Question 1

Your firm of Certified Public Accountants has recently gained a new audit client, Farai Limited (Farai).
The previous external auditors identified some employee fraud which had been perpetrated by a group
of employees over several years. The fraud was only discovered in last year’s audit. As a result of the
extensive fraud, Farai have developed an internal audit function comprising a highly experienced chief
internal auditor and two part-qualified staff. Your audit partner is keen to ensure that this year you will
work closely with the new internal audit function to ensure that any further fraud is identified.

You are aware that ISA 240 The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial
Statements, deals with an external auditor’s responsibilities however, both internal and external
auditors are required to deal with risks to the entity and this includes risks associated with fraud and
error.

REQUIRED:

(a) Explain how this new internal audit function can help Farai deal with the risk of fraud and error.
 Internal audit can help management manage risks in relation to fraud and error by commenting on
management’s own risk management processes and the appropriateness and effectiveness of these
processes. They can also periodically review and audit the systems and/or operations to determine
the risks of fraud and error and make recommendations for improvement in these systems and
operations.
 Internal auditors can also specifically test areas where the management or audit committee
believes there is a serious risk of fraud or error and report back to management or the audit
committee on their findings.
 In practice, the work of internal audit focuses heavily on the systems of control set in place to
ensure adequate procedures are there for preventing, detecting and reporting of fraud and error
and as such they have a responsibility for identifying and reporting on fraud and error.
 However, it should be recognised that many significant frauds by-pass normal internal control
processes e.g. management override of controls or management involvement in fraud. These are
much harder for the internal auditor to identify and report.
(b) Discuss the responsibilities of external auditors in respect of the risk of fraud and error in an audit
of financial statements.
I. External auditors are required by ISA 240 The Auditor’s Responsibilities Relating to Fraud in
an Audit of Financial Statements to consider the risks of material misstatements in the
financial statements due to fraud. Fraud is classified into two categories: Misstatements
arising from fraudulent financial reporting and Misstatements arising from
misappropriation of assets.

II. Their audit procedures will then be based on a risk assessment. Regardless of the risk
assessment, auditors are required to be alert to the possibility of fraud throughout the
audit and maintain an attitude of professional scepticism, notwithstanding the auditors’
past experience of the honesty and integrity of management and those charged with
governance. Members of the engagement team should discuss the susceptibility of the
entity’s financial statements to material misstatements due to fraud.

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 III. The auditor is required to consider, as part of the planning, risk identification and
assessment process, the accounting and internal control systems that management has
put in place in order to address the risk of material misstatements in the financial report
arising from fraud. The auditor needs to be aware of the distinction between
management and employee fraud and where they uncover fraudulent activity they need
to report to the appropriate level of management - normally the Board or Audit
Committee.

IV. Auditors should consider fraud risk factors, unusual or unexpected relationships, and
assess the risk of misstatements due to fraud, identifying any significant risks. Auditors
should evaluate the design of relevant internal controls, and determine whether they
have been implemented.

V. Auditors should determine an overall response to the assessed risk of material

misstatements due to fraud and develop appropriate audit procedures, including testing
certain journal entries, reviewing estimates for bias, and obtaining an understanding of
the business rationale of significant transactions outside the normal course of business.
Appropriate management representations should be obtained.

VI. Auditors are only concerned with risks that might cause material error in the financial
statements. External auditors might therefore pay less attention than internal auditors to
small frauds (and errors), although they must always consider whether evidence of
single instances of fraud (or error) are indicative of more systematic problems

(c) Identify what additional roles the internal auditors may have within Farai.

 Assist with risk management, establishing and maintaining good systems of internal
control.
 Help with implementation of new accounting standards.
 Review all policies and procedures to ensure best practice and better performance for
the organization.
 Audit areas not audited by external auditors specifically operational areas.
 Liaise with external auditors to improve audit quality and audit economy.
 Identify efficiencies in systems and processes through e.g. VFM or Best value audits.

Question 2

Explain the following letters of communication, clearly explaining their purposes

a. Engagement Letter
b. Management Letter
c. Letter of Representation
d. Letter of weakness
e. Discuss the importance of the Internal Audit Department.
f. How can the effectiveness of the Internal Auditing Department be enhanced?
g. Identify and explain the elements of an auditor’s report
h. Why do auditors give an opinion and not an outright assurance? Explain your answer giving examples.

