(a) Describe the legal liabilities of an auditor with respect to financial statements audited by him and measures that the auditor may institute to mitigate these liabilities. (8marks)
(b) Gikomba Limited is medium –sized manufacturing company domicile in Nairobi. During the year ended 31 March 2009, the turnover of the company was sh. 230 million while its trade receivables amounted to sh. 23 million. The trade receivables comprised 2,000 different companies and individuals with amounts owed ranging from sh. 5,000 to sh. 500,000.
You have been assigned the audit of the trade receivables of Gikomba limited by your audit senior. From initial enquires, you establish that the company had expensed in its income statement bad debts of sh. 1,800,000 and made a general provision of sh. 1,400,000 for doubtful debts. The general provision for doubtful debts of the company is based on a percentage of the trade receivables as at 31 March each year.
(i) Explain the audit approach an auditor should adopt in order to obtain sufficient and appropriate audit evidence regarding accounting estimates (3marks)
(ii) Describe the audit procedure you would undertake in verifying the amount of bad debts included in the financial statements of Gikomba Limited for the year ended 31 March 2009. (9marks)
You are the auditor of Tana Ltd, a Manufacturing concern, which has reported operating profits since inception. However, during the year ended 31 December 2008, Tana Ltd reported an operating loss of sh. 100milion. The authorized ordinary share capital of the company is sh. 200Milion.
Arising from the operating loss, the share price of the company on the stock exchange fell and number of investors took the opportunity to buy shares in Tana ltd, on the stock exchange. One of the investors Tigania Ltd acquired 4% of the ordinary shares of Tana Ltd.
Thereafter , Tigania .entered into an agreement to purchase 20% of the authorized ordinary share
capital of Tana Ltd . allotted to two shareholders of Tana Ltd. Who were also directors of the company.
The two directors were to retain 100 qualifying shares as required by the articles of association of Tana
ltd. On March 2009, a memorandum of understanding (MOU) was signed between Tana ltd. Under the
Terms of the MOU , two of the directors of Tigania Ltd would immediately join the board of directors of
Tana Ltd. The head office of Tana Ltd Would also be relocated to the offices of Tigania Ltd.
Tigania Ltd . Was to pay Sh. 80Million to Tana Ltd by 30 April 2009 as purchase consideration for
Additional 20% shares on 22 May 2009, the directors of Tana made the following pronouncements:
(1) The directors appointed from Tigania ltd to the board of Tana Ltd. had not obtained qualifying shares within the time required by the articles of Association of Tana Ltd.
(2) The two directors representing Tigania Ltd in the board of tana ltd ceased to be directors on 2 may 2009.
(3) The head office of Tana Ltd would move back to its former location.
(4) The bankers of Tigania Ltd had appointed a receiver , on 20 May 2009 in respect of a bank overdraft of Sh. 20 million
(5) Tigania Ltd owed Tana Ltd Sh. 30Million in respect of goods sold to the company
(6) There was an apparent misappropriation of cash belonging to Tana Ltd by Tigania Ltd amounting to sh. 60Million. The misappropriation was by fraudulent transaction involving the two directors of Tigania ltd who were in the board of Tana ltd.
The directors of Tana ltd have asked you to carry out an investigation to determine the following events and their legality:
(i) The acts and activities of the two directors representing Tigania Ltd in the board of Tana Ltd
(ii) The apparent misappropriation of cash belonging to tana ltd by Tigania
(iii) The possibility of use of monies belonging to Tana Ltd by Tigania Ltd to purchase shares in Tana ltd.
For each of the tasks assigned in (i), (ii), (iii) above , describe the work you would carry out and the investigation you would conduct , clearly identify the records you would examine and the personnel you would interview in the course of your investigation. (20marks)
Your firm has been invited to accept appointment as external auditor to AB ltd you have not had any previous dealings with AB Ltd but you act as auditors to CD Ltd , one of its major competitors
In addition to your appointment as an external auditor to AB ltd you have also requested that your firm:
1. Assist with the preparation of both the company’s corporation tax return and the directors’ personal tax returns
2. Provides tax planning services to both the company and its directors
3. Provides the company with general business advice
AB ltd is currently in the process of expanding its manufacturing capacity and has requested additional borrowing from its bank to finance the expansion. In support of this request, AB ltd has provided the bank with business plan including a profit and cash flow forecasts. The bank has in turn requested that the company’s incoming audit firm carry out a review of these e forecasts and produce an accompanying report.
Your firm has a total of 20 Partners and 400 employees
(a) Identify and explain the threats to your firm’s independence which may arise from the provision of the audit and non –audit services requested by AB ltd and describe the safeguards you would put in place to mitigate those threats. (8marks)
(b) Briefly describe the matters that you would consider and the audit procedures you would perform in reviewing the profit and cash flow forecasts prepared by AB Ltd. (8marks)
(c) Explain the difference between the level of assurance provided by an auditor’s report on the profit and cash flow forecasts and level of assurance provided by statutory audit report on financial statement. (4marks)
You have recently been appointed auditor of Leisure Hotels Limited, a company which owns several hotels. the company has an established internal audit department , which operates at the head office and visits the hotels for audit on regular basis .each hotel has computer which records the booking of rooms for overnight accommodation and produces the billings account for each guest.
(a) Describe the work you would expect to be carried out by the internal audit staff of leisure hotels Limited (11marks)
(b) Explain the factors you would consider and the work you would perform to enable you to assess the extent to which you could rely on the work of the internal staff (5Marks)
(c) Assuming that you conclude that the work of the internal audit staff reliable, describe the effect this would have on your audit work. (4marks)
Your audit firm has been appointed the auditors of Beba Yote Holdings Limited, which is the holding company of a group companies. The group has interested in the banking, insurance, transport, manufacturing and agriculture sectors
Some of the companies in the group are audited by other firms of certified accountants. The companies also trade with each other and have minority interest s.
The audit of one the subsidiary companies for the year ended 30 April 2009 has been concluded. The subsidiary company is by GBX Certified Public Accountants, who have issued a qualified audit report.
(a) State and explain five audit problems that you may face in auditing the financial statement of Beba Yote Holdings Limited. (15marks)
(b) Describe the matters you would consider in making an opinion on whether you should qualify your auditor report on the group due to the qualified auditor report of the subsidiary company. (5marks)
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