Question 1

Your firm of Certified Public Accountants have recently gained a new audit client, Farai Limited (Farai).
The previous external auditors identified some employee fraud which had been perpetrated by a group
of employees over several years. The fraud was only discovered in last year’s audit. As a result of the
extensive fraud, Farai have developed an internal audit function comprising a highly experienced chief
internal auditor and two part-qualified staff. Your audit partner is keen to ensure that this year you will
work closely with the new internal audit function to ensure that any further fraud is identified.

You are aware that ISA 240 The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial
Statements, deals with an external auditor’s responsibilities however, both internal and external
auditors are required to deal with risks to the entity and this includes risks associated with fraud and
error.

REQUIRED:

(a) Explain how this new internal audit function can help Farai deal with the risk of fraud and error.

(b) Discuss the responsibilities of external auditors in respect of the risk of fraud and error in an audit of
financial statements.

(c) Identify what additional roles the internal auditors may have within Farai.

Question 2
Explain the following letters of communication, clearly explaining their purposes
a. Engagement Letter
b. Management Letter
c. Letter of Representation
d. Letter of weakness
e. Discuss the importance of the Internal Audit Department.
f. How can the effectiveness of the Internal Auditing Department be enhanced?
g. Identify and explain the elements of an auditor’s report
h. Why do auditors give an opinion and not an outright assurance? Explain your answer
giving examples.

Question 3
The CPA firm Ladstock & Co. (Ladstock), has been asked to tender for the annual
audit of the financial statements of Authentic Goods Plc, a retailer of specialist goods
including Persian rugs and antique tapestries. Ladstock has been performing other
services for Authentic Goods Plc over the past three years, namely management
consulting and tax advice. In addition, there have been disputes in the past between
the management consulting and taxation departments of Ladstock and the
management of Authentic Goods Plc. Most of these disputes revolved around the level
of services provided and the fees charged. One of the audit managers in Ladstock was
previously employed by Authentic Goods Plc in the finance department. Apart from
the audit manager previously employed by Authentic Goods Plc, no-one in the
assurance department has experience in the antique and specialist goods industry.
Some members of Ladstock have shares in Authentic Goods Plc.

REQUIRED:
(a) Assess the potential threats to the independence of Ladstock if the company were
to undertake the audit of Authentic Goods Plc.

(b) Explain the procedures which Ladstock should conduct to determine if the
company is sufficiently independent to audit Authentic Goods Plc.

(c) Identify the safeguards Ladstock could implement in order to reduce the threats to
the company’s independence outlined in (a) above.

Question 4

a. Explain the term Environmental Audit clearly distinguishing it from Financial Audit.

b. Giving examples, discuss the –micro and macro- importance of Environmental Audits to a
business organisation of your choice.
Question 5
You are a junior auditor and you have been asked to take responsibility for the audit
of non-current assets of Wafawarowa Ltd (Wafawarowa). Wafawarowa has prepared
its financial statements for the year ended 31 March 2018. Your audit manager has
presented you with the Lead Schedule, as prepared by Wafawarowa’s accountant (see
below), as well as a copy of the non-current asset register. It is Wafawarowa’s
company policy to charge a full year’s depreciation in the year of acquisition and
none in the year of disposal.

Land and Buildings are depreciated at 2% straight line, Motor Vehicles at 20% reducing
balance, and Plant and Machinery at 10% reducing balance.

XLead Schedule for Wafawarowa Ltd as at 31 March 2018

Land and Motor Plant and Total

Buildings Vehicles Machinery
$ $ $ $
Opening balance 980,000 150,000 620,000 1,750,00
@NBV 0
Additions 346,000 204,000 426,000 976,000
Disposals 0 0 -50,000 -50,000
Depreciation -26,520 -72,000 -102,000 -200,520
Charge
Closing Balance @ 1,299,480 282,000 894,000 2,475,48
NBV 0

REQUIRED
(a) Discuss what is meant by a Non-Current Asset Register and outline the steps that
you as an auditor should take to confirm the accuracy of the register.
(b) Identify the audit procedures you should take to confirm the appropriateness of
additions to non-current assets during the accounting period.
(c) Using Wafawarowa’s Lead Schedule provided above, describe the audit work you
should conduct on non-current assets, and select items which require follow up or
further information from the client.
(You do not need to address work on additions in your answer to part ‘c’.)