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Purpose and content of the engagement letter
Purpose
The engagement letter should define clearly the extent of the auditors’ responsibilities and so
minimize the possibility of any misunderstanding between the client and the auditors. In this
way it helps to reduce the expectation gap. It acts as a contract between the two parties and
provides written confirmation of the auditors’ acceptance of the appointment, the scope of the
audit, the form of their report and the scope of any non-audit services.
Content
The form and content of the letter of engagement may vary for each client, but they would
generally include reference to the following:

 The objective of the audit

 Management’s responsibilities
 The applicable financial reporting framework
 The scope of the audit (including reference to applicable legislation, regulations or
pronouncements of professional bodies to which the auditor adheres)
 The form of any reports or other communication of results of the engagement
 The fact that because of the test nature and inherent limitations of an audit, together with
the inherent limitations of any accounting and internal control system, there is an
unavoidable risk that some material misstatement may remain undiscovered
 Unrestricted access to records, documentation and other information requested in
connection with the audit
 Basis on which fees are computed and billing arrangements

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Question 3
The CPA firm Ladstock & Co. (Ladstock), has been asked to tender for the annual audit of the financial
statements of Authentic Goods Plc, a retailer of specialist goods including Persian rugs and antique
tapestries. Ladstock has been performing other services for Authentic Goods Plc over the past three
years, namely management consulting and tax advice. In addition, there have been disputes in the past
between the management consulting and taxation departments of Ladstock and the management of
Authentic Goods Plc. Most of these disputes revolved around the level of services provided and the fees
charged. One of the audit managers in Ladstock was previously employed by Authentic Goods Plc in the
finance department. Apart from the audit manager previously employed by Authentic Goods Plc, no-
one in the assurance department has experience in the antique and specialist goods industry. Some
members of Ladstock have shares in Authentic Goods Plc.

REQUIRED:

(a) Assess the potential threats to the independence of Ladstock if the company were to undertake the
audit of Authentic Goods Plc.

(b) Explain the procedures which Ladstock should conduct to determine if the company is sufficiently
independent to audit Authentic Goods Plc.

(c) Identify the safeguards Ladstock could implement in order to reduce the threats to the company’s
independence outlined in (a) above.

Question 4

a. Explain the term Environmental Audit clearly distinguishing it from Financial Audit.

b. Giving examples, discuss the –micro and macro- importance of Environmental Audits to a
business organisation of your choice.

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Question 5
You are a junior auditor and you have been asked to take responsibility for the audit
of non-current assets of Wafawarowa Ltd (Wafawarowa). Wafawarowa has prepared
its financial statements for the year ended 31 March 2018. Your audit manager has
presented you with the Lead Schedule, as prepared by Wafawarowa’s accountant (see
below), as well as a copy of the non-current asset register. It is Wafawarowa’s
company policy to charge a full year’s depreciation in the year of acquisition and
none in the year of disposal.

Land and Buildings are depreciated at 2% straight line, Motor Vehicles at 20% reducing
balance, and Plant and Machinery at 10% reducing balance.

Lead Schedule for Wafawarowa Ltd as at 31 March 2018

Land and Motor Plant and Total

Buildings Vehicles Machinery

$ $ $ $

Opening balance 980,000 150,000 620,000 1,750,000

@NBV

Additions 346,000 204,000 426,000 976,000

Disposals 0 0 -50,000 -50,000

Depreciation -26,520 -72,000 -102,000 -200,520

Charge

Closing Balance @ 1,299,480 282,000 894,000 2,475,480

NBV

REQUIRED

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(a) Discuss what is meant by a Non-Current Asset Register and outline the steps that
you as an auditor should take to confirm the accuracy of the register.
(b) Identify the audit procedures you should take to confirm the appropriateness of
additions to non-current assets during the accounting period.
(c) Using Wafawarowa’s Lead Schedule provided above, describe the audit work you
should conduct on non-current assets, and select items which require follow up or
further information from the client.
(You do not need to address work on additions in your answer to part ‘c’.)
(d) Describe how you would assess the depreciation policy of Wafawarowa Ltd.

