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Cpa Section 6 Question Paper

Cpa Section 6

Course:Cpa

Exam Year:2011

QUESTION ONE
Six months ago Shupavu ltd closed down one of its factories as a result of detoriating market conditions. All staff employed at the factory were declared redundant on the date of closure.
While monitoring the monthly management accounts John Muga the internal auditor performed analytical procedures on salary expenses and established that the total payroll expense had reduced by 3% in the months following the closure of the factory.
This was lower than the expected reduction given that 25% of the total staff of the company had been declared redundant.Initial investigation by the internal auditor revealed that many of the employees who had been declared redundant had actually remained on the payroll records and salary payments in respect of these individuals were still been made every month. All the payments were being credited into the same bank account. As soon as the internal auditor realized there was a possibility of fraud, he informed the managing director who immediately stopped any further payments in respect of the redundant employees. Shupavu ltd has contacted your audit firm to conduct an investigation.

You are further informed that the senior accountant has been absent from work and has not been traced since the commencement of the investigations. It is suspected that he might have been involved in the suspected fraud.
Shupavu ltd are not audit clients of your firm of auditors. They have enquired whether your firm could provide a forensic investigation.
Required:
(a) Describe three objectives of a forensic investigation 3marks
(b) Using examples of procedures that could be used to gather evidence, explain the steps you would follow in undertaking the forensic audit 12 marks
(c) Assess how the code of ethics of professional accountants could be applied in the provision of the above forensic investigation 5 marks
QUESTION TWO
You are the audit manager in charge of the audit of Karibu furniture ltd Kill a listed company, for the year ended 31 July 2011. KFL buys domestic furniture from manufacturers for the sale to the general public. The company head office and warehouse are located at the same site. There are various sales branches and warehouses situated in different parts of the country.
Your firm Stephenson and Gerald, Certified Public accountants was engaged as the auditors for the company five years ago. All the accounting records of the company are maintained in the computer at the head office. When an order is received at the branch, the salesman checks whether the items of the furniture are in the inventory, if available, the customer pays in cash, cheque or credit card before the items are release from the warehouse. If the items are not in the branch, the salesmen confirm whether the items are available from the other local branches and therefore place an order for the items.
In the previous years’ audits, your firm has raised concern relating to actual inventory at the branches being less than the computer book inventory quantities. There have also been other concerns relating to identifying and valuing damaged inventory and goods returned by customers.
The company has a small internal audit department and their work includes periodic visits to the branches.
The company was subjected to a management buyout in February 2009 which resulted in high gearing. You also understand that the company has liquidity problems and that it is negotiating with its bankers for additional finance.
Required:
a) Explain the meaning of the term opinion shopping in auditing and indicate how audit firms should deal with opinion shopping. (2marks)
b) Discuss the matters you would consider and the work you would carry out in planning the audit (10marks)
c) Analyze the important matters considered during the overall review of an audit and their significance (8 marks)

QUESTION THREE
a) discuss the audit risks that the auditor face in the course of the audit of financial statements of entities with material assets stated at fair instead of historical costs (9marks)
b) You are the audit manager responsible for the audit of Rural Manufacturing Ltd for the year ended 31 December 2011. During the year ended 31 December 2010, the company purchased several investment properties utilizing its surplus funds in order to generate rental income. The assets were revalued at the yearend in accordance with IAS 40, investment property, and recognized in the financial statements at a fair value of sh. 1.2 billion. The total assets of the company were valued at sh. 24 billion as at 31 December 2010. The company hired an external valuer to provide the fair value for each property.
Required:
i. Citing reasons indicate the enquiries that you would make before placing any reliance on the work of the valuer. (6 marks)
ii. Explain the audit procedures you would carry out on the valuation of the investment properties. (5 marks)

