QUESTION ONE

1. It has been said that an auditor's report is the formal result of all his efforts. This being the case it is very important that the reader well understands the meaning of the Audit Report, particularly where the auditor wishes to qualify his opinion on the financial statements subject to audit.

Required

(a) Explain how the International Standards on Auditing attempt to ensure that the Audit Report is clearly understood.

(b) Describe clearly the circumstances in which an Adverse Opinion and a Disclaimer of Opinion would be appropriate. (Give two examples—one each—to illustrate your answer—a full audit opinion should not be given).

(c) Do you believe that a disclaimer of opinion is largely valueless? Give reasons to support your opinion.

QUESTION TWO

(a) What reports should be made to management?

(b) When should these reports be made?

(c) What names are given to these reports?

(d) List the contents of such reports?

QUESTION THREE

(a) List the circumstances in which the 7th Schedule requires qualification in audit reports

(b) List the circumstances in which the ISA 700, "The Auditors Report on Financial Statements" regards as involving inherent uncertainty

(c) What types of qualification are there?

(d) Give examples of limitation of scope

(e) Give examples of disagreement

(f) Distinguish between materiality and fundamentality

(g) What is emphasis of matter?

QUESTION FOUR

You are an audit senior in a firm of accountants which has been requested by one of the directors to carry out an examination of the accounting policies, calculations and procedures adopted by the company in preparing a profit forecast. The client requires an Accountant's Report to accompany the profit forecast. One of the partners has asked you to deal with this inquiry.

You are required

(a) To record the preliminary considerations and in particular those matters that the firm needs to agree with the directors of the clients company before accepting the assignment. (6 Marks)

(b) To record the main points which will need to be considered when carrying out the assignment before preparing the Accountant's Report. (6 Marks)

(c) To record the points that need to be considered when drafting the Accountant's Report.

(10 Marks)

(Total: 16 Marks)

QUESTION FIVE

Computer Maintenance Services Ltd. are computer Engineers with a current annual turnover of Sh.8,000,000. Generally customers are invoiced for maintenance work at the time that service is provided although the company offer their customers a three year service contract on payment of a non-refundable fixed sum at the beginning of the contract

You have been appointed auditor, your predecessors having resigned after completing the audit for the year ended 30 September 1989. Their report was unqualified.

You have commenced planning the audit of the financial statements for the year ending 30 September 1990 and have found that on the basis that payments for three year service contracts are non-refundable, the directors have in previous years taken credit for all such income at the time that the contract is entered into

The management accounts for the year to date show that direct costs represent approximately 80% of the service contract income. The net profit for the year ended 30 September 1989 was Sh.480,000 and income from service contracts entered into during that year amounted to Sh.2,150,000.

 You are required to write a formal letter to the directors setting out:

 (a) Your reservations, if any, on the accounting policy adopted for three year service contracts, and

(b) Your recommended treatment of such income, together with the disclosures you consider necessary in order for the financial statements to show a true and fair view.

(16 Marks)