UNIVERSITY OF ZIMBABWE

May/June 2017 Examinations

Faculty: Commerce

Department: Accountancy

Paper code and Title: AC220: Auditing II

Duration: 3 hours

Examiner: Mr G.O. Mushure

Authorized Materials: Calculators

INSTRUCTIONS:

1. This paper contains 5 Questions

2. Answer All questions from each section
3. Start each question on a new page
4. This question paper comprises 7 printed pages

NB: DO NOT TURN OVER THE QUESTION PAPER OR COMMENCE WRITING

UNTIL INSTRUCTED TO DO SO.
Question 1 (30 Marks)

You are currently busy with the audit for the financial year ended 30 September 2016 of
Nkosi Limited.

Most of the balance sheet and income statement items have already been audited on 31 July
2016, with the exception of the items mentioned below. This is because the audit must be
completed within 20 days after year end. Appropriate extracts from the draft financial
statements are as follows:

EXTRACTS FROM THE ABRIDGED DRAFT ANNUAL FINANCIAL STATEMENTS AT 30 SEPTEMBER 2016

BALANCE SHEET 2016

Assets
Fixed Assets 1 520 000
Investments 480 000
Current Assets 500 000
2 500 000
Capital and Liabilities
Share capital 2 500 000
Accumulated losses (2 000 000)
Share capital and reserves 500 000
Long term liabilities 1 000 000
Short term liabilities 1000 000
2 500 000

Problems were experienced with the completeness.of inventory and further audit work must
still be performed on this. No inventory count was done on 30 September, because an
inventory count took place on 31 July and continuous inventory records are used.

INCOME STATEMENT 2016

Turnover 12 000 000
Net loss for the year (1 200 000)
Accumulated loss at the beginning of the year (800 000)
Accumulated loss at the end of the year (2 000 000)

The net operating loss includes the following expense items which have not yet been audited.

Sundry Expenses
Water and lights 40 000
Property taxes 15 000
Auditor fee 250 000
Legal expenses 90 000

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The taxation note also shows an assessed loss of $850 000 for the year and a tax liability of
$400 000 in the previous year. No audit work has yet been performed on this.
Planning materiality has been set at $60 000.

Required

a) State with motivation the audit approach you will follow for the completion of the audit for
the annual financial statements ended 30 September 2016. (6 Marks)

b) List the necessary audit procedures to verify the completeness of inventory. (9 Marks)

c) List the audit work to be performed on the taxation loss of $850 000. (5 Marks)

d) List the audit procedures to be performed on the sundry expense items. (10 Marks)

Question 2 (24 Marks)

You are the auditor of Breweries Ltd, a large beer manufacturing and distribution company.
The company sells its products to all the local bottle stores and pubs as well as many of the
restaurants in the area.

The company's financial year end is 31 December 2015. The audit has to be completed by 15
January 2016. On 30 November 2015 the debtors balance amounted to $38 000 000. Ten
debtors represent a third of the population while the other two thirds consists of
approximately 4000 accounts.

Mr Vasi, the accountant, informed you that the company had experienced problems in the
debtors department during the current year. According to him, the debtors controller, Ms
Carstens, were found to be 'rolling cash'. After further investigation it was found that the
problem was due to the fact that she was also responsible for receiving cash from debtors.
This problem was corrected immediately by segregating the above functions and appointing a
new debtors controller.

Mr Vasi, now reviews the reconciliation between the debtors ledger and the control account
in the general ledger on a weekly basis. He also ensures that all queries on debtors' accounts
is referred to himself, by printing his direct telephone number on the monthly statements.

You have completed your tests of controls and the results thereof have confirmed the control
risk for debtors to be low.

Required

a) List the auditors objectives when performing substantive procedures of trade debtors.
(5 Marks)

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b) Explain whether the auditor should select debtors account balances in the debtors ledger
and trace them to the debtors listing or vice versa (3 Marks)

c) Discuss how you would select the sample of debtors to be circularised (2 Marks)

d) Explain the difference between confirming trade debtors balances on a 'positive' basis and
on a 'negative' basis. (3 Marks)

e) Describe the audit procedures you will perform at year end, specifically due to the fact that
the debtors confirmation was performed at 30 November 2015 (6 Marks)

f) Indicate the audit tests you would undertake in order to test Breweries sales cut off at 31
December 2015 (5 Marks)

Question 3 (22 Marks)

You are the auditor of Beverage Ltd, a company which brews and bottles clear beer and
distributes the products through a number of outlets around the country. The company brews
a number of brands of beer to suit different market tastes.

Beverage Ltd uses a network of Dell microcomputers to process its sales order entry and
accounts receivable application software on a decentralised basis, and these are connected to
a centralised Dell Mainframe Re-hosting Technology Platform. Input to the system is via on-
line terminals in the distribution outlets and at the central location. Input data is held in
batches until logical sign off for processing. Subsidiary ledger posting is real time, with
overnight batch update of the general ledger to the.mainframe.

