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Auditing And Investigations Theory Question Paper
Auditing And Investigations Theory
Course:Bachelor Of Commerce
Institution: Kca University question papers
Exam Year:2010
UNIVERSITY EXAMINATIONS: 2009/2010
FIRST YEAR EXAMINATION FOR THE DEGREE OF BACHELOR OF
COMMERCE
CAA 306-A AUDITING AND INVESTIGATIONS THEORY (SATURDAY)
DATE: AUGUST 2010 TIME: 2 HOURS
INSTRUCTIONS: Answer question ONE and any other TWO questions
QUESTION ONE
You are a manager in the forensic investigation department of your audit firm. The directors of a local
manufacturing company, Crocus Co, have contacted your department regarding a suspected fraud,
which has recently been discovered operating in the company, and you have been asked to look into
the matter further. You have held a preliminary discussion with Gita Thrales, the finance director of
Crocus Co, the notes of this conversation are shown below:
Notes of discussion with Gita Thrales
Four months ago Crocus Co shut down one of its five factories, in response to deteriorating Market
conditions, with all staff employed at the factory made redundant on the date of closure.
While monitoring the monthly management accounts, Gita performs analytical procedures on salary
expenses. She found that the monthly total payroll expense had reduced by 3% in the months following
the factory closure – not as much as expected, given that 20% of the total staff of the company had
been made redundant. Initial investigations performed last week by Gita revealed that many of the
employees who had been made redundant had actually remained on the payroll records, and salary
payments in respect of these individuals were still being made every month, with all payments going
into the same bank account. As soon as she realised that there may be a fraud being conducted within
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the company, Gita stopped any further payments in respect of the redundant employees. She contacted
our firm as she is unsure how to proceed, and would like our firm’s specialist department to conduct an
investigation.
Gita says that the senior accountant, Miles Rutland, has been absent from work since she conducted
her initial investigation last week, and it has been impossible to contact him. Gita believes that he may
have been involved with the suspected fraud.
Gita has asked whether your department would be able to provide a forensic investigation, but is
unsure what this would involve. Crocus Co is not an audit client of your firm.
Required:
a) Define the following terms:
(i) Forensic Accounting;
(ii) Forensic Investigation;
(iii) Forensic Auditing. (9 Marks)
b) Prepare a report to be sent to Gita Thrales (the finance director), in which you:
(i) Describe the objectives of a forensic investigation; and
(ii) Explain the steps involved in a forensic investigation into the payroll fraud, including
examples of procedures that could be used to gather evidence
(14 Marks)
c) Assess how the fundamental ethical principles of IFAC’s Code of Ethics for Professional
Accountants should be applied to the provision of a forensic investigation service.
(7 Marks)
(30 Marks)
QUESTION TWO
a) Explain FOUR reasons why a firm of auditors may decide NOT to seek re-election as auditor.
(6 Marks)
The Dragon Group is a large group of companies operating in the furniture retail trade. The group has
expanded rapidly in the last three years, by acquiring several subsidiaries each year. The management
of the parent company, Dragon Co, a listed company, has decided to put the audit of the group and all
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subsidiaries out to tender, as the current audit firm is not seeking re-election. The financial year end of
the Dragon Group is 30 September 2010.
You are a senior manager in Unicorn & Co, a global firm of Chartered Certified Accountants, with
offices in over 150 countries across the world. Unicorn & Co has been invited to tender for the Dragon
Group audit (including the audit of all subsidiaries). You manage a department within the firm which
specialises in the audit of retail companies, and you have been assigned the task of drafting the tender
document. You recently held a meeting with Edmund Jalousie, the group finance director, in which
you discussed the current group structure, recent acquisitions, and the group’s plans for future
expansion.
Meeting notes – Dragon Group
Group structure
The parent company owns 20 subsidiaries, all of which are wholly owned. Half of the subsidiaries are
located in the same country as the parent, and half overseas. Most of the foreign subsidiaries report
under the same financial reporting framework as Dragon Co, but several prepare financial statements
using local accounting rules.
Acquisitions during the year
Two companies were purchased in March 2010, both located in this country:
1. Mermaid Co, a company which operates 20 furniture retail outlets. The audit opinion
expressed by the incumbent auditors on the financial statements for the year ended 30
September 2009 was qualified by a disagreement over the non-disclosure of a
contingent liability. The contingent liability relates to a court case which is still ongoing.
2. Minotaur Co, a large company, whose operations are distribution and warehousing. This
represents a diversification away from retail, and it is hoped that the Dragon Group will
benefit from significant economies of scale as a result of the acquisition.
