INSTITUTE OF FINANCE MANAGEMENT ( IFM)

MODULE: AUDITING

CODE: AFU 07305

PROGAMME: BAC2

ACADEMIC YEAR 2021/2022

SEMESTER : ONE

LECTURER: DR MWIGA

REVIEW QUESTIONS (SET 1)

QUESTION ONE

a) Illustrate the fundamental principles of ethics, as stipulated in the NBAA code of

ethics which is based upon the code of ethics published by the Ethics Standard
Board for Accountants (ESBA) of the International Federation of Accountants
(IFAC).

(b) You are an audit senior with the accounting firm of Mambo Associates and you
are busy with the audit of Mbuga Transport Limited and the following matters
have been brought to attention of the firm:

i. The accounts clerk of Mbuga Transport resigned two months ago

and has not been replaced. As a result, Mbuga 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, Mbuga Transport need to prepare interim financial

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statements but cannot do so until the books are brought up to date.
The managing director of Mbuga Transport wants Jacqueline to
help out because she performed the audit last year. The audit
partner of Mambo Associates allows Mbuga Transport to engage
her for one month before the start of the annual audit.

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 ii. During the annual audit of Mbuga Transport, you discovered that
the company had materially understated income on last year’s tax
return. The client is unwilling to take corrective action. You
decided to inform the Tanzania Revenue Authority.

iii. On completion of the fieldwork for the audit of Mbuga Transport,

you are offered a free holiday ticket by the managing director. He
tells you that this gesture is in appreciation of a job well done. You
ultimately accepted the ticket.

iv. The managing partner of Mambo Associates is not very pleased

with the time Mbuga Transport is taking to pay its audit fee for the
year. He decides to take TZS.5,000,000 out of a trust fund that
Mambo Associates holds on their behalf. He intends to refund it as
soon as Mbuga Transport make payments of its audit fee.

REQUIRED:

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 answers by making reference to the relevant
professional standards).

QUESTION TWO

MT is an investment company. It has a small audit department (4 staff), focusing

primarily on financial audits. Your firm provides external audit services and has been
asked to bid to provide internal audit and review services to MT, either on a partnership
basis with the existing team or taking over the function completely.

(a). You have been asked to prepare a report showing the key factors to be
considered in making the decision on outsourced services, in particular:
 High level planning.
 Risk based approach
 Methodology
 Management information and reporting.
 Corporate governance.

(b). Describe the issues that your firm might face in the provision of internal audit
services, in particular ethical concerns and how these could be addressed.

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(c). Explain the advantages and disadvantages of outsourcing of internal audit services

QUESTION THREE

The directors of Melton Manufacturing have asked your firm to act as their auditors for
the year ended 30 September, 2021. They will be asking their existing auditors to resign
as they say they do not provide a cost-effective service.

Required:
(a). Describe the investigations you would carry out and the practical and ethical
matters you would consider before you can:
 Accept the appointment as the company’s auditor; and
 Be appointed the company’s auditor.

(b)
i. Explain why it is important that an auditor should send a letter of engagement to
the client prior to undertaking the audit

ii. Briefly describe the main contents of a letter of engagement which you would
send to the directors of Melton Manufacturing

QUESTION FOUR.

An auditor’s independence may be compromised by the provision of other non-audit

services.
a) Many audit firms provide additional services to their audit clients. These services
include:
i. Calculating the company’s income tax liability and the director’s income tax
liability, and negotiating with the tax authorities
ii. Preparing the company’s financial statements for audit, from the accounting
records
iii. Advising on systems of internal control

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You are required to:
i. Describe the effect on the auditor’s independence of providing these services
ii. Describe the benefits provision of these services may provide to the client; and
iii. Describe the procedures the audit firm should instigate to minimize the risk of
providing them affecting their independence.

QUESTION FIVE

Section 2.1.6.2. of the background to the Tanzania Statements of Auditing Standards

and Guidelines deals with the independence of the auditor.

