GREAT ZIMBABWE UNIVERSITY

FACULTY OF COMMERCE

DEPARTMENT OF ACCOUNTING AND INFORMATION SYSTEM

COURSE CODE:HACC423/HSPAC422

COURSE TITLE: ADVANCED AUDIT THEORY AND PRACTICE

QUESTION 1

Auditing firms do not always describe themselves as auditors. They describe

themselves as “Chartered Accountants” because apart from auditing, they also render
other services to their clients.
(a) Describe FIVE other services, which audit firms provide for their clients in
addition to auditing. [15 Marks]
(b) What are the contents of auditor’s disclosure about the entity’s ability to continue
as a going concern? [10 marks]

QUESTION 2
An auditor is expected to be independent, competent and of high integrity.
(a) Write short notes on each of the above qualities. [12 marks]
(b) List EIGHT factors that may impair the independence of an auditor. [8 marks]
(c) What do you understand by audit queries and alarms in the public sector [5 marks]

QUESTION 3
The auditing guidelines “Audit evidence” suggests that techniques of audit testing fall
into some broad categories.
Required:
(a) List and discuss FIVE of these categories giving TWO examples of each.[15 marks]

(b) Rosalia Shumba a Chartered Accountant in Zimbabwe is a registered auditor and

conducts the audit of Shoko Ltd, as well as acting for the company in tax matters. ZB
Bank, which has a substantial long-term investment in Shoko Ltd, requires, in terms of
its agreement with Shoko Ltd, that the company’s annual financial statements are
audited by a registered auditor and submitted to the bank. During the current year’s
audit of this client, Rosalia Shumba discovers that Kurai Chuma, sole shareholder and
managing director of the company, has been running an alternate set of accounting
records which reflect the true situation whilst she has been auditing and submitting tax
returns based on a fraudulent set of accounting records.
When Rosalia Shumba confronts Kurai Chuma with this evidence, he admits that he
has done this for some years but indicates that he is not at all worried about it, because
he was only able to get away with it due to the inadequate audit which Rosalia Shumba
had conducted over the years. Kurai further states that should Rosalia Shumba report
the matter to anyone, he will simply state that she was a willing partner to the fraud.

On scrutiny of correspondence from her past dealings with Kurai Chuma and of prior
audit working papers, Rosalia Shumba realises that she could indeed appear to have
conspired with Kurai Chuma as her audit documentation could be considered to be
inadequate and she had not followed up on a number of queries concerning the audit.
Furthermore, a large percentage of her professional fees come from work referred to
her by Kurai Chuma.

Required
Discuss fully the situation in which Rosalia Shumba finds herself in relation to the Code
of Professional Conduct. [10 marks]

QUESTION 4
“Audit evidence” refers to the information obtained by the auditor and used in arriving at
the conclusion on which he bases his opinion on the financial statements.
Required:
(a) List and describe any five sources of audit evidence. [10 marks]
(b) What are the basic steps to Computer-Assisted Audit Techniques’ (CAATs)
developments?
[15 marks]

QUESTION 5
a) Discuss the audit objectives applicable to inventories?
[15
marks]
b) What alternative procedures should an auditor follow if physical inventory
observation is impracticable?
[10 marks]

QUESTION 6
(a) The audit objectives in the verification of liabilities should focus on ascertaining
that accrued liabilities are not understated, but not ignoring the possibility of the
opposite may occur. What are some possible auditing procedures that would
 help the auditor address the completeness audit objective for liabilities?
[15 marks]
(b) If auditor has assessed control risk as low, then merely reviewing the client’s
reconciliations at year-end may be appropriate. What steps should an auditor
take in reviewing a client’s bank reconciliation?
[10 marks]

QUESTION 7
The Chairman of XYZ LTD, a small scale enterprise has been advised by his
accountant to appoint an external auditor, but he disagreed with his accountant that
since he has a qualified accountant in his employment, there is no need appointing an
external auditor.
As a consultant, explain to the chairman:-
(a) (i) The difference between auditing and accountancy work; [4
marks]
(ii) The objectives of an external audit [3 marks]
(iii) The advantages of an external audit [8 marks]

(b) Discuss five essential features of systems audit [10

marks]

QUESTION 8
Your client of over five years – ABC Rubber Products Limited, is proposing to change
over to a computer-based accounting system.
(a) How would this impact on your approach to the audit? [10 marks]
(b) Enumerate the major differences between manual and computer-based accounting
system [10 marks]
(c) Explain the term “Audit Committee” considering the provision of the Companies and
Allied Matters Act, 1990 [5 marks]

QUESTION 9
It is common practice for auditors to send a letter of engagement to new clients and
increasingly to existing clients. Matters usually included range from definition of scope
to audit fees.
Required:
(a) Briefly describe an engagement letter. [5 Marks]
(b) Discuss the purpose of the engagement letter [10 Marks]
(c) List some of the principal contents of an engagement letter. [10 Marks]

QUESTION 10
Most large companies have both internal and external auditors.
Required:
(a) Distinguish between the internal audit and external audit. [2 marks]
(b) Describe the scope and objectives of internal audit. [3 Marks]
(c) Explain the criteria employed by the external auditor to assess the likely
effectiveness and relevance of the internal audit functions [3 Marks]
(d) State four areas where the Internal Audit function can be of assistance to the
External Audit. [2 Marks]
(e) The auditor’s tests of controls help to identify weaknesses which constitute threats to
data security, reliability and loss. Discuss. [15 marks]

QUESTION 11
a) As the audit manager in charge of an audit of a large multinational company,
draw up an audit programme for fixed assets for the use of the field staff.[10
Marks]
b) Define and explain what is meant by analytical review procedures. [3 marks]
c) Discuss four types of general analytical review procedures. [8 marks]
d) What is the purpose of performing preliminary analytical review procedures at the
audit planning stage? [4 marks]

QUESTION 12
Audit is “An independent examination of and the expression of opinion on the financial
statements of an enterprise by an appointed auditor in pursuance of that appointment”.
Required:
(a) List any SIX types of audit [6 marks]
(b) State ONE advantage of an audit to each of five different users of the audit report.
[10
marks]
(c) Write short notes on the following:
i) Compliance tests [3 marks]
ii) Substantive tests [3 marks]
iii) Vouching [3 marks]

QUESTION 13
An Auditor is expected to obtain relevant and reliable audit evidence sufficient to enable
him draw measurable conclusions as a basis for his report. You are required to:
(a) Discuss the factors, which may influence the auditor’s judgment in relation to
sufficiency of the evidence so collected.
[15 marks]
(b) Discuss the factors that would enable the auditor assess the reliability of such
evidence.
[10 marks]

QUESTION 14
Pineapple Ltd. a manufacturing company involved in the production of vegetable oil, has
been in business for over five years. Since then, it has been making huge losses. The
company accounts are being audited by Banana and Co., Chartered Accountants.
The company is currently experiencing serious financial difficulties. It has approached
the major shareholder to assist it; by granting it a soft loan. Enquiries made by the major
shareholder who is the Chairman, revealed that management, with the assistance of
some suppliers of the company are defrauding the company, through payment for
materials not supplied. The Chairman has approached your firm of Chartered
Accountants, Ree and Co, to carry out an investigation into this matter and report your
findings to him.
You are aware that Jacobs Ltd, one of your major clients, is one of the major suppliers
of
Pineapple Ltd.

Required
i) State, with reasons, whether Ree and Co. (Chartered Accountants) should
accept or reject this appointment. [5 marks]
ii) If Ree and Co. decides to accept the appointment, what steps should it take
before formally accepting? [4marks]
iii) Draw up a programme of work to be undertaken by Ree and Co. [11
marks]
iv) What are the shortcomings of using standardised audit programmes? [5
Marks]

QUESTION 15
In terms of ISA300, the audit plan must contain a description of the nature, timing and
extent of planned risk assessment procedures sufficient to assess the risk of material
misstatements. Audit is a combination of inherent risk, control risk and detection risk.
The auditor must there evaluate the materiality and risks specific to the company.
Materiality limits should be set at the planning stage of the audit to act as a guideline for
deciding whether adjustments should be made to the financial statements.

Required

(a) Briefly describe the terms ‘inherent risk’, ‘control risk’,’ detection risk’ and ‘audit
risk’
 [8 marks]
(b) List the eight factors which the auditor would bear in mind when assessing the
audit risk of a company. Your answer should talk of inherent and control risk.
[4 marks]
(c) Define and explain the Risk Equation, describing how it should be used in
auditing planning. [3
marks]
(d) Discuss the considerations which would determine whether an item is material in
relation to financial statements
[4 marks]
(e) Discuss the validity of the statement that “materiality limits should be set at the
planning stage of the audit and should be rigidly be adhered to throughout the
audit.” [6 marks]

QUESTION 16

(a) ISA 210 Terms of Audit Engagements explain the content and use of engagement
letters.

Required:

State any Four items that could be included in an engagement letter. [4

marks]

(b) ISA 500 Audit Evidence explains types of audit evidence that the auditor can obtain.

Required:
State, and briefly explain, four types of audit evidence that can be obtained by the
auditor.
[12 marks]

(c) ISA 700 The Independent Auditor’s Report on a Complete Set of General Purpose
Financial Statements explains the form and content of audit reports.
Required:
State three ways in which an auditor’s report may be modified and briefly explain the
use of each modification.
[9 marks]

QUESTION 17
You are the newly appointed internal auditor of Black Hotels plc. You have received a
copy of a management letter from the external auditors to the Board pointing out that
there is no internal audit service to provide quality assurance to management and
consequently the systems of internal control are less than satisfactory. You have also
discovered a variety of practices carried out by staff which you consider as fraudulent.
These include pilferage of inventory and abuse of the hotels’ computer facilities. The
chairman of Black Hotels plc, stung by these criticisms, has asked for your comments
and how you will “use internal audit to help us fight fraud and improve our systems”.

Required

Draft a memorandum to the audit committee in order to comply with the chairman’s
request.
[25 marks]

QUESTION 18

The auditor is increasingly abandoning subjective selection of items for testing in favor
of statistical sampling techniques.