(d) Describe how you would assess the depreciation policy of Wafawarowa Ltd.

Question 6

A and C, Chartered Certified Accountants, recently held a staff training session on quality control. The
session concluded with staff being invited to raise matters from their experience relating to the ethical
rules on independence.

Some of these matters are given be low.

(i) Shortly before commencing the final audit of a large listed company, a junior staff member on the
audit team inherited a substantial number of shares in that company. No action was taken because,
although representing a large investment for the staff member concerned, the number of shares was
totally immaterial with respect to the company. Moreover; the partner knew that when the
company's results were announced the share price would rise and he did not think it was fair to
require the staff member to sell them now.

(ii) The management accountant of another listed company client had an accident and was away from
work for three months. At the time of the accident the audit senior was winding up the prior year's
audit and, because of his familiarity with the company's management accounting system, it was
agreed that he would take over as management accountant for the three months.

(iii) In its management letter to another audit client, A and C warned the company that their computer
system lacked essential controls. The company decided to install a totally new computer system and A
and C's management consultancy department was appointed to design the new system.

(iv) A and C was recently approached by a large company that was not then an audit client, for a
second opinion. The company was in dispute with its existing auditors who were proposing to issue a
modified auditor's report because of disagreement over inventory valuation. A and C's technical
partner reviewed the evidence provided by the company and advised the company that its accounting
treatment was in order.

Shortly afterwards A and C were invited to accept nomination as auditors. The reply to the letter of
enquiry to the existing auditors made it clear that the inventory valuation dispute was not as
straightforward as the company had made it out to be.

Required:
(a) Discuss whether A and C may have impaired their independence or otherwise acted
unprofessionally in each of the situations described.

(b) Briefly explain the term ‘confidentiality’ and explain the situations where an auditor may disclose
confidential information about a client.
Question 7

You are a recently appointed audit senior in ABC Accountants and are eager to
demonstrate your skills in your new role within the firm. On your first morning in this
new position you receive an email from your manager indicating that you will be
involved in the audit of Body First Ltd (Body First) a state-of-the-art sporting facility,
for the year ended 31 December 2012.You know from talking to your colleagues in the
past that one of the added perks of this particular assignment is free use of the
facilities during the course of the audit, and then the opportunity to take up
membership at a significantly discounted rate.

Your manager informs you that following his preliminary review of the figures it would
appear that revenue and profits have declined over the past year and this is likely due
to toughening economic conditions. Body First’s strategy in the current year and in
the immediate future is to focus on controlling costs and maintaining revenue through
the promotion of fitness classes and reduced rates for use of the pool and gym.
Although

Body First has experienced reductions in revenues, this has been less significant than
the reductions experienced by other sporting centres as the equipment and facilities
are second to none. Your manager has informed you that the audit areas of emphasis
for Body First in the current year must be responsive to the specific audit risks that
may arise as a result of the current downturn in the economic environment. She has
also asked you to consider how materiality should be addressed for Body First.

REQUIRED:

(a) In response to the information provided above, draft a memo to the audit partner
identifying three pertinent audit risks that may arise for a company such as Body
First, together with the reasons for each risk.
(b) Outline an appropriate testing approach for each of the three risks which you
identified in Part (a) above.

(c) Discuss materiality and how it should be addressed during the course of the audit.

Question 8

Matambo & Co sells cars, car parts and petrol from 25 different locations in one country. Each branch
has up to 20 staff working there, although most of the accounting systems are designed and
implemented from the company’s head office. All accounting systems, apart from petty cash, are
computerised, with the internal audit department frequently advising and implementing controls
within those systems.

Matambo & Co has an internal audit department of six staff, all of whom have been employed at
Matambo & Co for a minimum of five years and some for as long as 15 years. In the past, the chief
internal auditor appoints staff within the internal audit department, although the chief executive
officer (CEO) is responsible for appointing the chief internal auditor. The chief internal auditor reports
directly to the finance director. The finance director also assists the chief internal auditor in deciding
on the scope of work of the internal audit department.

You are an audit manager in the internal audit department of Matambo & Co. You are currently
auditing the petty cash systems at the different branches. Your initial systems notes on petty cash
contain the following information:

1. The average petty cash balance at each branch is $5,000.

2. Average monthly expenditure is $1,538, with amounts ranging from $1 to $500.

3. Petty cash is kept in a lockable box on a bookcase in the accounts office.

4. Vouchers for expenditure are signed by the person incurring that expenditure to confirm they have
received re-imbursement from petty cash.

