Audit evaluation and reviews

August 2025

3 Questions

Question 1

According to International Standard on Auditing (ISA) 550 “Related Parties”, auditors are responsible for identifying, assessing and responding to the risks of material misstatements that may arise from an entity's failure to appropriately account for or disclose related party relationships, transactions or balances. This responsibility exists because financial reporting frameworks establish specific accounting and disclosure requirements for such matters.

Required:

(a) Discuss FIVE audit procedures that an auditor could develop to be relied upon to ascertain the existence of related parties.

(b) You are the audit manager at Hapa and Pale Associates, a firm of Certified Public Accountants and you are currently reviewing the audit file of Wasafiri Ltd. for the year ended 30 June 2025. Wasafiri Ltd. is engaged in the export of raw coffee to the international market. During the course of the audit, a junior team member identified several repetitive large payments made by the client to a consulting firm registered in a tax haven. When management was asked to explain the nature and purpose of these payments, they provided only minimal supporting documentation and offered vague explanations, merely stating that the payments were for “market research”.

Required:

(i) Identify FIVE red flags that could indicate the risk of money laundering at Wasafiri Ltd.

(ii) As the audit manager responsible for this audit, explain FIVE appropriate steps you might take upon receiving this information.

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Question 3b

The Companies Act, 2015 (Kenya), along with International Standards on Auditing (ISA), governs the preparation and retention of audit working papers.

With reference to the above statement explain the following:

(i). Use of audit working papers.

(ii). Content of audit working papers.

(iii). Retention of audit working papers.

(iv). Confidentiality and safeguarding of working papers.

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Question 4a

You are the audit manager responsible for the audit of Mawega Ltd. a medium-sized technology company that provides software solutions to businesses for the year ended 31 March 2025. The final audit for the year is almost complete and you are reviewing the audit working papers. The following matters have been raised by the audit senior for your attention:

1	Termination of a major client contract Two weeks after the reporting date, Mawega Ltd.’s largest client (which represents 40% of the company’s annual revenue) terminated its contract. The client cited significant data protection concerns as the primary reason for the termination. This client had been a critical source of revenue and the loss could have a material impact on the company’s financial performance going forward. Management's position The company has expressed confidence that the company will recover from this setback by securing new clients. However, the company has not yet signed any replacement contracts or secured any new business in the short term.
2	Short-term loan for payroll obligations After the reporting date, the company obtained a short-term loan of Sh.50 million from a local financial institution. The loan was intended to meet payroll obligations for the next two months due to cash flow difficulties. This loan is a temporary measure and the company has expressed that it demonstrates financial resilience, reinforcing their belief that the company is a going concern. Management’s position Management is confident that the loan reflects a temporary challenge and that the company will be able to stabilize its financial position shortly. However, the company has not presented a detailed plan on how they intend to address the underlying cash flow issues or repay the loan.
3	Related party transaction During the audit, a related party transaction was noted where the Chief Executive Officer’s (CEO) private company leased equipment to Mawega Ltd. at above-market rates. The nature of the related party relationship was not disclosed in the financial statements and the lease payments appear to be significantly higher than industry standards for similar equipment. Management’s position Management has not provided an explanation for the discrepancy in lease terms and has not made any disclosures regarding the related party relationship in the financial statements, asserting that the lease arrangement was made based on mutual agreement with no intention of evading compliance.
Required:
(i)	For each of the matters above, evaluate the implications of the post-reporting date events for the auditor’s assessment of the going concern assumption.
(ii)	Determine whether these events require adjustment or disclosure under International Accounting Standards (IAS) 10, “Events After the Reporting Period”.

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April 2025

3 Questions

Question 3b

You are the audit manager in John Bosco and Associates, a firm of Certified Public Accountants, responsible for the audit of Cider hospital for the year ended 31 March 2025. You recently visited the audit team, who are currently on site performing the field work, to review the work performed and to discuss their progress. During your visit the audit senior brought forward the following matter for your action.

During the review of medical inventories, which included medicines used in a variety of treatment at the hospital, it was noted that a number of medicines had passed their recommended use by dates. These were recorded on an inventory spreadsheet maintained by the financial controller and were easy to spot because they were highlighted in red. One of the audit team members inspected a sample of the inventories in question and confirmed that their use by date had expired. The audit team requested to look at the spreadsheet again, but they were denied access.

The following day, the finance director confronted the audit team accusing them of extending their investigation ‘beyond their scope of audit’. He also threatened to remove them from the premises if they continued to ask questions which were not relevant to the audit of the hospital’s financial statements. Since then, the audit team was unable to complete their audit of medical inventories. They also noted that the room where the inventories were previously kept had been emptied.

Required:

With reference to the above matter raised by the audit senior, describe:

(i) TWO ethical and professional issues surrounding this matter.

(ii) THREE ways that you could report the non-compliance to the management of Cider hospital.

(iii) The impact of the matter on the financial statements of Cider Hospital.

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Question 4b

International Standards on Auditing (ISA) 315 Identifying and Assessing the Risk of Material Misstatements Through Understanding of The Entity and Its Environment, requires auditors to obtain an understanding of the entity and its environment, including its internal controls.

Required:

Explain FIVE reasons why obtaining an understanding of the entity and its environment is important for the auditors.

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Question 5c

You are a senior auditor in the audit of Cashew Ltd., a wholesale company, for the year ended 31 March 2025. The company intends to determine the quantity and value of each line of inventory at a physical inventory check to be held on 22 February 2025 and then adjust the movements between 23 February 2024 and 30 December 2024. The purchases and sales ledgers will be closed. The company has a fast-moving stock, but operates a satisfactory recording system which incorporates goods inwards and dispatch records.

Required:

Describe FIVE audit procedures that you would adopt to satisfy yourself that the company’s cut off discipline is adequate.

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December 2024

2 Questions

Question 3a

Your audit team has identified several significant transactions between the company and its controlling shareholder. There is concern that these related party transactions have not been appropriately disclosed in the financial statements.

Required:

Identity SIX potential risks associated with related party transactions.

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Question 3c

You are the audit manager responsible for the audit of Helluland Ltd. For the year ended 31 December 2023. The final audit for the year is nearing completion and you are reviewing the audit working papers. The draft financial statements recognise total assets of Sh.500 million, revenue of Sh.120 million and profit before tax of Sh.55 million.

Helluland Ltd. owns a number of properties which have been classified as assets held for sale in the statement of financial position. The notes to the financial statements state that the properties are all due to be sold within one year. On classification as held for sale, in April 2023, the properties were revalued from carrying value of Sh.45 million to fair value less cost to sell of Sh.40 million, which is the amount recognised in the statement of financial position at the year end.

Required:

With reference to the above statement, describe THREE matters that you might consider appropriate for reclassification in respect to the audit of non-current assets held for sale.

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August 2024

4 Questions

Question 1b

International Standard on Auditing (ISA) 520, “Analytical Procedures”, requires auditors to perform analytical procedures at various stages of audit risk assessment.

Required:

(i) Explain FIVE objectives of performing analytical procedures as part of audit risk assessment.

(ii) Highlight THREE limitations of performing analytical procedures at the planning stage of the final audit.

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Question 1c

You are a senior auditor in the audit of Bayeti Ltd., a medium-sized company which sells a limited range of industrial products. While performing reviews on Bayeti Ltd.’s audit files, you have noted that a number of creditors have withdrawn their financial support to your client and that your client has defaulted on a number of loans. The working papers conclude that the going concern assumption is inappropriate and recommends that a note explaining the cash flow challenges your client is facing be included in the financial statements. However, the directors are reluctant to include the note in the financial statements.

Required:

In each case, discuss THREE implications on the audit report if:

(i) The directors refuse to disclose the note.

(ii) The directors agree to disclose the note.

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Question 2b

You are the Audit Manager of Maharabu and Maharabu Associates, a firm of Certified Public Accountants, responsible for the audit of Madeni Ltd. You are currently reviewing the working papers of the audit for the year ended 31 December 2023. While reviewing the working papers on the payroll with the audit junior, he mentioned the following:

“A number of new employees were hired during the year, with Sh.1.35 million being paid to them. No documentation is available to show that the board had authorised the hiring of additional members of staff. When I questioned the payroll supervisor, she mentioned that she made the additions. She said that no authorisation was required from the board, because the new employees were hired on a temporary basis. Conversely, when making enquiries about the staffing levels from the management, it was stated that no new employees had been taken on board for the year under review”. Other than the tests of controls planned, no other audit work has been performed.

Required:

(i) Explain the meaning of the term "professional skepticism".

(ii) In relation to the audit of Madeni Ltd.’s payroll, recommend FOUR actions that should be taken by the auditor.

