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Caa 306: Auditing &Amp; Investigations Question Paper
Caa 306: Auditing &Amp; Investigations
Course:Bachelor Of Commerce
Institution: Kca University question papers
Exam Year:2009
1
UNIVERSITY EXAMINATIONS: 2008/2009
THIRD YEAR STAGE II EXAMINATION FOR THE DEGREE OF
BACHELOR OF COMMERCE
CAA 306: AUDITING & INVESTIGATIONS
DATE: APRIL 2009 TIME: 2 HOURS
INSTRUCTIONS: Answer question ONE and any other TWO questions
QUESTION ONE
a) The partner in charge of your audit firm has asked your advice on frauds which have been
detected in recent audits.
The audited financial statements of a client, Lam Trading Ltd, were approved by shareholders at the
Annual General Meeting on 3 June 2008. On 7 June 2008 the managing director of Lam Trading
discovered a petty cash fraud by the cashier. Investigation of this fraud has revealed that it has been
carried over a period of one year. It involved the cashier making out, signing and claiming petty cash
expenses which were charged to motor vehicle expenses. No receipts were attached to the petty cash
vouchers. The managing director signs all cheques for reimbursing the petty cash float. Lam Trading
Ltd. Has sales of about Sh. 160 million and the profit before tax is about Sh. 12 million. The
accountant has prepared the draft financial statements for audit.
The partner in charge of the audit decided that no audit work should be carried out on petty cash. He
considered petty cash expenditure was small. So the risks of a material error or fraud were small.
2
Required:
i) Briefly state the auditor’s responsibilities for detecting fraud and error in financial
statements (5 Marks)
ii) Consider whether your firm is negligent if the fraud amounted to Sh. 400,000
(5 Marks)
iii) Consider whether your firm is negligent if the fraud amounted to Sh. 1,600,000
(5Marks)
b) The audit of director’s remuneration at Wick Enterprises Ltd., a limited company has
confirmed that the managing director’s salary is Sh. 18 million per annum and that he is the
highest paid director. However, a junior member of the audit team asked you to look at some
purchase invoices paid by the company. Your investigations have revealed that the managing
director has had work amounting to Sh. 8 million carried out in his home, which has been paid
by Wick Enterprises Ltd. The managing director has authorized payment of these invoices and
there is no record of authorization of this work in board minutes. The managing director has
refused to include the Sh. 8 million in his remuneration for the year, and to charge the financial
statements. If you insist on qualifying your audit report on this matter, the managing director
says he will get a new firm to audit the current year’s financial statements. The company’s
profit before tax for the year is Sh. 640 million.
Assuming the managing director refuses to amend the financial statements, you are required to:
i) Consider whether the undisclosed remuneration is a material item in the financial
statements (5Marks)
ii) Describe the matters you will consider and the action you take:
• To avoid replaced auditor, and
• If you are replaced as auditor, assuming the managing director owns 60% of the
issued shares of Wick Enterprises Ltd. (5 Marks)
iii) Describe the matters you will consider and the action you will take to avoid being
replaced as auditor assuming Wick Enterprises Ltd. is a listed company with an audit
committee and the managing director owns less than 1% of the issued shares.
(5 Marks)
(Total 30 Marks)
3
QUESTION TWO
The International Auditing Practices Committee requires that doubts about the going concern
presumption be detected and adequately disclosed in the financial statements and auditors’ reports.
Required:
a) Explain the term “going concern” in relation to the preparation of financial statement.
(4 Marks)
b) Describe the audit procedures the auditor should undertake in order to obtain sufficient audit
evidence to be able to form an opinion on the going concern status of the company.
(6 Marks)
c) List six factors which might cast doubt on the going concern status of a company. (6 Marks)
d) Discuss briefly how the present responsibilities of the auditor regarding the going concern
status of company could be extended. (4 Marks)
(Total: 20 Marks)
QUESTION THREE
Nyama Safi Company has been in operation since early 1980’s buying live animals for slaughter and
sale of meat and meat products. Due to stiff competition from small and medium meat companies, the
company experienced loses. In December 2006 a receiver was appointed by a creditor under powers in
a loan agreement, which gave a floating charge. A resolution to wind up the company voluntarily was
passed on 10 January 2007, when the liquidator was appointed.
You were subsequently appointed to audit the liquidation and receivership accounts mainly the
receiver’s and liquidators statements of accounts.
You have discovered that:
i) Assets were sold at below market value through an appointed auctioneer. The auction firm belongs
to the wife of one of the directors of Nyama Safi Company.
ii) A year ago, some of the assets, mainly Mercedes Benz and Pajero cars, were sold to the directors
at net book values, which were much below the realizable market values.
4
Required:
a) State your audit responsibilities in the audit of liquidation and receivership. (10 Marks)
b) Indicate the action you would take to verify the values of the assets in the cases above.
(10 Marks)
(Total 20 Marks)
QUESTION FOUR
You are the auditor of Fixit Ltd. The company consists of a head office and a chain of 200 shoe repair
and key-cutting kiosks. These kiosks are located in supermarkets and shopping centers and each is run
by a single staff member who repairs shoes and cuts keys while customers wait.
In an attempt to increase turnover, Fixit Ltd recently advertised that all workmanship in the kiosks
would be guaranteed for three months. However, this additional service has not resulted in the
expected additional sales. Management believes incremental revenue is being misappropriated by
certain kiosk operators.
In addition, it has come to your attention that various components, namely heels, soles and keys are
being removed from kiosks by certain operators and sold to competitors. Instances have also been
found where operators regularly repair shoes for friends without charging them.
Although each kiosk has a register, controls and procedures in the chain are currently weak and head
office management has asked for your advice on desirable internal control procedure.
Required:
Detail the internal control procedure you would expect to find that would provide adequate control
over:
a) Cash sales (10 Marks)
b) Stock (10 Marks)
(Total 20 Marks)
5
QUESTION FIVE
The Board of D Ltd, a company quoted on the stock exchanger, has decided to introduce an internal
audit function. As a first step, the Board wishes to outsource the service and has invited your audit
firm to tender for contract. The terms of reference will entail a range of activities including:
• Review accounting, internal control and risk management systems.
• Examination of financial and operating information.
Your firm has provided a number of services to this client for many years including, the statutory
audit of the annual financial statements and on-going consultancy work
Required:
a) Explain the importance of the concept of independence to external auditing. (6 Marks)
b) Identify and discuss the threats to your audit firm’s independence which may arise from the
provision of all the services outlines above and suggest how these treats may be resolved by
your firm. (14 Marks)
(Total 20 Marks)
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