REQUIRED:
a) Define “independence” as it relates to auditing.
(Note: your definition should refer to both independence in fact and independence in
appearance)
b) Explain briefly why independence is of critical importance for external auditors.
c) Discuss at least six factors that may result in an auditor’s independence being
compromised in fact or in appearance.

QUESTION SIX

Papa Wembe, a partner in Siajabu & Company, is the auditor of a sole trader Hamna
Matata who runs a retail shop. At the local golf club, Hamna introduces Mr. Wembe to
Saidi Jabu, the managing director of Sema Tena Limited. Saidi states that he is very
disappointed with the poor services given by the companys present auditors Messrs
Mwanzo na Mwisho. Mr. Wembe, he says, if you will take on the audit of my companys
accounts, I will sack Messrs Mwanzo na Mwisho immediately. Certainly, said Papa
Wembe, “I shall come round to your office and start auditing the books of your company
on Monday”.

Required:
i. Comment upon Mr. Wembes decision to start auditing the books of Sema Tena
Ltd on next Monday, stating why he should or should not take up the audit on
that day.
ii. Explain how said Jabu can sack his companys auditors Messrs Mwanzo na
Mwisho. What rights does Messrs Mwanzo na Mwisho have in this situation?

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 iii. Explain how the auditor is appointed to audit the accounts of a sole trader and
accounts of a limited company, detailing in each case, what qualifications and
experience the person so appointed must have.
iv. In what ways does the audit of the accounts of a sole trader differ from the audit
of the accounts of a limited liability company? Why do these differences exist?
v. When taking up an appointment, an auditor is advised to send his client a letter
of engagement. Explain what a letter of engagement is, and specify the main
points which should be included in such a letter.

QUESTION SEVEN

(a) The rights, duties and responsibilities of an auditor are sometimes confused
with those of management by stakeholders. Some of them are of the view
that the auditors are the same as the management of the company. This is
based on the fact that the auditors and management of a company are both
concerned with financial reporting. Although there is common ground
regarding the actual work done, the functions of the auditors and
management are essentially different. Consequently, their respective rights,
duties and responsibilities will also differ.

REQUIRED:

Outline and explain any three:

(i) Rights of auditors.

(ii) Duties of the auditor.

(b) Assume that you have been properly appointed as an auditor of MAKARI
Enterprises Ltd. As part of your first interim audit of the company you
attended a wages payout. The exercise brought to light the fact that some of
the wages were drawn for non-existent employees. Further enquiry revealed
more that some of the wages were in fact for the personal domestic staff of
the five directors of the company and that this had been a practice for some
years. The practices were never authorized by any policy documents of
MAKARI Enterprises Ltd.

You indicated that the matters should be reported to the shareholders. It seems
that the directors were unhappy about your reaction of reporting the matter to the

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 shareholders. You have been accordingly informed that your services are no
longer required. You have received a special notice of general meeting of the
company to be held for the purpose of dismissing you as one auditor of MAKARI
Enterprises Ltd in due course.

REQUIRED:

(i) State the procedures applied to protect the removal of an auditor from the
office.

(ii) From the scenario above, State whether the auditor may be removed in
the manner proposed. Give reasons.

QUESTION EIGHT

a) Client confidentiality underpins the relationship between auditors and their

clients.

REQUIRED:

Explain the circumstances in which NBAA’s Code of Ethics permits or requires

external auditors to disclose information relating to their clients to third parties
without the knowledge or consent of the client.

b) You are an auditor of the Matix Auditors who are external auditors of Ilala City
Cleaners Ltd (ICCL), a waste disposal company. ICCL has breached tax
regulations, environmental regulations and health and safety regulations.

You have been approached by the Tanzania Revenue Authority (TRA), Business
Registration and Licensing Authority (BRELA) and a trade union representative
asking you to provide them with information about the ICCL. You have also been
approached by the police who are investigating a suspected fraud perpetrated by
the Managing Director of the ICCL and they wish to ask you certain questions
about him.