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Question 4b

You are a senior auditor in the audit of Jasiri Ltd., a medium sized manufacturing company. The audit of the financial statements for the year ended 30 June 2024 is almost complete and you are reviewing the audit files for the period. The following issues have prompted the senior auditor to call for a meeting with the client’s top management to be held in a weeks’ time:

There were questions concerning the accuracy of the depreciation charged in the financial statements and a preliminary investigation revealed that the computerised accounting system had failed to compute depreciation of equipment correctly resulting to an overstatement of the depreciation value by Sh.780,975. The book value of the equipment had been overstated by Sh.1,128,340. The equipment value for the year ended 30 June 2024 was Sh.7,135,725.
At the beginning of the year 2024, the company had issued a loan to Sarah Hagoi, one of the members of the top management, amounting to Sh.500,000. On further examination of the records, it was discovered that the loan had not been disclosed in the financial statements because it was considered immaterial.
During the year ended 30 June 2024, the company made a reduction on its provision for customer warranties recognised in the financial statements. During the past two years, the provision has been made at the rate of 10% of sales for three months. The management has however decided to reduce it to 5% on the claims that the quality assurance processes had improved and therefore customer warranty claims were likely to reduce. Further investigations however revealed that warranty claims have by far remained the same as in previous periods.

Required:

(i) Discuss how the auditor would be expected to treat each scenario mentioned above for the purpose of reporting.

(ii) Propose how you would treat each scenario mentioned above in the auditors report assuming the management of Jasiri Ltd. does not correct the misstatements.

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April 2024

3 Questions

Question 3b

When auditing consolidated financial statements, the auditor pays close attention to accounting policies as they have a significant impact on the presentation and disclosure of financial information.

Required:

Discuss FIVE areas of interest by an auditor in relation to the accounting policies related to consolidated financial statements.

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Question 2c

According to International Standard on Auditing (ISA) 550, “Related Parties”, certain relationships, such as parent and subsidiary, investor and investee may be clearly evident. However, determining the existence of other related party relationships requires the application of specific audit procedures. The auditor could also devise detailed procedures intended to provide guidance for identifying material transactions with parties known to be related and for identifying material transactions that may be indicative of the existence of previously undetermined relationships.

Required:

Suggest SIX audit procedures that could be relied upon to ascertain the existence of related parties.

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Question 1a

You are the audit manager of Gabriel and Moses Associates, a firm of Certified Public Accountants, responsible for the audit of Saforer Ltd. The draft financial statements reported a profit of Sh.13,000,000 for the year ended 31 December 2023. The audit for the year-end is almost complete and the following matters have been raised by the audit senior for your attention:

On 2 November 2023, a major customer went into receivership. The balance owing from the customer was Sh.2,800,000 as at 31 December 2023. This amount has been included in the accounts receivable figure in the year-end financial statements. A former employee sued Saforer Ltd. for unfair dismissal during the month of December 2023.
The company’s lawyers estimate that damages amounting to Sh.65,000 are probably payable. A note has been included under the notes to the accounts describing the legal claim and the estimated damages. However, no adjustment has been made to the financial statements to recognise the probable loss.

After discussing the above matters with the management of Saforer Ltd, the managers decided not to adjust their financial statements. The audit senior then drafted the audit report. The following is an extract of the audit report:

Basis for opinion and disclaimer of opinion

We have performed our audit based on a materiality level of Sh.1,650,000. Our audit procedures have confirmed conclusively that trade receivables are materially misstated. The Finance Director, Philip Majuto, has refused to make an adjustment to write off a material trade receivable balance. Therefore, in our opinion, the financial statements of Saforer Ltd. are materially misstated and we therefore express a disclaimer of opinion.

Emphasis of matter paragraph

Saforer Ltd. is facing a legal claim for Sh.65,000 from a former employee. In our opinion this amount should be recognised as a provision in the financial statements of which this has not been done. We draw our attention to this breach of International Financial Reporting Standards (IFRSs).

Required:

Using the proposed audit report extract for the year ended 31 December 2023, evaluate FIVE matters that are not correctly presented in the report.

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December 2023

7 Questions

Question 3b

The question on whether a change constitutes a change in policy or a change in estimate has been a major source of discussion among accountants and auditors.

Required:

Distinguish between a “change in accounting estimate” and a “change in accounting policy”.

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Question 1a

You are the Audit Manager of Baraka and Company LLP, who are the auditors of Miradi Ltd. for the year ended 30 June 2023. The company has net assets of Sh.150 million. The audit has been completed but there is a matter that has not yet been resolved on depreciation of buildings. The directors of Miradi Ltd. have resolved that depreciation on buildings will not be provided for in the financial statements. The buildings were acquired in the year 2020 and no depreciation has been provided since.

Required:

(i). Describe SIX additional audit procedures and actions that you could take with respect to the above matter.

(ii). Assume that, according to your workings, the depreciation charge on the buildings for the year ended 30 June 2023 should be Sh.4,200,000 based on the straight line method of depreciation at an annual rate of 5%.

Required:

Discuss the implications of the above on the financial statements, clearly indicating its effect on the audit report.

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Question 1b

Explain SIX audit risks associated with the audit of financial instruments.

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Question 2b

Describe FOUR procedures that an auditor might perform to identify subsequent events occurring after the financial year end in a company.

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Question 3a

Compumax Ltd. is one of your audit clients for the year ended 30 June 2023. The company has followed generally accepted accounting principles and had a conservative approach to recognising revenue from its software application sales. Revenue was recognised only when the product was delivered to the customer.

Due to increased competition leading to a declining market share, the Chief Executive Officer (CEO) of the company has put pressure on the Chief Finance Officer (CFO) to find ways to improve the company’s financial performance and boost revenue numbers. In reacting to the pressure, the CFO decided that the new policy will be that revenue from software application sales could be recognised as soon as the contract was signed, regardless of the product’s actual delivery to the customer. The CFO did not disclose the change in policy. With the new policy, the company started recognising revenue from software application sales immediately after contract signing, artificially inflating the company’s revenue figures. This allowed the company to present a more favourable financial status, potentially increasing the share price and attracting new investors.

Required:

With reference to the above scenario:

(i). Describe THREE circumstances under which a change in accounting policy is permissible.

(ii).Summarise THREE disclosures that could be made in the financial statements regarding the change in accounting policy.

(iii).Discuss FIVE audit procedures that are necessary where an entity has changed an accounting policy.

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Question 4a

During the audit of the financial statements of WX Company Ltd. for the year ended 31 December 2022, the auditors realised that new information that had not been accounted for when the management prepared the financial statements had come to their notice as follows:

A court case in which a customer had sued the company for goods that got lost in transit from one of the company’s stores was decided against the company. Although the company had made a provision for a refund of the deposit paid on the goods, the court also awarded the customer the costs of the suit and general damages. The total amount payable now exceeds the provision.
A customer who owed the company a substantial amount of money and had been having problems paying has had to close business after his bank, from which he had obtained a loan, petitioned for liquidation of the business. Although he had invested the bank loan in a building project, the building had stalled before completion. The materials purchased from WX Ltd. had already been used in the project which the bank has attached as a collateral for their loan. WX Ltd. may never be paid the balance on this account.
Due to the rapid fluctuations in the foreign exchange rate, the directors feel that some of the inventory purchased earlier would not be replaceable if sold on the basis of their initial import cost and have suggested a revaluation of the inventory as a way of safeguarding the business from possible losses.

Required:

In each of the situations explained above, discuss the auditor’s advice to the management of WX Company Ltd. in order to minimise the risk of material misstatement resulting from these events.

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Question 5a

Solar Power Limited (SPL), an international company, sells solar panels subject to a warranty of one year. Included in the statement of financial position of SPL is a warranty provision of Sh.100,000,000. The director who owns 70% of the shares in the company is the one who estimates the cost of repairing defective solar panels reported by dissatisfied customers. The estimate from the director forms the basis of the provision.

This is your first audit of SPL whose turnover in the previous year was Sh.10 billion compared to Sh.15 billion this year.

Required:

Explain the audit procedures that you would perform during the year in respect to the estimated warranty provision included in the statement of financial position for the current year.

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August 2023

2 Questions

Question 1b

You are the auditor of Flowermint Ltd., a company engaged in growing and exporting flowers. Assume that when you arrived at your client’s office on 11 January 2023 to begin the audit for the year ended 31 December 2022, you discovered that the client had been drawing cheques as the creditors invoices became due but not necessarily mailing them. Because of a working capital shortage, some cheques may have been held for two or three weeks.

The client informs you that unmailed cheques amounting to Sh.27,600,000 were on hand as at 31 December 2022. He states that these December 2022 dated cheques had been entered in the cash disbursements book and charged to the respective creditors accounts in December because the cheques were prenumbered. Heavy sales collections permitted him to mail the cheques before your arrival.

