BINDURA UNIVERSITY OF SCIENCE EDUCATION FACULTY OF COMMERCE ~~ NOV 2020 DEPARTMENT OF ACCOUNTANCY PROGRAMME! Bachelor of Accountancy (Honours) Degree ADVANCED AUDITING 1: AC 403 EXAMINATION PAPER DURATION: 3 HOURS 100 MARKS INSTRUCTIONS TO CANDIDATES 1. Answer all questions 2. Cell phones are not allowed in the examination 3._ Start each question on a fresh page Page 1 of 7ION I You are the auditor of Ticketts Ltd, a company which sells theatre and cinema tickets on a commission ba At its head office the company has a central IBM mainframe which is linked to 78 on-line terminals, with real-time processing, located in its ticket office around the country. The sale of ticke ind collection of cash takes place as follows’ ‘© Deiails of current and future events are recorded on the computer system at the head office. Details such as dates, times and systems-generated event codes for each event are printed and delivered to each of the ticket offices on a weekly basis. A lever-arch file containing seating plans for all participating venues is available at every ticket office. «A cashier is employed at each ticket office on a shift basis. The cashiers at certain ticket of ces work two shifts while others work three Shifts, depending on sales volumes. The cashiers are each allocated their own cash box and cash float which they use to supply change to customers. The cashiers always maintain physical control over their cash boxes and take them home when off duty, Cash receipts for ticket sales are deposited into a safe until collected by a security firm at end of every shift. The security firm delivers all cash collected to central Ticketts depot in the relevant city. A cash control sheet, prepared manually by each cashier, accompanies the cash to the central depot. The control sheet records all takings for the shift. ‘© The central depot controller totals the cash received, agrees the total to the control sheet, prepares a daily deposit slip for each control sheet and captures the deposit slip amounts to a suspense file on the computer system via an on-line terminal. ‘The controller stores cash received from ticket offices in a safe until deposited at the bank, The controller accompanied by an employee of the security firm, visits the bank daily to make a separate deposit for each cashier for each shift. The controller sends all the original deposit slips to the head office on a weekly basis, where cash book clerks agrees the amounts to details stored on the suspense file ‘on the computer system once details have been agreed, a code is recorded on the system which results in the transfer of the deposit details to a cumulative transaction file, The transaction file is totalled and used as a source for an automatic journal entry to the general ledger on a weekly basis. Page 2 of 7© When customers purchase tickets, the event code (that is code designing the event) date and time of the event and the number of tickets required are entered into the system by the cashier. The best available seats for the event are displayed on the sereen together with the price of the tickets. If the customer requests different seats, these can be allocated if still available. If an event is fully booked thi reported on the screen. Once the customer is satisfied with the seats, date and tr the cashier enters @ code and the tickets are printed and handed to the customer. Payment is accepted only in cash or by cheque. ‘The amount of cash received is entered into the system. If a cheque is tendered, the bar code, account number and amount are entered into the system by the cashier. This procedure achieves two purposes: i) Arecord of the cheque is maintained for later comparison with the deposit slips at head office; and ii) An immediate comparison is made of the bank code and account number ‘with a list of ineffective and closed accounts (including details of stolen and missing cheques received from banking institutions). At the end of each shift the cashier selects an option on the system which produces a report of cash received during the shift. This assists the cashier in preparing the manual cash summary and identifying cash shortages or surpluses, ‘The system described above works well and you have no significant criticism or recommendation for improvement, Required: a) As an auditor, list and explain programmed controls you would expect to be incorporated into the sales and receipt systems to ensure the completeness, accuracy and validity of sales and receipt transactions recorded in the company’s general ledger (you need not deal with the use of reports produced by the system or controls over standing data). (20 marks) b)_ Describe the proposed contents of reports which could be generated from data recorded by the cashiers which will assist management in assessing the vial (5 marks) [Total marks: 25] ility of individual tickets offices. Page 3 of 7QUESTION 2 Your firm has recently been appointed as auditors of Armstronies Ltd, a large company which markets sophisticated electronic equipment for heavy industry as well as the arms industry. The previous audit firm lost the audit as a direct result of a conflict with Bart simpli jo, the managing director of Armstronics Ltd, over the adoption of various accounting policies by Armstronics Ltd. The conflict had become very heated, due mainly to Bart Simplicio’s aggressive nature, and had led to a qualified audit report. Whilst familiarisin a) b) °) d) with the company and its environment you discover that Bart Si nplicio had risen up through the ranks of Anmstronics Ltd with ruthlessness and determination, On the way, he had built his personal wealth on a foundation of shares in Armstronies Ltd. He has surrounded himself with an aggressive team of loyal managers. You consider that their loyalty is partially due to the fact that management are not paid a salary but are given a monthly retainer, superior fringe benefits and a percentage of reported profits. Much of the sophisticated electronic equipment is imported from the United States, Japan and Taiwan whilst exports, particularly arms, are made to the governments of Middle Eastern and African countries. You also discover that one of the divisions of the company namely the ‘Foreign Development Division’ sells arms exclusively to companies who in turn sell to mercenary and guerrilla organisations, Bart Simplicio commented that “the world arms market is ut-throat and secretive, provided that our government customers don’t find out who we supply ~ no problem! We cover our tracks pretty well”. Bart Simplicio places little emphasis on “historical accounting figures’ despite the reasonably sophisticated computer facilities