The Institute of Certified Public Accountants of Kenya has opted for the adoption of International Accounting Standards for all the companies with financial year beginning on or after 1 January 1999. In 1999, some companies opted for an early adoption of the International Accounting Standards. Some companies whose financial year end was 31 December 1999 have already adopted the standards.
Outline the major changes that have been necessitated by the adoption of International Accounting Standards. (Total: 16 marks)
The opportunity has arisen for your firm to seek appointment as auditors of Supersave Ltd., a supermarket chain of 20 stores which operates a sophisticated computerized stock control and re-ordering system. You learn that Supersave Ltd. has also invited three of your competitors to produce a written presentation, the standard of which is crucial to progressing to the next stage when the company will select two firms to make an oral presentation. Given the complex systems within its business, Supersave Ltd. is particularly anxious to establish the ability of your auditing procedures to deal with the business risks and has asked you to set out as part of your presentation your approach concerning:
audit risk that is, the degree of misstatement through errors or irregularities and how your procedures would seek to address it in the business of Supersave Ltd.
Materiality and how this might be applied
sampling and the extent to which it might be appropriate to use this technique
analytical review and its contribution to the efficiency of your audit process.
You understand the need for Supersave Ltd. to have a high level of confidence in your firm’s approach to highly computerized clients, and you have the task of drafting the sections of your firm’s written presentation to demonstrate how your procedures would be likely to apply to this client.
Draft the section of the written presentation to Supersave Ltd. which deals with these four separate aspects of the audit approach. (Total: 24 marks)
Vintage Villas Ltd. operates five holiday centers on freehold sites in Kenya. The company’s financial statements for the year ended 30 April 2000 disclose total turnover of 456 million and net profit before taxation of Sh.50,400,000. The following matters have arisen for your audit work on these financial statements:
Costs of brochures and advertising of Sh.15,840,000 relating to the year ended 30 April 2000 for the peak season have been carried forward in the balance sheet as a prepayment.
Bar stocks at one of the holiday centers were not physically counted on 30 April 2000 but were estimated by the bar manager at Sh.840,000 based on the previous physical stocktaking at 31 March 2000 which disclosed a value of Sh.768,000. Sales during the month of April amounted to Sh.1,320,000. The subsequent physical stocktaking took place on 31 May 2000. using the estimated value on 30 April 2000, a review of the trading results for the month of April and May disclosed a gross profit percentage of 60% and 39% respectively, compared with an average of 46% for the other eleven months of the year.
The manger of each holiday center is responsible for paying casual labour employed during the six peak holiday weeks and for the shorter periods at other times of the year. These payments are made in cash and amount to approximately Sh.4,800,000 per center for the year, but no receipts or vouchers are available apart from the weekly lists of payments signed by each manager. However all necessary PAYE and NSSF requirements have been complied with in respect of such payments.
Provisions for liabilities and charges include a provision for future maintenance of Sh.24,000,000 representing one third of the estimated cost of totally renovating all building in the holiday centers. During February each year, one third of the properties on each side is fully renovated.
Comment on the further considerations required of each of the above matters in order to conclude the audit and to indicate the possible effects on the audit report.
(Total: 20 marks)
Consumer Supplies Ltd. which has an annual turnover of approximately Sh.1,500 million maintains a computerized sales ledger for approximately 6,000 customers. The existing computer system is prone to input and processing errors due to insufficient controls being incorporated into the programs. Consequently the programs are to be rewritten.
Describe in note form the controls which could be written into the new program in order to minimize the occurrence of input and processing errors. (Total: 20 marks)
Mr. Kimani and Mr. Mathenge are each 50% shareholders and the only directors of K&M Ltd., a company which operates as a building contractor involved in civil engineering contracts which frequently take more than one year to complete. The turnover of the company in the year ended 31 March 2000 was in the region of Sh.1,200 million. The company has been suffering cash flow problems in recent times. Mr. Kimani and Mr. Mathenge have disagreed on the management policies of the company. As a result of this disagreement, Mr. Mathenge has agreed to sell his shares to Mr. Kimani and has resigned as a director with effect from 31 March 2000. The consideration for the shares is to be fixed by a valuation of the shares based on the audited accounts for the year ended 31 March 2000.
You have been appointed the investigating accountant to review the valuation of the shares. Mr. Kimani and the auditors of K&M Ltd. have agreed to cooperate fully.
As the investigating accountant, detail those matters which you would pay particular attention to in carrying out your review. (Total: 20 marks)