The client wishes to adjust the cash balance and accounts payable as at 31 December 2022 by Sh.27,600,000 because the cash account had a credit balance. The client is also reluctant to reflect an overdraft in the financial statements.

Required:

(i). Prepare a detailed audit program indicating the procedures you would use to satisfy yourself of the accuracy of the cash at bank balances on the client’s financial statements.

(ii) Discuss the propriety or otherwise of reversing the indicated amount of outstanding cheques as at 31 December 2022.

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Question 1a

CMP Ltd. is a production company that employs fifty workers. The company has the following payroll procedures:

The factory foreman interviews applicants and on the basis of the interview either hires or rejects them. When applicants are hired, they fill in an employees withholding exemption certificate (W-4 form) and forward it to the foreman. The foreman indicates the hourly rate of pay for the new employee in the W-4 form and then forwards it to a payroll clerk as notice that the worker has been employed. The foreman verbally advises the payroll department of any adjustments to the hourly rate of pay.
A supply of blank time cards is kept in a box near the entrance to the factory. Each worker takes a time card on Monday morning, fills in his name and notes in pencil their daily arrival and departure times. At the end of the week, the workers drop the time cards in a box near the factory door.
Each Monday morning, the completed time cards are taken from the box by a payroll clerk. One of the payroll clerks then records the payroll transactions using a computer system which captures all information for the payroll journal as calculated by the clerk and automatically updates the employees earnings records and general ledger. Employees are automatically removed from the payroll when they fail to return in a time card.
The payroll cheques are manually signed by the chief accountant and given to the foreman. The foreman distributes the cheques to the employees and arranges for the delivery of the cheques to those who are absent. The payroll bank account is reconciled by the chief accountant, who also prepares the various payroll tax reports.

Required:

Discuss SIX deficiencies in CMP Ltd.’s internal controls with the associated risk for each deficiency.

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April 2023

4 Questions

Question 4

Lavenda Group has been a client of your Audit firm for several years. The group of companies specialises in production and sale of health food products. You are a senior audit manager responsible for the audit of the Lavenda Group. The group companies all have a financial year ended 31 December 2022. Your firm audits all components of the group with the exception of P Ltd. which was acquired during the year. You are currently planning the final audit of the consolidated financial statements. Information about several matters relevant to the group audit is given below. These matters are all potentially material to the consolidated financial statements. None of the companies in the group is listed.

Lavenda Ltd.

This is a non-trading parent company, which wholly owns three subsidiaries: D Ltd., S Ltd. and P Ltd. all of which are involved with the core manufacturing and marketing operations of the group. This year, the directors decided to diversify the group’s activities in order to reduce risk exposure. Non-controlling interests representing long-term investments have been made in two companies. In the consolidated statement of financial position, these investments are accounted for as associates, as Lavenda Ltd. is able to exert significant influence over the companies. As part of their remuneration, the directors of Lavenda Ltd. receive a bonus based on the profit before tax of the group. In April 2022, the group finance director resigned from office after a disagreement with the chief executive officer over changes to accounting estimates. A new group finance director is yet to be appointed.

D Ltd.

This company mills, blends, packages and distributes healthy flours and natural spices. During the year, the factory was extended by the self-construction of a new processing area, at a total cost of Sh.8 million which is material in the context of the company’s financial statements as well as the Group. A loan of Sh.8 million with an interest rate of 5% per annum had been taken out to finance the construction. The construction took 6 months to complete and the new processing area was ready for use on 1 August 2022. The processing area began to be used on 1 November 2022. The estimated useful life of the extended factory is 15 years.

S Ltd.

This company’s operations involve the manufacture and distribution of peanut butter and other bread spreads. S Ltd. is involved in a court case with a competitor, F Foods Ltd., which alleges that a design used in S Ltd. printed material copies one of F Foods Ltd.’s designs which are protected under copyright. A verbal confirmation was made from S Ltd. lawyers that a claim of Sh.2.5 million has been made against S Ltd., which is probable to be paid. S Ltd. has not made a provision.

P Ltd.

This company is a new and significant acquisition, purchased in June 2022. It is located in North Africa and has been purchased to supply peanuts and other ingredients for the goods produced by S Ltd. It is now supplying approximately half of the ingredients used in S Ltd. The country in which P Ltd. is situated has not adopted International Financial Reporting Standards, meaning that P Ltd.’s financial statements are prepared using local accounting rules. The company uses local currency to measure and present its financial statements.

P Ltd. is audited by a small local firm, ABC & Co, also based in North Africa. Assume that Audit regulations in that country are not based on International Standards on Auditing.

Required:

(a) Evaluate the principal audit risks to be considered in your planning of the final audit of the consolidated financial statements for the year ended 31 December 2022.

(b) Describe the procedures that should be performed in deciding the extent of reliance to be placed on the work of ABC & Co.

(c) Recommend the principal audit procedures that should be performed on the classification of non-controlling investments made by Lavenda Ltd.

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Question 5

Your firm is the current auditor of Safi Limited, a renowned wholesale business. You have been asked to carry out audit checks on the cut off and verifying inventory quantities at the year end.

The company maintains the details of the inventory quantities on its computer. These inventory quantities are updated from the goods received notes and the sales invoices. The company carries out the inventory count each month when all the fast moving and high value inventory is counted, and a third of the remaining inventory is counted in rotation so that all the items are counted at least four times a year. You attended the inventory count on the second Sunday of October 2022 and a further inventory count on the first Sunday of November 2022.

The company’s year-end was 31 October 2022 and the inventory quantities as at that date as shown by the computer had been used in the valuation of the inventory. No inventory was counted at the year end.

Required:

(a). Describe the principal matters that you should have checked and the matters you should have recorded when you attended the company’s inventory count on the second Sunday of October 2022.

(b). Explain the checks you will perform in confirming the sales and purchases cut offs have been correctly carried out at the year end.

(c). Discuss the work you will carry out to check that the book inventory records have been correctly updated from the inventory count.

(d). Summarise the work you will carry out to satisfy yourself that the inventory quantities used in the relation of the inventory at the year end is correct.

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Question 2b

You are the manager responsible for the audit of four audit clients of M & Associates, a firm of CPAs. The year end in each case is 31 December 2022. You are currently reviewing the audit working paper files and the audit seniors’ recommendations for the auditors’ reports.

Required:

For each of the cases below, comment on the appropriateness or otherwise of the proposition of the audit senior regarding the auditors’ reports. Where you disagree, indicate what audit modification (if any) should be given instead.

Details are as follows:

1	C Ltd. is experiencing going concern problems as noted during this year’s audit. Unless it secures the prospected loan from the bank to finance a contract already won, C Ltd. will likely not continue operating in the foreseeable future. No disclosure of the going concern problems has been made. The audit senior has suggested that, due to the seriousness of the situation, the audit opinion must at least be qualified ‘except for’.
2	P Ltd. has changed its accounting policy on premises from cost model to revaluation model. No disclosure of this change has been given in the financial statements. The carrying amount of the premises in the statement of financial position as at 31 December 2022 is the same as at 31 December 2021. The premises figure is material in the context of the financial statements. The audit senior is satisfied with the carrying value of the premises in the statement of financial position. The audit senior has concluded that a qualification is not required but suggests that attention should be drawn to the change by way of an emphasis of matter paragraph.
3	The directors’ report of AC Ltd. states that the company’s revenue has grown from 1.2 % to 4% in the last one year. However, analytical review procedures showed that revenues had only grown by 1.65%. The audit senior is satisfied that the revenue figures are correct. The audit senior has noted that an unmodified opinion should be given as the audit opinion does not extend to the directors’ report.

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Question 2a

You are responsible for the audit of Spheres Ltd. and are currently reviewing the working papers of the audit for the year ended 31 December 2022. In the working papers dealing with payroll, the audit junior has commented as follows:

“A number of new employees have been added to the company’s payroll during the year, with combined payments of Sh.1.35 million being made to them. There does not appear to be any authorisation for these additions. When I questioned the payroll supervisor who made the additions, he said that no authorisation was needed because the new employees were hired on a temporary basis. Conversely, when making enquiries about the staffing levels from the management, it was stated that no new employees have been taken on this year. Other than the tests of controls planned, no other audit work has been performed”.

Required:

(i) Explain the meaning of the term “professional skepticism”.

(ii) In relation to the audit of Spheres Ltd.’s payroll, recommend further actions that should be taken by the auditor.

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December 2022

3 Questions

Question 5a

Describe TWO risks that an auditor could face in the audit of each the following items:

(i). Related party transactions.

(ii). Construction contracts.

(iii). Impairment.

(iv). Contingent liabilities.

