AUDITING – CUAC 202
ASSIGNMENT 1
1(a)Explain the importance of audit planning and state two matters that would be included in an audit plan.(6)
(b)List factors that influence reliability of audit evidence.(4)
(c)You are the senior-in-charge of the audit of TH Limited, a company which produces sophisticated electronic laboratory equipment. The company imports a high proportion of the components it uses from the far East. The equipment is used by some laboratories dealing with hazardous chemicals.
As the audit draws to a close, the partner in charge has asked you to ensure that all procedures relating to subsequent events and going concern are properly performed. You are to consider the audit work to be performed in relation to subsequent events and going concern.
Required
(1)List the responsibility of the auditor for detecting errors in the accounts during the following periods.
(i)From the balance sheet date to the completion of the detailed audit work.(2)
(ii)From the completion of the detailed audit work to the date the directors sign the financial statements. (2)
(iii)From the date the directors sign the financial statements to the meeting where shareholders approve the accounts. (2)
(2)Briefly explain the auditor’s responsibility regarding the going concern and state the audit procedures to be undertaken where the entity’s going concern status is doubtful.(3)
(3)Explain what is meant by the following:
i)Audit risk
ii)Inherent risk
iii)Control risk
iv)Detection risk
v)Explain how an auditors approach might be affected if he concludes that there is a high inherent risk.
ASSIGNMENT 2
(a)DP Co is a wholesaler of furniture (such as chairs, tables and cupboards). DP buys the furniture from six major manufacturers and sells them to over 600 different customers ranging from large retails chain stores to smaller owner-controlled businesses. The receivables balance therefore includes customers owing up to $125,000.00 to smaller balances of about $5,000.00, all with many different due dates for payments and credit limits. All information is stored on DP’s computer systems although previous audits have tended to adopt an ‘audit around the computer’ approach.
You are the audit senior-in-charge of the audit of the receivables balance. For the first time at this client, you have decided to use audit software to assist with the audit of the receivables balance. Computer staff at DP are happy to help the auditor, although they cannot confirm completeness of systems documentation, and warn that the systems have very old operating systems in place, limiting file compatibility with more modern programs.
The change in audit approach has been mainly to fully understand DP’s computer systems prior to new internet modules being added next year. To limit the possibility of damage to DP’s computer files, copy files will be provided by DP’s computer staff for the auditor to use with their own audit software.
Required
i)Explain the audit procedures that should be carried out using audit software on the receivables balance at DP Co. For each procedure, explain the reason for that procedure.(9)
ii)Explain the potential problems of using audit software at DPCo. For each problem, explain how it can be resolved. (8)
iii)Explain the concept of ‘auditing around the computer’ and discuss why this increases audit risk for the auditor. (3)
ASSIGNMENT 3
You are the senior-in-charge of the audit of Sparks Company, a distributor of electrical components. A member of the audit team had undertaken a review of the accounting and control systems and had identified and confirmed the following significant points of deficiency;
(i)Purchases
Purchase Ledger Clerks amend the payables master file with details of new suppliers on verbal authority of the financial controller. No printouts of amendments is obtained.
(ii)Sales
Credit limit parameters within the sales order processing software are unrealistically low, resulting in a high volume of items being rejected as exceptions.
(iii)Cash at Bank
The monthly reconciliations prepared by the assistant accountant are not reviewed.
(iv)Contingency Planning
There is no formal disaster recovery plan.
Required
(i)Set out in a manner suitable for inclusion in a report to management, the possible consequences of the above deficiencies and the recommendations to remedy the deficiencies. Your recommendations should clearly describe how the control procedures should operate. (10)
(ii)Explain how a report on these matters written by internal audit would differ from the external auditors. (10)
ASSIGNMENT 4
The office of the Auditor General is that of a public servant. What are the factors that help to achieve Independence of the auditor general in the public service as he carries his function as Chief Internal Auditor.
ASSIGNMENT 5
What are the fundamental principles needed to achieve the objectives of the auditing profession?
ASSIGNMENT 6
Why should the company waste resources to have Management Auditors when it is already paying for external auditing services?
ASSIGNMENT 7
Generally Accepted Government Auditing Standards (GAGAS) consists of 32 standards compared to only 10 for GAAS. Why is this case?
ASSIGNMENT 8
Explain the term “audit risk” and the three elements that contribute to total audit risk.(4)
The CD charity was established in 1960. The charity’s aim is to provide support to children from disadvantaged backgrounds who wish to take part in sports such as tennis and football.
CD has a detailed constitution which explains how the charity’s income can be spent. The constitution also notes that administration expenditure cannot exceed 10% of income in a year.
The charity’s income is derived wholly from voluntary donations.
