PWF! I'IFIITIIBIFI UNIVERSITY EXAMINER(S) perceived error or ambiguities & any assumption made by the candidate should be clearly stated.

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1 I I'IFIITIIBIFI UNIVERSITY OF SCIETICE FIFID TECHNOLOGY FACULTY OF MANAGEMENT SCIENCES DEPARTMENT OF ACCOUNTING, ECONOMICS AND FINANCE QUALIFICATION: BACHELOR OF ACCOUNTING QUALIFICATION CODE: 07BACC LEVEL: 7 COURSE CODE: GAU7115 COURSE NAME: AUDITING 310 SESSION: JUNE 2017 PAPER: THEORY DURATION: 3 HOURS MARKS: 100 FIRST OPPORTUNITY EXAMINATION QUESTION PAPER EXAMINER(S) Mr Kofi Boamah, Mrs M Dikuua and Mr A Simasiku MODERATOR: Mr. E Beukes INSTRUCTIONS This question paper is made up of four (4) questions. PWF! Answer ALL the questions and in blue or black ink. Start each question on a new page in your answer booklet. Questions relating to this examination 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 & any assumption made by the candidate should be clearly stated. THIS QUESTION PAPER CONSISTS OF 7 PAGES (Including this front page)

2 QUESTION 1 (20 MARKS) 1. What is the difference between audit strategy and audit plan? (4 marks) 2. You have been appointed as the auditor of a company which was previously audited by another auditor. Being a new client, what additional considerations would you take into account while performing the preliminary engagement activities before commencement of the audit? (12 marks) 3. Identify four ways in which proper planning benefits the audit. (4 marks) QUESTION 2 (20 MARKS) You are a member of the newly established internal audit section of Cold Front (Pty) Ltd, a company which supplies parts and accessories to refrigeration and air conditioning maintenance businesses in the Khomas region. Cold Front (Pty) Ltd was started by Frans Frost an engineer, some years ago and has never had particularly sound internal controls. The company has grown steadily over the years and the weaknesses in the internal controls has started to have an adverse effect on the business, eg. lost sales, theft of inventory, etc. Hence the establishment ofthe internal audit section. You have been assigned to evaluate controls in the revenue and receipts cycle, and as your first step, you have compiled the following narrative description of the cycle: 1. The daily incoming mail is opened by the company receptionist and all orders received from customers are placed in a box marked Incoming Orders. The box is then sent to the senior warehouse clerk who initiates the picking of the items ordered. 2. Some customers fax their orders directly to the senior warehouse clerk prior to sending their orders through the post. The company does not accept telephonic orders; if customers phone to place an order they are requested to submit or fax a hardcopy order. 3. Sales are only made on credit (no cash sales). There is no demand for over the counter sales. 4. On receipt of the customer orders/faxes the senior warehouse clerk makes a photocopy of each one. He files the originals alphabetically (by customer name) in a lever arch file. He splits the photocopy orders roughly into 2 piles and hands a pile to each of the 2 junior warehouse clerks who, amongst other duties, are responsible for picking the items ordered from the shelves. 5. As the junior warehouse clerks pick the goods from the shelves, they tick off each item picked on the photocopy order. If an item ordered is out of stock, the warehouse clerk puts a cross against the item on the photocopy order. lfthe order for a particular item can only be partially filled (say 3 out of5), the clerk crosses out the 5 on the photocopy 2