Required

(a) State the advantages and disadvantages of statistical sampling techniques

[10 marks]
(b) State the conditions which must be present before statistical sampling techniques
can be used. [5 marks]

(c) Discuss the factors which an auditor must consider when using statistical
sampling techniques.
[10 marks]

QUESTION 19

The new audit trainee of your firm of auditors has asked you to advise him on the
reliability of the following types of third party evidence:

(i) Valuation of land and buildings by a valuer

(ii) The replies to a debtor’s circularization confirming balances due to the
company
(iii) The letter received from the bank confirming year-end bank balances

Required
 (a) Discuss the reliability of each of the three types of third party evidence listed in (i)
to (iii) above, and consider the accuracy of the valuations they provide.
[9 marks]
(b) For valuations provided by a valuer, describe the work you would carry out to
check the independence, qualifications and experience of the valuer and the
accuracy of the valuation.
[8 marks]
(c) For the letter received from the bank, describe the work you would perform in
checking the bank reconciliation and that the balance on the bank accounts, as
included in the financial statements, is correct.
[8 marks]

QUESTION 20

You have been asked by the senior in charge of the audit of Bingham Manufacturing
Limited to describe certain aspects of the work you will carry out in auditing the
company’s wages system. Employees of Bingham Manufacturing are paid on the basis
of hours worked and quantities produced. The hours worked are recorded on clock
cards and the quantities produced are confirmed by the supervisor. Wages are paid in
cash each Friday for the previous week’s work. Appointment of employees is authorized
by the managing director, and the personnel department maintains employees’ records
and their rates of pay. The cashier is separate from the wages department.

Previous years’ audits have highlighted weaknesses in internal controls in the

company’s wages system. This has allowed an employee in the wages department to
perpetrate a fraud by creating fictitious employees on the payroll and misappropriating
the wages. Some of your audit tests have been designed to detect whether this fraud is
still taking place.

A “starters and leavers” test is carried out to ensure that employees are not paid before
they commence employment or after they have left.

Required

(a) State the principal controls you would expect to exist in a wages system and
explain their purpose. [10
marks]
(b) Assuming you decide not to attend the wages payout, suggest other techniques
you can use to check the existence of employees. [5
marks]
(c) Describe how you will carry out a starters and leavers test. [4 mark]
 (d) Describe the analytical review techniques you can use in auditing the wages
system. This should include suggesting any ratios you would calculate.
[6 marks]

QUESTION 21

You are the senior in charge of the audit of Big Ltd a manufacturing company. You have
been talking with the payroll supervisor who has commented on the strength of the
company’s payroll internal control system. She has assumed that this internal control
system guarantees the completeness, accuracy and validity of the payroll accounting
records.

Required

a) State whether you agree with the supervisor’s assumption that an internal control
system can guarantee the completeness, accuracy and validity of the records,
supporting your answer by using examples from the payroll system
[15 marks]
b) The supervisor has also asked you to explain some internal control terminology
which she does not understand. Explain the meaning of the following terms,
using payroll examples different from those you have given above:
i) Segregation of duties [5
marks]
ii) Arithmetical and accounting controls [5
marks]

QUESTION 22

Ngara Ltd is a Zimbabwean based company which designs and manufactures motor
vehicles. It also has a small yard in Mutare which it purchased recently. Most of the
vehicles are manufactured to customer specification. However as trade has been slack
recently the company is manufacturing some vehicles without orders in the hope of
obtaining buyers when the market picks up. Most of the company’s output is for export
and it quotes its prices in US dollars.

You are asked to act as senior in charge of the audit. The company has a year end of
30 September. It is apparent from the previous year’s audit file that the company has
always had weak internal controls.

The company is currently amending its designs to take advantage of new technology
and has invested a considerable amount of time and money in this. Consequently it is
heavily indebted to the bank. The bank overdraft facility is to be reviewed in November
2020 and the managing director wishes to ensure the continuing availability of the
overdraft facility before attending a major trade fair in late November 2020.

Required

a) Identify from the situation outlined above, circumstances particular to Ngara Ltd
that must be taken into account when planning the audit. [12
marks]
b) Explain clearly why such factors must be taken into account. [13 marks]
QUESTION 23

You have been asked by the manager in charge of the audit of Shumba Ltd to consider
and describe various aspects of carrying out a debtor’s circularization at its year end of
31 October 2019. The company sells all its products on credit and the draft accounts
show annual sales of $15 million and a year-end accounts receivable of $4.3 million.
Your tests of control on the sales system have shown that there is a satisfactory division
of duties in the sales system and only minor errors were found in the tests of control.

Required

a) Consider the reliability of a debtor’s circularization in providing audit evidence

and in verifying the value of year-end accounts receivable.
[9 marks]
b) Describe the work you will carry out in auditing the replies to the debtors’
circularization where:
i) The debtor disagrees the balance and provides a different balance. [7
marks]
ii) The debtor does not reply to the circularization. In answering this part you
should consider the techniques you would use to verify the existence of
the debtor and the investigations you would carry out to check the
recoverability of the debt on the sales ledger
[9 marks]
QUESTION 24

You are the manager responsible for the annual review of your firm’s audit
engagements to identify situations where independence may be at risk and where
appropriate safeguards should be applied. From your review of your firm’s files relating
to Shava Ltd you ascertain the following:

The company is expanding rapidly following a number of acquisitions and is preparing

to apply for admission to the Zimbabwe Stock Exchange and to offer a proportion of its
shares to the public. As a result of the special investigations undertaken, total fees from
Shava Ltd amount to 17% of your firm’s gross practice income for the current year.

The company is about to undertake a feasibility study, on a proposal to expand into

Europe which is to be kept a secret from employees. To keep the initial costs of Shava
Ltd team’s European travel expenses a secret, a partner (who is not the engagement
partner) has offered to have them put onto his credit card. There would then be billed as
professional fees.

Required

a) Explain the risks you would consider in deciding whether or not the appointment
should continue. [12
marks]
b) Briefly describe the safeguards available. [8
marks]
c) Come to a conclusion on whether you consider the appointment should continue.
[5
marks]

QUESTION 25
(a) You are an audit partner at Moyo & Kaseke Auditors, a medium-sized auditing firm
based in Zimbabwe. You were promoted to partnership seven years ago, after being
with the firm for 11 years. You are currently busy with the audit of Pangono Investments
for the year ended 31 December 2021. You have worked on the audit of Pangono
Investments since joining Moyo & Kaseke, first as a trainee accountant and now as the
partner in charge of the audit. Pangono Investments has never had a qualified audit
opinion. During a discussion held with the CEO of Pangono Investments, Terrence
Kombai, he promised that you and your family of four members will receive a free
subscription to the Pangono Investments magazine, if an unmodified audit report is
issued for the 2021 year. Realising that your 18-year-old daughter wants to become a
journalist, Mr Terrence Kombai also vowed that the company will grant her a
comprehensive study bursary (to the value of approximately $250 000) if you express
an unmodified audit opinion. To remain ethical, your daughter will have a commitment to
work at Pangono Investments for five years after her graduation.

Required
Discuss the considerations from the background information which you, as the partner
in charge of Pangono Investments, will take into account in terms of the Code of
Professional Conduct.
[13 marks]
(b) Discuss the view that it is often the case that the guidance provided by the
International Standards on Auditing is insufficiently specific to be of real value to an
auditor in practice. You should refer specifically (but not exclusively) to ISA 500 - Audit
Evidence and the requirement for audit evidence to be both “sufficient” and
“appropriate”. [6 marks]
(c) Assess the view that if an auditor believes that management representations are
fundamentally unreliable, then s/he has no realistic alternative other than to terminate
the relationship with the client. [6
marks]

Question 26
Your firm has recently been appointed as auditors of Kentronics Ltd, a large company
which markets sophisticated electronic equipment for heavy industry as well as the
mining equipment industry. The previous audit firm lost the audit as a direct result of a
conflict with Bradley Cosmas, the managing director of Kentronics Ltd, over the
adoption of various accounting policies by Kentronics Ltd. The conflict had become very
heated, due mainly to Bradley Cosmas’s aggressive nature, and had led to a qualified
audit report. Whilst familiarising yourself with the company and its environment you
discover that:
1. Bradley Cosmas had risen up through the ranks of Kentronics Ltd with
ruthlessness and determination. On the way, he had built his personal wealth on
a foundation of shares in Armtronics Ltd.
2. He has surrounded himself with an aggressive team of loyal managers. You
consider that their loyalty is partially due to the fact that management are not
paid a salary but are given a monthly retainer, superior fringe benefits and a
percentage of reported profits.
3. Much of the sophisticated electronic equipment is imported from the China,
Japan and Taiwan whilst exports, particularly mining equipment, are made to the
governments of African countries.
4. You also discover that one of the divisions of the company namely the “Foreign
Development Division” sells mining equipment exclusively to companies who in
turn sell to mercenary and guerrilla organisations. Bradley Cosmas commented
that “the world mining equipment market is cut-throat and secretive, provided that
our government customers don’t find out who we supply – no problem! We cover
our tracks pretty well”.
5. Bradley Cosmas places little emphasis on “historical accounting figures” despite
the reasonably sophisticated computer facilities available. The vast majority of
computer time is used for forecasting and analysis of worldwide economic trends
within the electronics industry. As Bradley Cosmas says “accountants and
bankers deal with history – you’ve got to be a prophet to make a profit!”.
 6. Kentronics Ltd has an audit committee which consists of three non-executive
directors, all of whom are experts in the mining equipment manufacture industry,
and Brendon Rusike, Bradley Cosmas’s brother-in-law, who is the chairman.
7. Over the years Kentronics Ltd has reported figures better than its competitors but
for the last two years profits have receded. Although there appears to be no real
threat of going concern difficulties, liquidity has tightened significantly. The
company is heavily committed to long-term borrowings and the company’s
bankers have indicated that their continued financial support will be reviewed in
the light of the audited financial statements for the year under audit.
8. Bradley Cosmas appears unconcerned about the drop in profits. He has
responded to your enquiries by saying “the company is in good shape, the Heavy
Industry Division is solid. The mining equipment Division is thriving with the
mines in Africa. Last year Kentronics Ltd concluded the first of many contracts
with Cosmas Mining Equipment Ltd, which is based in Botswana, for the supply
of mining equipment to various worldwide governments. The Foreign
Development Division – we won’t talk too much about that!”