Question 6 CPAApril 2017 q6

A and C, Chartered Certified Accountants, recently held a staff training session on quality control. The
session concluded with staff being invited to raise matters from their experience relating to the ethical rules
on independence.

Some of these matters are given be low.

(i) Shortly before commencing the final audit of a large listed company, a junior staff member on the audit
team inherited a substantial number of shares in that company. No action was taken because, although
representing a large investment for the staff member concerned, the number of shares was totally immaterial
with respect to the company. Moreover; the partner knew that when the company's results were announced
the share price would rise and he did not think it was fair to require the staff member to sell them now.

(ii) The management accountant of another listed company client had an accident and was away from work
for three months. At the time of the accident the audit senior was winding up the prior year's audit and,
because of his familiarity with the company's management accounting system, it was agreed that he would
take over as management accountant for the three months.

(iii) In its management letter to another audit client, A and C warned the company that their computer
system lacked essential controls. The company decided to install a totally new computer system and A and C's
management consultancy department was appointed to design the new system.

(iv) A and C was recently approached by a large company that was not then an audit client, for a second
opinion. The company was in dispute with its existing auditors who were proposing to issue a modified
auditor's report because of disagreement over inventory valuation. A and C's technical partner reviewed the
evidence provided by the company and advised the company that its accounting treatment was in order.
Shortly afterwards A and C were invited to accept nomination as auditors. The reply to the letter of enquiry
to the existing auditors made it clear that the inventory valuation dispute was not as straightforward as the
company had made it out to be.

Required:

(a) Discuss whether A and C may have impaired their independence or otherwise acted unprofessionally in
each of the situations described

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Shareholding by staff member
While partners are not allowed to hold shares in client companies there is no specific prohibition
in the Code of Ethics on the holding of shares in audit clients by audit staff providing the staff
members concerned are not personally involved in the audit of such clients. However, some audit
firms have adopted a prohibition on the holding of shares in audit clients by audit staff as an in-
house rule.

The argument that independence is not impaired because the holding is insignificant is incorrect.
If the holding is of such a size as is likely to influence the behaviour of the audit staff member,
then it is material. If the staff member was allowed to retain the shares then he or she should not
have been included in the audit team.

If the partner advised the staff member not to sell the shares until after the audit was completed,
then this would have been unethical and possibly illegal in that it constitutes insider dealing – the
use of privileged information to secure a personal advantage in the trading of shares.

Management accounting services

Preparation of accounting records on behalf of a listed or public interest company is normally
prohibited. An exception to this Rule allows such work to be performed in an emergency
situation which does not extend beyond the minimum period necessary and where every care was
taken that management accepted full responsibility for the work of the audit firm’s staff member.

It is more reasonable, however, to argue that the assignment of a staff member to the position of
management accountant is likely to breach the rules on independence. It amounts to a staff
member of the firm being engaged in making management decisions on behalf of the client. The
firm will thus be reporting on a statement of financial performance in which one of its own
employees had played an active part. A user of the financial statements might conclude that the
audit firm might have an incentive to conspire with management in concealing poor performance
attributable, in part, to the actions of its own staff member.

(Advice on controls)
This raises a controversial area in auditor independence. While the reporting of control
weaknesses discovered during the audit is a required procedure, advising on the development of
new systems to overcome those weaknesses is seen by some critics as a possible threat to
independence. There is both a general and a specific issue. The general issue is that audit firms
generate revenues from clients for both audit and non-audit work. However, contracts for non-
audit work are given by management. In performing the audit, the auditors may be reluctant to
disagree with management for fear of losing non-audit contracts. The specific issue is that known
as selfreview.

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Since the firm designed the new internal control system, there is a presumption, when evaluating
control effectiveness at the next audit, that there will be no weaknesses in the system.

While providing non-audit services by auditors is not prohibited, the firm should ensure that they
should not exceed the overall fee limit of 15% from any one client. However, they do stress that,
in advising the client, the audit firm must not make executive decisions. The implementation of
advice is the responsibility of management over which the auditor has no control. At the next
audit the auditor must check that the system has been properly put into operation and that it is
being operated effectively.