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Question 4

Achievers Holdings Ltd. is a non-trading holding company with several subsidiaries within East Africa. The company is based in Nairobi with investment holdings ranging from 75% to 100% in several subsidiary companies.

You are the audit manager responsible for the audit of the group accounts. One subsidiary company operating in Rwanda is audited by your firm through a branch office in Kigali. The other subsidiaries in Tanzania and Uganda are audited by other audit firms based in the respective countries.

Assume that the financial year end of Achievers Holdings Ltd. is 30 June, but the subsidiary companies based in Uganda and Rwanda are engaged in highly seasonal businesses, and have 31 March as their financial year end. The subsidiary company in Tanzania was acquired during the year ended 30 June 2022.

Required:

(a) Describe the evidence you would expect to obtain in your review of the audit work undertaken in Rwanda, Uganda and Tanzania.

(b) Following the completion of the subsidiary companies audits, discuss the matters that you would address in your review of the consolidated financial statements of Achievers Holdings Ltd. for the year ended 30 June 2022, with specific focus on:

(i) General issues touching on consolidated accounts.

(ii) Audit issues relating to subsidiaries with different year ends.

(iii) Audit issues relating to the newly acquired subsidiary in Tanzania.

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Question 2c

In the context of audit peer reviews:

(i) Distinguish between a “systems review” and an “engagement review”.

(ii) Citing reasons, explain the importance of peer review.

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August 2022

7 Questions

Question 5a

Explain each of the following concepts, clearly indicating its impact on the work of auditors:

(i) Environmental audits.

(ii) Social reporting.

(iii) Audit disengagement.

(iv) Value for money audits.

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Question 2a

Radar Ltd. is a large private company that organises conferences, meetings and celebrations for other companies. The company was set up ten years ago by S and J who are the majority shareholders. The company employs over 300 staff in its 25 offices.

Your firm, XYZ CPA, where you are the Manager - Business Advisory, has been hired to provide internal audit services to Radar Ltd. In discussing with S, you discover that there is a small audit team headed by W, a recently qualified accountant. Before heading the internal audit, W was a junior finance manager in the company. Members of the internal audit team at Radar Ltd. would be redeployed to the finance department once XYZ CPA starts provision of the internal audit services.

S has briefed you of many instances where management policies were ignored. In addition, J has recently discovered a fraud in one office whereby an accounts manager was authorising payments of invoices received from fictitious suppliers, with the payment being channelled to the accounts manager’s personal bank account.

(i). Evaluate the benefits to Radar Ltd. from outsourcing its internal audit function.

(ii). Explain the potential impact on the external audit of Radar Ltd. if the internal audit function is outsourced

(iii). Recommend procedures that could be used by XYZ CPA to quantify any financial loss suffered by Radar Ltd. due to the above fraud.

(iv). Compare responsibilities of external auditors and of management in relation to the prevention and detection of fraud.

(v). Assess two benefits and one limitation that may arise from setting up an audit committee in Radar Ltd.

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Question 3a

Annlisa Keya is the financial controller of a leading church organisation in the country. Recently, the chief cashier in the church was suspended for misappropriating cash amounting to Sh.2 million over a period of six months.

The church’s Board of Deacons and the Finance Committee are of the view that though Annlisa Keya was not directly responsible for the loss, she failed by not discovering the fraud in time. They have recommended her suspension and possible dismissal. There are also worries that, because of the high cash volumes transacted in the church, the risk of errors and fraud in cash management is significant.

Annlisa has suggested to the Board of Deacons and Finance Committee to engage an independent auditor to carry out an investigation.

Your audit firm has been invited to a preparatory meeting of the Board of Deacons as the potential auditor for the assignment.

Required:

(i) Highlight the issues you would raise during this meeting regarding the entire investigation process.

(ii) Describe the essential principles that you must observe to conduct an effective investigation.

(iii) Recommend an effective internal control system for cash handled by the church.

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Question 3b

Describe the factors to be considered by an auditor in assessing the inherent risk in an organisation.

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Question 3c

Explain how audit files are archived and retrieved for a large organisation.

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Question 4a

Bandari Furniture Ltd. manufactures a wide range of domestic furniture. The main components of the furniture items are wood for the frames, foam filing for the cushions and fabric for the covering. The company’s annual turnover is Sh.700 million while its stock at the end of the year ended 31 December 2021 was Sh.400 million. You attended the stock take and you were happy with the accuracy of the exercise. The cost of raw materials and direct labour are calculated using the standard costing system while overheads are computed from the company’s financial accounting records as a percentage of direct labour cost.

Required:

(i) Describe the audit work that you would perform to check the standard cost per unit of a line of finished stock. Comment on how accurate this standard cost has to be.

(ii) Explain the work that you would perform to confirm that the variances are being determined correctly.

(iii) Comment on the overheads that you would include in the value of stock and those that you would not include, citing relevant examples.

(iv) State two variances that you would include and those that you would exclude when adjusting the value of stock from standard cost to actual cost.

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Question 4b

You are the auditor of Zambezi Ltd., a manufacturer of handcrafts. 40% of the sales are exported to a foreign country. You are about to commence the audit of the accounts for the year ended 31 October 2021. Account receivables are included in the statement of financial position at the year end net of Sh.3,000,000 debt provision (5%) at Sh.57 million. In the past audits, there has been a poor response to the trade receivables circularisation and a decision has been taken not to circularise or circulate them this year. In an attempt to reduce the exposure to the foreign currency, Zambezi Ltd. sells 50% of the foreign currency trade receivable forwards.

Required:

(i) Explain the substantive procedures that you would perform as an auditor to verify the accuracy of account receivables.

(ii) Describe the audit tests you would carry out in order to form an opinion on the doubtful debts provision and the action you would take if you concluded that it was materially misstated.

(iii) State what adjustment, if any, you would make to the foreign currency account receivables on the basis that they have all been recorded at the actual exchange rate ruling on the date of sale.

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April 2022

6 Questions

Question 3a

The following information relates to Vitenge Supplies Ltd.:

1	At monthly intervals, the purchases ledger clerk of the company, Anna Mbole, lists the ledger balances. She then compares them with the file of suppliers' statements. Those statements that agree with the list of the balances are extracted and placed in the file. Those that do not agree with the listed balances are left in the original file.
2	Anna Mbole then prepares a list of the payments for all the suppliers who have sent the statements follows:

2	(i)	Where the statement agrees with the balance, the statement is attached to the list.
	(ii)	Where the statement disagrees with the balance, Anne Mbole computes a round sum amount (which is slightly less than the balance on the ledger) and enters this amount on the list of the payments. She then leaves the statement in the file.

3	The list of the payments is then passed to Peter Dawa the assistant accountant, who writes out the cheques. The cheques, lists and the statements are then sent to Lucia Kawa, the Finance Director, who signs them after checking against the statements (where these are attached) and the list of balances.
4	The cheques are then passed to the Managing Director, William Sinai, the other signatory, who signs the cheques and sends them back to Peter Dawa, who then posts them to the parties concerned.
5	The auditors of the company have previously made comments regarding the poor quality of the accounting controls.

Required:

(i) Isolate the areas which could have attracted adverse comments from the auditors.

(ii) Design a programme for the substantive tests which would provide reassurance that the cheque payments are not made improperly to creditors.

(iii) Describe the controls to be instituted over the custody and authorisation of the cheque payments.

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Question 2a

During the last year's audit of Mila General Stores (MGS), a large retail chain of shops, you observe that commissions amount to about 25% of total sales, which is higher than in previous years. Further investigation reveals that the sector in which the shop operates on average has larger sales commissions than MGS with significant variation in rates depending on the product sold.

At the time a sale is made, the sales person records his commission rate and the total amount of the commission on the office copy of the sales invoice. When sales are keyed into the computer, a debit to sales commission expense account and a credit to accrued sales commission account are also recorded. As part of recording the sales and sales commission expense, the accounts receivable clerk verifies the prices, quantities, commission rates and all calculations on the sales invoices. Both the accounts receivable and the sales persons' commission master files are updated when the sales and sales commission are recorded. On the 15th day after the end of each month, the sales person is paid for the preceding month's sales commission.

Required:

(i) An audit program to verify sales commission expense, assuming that no audit tests have been conducted in any audit area to this point.

(ii) An audit program to verify accrued sales commission at the end of the year, assuming that the tests you designed in (a) (i) above resulted in no significant misstatements.

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Question 4

Jamaa Manufacturing Ltd. is planning to install an automated sales accounting system. The company's management has requested for your advice on certain matters relating to the proposed sales accounting system.

Required:

(a) Describe the controls that should be incorporated in the new system before it:

(i) Issues an order confirmation to a customer.

(ii) Raises a dispatch note and authorises dispatch of goods to the customer.

(b) Describe the controls which should be exercised over:

(i) Changing customer details including adding new customers, amending their details and deleting customers.

