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Hbc2215:Auditing Ii Question Paper
Hbc2215:Auditing Ii
Course:Bachelor Of Commerce
Institution: Meru University Of Science And Technology question papers
Exam Year:2012
QUESTION ONE (25 MARKS)
The following extracts were obtained from Super Furniture Ltd a company that deals with office n 30/6. Kinoti; a CPA(K) and B.Com (Accounting Option) from MUCST was appointed to take charge on 20/8/2011 following resignation of Kanga, the previous auditor.
(a) Shareholding-currently all shares are held by directors. A takeover offer, from Domino Ltd was received to buy 55% of equity shares in Super Furniture Ltd. Negotiations are going on. (b) Materiality – Materiality level has been set at 1.5M, of annual sales while reviewing the audit working papers for the year ended 30/6/2011, Kinoti found the following notes prepared by Kanga. Sundry accruals 5,028 3,774 Provision for leave pay 6,180 1,800 Provision for major repairs 12,000 7,954 Provision for legal costs - 480 Provision for losses on insurance claims 1,050 -
Provision for bad debts 750 750 Provision for management allowances 2,245 1,800 27,253 16,558 Notes 1. Sundry accruals: All sundry accruals full list has been disclosed with support documents. All accruals are normal company expenses and appear reasonable. 2. Provision for leave pay The provision amount agrees with total leave pay in salaries system printout. Review on salaries system controls including computerized leave records and controls tests for compliance shows no weaknesses or exceptions. Reason for lower provision in 2011, is due to change in policy where only management were the ones to carry leave forward from one year to the next. 3. Provision for major repairs The account was debited with sh4,046,000 in year ended 30/6/11. Only expenses of Shs850,000(21%) 4,046,000 has had support document. 4. Provision for Legal costs No amount has been incurred. 5. Provision for bad debts The company monthly credit sales of amount to Shs7,200,000 is considered sufficient, a 10% provision on bad debts is considered sufficient. 6. Provision for management allowances All managers are entitled to a bonus based on criteria determined a year in advance at their annual performance review. The finance director Mr. Thuita refused to provide a list or letters setting criteria since the matter had not been finalized for year 2011. Policy is lacking on the part of company management allowances. Required: a) Define inherit risk, control risk and detection risk. (6 Marks) b) materiality considerations (6 Marks) c) Draft review notes to finance director and Senior Internal auditor in charge on your opinion or satisfaction with regards to calculations, provisions and accounting principles applied. (7 Marks) d) Explain why there has been increase in use of risk based auditing years in recent years. (6 Marks)
QUESTION TWO (15 MARKS)
The Institute of Certified Public Accountants of Kenya did opt for adoption of international Accounting Standards for all companies in Kenya since 2003. a) Outline the underlying issues and challenges that have necessitated the adoption of international accounting standards by CPA (K). (5 Marks) b) In the recent years especially after the year 2002, corporate and public attention has significantly focused on corporate Governance, in addition to financial reporting by use of accounts and financial statements. Required: Highlight the underlying reasons or factors that have led to increased public attention on corporate governance. (5 Marks) c) In the year 2008/2009 the office of the Prime minister, issued a circular/directive that all state corporations, local authorities and government ministries to form and have audit committees in their organization structures. Required: Explain the role of audit committees in the light of corporate governance controls and oversight, especially in the public sector. (5 Marks)
QUESTION THREE (15 MARKS)
Fixi Ltd has appointed you as their auditor. The company has a head office in Meru and has 10 shoe repair and key cutting Kiosks all over Meru and Tharaka Nithi counties. The kiosks are located next to Buses/matatu stage and each is run by a single staff member shoe repairs the shoes and cuts keys while customers wait.
1. During the year that had first ended three months ago, management (head office) had noted several developments within the Fixi business chain. 2. Management had provided a 3 months guarantee for all works done, which resulted to incremental revenue earnings. However, the books show no additional profit entries and management was of the view that some kiosk operators were pocketing the monies for personal gains. 3. Upon, you (auditor), taking the audit engagement, it has come to your attention (which you shared verbally with Head office) that various components, namely heels, soles and keys are being removed from kiosks by certain operators and sold to competitors. You have noticed instances where operators repair shoes to their friends and relatives without charging them. You have also noticed that field offices have no proper books of transaction records, though each kiosk has a register controls and procedures in the Business chain are currently very weak and open to abuse by operators. Required
a) Highlight the audit sampling techniques you would use to gather evidence/sufficient information to carry out the audit. (5 Marks) b) State the substantive procedures you would use to check accounts, records and transactions. (5 Marks) c) Detail internal control procedures you would recommend to the management of Fixi Ltd to safeguard Business assets and enhance discipline in business management on the part of field operators. (5 Marks)
QUESTION FOUR (15 MARKS)
The following relate to Murio Ltd as at 31 December 2011.
Assets Costs Depreciation Net Book Value
Shs000 Shs000 Shs000 Land and Buildings 145,000 45,000 100,000 Plant & Machineries 80,000 75,000 10,000 Equipments 12,000 9,000 3,000 Furniture &equipments 30,000 25,000 5,000 Computers &equipments 45,000 38,000 7,000 Net currents assets 10,000 Total Assets 138,000
Financed by Ordinary share capital 50,000 Ordinary share premium 15,000 Capital reserves 30,000 Revenue reserves 2,000 Long term Bank loan 41,000 3 year period operations results 138,000
2009 2010 2011 Shs million Shs million Shs million Sales turnover 25 23.8 21.750 Operating costs including Cost of sales before interest Charges 17 19.500 18 Interest charges 2.87 2.73 2.66 Tax payment 30% 1.539 0.471 0.327 Required: a) Explain the term going concern in relation to preparation of financial statements (2 Marks)
b) Highlight the audit procedures, the auditor should undertake in order to obtain sufficient audit evidence to be able to form an opinion on the going concern status of the company. (6 Marks) c) In the light of Murio Ltd results and available information what are status of the company as a going concern. (3 Marks) d) List four factors/matters that might cast doubt on the going concern status of Murio Ltd. (4 Marks)
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