Advice to non-audit clients

Although A and B are not threatening their own independence their action is in breach of
professional rules. By offering advice they are prejudicing the independence of the auditors of
the company they are advising. This practice is sometimes referred to as ‘opinion shopping’ and
is carried out by companies in order to exert pressure on their existing auditors. When invited to
provide such advice, professional rules require A and B to communicate directly with the
company’s auditors to ensure that their advice is based on all available facts relevant to the
judgement. A and B are under an ethical responsibility to decline to be nominated as auditors and
to write to the company retracting the advice previously given in the light of further information.

(b) Briefly explain the term ‘confidentiality’ and explain the situations where an auditor may disclose
confidential information about a client.

Confidentiality is an implied term on auditors’ contracts with their clients. For this reason
auditors should not disclose confidential information to others persons, against their client’s
wishes. The obligation of the confidentiality continues even though a professional relationship
ended.

However, there are circumstances where auditor may disclose information to third parties
without obtaining permission. These are categorized as obligatory and voluntary disclosures.

Obligatory

Auditors are obliged to make disclosure where, for example, where there is a statutory right or
duty to disclose, such as if the auditor suspects the client is involved in money laundering,
terrorism or drug trafficking in which case they must notify the relevant authorities.

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Auditors must make disclosure if compelled by the process law, for example under the court
order or summons, under which they are obliged to disclose information.

Voluntary

In certain circumstances auditors are free, as opposed to obliged, to disclose information without
obtaining the client’s permission first. These circumstances can be categorized into the four areas
below.
Public interest – An auditor may disclose information which would otherwise be confidential if
disclosure can be justified in the ‘public interest’. This would be perhaps if those charged with
governance are involved in fraudulent activities.
Protect a member’s interest – Members/auditors may disclose information to defend themselves
against a negligence action, disciplinary proceedings or if suing for unpaid fees.
Authorized by statute/laws – There are cases of express statutory provision where disclosure of
information to a proper authority overrides the duty of confidentiality.
Non-governmental bodies – Auditors may be approached by non-governmental bodies seeking
information concerning suspected acts of misconduct not amounting to a crime or civil wrong.
Disclosure should only be made to those bodies with statutory powers to compel disclosure

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Question 7 coursehero

Your manager informs you that following his preliminary review of the figures it would
appear that revenue and profits have declined over the past year and this is likely due
to toughening economic conditions. Body First’s strategy in the current year and in
the immediate future is to focus on controlling costs and maintaining revenue through
the promotion of fitness classes and reduced rates for use of the pool and gym.
Although

Body First has experienced reductions in revenues, this has been less significant than
the reductions experienced by other sporting centres as the equipment and facilities
are second to none. Your manager has informed you that the audit areas of emphasis
for Body First in the current year must be responsive to the specific audit risks that
may arise as a result of the current downturn in the economic environment. She has
also asked you to consider how materiality should be addressed for Body First.

REQUIRED:

(a) In response to the information provided above, draft a memo to the audit partner
identifying three pertinent audit risks that may arise for a company such as Body
First, together with the reasons for each risk.

(b) Outline an appropriate testing approach for each of the three risks which you
identified in Part (a) above.

(c) Discuss materiality and how it should be addressed during the course of the audit.

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Question 8 solution below

Matambo & 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.

Matambo & Co has an internal audit department of six staff, all of whom have been employed at Matambo & Co
for a minimum of five years and some for as long as 15 years. In the past, the chief internal auditor appoints
staff within the internal audit department, although the chief executive officer (CEO) is responsible for
appointing the chief internal auditor. The chief internal auditor reports directly to the finance director. The
finance director also assists the chief internal auditor in deciding on the scope of work of the internal audit
department.

Required:

(a) Explain the issues which limit the independence of the internal audit department in Matambo &
Co. Recommend a way of overcoming each issue.

Reporting system
The chief internal auditor reports to the finance director. This limits the effectiveness of the
internal audit reports as the finance director will also be responsible for some of the
financial systems that the internal auditor is reporting on. Similarly, the chief internal auditor
may soften or limit criticism in reports to avoid confrontation with the finance director.