5. Vouchers are recorded in the petty cash book by the accounts clerk; each voucher records the date,
reason for the expenditure, amount of expenditure and person incurring that expenditure.

6. Petty cash is counted every month by the accounts clerk, who is in charge of the cash. The petty
cash balance is then reimbursed using the ‘imprest’ system and the journal entry produced to record
expenditure in the general ledger.

7. The cheque to reimburse petty cash is signed by the accountant at the branch at the same time as
the journal entry to the general ledger is reviewed.
Required:

(a) Explain the issues which limit the independence of the internal audit department in Matambo &
Co. Recommend a way of overcoming each issue.

(b) Explain the internal control weaknesses in the petty cash system at Matambo & Co. For each
weakness, recommend a control to overcome that weakness.
Question 9

The following situations involve Joey Jingles, an audit senior with the accounting firm
of Barnacles and Boots. He is involved with the client of Fast Transport plc (Fast
Transport) and the following matters have been brought to the attention of the firm.

(i) The accounts clerk of Fast Transport resigned two months ago and has not been
replaced. As a result, Fast Transport’s transactions during this period have not been
recorded and the books are not up to date. To comply with the terms of a loan
agreement, Fast Transport needs to prepare interim financial statements but cannot
do so until the books are brought up to date. The managing director of Fast Transport
wants Joey to help out because he performed the audit last year. The audit partner of

Barnacles and Boots allows Fast Transport to engage him for one month before the
start of the annual audit.

(ii) During the annual audit of Fast Transport, Joey discovered that the company had
materially understated income on last year’s tax return. The client is unwilling to
take corrective action. Joey decides to inform the Taxation Office.

(iii) On completion of the fieldwork for the audit of Fast Transport, Joey is offered six
free cinema tickets by the managing director. He tells him this gesture is in
appreciation of a job well done. Joey accepts the tickets.

(iv) The managing partner of Barnacles and Boots is not very pleased with the time
Fast Transport is taking to pay its audit fee for the year. He decides to take €5,000
out of a trust fund that Barnacles and Boots holds on their behalf. He intends to
replace it as soon as Fast Transport sends payment of its audit fee.

REQUIRED:

(a) Illustrate the fundamental principles of ethics based upon the code of ethics
published by the International Federation of Accountants (IFAC). Give examples.
(b) In respect of each of the four situations, (i) to (iv) outlined above, identify any
ethical issues involved and assess whether or not there has been a violation of ethical
conduct. Support your answer by reference to relevant professional standards.

Question 10
Trombone Co (Trombone) operates a chain of hotels across the
country. Trombone employs in excess of 250 permanent employees
and its year end is 31 August 2018. You are the audit supervisor of
Viola & Co and are currently reviewing the documentation of Trombone’s
payroll system, detailed below, in preparation for the interim audit.
Trombone’s payroll system
Permanent employees work a standard number of hours per week as
specified in their employment contract. However, when the hotels
are busy, staff can be requested by management to work additional
shifts as overtime. This can either be paid on a monthly basis or
taken as days off.
Employees record any overtime worked and days taken off on weekly
overtime sheets which are sent to the payroll department. The standard
hours per employee are automatically set up in the system and the
overtime sheets are entered by clerks into the payroll package, which
automatically calculates the gross and net pay along with relevant
deductions. These calculations are not checked at all. Wages are increased
by the rate of inflation each year and the clerks are responsible for
updating the standing data in the payroll system.
Employees are paid on a monthly basis by bank transfer for their
contracted weekly hours and for any overtime worked in the previous
month. If employees choose to be paid for overtime, authorisation is
required by department heads of any overtime in excess of 30% of standard
hours. If employees choose instead to take days off, the payroll clerks
should check back to the ‘overtime worked’ report; however, this
report is not always checked.
The ‘overtime worked’ report, which details any overtime recorded by
employees, is run by the payroll department weekly and emailed to
department heads for authorisation. The payroll department asks
department heads to only report if there are any errors recorded.
Department heads are required to arrange for overtime sheets to be
authorised by an alternative responsible official if they are away on
annual leave; however, there are instances where this arrangement
 has not occurred.
The payroll package produces a list of payments per employee; this links
into the bank system to produce a list of automatic payments. The
finance director reviews the total list of bank transfers and
compares this to the total amount to be paid per the payroll records;
if any issues arise then the automatic bank transfer can be manually
changed by the finance director.
Required
(a) In respect of the payroll system of Trombone Co:
(i) Identify and explain FIVE deficiencies.
(ii) In tabular form, recommend a control to address each
of these deficiencies.
(iii) In tabular form, describe a test of control Viola & Co
should perform to assess if each of these controls is
operating effectively.
(b) Tabulate the difference between an interim and a final audit.

