AUDITING PRINCIPLES AND PRACTICE II

Assignment II
1. You are auditing the financial statements of the Tana Hotel construction project sub-
contracted by the Tikur Abay Construction Enterprises. The Tana hotel construction
project is run by an independent contractor. You find all employees are paid in cash
because Ato Tola –the contractor –believes this arrangement reduces clerical expenses
and is preferred by the employees. During the audit you find in the petty cash fund an
amount of approximately birr 300 of which birr 265 is stated to be unclaimed wages.
Further investigation reveals that AtoTola has installed the procedures of putting any
unclaimed wages in petty cash fund so that the cash can be used for disbursement. When
the claimant to the wage appears, he is paid from the petty cash fund. Ato Tola contends
that this procedures reduces the number of cheque drawn to replenish the petty cash fund
and centers the responsibility for all cash on hand in one person in as much as the petty
cash custodian distributes the pay envelopes.
Instruction:
I) Explain fully whether the system provides proper internal control over unclaimed
wages and petty cash. Be specific.
II) As Ato Tola insists on paying salaries in cash, suggest specific procedures you
recommend for better internal control over unclaimed wage and petty cash.
2. In the Ethiopian Metal works company all disbursements for amounts over Birr 50 are
made by cheque. Each cheque on general cash requires the signature of Ato Samuel,
Treasurer, plus counter signature of either Ato Fekade, president, or Ato Leikun, vice
president. As latter two cheque signatories do considerable traveling, they frequently sign
blank cheque when they expect to be away for a few days and leave them with Ato
Samuel to be used as needed. Before signing a cheque, each of these three is supposed to
examine carefully the voucher to be paid, which is always accompanied by the voucher’s
invoice approved for price, quantity, and extension, receiving report, and a copy of the
purchase order, all properly approved and initialed. Each of the cheque signers is very
conscious of the importance of internal control and assures you he does examine
vouchers very carefully before signing cheques.
Instruction:
I) Describe briefly the most outstanding weakness you note in the internal control as
described above, and outline the improvements you suggest to strengthen system.
3. In your examination of a medium sized restaurant you observe that all customers pay
their cheque to a single cashier, who also prepares and makes daily banking deposits. she
submits a copy of the deposit slip to the accountant, so that he can record the daily cash
receipts.
Instructions:
I) Describe the weaknesses in internal control.
II) Describe in detail the audit procedure you need to apply in this case, uncover
irregularities that could happen.