To ensure independence, the internal auditor should report to an audit committee. (2 marks)
Scope of work
The scope of work of internal audit is decided by the finance director in discussion with the chief
internal auditor. This means that the finance director may try and influence the chief internal
auditor regarding the areas that the internal audit department is auditing, possibly directing
attention away from any contentious areas that the director does not want auditing.

To ensure independence, the scope of work of the internal audit department should be decided by
the chief internal auditor, perhaps with the assistance of an audit committee. (2 marks)

Audit work
The chief internal auditor appears to be auditing the controls which were proposed by that

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department. This limits independence as the auditor is effectively auditing his own work, and
may not therefore identify any mistakes.

To ensure independence, the chief internal auditor should not establish control systems in
Matambo. However, where controls have already been established, another member of the
internal audit should carry out the audit of petty cash to provide some limited independence. (2
marks)

Length of service of internal audit staff

All internal audit staff at Matambo have been employed for at least five years. This may limit
their effectiveness as they will be very familiar with the systems being reviewed and therefore
may not be sufficiently objective to identify errors in those systems.

To ensure independence, the existing staff should be rotated into different areas of internal audit
work and the chief internal auditor independently review the work carried out. (2 marks)

Appointment of chief internal auditor

The chief internal auditor is appointed by the chief executive officer (CEO) of Matambo. Given
that the CEO is responsible for the running of the company, it is possible that there will be bias
in the appointment of the chief internal auditor; the CEO may appoint someone who he knows
will not criticize his work or the company.

To ensure independence, the chief internal auditor should be appointed by an audit committee or
at least the appointment agreed by the whole board. (2 marks)

Part b)

You are an audit manager in the internal audit department of Matambo & Co. 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.

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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 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.

(b) Explain the internal control weaknesses in the petty cash system at Matambo & Co. For each
weakness, recommend a control to overcome that weakness.

Deficiency Control
The amount of cash held in the petty cash box is
The amount of the petty cash balance at each
high ($5,000) in comparison to the average
branch should be reviewed. Based on an average
monthly expenditure of ($1,538). This increases
monthly expense of $1,538, a balance of $2,000
the risk that the cash will be stolen or that errors
would seem reasonable.
will be made in counting.
The petty cash box is not physically secure as it is The petty cash box should be kept in the branch
kept on a bookcase in the accounts office. This safe or in a locked drawer in the accountant's
increases the risk of theft. desk.
Reimbursement for petty cash expenditure takes
place without evidence of the expenditure being All petty cash claims should be supported by a
incurred eg receipt. This may result in false receipt.
claims being made.
The petty cash vouchers are not authorised – they
All petty cash vouchers should be authorised by
are only signed by the individual claiming
the accounts clerk.
reimbursement.
In some instances significant items are purchased
through petty cash (up to $500). These are not
Expenditure over a certain limit (eg $50) should
authorised prior to the purchase being made. This
be authorised in advance.
could result in unnecessary expense being
incurred by the business.
There is no indication that the vouchers are pre
Petty cash vouchers should be pre-numbered. On
numbered, meaning that the branch cannot
entry into the petty cash book the sequential
confirm completeness of the vouchers.
numbering should be checked to ensure that all
Unauthorised claims could be made and then
expenditure has been completely recorded.
blamed on missing vouchers.
There is a lack of segregation of duties. The petty
cash is counted by the accounts clerk who is also The accountant should check the petty cash count
responsible for the cash balance. There is no to confirm the accuracy of the balance and ensure
additional independent check on the petty cash that the asset is safeguarded.
balance.
Whilst the accountant confirms that the cheque to The petty cash vouchers should be reviewed by

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reimburse petty cash agrees to the journal entry to the accountant to confirm that the monthly petty
the general ledger, the petty cash vouchers are not cash expenditure agrees to the reimbursement
reviewed to support the amounts involved. cheque and journal entries.

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Question 9 my notes

The following situations involve Joey Jingles, an audit senior with the accounting firm
of Barnacles and Boots. He is involved with the client of Fast Transport plc (Fast
Transport) and the following matters have been brought to the attention of the firm.