(ii) Changing customer credit limits. (2 marks) (iii) Changing the selling prices of products.

(c) Describe:

(i) The credit control criteria that the automated sales accounting system should use to decide whether to prevent dispatches to customers.

(ii) The manual procedures which should be exercised before the system allows goods to be dispatched to a company where the computer's criteria rejects dispatch of the goods.

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Question 5a

Describe the circumstances that could lead to each of the following audit opinions and the implications of each opinion:

(i) Adverse opinion.

(ii) Emphasis of matter.

(iii) Disclaimer of opinion.

(iv) 'Except for' opinion.

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Question 5b

Discuss the factors that could influence an auditor's decision in the following matters:

(i) Whether to apply statistical or judgemental sampling technique.

(ii) Determining the size of the sample to be used for testing.

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Question 5c

Explain the peculiar risks that an auditor faces when auditing and expressing an opinion on the following:

(i) Holding companies, subsidiaries and associates.

(ii) Related party transactions.

(iii) Branches and segments.

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Pilot December 2021

5 Questions

Question 3

You are responsible for the audit of Mariba and Co. Club and have found some potential causes of concern that could indicate fraudulent activity or financial misconduct within the company.

In particular:

52% of the products on sale by Mariba and Co. Club are supplied through one of the major international companies with a special finance arrangement deal.
Bank reconciliations were last done 11 months ago.
3. There has been a big turnover of staff heading the finance docket with 5 persons having been replaced over the last 6 months.
There are huge unreconciled balances in the accounts receivable and payables running into millions of shillings.
The current head of finance has taken sick leave for the last four weeks due to stress.

Required

(a) Comment on the need for ethical guidance for accountants on money laundering.

(b) Explain the difference between fraud and error and how the issues shown here could be categorised as fraud or error.

(c) Discuss the role of management and the role of the auditor in the prevention and detection of fraud and error.

(d) Describe what steps you would take to further investigate and then report on the matters referred to above.

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Question 4

You are the manager in charge of the audit of MNOP Ltd.

The following issues have arisen:

A customer is suing the company for Sh.600 million for damage caused to their products in transit. The company is defending the claim and believes that the products were not the responsibility of the company as the goods had been delivered to an independent transporter.
A balance due from Mronjiwa Ltd. in respect of sub-contract work, of Sh.300 million, has been outstanding for over six months. Your firm has been asked by the accountant not to write to Mronjiwa Ltd. for direct confirmation of this amount as the latter company objects to such letters. You have been assured by the accountant that the relationship between the two companies is good and that the outstanding balance will be paid.

Required:

For each of the above issues:

(a) State, with reasons, the audit work that you would expect to find in undertaking your review of the audit working papers for the year ended 31 December 2021.

(b) Draft the relevant sections dealing with these issues of the written representation letter you would wish the directors to sign.

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Question 5

As the lead auditor in the audit of XYZ Limited, a company with sole distributorship rights of a new brand of vehicles, the following issues are raised at the closing meeting with management:

The company’s working capital has been negative for the last 3 years and financing of company operations has been through an overdraft facility.
The financing bank is reluctant to extend further credit to the company due to its’ inability and long delays in servicing the overdraft which has fallen into huge arrears running into Sh.900 million.
The supplier of the vehicles is only providing vehicles upon receipt of full payment.
Three suppliers have moved to court to have the company put under administration for its’ inability to pay their debt totalling to Sh.800 million.
Senior management staff in finance and human resource have recently quit for reasons they were not willing to provide.
Salaries to staff are in arrears for over five months and staff are demotivated.

Required:

(a) Draft the audit opinion you would give under the circumstances.

(b) What audit risks are evident from the narration above and what further audit procedures would you perform for each of the issues discussed above.

(c) From the issues identified above, draft a management letter clearly highlighting the issue, implication and recommendation to management.

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Question 2

Your firm has recently been appointed the statutory auditor of Mali Mengi Limited, a large soft drinks company in your country, for the year ended 31 December 2021. The previous auditors, from whom your firm has received professional clearance, did not wish to be re-appointed as auditors. The principal activities of the company are the distribution and retail of soft drinks. All products are imported from suppliers based in USA and delivered to Mombasa central warehouse. The company has its own retail outlets but also supplies national supermarket chains and small independent retailers.

Additional information on the company’s operations:

1	Sales Sales through its own retail outlets are on a cash basis and sales to supermarkets and independent retailers are on a credit basis.
2	Inventory records management The company maintains computerised inventory records for inventories held at the distribution centre and retail outlets. Each sale is recorded and the computer updates the quantity sold and the inventory balance. The manager at each outlet is responsible for banking the takings on a daily basis.
3	Website Development During the year, the company engaged consultants to design and implement the company’s new website with online ordering facilities.
4	Targeted launch date Under the terms of the contract, the website was scheduled to be operational by the end of October 2021 in order to take advantage of the high seasonal demand at this time of the year.
5	Failure to launch and legal suit Due to technical problems, the website was not launched until the end of December 2021. The consultants have been paid in full for their work. However, the company has commenced legal proceedings for breach of contract.
6	Increased revenue in presented management accounts Despite failing to meet its revenue targets in respect of online revenue, the management accounts for the 12 months to 31 December 2021 indicate an increase in revenue of 30 % compared with the same period in 2020.
7	Stocks and receivables Stocks and receivables balances are significantly higher than the previous year as a result of the increased level of activity.
8	Proposed expansion Management is planning to expand the retail activities of the business by opening additional retail outlets in Uganda, Tanzania and Ethiopia.
9	Funding of expansion It is hoping to fund the expansion with a bank loan and has approached the company’s bankers to provide the funding. The bankers require the audited financial statements before making a decision. Management is keen to have the funding in place to progress with the expansion and would like to have the audit completed by 31 December 2021.
Required Identify, from the circumstances described above, the key business risks and for each risk:
(a)	List the factors which have led you to identify that risk.
(b)	Outline the audit work you would perform to address the risk.

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Question 1

You are a manager in XYZ and Co., an international firm of auditors with specific responsibility for the quality of audits. The firm was appointed auditor of Masaku Savings and Credit Cooperative (MSCC) a provider of savings and credit services to its employees located in all parts of the country. You have just visited the audit team at MSCC head office. The audit team comprises of the manager and two audit assistants.

MSCC’s draft accounts for the year ended 31 December 2020 are summarised as follows:

Masaku Savings and Credit Co-operative Society Ltd.
Annual report and financial statements for the year ended 31December 2020
Statistical information as at 31 December:
	2020 "000"	2019 "000"
Membership - Active	65	62
Membership.- Dormant	0	0
	65	62
	Sh.“000”	Sh.“000”
Financial
Total assets	11,283,668	10,910,696
Members' deposits	10,301,544	9,528,044
Loans to members	10,692,984	9,540,914
Share capital	116,000	111,000
Total revenue	393,713	843,070
Total interest income	382,113	827,970
Total expenses	116,773	139,674
Current assets	11,279,009	10,904,040
Current liabilities	354,256	758,884
Working capital	10,924,753	10,145,156
Capital employed	10,929,412	10,151,812
Interest rate on members' deposits	267,840	400

Employees of the Sacco	521	400
Key ratios
Liquidity ratio	31.84	14.37
Return on capital employed	(2)%	12%
Interest rate on members' deposits	2.6%	7.0%
Dividend rate on members share capital	1%	7%

During your visit, a review of the audit working papers revealed the following:

One audit trainee is concerned with the ratios presented and has sought the manager’s guidance with regards to the implication.
On the audit planning checklist, the audit manager has crossed through the analytical procedures section and written ‘not applicable – new client’. The audit planning checklist has not been signed off as having been reviewed. The audit manager last visited MSCC’s office when the final audit commenced three weeks ago.
The audit manager has since completed the audit of total assets. The Audit manager spends most of his time working from the firm’s office and is currently allocated to seven other assignments as well as MSCC’s audit.
As at 30 June 2020, trade receivables amounted to Sh.11.3 billion (2019 – Sh.10.2 billion). One of the trainees has just finished sending out first requests for direct confirmation of customers’ balances as at the end of the reporting period.
The audit trainee is concerned with the growth in loan to members and the response provided for by management is not satisfactory.

Required:

Identify and comment on the implications of these findings for XYZ and Co. quality control policies and procedures.

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December 2021

7 Questions

Question 4c

Describe some of the areas that an audit review should address.

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Question 4a

Audit committees play a critical role in the governance structure of institutions and in the protection of public interest. Required: Discuss the key responsibilities of an audit committee.

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Question 3c

The International Standards on Auditing (ISAs) address various professional standards of practice for auditors. In particular, ISA 240 - "The Auditor's Responsibilities Relating to Fraud in an Audit of Financial Statements" requires the auditor to focus on areas where there is risk of material misstatements due to fraud, including management fraud.

