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Auditing And Investigation Theory Question Paper
Auditing And Investigation Theory
Course:Bachelor Of Commerce
Institution: Kca University question papers
Exam Year:2010
UNIVERSITY EXAMINATIONS: 2010/2011
FIRST YEAR EXAMINATION FOR THE DEGREE OF BACHELOR OF
COMMERCE
CAA 306: AUDITING AND INVESTIGATION THEORY
(SATURDAY CLASS)
DATE: DECEMBER 2010 TIME: 2 HOURS
INSTRUCTIONS: Answer question ONE and any other TWO questions
QUESTION ONE
You are an audit senior in Staple and Co and you are commencing the planning of the audit of
Smoothbrush Paints Co for the year ending 31 August 2010.
Smoothbrush Paints Co is a paint manufacturer and has been trading for over 50 years, it operates from
one central site, which includes the production facility, warehouse and administration offices.
Smoothbrush sells all of its goods to large home improvement stores, with 60% being to one large
chain store Homewares. The company has a one year contract to be the sole supplier of paint to
Homewares. It secured the contract through significantly reducing prices and offering a four-month
credit period, the company’s normal credit period is one month.
Goods in/purchases
In recent years, Smoothbrush has reduced the level of goods directly manufactured and instead started
to import paint from South Asia. Approximately 60% is imported and 40% manufactured. Within the
production facility is a large amount of old plant and equipment that is now redundant and has minimal
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scrap value. Purchase orders for overseas paint are made six months in advance and goods can be in
transit for up to two months. Smoothbrush accounts for the inventory when it receives the goods.
To avoid the disruption of a year end inventory count, Smoothbrush has this year introduced a
continuous/perpetual inventory counting system. The warehouse has been divided into 12 areas and
these are each to be counted once over the year. The counting team includes a member of the internal
audit department and a warehouse staff member. The following procedures have been adopted;
1. The team prints the inventory quantities and descriptions from the system and these records are then
compared to the inventory physically present.
2. Any discrepancies in relation to quantities are noted on the inventory sheets, including any items not
listed on the sheets but present in the warehouse area.
3. Any damaged or old items are noted and they are removed from the inventory sheets.
4. The sheets are then passed to the finance department for adjustments to be made to the records when
the count has finished.
5. During the counts there will continue to be inventory movements with goods arriving and leaving
the warehouse.
At the year end it is proposed that the inventory will be based on the underlying records. Traditionally
Smoothbrush has maintained an inventory provision based on 1% of the inventory value, but
management feels that as inventory is being reviewed more regularly it no longer needs this provision.
Finance Director
In May 2010 Smoothbrush had a dispute with its finance director (FD) and he immediately left the
company. The company has temporarily asked the financial controller to take over the role while they
recruit a permanent replacement.
The old FD has notified Smoothbrush that he intends to sue for unfair dismissal. The company is not
proposing to make any provision or disclosures for this, as they are confi dent the claim has no merit.
Required:
(a) Identify and explain the audit risks identified at the planning stage of the audit of Smoothbrush
Paints Co. (10 marks)
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(b) Discuss the importance of assessing risks at the planning stage of an audit. (4 marks)
(c) List and explain suitable controls that should operate over the continuous/perpetual inventory
counting system, to ensure the completeness and accuracy of the existing inventory records at
Smoothbrush Paints Co. (10 marks)
(d) Describe THREE substantive procedures the auditor of Smoothbrush Paints Co should perform at
the year end in confirming each of the following:
(i) The valuation of inventory; (3 marks)
(ii) The completeness of provisions or contingent liabilities. (3 marks)
(Total: 30 marks)
QUESTION TWO
(a) (i) Define a ‘test of control’ and a ‘substantive procedure’; (2 marks)
(ii) State ONE test of control and ONE substantive procedure in relation to sales
invoicing. (2 marks)
(b) Shiny Happy Windows Co (SHW) is a window cleaning company. Customers’
windows are cleaned monthly, the window cleaner then posts a stamped addressed
envelope for payment through the customer’s front door.
SHW has a large number of receivable balances and these customers pay by cheque or cash, which is
received in the stamped addressed envelopes in the post. The following procedures are applied to the
cash received cycle:
1. A junior clerk from the accounts department opens the post and if any cheques or cash have been
sent, she records the receipts in the cash received log and then places all the monies into the locked
small cash box.
2. The contents of the cash box are counted each day and every few days these sums are banked by
which ever member of the fi nance team is available.
3. The cashier records the details of the cash received log into the cash receipts day book and also
updates the sales ledger.
4. Usually on a monthly basis the cashier performs a bank reconciliation, which he then
files, if he misses a month then he catches this up in the following month’s
reconciliation.