Required
Evaluate the risk that the annual financial statements of Kentronics Ltd contain material
misstatements as a result of fraudulent financial reporting. Your answer should
consider the following:
 the incentives/pressures on the company to engage in fraudulent financial
reporting;
 situations or conditions which provide the opportunity; and
 the attitudes of management which may suggest fraudulent financial reporting.
[25 marks]

Question 27
Mushrooms Ltd. is a major mushroom growing and processing facility situated on the
outskirts of Masvingo city. The financial statements year-end is 31 December. On 1
October 2021, the company received final confirmation of a compulsory purchase order
for its main facility which the local authority needed for a key infrastructure project it was
undertaking. In anticipation of this Mushrooms had been exploring various possibilities,
one of which was the sale of its specialist equipment. By coincidence, on 5 October, an
offer was received from its largest competitor to buy the equipment in its entirety at a
price that the CEO described as “more than fair”. Accordingly, and considering that the
company found trading tough in the recession anyway, the shareholder managers
decided to cease trading and wind up the business. By 10 October 2021, management
had notified all of the employees, suppliers and customers, that Mushrooms would
cease all growing and ancillary activities on 30 November 2021. The 150-strong
workforce and the majority of the accounts department and support staff, were made
redundant with effect from that latter date; the arrangements were made to transport the
plant and equipment to the former competitor’s premises.
The marketing, human resources, and, production managers ceased to be employed by
the company at 31 December 2021. However, the chief executive, sales manager,
finance manager, accountant and a small number of accounting and other support staff
will continue to be employed until the company is wound down completely.
Mushrooms also owned five other premises, located away from the main facility, which
were used in the business mainly for storage and distribution. These were put on the
market on 1 November 2021. Mushrooms accounts for all property, plant and
equipment under the cost model (i.e. at depreciated cost). The small head office in the
City Centre is held on lease and will continue to be occupied until the lease expires in
2024.
Mushrooms has three-year agreements with two major supermarket chains for the sale
of its products. It had also negotiated a deal with a major agricultural co-operative for
the purchase of various plant foods and fertilizers, under which it was offered a
substantial discount on condition that Mushrooms would purchase the relevant products
exclusively from the co-operative for a three-year period beginning, 1 August 2020. The
legal consequences of these agreements are uncertain now that Mushrooms has
ceased trading. So far, however, none of these parties has lodged any legal claim
against Mushrooms, but the supermarkets are withholding payment of their account
balances pending clarification of the legal position.

Required
You are required to answer the following in the context of the final audit of the financial
statements of Mushroom Ltd. for the year ending 31 December 2021:
(a) Using the information provided, identify and make a judgement on the financial
statement risks to be taken into account in planning the audit.
[12 marks]
(b) Evaluate the extent of the reliance to be placed on:
(i) analytical procedures; and [4 marks]
(ii) written representations, in comparison with that for the prior year audit. [4 marks]
(c) Analyse the principal audit work to be performed in respect of the carrying value of
the amounts due from the supermarkets as on 31 December 2021. [5
marks]

Question 28
Your firm has recently been appointed Auditor of Crush Manufacturing Ltd. Crush
Manufacturing Ltd is quoted on the Zimbabwe Stock Exchange and the Directors own
less than 4% of the company’s shares.
You have been asked by the Senior in charge of the audit to carry out work in relation to
Directorsʼ transactions with the company, which are required to be disclosed in the
company’s annual financial statements

Required
(a) Evaluate the rationale behind the work you would carry out to check if the company
has made any loans or quasi loans to a Director or a Shadow Director or entered into
any guarantees in connection with a loan to a Director or a Shadow Director and
consider why this work is of particular importance in the current climate.
[8 marks]
(b) Justify why it is important for Auditors to check if there are any:
(i) Directorsʼ service agreements with the company;
(ii) Options granted by the company to enable Directors to purchase shares in the
company at a fixed price at a future date and how should this work be carried out?
[6 marks]
(c) Specify and analyse the investigations you would carry out to determine whether any
Director has had a material interest in a contract with the company (other than those
described in part b) above).
[6 marks]
(d) Assume that the work you would carry out reveals that Crush Manufacturing Ltd had
purchased all the shares in Tiktok Enterprises for $2 000 000. One of the Directors of
Crush Manufacturing Ltd owned 50% of the shares of Tiktok Enterprises. How should
you proceed on foot of this discovery? Justify your answer.
[5 marks]

Question 29

You are the audit manager for Perpekale, a limited liability company which sells books,
CDs, DVDs and similar items via two divisions: mail order and online ordering on the
Internet. Perperkale is a new audit client. You are commencing the planning of the audit
for the year ended 31 May 20X9. The initial meeting with the directors has provided the
information below

The company’s sales revenue is in excess of $85 million with net profits of $4 million. All
profits are currently earned in the mail order division, although the Internet division is
expected to return a small net profit next year. Sales revenue is growing at the rate of
20% p.a. net profit has remained almost the same for the last four years. In the next
year, the directors plan to expand the range of goods sold through the Internet division
to include toys, garden furniture and fashion clothes. The directors believe that when
one product has been sold on the Internet, then any other product can be as well. The
accounting system to record sales by the mail order division is relatively old. It relies on
extensive manual input to transfer orders received in the post onto Perpekale’s
computer systems. Recently errors have been known to occur, in the input of orders,
and in the invoicing of goods following despatch. The directors maintain that the
accounting system produces materially correct figures and they cannot waste time in
identifying relatively minor errors. The company accountant, who is not qualified and
was appointed because he is a personal friend of the directors, agrees with this view.
The directors estimate that their expansion plans will require a bank loan of
approximately $30 million, partly to finance the enhanced web site but also to provide
working capital to increase inventory levels. A meeting with the bank has been
scheduled for three months after the year end. The directors expect an unmodified
auditor’s report to be signed prior to this time.

Required:

(a)Explain the term ‘audit risk’. (5marks)

(b)Identify and describe the matters that give rise to audit risks associated with
Perpekale. (10 marks)

(c) Explain the enquiries you will make, and the audit procedures you will perform to
assist you in making a decision regarding the going concern status of Perpekale in
reaching your audit opinion on the financial statements. (10 marks)
(Total marks 25 )

Question 30

Kosmas is a highquality, private motor manufacturing company. It has recently joined a

consortium for the purchase of parts. Kosmas ’s purchases and capital expenditure
systems are not integrated.

Purchase orders are generated automatically by the computerised inventory system

when inventory levels fall below a given level in the context of scheduled production.
This system does not work well because the system uses outdated purchasing and
production patterns and many manual adjustments are required. The orders are
reviewed by the production controller and her junior managers and changes are made
informally by junior clerical staff in the production controller’s department. Some of the
purchases are input into the buying consortium system which shows the optimum
supplier for any combination of cost, delivery time and specification. This system has
only been in operation for a few months. The system takes up a substantial amount of
disk space on the company’s computers and is suspected of causing problems in other
systems. It is difficult to use and so far, only two of the production controller’s junior
managers are able to use it. As a result, the parts ordered through the system are
sometimes of the incorrect specification or are delivered late. The remaining purchases
are ordered directly from manufacturers, as before, through a reasonably well
controlled buying department.

Required:
(a) Describe the errors and misappropriations that may occur if purchases and
capital expenditure are not properly controlled.(5 marks)
(b) Set out, in a form suitable for inclusion in a report to management, the
weaknesses, potential consequences and your recommendations relating to the
purchases and capital expenditure systems of Kosmas. (20 marks)
(Total: 25 marks)

Question 31
You are carrying out the audit of the purchases system of Five Furniture Limited. The
Company has sales revenue of about $10 million, and all the shares are owned by Mrs.
Kamwenje and her husband who are non-executive directors, and are not involved in
the day-to-day running of the business. The Managing Director is responsible for
running the business, but does not own any of the company’s shares.

The bookkeeper maintains all the accounting records and prepares the annual financial
statements .A microcomputer is used to maintain the accounting records including those
of the purchases system. Standard accounting software is used, which was purchased
from an independent supplier. For the purchases system, a purchases ledger is
maintained to which invoices, credits adjustments, cash and discount are posted. When
purchase invoices and credits are input into the computer, the value of the invoice or
credit is posted to the purchases ledger, and the expense analysis and sales tax are
posted to the nominal ledger.

You have determined that the purchases system operates as follows.

 When materials are required for production; the production manager sends a
handwritten note to the buying manager. For orders of other items, the
department manager or managing director send handwritten notes to the buying
manager. The buying manager finds a suitable supplier and raises a purchase
order. The purchase order is signed by the managing director. You are aware
 that purchase orders are not issued for all goods and services received by the
company.

 Materials for production are received by the goods received department, who
issue a goods received note (GRN), and send a copy to the bookkeeper. There is
no system for recording receipt of other goods and services.

 The bookkeeper receives the purchase invoice, and matches it with the goods
received note and purchase order (if available). The managing director
authorizes the invoice for posting to the purchases ledger.

 The bookkeeper analyses the invoice and posts it to the purchase ledger.

 At the end of each month, the bookkeeper prepares a list of payable balances to
be paid. This is approved by the managing director.

 The bookkeeper prepares the cheques and remittances, and posts the cheques
to the purchases ledger and cash book.

 The managing director signs the cheques, and the bookkeeper sends the
cheques and remittances to the creditors.

Mr. and Mrs. Kamwenje, the two shareholders of Five Furniture Limited, are aware that
there may be weaknesses in the internal controls in the purchases system and have
suggested that an internal auditor should be appointed who reports to them.

Required
(a) Write a report to the directors of Five Furniture Limited
(i) Assessing the weaknesses in Five furniture’s purchases system and
include suggested ways for improvement.
(20 marks)

(ii) Differentiating the work of an external auditor from that of an internal

auditor. (5 marks)

Question 32
It is important that an auditor’s independence is beyond question, and that he should
behave with integrity and objectivity in all professional and business situations.