(i) The accounts clerk of Fast Transport resigned two months ago and has not been
replaced. As a result, Fast Transport’s transactions during this period have not been
recorded and the books are not up to date. To comply with the terms of a loan
agreement, Fast Transport needs to prepare interim financial statements but cannot
do so until the books are brought up to date. The managing director of Fast Transport
wants Joey to help out because he performed the audit last year. The audit partner of

Barnacles and Boots allows Fast Transport to engage him for one month before the
start of the annual audit.

(ii) During the annual audit of Fast Transport, Joey discovered that the company had
materially understated income on last year’s tax return. The client is unwilling to
take corrective action. Joey decides to inform the Taxation Office.

(iii) On completion of the fieldwork for the audit of Fast Transport, Joey is offered six
free cinema tickets by the managing director. He tells him this gesture is in
appreciation of a job well done. Joey accepts the tickets.

(iv) The managing partner of Barnacles and Boots is not very pleased with the time
Fast Transport is taking to pay its audit fee for the year. He decides to take €5,000
out of a trust fund that Barnacles and Boots holds on their behalf. He intends to
replace it as soon as Fast Transport sends payment of its audit fee.

REQUIRED:

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(b) In respect of each of the four situations, (i) to (iv) outlined above, identify any
ethical issues involved and assess whether or not there has been a violation of ethical
conduct. Support your answer by reference to relevant professional standards.

(a) Illustrate the fundamental principles of ethics based upon the code of ethics
published by the International Federation of Accountants (IFAC). Give examples.

Integrity Members shall be straightforward and honest in all professional and

business relationships.

Objectivity Members shall not allow bias, conflicts of interest or undue influence
of others to override professional or business judgments.

Professional Members have a continuing duty to maintain professional knowledge

competence and due and skill at the level required to ensure that a client or employer
care receives competent professional services based on current
developments in practice, legislation and techniques. Members shall
act diligently and in accordance with applicable technical and
professional standards

Confidentiality Members shall respect the confidentiality of information acquired as

a result of professional and business relationships and, therefore,
not disclose any such information to third parties without proper and
specific authority, or unless there is a legal or professional right or
duty to disclose. Confidential information acquired as a result of
professional and business relationships must not be used for the
personal advantage of members or third parties.
Professional Members shall comply with relevant laws and regulations and avoid
behaviour any action that discredits the profession

Question 10

Trombone Co (Trombone) operates a chain of hotels across the country. Trombone employs in excess
of 250 permanent employees and its year end is 31 August 2018. You are the audit supervisor of Viola
& Co and are currently reviewing the documentation of Trombone’s payroll system, detailed below, in
preparation for the interim audit.

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Trombone’s payroll system
Permanent employees work a standard number of hours per week as specified in their employment
contract. However, when the hotels are busy, staff can be requested by management to work additional
shifts as overtime. This can either be paid on a monthly basis or taken as days off.
Employees record any overtime worked and days taken off on weekly overtime sheets which are sent to
the payroll department. The standard hours per employee are automatically set up in the system and the
overtime sheets are entered by clerks into the payroll package, which automatically calculates the gross
and net pay along with relevant deductions. These calculations are not checked at all. Wages are increased
by the rate of inflation each year and the clerks are responsible for updating the standing data in the
payroll system.
Employees are paid on a monthly basis by bank transfer for their contracted weekly hours and for any
overtime worked in the previous month. If employees choose to be paid for overtime, authorisation is
required by department heads of any overtime in excess of 30% of standard hours. If employees choose
instead to take days off, the payroll clerks should check back to the ‘overtime worked’ report;
however, this report is not always checked.
The ‘overtime worked’ report, which details any overtime recorded by employees, is run by the payroll
department weekly and emailed to department heads for authorisation. The payroll department asks
department heads to only report if there are any errors recorded. Department heads are required to
arrange for overtime sheets to be authorised by analternative responsible official iftheyare awayon
annual leave; however,there are instances where this arrangement has not occurred.
The payroll package produces a list of payments per employee; this links into the bank system to
produce a list of automatic payments. The finance director reviews the total list ofbank transfers and
compares this to the total amount to be paid per the payroll records; if any issues arise then the
automatic bank transfer can be manually changed by the finance director.
Required:
a. In respect of the payroll system of Trombone Co:
(i) Identify and explain FIVE deficiencies.
(ii) In tabular form, recommend a control to address each of these deficiencies.
(iii) In tabular form, describe a test of control Viola & Co should perform to assess if each of
these controls is operating effectively.
b. Tabulate the difference between an interim and a final audit.