Sources of donations include:
- Cash collected by volunteers asking public for donations in shopping areas.
- Cheques sent to charity’s head office.
- Donations from generous individuals. Some of these donations have specific clauses attached to them indicating that the initial amount donated (capital) cannot be spent and that the income (interest) from the donations must be spent on specific activities, e.g. provision of sports equipment.
The rules regarding the taxation of charities in the country CD is based are complicated, with only certain expenditure being allowable for taxation purposes and donations of capital being treated as income in some situations.
Required
a)Identify areas of inherent risk in the CD charity and explain the effects of these risks on the audit. (12)
b)Explain why the control environment may be weak at the charity CD.(4)
ASSIGNMENT 9
SM Co provides scientific to a wide range of clients. Typical assignments range from testing food for illegal additives to providing forensic analysis on items used to commit crimes to assist law enforcement officers.
The annual audit in nearly complete. As audit senior you have reported to the engagement partner that SM is having some financial difficulties. Income has fallen due to the adverse effect of two high profile court cases, where SM’s services to assist the prosecution were found to be in error. Not only did this provide adverse publicity for SM, but a number of clients withdrew their contracts. A senior employee then left SM, stating lack of investment in new analysis machines was increasing the risk of in correct information being provided by the company.
A cash flow forecast prepared internally shows SM requiring significant additional cash within the next 12 months to maintain even the current level of services. SM’s auditors have been asked to provide a negative assurance report on this forecast.
Required
a)Define “going concern” and discuss the auditor’s responsibility in respect of going concern.(4)
b)State the audit procedures that may be carried out to try to determine whether or not SM Co is a going concern. (8)
c)Explain the audit procedures the auditor may take where the auditor has decided that SM co is unlikely to be going concern. (4)
d)In the context of cash flow forecast, define the term “negative assurance” and explain how this differs from the assurance provided by an audit report on statutory financial statements. (4)
ASSIGNMENT 10
a)Contrast the roles of internal and external auditors.(10)
b)What is the importance of audit committees?(10)
ASSIGNMENT 11
a)State the audit objectives associated with verification of fixed assets.(8)
b)Outline the substantive testing procedures you would perform to achieve the objectives in (a) (12)
ASSIGNMENT 12
Your firm which has eight partners has been invited by Mr. G, the managing director and majority shareholders of Bs by co to accept appointment as statutory auditors of the company. The present firm of auditors will not be reappointed when its term of office expires.
The principal activity of Bs by co is the manufacture and distribution of healthcare products. Your firm has several companies operating in the healthcare sector in its client portifolio.
Mr. G has requested that your firm assists with the preparation on the company’s corporation tax computation and provides consultants services on an on going basis in connection with his plans to grow the business. He has also suggested that a partner in your firm joins the board of Bs by Co as a non executive director.
Required
Set out matters to be considered and the procedures to be performed in order to determine whether to accept the appoint as auditor. (10)
Identify and explain the threats for independence and objectivity which may arise from the provision of the services requested by Mr. G and state how these threats should be resolved. (10)
Set out benefits to audit firms and their clients of having audit and non audit services provided by the same firm of accountants. (5)
Assignment 13
Big Blocks (BB) based in Harare, offers design solutions to architectural, construction and engineering customers using concrete. BB create products tailored to customer specifications using computer controlled machinery and coating materials. BB’s customer base is varied from well known multinational companies, to individual customers with a design idea. Typical products include dining room tables, landscape seating, spa and pool features and garden planters. BB’ s workshop in Bulawayo contains computer-controlled machines that have the capability to cut blocks of concrete into virtually any shape or size.
In previous years, BB maintained a manual accounts system. This year BB has purchased a new Computerized Accounts System (CAS) which records purchases and sales transactions and maintains records of trade receivables, trade payables and inventory.
You, Ian Chiva, as BB’s audit engagement supervisor have decided to adopt a risk based audit strategy in the audit of BB.
Whilst BB now maintains records of Inventory (in both quantity and value) on its new CAS, you and your audit team will be observing the physical inventory count in BB at year end to ensure the proper cut off of purchases and sales.
Required
a)
i) Explain why observation of the physical inventory count is essential in ensuring the proper cut off of purchases and sales. (4)
ii) What information should the auditor obtain during the physical count to ensure that cut off for sales is accurate? (4)
iii) What information should the auditor obtain during the physical count to ensure that cut off for purchases is accurate? (2)
b) Tim Kamwe, Managing director of BB, has a number of concerns regarding tha audit. She knows that you plan to adopt a risk based auditing strategy and does not know what this means. She asked that you send a letter explaining:
i) What is meant by risk based auditing strategy; and(4)
ii) Advising on the steps that you propose to take arising from BB’s implementation of its new computerized accounting system. (4)
Assignment 14
Spring Valley (SV) is a bar in Chinhoyi. The premises was built in the 60s and still has some of its original features. It serves bar food as well as drinks. SV’s financial year end is 30 June 2012.