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Other matters
The acquisitive strategy of the group over the last few years has led to significant growth. Group
revenue has increased by 25% in the last three years, and is predicted to increase by a further 35% in
the next four years as the acquisition of more subsidiaries is planned. The Dragon Group has raised
finance for the acquisitions in the past by becoming listed on the stock exchanges of three different
countries. A new listing on a foreign stock exchange is planned for January 2011. For this reason,
management would like the group audit completed by 31 December 2010.
Required:
b) Recommend and describe the principal matters to be included in your firm’s tender document
to provide the audit service to the Dragon Group. (12 Marks)
c) Using the specific information provided, evaluate the matters that should be considered before
accepting the audit engagement, in the event of your firm being successful in the tender.
(8 Marks)
(20 Marks)
QUESTION THREE
You are the manager responsible for four audit clients of Axis & Co, a firm of Chartered Certified
Accountants. The year end in each case is 30 June 2010.
You are currently reviewing the audit working paper files and the audit seniors’ recommendations for
the auditors’ reports. Details are as follows:
a) Mantis Co is a subsidiary of Cube Co. Serious going concern problems have been noted during
this year’s audit. Mantis will be unable to trade for the foreseeable future unless it continues to
receive financial support from the parent company. Mantis has received a letter of support
(‘comfort letter’) from Cube Co.The audit senior has suggested that, due to the seriousness of
the situation, the audit opinion must at least be qualified ‘except for’.
(5 Marks)
b) Lorenze Co has changed its accounting policy for goodwill during the year from amortisation
over its estimated useful life to annual impairment testing. No disclosure of this change has
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been given in the financial statements.The carrying amount of goodwill in the balance sheet as
at 30 June 2010 is the same as at 30 June 2009 as management’s impairment test show that it is
not impaired. The audit senior has concluded that a qualification is not required but suggests
that attention can be drawn to the change by way of an emphasis of matter paragraph.
(6 Marks)
c) (The directors’ report of Abrupt Co states that investment property rental forms a major part of
revenue. However, a note to the financial statements shows that property rental represents only
1·6% of total revenue for the year. The audit senior is satisfied that the revenue figures are
correct.The audit senior has noted that an unqualified opinion should be given as the audit
opinion does not extend to the directors’ report. (4 Marks)
d) Audit work on the after-date bank transactions of Jingle Co has identified a transfer of cash
from Bell Co. The audit senior assigned to the audit of Jingle has documented that Jingle’s
finance director explained that Bell commenced trading on 7 July 2010, after being set up as a
wholly-owned foreign subsidiary of Jingle.The audit senior has noted that although no other
evidence has been obtained an unmodified opinion is appropriate because the matter does not
impact on the current year’s financial statements. (5 Marks)
Required:
For each situation, comment on the suitability or otherwise of the audit senior’s proposals for the
auditors’ reports.Where you disagree, indicate what audit modification (if any) should be given
instead.
Note: The Mark allocation is shown against each of the four issues.
(20 Marks)
QUESTION FOUR
a) Comment on the need for ethical guidance for accountants on money laundering.
(5 Marks)
b) You are senior manager in Dedza & Co, a firm of Chartered Certified Accountants. Recently, you
have been assigned specific responsibility for undertaking annual reviews of existing clients. The
following situations have arisen in connection with three clients:
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i.) Dedza was appointed auditor and tax advisor to Kora Co last year and has recently
issued an unmodified opinion on the financial statements for the year ended 31 March
2010. To your surprise, the tax authority has just launched an investigation into the
affairs of Kora on suspicion of underdeclaring income. (7 Marks)
ii.) The chief executive of Xalam Co, an exporter of specialist equipment, has asked for
advice on the accounting treatment and disclosure of payments being made for security
consultancy services. The payments, which aim to ensure that consignments are not
impounded in the destination country of a major customer, may be material to the
financial statements for the year ending 31 December 2010. Xalam does not treat
thesepayments as tax deductible. (4 Marks)
iii.) Your firm has provided financial advice to the Pholey family for many years and this
has sometimes involved your firm in carrying out transactions on their behalf. The
eldest son, Esau, is to take up a position as a senior government official to a foreign
country next month. (4 Marks)
Required:
Identify and comment on the ethical and other professional issues raised by each of these matters and
state what action, if any, Dedza & Co should now take. (15 Marks)
Note: The Mark allocation is shown against each of the three situations.
(20 Marks)
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