The following are a series of questions which were asked by auditors of AB & Co at a
recent update seminar on professional ethics:

(a) Can I audit my brother’s company? (5

marks)

(b) Can I prepare the financial statements of a public company and still remain as
auditor? (5 marks)

(c) My client has threatened to sue the firm for negligence. Can I still remain as
auditor? (5 marks)

(d) If I discover evidence of money laundering, should I continue to protect client

confidentiality and therefore keep quiet?
(5 marks)

(e) What are the five fundamental ethics of conduct of a professional accountant?
(5 marks)

Required

Discuss the answers you would give to the above questions posed by the auditors.

Question 33

The directors of Melton Manufacturing have asked your firm to act as their auditors for
the year ended 30 September. They will be asking their existing auditors to resign, as
they do not provide a cost effective service..

Required

(a) Describe the investigations you would carry out and ethical matters you would
consider before you can accept the appointment as the company’s auditor (10
marks)

(b) Explain why it is important that an auditor should send a letter of engagement to
the client prior to undertaking an audit. (5 marks)

(c) Briefly describe the main contents of a letter of engagement which you would
send to the directors of Melton Manufacturing. (10 marks)
Question 34

Corsco is a large telecommunications company that is listed on a stock exchange. It is

highly geared because, like many such companies, it borrowed a large sum to pay for a
licence to operate a mobile phone network with technology that has not proved popular.
The company’s share price has dropped by 50% during the last three years and there
have been several changes of senior management during that period. There has been
considerable speculation in the press over the last six months about whether the
company can survive without being taken over by a rival. There have been three
approaches made to the company by other companies regarding a possible takeover
but all have failed, mainly because the bidders pulled out of the deal as a result of the
drop in share prices generally.
The company has net assets, but has found it necessary to severely curtail its capital
investment program. Some commentators consider this to be fundamental to the future
growth of the business, others consider that the existing business is fundamentally
sound. It has also been necessary for the company to restructure its finances. Detailed
disclosures of all of these matters have always been made in the financial statements.
No reference has been made to the going concern status of the company in previous
auditor’s reports on financial statements and the deterioration in circumstances in the
current year is no worse than it has been in previous years.

(a) Describe the external auditor’s responsibilities and the work that the
auditor should perform in relation to the going concern status of companies

(b) Describe the possible audit reports that can be issued where the going concern
status of a company is called into question; Your answer should describe the
circumstances in which they can be issued.

( c) On the basis of the information provided above, describe the audit report that you
consider is likely to be issued in the case of Corsco, giving reasons.

(d) Explain the difficulties that would be faced by Corsco and its auditors if Corsco’s
audit report made reference to going concern issues.

Question 35

Smithson Co provides scientific services 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 is nearly complete. As audit senior you have reported to the
engagement partner that Smithson is having some financial difficulties. Income has
fallen due to the adverse effect of two high-profile court cases, where Smithson’s
services to assist the prosecution were found to be in error. Not only did this provide
adverse publicity for Smithson, but a number of clients withdrew their contracts. A
senior employee then left Smithson, stating lack of investment in new analysis
machines was increasing the risk of incorrect information being provided by the
company.

A cash flow forecast prepared internally shows Smithson requiring significant additional
cash within the next 12 months to maintain even the current level of services.
Smithson’s auditors have been asked to provide a negative assurance report on this
forecast.

Required:
(a) Define ‘going concern’ and discuss the auditor’s responsibilities in respect of
going concern. (10marks)

(c) State the audit procedures that may be carried out to try to determine
whether or not Smithson Co is a going concern.
(10marks)

Question 36
Gushito plc sells a variety of electrical equipment on a wholesale basis to some 1,500
credit customers. Cash sales are not a feature of the business.

Sales orders are received by telephone and are recorded on a pre-numbered order form
in two parts.
Part 1 is sent to the customer as acknowledgement of the order. Part 2 is used by the
manager of the sales office as an action copy. He authorizes the order after checking
the account balance with the accounts department to ensure that the credit limit is not
exceeded. The order is then passed to the warehouse where the goods are picked and
sent to dispatch. The order form is then passed to the invoice typing section in the sales
office, and three-part invoice sets are typed. Each set is numbered by reference to a
number register, and the top copy is given to the customer with the goods at the
collection point. The second copy is an accounts copy and the third is filed in the
customer file in the sales office. There are no other procedures in relation to sales order
processing.
Required
(a) Identify at least 5 weaknesses, impact and recommend for improvements.
(15 marks)

(b) Devise a programme of tests which are designed to provide reassurance that sales
are
recorded accurately and debts are collectable. ( 10
marks)

Question 37

It is recommended that audit partners be rotated every five years.In order to strengthen
the ethical code of conduct, professional accountancy bodies are currently debating
whether to reduce the mandatary period for rotation of audit partners to as little as two
years.

Required

(a) Discuss why audit partner rotation is important in an ethical code of conduct. (5
marks)

(b) State other ethical issues that must be observed by an auditor. ( 10 marks)

Question 38

Mudengu manufactures a range of components and spare parts for textile industry. The
company employs 150 hourly paid production workers and 90 selling, distributing and
administrative staff, including the three directors of the company. There are two wages
clerks who deal with the weekly payroll of the hourly paid employees. They are directly
responsible to the assistant accountant.

The company uses a computerized time clock at the factory gate to record the hours
worked by the production employees. Each employee has a card with magnetic strip
with own identification code on it .This card is inserted in the computerized time clock on
the arrival and departure of the workers whereupon it records the hours worked on the
card. The cards rare collected weekly by the wages clerks who simply insert them
individually into the microcomputer which reads them and prepares the payroll. The
production manager keeps the unused clock cards in a locked cabinet in his office.

Wages are paid one week in arrears. The wages clerk compile the payroll by means of
the microcomputer system; pass the payroll to the assistant accountant who scrutinizes
it before drawing the wages cheque , which is passed to one of the directors for
signature. Any pay increases are negotiated locally by representatives of the
employees. If any alterations are required to standing data on the microcomputer, then
the wages clerks amend the records .For example, when a wage increase has been
negotiated, the rates of pay are changed by the wages clerks.

The cheque is drawn to cover net wages and the cashier makes arrangements for
collecting the cash from the bank. The wages clerks then make up the wages
envelopes. Whenever there is assistance required on preparing wages, the assistant
accountant helps the wages clerks. The payment of wages is carried out by the
production manager who returns any unclaimed wages to the wages clerks who keep
them in a locked filling cabinet. Each employee is expected to collect his unclaimed
wages personally.

New production employees are notified to the wages department verbally by the
production manager and when the employees leave a note to hat effect is sent to the
wages department by the production manager. All statutory deductions are paid to the
appropriate authorities by the chief accountant.

You have recently been appointed the auditor of Mudengu for the year ended 31
December and have just started your interim audit. You are about to commerce your
audit evaluation and testing of the wages system.

Required

(a) Describe the weaknesses in the present wages and salaries system, and
suggest, with reasons, improvements which could be made to the system
(assuming the controls are those set out above.)
(25 marks)
(b) Describe the appropriate audit approach to wages, based on the above. (5
marks)

Question 39

(a) ISA 210 Terms of Audit Engagements explain the content and use of engagement
letters.

Required:

State SIX items that could be included in an engagement letter. (6 marks)

(b) ISA 500 Audit Evidence explains types of audit evidence that the auditor can obtain.
Required:
State, and briefly explain, four types of audit evidence that can be obtained by the
auditor. (8 marks)

(c) ISA 700 The Independent Auditor’s Report on a Complete Set of General Purpose
Financial Statements explains the form and content of audit reports.
Required:
State three ways in which an auditor’s report may be modified and briefly explain
the use of each
modification. (6 marks)
(20 marks)

Question 40

In terms of ISA300, the audit plan must contain a description of the nature, timing and
extent of planned risk assessment procedures sufficient to assess the risk of material
misstatements. Audit is a combination of inherent risk, control risk and detection risk.
The auditor must there evaluate the materiality and risks specific to the company.
Materiality limits should be set at the planning stage of the audit to act as a guideline for
deciding whether adjustments should be made to the financial statements.

Required

(f) Briefly describe the terms ‘inherent risk’, ‘control risk’,’ detection risk’ and ‘audit
risk’ (5 marks)
(g) List the eight factors which the auditor would bear in mind when assessing the
audit risk of a company. Your answer should talk of inherent and control risk.
( 5 marks)
(h) Define and explain the Risk Equation, describing how it should be used in auditing planning.
(5 marks)
(i) Discuss the considerations which would determine whether an item is material in relation to
financial statements ( 4 marks )
(j) Discuss the validity of the statement that “materiality limits should be set at the planning stage of
the audit and should be rigidly be adhered to throughout the audit.” ( 6 marks)

End of paper

QUESTION 41
You are the manager in charge of the audit of Ruddington Furniture for the year ended 31 July
and you have been asked to describe the work which should be carried out in planning the audit
and in monitoring its progress. Ruddington Furniture buys domestic furniture from
manufacturers and sells it to the general public. The company‟s head office and main
warehouse are on the same site, and there are sales branches with associated warehouses in
different parts of the country. Your firm has been the auditor of the company for a number of
years. All the company‟s accounting records are maintained on the computer at head office.
When a sale takes place at the branch, the salesman checks that the furniture the customer
requires is in stock, and if it is, the customer pays for the items by cash, cheque or credit card
(or charge card) and collects them from the warehouse. Where the items are not in stock, it is
possible to find whether they are available at another local branch, or an order can be placed for
the stock. In previous years‟ audits there have been problems at branches of the actual stock
being less than the computer book inventory quantities. Also, problems have been experienced
in identifying and valuing damaged inventory and goods returned by customers. The company
has a small internal audit department and their work includes periodic visits to branches. The
company was subject to a management buy-out in February two years ago which resulted in
high gearing. You understand that because of a recession in the furniture trade the company
has liquidity problems and that currently it is negotiating with the bank to obtain additional
finance.