Required:

Explain the actions that an auditor should take to effectively deal with issues of fraud during an audit.

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Question 3b

There is a strong inter-connection between a financial audit and an operational audit. However, differences also exist.

Required:

Discuss the above statement, clearly bringing out any differences between the two types of audit.

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Question 3a

An audit strategy sets the direction, timing and scope of an audit. Required: In the context of the statement above:

(i) Explore the salient features that distinguish a systems-based approach from a risk-based approach to an audit

(ii) Describe the factors that influence the choice of an audit strategy.

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Question 1b

Management audit calls for an inter-disciplinary approach considering the scope and focus of the audit.

Required:

Discuss the above statement with particular reference to:

(i) Steps involved in a management audit.

(ii) Management functions appraised. (iii) Audit techniques adopted.

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Question 1a

One of the practices that has gained momentum in the recent past is remote auditing, particularly following the outbreak of the COVID-19 pandemic.

Required:

As an auditor, describe how you would approach remote auditing from a practical perspective.

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September 2021

11 Questions

Question 5a

Discuss the nature and purpose of the following:

(i) E-Commerce audits.

(ii) Value for money audits.

(iii) Social audits.

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Question 4b

Describe the audit work that you would carry out in respect of the following:

(i) Segment information.

(ii) Transfer of shares.

(iii) Dividends.

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Question 4a

You are the auditor of Benrose Ltd. which undertakes construction contracts on behalf of its clients.

Last year, you qualified the auditor's report due to lack of evidence to support the client's schedules of estimated costs to completion. During the year, a quantity surveyor joined the management team of Benrose Ltd. His main role is to prepare year end schedules, by contract, of total costs to completion. This includes:

Direct costs incurred to the balance sheet date.
Attributable overheads.
Estimated costs to completion.

You are satisfied that the quantity surveyor is appropriately qualified and experienced.

Required:

(i) Explain the nature and extent of the reliance which you would seek to place on the work of the quantity surveyor.

(ii) Describe the audit work you would perform in respect of total costs to completion.

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Question 3b

Describe how the following factors are posing risks to internal audit in the new dispensation:

(i) Cyber security in the remote world of work.

(ii) Changing regulatory risks.

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Question 3a

Following the outbreak of the Covid-19 pandemic with its associated uncertainty and crisis management requirements, internal audit is now in an interesting position to guide organisations through a completely new landscape of risk. It is evident that new trends have emerged in internal audit that will change the way audit is perceived for years to come.

Required:

In the context of the above statement, explain how the following recent trends are transforming the audit landscape:

(i) Artificial intelligence.

(ii) Soft controls and company culture.

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Question 2c

Discuss how horizontal groups (non-consolidated entities under common control) affect the scope of an audit and the audit work undertaken.

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Question 2b

Explain the role of support/comfort letters as evidence in the audit of group financial statements.

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Question 2a

You are a manager at Dundee Associates, a firm of Certified Public Accountants. Your specific responsibility is for the quality of audits.

Your firm was appointed the auditor of Taka Ltd., a provider of waste management services, in January 2020. You have visited the audit team at Taka Ltd.'s head office. The team comprises an audit senior, an audit assistant and two trainees.

Taka Ltd.'s draft accounts for the year ended 31 December 2019 show revenues of Sh.118 million (2018 Sh.8.3 million) and total assets of Sh.40 million (2018 Sh.30 million). During your visit, a review of the audit working papers revealed the following:

(i)

On the planning checklist, the audit senior has crossed through the analytical procedures section and written "Not applicable-New client". The audit planning checklist has not been signed off as having been reviewed.

(ii)

The audit senior last visited Taka Ltd.'s office when the final audit commenced two weeks earlier on I February 2020. The audit senior has since completed the audit of tangible non-current assets including property and service equipment which amount to Sh.8 million as at 31 December 2019 (2018 Sh.8 million). The audit senior spends most of his time at your firm's office and is currently allocated three other assignments in addition to the audit of Taka Ltd.

Required:

Discuss the implications of the two findings above for Dundee Associate's quality control policies and procedures.

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Question 5b

Discuss the practical challenges that professional bodies might face in trying to conduct audit quality assurance (AQA) activities in member audit firms.

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Question 1b

Suggest the procedures that an auditor should perform in order to gain understanding of a client's business.

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Question 1a

Maisha Bora Welfare Group was established in the year 2015. The organisation's aim is to provide support to children from disadvantaged backgrounds who wish to take part in athletics.

The organisation has a detailed constitution which explains how the income of the welfare group can be spent. The constitution also notes that administration expenses should not exceed 10% of income in any one year.

The income ofthe organisation is derived wholly from voluntary donations. The sources of income include:

Cash collected by volunteers seeking donations from the public.
Cheques sent to the welfare group's head office.
Donations from generous individuals. Some of these donations have specific clauses attached to them indicating that the initial amount donated (capital) cannot be spent and that the interest income from the donation must be spent on specific activities, for example, provision of sports shoes.

Required:

In the context of the above information:

(i) Explain the term "audit risk", clearly indicating three elements of risk that contribute to total audit risk.

(ii) Explore the areas of inherent risk in Maisha Bora Welfare Group, explaining the effect of each of these risks on the audit approach to be adopted.

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May 2021

2 Questions

Question 3a

You are the auditor of Majiwa Electronics, a small family-owned entity involved in selling electronic items.

During your upcoming audit planning meetings, one of the matters to be discussed is whether the auditor will perform analytical procedures.

Required:

(i) Describe the steps involved in conducting analytical procedures.

(ii) Analyse the criteria used to assess whether substantive analytical procedures might be used.

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Question 5b

Madini Ltd. is a company involved in buying and exportation of minelite, a newly discovered type of mineral. The mineral is mined and purchased when still wet. As the newly appointed auditor for the year ended 30 September 2020. you gather the following from the Managing Director of Madini Ltd.:

It takes about two months by sea to transport the mineral to company X, the major buyer based in country Z. During transportation, the mineral loses some weight due to evaporation.
Company X tests the quality of the mineral and pays based on the quality determined, not the invoice generated by Madini Ltd.
Madini Ltd. pays 4% to its home country's revenue authority as export levy based on the invoice to Company X and other buyers.
Of late, Madini Ltd. has experienced heavy losses due to currency fluctuations, inadequate supplies of the mineral and falling prices in the international market. The major shareholder is contemplating closing down the business.

Required:

(i) Explore the key audit risks that the auditor is exposed to in auditing the financial statements of Madini Ltd.

(ii) Formulate a realistic audit plan to determine the gross profit of Madini Ltd.

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November 2020

2 Questions

Question 2

You are the manager responsible for the audit of Food Supremo Limited and its subsidiaries. The group mainly operates a chain of national restaurants and provides vending and other catering services to corporate clients. All restaurants offer "eat-in"; "take-away" and "home delivery" services.

The draft consolidated financial statements for the year ended 30 September 2019 show revenue of Sh.422 million (2018- Sh.418 million), profit before taxation of Sh.18 million (2018-Sh.22 million) and total assets of Sh.307 million (2018-Sh.234 million).

The following issues arising during the final audit have been noted on a schedule of points for your attention:

In September 2019, the board announced plans to cease offering "home delivery" services from the end ofthat month. The sales amounted to Sh.6 million for the year to 30 September 2019 (2018-Sh.8 million). A provision of Sh.2 million has been made as at 30 September 2019 for the compensation of redundant employees (mainly drivers). Delivery vehicles have been classified as non-current assets held for sale as at 30 September 2019 and measured at fair value less cost to sell, that is, Sh.8 million (carrying amount, Sh.5 million).

Historically, all owned premises have been measured at net book value and depreciated over 10 to 50 years. The board has decided to revalue these premises for the year as at 30 September 2019. At the statement of financial position date, two properties had been revalued upwards by a total of Sh.17 million. Another 15 properties have since been revalued upwards by Sh.54 million and there remain a further three properties which are all expected to be revalued during year 2020. A revaluation surplus of Sh.71 million has been credited to equity.

Required:

(a) For each of the matters listed under 1 and 2 above, discuss four factors that would influence the auditors approach to the audit and opinion, including assessment of materiality.

(b) As the auditor of Food Supremo Group, describe the evidence that you would expect to find in your audit.

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Question 3

You are the auditor of Synergy Ltd., a medium-sized company which sells a limited range of industrial products. The value of the company's sales orders range between Sh.5,000 and Sh.100,000 depending on the volume and mix of the orders. Recently, the company decided to transfer the sales accounting function to a computer bureau. Synergy Ltd. operates a fixed price list for customers and any changes to the price list must be approved by the sales manager. The specific functions outsourced to the computer bureau regarding the sales function were:

1. Producing invoices.

2. Updating the master file on trade receivables.

3. Analysing sales so as to produce credit entries to stock control accounts.

In order for the computer bureau to discharge its functions, Synergy Ltd. provides the bureau with the following information:

(i) Details of quantities and type of sale transactions.

