Describe the audit procedures that you would perform in order to be satisfied as to the validity of the amount attributed to stock in the balance sheet of XYZ Supermarket Ltd above…

a) Explain the purpose of an internal control questionnaire to an auditor. (4 marks)

b) Explain the factors an auditor should consider when determining the adequacy of a client’s internal control system. (6 marks)

c) Kenya Cans Ltd. manufactures cans which are stamped from sheets of metal molded and supplied to Selmont Ltd for packing fruits. After stamping the sheets of metal, scrap metal is produced as residue. During the year 2004, revenue from scrap metal amounted to Sh.500,000.

The company has established the following system to monitor the sale of scrap metal;

i) Scrap metal is placed by employees in a large bin outside the workshop.
ii) At the of the week a local scrap dealer collects the scrap metal leaving the bin empty.
iii) The scrap dealer takes the scrap metal to the gatekeeper who measures and records the weight in a register before it exits the factory.
iv) The scrap dealer sends cheques the following week with a statement showing the weight collected, price and cheques amount. The company’s cashier on receiving the cheques, compares it with the statement to ensure that they both agree with the gatekeeper’s registers.

Required;
i) Explain the weaknesses of the above system. (4 marks)
ii) Suggest recommendations to improve on the above system. (6 marks)
(Total: 20 marks)

QUESTION FIVE
Your audit senior has assigned you the responsibility of auditing the stock of your client, XYZ Supermarket Ltd. for the year ending 31 December 2005.

The company’s stock take is carried out once a year in the month of November simultaneously for all the retail outlets.

Required:
a) State the audit assurances you would seek to obtain in the audit of stock. (4 marks)

b) Describe the audit procedures that you would perform in order to be satisfied as to the validity of the amount attributed to stock in the balance sheet of XYZ Supermarket Ltd.
(12 marks)
c) Define the word “bar coding” and explain its importance to XYZ Supermarket Ltd.
(4 marks)
(Total: 20 marks)

QUESTION SIX
a) Your audit firm, Kimani and Associates has been contracted by the government to audit the procurement system followed by the government.

Required:
i) Identify the likely risk areas that your firm may encounter in the audit.(5 marks)

ii) Suggest possible measures the government can implement to strengthen the internal control system on procurements. (5 marks)

b) Outline the audit procedures an audit firm should follow in the verification of a manufacturing company’s liabilities. (10 marks)
(Total: 20 marks)

QUESTION SEVEN
a) An auditor should form an opinion on the adequacy of the accounting treatment of an inherent uncertainty disclosed in the financial statements of a company.

i) What is meant by the term “inherent uncertainty”? (2 marks)
ii) Explain the treatment of inherent uncertainties in the auditor’s report. (6 marks)

b) Summarise the principal contents of a statement of directors’ responsibilities to be included in financial statements. (8 marks)

c) Explain the steps an auditor should take if he concludes that the client has made a departure from an accounting standard in the preparation of the financial statements.
(4 marks)
(Total: 20 marks)

QUESTION EIGHT
a) The computerization of business operations has posed many challenges to the auditor.

Explain the difficulties experienced by an auditor in each of the following situations:

i) In the use of test packs. (4 marks)
ii) In on-line systems. (4 marks)
iii) When auditing the output of a complex computerized system. (6 marks)

b) Briefly explain how an auditor verifies the following items in a computerized system.

i) Standing data in a master file (3 marks)
ii) Alterations made in the computer programs. (3 marks)
(Total: 20 marks)

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