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Required:
For the cash cycle of SHW:
(i) Identify and explain THREE deficiencies in the system; (3 marks)
(ii) Suggest controls to address each of these deficiencies; and (3 marks)
(iii) List tests of controls the auditor of SHW would perform to assess if the controls are operating
effectively. (3 marks)
(c) Describe substantive procedures an auditor would perform in verifying a company’s bank balance.
(7 marks)
(Total: 20 marks)
QUESTION THREE
You are the manager responsible for four audit clients of Axis & Co, a firm of Chartered Certified
Accountants. The year end in each case is 30 June 2010.
You are currently reviewing the audit working paper files and the audit seniors’ recommendations for
the auditors’ reports. Details are as follows:
(a) Mantis Co is a subsidiary of Cube Co. Serious going concern problems have been noted during this
year’s audit. Mantis will be unable to trade for the foreseeable future unless it continues to receive
financial support from the parent company. Mantis has received a letter of support (‘comfort letter’)
from Cube Co.
The audit senior has suggested that, due to the seriousness of the situation, the audit opinion must at
least be qualified ‘except for’. (5 marks)
(b) Lorenze Co has changed its accounting policy for goodwill during the year from amortisation over
its estimated useful life to annual impairment testing. No disclosure of this change has been given in
the financial statements. The carrying amount of goodwill in the balance sheet as at 30 June 2006 is the
same as at 30 June 2009 as management’s impairment test show that it is not impaired.
The audit senior has concluded that a qualification is not required but suggests that attention can be
drawn to the change by way of an emphasis of matter paragraph. (6 marks)
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(c) The directors’ report of Abrupt Co states that investment property rental forms a major part of
revenue. However, a note to the financial statements shows that property rental represents only 1·6% of
total revenue for the year. The audit senior is satisfied that the revenue figures are correct.
The audit senior has noted that an unqualified opinion should be given as the audit opinion does not
extend to the directors’ report. (4 marks)
(d) Audit work on the after-date bank transactions of Jingle Co has identified a transfer of cash from
Bell Co. The audit senior assigned to the audit of Jingle has documented that Jingle’s finance director
explained that Bell commenced trading on 7 July 2010, after being set up as a wholly-owned foreign
subsidiary of Jingle.
The audit senior has noted that although no other evidence has been obtained an unmodified opinion is
appropriate because the matter does not impact on the current year’s financial statements. (5 marks)
Required:
For each situation, comment on the suitability or otherwise of the audit senior’s proposals for the
auditors’ reports.
Where you disagree, indicate what audit modification (if any) should be given instead.
Note: The mark allocation is shown against each of the four issues.
(Total: 20 marks)
QUESTION FOUR
You are an audit manager in Nate & Co, a firm of Chartered Certified Accountants. You are reviewing
three situations, which were recently discussed at the monthly audit managers’ meeting:
(1) Nate & Co has recently been approached by a potential new audit client, Fisher Co. Your firm is
keen to take the appointment and is currently carrying out client acceptance procedures. Fisher Co was
recently incorporated by Marcellus Fisher, with its main trade being the retailing of wooden storage
boxes.
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(2) Nate & Co provides the audit service to CF Co, a national financial services organisation. Due to a
number of errors in the recording of cash deposits from new customers that have been discovered by
CF Co’s internal audit team, the directors of CF Co have requested that your firm carry out a review of
the financial information
technology systems. It has come to your attention that while working on the audit planning of CF Co,
Jin Sayed, one of the juniors on the audit team, who is a recent information technology graduate, spent
three hours providing advice to the internal audit team about how to improve the system. As far as you
know, this advice has not been used by the internal audit team.
(3) LA Shots Co is a manufacturer of bottled drinks, and has been an audit client of Nate & Co for five
years. Two audit juniors attended the annual inventory count last Monday. They reported that Brenda
Mangle, the new production manager of LA Shots Co, wanted the inventory count and audit
procedures performed as quickly as possible. As an incentive she offered the two juniors ten free
bottles of ‘Super Juice’ from the end of the
production line. Brenda also invited them to join the LA Shots Co office party, which commenced at
the end of the inventory count. The inventory count and audit procedures were completed within two
hours (the previous year’s procedures lasted a full day), and the juniors then spent four hours at the
office party.
Required:
(a) Define ‘money laundering’ and state the procedures specific to money laundering that should be
considered before, and on the acceptance of, the audit appointment of Fisher Co. (5 marks)
(b) With reference to CF Co, explain the ethical and other professional issues raised. (9 marks)
(c) Identify and discuss the ethical and professional matters raised at the inventory count of LA Shots
Co. (6 marks)
(Total: 20 marks)
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