(ii) Cash receipts.

(iii) Price lists and alterations.

(iv) Bad debts and special credits.

Required:

(a) Citing ten areas of interest, describe the internal control system you would recommend to the management of Synergy Ltd. covering sales and delivery of input to the computer bureau.

(b) Describe six audit procedures you would carry out to verify the sales of Synergy Ltd.

(c) Explain four drawbacks of outsourcing of the payroll function by the management of Synergy Ltd.

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November 2019

4 Questions

Question 4c

You are the audit manager in-charge of the audit of Maji Mazuri Ltd., a mineral water bottling company.

During the audit for the year ended 31 December 2018 and four months ended 30 April 2019, your audit team observed the following:

(i). Fixed assets were not uniquely labelled and there was no fixed assets register.

(ii). Neither the finance manager nor any of the key staff has any professional accounting qualification.

(iii).There are no budgets against which actual financial performance may be compared.

(iv). Though there is an accounting software that has been in use for the last ten years, you are informed that it is highly doubtful if it accurately computes cost of sales and closing stock hence misstating profits.

(v). There are no written policies and procedure manuals to guide financial management, human resource management or procurement.

(vi) The company does not generate monthly management accounts. Financial statements for year 2018 were availed for audit by end of March 2019.

(vii) There was no evidence of a physical stock-take having been conducted at the year end or on a monthly basis. The company has no perpetual stock system.

Summarise how each of the above factors may impact your opinion on the truth and fairness of financial statements. and the reliability of the internal control system.

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Question 3b

The preparation of financial estimates involves significant subjective judgement and opinion. Many of the provisions made fall within what are ordinarily called "accounting estimates".

Required:

Describe four audit procedures required in respect of accounting estimates.

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Question 3a

You have recently been appointed as the auditor of Dania Ltd. The outgoing auditor provided no reasons as to why you should not accept appointment but nevertheless, commented that auditing the client "was a challenge".

During your planning for the new audit, you discovered that:

The company has been experiencing a low return on assets over the last few years.
The company has failed to meet its contractual obligations and consequently has lost several contracts to competitors.
The production manager's package includes a substantial profit related bonus.
Staff are unhappy and there is a huge turnover of staff.
The managing director, a substantial shareholder is about to retire and his exit package includes a profit related bonus.
The managing director is keen on the accounts showing a dramatic improvement in the current year due to cost savings.

Required:

(i) Describe how you would analyse inherent risks in planning for the audit of Dania Ltd.

(ii) On analysing draft accounts, you discover that profits have improved significantly due to a decline in provisions for doubtful debtors. Discuss how this finding would affect your audit programme.

(iii) You also discover that non-current assets have been valued at prices that cannot be supported. In spite of this, the managing director is unwilling to engage an independent valuer. Demonstrate, through a draft audit opinion, how you would reflect the above finding.

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Question 1a

Bingo Ltd is the parent company of an expanding group of companies. The group's main business activity is the manufacture of parts for the motor vehicle industry.

All subsidiaries are wholly owned and are as summarised below:

A Ltd., acquired in January 2008
B Ltd., acquired in July 2011
C Ltd., acquired in August 2019

The company now seeks to acquire a fourth subsidiary, D Ltd.

As the audit manager at Mhasibu Associates, Certified Public Accountants you are reviewing the working papers in the ongoing final audit of the Bingo Group for the year ending 31 December 2019.

Your firm has audited all current components of the group for several years, but the target company, D Ltd is audited by a different firm.

You have been provided with the following schedule of the cost of investment in D Ltd., showing that goodwill on acquisition of D Ltd. will be recognised in the consolidated statement of financial position at Sh.75 million, computed as follows:

Cost of investment	Sh."million"
Cash consideration	250
Deferred consideration payable
31 March 2020	150
Contingent consideration payable
31 March 2024 of D Ltd. (revenue growth is 8% per annum)	100
	500
Net assets acquired	(425)
Goodwill on acquisition	75

These figures are material to the financial statements of Bingo Ltd. and the Group as a whole. The acquisition will be completed in December 2019.

Required:

(i) Explain the matters that you would consider and the evidence you would expect to find in respect of the carrying value of the cost of investment of D Ltd. in the financial statements of Bingo Ltd.

(ii) Outline the principal audit procedures to be performed on the consolidation schedule of the Bingo Group.

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May 2019

1 Questions

Question 3a

Sinendet Ltd. manufactures custom-made furniture. The company's year end is 31 May. The company purchases its raw materials from a wide range of suppliers. The company's purchasing system is described below:

When production supervisors require raw materials, they complete a requisition form which is submitted to the purchase ordering department. Requisition forms do not require authorisation and no reference is made to the current inventory levels of the materials being requested. Staff in the purchase ordering department use the requisitions to raise sequentially numbered purchase orders based on the approved suppliers list, which was last updated 24 months ago. The purchasing director authorises the orders prior to these being sent to the suppliers.
When goods are received, the warehouse department verifies the quantity to the suppliers despatch note and checks that the quality of the goods received is satisfactory. The department then completes a sequentially numbered goods received note (GRN) and sends a copy to the finance department.
Purchase invoices are sent directly to the purchases ledger clerk, who stores them in a manual file until the end of the week. He then inputs the invoices into the purchases ledger using batch controls and gives each invoice a unique number based on the supplier code. The invoices are reviewed and authorised for payment by the finance director, but the actual payment is only made 60 days after the invoice is input into the system.

Required:

With respect to the purchase ordering system described above:

(i) Analyse four system deficiencies.

(ii) Recommend a control to address each of the deficiencies described in a (i) above.

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November 2018

2 Questions

Question 3b

Analytical procedures consist of evaluations of financial information made by a study of plausible relationships among both financial and non-financial data. They range from simple comparisons to the use of complex models involving many relationships and elements of data. They involve comparisons of recorded amounts or ratios developed from recorded amounts to expectations developed by the auditors.

Required:

(i) Describe four broad objectives of analytical procedures.

(ii) Describe two factors that influence the extent to which an auditor will use the results of analytical procedures to reduce detailed tests in meeting audit objectives.

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Question 2b

You are the auditor of a company with branches spread throughout the region. The turnover for the year ended 30 June 2018 was Sh.3,125 million, the profit before tax was Sh.187.5 million and the net assets were Sh.1,187.5 million.

Your audit report was signed in September 2018 without qualification.

You have received a call from the finance director of the company that the sales ledger clerk in one of the branches has been caught "teeming and lading". His investigations show that during the year to 30 June 2018, the sales ledger clerk had diverted Sh.6.25 million of receipts from customers to his own bank account. The finance director has requested you to attend a meeting with him to discuss the matter.

On checking the records, you ascertain that as at 30 June 2018, the branch affected had net assets of Sh.50 million, a turnover of Sh.125 million and recorded a small loss.

Your re-examination of the audit working papers shows that your staff had visited the branch and had apparently carried out their responsibilities in the required manner.

Required:

Analyse the above scenario and prepare detailed notes to guide you in your discussions with the finance director.

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May 2018

5 Questions

Question 5

You are the lead auditor of Douala Holdings Limited, a large conglomerate with a number of subsidiaries. Some of the subsidiaries are audited by other firms. Your firm is in the process of determining the extent to which the work of the auditors of the subsidiary companies can be relied upon in the audit of the accounts of the parent company and preparation of the group financial statements.

Required:

(a) Explain three factors that you would consider in deciding on the extent to which you would rely on the work of the auditor of the subsidiary companies.

(b) Analyse three matters that you would consider in deciding whether you should qualify your auditreport on the parent company given that the audit report on the financial statements of one or more of the subsidiary companies was qualified.

(c) Your engagement team for the audit of Douala Holdings Limited includes an audit senior and two relatively new audit assistants. One of the focus areas of the audit is the relatively high number of related party transactions among the companies in the group. You wish to brief your team on the key audit considerations for related party transactions.

Summarise four matters for inclusion in your brief to the engagement team.

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Question 4b

Discuss the auditor's consideration of materiality at the planning stage and the overall review stage of an audit.

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Question 4a

You are the audit manager responsible for the audit of Spark Electricals Ltd., a manufacturing company, for the financial year ended 30 September 2017. The audit work has been completed and reviewed and the audit report is due in four days.

The financial statements show revenue for the year ended 30 September 2017 of Sh.200 million, net profit Sh.50 million and total assets at the period end at Sh.1,000 million. The draft audit opinion is unmodified.

