BAC 311

AUDIT AND ASSURANCE SERVICES 2023

Code of the Name of the Module Date of Exam DURATION

Module

BAC 311 AUDIT AND ASSURANCE JUNE 7TH 2023 3 hours

SERVICES1

You are advised to read the following before answering the examination questions.

1. Read each of the questions carefully before you answer.

2. Number the answers to the questions clearly before answering.
3. Answer all parts of a question at one place in continuous manner.
4. Please write as clearly as possible as illegible handwriting cannot be marked

This paper contains two parts; Section A and Section B. Section A is compulsory and comprises one
questions with a total of 20 marks. Section B contains 6 questions having 20 marks each. Answer any 4
questions from section B.

SECTION A-COMPULSORY QUESTION 1

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There are many reasons for maintaining internal control systems. These include the need to ensure that:

(i) transactions are properly authorised

(ii) transactions are promptly and accurately recorded

(iii) access to assets and records is properly authorised

(iv) recorded assets represent actual assets

In the absence of internal controls, errors, omissions and misappropriation of assets are likely, and external
and internal auditors pay particular attention to both the design and operation of internal control systems.
Receivable is an area in which most organisations expect internal controls to be operating effectively.

Required:

(a) In the context of receivables, list and describe the types of error, omission and misappropriation of
assets that can occur in practice where internal controls are weak or non-existent.(4 marks)

(b) Explain why even a good system of internal control will not necessarily prevent or detect errors,
omissions and the misappropriation of assets in a receivables system, and explain why a good system of
internalcontrol is important to auditors.(4 marks)

(c) List the main internal controls that you would expect to be in operation in the receivables system at a
small manufacturing company with a computerised accounting system.(9 marks)

(d) Explain why external auditors seek to rely on the proper operation of internal controls wherever
possible.(3 marks)

(20 marks)

SECTION B -ANSWER ANY FOUR QUESTIONS

QUESTION TWO -20 MARKS

(a) Describe 5 substantive procedures an auditor would perform in verifying a company’s bank balance.
(10 MARKS)

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(b) Describe 5 substantive procedures the auditor should perform on the year-end trade payables (10
MARKS)

QUESTION THREE-20 MARKS

Coolex manufactures air conditioners. The company supplies its products to its dealers who, in turn, sell the
products to the customers. The market is highly competitive, so the company has to incur heavy costs on
advertisements.The company receives its payments through bills of exchange. The bills are sometimes
discounted subject to

the needs of the company.

Required:

(a) List the control activities which are required to be in place with respect to:

(i) advertisement expenses; and (5 marks)

(ii) contingent liabilities. (5 marks)

(b) List the tests of controls which the auditors of the company would perform to ensure the financial
statements are true and fair with respect to:

(i) advertisement expenses; and (5 marks)

(ii) contingent liabilities. (5 marks)

(20 marks)

QUESTION FOUR-20 MARKS

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ISA 230 Audit Documentation deals with the auditor’s responsibility to prepare audit documentation for an
audit of financial statements.

Required:

State THREE benefits of documenting audit work. (3 marks)

(b) Explain the purpose of FOUR items that should be included on every working paper prepared by the
audit team. (4 marks)

(c) Describe the two main planning documents prepared by the auditor and briefly

explain the relationship between them. (3 marks)

(d) Explain the auditor’s responsibility for the prevention and detection of fraud and

error. (5 marks)(e) Explain the auditor’s

responsibility to consider laws and regulations (5 marks)

QUESTION FIVE-20 MARKS

You are the auditor of Bears World, a limited liability company which manufactures and sells small cuddly
toys by mail order. The company is managed by Mr Kyto and two assistants. Mr Kyto authorises important
transactions such as wages and large orders, one assistant maintains the payables ledger and orders
inventory and pays suppliers, and the other assistant receives customer orders and dispatches cuddly toys.
Due to other business commitments Mr Kyto only visits the office once per week.

At any time, about 100 different types of cuddly toys are available for sale. All sales are made cash with
order -there are no receivables. Customers pay using credit cards and occasionally by sending cash.
Turnover is over $5.2 million.

You are planning the audit of BearsWorld and are considering using some of the procedures for gathering
audit

evidence recommended by ISA500 as follows:

(i) analytical Procedures

(ii) inquiry

(iii) inspection

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(iv) observation

(v) re-calculation

Required:

(a) For EACH of the above procedures:

(i) explain its use in gathering audit evidence.(5 marks)

(ii) describe one example for the audit of Bears World.(5 marks)

(b) Discuss the suitability of each procedure for Bears World, explaining the limitations of each.(10 marks)

(20 marks)

QUESTION SIX-20 MARKS

Matalas 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.

You are an audit manager in the internal audit department of Matalas. 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

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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:

Explain the internal control deficiencies in the petty cash system at Matalas Co.For each deficiency,
recommend a control to overcome that deficiency.

QUESTION SEVEN-20 MARKS

Explain At least 4 Audit substantive procedures for the following classes of transactions:

a) Research and Development costs

b) Depreciation

c) Managers Bonuses

d) Payroll

e) Bad debts

END OF EXAMS

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