available, The vast majority of computer time is used for forecasting and analysis of worldwide economic trends within the electronics industry. As Bart Simplicio says, “accountants and bankers deal with history ~ you've got to be a prophet to make a profit! ‘Armstronies Ltd has an audit committee which consists of three non-executive directors, all of whom are experts in the armament manufacture industry, and Mikel Jacobson, Bart Simplicio’s brother-in-law, who is the chairman. Over the years Armstronies Ltd has reported figures better than its competitors but for the last two years profits have receded. Although there appears to be no real threat of going concern difficulties, liquidity has tightened significantly. The Page 4 of 7company is heavily committed to long-term borrowings and the company’s bankers have indicated that their continued financial support will be reviewed in the light of the audited financial statements for the year under audit. h) Bart Simplici appears unconcerned about the drop in profits. He has responded to your enquiries by saying “the company is in good shape; the Heavy Industry Division is solid. The Arms Division is thriving with the wars in the Middle East. Last year Armstronies Ltd concluded the first of many contracts with Simplicio Arms Ine, which is based in Vienna, for the supply of arms to various worldwide governments. The Foreign Development Division — we won’t talk too much about that!” Required Evaluate the risk that the annual financial statements of Armstronies Ltd contain material misstatements as a result of fraudulent financial reporting. Your answer should consider the following: i) the incentives/pressures on the company to engage in fraudulent financial reporting; ii) situations or conditions which provide the opportunity; and iii) the attitudes of management which may suggest fraudulent financial reporting. (25 Marks) QUESTION 3 Batanai Resour es, a large listed company founded and controlled by Kuda. The principal business of the company was to develop derelict land in city centres into office accommodation, In carly 2018, the tax authorities became suspicious of the nature of the operations being carried out by the company and an investigation into its affail commenced. The res iltant report stated that the organisation's intemal controls were weak and non- existent in many cases. ‘The investigators found payments to unknown persons, and fictitious consultancy firms. In addition, Kuda had maintained a seeret expense account that was used to disburse funds to himself. The board of directors of Batanai Resources did not know of the existence of this account. The expense account was maintained by the partner of the firm of accountants responsible for the audit of the company, The auditors were heavily criticised in the report of the investigators. ‘The firm of auditors, All Cost and Company, had an aggressive marketing strategy and had increased its audit Page $ of 7fees by 100% in two years. The audit firm had accepted the appointment in 2017 after the previous auditors had been dismissed. ‘The auditors? report for the year ended 2016 had been heavily qualified by the previous auditors on the grounds of poor internal controls and lack of audit evidence. Kuda had approached several firms of auditors in order to ascertain whether they would qualify the auditors’ report given the present system of control in PLD and Associates. All Cost and Company had stated that it was likely that they would qualify their report. ‘They realised that Kuda was ‘opinion’ shopping but were prepared to give an opinion in order to attract the client to the firm, Batanai Resources subsequently filed for insolvency and All Cost and Company were sued for negligence by the largest loan payable, its bankers. Required: a) Describe the procedures which an audit firm should carry out before accepting a client with potentially high audit risk such as Batanai Resources. (7 Marks) b) Discuss the ethical problems raised by the secret expense account for Kuda by the audit partner. (6 Marks) ©) St opinion shopping” by prospective audit clients. (6 Marks) ggest measures that audit firms might introduce to try and minimise the practice of e the risk of litigation and its effect upon the audit (6 Marks) 5] ) Explain how audit firms can redi pra [Total marks: QUESTION 4 Your firm of Certified Public Accountants is auditing the financial statements of Runtime Manufacturing Limited for the year ended 31 March 2018. You have been assigned to the audit of the company’s noncurrent assets, which comprise of freehold land and buildings, plant and machinery, fixtures and fittings and motor vehicles. The fieehold land and buildings were purchased 5 years earlier (in April 2015) for $5 million, At the date of purchase, a professional estate agent estimated that both the land and the buildings had a value of $2 million and $3 million respectively. Since 2015, depreciation has been charged on the buildings at 2% per annum on a straight-line basis with a full year’s depreciation being charged in year of addition and none in year of disposal Page 6 of 7In the 31 March 2018 financial statements, the land and buildings have been revalued to $8 million ($4.5 million for the land and $3.5 million for the buildings). This is the first time that a revaluation has been incorporated into the financial statements as previous valuations have remained consistent with the depreciated cost. This has been agreed by an independent valuer. ‘The engagement partner is concerned at the large increase in the value of the land and buildings since they were purchased, and they have asked you to check the reliability and accuracy of the valuation. You are aware that ISA 620 Using the Work of an Auditor's Expert could assist you in carrying out this work In addition, you have been tasked with verifying the existence and completeness of plant and machinery recorded in the company’s computerised non-current asset register. The non-curtent asset register records the description of each non-current asset, the orig cost, the depreciation charge and the accumulated depreciation. Required: a) Outline the audit work you will carry out to check whether the valuer has provided a reliable and accurate valuation of the land and buildings as at 31 March 2018, (12 marks) b)_ Describe the audit work you should carry out to check the existence and completeness of plant and machinery, as recorded in the company’s non-current asset register. (8 marks) ©) Identify the main benefits for the company and also for the Auditor of a client maintaining a non-current asset register. (3 marks) [Total marks: 25] “END OF PAPER*** Page 7 of 7