3 order and enters a 3. He then ticks the item off. The clerks place the items picked for each order in a plastic basket (called a picking basket) which, once the order has been picked is placed by the junior warehouse clerk on a rack in the dispatch section. The relevant photocopy order is placed in the picking basket with the items picked. In the dispatch section, the senior dispatch clerk makes out a three part, pre-printed, numerically sequenced delivery note, taking the details required to complete the delivery note from the photocopy order. Where an item has a cross against it (out of stock) on the photocopy order, it is not included in the delivery note. Once the delivery note has been made out, the items are taken from the picking basket and packed in a box for delivery. The box is labelled by a junior dispatch delivery note number written on the side of the box. clerk and the The company delivers all orders to its customers using a fleet ofsmall delivery vehicles. Boxes to be delivered are loaded onto the vehicles under the supervision ofthe driver. The driver is given the list of deliveries to make as well as 2 copies ofthe delivery note for each delivery. As the goods are loaded, the driver checks the delivery number written on each box against his list and copies of the delivery correct boxes have been loaded. notes to ensure that all When a delivery vehicle leaves (or arrives at) the company's premises, a guard security gate records the time of departure (or arrival). at the 10. On receipt of the goods, the customer is required to sign and date both copies of the Cold Front (Pty) Ltd delivery note. The customer retains 1 copy and the driver keeps the other. On returning to Cold Front (Pty) Ltd, he driver gives the signed delivery notes to Carmen Chetty, the company bookkeeper, who is responsible for writing up invoices, receipting payments from customers, passing credit notes etc. Carmen Chetty and the driver reconcile the signed delivery notes to the driver s list of deliveries and both sign the list. 11. On Friday mornings, Carmen Chetty makes out an invoice for each delivery note received during the week. She obtains the customer details as well as the description and quantity of items delivered from the delivery note and the prices ofthe items from the official price list. To complete the invoice, she does the extensions, casts and VAT calculations. Invoices are pre-printed, sequenced and in duplicate. The top copy promptly to the customer and the second copy remains in the invoice book. is sent 12. Once she has made out all of the invoices, Carmen Chetty writes up the weekly sales journal and posts (enters) the sale to the individual debtors account in the debtors ledger. If the entity to whom the sale has been made, does not have an account, Carmen Chetty opens a ledger account for the new debtor.

4 YOU ARE REQUIRED TO identify and explain the weaknesses in the revenue and receipts cycle at Cold Front (Pty) Ltd, based on the information given above. (20 marks) You are not required to make recommendations to resolve the weaknesses. QUESTION 3 (35 MARKS) PART A (8 MARKS) YOU ARE REQUIRED TO select the most appropriate answer to the following questions: 1. The auditor s objective when using audit sampling is to: a. keep the cost of the audit within a reasonable but acceptable cost budget. b. provide a reasonable basis on which to draw conclusions about the population from which the sample is drawn. c. address one of the limitations of an audit. d. Identify only those misstatements or deviations which are material. be different from the 2. The risk that the auditor s conclusion based on a sample may conclusion if the entire population were subjected to the same procedure a. statistical risk b. inherent risk c. sampling risk cl. non-sampling risk is termed: 3. An approach to sampling which is based on the random selection of the sample items and the use of probability theory to evaluate sample results is termed: a. monetary unit sampling b. risk based sampling c. audit sampling cl. statistical sampling 4. For audit sampling purposes the individual items making up the population being sampled are referred to as: a. sampling units b. sampling blocks c. sampling stratifications d. samplingtransactions which is 5. A tolerable misstatement relates to: a. the rate of deviation from prescribed control procedures which is acceptable to the auditor. b. the materiality level set by the auditor when planning the audit. c. The monetary amount of misstatement in a population which is acceptable to the auditor.