SV does its banking with CBZ Bank Magamba way Branch.
On 15 January 2012, SV took out a 20 year mortgage for USD $5 200 000 to acquire the building adjoining the bar, with the intention of expanding. SV used the bar and ground on which the bar stands as collateral. Every month since the loan was obtained a payment of USD $ 40 000 (principal and interest) has been paid to CBZ.
As the responsible audit manger, you are in charge of the current year audit for SV. SV is an existing client of your firm but this is the first time SV has had a mortgage.
Required
a)
i) Explain why it would be necessary to record information on the mortgage for inclusion in the permanent file. (2)
ii) Identify what type of information in relation to the mortgage should be included in the permanent file. (2)
iii) Identify and explain and THREE key financial statement assertions for the mortgage, interest expense, and interest payable accounts i.e. ONE assertion for each. (3)
b)
i) List the audit procedures you should perform to audit the internal control components of the mortgage. (5)
ii) List the substantive audit procedures to verify:
- The issue of the mortgage;(1)
- The balance of the mortgage at 30 June 2012;(1)
- Interest payable accounts at 30 June 2012(1)
- And the balance in the interest expense account for the period ended 30 June 2012.(1)
c) Briefly explain why the audit procedures on mortgage payable, interest expense, and interest payable should be conducted together. (4)
Assignment 15
Zim Tours (ZT) is a company which markets Zimbabwe as a destination for business tourism. ZT operates six convention centres in various locations around Zimbabwe. ZT’s office premises are located in Harare. The company’ directors, central administration and accounts department are located at its premises and wages payments to all employees, together with all company supplier payments, are made from there.
The company’s accounting system comprises of a fully integrated nominal, trade payables, trade receivables ledgers, together with an online, real time Internet Based booking system that enables convention organizers to book convention centres through the company website. Convention organizers use the link to the ZT’s website to view the various convention centres and prices. Prices for, and availability of, the various rooms in each convention centre are automatically updated on the system weekly. Convention organizers make bookings through the online system and provide credit card information for payment. After the credit card details are verified the sales ledger is automatically updated. Then an electronic copy of the booking is sent to relevant convention centre. Convention organizers may cancel a booking made online within 30 days are by going through an online cancellation process.
You have become aware that some convention organizers have expressed concerns about doing business online with ZT.
As on line computer systems lend themselves very well to the use of Computer Assisted Audit Techniques (CAATS), it is proposed to use CAATS as part of the audit.
Required
You, as Audit Manager, are asked to:
a)Briefly discuss the potential advantages from an internal control perspective for a company like ZT having a computerized accounting system as opposed to using a manual accounting
system. (4)
b)Identify and explain TWO inherent risks and TWO controls risks for accounting systems that rely heavily on IT systems. (8)
c)Give two reasons justifying why convention organizers might have concerns about doing business online with ZT. (4)
d)List FOUR factors that would affect the auditor’s use of CAATS.(4)
Assignment 16
SBP distributes and sells baby products across Zambia. Jill, the audit junior, with responsibility for both sales and receivables performed a preliminary evaluation of the company’s internal control over sales transactions and concluded that the system of internal controls over sales is in general good and control risk is low. Therefore, Jill decides to test controls to confirm her assessment of control risk. SBP raised approximately 650 sales invoices during the year, whose recorded total is $ 750 000. SBP’s profit before taxes for the year is $ 180 000.
Deciding to use judgmental (non statistical) sampling Jill randomly selects a sample of 40 copy sales invoices from the recorded sales. She examines each sample invoice by conducting the following tests of control:
- Checks the invoice is correctly coded with customer and nominal codes.
- Checks that the prices on the invoice are consistent with SBP’s official price list.
- Checks the invoice for arithmetic, prices and calculations including VAT.
- Traces the invoices details to the customer sales order.
- Traces the invoice amount to SBP’s day books, ledger and inventory records.
After performing the above tests of control, Jill notes a few minor control deviations, for which the SBP’s sales staff give her plausible explanations. Jill therefore confirms her assessment of control risk as low. Consequently, Jill decides to confirm receivables at year end and to limit her sample size to 15 accounts selected haphazardly from the population of 250 receivables accounts.
Required
a)Briefly explain the concept of sampling risk, indicating why such risk exists and what measures Jill should take to minimize such risk. (5)
b)Critically evaluate Jill’s audit approach with respect to the truth and fairness of sales and receivables. (6)