Audit Practice And Investigation Question Paper

Audit Practice And Investigation

Course:Bachelor Of Commerce

Institution: Kenyatta University question papers

Exam Year:2009

KENYATTA UNIVERSITY
UNIVERSITY EXAMINATIONS 2008/2009
INSTITUTE OF OPEN LEARNING
FIRST SEMESTER EXAMINATION FOR THE DEGREE OF BACHELOR OF
COMMERCE
BAC 401: AUDIT, PRACTICE AND INVESTIGATIONS

DATE: Thursday 8th January, 2009

TIME: 10.00 a.m. – 12.00 noon

INSTRUCTIONS
1. Answer ALL questions.
2. Show all your workings
3. Marks allocated are shown at the end of the question.

Question One
AZ Ltd. is a large public construction company with annual sales of sh 25 billion and its
draft income statement shows a profit from operations fro the year ended 30 September
2002 of sh 3 billion. This is the first audit by your audit firm. Inquiry of the previous
auditors revealed no reasons of concern. On completing the audit work at the company’s
premises, the audit senior has drafted a memo extracts from which are produced below:
1.
INVENTORY VALUATION
Inventories include sh 525 million at cost of scrap rubber. This material is widely used as
a road surface in other countries. Contracts for road building with this country’s ministry
of construction, the state authority for road constructions does not currently permit the
use of this material. However, the matter was known to be under review and on being
offered a special purchase of this material. AZ Ltd speculated on a a favourable outcome
of the review and the purchase and purchased the material. In November 2002 shortly
before the financial statements were approved by the directors, the ministry of
construction reported that it would not currently accept the use for this material. If used on non-ministry of construction contracts, the materials net realizable value would
not exceed sh 150 million. The chief financial officer maintains that as a ministry of construction’s report was issued after the balance sheet date, the write down of the
inventory should be reflected in the next period’s financial statements.

2.
DEPRECIATION
In 1998, the company purchased two computers controlled earthmovers at a cost of
sh 188 million each and a further two at the same price 1999. Depreciation has been
provided at 10% per annum straight line, the same basis as it previously depreciated
conventional earthmovers.

This year, 2002, the company that improvements in technology made it worthwhile
scrapping the first two computer controlled earthmovers and replacing them with the
latest model at a cost of sh 300 million each. The company’s chief engineer tells you that
the technology is developing so rapidly it appears likely they will continue to replace
these machines every five years. The chief financial officer claims that the depreciation
rate of 10% is in the line with industry standards and reflects the physical life of
machines. He argues that continued improvements in technology cannot be foreseen and
that there is no justification for increasing depreciation to 20% per annum because of the
possibility of technological obsolescence.

3.
CONTINGENT LIABILITY
The company is being sued for sh 4 billion by the ministry construction for the defective
work on recently completed road. The company maintains that it met the ministry’s
construction’s specifications and that it is the ministry’s engineers who are at fault in
drawing up the specifications. AZ Ltd maintains that it has no case to answer, that the
possibility of loss is remote and that the claim need not be disclosed as a contingent
liability. An investigative journalist has recently published an article suggesting that other roads constructed by the company exhibit similar faults. The chief executive officer admitted that the company’s road building techniques are under investigation by the ministry of construction. If the company were to lose the case, its future as a going concern would be threatened.

Required
Explain the effect of each of the three matters, namely: inventory valuation, depreciation and contingent liability (i) on the financial statements and (ii) if the company were to refuse to amend the financial statements on the auditor’s report. [20 marks]

Question Two
a)
Explain the meaning on going “Concern basis” within the context of International Standard on Auditing No. 570. [5 marks]
b)
Describe the specific audit procedures you would undertake to ascertain the “going concern” status of a company. [10 marks]

Question Three
a)
Explain any five features or qualities that auditors look for during the final review
of financial statements. [10 marks]
b)
Explain any five ways in which auditors can minimize their professional liabilities. [10 marks]

Question Four
“Modern approach to auditing call for risk-based auditing is a most welcome development”
a)
Define the term risk based auditing. [2 marks]
b)
Explain what is meant by the terms:
(i)
Inherent risk [1 mark]
(ii)
Control risk [1 mark]
(iii)
Detection risk [1 mark]
c)
Describe five problems associated with the use of audit interrogation programmes. [10 marks]

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