The company has implemented new sales accounting software in the majority of its
distribution outlets in the current year. The software covers order entry and invoicing
functions. The software has been developed and implemented by the company's in house
information systems department and you have satisfied yourself that adequate
implementation and conversion procedures were employed.

The audit approach for the year ended 30 June 2016 was a test of control risk based audit
approach and you seek to continue this audit approach, given the fact that a new computer
system has been installed. Accordingly, you are in the process of documenting the new
system as a basis of reliance on the manual and computerised processing controls.

Shipment of goods is recorded on a system independent of the new sales application, and data
are transferred from the shipment application to trigger the invoicing process for a particular
shipment. The invoice module matches each shipment record with an unfulfilled order record

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and produces a priced invoice using standing data. Invoice details can be manually adjusted
prior to the invoice print run. Rejected data is held in a suspense file.

Required

a) Set out in tabular form the key control objectives for the invoicing module of the new sales
application system and the controls which you would expect Beverage Ltd to have
implemented to address these objectives. You are to consider both manual and programmed
controls. You may ignore general controls. (16 Marks)

b) List the factors which would cause you to review, as part of the 2016 audit, the general
control environment in which the new application software is processed. (6 Marks)

Question 4 (14 Marks)

You are the auditor of Pot Ltd, a large food processing company with a well-known trade
name. Pot Ltd supplied a wide variety of food products to a diverse retail market which varies
from supermarkets to corner cafes. All sales by Pot Ltd are made on credit and, with the
exception of the supermarkets which have 60 days for payment, all credit sales are on 30 days
terms.

You have commenced the final audit of Pot Ltd for the year ended 28 February 2017. Your
planning procedures indicated that the business has remained largely unchanged from the
prior year and that there are no specific risk factors concerning debtors. The results of your
compliance tests carried out during the interim audit confirmed that you can place reliance on
internal controls over sales and debtors in designing your audit approach.

For the purposes of the audit, you have compiled the following information regarding the
accounts receivable at year end:

1. Materiality figure to be applied to accounts receivable $300 000

2. Balance sheet disclosure
2017 2016
$'000 $'000
Accounts receivable 30 201 24 127
3. Composition per trial balance
Trade debtors 25 252 20 151
Short term loan to fellow subsidiary 2 000 1 200
Loans to directors and personnel 1 756 1 483
Prepayments 2 451 2 298
Provision for doubtful debts (1 258) (1 005)
30 201 24 127

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4. The financial accountant of Pot Ltd has summarised the movement of the trade debtors control
account as follows:

Balance at 1 March 2016 19 151 105

Credit sales 95 286 281
Receipts from trade debtors (83 192 572)
Sales returns (1 854 194)
Settlement discounts (1 642 049)
Bad debts written off (2 495 521)
Balance at 28 February 2017 25 252 050

5. List of trade debtors and age analysis of each market segment

Debtors Balance Current 30 Days 60 Days 90 Days 120days

28/2/17 Month
$'000 $'000 $'000 $'000 $1000 $'000
Supermarkets
PicknChoose 5 150 1 458 1 390 1 997 305
GreenSpar 3 398 1 121 987 793 497
OKAY 4 236 1 723 1 378 1 135
Chain Stores
20 Chain Stores 7 104 2 797 2 105 1 294 658 250
Cafes
350 Cafes 6 364 2 367 2 203 752 626 416
Credit balances (1 000) (1 000)
TOTAL 25 252 8 466 8 063 5 971 2 086 665

Required

a) State, with reasons, how you would select specific debtors balances for your year-end
circularisation of trade debtors of Pot Ltd (you are not required to deal with the actual
circularisation process). (8 Marks)

b) Critically review the provision for doubtful debts made by Pot Ltd at 28 February 2017.
(6 Marks)

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Question 5 (10 Marks)

During the current financial year the following matters arose at Harbour (Pvt) Ltd, one of
your audit firm's clients. Both matters were uncovered by the newly established internal audit
department.

1.It emerged that Jim Jones the head storeman had been, for a number of years, operating the
following scheme. One of his duties was to check deliveries of raw materials for quantity
against copy purchase orders prepared by the purchasing department. In collusion with a
supplier's delivery clerk he has consistently accepted short deliveries but signed good
received notes for quantities of goods ordered. The delivery clerk has subsequently sold the
goods short delivered and shared proceeds with Jim Jones.

2. Sam Hlatshwayo the purchasing manager, and the financial director Mr. Bill Mandebvu
had an arrangement with a major supplier to the company whereby they would accept a
commission from the supplier in their personal capacities, for placing orders with that
supplier. This has also been going on for some years.

The managing director of Harbour (Pvt) Ltd immediately informed you as auditor on both
these matters.

Required

a) Discuss the auditors general responsibilities with regard to the prevention and detection of
fraud. (5 Marks)

b) With regard to EACH of the matters described„discuss whether they should be classified
as irregular acts or as illegal acts, and indicate what action you would have taken had you
discovered these matters whilst performing the audit. (5 Marks)