Required You are required to list and describe the matters you will consider and the work you
will carry out in planning the audit. ( 20 marks)

QUESTION 42

The directors of Gotora have asked your firm to act as their auditors for the year ended 30
September. They will be asking their existing auditors to resign, as they do not provide a cost
effective service. The partner proposed for appointment to Gotora holds a membership
certificate and a certificate of registration as a registered auditor through the ACCA. The
proposed partner is scheduled for routine investigation by the ACCA regulation monitoring unit.

Required

(a) Describe the investigations you would carry out and ethical matters you would consider
before you can accept the appointment as the company’s auditor. (10
marks)
 (b) Explain why it is important that an auditor should send a letter of engagement to the
client prior to undertaking an audit.
(5 marks)

(c) Briefly describe the main contents of a letter of engagement which you would send to the
directors of Gotora Manufacturing. (10 marks)

QUESTION 43

You are in the process of determining an audit approach to the following two areas, as part of
your audit of a low cost supermarket chain:

(a) Bank (2 bank accounts, full reconciliations, complex system)

(b) Purchases (1000‟s of transactions, well-oiled system)

Required

Compare the alternative audit approaches and select the best

Question 44

ISA 315 Identifying and assessing the risks of material misstatement through understanding the
entity and its environment states that management implicitly or explicitly makes assertions
relating to the various elements of financial statements including related disclosures. Auditors
may use three categories of assertions to form a basis for risk assessments and the design and
performance of further audit procedures.
The three categories suggested by ISA 315 relate to (i) classes of transactions, (ii) account
balances, and (iii) presentation and disclosure. One assertion applicable to all three categories
is completeness: that all transactions, events, assets, liabilities, equity interests and disclosures
that should be included, are included in the financial statements.
Required
(a) List and describe seven financial statement assertions, other than completeness,
used by auditors in the audit of financial statements. (7marks)
(b) List the sources of evidence available to you in verifying the ownership and cost of
(i) Land and building (3marks)
(ii) Leased property (3marks)
(iii) Motor vehicles (3 marks)

Question 45

You are the auditor of Noczim, a limited liability company which extracts, refines and sells oil
and petroleum related products. The audit of Noczim for the year ended 30 June 2015 had the
following events:
Date Event
 15 August 2015 Bankruptcy of major customer representing 11% of the
trade receivables on the statement of financial position.
21 September 2015 Financial statements approved by directors.
22 September 2015 Audit work completed and auditors' report signed.
1 November 2015 Accidental release of toxic chemicals into the river from the
company's oil refinery resulting in severe damage to the
environment. Management had amended and made
adequate disclosure of the event in the financial
statements.
23 November 2015 Financial statements issued to members of Noczim.
30 November 2015 A fire at one of the company's oil wells completely
destroys the well. Drilling a new well will take ten months
with a consequent loss in oil production during this time.
51
Required
(i) ISA 560 Subsequent Events explains the audit work required in connection with
subsequent events. Explain what you understand by the term subsequent events
(4 marks)
(ii) For, 15 August 2015,1 November 2015,and 30November 2015 dates state whether
the events occurring on those dates are adjusting or non-adjusting, giving reasons
for your decision. (6 marks)
(iii) Explain the auditor's responsibility and the audit procedures that should be carried out at
the noted dates. (10 marks)

Question 46
Consider the following scenarios;

(a) Spiwe limited is being sued by a competitor company for the theft of intellectual property.
The lawyers believe that this is important and a vital case .However, this is not
mentioned anywhere in the Financial statements.

(b) Wonder limited did not provide for a bad debt of $50,000 despite the fact that the
customer went bust after the year end.Profit was $500 000 and receivables were $200
000.

(c) During the audit of Katleen ltd it comes to your attention that the company has valued a certain
inventory line at its total cost price of $7 000.These inventory items, have not been sold for a
number of years and it is unlikely that they can be sold in the future unless the price is reduced
to $3 000.If the write-down was charged it would have a material effect on the financial
statement.
Required
For each of the above scenarios outline the qualified audit report, and the basis for each
opinion.(24 marks)

QUESTION 47
ISA 500 Audit evidence states that the auditors objective ‘is to design and perform audit
procedures in such a way as to enable the auditor to obtain sufficient appropriate audit evidence
to be able to draw reasonable conclusions on which to base the auditor’s opinion'.
Required
(a) List and explain the factors which will influence the auditor's judgment concerning the
sufficiency of audit evidence obtained. (5 marks)
(b) Explain the three qualities of audit evidence. (15 marks)

Question 48

N Richardson is a wholesaler of furniture. It buys the furniture on credit from over 45

supplier .Trade payables range from $125 to $5 000.

Required

To explain the audit procedures that should be carried out on payables explaining the reason for
each procedure. (use the PROVEAEIOU financial assession approach)
(20 marks)

Question 49

You are the senior in charge of the audit of Dean. To assist you in your audit planning, one of the audit
team has provided the following description of the purchasing system. No other controls exist apart from
those described.

“The company has no buying department so employees place orders in their own area of responsibility. A
three part order form is used; copy 1 is retained by the originator, copy 2 is sent to the goods inward
department and copy 3 is sent to the supplier.” “Goods are received, but not checked, by the goods
inwards clerk. Once received, the advice note and purchase order for those goods are sent to the
purchase ledger clerk.” “When the supplier’s invoice is received the purchase ledger clerk checks the
calculations on it, initials it and staples the advice note and purchase order to it. She enters the invoice on
to the purchase ledger.” “The invoice is then sent to the manager responsible for the employee who
ordered the goods. The manager codes the invoice and returns it to the purchase ledger clerk.

Purchase invoices are coded, entered on an analysis sheet and posted to the nominal ledger monthly by
journal entry.” “The cashier pays suppliers monthly on instructions from the purchase ledger clerk.

The purchase ledger control account is reconciled monthly by the purchase ledger clerk who also
reconciles suppliers‟ statements.”

Required

You are required:

(a) To identify six weaknesses, its impact and provide some recommendations (26 marks)
(2marks are given for professional presentation)

(b) To describe the effect it would have on your normal audit procedures. (6 marks)

(Total 32 marks)

Question 50

It has been recommended that “Audit working papers should always be sufficiently complete and detailed
to enable an experienced auditor with no previous connection with the audit subsequently to ascertain
from them what work was performed and to support the conclusions reached.‟

Required

(a) Describe four benefits that the auditor will obtain from working papers that meet the above
requirement. (8 marks)

(b) Discuss the reliability of the following types of audit evidence, giving two examples of each form
of evidence;

(i) Evidence originated by the auditor

(ii) Evidence created by third parties

(iii) Evidence created by the management of the client. (9 marks)

(c) Briefly explain the purpose of the Current and the Permanent Audit File. For each of the two files
list three types of information typically retained in each. (8 marks)

(Total Marks=25)

Question 51.

You are given the following scenarios:

a) Jones Limited made a very poor attempt to conduct their inventory count. You attended the
inventory count; however, there was insufficient evidence that the stock valuation at $4 million is accurate.
Turnover was $50 million and profit $15 million. (8 marks)

(b) Scott Limited did not provide for a bad debt of $50,000 despite the fact the customer went bust
just after the year end. Profit was $500,000 and receivables $200,000. (6 marks)

(c) Phillips Limited is being sued by a competitor company for the theft of intellectual property. The
lawyers believe that this important but not vital case could go either way. However, this is not mentioned
anywhere in the Financial Statements. (6 marks)

(d) Wilson Limited is a cash retailer. There is no system to confirm the accuracy of cash sales.

(e) You are the audit manager of Majaira Sharai & Co.One of your new clients this year is Caleb Co.,
a company having net assets of $18 million. The audit work has been completed , but there is one
outstanding matter you are currently investigating ;the directors have decided not to provide for
depreciation on buildings in the financial statements , although IAS 16 requires so.The charge should be
$420 000 based on the straight line method of depreciation using a straight line method of 5%.

(5marks)

Required:

For each of the above outline the qualified audit report, and the basis for each opinion.

(Total marks 25=breakdown as indicated on each scenario)

Question 52: [25 Marks]

(a) What is auditing? (5 marks)

(b) Why is it taken as an assurance engagement (5marks)
( c )What are the benefits of an audit (5 marks)
(d ) They are two types of auditing external and internal. Can you define the two and
show their differences and similarities. (10 marks)

Question 53: [25 Marks]

You are given the following scenarios:

a) Jones Limited made a very poor attempt to conduct their inventory count. You
attended the inventory count; however, there was insufficient evidence that the stock
valuation at $4 million is accurate. Turnover was $50 million and profit $15 million.
(8 marks)

(b) Scott Limited did not provide for a bad debt of $50,000 despite the fact the
customer went bust just after the year end. Profit was $500,000 and receivables
$200,000. (6 marks)

(c) Phillips Limited is being sued by a competitor company for the theft of
intellectual property. The lawyers believe that this important but not vital case could go
either way. However, this is not mentioned anywhere in the Financial Statements.
(6 marks)

(d) Wilson Limited is a cash retailer. There is no system to confirm the accuracy of
cash sales. (5 marks)

Required:
For each of the above outline the qualified audit report, and the basis for each opinion.

Question 54: [25 Marks]

They are many techniques of gathering audit evidence. Describe the importance and
giving examples of the following technique used in gathering audit evidence

(a ) Sampling. (12 marks)

(b ) CAATs. (13 marks)

Question 55: [25 Marks]

As an auditor one needs to know both the international accounting standards and the
international auditing standards.
Required
Define and give examples of the following terms
(i) International Financial Reporting standards (13 marks)
(ii)International Standards on auditing (12 marks)

(a) Explain the situations where an auditor may disclose confidential information about a
client. (8 marks)

(b) You are an audit manager in McKay & Co, a firm of Chartered Certified Accountants.
You are preparing the engagement letter for the audit of Ancients, a public limited liability
company, for the year ending 30 June 20X6.Ancients has grown rapidly over the past few years,
and is now one of your firm's most important clients.
Ancients has been an audit client for eight years and McKay & Co has provided audit, taxation
and management consultancy advice during this time. The client has been satisfied with the
services provided, although the taxation fee for the period to 31 December 20X5 remains
unpaid.
Audit personnel available for this year's audit are most of the staff from last year, including Mr
Grace, an audit partner and Mr Jones, an audit senior. Mr Grace has been the audit partner
since Ancients became an audit client. You are aware that Allyson Grace, the daughter of Mr
Grace, has recently been appointed the financial director at Ancients.
To celebrate her new appointment, Allyson has suggested taking all of the audit staff out to an
expensive restaurant prior to the start of the audit work for this year.