Question 11

The CPA firm Latis & Co. (Latis), has been asked to tender for the annual audit of the financial
statements of A.G Plc, a retailer of specialist goods including Italian rugs and antique tapestries. Latis
has been performing other services for A.G Plc over the past three years, namely management
consulting and tax advice. In addition, there have been disputes in the past between the management
consulting and taxation departments of Latis and the management of A.G Plc. Most of these disputes
revolved around the level of services provided and the fees charged. One of the audit managers in
Latis was previously employed by A.G Plc in the finance department. Apart from the audit manager
previously employed by A.G Plc, no-one in the assurance department has experience in the antique
and specialist goods industry. Some members of Latis have shares in A.G Plc.

REQUIREMENT:

(a) Assess the potential threats to the independence of Latis if the company were to undertake the
audit of A.G Plc.

(b) Explain the procedures which Latis should conduct to determine if the company is sufficiently
independent to audit A.G Plc.

(c) Identify the safeguards Latis could implement in order to reduce the threats to the
company’s independence outlined in (a) above.
Question 12

You are a recently appointed audit senior in A&C Accountants and are eager to demonstrate your
skills in your new role within the firm. On your first morning in this new position you receive an email
from your manager indicating that you will be involved in the audit of Body First Ltd (Body First) a
state-of-the-art sporting facility, for the year ended 31 December 2016. You know from talking to your
colleagues in the past that one of the added perks of this particular assignment is free use of the
facilities during the course of the audit, and then the opportunity to take up membership at a
significantly discounted rate.

Your manager informs you that following his preliminary review of the figures it would appear that
revenue and profits have declined over the past year and this is likely due to toughening economic
conditions. Body First’s strategy in the current year and in the immediate future is to focus on
controlling costs and maintaining revenue through the promotion of fitness classes and reduced rates
for use of the pool and gym. Although

Body First has experienced reductions in revenues, this has been less significant than the reductions
experienced by other sporting centres as the equipment and facilities are second to none. Your
manager has informed you that the audit areas of emphasis for Body First in the current year must be
responsive to the specific audit risks that may arise as a result of the current downturn in the
economic environment. She has also asked you to consider how materiality should be addressed for
Body First.

REQUIREMENT:

(a) In response to the information provided above, draft a memo to the audit partner identifying three
pertinent audit risks that may arise for a company such as Body First, together with the reasons for
each risk.

(b) Outline an appropriate testing approach for each of the three risks which you identified in Part (a)
above.

(c) Discuss materiality and how it should be addressed during the course of the audit.
Question 13

a. Explain the following terms:

1. Expert
2. Other Auditor
3. Principal Auditor

b. Describe considerations an auditor should make before deciding to make use

of the work of an expert?
c. Describe the steps an auditor would take when an expert presents
information contrary to the auditor’s expectations if:
1. The audit report has to be modified, and

2. There is no need to qualify the audit report.

Question 14

A. Why should the company waste resources to have Management

Auditors when it is already paying for external auditing services.

B. One of your responsibilities with your audit firm, Dan and Partners,
CPAs, is developing new clients. Dan and Partner is a small audit
firm. AMC motors is based in Mvuma where they sell new and used
cars. AMC also service cars. You are currently in discussions with
AMC in relation to the possibility of Dan and Partners becoming
AMC’s new auditors. If your firm consents to be their Auditor, AMC
has offered to service your car free of charge and the cars of the
three audit partners of the audit firm. Normal charge for a service of
one of these cars is $600. You plan to communicate with the previous
auditor before making your recommendation.
Required:

a) State with reasons whether you and the audit partner should accept the offer of free car
services from AMC in the event they are accepted as an audit client.

b) In addition to communicating with the previous auditor, explain FOUR factors that you should
consider in determining whether it is feasible for Dan and Partner to accept this engagement.

Identify the information you should obtain from AMC’s previous auditor.