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AUD821S- ADVANCED AUDIT- 1ST OPP- NOV 2023 |
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nAmlBIA unlVERSITY
OF SCIEnCE Ano TECHnOLOGY
FACULTYOF COMMERCE, HUMAN SCIENCESAND EDUCATION
DEPARTMENT OF ECONOMICS, ACCOUNTING & FINANCE
QUALIFICATION: BACHELOR OF ACCOUNTING (HONOURS)
QUALIFICATION CODE: 08BOAH
COURSE CODE: AUD812S
LEVEL: 8
COURSE NAME: ADVANCED AUDIT
SESSION: NOVEMBER 2023
DURATION: 3 HOURS
PAPER: THEORY AND APPLICATION
MARKS: 100
FIRST OPPORTUNITY EXAMINATION QUESTION PAPER
EXAMINERS:
Kuhepa Tjondu
MODERATOR: Marko Tandota
INSTRUCTIONS
• This question paper is made up of FOUR(4) questions.
• Start each question on a new page.
• Answer All the questions and in blue or black ink.
• You are advised to pay due attention to expression and presentation. Failure to do so will
cost you marks.
• Start each question on a new page in your answer booklet and show all your workings.
• Questions relating to this paper may be raised in the initial 30 minutes after the start of
the paper. Thereafter, candidates must use their initiative to deal with any perceived error
or ambiguities and any assumption made by the candidate should be clearly stated.
PERMISSIBLE MATERIALS
Non-programmable calculator/financial calculator
THIS QUESTION PAPER CONSISTS OF 8 PAGES (Including this front page)
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Question 1
(30 marks)
You are the audit supeNisor of Muundjua & Co and are currently planning the audit of an
existing client, Kemetic Science Co (Kemetic), whose year-end was 30 April 2023. Kemetic is
a pharmaceutical company, which manufactures and supplies a wide range of medical
supplies. The draft financial statements show revenue of N$35.6 million and profit before tax
of N$5.9 million.
Kemetic's previous finance director left the company in December 2022 after it was discovered
that he had been claiming fraudulent expenses from the company for a significant period of
time. A new finance director was appointed in January 2023 who was previously a financial
controller of a bank, and she has expressed surprise that Muundjua & Co had not uncovered
the fraud during last year's audit.
During the year Kemetic has spent N$1.8 million on developing several new products. These
projects are at different stages of development and the draft financial statements show the full
amount of N$1.8 million within intangible assets. In order to fund this development, N$2.0
million was borrowed from the bank and is due for repayment over a ten-year period. The bank
has attached minimum profit targets as part of the loan covenants.
The new finance director has informed the audit partner that since the year-end there has
been an increased number of sales returns and that in the month of May over N$0.5 million of
goods sold in April were returned.
Muundjua & Co attended the year-end inventory count at Kemetic's warehouse. The auditor
present raised concerns that during the count there were movements of goods in and out the
warehouse and this process did not seem well controlled.
During the year, a review of plant and equipment in the factory was undertaken and surplus
plant was sold, resulting in a profit on disposal of N$210,000.
Required:
(a) State Muundjua & Co's responsibilities in relation to the prevention and detection of fraud
and error.
(5 marks)
(b) Describe EIGHT audit risks, and explain the auditor's response to each risk, in planning
the audit of Kemetic Science Co.
(16 marks)
Note: Prepare your answer using two columns headed Audit risk and Auditor's response
respectively.
(c) Explain the quality control procedures that Muundjua & Co should have in place during the
engagement performance.
(5 marks)
(d) Kemetic's new finance director has read about review engagements and is interested in
the possibility of Muundjua & Co undertaking these in the future. However, she is unsure how
these engagements differ from an external audit and how much assurance would be gained
from this type of engagement.
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Required:
(i) Explain the purpose of review engagements and how these differ from external audits;
and
(2 marks)
(ii) Describe the level of assurance provided by external audits and review engagements.
(2 mark)
Question 2
(30 marks)
(a) Auditors are required to document a company's accounting and internal control systems
as part of their audit process. Two methods available for documenting internal control systems
are narrative notes and questionnaires.
Required: For each of the two methods, NARRATIVE NOTES and QUESTIONNAIRES:
(i) Describe the method for documenting internal control systems; and
(ii) Explain an ADVANTAGE of using this method.
Note: The total marks will be split equally between each part.