QUESTION FOUR.
You are the manger in charge of the audit of subira ltd. A local distributor of fast moving consumer goods. You are also the auditors of Sifa ltd which imports goods from the neighboring country and sells the goods to Subira ltd/ the two companies have common shareholders and directors including the managing director.
Subira ltd also buys from three other local suppliers.
Whereas all purchases by Subira ltd from Sifa ltd are paid for promptly, Subira ltd extends sixty day credit to its customers.
The managing director expresses doubt on the reliability of the inventories control system.
Sifa ltd owns some trucks which it uses to ferry goods from the neighboring country. The trucks have computerized mechanism for monitoring fuel consumption which is the basis of determing their transport costs which include drivers allowance for upkeep while ferrying the goods.
In addition, Sifa ltd hires trucks from third parties which it pays for at agreed rates. These costs are categorized as transport expenses in the income statements of Sifa ltd.
The managing director is apprehensive about the inventory management system especially with regard to damaged packages regular stock takes adequate documentation of stock movements and slow moving goods.
Required:
a) Describe the audit procedures you would undertake to verify the occurrence completeness and validity of:
i. Sifa limited’s sales. (3 marks)
ii. Subira limited’s purchases. (3 marks)
iii. Subira limited’s receivables. (3 marks)
iv. Subira limited’s inventories. (3 marks)
v. Sifa limited’s transport costs. (3 marks)
b) Summarize the challenges you might face as an auditor in carrying out the audit. (5 marks)
QUESTION FIVE
You are the engagement partner responsible for the audit of Newton Company Ltd. (NCL), a company whose financial year end is 31 July. The company is a private entity and has been in operation for over five years. The company has been profitable except for the last two years when it began incurring losses as well as high interest costs. The losses were due to increased borrowing to finance additional assets. The company has continued to incur operating losses during the current year.
The extracts from the May 2011, management accounts and the 2010 audited annual financial statements is as follows:
Income statements for: 10 months to 31 may 2011 12 months ended 31 July 2010 (audited)
Sh “000” Sh “000”
Operating loss before interest 96,000 50,400
Interest expense 38,400 28,800
Net loss 134,400 79,200

Accumulated loss brought forward 91,200 12,000
Accumulated loss carried forward 225,600 91,200

Statement of financial position for: 10 months as at 31 may 2011 12months as at 31 July 2010
Non-current assets 2 264,000 200,000
Current assets:
Inventory 96,000 84,000
Accounts receivable 72,000 60.000
168,000 144,000
current liabilities:
Bank overdraft 3 72,000 67,200
Accounts payable 225,600 108,000
297,600 175,200
Net current liabilities (129,600) (31,200)
Total assets 134,400 268,800

Equity and liabilities:
Ordinary share capital 240,000 240,000
Accumulated losses (225,600) (92,200)
14,400 148,800
Long term borrowings 1 120,000 120,000
134,400 268,800
Notes:
1. Long term borrowings are from Equality Bank Ltd and are secured by a mortgage over land and buildings and a pledge on book debts. Interest is charged at 22% per annum. These borrowings fall due for repayment on 31 January 2012. The company is currently negotiating with equality Bank ltd to replace the borrowings with a five year loan.
2. Non-current assets comprise:
(i) land and buildings purchased in 1990 at a cost of sh. 36 million (2011: sh. 36 million)
(ii) plant and machinery with a net book value of sh.228 million (2011: sh. 264 million)
3. The bank overdraft is unsecured. On 1 June 2011, the directors sold the underperforming plant and machinery with a net book value of sh. 108 million for sh. 48 million. The loss of sh. 60 million on the sale of the plant and machinery resulted in shareholder’s deficit at 1 June 2011 of sh. 45,600,000.
The managing director is confident that although it is unlikely that there will be any material change in the financial position of the company before the financial year end, the company will return to profitability in the new financial year as certain large new contracts have been secured. In addition, interest payable will be reduced by the injection of sh. 48 million from the sale of the assets. The managing directors however concerned about the shareholder’s deficit and requires your opinion on the matter.
Required:
a) NCL on the measures that could be taken to improve the financial position of the company. (8marks)
b) Evaluate the additional information you would require to support the managing director’s comments that the company will return to profitability. (6marks)
c) Consider the form of audit opinion you would issue on the financial statements of NCL if you conclude that the company is experiencing going concern problems, under the following circumstances:
(i) The financial statements give sufficient disclosures of the going concern problems. (3 marks)
(ii) There is no disclosure of the going concern problem in the financial statements and you believe there is a serious risk that the company will fail in the foreseeable future. (3 marks)

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