QUESTION ONE

Restmount Kenya Ltd. was formed on 1 October 1997 in order to export tea and coffee to European markets. The Directors are unsure as to their responsibilities and the nature of their relationship with the external auditors. The audit partner has asked you to visit the client and explain to the directors, the fundamental aspects of the accountability of the directors and their relationship with the auditor.

Required:

Explain to the directors of Restmount Kenya Ltd.

• The need for an audit (6 marks)
• Procedures for the appointment of an auditor of a public company under the Companies Act.(5 marks)
• Directors responsibilities in relation to the accounting function of the Company (4 marks)
• Auditors’ statutory responsibilities in relation to the audit of the company’s financial statements (5 marks)

(Total: 20 marks)

QUESTION TWO

1. Briefly explain two practical circumstances when the auditor may be liable for damages arising from material misstatements in published financial statements on which the auditors have expressed an audit opinion. (6 marks)
2. List the classes of persons who may make a successful legal action against the auditors negligence. (4 marks)
3. Explain how an audit firm can minimise its potential legal liability for professional negligence.

(10 marks)

(Total: 20 marks)

QUESTION THREE

Tamu Tamu Limited is a general trading company. It has presented its annual accounts for audit for the year ended 31 December 1996.

Required:

1. State how you would verify the following assets:

• Short term deposit with the bank: (4 marks)
• Motor vehicles; (4 marks)
• Disposal of plant; (3 marks)
• Loans given to employees; (3 marks)

2. With reference to the annual general meeting of the company, list the items that you would expect to be recorded in the resolutions of the shareholders. ( 6 marks)

(Total: 20 marks)

QUESTION FOUR

You are the auditor of a manufacturing company which makes and sells ladies clothing. While checking the accounts at the date of the balance sheet you receive from management a certificate showing the value of stock and work in progress. You feel that additional work is necessary to confirm the correctness of the figures.

 Required:

1. Describe the procedure you would carry out when checking the stock sheets. (10 marks)
2. Indicate the additional work that must be carried out on the work in progress. (4 marks)
3. State three factors that could affect the accuracy of the figures given by the management. (6 marks)

(Total: 20 marks)

 QUESTION FIVE

1. Describe the principal purpose of a management letter. (5 marks)
2. Your audit firm has acted for many years as auditors of Western Fishing Products Ltd. In the course of your audit, you have come across the following matters, which you believe should bebrought to the attention of the directors through a management letter.

• The company banks all its cheques and cash once a week; usually on a Friday afternoon.
• Unbanked cash is held in a petty cash box which is kept in the drawer of a desk in the general office. Only the financial controller and the general manager have access to the keys for the drawer and petty cash box.
• Suppliers statements once received are passed on to the purchases ledger clerk for checking against creditors account and subsequent filing. No further controls are implemented after the filing.
• The company’s stock taking instructions require that pre-numbered stock sheets be issued by and returned to the financial controller. During the stock take attendance you noted that the stock sheets in use were not pre-numbered as required.

Required.

Draft a management letter to the managing director highlighting the above weakness, their implications and suitable recommendations to overcome them. (15 marks)

(Total: 20 marks)

QUESTION SIX

Explain the following terms:

1. Materiality; (4 marks)
2. The duty of confidentiality; (5 marks)
3. Professional idemnity insurance; (3 marks)
4. Peer review; (3 marks)
5. Quality Control; (5 marks)

(Total: 20marks)

 QUESTION SEVEN

Petty Shops Ltd. operates a large number of small retail outlets selling newspapers, sweets, cigarettes and sundry items. The internal control system provides for all books to be kept at head office with a branch stock account at selling price. Each outlet is required to bank receipts daily and intact; and to make a weekly stock report. All stock other than newspapers and magazines required by an outlet must be ordered from the company’s central warehouse and is delivered twice weekly. Each outlet receives daily deliveries of newspapers and magazines direct from the supplier.

 There are usually two members of staff on duty at each outlet at any one time with a considerable number of the staff being employed on a part-time basis. Petty Shops Ltd. employs a small internal audit department who visit each outlet at least twice each year.

 Required:

1. State and explain four criteria which should be employed in assessing the effectiveness and the relevance of an internal audit function. (8 marks)
2. Identify three types of fraud to which Petty Shops Ltd. may be particularly vulnerable in operating a large number of small outlets. (3 marks)
3. In circumstances where the auditors have identified high risk areas within an audit, give five keyelements which should exist in the general audit approach to these areas. (5 marks)
4. State with reasons whether the external auditors would be expected to visit outlets every year.

(4 marks)

(Total: 20 marks)

QUESTION EIGHT

During the course of the audit, the auditor may need to consider audit evidence in the form of reports, opinions, valuations or statements from specialists.

 Required:

1. List four examples of situations where an auditor may wish to rely upon the report of a specialist. (8 marks)
2. Describe the principles or factors which the auditor should consider when placing reliance on audit evidence provided by specialists. (12 marks)

(Total: 20 marks)