(4 marks)
(b) Mkondo Co is a company listed on a stock exchange. It manufactures furniture which it
supplies to a wide range of retailers acrossthe region. The company has an internal audit (IA)
department and the company's year end is 30 June 2023. You are an audit supervisor with
Orisha & Co, preparing the draft audit programmes and reviewing extracts from the internal
controls documentation in preparation for the interim audit.
Sales
Mkondo Co generates revenue through visits by its sales staff to customers' premises. Sales
ledger clerks, who work at head office, carry out credit checks on new customers prior to being
accepted and then set their credit limits. Sales staff visit retail customers' sites personally and
orders are completed using a four-part pre-printed order form. One copy is left with the
customer, a second copy is returned to the sales ordering department, the third is sent to the
warehouse and the fourth to the finance department at head office. Each sales order number
is based on the sales person's own identification number in order to facilitate monitoring of
sales staff performance.
Retail customers are given payment terms of 30 days and most customers choose to pay
their invoices by bank transfer. Each day Lily Shah, a finance clerk, posts the bank transfer
receipts from the bank statements to the cash book and updates the sales ledger. On a
monthly basis, she performs the bank reconciliation.
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Purchases and inventory
Receipts of raw materials and goods from suppliers are processed by the warehouse team at
head office, who agree the delivery to the purchase order, check the quantity and quality of
goods and complete a sequentially numbered goods received note (GRN). The GRNs are
sent to the finance department daily. On receipt of the purchase invoice from the supplier,
Camilla Brown, the purchase ledger clerk, matches it to the GRN and order and the three
documents are sent for authorisation by the appropriate individual. Once authorised, the
purchase invoices are logged into the purchase ledger by Camilla, who utilises document
count controls to ensure the correct number of invoices has been input. The company values
its inventory using standard costs, both for internal management reporting and for inclusion in
the year-end financial statements. The basis of the standard costs was reviewed
approximately 18 months ago.
Payroll
Mkondo Co employs a mixture of factory staff, who work a standard shift of eight hours a day,
and administration and sales staff who are salaried. All staff are paid monthly by bank transfer.
Occasionally, overtime is required of factory staff. Where this occurs, details of overtime
worked per employee is collated and submitted to the payroll department by a production
clerk. The payroll department pays this overtime in the month it occurs. At the end of each
quarter, the company's payroll department sends overtime reports which detail the amount of
overtime worked to the production director for their review.
Mkondo Co's payroll package produces a list of payments per employee which links into the
bank system to produce a list of automatic bank transfer payments. The finance director
reviews the total to be paid on the list of automatic payments and compares this to the total
payroll amount to be paid for the month per the payroll records. If any issues arise, then the
automatic bank transfer can be manually changed by the finance director.
Required:
(b) In respect of the internal controls of Mkondo Co:
(i) Identify and explain SIX deficiencies
(ii) Recommend a control to address each of these deficiencies, and
(iii) Describe a TEST OF CONTROL the external auditors should perform to assess if each of
these controls, if implemented, is operating effectively to reduce the identified deficiency.
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Note: Prepare your answer using three columns headed Control deficiency, Control
recommendation and Test of control respectively. The total marks will be split equally between
each part.
(18 marks)
Mkondo Co deducts employment taxes from its employees' wages and salaries on a monthly
basis and pays these to the local taxation authorities in the following month. At the year end,
the financial statements will contain an accrual for employment tax payable.
Required:
(c) Describe the substantive procedures the auditor should perform to obtain sufficient and
appropriate audit evidence in respect of Mkondo Co's year-end accrual for employment tax
payable.
(4 marks)
The listing rules of the stock exchange require compliance with corporate governance
principles and the directors of Mkondo Co are confident that they are following best practice
in relation to this. However, the chair recently received correspondence from a shareholder,
who is concerned that the company is not fully compliant. The company's finance director has
therefore requested a review of the company's compliance with corporate governance
principles.
Mkondo Co has been listed for over eight years and its board comprises four executive and
four independent non-executive directors (NEDs), excluding the chair. An audit committee
comprised of the NEDs and the finance director meets each quarter to review the company's
internal controls.
The directors' remuneration is set by the finance director. NEDs are paid a fixed fee for their
services and executive directors are paid an annualsalary as well as a significant annual bonus
based on Mkondo Co's profits. The company's chair does not have an executive role and so
she has sole responsibility for liaising with the shareholders and answering any of their
questions.
Required:
(d) Describe TWO corporate governance weaknesses faced by Mkondo Co and provide a
recommendation to address each weakness to ensure compliance with corporate governance
principles. Note: Prepare your answer using two columns headed Weakness and
Recommendation respectively.