Required
Identify and explain the risks to independence arising in carrying out your audit of Ancients for
the year ending 30 June 20X6, and suggest ways of mitigating each of the risks you identify. (17
marks)

Question 56

Brian Ltd was formed on November 2013 in order to manufacture microchips. The
directors are unsure of their responsibilities and the nature of their relationship with the
external auditors. The audit partner has ask you to visit the client and explain to the
directors the more fundamental aspects of the accountability of the company and their
relationship with the auditor.

Required

Through a memorandum, explain to the directors

(a ) Why is the need for an audit. (5 marks)

(b ) how the auditor of a public company may be appointed under the companies Act
(5 marks)

(c) What are the rights and powers of an auditor under the Companies Act
(10 marks )

(d ) The responsibilities of the directors in relation to the accounting ,fraud and

internal controls functions of Brian Ltd.
(10 marks )

QUESTION 57

The maintenance of auditor independence is vital to the credibility of the audit in the
minds of the users of the financial statements .Professional regulations has been seen
as being one of the more acceptable methods of acceptable methods of achieving
auditor independence than state regulations although certain sections of the Companies
‘s Act have a bearing on such independence.

(a) state and explain the two sides of auditor independence (8 marks )

(b ) Explain the circumstance that may threaten auditor ‘ independence and

objectivity(10 marks )

( c) Explain some the measures that auditors may implement in order to deal with the
threats (12 marks)
Question 58

The directors of Melton Manufacturing have asked your firm to act as their auditors for
the year ended 30 September. They will be asking their existing auditors to resign, as
they do not provide a cost effective service. The partner proposed for appointment to
Melton Manufacturing holds a membership certificate and a certificate of registration as
a registered auditor through the ACCA. The proposed partner is scheduled for routine
investigation by the ACCA regulation monitoring unit.

Required

(a) Describe the investigations you would carry out and ethical matters you would
consider before you can accept the appointment as the company’s auditor. (8
marks)

(b) Explain why it is important that an auditor should send a letter of engagement to
the client prior to undertaking an audit. (4 marks)

(b) Briefly describe the main contents of a letter of engagement which you would
send to the directors of Melton Manufacturing. (8 marks)

Question 59

You are a manager in Kudenga & Company , a firm of Chartered Certified

Accountants .You have specific responsibility for undertaking annual review s of existing
clients and advising whether an engagement can properly be continued .The following
matter arose in connection with the audit of Econet,a company listed on the stock
exchange, for the year to 31 December 2011;

(1) The audit team included a manager, two supervisors, two qualified seniors and
six trainees. The final audit, which lasted approximately five weeks, was very
time –pressured and the team worked late into the night towards the end of the
audit .ECONET’s staff was very supportive throughout and paid for evening
meals that were brought in so that the audit could work with minimum
disruptions.
(2) Econetc’s chief finance Officer Antony Mutati was so impressed with the
commitment of the audit Staff that he asked that Kudenga pay them a bonus
 through increased audit fee. In April 2011, Kudenga paid all the members of the
team below manger status a bonus amounting to a week‘s salary. The bonus
was processed through Kudenga‘s payroll, in the same way as overtime
payments and recharged to Econet as part of the audit expenses.
.
Required

(a) Comment on the ethical and other professional issues raised by each of the
above matters.
(12 marks)
(b) Discuss the appropriateness of available safeguards and advise whether or not
Kudenga should continue as the auditor to Econet (10 marks)
. (20
marks)

Question 60

You are a manager in the audit department of Mutamba & Partners, responsible for the
audits of Tiny Co, Little Co and Big Co. Each company has a financial year ended 31
July 2011, and the audits of all companies are nearing completion. The following issues
have arisen in relation to the audit of accounting estimates and fair values:

(a) Tiny Co

Tiny Co is a company involved in energy production. It owns several nuclear power

stations, which have a remaining estimated useful life of 20 years. Tiny Co intends to
decommission the power stations at the end of their useful life and the statement of
financial position at 31 July 2011 recognizes a material provision in respect of
decommissioning costs of $97 million (2010 – $110 million). A brief note to the financial
statements discloses the opening and closing value of the provision but no other
information is provided.

Required:

Comment on the matters that should be considered, and explain the audit
evidence you should expect to find in your file review in respect of the
decommissioning provision. (10 marks)
(b) Little Co

Little Co is also involved in energy production. It has a trading division which manages a
portfolio of complex financial instruments such as derivatives. The portfolio is material to
the financial statements. Due to the specialist nature of these financial instruments, an
auditor’s expert was engaged to assist in obtaining sufficient appropriate audit evidence
relating to the fair value of the financial instruments. The objectivity, capabilities and
competence of the expert were confirmed prior to their engagement.

Required:

Explain the procedures that should be performed in evaluating the adequacy of

the auditor’s expert’s work.
(8 marks)

(c) Big Co

Big operates a warehousing and distribution service, and owns 120 properties. During
the year ended 31 July 2011, management changed its estimate of the useful life of all
properties, extending the life on average by 10 years. The financial statements contain
a retrospective adjustment, which increases opening non-current assets and equity by a
material amount. Information in respect of the change in estimate has not been
disclosed in the notes to the financial statements.

Required:

Identify and explain the potential implications for the auditor’s report of the
accounting treatment of the change in accounting estimates. (7 marks)

(25 marks)

QUESTION 61
Auditing firms do not always describe themselves as auditors. They describe
themselves as “Chartered Accountants” because apart from auditing, they also render
other services to their clients.
(c) Describe FIVE other services, which audit firms provide for their clients in
addition to auditing. [15
Marks]
 (d) What are the contents of auditor’s disclosure about the entity’s ability to continue
as a going concern? [10
marks]

QUESTION 62
An auditor is expected to be independent, competent and of high integrity.
(a) Write short notes on each of the above qualities. [12 marks]
(b) List EIGHT factors that may impair the independence of an auditor. [8
marks]
(c) What do you understand by audit queries and alarms in the public sector? [5
marks]

QUESTION 63
The auditing guidelines “Audit evidence” suggests that techniques of audit testing fall
into some broad categories.
Required:
(b) List and discuss FIVE of these categories giving TWO examples of each. [15
marks]

(b) Rosalia Shumba a Chartered Accountant in Zimbabwe is a registered auditor and

conducts the audit of Shoko Ltd, as well as acting for the company in tax matters. ZB
Bank, which has a substantial long-term investment in Shoko Ltd, requires, in terms of
its agreement with Shoko Ltd, that the company’s annual financial statements are
audited by a registered auditor and submitted to the bank. During the current year’s
audit of this client, Rosalia Shumba discovers that Kurai Chuma, sole shareholder and
managing director of the company, has been running an alternate set of accounting
records which reflect the true situation whilst she has been auditing and submitting tax
returns based on a fraudulent set of accounting records.
When Rosalia Shumba confronts Kurai Chuma with this evidence, he admits that he
has done this for some years but indicates that he is not at all worried about it, because
he was only able to get away with it due to the inadequate audit which Rosalia Shumba
had conducted over the years. Kurai further states that should Rosalia Shumba report
the matter to anyone, he will simply state that she was a willing partner to the fraud.
On scrutiny of correspondence from her past dealings with Kurai Chuma and of prior
audit working papers, Rosalia Shumba realises that she could indeed appear to have
conspired with Kurai Chuma as her audit documentation could be considered to be
inadequate and she had not followed up on a number of queries concerning the audit.
Furthermore, a large percentage of her professional fees come from work referred to
her by Kurai Chuma.

Required
Discuss fully the situation in which Rosalia Shumba finds herself in relation to the Code
of
Professional Conduct. [10 marks]

QUESTION 64
“Audit evidence” refers to the information obtained by the auditor and used in arriving at
the conclusion on which he bases his opinion on the financial statements.
Required:
(c) List and describe any five sources of audit evidence. [10 marks]
(d) What are the basic steps to Computer-Assisted Audit Techniques’ (CAATs)
developments?
[15 marks]

QUESTION 65
c) Discuss the audit objectives applicable to inventories? [15 marks]
d) What alternative procedures should an auditor follow if physical inventory
observation is impracticable?
[10 marks]

QUESTION 66
(c) The audit objectives in the verification of liabilities should focus on ascertaining
that accrued liabilities are not understated, but not ignoring the possibility of the
opposite may occur. What are some possible auditing procedures that would
help the auditor address the completeness audit objective for liabilities?
[15 marks]
(d) If auditor has assessed control risk as low, then merely reviewing the client’s
reconciliations at year-end may be appropriate. What steps should an auditor
take in reviewing a client’s bank reconciliation?
[10 marks]

QUESTION 67
The Chairman of XYZ LTD, a small scale enterprise has been advised by his
accountant to appoint an external auditor, but he disagreed with his accountant that
since he has a qualified accountant in his employment, there is no need appointing an
external auditor.
As a consultant, explain to the chairman:-
(a) (i) The difference between auditing and accountancy work; [4
marks]
(ii) The objectives of an external audit [3 marks]
 (iii) The advantages of an external audit [8 marks]

(b) Discuss five essential features of systems audit [10

marks]

QUESTION 68
Your client of over five years – ABC Rubber Products Limited, is proposing to change
over to a
computer-based accounting system.
(a) How would this impact on your approach to the audit? [10
marks]
(b) Enumerate the major differences between manual and computer-based accounting
system.
[10 marks]
(c) Explain the term “Audit Committee” considering the provision of the Companies and
Allied
Matters Act, 1990 [5 marks]

QUESTION 69
It is common practice for auditors to send a letter of engagement to new clients and
increasingly to existing clients. Matters usually included range from definition of scope
to audit fees.
Required:
(a) Briefly describe an engagement letter. [5
Marks]
(b) Discuss the purpose of the engagement letter [10
Marks]
(c) List some of the principal contents of an engagement letter. [10
Marks]

QUESTION 70
Most large companies have both internal and external auditors.
Required:
(a) Distinguish between the internal audit and external audit. [2 marks]
(b) Describe the scope and objectives of internal audit. [3
Marks]
(c) Explain the criteria employed by the external auditor to assess the likely
effectiveness and relevance of the internal audit functions
[3 Marks]
(d) State four areas where the Internal Audit function can be of assistance to the
External
Audit. [2 Marks]
(e) The auditor’s tests of controls help to identify weaknesses which constitute threats to
data security, reliability and loss. Discuss.
[15 marks]

QUESTION 71
e) As the audit manager in charge of an audit of a large multinational company,
draw up an audit programme for fixed assets for the use of the field staff.
[10 Marks]
f) Define and explain what is meant by analytical review procedures. [3
marks]
g) Discuss four types of general analytical review procedures. [8
marks]
h) What is the purpose of performing preliminary analytical review procedures at the
audit planning stage? [4
marks]

QUESTION 72
Audit is “An independent examination of and the expression of opinion on the financial
statements of an enterprise by an appointed auditor in pursuance of that appointment”.
Required:
(a) List any SIX types of audit [6
marks]
(b) State ONE advantage of an audit to each of five different users of the audit report.