Question 11 courcehero

The CPA firm Latis & Co. (Latis), has been asked to tender for the annual audit of the financial
statements of A.G Plc, a retailer of specialist goods including Italian rugs and antique tapestries. Latis
has been performing other services for A.G Plc over the past three years, namely management

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consulting and tax advice. In addition, there have been disputes in the past between the management
consulting and taxation departments of Latis and the management of A.G Plc. Most of these disputes
revolved around the level of services provided and the fees charged. One of the audit managers in
Latis was previously employed by A.G Plc in the finance department. Apart from the audit manager
previously employed by A.G Plc, no-one in the assurance department has experience in the antique
and specialist goods industry. Some members of Latis have shares in A.G Plc.

REQUIREMENT:

(a) Assess the potential threats to the independence of Latis if the company were to undertake the
audit of A.G Plc.

(b) Explain the procedures which Latis should conduct to determine if the company is sufficiently
independent to audit A.G Plc.

(c) Identify the safeguards Latis could implement in order to reduce the threats to the
company’s independence outlined in (a) above.

King Danny 18 | P a g e
Question 12
You are a recently appointed audit senior in A&C Accountants and are eager to demonstrate your
skills in your new role within the firm. On your first morning in this new position you receive an email
from your manager indicating that you will be involved in the audit of Body First Ltd (Body First) a
state-of-the-art sporting facility, for the year ended 31 December 2016. You know from talking to your
colleagues in the past that one of the added perks of this particular assignment is free use of the
facilities during the course of the audit, and then the opportunity to take up membership at a
significantly discounted rate.

Your manager informs you that following his preliminary review of the figures it would appear that
revenue and profits have declined over the past year and this is likely due to toughening economic
conditions. Body First’s strategy in the current year and in the immediate future is to focus on
controlling costs and maintaining revenue through the promotion of fitness classes and reduced rates
for use of the pool and gym. Although

Body First has experienced reductions in revenues, this has been less significant than the reductions
experienced by other sporting centres as the equipment and facilities are second to none. Your
manager has informed you that the audit areas of emphasis for Body First in the current year must be
responsive to the specific audit risks that may arise as a result of the current downturn in the
economic environment. She has also asked you to consider how materiality should be addressed for
Body First.

REQUIREMENT:

(a) In response to the information provided above, draft a memo to the audit partner identifying
three pertinent audit risks that may arise for a company such as Body First, together with the reasons
for each risk.

(b) Outline an appropriate testing approach for each of the three risks which you identified in Part (a)
above.

(c) Discuss materiality and how it should be addressed during the course of the audit.

King Danny 19 | P a g e
Question 13

a. Explain the following terms:

1. Expert
2. Other Auditor
3. Principal Auditor

b. Describe considerations an auditor should make before deciding to make use

of the work of an expert?
c. Describe the steps an auditor would take when an expert presents
information contrary to the auditor’s expectations if:
1. The audit report has to be modified, and

2. There is no need to qualify the audit report.

Question 14 cut hero

A. Why should the company waste resources to have Management

Auditors when it is already paying for external auditing services.

B. One of your responsibilities with your audit firm, Dan and Partners,
CPAs, is developing new clients. Dan and Partner is a small audit
firm. AMC motors is based in Mvuma where they sell new and used
cars. AMC also service cars. You are currently in discussions with
AMC in relation to the possibility of Dan and Partners becoming
AMC’s new auditors. If your firm consents to be their Auditor, AMC
has offered to service your car free of charge and the cars of the
three audit partners of the audit firm. Normal charge for a service of
one of these cars is $600. You plan to communicate with the previous
auditor before making your recommendation.
Required:

a) State with reasons whether you and the audit partner should accept the offer of free car
services from AMC in the event they are accepted as an audit client.

b) In addition to communicating with the previous auditor, explain FOUR factors that you should
consider in determining whether it is feasible for Dan and Partner to accept this engagement.

c) Identify the information you should obtain from AMC’s previous auditor.

King Danny 20 | P a g e