REQUIRED:

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 Describe how you would respond to these types of requests.

c) Kagombora Co. is a manufacturer of bottled drinks and has been an audit client
of Ally & Co for six years. Two audit juniors attended the annual inventory count
last Monday. They reported that Brenda, the new production manager of
Kagombora Co. wanted the inventory count and audit procedures performed as
quickly as possible. As an incentive, she offered the two junior auditors, ten free
bottles of SUPER JUICE from the end of the production line. Brenda also invited
them to join the Kagombora Co. office party, which commenced at the end of the
inventory count. The inventory count and audit procedures were completed
within two hours (the previous year’s procedures lasted in a full day) and the
junior auditors then spent four hours at the office party.

REQUIRED:

Identify and explain the ethical and professional matters arise during the
inventory count of Kagombora Co.

d) ISA 200 –deals with the Overall objectives of the independent auditor and the
conduct of an audit in accordance with International Standards on Auditing.

REQUIRED:

Explain the overall objectives of the auditor as provided for in ISA 200.

QUESTION NINE

You are a manager in the audit firm of Ali & Co; and this is your first time you have worked
on one of the firm’s established clients, Stark Co. The main activity of Stark Co is
providing investment advice to individuals regarding saving for retirement, purchase of
shares and securities and investing in tax efficient savings schemes. Stark is
regulated by the relevant financial services authority.

You have been asked to start the audit planning for Stark Co, by Mr Son, a partner in
Ali & Co. Mr Son has been the engagement partner for Stark Co, for the previous nine
years and so has excellent knowledge of the client. Mr Son has informed you that he

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 would like his daughter Zoe to be part of the audit team this year; Zoe is currently
studying for her first set of fundamentals papers for her ACCA qualification. Mr Son
also informs you that Mr Far, the audit senior, received investment advice from Stark
Co during the year and intends to do the same next year.

In an initial meeting with the finance director of Stark Co, you learn that the audit team
will not be entertained on Stark Co’s yacht this year as this could appear to be an
attempt to influence the opinion of the audit. Instead, he has arranged a balloon
flight costing less than one-tenth of the expense of using the yacht and hopes
this will be acceptable. The director also states that the fee for taxation services this
year should be based on a percentage of tax saved and trusts that your firm will
accept a fixed fee for representing Stark Co in a dispute regarding the amount of
sales tax payable to the taxation authorities.

i. Explain the ethical threats which may affect the auditor of Stark Co.
ii. For each ethical threat, discuss how the effect of the threat can be
mitigated.

QUESTION TEN
You are the audit manager of Jones & Co and you are planning the audit of LV Fones Co,
which has been an audit client for four years and specializes in manufacturing luxury mobile
phones. During the planning stage of the audit you have obtained the following information.
The employees of LV Fones Co are entitled to purchase mobile phones at a discount of
10%. The audit team has in previous years been offered the same level of staff discount.
During the year the financial controller of LV Fones was ill and hence unable to work.
The company had no spare staff able to fulfill the role and hence a qualified audit
senior of Jones & Co was seconded to the client for three months. The audit partner has
recommended that the audit senior work on the audit as he has good knowledge of
the client. The fee income derived from LV Fones was boosted by this engagement
and along with the audit and tax fee, now accounts for 16% of the firm’s total
fees.From a review of the correspondence files you note that the partner and the
finance director have known each Other socially for many years and in fact went on
holiday together last summer with their families. As a result of this friendship the partner
has not yet spoken to the client about the fee for last year’s audit, 20% of which is still
outstanding.
Required:
i. Explain the ethical threats which may affect the independence of Jones &
Co’s audit of LV Fones Co;

ii. For each threat explain how it might be avoided.

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iii. Describe the steps an audit firm should perform prior to accepting a new
audit engagement.

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