(4 marks)
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Question 3
(25 marks)
Damaseb Co manufactures chemical compounds using a continuous production process. Its
year-end was 31 July 2022 and the draft profit before tax is N$13.6 million. You are the audit
supervisor and the year-end audit is due to commence shortly. The following matters have
been brought to your attention.
Revaluation of property, plant and equipment (PPE)
At the beginning of the year, management undertook an extensive review of Damaseb Co's
non-current asset valuations and as a result decided to update the carrying value of all PPE.
The finance director, Peter Dullman, contacted his brother, Martin, who is a valuer and
requested that Martin's firm undertake the valuation, which took place in August 2021.
Inventory valuation
Your firm attended the year-end inventory count for Damaseb Co and ascertained that the
process for recording work in progress (WIP) and finished goods was acceptable. Both WIP
and finished goods are material to the financial statements and the quantity and stage of
completion of all ongoing production was recorded accurately during the count. During the
inventory count, the count supervisor noted that a consignment of finished goods, compound
E243, with a value of N$720,000, was defective in that the chemical mix was incorrect. The
finance director believes that compound E243 can still be sold at a discounted sum of
N$400,000.
Bank loan Damaseb Co secured a bank loan of N$2.6 million on 1 October 2021. Repayments
of N$200,000 are due quarterly, with a lump sum of N$800,000 due for repayment in January
2023. The company met all loan payments in 2021 on time, but was late in paying the April
and July 2022 repayments.
Required:
(a) Describe substantive procedures the auditor should perform to obtain sufficient and
appropriate audit evidence in relation to the revaluation of Damaseb Co's property, plant and
equipment.
(5 marks)
(b) Describe substantive procedures the auditor should perform to obtain sufficient and
appropriate audit evidence in relation to the VALUATION of Damaseb Co's inventory.
(6 marks)
(c) Describe substantive procedures the auditor should perform to obtain sufficient and
appropriate audit evidence in relation to Damaseb Co's bank loan.
(4 marks)
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(d) Describe the procedures which the auditor of Damaseb Co should perform in assessing
whether or not the company is a going concern.
(5 marks)
Question 4
(20 marks)
Asake Co manufactures motor vehicle components and its year end was 30 June
2023. You are an audit supervisor of Burna & Co and the final audit is due to
commence shortly. Total assets are N$43.2m and profit before tax is N$7.2m. The
following matters have been brought to your attention:
Trade receivables
Asake Co's trade receivables ledger is comprised of a large number of customers. In
previous years, the audit team has undertaken a positive trade receivables
circularisation to confirm year-end balances. However, the customer response rate
has historically been low and so alternative audit procedures have been undertaken.
A decision has been made that for the current year audit a circularisation will not be
performed. The year-end trade receivables balance is N$3.9m (2022: N$2.8m) and
the allowance for trade receivables is N$410,000 (2022: N$300,000).
Bank balances
The bank and cash figure included in Asake Co's draft financial statements is
comprised of a number of bank account balances: an overdraft of N$5.1m which is the
company's main current account and N$0.2m relating to several savings accounts.
The finance director has informed the audit manager that all accounts have been
reconciled as at the year end. The overdraft of N$5.1m has increased significantly
since the prior year (2022: N$1.2m). The directors have informed you that the overdraft
facility, which the company requires in order to operate on a daily basis, is due for
renewal in October 2023 and that they are confident it will be renewed.
Required:
(a) Describe substantive procedures the auditor should perform to obtain sufficient and
appropriate audit evidence in relation to Asake Co's trade receivables.
(5 marks)
(b) Describe substantive procedures the auditor should perform to obtain sufficient and
appropriate audit evidence in relation to Asake Co's bank balances.
(5 marks)
(c) Describe the audit procedures the auditor should perform in assessing whether or
not Asake Co is a going concern.
(5 marks)
During the final audit, the finance director has informed the audit team that Asake Co's
bankers will not make a decision on the renewal of the overdraft facility until after the
auditor's report is signed. The audit engagement partner is satisfied that the use of the
going concern basis is appropriate. The directors have agreed to include some brief
going concern disclosures in the draft financial statements and the audit team still have
to assess the adequacy of these disclosures.
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Required:
(d) Discuss the issue and describe the impact on the auditor's report of Asake Co of
adequate AND inadequate going concern disclosure.
(5 marks)
THE END
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