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Mfa 510 Auditing And Assurance Part Time Weekend Question Paper
Mfa 510 Auditing And Assurance Part Time Weekend
Course:Masters Of Science In Finance
Institution: Kca University question papers
Exam Year:2014
UNIVERSITY EXAMINATIONS: 2013/2014
EXAMINATION FOR THE MASTERS OF SCIENCE (MSC) FINANCE AND
INVESTMENT/ACCOUNTING/ECONOMICS
MFA 510 AUDITING AND ASSURANCE PART TIME WEEKEND
DATE: AUGUST, 2014
TIME: 3 HOURS
INSTRUCTIONS: Answer Question One and Any Other Three Questions
QUESTION ONE (31 MARKS)
Your consultancy firm is conducting the annual audit of Real Estate Ltd, which is a large company
that develops and sells residential, commercial and mortgage house for sale. Your audit team has
completed conducting interview (enquiry) from sales director who made the following remarks.
“It appears that several sales representatives have been claiming reimbursement for fictitious
client entertaining expenses”
Preliminary analytical reviews have also indicated that client entertainment expenses have been on the
increase despite declining sales. In addition to the audit work, the managing director who is your close
business associate and friend has also requested if your firm can conduct an investigation in the matter.
Required:
a) List and explain the possible threat to auditor independence in the above case
b) Discuss the audit procedure you will carry out on client entertainment expenses clearly
indicating the assertion you are testing
c)
(6 Marks)
State and explain the additional audit tests you would recommend to your audit team in the
above case
d)
(7 Marks)
(6 Marks)
Identity possible weakness in the system of internal control that causes the above fraud and
recommend possible control to be put in place
(6 Marks)
1
e)
Assess the ethical and professional issues raised by the request for your firm to investigate the
alleged fraudulent activity
(6 Marks)
QUESTION TWO (23 MARKS)
Your audit team responsible for the tangible non-current assets of Sunrise Ltd has made the following
note “the investment property balance was revalued at open market valuation during the year from Ksh
450 million to Ksh 540 million. The increase in fair value of KSh 90 million is included as other
comprehensive income. The appointed independent valuer is however a former employee of the
company. You have noted some inconsistency in the information availed to you and the data provided
to the valuer.
a)
Identify the circumstances that would require an auditor to obtain the evidence of an expert.
(7 Mark)
b)
Explain whether an auditor who has relied on the work of an expert in his audit should make
reference to the expert in the auditor?s report.
c)
(4 Marks)
Discuss the admissibility of the evidence provided by the independent valuer in the above case
(6 Marks)
d)
ISA 500 Audit Evidence requires audit evidence to be reliable. List and explain three factors
that influence the reliability of audit evidence
(6 Marks)
QUESTION THREE (23 MARKS)
Your client is considering whether to recruit internal auditors or to outsource the internal audit
department. If outsourced, your client would require a team to undertake monthly visits to test controls
at the various shops across the country, and to perform ad hoc operational reviews at shops and head
office.
Required:
a)
Explain the importance of enhancing the independence of the internal audit function in
organization
b)
(4 Marks)
Discuss the advantages and disadvantages of outsourcing their internal audit department.
(6 Marks)
c) Outline and explain the main duties of audit committee of the board of directors
d) Explain how a strong internal audit department can influence the work of the external auditor
and the procedure to evaluate the work of internal auditors
(6 Marks)
(7 Marks)
2
QUESTION FOUR (23 MARKS)
Your audit firm has been appointed the auditors of Fashions Ltd. Shortly after the appointment, the
company?s directors have drafted a letter to your firm containing some of the following comments:
Your firm will not be allowed to undertake independent inventory or cash count;
The Board of Directors has the right to dismiss your firm at any time without disclosing any
reason for its action.
The Board of Directors will determine the remuneration of the auditor based on the outcome of
the auditor.
Required:
a)
Explain how limitation of scope of audit procedure or work affect the report of the auditor
(7 Marks)
b)
Explain to the company?s directors the procedure for removing an auditor in accordance with
the Companies Act.
c)
Explain to the company?s directors the rights and duties of an auditor under the Companies
Act.
d)
(4 Marks)
(6 Marks)
Highlight the steps that your firm should have taken to ensure that the appointment was carried
out in a proper manner.
(4 Marks)
QUESTION FIVE (23 MARKS)
a)
List four assertions of financial statements relevant to the audit of tangible non-current assets
and state one audit procedure which provides appropriate evidence for each assertion.
(8 Marks)
b)
Explain the term „audit risk? and the three elements of risk that contribute to total audit risk.
(7 Marks)
c)
ISA 260 Communication with those Charged with Governance deals with the auditor?s
responsibility to communicate with those charged with governance in relation to an audit of
financial statements.
Required:
i)
State and explain two specific responsibilities of those charged with governance
(4 Marks)
ii)
Explain four examples of matters that might be communicated to them by the auditor.
(4 Marks)
3
QUESTION SIX (23 MARKS)
An auditor?s report should contain a clear expression of opinion on the financial statements. For each
of the following situation, briefly explain the type of opinion that should be expressed in the auditor?s
report:
i)
Andrea and Associates (CPA) are appointed as auditors of C Ltd. midway through the financial
year of the company. Consequently, they are unable to carry out audit procedures necessary to
obtain adequate assurance regarding the quantity and condition of stock and work in progress
appearing in the balance sheet. Any adjustment to this figure would have a significant effect
on the profit for the year.
ii)
(5 Marks)
A client company has made no provision for losses expected to arise on a long term contract
currently in progress as the directors of the company are of the view that such losses should be
offset against amounts recoverable on other long term contracts of the company. Recognition
of the losses would have a significant effect on the profit for the year.
iii)
(5 Marks)
The consolidated financial statements of XYZ Ltd. have disclosed an on-going court case
brought against B Ltd., a wholly owned subsidiary of the company, for an alleged breach of
environmental regulations. The future settlement of this court case could lead to additional
liabilities and the winding up of B Ltd., resulting in a substantial negative effect on the
consolidated financial statements.
iv)
(5 Mark)
The auditor is denied permission to contact credit customer and there are no other reasonable
substantive procedures the auditor can perform to confirm year-end receivables balance.
(4 Marks)
v)
The directors have refused to issue the auditors with a letter of representation and governance
structure of the company is questionable
(4 Marks)
4
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