Principles Of Auditing Question Paper

Principles Of Auditing

Course:Bachelor Of Commerce

Institution: Kenyatta University question papers

Exam Year:2009

KENYATTA UNIVERSITY
UNIVERSITY EXAMINATIONS 2009/2010
FIRST SEMESTER EXAMINATION FOR THE DEGREE OF
BACHELOR OF COMMERCE

BAC 303: PRINCIPLES OF AUDITING

DATE:
Monday 28th December 2009

TIME: 8.00am – 10.00am

INSTRUCTIONS
Answer question ONE and any other TWO questions
Question One
During the course of your audit of fixed assets of City Engineering PLC at 31 Dec. 2008,
two problems have arisen,
i)
The calculations of the cost of direct labour incurred on assets in course of

construction by company’s employees have been accidentally destroyed for the

early part of the year. The direct labour cost invoice Shs 1000,000.
ii)
The company has received a government grant of Shs 2,500,000 towards cost of

plant and equipment acquired during the year and expected to last ten years. The

grant has been created in full to the profits and loss account as exceptional
income.
Required:

a)
List the general forms of qualification available to auditors. In drafting

their report and state the circumstances in which each is appropriate.

[6marks]

b)
State whether you feel that a qualified audit report would be necessary for

each of the two circumstances outlined above giving reasons in each case.

[6marks]

Page 1 of 3

c)
On the assumption that you decided that a qualified report would be

necessary, with respect to treatment of the government grant, draft the

section of the report describing
the
matter.
[4marks]

d)
Outline the auditors general responsibility with regard to the statement in

the director’s report concerning the valuation of land and building.

[2marks]

[18marks]
Question Two
In connection with your examination of the financial statements of Kenron products Ltd
for the year ended 31 March 2009, you are reviewing the plans for physical stock account
at the company’s Warehouse on 31March 2009. The company assembles domestic
appliances and stocks of finished appliances, unassembled parts and Sundry stocks are
stored in the warehouse which is adjacent to the company’s assembly plants. The plant
will continue to produce goods during the stock count until 5 pm on 31 March 2009. On
30 March 2009, the warehouse staff will deliver the estimated quantities of unassembled
parts and sundry stocks. Which will be required for production for 31 March 2009;
however, emergency requisitions by the factory will be filled on 31 March. During the
stock count, the warehouse staff will continue to receive plants and sundry stocks and to
dispatch finished appliances. Appliances which are completed on 31 March 2009 will
remain in the assembly plant until after the physical stock count has been completed.

Required:
a)
List the principal procedures which the auditor should carry out when planning

attendance at a company’s stock take.

[8marks]
b) Describe
the
procedure
which Kenron products Ltd should establish in order to

ensure that all stock items are counted and that no item of stock is counted twice.

[8marks]
c)
Describe the audit procedures you would carry out at the time of the stock count

in order to ensure that stock cut-off is correct.

[3marks]

[Total 19marks]

Page 2 of 3

Question Three
Management representations are an important source of audit incidence. This
representation may be oral or written and may be obtained either on an informal or
formal basis. The auditor will include information obtained in this manner in his audit
working papers where it forms part of his total audit incidence.
Required
a)
Explain the nature and role of the letter of representation.
[5marks]
b)
Explain why it is important for the auditor to discuss the contents of the letter of

representation at an early stage
of
audit.
[4marks]
c)
Explain why standard letters of representation are becoming less frequently used
by
auditing
profession. [4marks]
d)
Discuss the implications for the auditor of a small company, if the directors refuse

to sign the letter of representation.
[5marks]

[Total 18marks]

Question Four
Wheels Ltd is a medium sized wholesaler of soft toys with a small factory in Nakuru, a
trevelling sales force of six representatives and an account department consisting of a
qualified chief accountant (Erick James) and two accounts clerks.
You were the manager in charge of the audit last year and have recently carried out your
preliminary planning for this year audit (to 31 Dec. 2009). From discussions with Erick
James you have discovered that on his appointment in late 2008 new systems were
introduced and you expect to be able to rely from 1st January on the internal control of the
new system in all areas. Previously you were unable to relay on internal control over
purchase, wages or salesmen’s expenses and carried out very extensive detailed testing in
these areas.
Required:
Draft out a memorandum setting out the intended means of approaching the audit to
ensure attention is devoted to all critical aspects and to assist in direction and control of
the audit.

[15marks]
Page 3 of 3

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