5 d. the extent of misstatement in disclosure which the auditor regards as acceptable. 6. A misstatement or deviation in a population which is clearly not representative ofthe population is termed: a. a sampling error b a constituent of sampling risk c. a tolerable misstatement d an anomaly 7. A lower level of sampling risk which the auditor is willing to accept will: a. result in a smaller sample size b result in a greater sample size c. have no effect on the sample size cl have no effect on the sample size but will increase audit risk he the risk of expressing an inappropriate opinion). 8. Selecting samples for testing from a population without following a structured technique is termed: a. random selection b systematic selection c. haphazard selection d stratification selection PART B (27 MARKS) You are the auditor of H-Two-Oh (Pty) Ltd, a chemical manufacturer based in Walvis Bay. Over the previous eighteen months, the company s monthly reporting system has revealed a steady decline in profits due mainly to the entry by foreign companies into the local market. In response to the decline, the directors took a decision halfway through the financial year currently under audit (31 December 2016), to invest in new plant and equipment capable of recycling chemical waste as this was regarded as the only way in which the company could continue to operate. The company s borrowing powers the necessary finance for the expansion. were extended to their limits to raise The final audit for the financial year-end commenced in January, and at this stage, the company appeared to be geared for a return to profitable trading; the new plant had been commissioned and the first shipload of chemical waste for recycling had been ordered from the Far East, and was in fact on the water. A number of contracts for the supply of products from the recycling had been signed with various customers. However, shortly before the completion ofthe year-end audit, a controversy, which had been building for some months, erupted in the media concerning the importation of waste product for recycling. This resulted in the government placing an indefinite ban on such imports. Expert opinion believes that the ban will not be lifted in future years due to the growing influence of 5

6 environmentalists in the government and business communities. The consequences of the ban for H-Two-Oh (Pty) Ltd were felt immediately as the container ship transporting the chemical waste from the Far East was turned back as it would not have been allowed to dock in Namibia. The directors of H Two Oh (Pty) Ltd have ignored this matter for the 31 December 2016 financial statements on the grounds that it occurred after reporting date and that there is no point in alarming the shareholders. They can offer no plausible explanation as to how the company will continue to operate profitably. YOU ARE REQUIRED TO: 1. Discuss the effect which the above information would have on your audit report for the financial year end 31 December (15 marks) 2. Draft the appropriate 'Basis for opinion and Audit opinion paragraphs to be included in the audit report for the financial year end 31 December 2016 assuming that the directors are not prepared to make any changes to the financial statements. (12 marks) QUESTION 4 (25 MARKS) PART A (10 MARKS) In the audit engagement acceptance or reappointment stage, audit evidence is the information that the auditor is to consider for the appointment. Further, the standard explains what constitutes audit evidence and establishes requirements regarding designing and performing audit procedures to obtain sufficient appropriate audit evidence, and the objective of the auditor is to plan and perform the audit to obtain appropriate audit evidence that is sufficient to support the opinion expressed in the auditor's report. 1. Briefly explain the concept of audit evidence? (3 marks) 2. State what constitutes relevance and reliability explaining which they are obtained. (7 the circumstances under marks) PART B (15 MARKS) 1. Discuss the advantages and disadvantages ofoutsourcing an internal audit department. (5 marks) 2. MonteHodge Ltd has a sales income of NS 253 million and employs 1,200 people in 15 different locations. MonteHodge Ltd provides various financial services from pension and investment advice to individuals, to maintaining cashbooks and cash forecasting in small to medium-sized companies. The company is owned by six shareholders, who belong to the same family; it is not listed on the Namibian stock exchange and the 6

7 shareholders do not intend to apply for a listing. However, an annual audit is required by statute and additional regulation of the financial services sector is expected in the near future. Most employees are provided with on line, real-time computer systems, which present financial and stock market information to enable the employees to provide up to date advice to their clients. Accounting systems record income, which is based on fees generated from investment advice. Expenditure is mainly fixed, being salaries, office rent, lighting and heating, etc. Internal control systems are limited; the directors tending to trust staff and being more concerned with making profits than implementing detailed controls. Four of the shareholders are board members, with one member being the chairman and chief executive officer. The financial accountant is not qualified, although has many years experience in preparing financial statements. YOU ARE REQUIRED TO discuss the reasons for and against having department in MonteHodge Ltd. an internal audit (10 marks)

namib I A UnIVERSITY OF SCIEnCE AnD TECHnOLOGY

namib I A UnIVERSITY OF SCIEnCE AnD TECHnOLOGY Faculty of Management Sciences Department of Accounting, Economics and Finance QUALIFICATION: BACHELOR OF ACCOUNTING QUALIFICATION CODE: 07BACC LEVEL: LEVEL