[10 marks]
(c) Write short notes on the following:
iv) Compliance tests [3 marks]
v) Substantive tests [3 marks]
vi) Vouching [3 marks]

QUESTION 73
An Auditor is expected to obtain relevant and reliable audit evidence sufficient to enable
him draw measurable conclusions as a basis for his report. You are required to:
(a) Discuss the factors, which may influence the auditor’s judgment in relation to
sufficiency of the evidence so collected.
[15 marks]
(b) Discuss the factors that would enable the auditor assess the reliability of such
evidence.
[10 marks]
QUESTION 74
Pineapple Ltd. a manufacturing company involved in the production of vegetable oil, has
been in business for over five years. Since then, it has been making huge losses. The
company accounts are being audited by Banana and Co., Chartered Accountants.
The company is currently experiencing serious financial difficulties. It has approached
the major shareholder to assist it; by granting it a soft loan. Enquiries made by the major
shareholder who is the Chairman, revealed that management, with the assistance of
some suppliers of the company are defrauding the company, through payment for
materials not supplied. The Chairman has approached your firm of Chartered
Accountants, Ree and Co, to carry out an investigation into this matter and report your
findings to him.
You are aware that Jacobs Ltd, one of your major clients, is one of the major suppliers
of
Pineapple Ltd.

Required
v) State, with reasons, whether Ree and Co. (Chartered Accountants) should
accept or reject this appointment.
[5 marks]
vi) If Ree and Co. decides to accept the appointment, what steps should it take
before formally accepting?
[4marks]
vii) Draw up a programme of work to be undertaken by Ree and Co. [11
marks]
viii) What are the shortcomings of using standardised audit programmes?
[5 Marks]

QUESTION 75
In terms of ISA300, the audit plan must contain a description of the nature, timing and
extent of planned risk assessment procedures sufficient to assess the risk of material
misstatements. Audit is a combination of inherent risk, control risk and detection risk.
The auditor must there evaluate the materiality and risks specific to the company.
Materiality limits should be set at the planning stage of the audit to act as a guideline for
deciding whether adjustments should be made to the financial statements.

Required

(k) Briefly describe the terms ‘inherent risk’, ‘control risk’,’ detection risk’ and ‘audit
risk’
[8 marks]
 (l) List the eight factors which the auditor would bear in mind when assessing the
audit risk of a company. Your answer should talk of inherent and control risk.
[4 marks]
(m) Define and explain the Risk Equation, describing how it should be used in
auditing planning. [3
marks]
(n) Discuss the considerations which would determine whether an item is material in
relation to financial statements
[4 marks]
(o) Discuss the validity of the statement that “materiality limits should be set at the
planning stage of the audit and should be rigidly be adhered to throughout the
audit.” [6 marks]

QUESTION 76

(a) ISA 210 Terms of Audit Engagements explain the content and use of engagement
letters.

Required:

State any Four items that could be included in an engagement letter. [4

marks]

(b) ISA 500 Audit Evidence explains types of audit evidence that the auditor can obtain.

Required:
State, and briefly explain, four types of audit evidence that can be obtained by the
auditor.
[12 marks]

(c) ISA 700 The Independent Auditor’s Report on a Complete Set of General Purpose
Financial Statements explains the form and content of audit reports.
Required:
State three ways in which an auditor’s report may be modified and briefly explain the
use of each modification.
[9 marks]

QUESTION 77
You are the newly appointed internal auditor of Black Hotels plc. You have received a
copy of a management letter from the external auditors to the Board pointing out that
there is no internal audit service to provide quality assurance to management and
consequently the systems of internal control are less than satisfactory. You have also
discovered a variety of practices carried out by staff which you consider as fraudulent.
These include pilferage of inventory and abuse of the hotels’ computer facilities. The
chairman of Black Hotels plc, stung by these criticisms, has asked for your comments
and how you will “use internal audit to help us fight fraud and improve our systems”.

Required

Draft a memorandum to the audit committee in order to comply with the chairman’s
request.
[25 marks]

QUESTION 78

The auditor is increasingly abandoning subjective selection of items for testing in favor
of statistical sampling techniques.

Required

(d) State the advantages and disadvantages of statistical sampling techniques.

[10 marks]
(e) State the conditions which must be present before statistical sampling techniques
can be used. [5
marks]
(f) Discuss the factors which an auditor must consider when using statistical
sampling techniques.
[10 marks]

QUESTION 79

The new audit trainee of your firm of auditors has asked you to advise him on the
reliability of the following types of third party evidence:

(iv) Valuation of land and buildings by a valuer

(v) The replies to a debtor’s circularization confirming balances due to the
company
(vi) The letter received from the bank confirming year-end bank balances

Required
 (d) Discuss the reliability of each of the three types of third party evidence listed in (i)
to (iii) above, and consider the accuracy of the valuations they provide.
[9 marks]
(e) For valuations provided by a valuer, describe the work you would carry out to
check the independence, qualifications and experience of the valuer and the
accuracy of the valuation.
[8 marks]
(f) For the letter received from the bank, describe the work you would perform in
checking the bank reconciliation and that the balance on the bank accounts, as
included in the financial statements, is correct.
[8 marks]

QUESTION 80

You have been asked by the senior in charge of the audit of Bingham Manufacturing
Limited to describe certain aspects of the work you will carry out in auditing the
company’s wages system. Employees of Bingham Manufacturing are paid on the basis
of hours worked and quantities produced. The hours worked are recorded on clock
cards and the quantities produced are confirmed by the supervisor. Wages are paid in
cash each Friday for the previous week’s work. Appointment of employees is authorized
by the managing director, and the personnel department maintains employees’ records
and their rates of pay. The cashier is separate from the wages department.

Previous years’ audits have highlighted weaknesses in internal controls in the

company’s wages system. This has allowed an employee in the wages department to
perpetrate a fraud by creating fictitious employees on the payroll and misappropriating
the wages. Some of your audit tests have been designed to detect whether this fraud is
still taking place.

A “starters and leavers” test is carried out to ensure that employees are not paid before
they commence employment or after they have left.

Required

(e) State the principal controls you would expect to exist in a wages system and
explain their purpose. [10
marks]
(f) Assuming you decide not to attend the wages payout, suggest other techniques
you can use to check the existence of employees. [5
marks]
(g) Describe how you will carry out a starters and leavers test. [4 mark]
 (h) Describe the analytical review techniques you can use in auditing the wages
system. This should include suggesting any ratios you would calculate.
[6 marks]

QUESTION 81

You are the senior in charge of the audit of Big Ltd a manufacturing company. You have
been talking with the payroll supervisor who has commented on the strength of the
company’s payroll internal control system. She has assumed that this internal control
system guarantees the completeness, accuracy and validity of the payroll accounting
records.

Required

c) State whether you agree with the supervisor’s assumption that an internal control
system can guarantee the completeness, accuracy and validity of the records,
supporting your answer by using examples from the payroll system
[15 marks]
d) The supervisor has also asked you to explain some internal control terminology
which she does not understand. Explain the meaning of the following terms,
using payroll examples different from those you have given above:
i) Segregation of duties [5
marks]
ii) Arithmetical and accounting controls [5
marks]

QUESTION 82

Ngara Ltd is a Zimbabwean based company which designs and manufactures motor
vehicles. It also has a small yard in Mutare which it purchased recently. Most of the
vehicles are manufactured to customer specification. However as trade has been slack
recently the company is manufacturing some vehicles without orders in the hope of
obtaining buyers when the market picks up. Most of the company’s output is for export
and it quotes its prices in US dollars.

You are asked to act as senior in charge of the audit. The company has a year end of
30 September. It is apparent from the previous year’s audit file that the company has
always had weak internal controls.

The company is currently amending its designs to take advantage of new technology
and has invested a considerable amount of time and money in this. Consequently it is
heavily indebted to the bank. The bank overdraft facility is to be reviewed in November
2020 and the managing director wishes to ensure the continuing availability of the
overdraft facility before attending a major trade fair in late November 2020.

Required

c) Identify from the situation outlined above, circumstances particular to Ngara Ltd
that must be taken into account when planning the audit. [12
marks]
d) Explain clearly why such factors must be taken into account. [13 marks]
QUESTION 83

You have been asked by the manager in charge of the audit of Shumba Ltd to consider
and describe various aspects of carrying out a debtor’s circularization at its year end of
31 October 2019. The company sells all its products on credit and the draft accounts
show annual sales of $15 million and a year-end accounts receivable of $4.3 million.
Your tests of control on the sales system have shown that there is a satisfactory division
of duties in the sales system and only minor errors were found in the tests of control.

