that the debts be the subject of a specific representation made by the company’s director.

Required:
a) Outline the purpose of a letter of representation from management to the auditor.
(5 marks)
b) Draft a paragraph for a letter of representation appropriate to the circumstances described above. (3 marks)
c) Outline the audit work which should be performed when seeking evidence to substantiate the management’s representations as drafted and indicated the value of the directors’ representations in these circumstances. You should present your answer under the following headings:
• Existence and title. (3 marks)
• Valuation. (2 marks)
• Disclosure. (2 marks)
d) State what action you would take if the directors refused to provide you with a letter of representation. (5 marks)
(Total: 20 marks)

QUESTION SEVEN
a) (i) Describe the circumstance under which an auditor may be liable for damages for materials misstatements in published accounts on which he has expressed an audit opinion. (4 marks)
(ii) Under what circumstances can be avoid liability? (4 marks)
b) Identify the categories of parties who may institute successful legal claims against an auditor emphasizing the basis a court of law would use to assess the value of damages.
(7 marks)
c) What specific actions can an individual auditor or audit firm take to minimize liability arising from audit risk? (5 marks)
(Total: 20 marks)

QUESTION EIGHT
Your client, ABC Ltd. has a system for inputting purchase and expense invoice where the operator inputs the following from each item.

Order number (a code 2221 is used for items like electricity)
Supplier name
Supplier code number
First four letters of nominal account name (entered on invoice by purchase department manager)
Nominal account code (entered by purchase department manager)
Date
Goods inward note number
Net amount
VAT amount
Gross amount

Required:

a) Suggest manual operation and controls which might previously have applied to these invoices. (6 marks)
b) Suggest input controls that might be applied by the program to these items. (8 marks)
c) List some audit tests that could be applied to these items indicating the purpose of each test and the relevant audit evidence obtained. (6 marks)
(Total: 20 marks)

Auditing And Assurance Question Paper

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