Required

c) Consider the reliability of a debtor’s circularization in providing audit evidence

and in verifying the value of year-end accounts receivable.
[9 marks]
d) Describe the work you will carry out in auditing the replies to the debtors’
circularization where:
i) The debtor disagrees the balance and provides a different balance. [7
marks]
ii) The debtor does not reply to the circularization. In answering this part you
should consider the techniques you would use to verify the existence of
the debtor and the investigations you would carry out to check the
recoverability of the debt on the sales ledger
[9 marks]
QUESTION 84

You are the manager responsible for the annual review of your firm’s audit
engagements to identify situations where independence may be at risk and where
appropriate safeguards should be applied. From your review of your firm’s files relating
to Shava Ltd you ascertain the following:

The company is expanding rapidly following a number of acquisitions and is preparing

to apply for admission to the Zimbabwe Stock Exchange and to offer a proportion of its
shares to the public. As a result of the special investigations undertaken, total fees from
Shava Ltd amount to 17% of your firm’s gross practice income for the current year.

The company is about to undertake a feasibility study, on a proposal to expand into

Europe which is to be kept a secret from employees. To keep the initial costs of Shava
Ltd team’s European travel expenses a secret, a partner (who is not the engagement
partner) has offered to have them put onto his credit card. There would then be billed as
professional fees.

Required

d) Explain the risks you would consider in deciding whether or not the appointment
should continue. [12
marks]
e) Briefly describe the safeguards available. [8
marks]
f) Come to a conclusion on whether you consider the appointment should continue.
[5
marks]

QUESTION 85
(a) You are an audit partner at Moyo & Kaseke Auditors, a medium-sized auditing firm
based in Zimbabwe. You were promoted to partnership seven years ago, after being
with the firm for 11 years. You are currently busy with the audit of Pangono Investments
for the year ended 31 December 2021. You have worked on the audit of Pangono
Investments since joining Moyo & Kaseke, first as a trainee accountant and now as the
partner in charge of the audit. Pangono Investments has never had a qualified audit
opinion. During a discussion held with the CEO of Pangono Investments, Terrence
Kombai, he promised that you and your family of four members will receive a free
subscription to the Pangono Investments magazine, if an unmodified audit report is
issued for the 2021 year. Realising that your 18-year-old daughter wants to become a
journalist, Mr Terrence Kombai also vowed that the company will grant her a
comprehensive study bursary (to the value of approximately $250 000) if you express
an unmodified audit opinion. To remain ethical, your daughter will have a commitment to
work at Pangono Investments for five years after her graduation.

Required
Discuss the considerations from the background information which you, as the partner
in charge of Pangono Investments, will take into account in terms of the Code of
Professional Conduct.
[13 marks]
(b) Discuss the view that it is often the case that the guidance provided by the
International Standards on Auditing is insufficiently specific to be of real value to an
auditor in practice. You should refer specifically (but not exclusively) to ISA 500 - Audit
Evidence and the requirement for audit evidence to be both “sufficient” and
“appropriate”. [6 marks]
(c) Assess the view that if an auditor believes that management representations are
fundamentally unreliable, then s/he has no realistic alternative other than to terminate
the relationship with the client. [6
marks]

Question 86
Your firm has recently been appointed as auditors of Kentronics Ltd, a large company
which markets sophisticated electronic equipment for heavy industry as well as the
mining equipment industry. The previous audit firm lost the audit as a direct result of a
conflict with Bradley Cosmas, the managing director of Kentronics Ltd, over the
adoption of various accounting policies by Kentronics Ltd. The conflict had become very
heated, due mainly to Bradley Cosmas’s aggressive nature, and had led to a qualified
audit report. Whilst familiarising yourself with the company and its environment you
discover that:
9. Bradley Cosmas had risen up through the ranks of Kentronics Ltd with
ruthlessness and determination. On the way, he had built his personal wealth on
a foundation of shares in Armtronics Ltd.
10. He has surrounded himself with an aggressive team of loyal managers. You
consider that their loyalty is partially due to the fact that management are not
paid a salary but are given a monthly retainer, superior fringe benefits and a
percentage of reported profits.
11. Much of the sophisticated electronic equipment is imported from the China,
Japan and Taiwan whilst exports, particularly mining equipment, are made to the
governments of African countries.
12. You also discover that one of the divisions of the company namely the “Foreign
Development Division” sells mining equipment exclusively to companies who in
turn sell to mercenary and guerrilla organisations. Bradley Cosmas commented
that “the world mining equipment market is cut-throat and secretive, provided that
our government customers don’t find out who we supply – no problem! We cover
our tracks pretty well”.
13. Bradley Cosmas places little emphasis on “historical accounting figures” despite
the reasonably sophisticated computer facilities available. The vast majority of
computer time is used for forecasting and analysis of worldwide economic trends
within the electronics industry. As Bradley Cosmas says “accountants and
bankers deal with history – you’ve got to be a prophet to make a profit!”.
 14. Kentronics Ltd has an audit committee which consists of three non-executive
directors, all of whom are experts in the mining equipment manufacture industry,
and Brendon Rusike, Bradley Cosmas’s brother-in-law, who is the chairman.
15. Over the years Kentronics Ltd has reported figures better than its competitors but
for the last two years profits have receded. Although there appears to be no real
threat of going concern difficulties, liquidity has tightened significantly. The
company is heavily committed to long-term borrowings and the company’s
bankers have indicated that their continued financial support will be reviewed in
the light of the audited financial statements for the year under audit.
16. Bradley Cosmas appears unconcerned about the drop in profits. He has
responded to your enquiries by saying “the company is in good shape, the Heavy
Industry Division is solid. The mining equipment Division is thriving with the
mines in Africa. Last year Kentronics Ltd concluded the first of many contracts
with Cosmas Mining Equipment Ltd, which is based in Botswana, for the supply
of mining equipment to various worldwide governments. The Foreign
Development Division – we won’t talk too much about that!”

Required
Evaluate the risk that the annual financial statements of Kentronics Ltd contain material
misstatements as a result of fraudulent financial reporting. Your answer should
consider the following:
 the incentives/pressures on the company to engage in fraudulent financial
reporting;
 situations or conditions which provide the opportunity; and
 the attitudes of management which may suggest fraudulent financial reporting.
[25 marks]

Question 87
Mushrooms Ltd. is a major mushroom growing and processing facility situated on the
outskirts of Masvingo city. The financial statements year-end is 31 December. On 1
October 2021, the company received final confirmation of a compulsory purchase order
for its main facility which the local authority needed for a key infrastructure project it was
undertaking. In anticipation of this Mushrooms had been exploring various possibilities,
one of which was the sale of its specialist equipment. By coincidence, on 5 October, an
offer was received from its largest competitor to buy the equipment in its entirety at a
price that the CEO described as “more than fair”. Accordingly, and considering that the
company found trading tough in the recession anyway, the shareholder managers
decided to cease trading and wind up the business. By 10 October 2021, management
had notified all of the employees, suppliers and customers, that Mushrooms would
cease all growing and ancillary activities on 30 November 2021. The 150-strong
workforce and the majority of the accounts department and support staff, were made
redundant with effect from that latter date; the arrangements were made to transport the
plant and equipment to the former competitor’s premises.
The marketing, human resources, and, production managers ceased to be employed by
the company at 31 December 2021. However, the chief executive, sales manager,
finance manager, accountant and a small number of accounting and other support staff
will continue to be employed until the company is wound down completely.
Mushrooms also owned five other premises, located away from the main facility, which
were used in the business mainly for storage and distribution. These were put on the
market on 1 November 2021. Mushrooms accounts for all property, plant and
equipment under the cost model (i.e. at depreciated cost). The small head office in the
City Centre is held on lease and will continue to be occupied until the lease expires in
2024.
Mushrooms has three-year agreements with two major supermarket chains for the sale
of its products. It had also negotiated a deal with a major agricultural co-operative for
the purchase of various plant foods and fertilizers, under which it was offered a
substantial discount on condition that Mushrooms would purchase the relevant products
exclusively from the co-operative for a three-year period beginning, 1 August 2020. The
legal consequences of these agreements are uncertain now that Mushrooms has
ceased trading. So far, however, none of these parties has lodged any legal claim
against Mushrooms, but the supermarkets are withholding payment of their account
balances pending clarification of the legal position.

Required
You are required to answer the following in the context of the final audit of the financial
statements of Mushroom Ltd. for the year ending 31 December 2021:
(a) Using the information provided, identify and make a judgement on the financial
statement risks to be taken into account in planning the audit.
[12 marks]
(b) Evaluate the extent of the reliance to be placed on:
(i) analytical procedures; and [4 marks]
(ii) written representations, in comparison with that for the prior year audit. [4 marks]
(c) Analyse the principal audit work to be performed in respect of the carrying value of
the amounts due from the supermarkets as on 31 December 2021. [5
marks]

Question 88
Your firm has recently been appointed Auditor of Crush Manufacturing Ltd. Crush
Manufacturing Ltd is quoted on the Zimbabwe Stock Exchange and the Directors own
less than 4% of the company’s shares.
You have been asked by the Senior in charge of the audit to carry out work in relation to
Directorsʼ transactions with the company, which are required to be disclosed in the
company’s annual financial statements

Required
(a) Evaluate the rationale behind the work you would carry out to check if the company
has made any loans or quasi loans to a Director or a Shadow Director or entered into
any guarantees in connection with a loan to a Director or a Shadow Director and
consider why this work is of particular importance in the current climate.
[8 marks]
(b) Justify why it is important for Auditors to check if there are any:
(i) Directorsʼ service agreements with the company;
(ii) Options granted by the company to enable Directors to purchase shares in the
company at a fixed price at a future date and how should this work be carried out?
[6 marks]
(c) Specify and analyse the investigations you would carry out to determine whether any
Director has had a material interest in a contract with the company (other than those
described in part b) above).
[6 marks]
(d) Assume that the work you would carry out reveals that Crush Manufacturing Ltd had
purchased all the shares in Tiktok Enterprises for $2 000 000. One of the Directors of
Crush Manufacturing Ltd owned 50% of the shares of Tiktok Enterprises. How should
you proceed on foot of this discovery? Justify your answer.
[5 marks]