The company's finance director has just called you about an announcement made the previous day of an impending significant restructuring ofthe company which will take place over the next five months.

The restructuring will involve the closure of a factory and its relocation to another part of the country. It is expected that there will be some job redundancies. The estimated cost of the factory's closure is Sh.4 million. The financial statements have not been amended in respeet ofthis matter.

Required:

(i) Comment on the financial reporting implications of the above announcement.

(ii) Advise on any further audit procedures you would perform in view of the additional information received.

(iii) Recommend the action to take if the financial statements are not amended.

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Question 3b

An audit of directors' remuneration at Funika Ltd., a listed company has established that the Managing Director, Mr. Anson Mweni, is the highest paid director of the company with an annual pay of Sh.36 million.

As you peruse some of the company's recent purchase invoices, you notice that part of the invoices totaling Sh.12 million relate to repair works undertaken at Mr. Mweni's house. Although Mr. Mweni authorised these payments, there were no Board minutes approving the same. You further establish that Mr. Mweni has ignored internal advice to include the Sh.12 million as part of his annual benefit and for the financial statements to be amended to reflect the proposed change in treatment of the item. The company's profit before tax for the year before any adjustments amounted to Sh.640 million.

The company's Annual General Meeting (AGM) is due to be held soon.

Required:

(i) Assess whether the undisclosed remuneration is material in the above context. Justify your conclusion.

(ii) Assume further that Funika Ltd. has an Audit and Risk Committee and that Mr. Mweni owns less than 1% of the issued shares. You have gathered hints that Mr. Mweni intends to push for replacement of your firm as auditors for the current financial year should you attempt to qualify the audit report.

Describe, indicating any other institutions that you will involve, the matters that you will consider and the actions that you will take to protect the interests of the company's shareholders and the integrity of your firm.

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Question 3a

You are the engagement partner responsible for the audit of the financial statements of Malezi Ltd. for the year ended 30 April 2018. Your preliminary evaluation of the accounting and internal control systems indicated that the systems were reliable. However, subsequent tests of controls revealed that the systems were not operating effectively. This situation has necessitated various revisions to your audit plan.

Required:

In view of the situation explained above, describe the changes that you would effect:

(i) During the interim audit.

(ii) At the final audit visit.

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December 2017

3 Questions

Question 5b

You are auditing the financial statements of Zebra Engineering Ltd. for the year ended 30 June 2017. The partner in charge of the audit instructs you to carry out a review of the company's activities since the financial year end.

Required:

Analyse seven audit procedures which you might carry out in order to identify any material post balance sheet events.

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Question 3c

You are the audit manager assigned to the audit of Njema Ltd., the parent company of a group. As part of your work, in relation to the consolidated accounts, you are reviewing the work of the auditors who audit the accounts of the subsidiaries.

Required:

In the context of the above scenario, discuss five matters you should examine before relying on accounts not audited by you.

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Question 3b

You are the audit manager of Tausi Ltd. You are conducting a review of the financial statements and notice some transactions with the pension fund of the employees. There is no disclosure in the accounts about any related party transactions.

Required:

With reference to the above statement, suggest six procedures that an auditor might carry out in order to establish if the pension fund is a related party.

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May 2017

1 Questions

Question 3b

You are a newly appointed auditor of Shida Ltd. You have recently ascertained the following about your new client:

The company has two major customers and a few small-sized customers.
The company recently purchased a very large and complex computer system as part of its automation process. The administration staff do not have adequate competence to run the system properly.
The Chief Executive Officer of the company, Albert Amingi, has a dominating personality and is overbearing on his subordinates.
The company has no formal management accounting system. The new computer system is supposed to remedy this gap.

Required:

Justifying your answer, suggest an appropriate audit strategy for the first audit of Shida Ltd.

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November 2016

1 Questions

Question 2

Your audit firm, Makau Kilunda and Associates, are the auditors of Kikomi Manufacturing Group (KMG) Ltd. The group comprises various subsidiaries which were acquired over the last two years.

The subsidiary companies operate diverse businesses including but not limited to mining, agriculture, beauty products and steel manufacturing works. The CEO of KMG Ltd., Mr. Tim Kilonzo is very entrepreneurial and autocratic. KMG Ltd. is highly geared and recently acquired a listed company dealing in information communication technology solutions. A financial analyst had indicated in one ofthe respected financial magazines that the listed company was acquired at a very high price compared to the value of its assets.

Another large subsidiary which manufactures skin products has been sued by customers over some products which have allegedly adversely affected their skins. Some farmers also allege that the maize seeds supplied by one of the subsidiary companies were faulty and thus the seedlings withered one month after germination.

Required:

(a) Assess the audit risk faced by Makau Kilunda and Associates in the course of the audit of Kikomi Manufacturing Group (KMG) Ltd.

(b) Summarise the advantages of a business risk approach to the audit of KMG Ltd.

(c) (i) Undertake a business risk assessment of KMG Ltd.

(ii) Highlight how the business risk assessment in (c) (i) above might influence the audit process.

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May 2016

3 Questions

Question 3

Bakari Ltd. acquired 75 per cent of the ordinary shares of Makali Ltd. on 30 June 2015 for Sh.20 million. The reserves of Makali Ltd. at the time of acquisition were Sh.10 million (credit).

The statements of financial position of the two companies as at 31 December 2015 were as follows:

Statements of financial position as at 31 December 2015:

	Bakari Ltd. Sh. "000"	Makali Ltd. Sh. "000"
Sundry assets	20,000	50,000
Investments in Makali Ltd. 75,000 ordinary shares of Sh.100 each	20,000	-
	40,000	50,000
Financed by:
Share capital	20,000	10,000
Revenue reserves	20,000	40,000
	40,000	50,000

Additional information:

The subsidiary company was audited by another auditing firm and the directors of the holding company agreed through a resolution that the audit firm would continue to audit the subsidiary company for the year ended 31 December 2015.

Required:

(a) Describe the matters you would consider in the audit of the holding company, Bakari Ltd.

(b) Summarise the information that you would require from the auditors of the subsidiary company, Makali Ltd.

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Question 4

You are responsible for the audit of Superior Packaging Ltd. for the year ended 31 March 2016. The principal activity of Superior Packaging Ltd. is the provision of high quality packaging services for manufacturing companies. The company was established 3 years ago and has significantly exceeded its growth targets in each subsequent year. Historically, the packaging process was labour intensive. However in December 2015, in an effort to reduce labour costs and increase efficiency, the company invested in an enhanced automated packing system. The investment was funded by a loan repayable in monthly instalments over 4 years. The loan agreement includes a covenant specifying that the company's debt equity ratio should not exceed 1:1.

A comparison of the draft financial statements for the year ended 31 March 2016 with the previous year's financial statements indicates a significant increase in the turnover (revenue) with a small increase in profitability. The company is currently trading in excess of its overdraft limit and is negotiating an increase in its facility with the bank. The management of the company has prepared, in support of its negotiations, profit and cash flow forecasts based on the assumption that the anticipated increase in efficiency and reduction in labour costs will be achieved. The company has struggled to meet its wage bill obligations and fallen behind with PAYE, NHIF and NSSF remittances. It has also failed to comply with the terms of the lease in respect of the factory premises and has not paid the last three months instalments.

Required:

(a). Explain from the information provided above, factors which could indicate that Superior Packaging Ltd. might not be a going concern.

(b) Describe the duties of the directors in respect of going concern basis of a company.

(c) Where events have been identified which cast doubt on the appropriateness of the going concern basis, management should demonstrate to the auditors that they have identified the problem and have plans to deal with it.

Propose the procedures the auditors must carry out on the management plans and the possible impact to the auditors report.

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Question 1

You are the audit manager assigned the audit of the financial statements of Himaya Ltd. for the year ended 31 December 2015. You have come across three material items in the course of your audit which need to be concluded in order to form an audit opinion on the financial statements.

Required:

(a) In the context of the above scenario, describe the audit work to be performed on the following matters:

(i) The allowance for doubtful debts for the current financial year is Sh.15 million which represents 2.5% of the accounts receivable as at 31 December 2015. The allowance for doubtful debts for the three previous years was 5% of the accounts receivable. The credit controller has advised that the reduction in allowance was due to the measures undertaken to improve on debt collection and credit check procedures.

(ii) The directors' emoluments amounting to Sh.70 million during the year have not been disclosed in the financial statements.

(iii) Circularisation of a debtor owing the company Sh.68 million had not been done due to what the financial controller justified as "strained relations with the debtor". No cash has been received from the debtor and some documents regarding shipment to the customer are missing.

(b) Explain how the three matters outlined in (a)(i), (ii) and (iii) above would impact on the auditors report, assuming that your best estimate of the appropriate allowance for doubtful debts is Sh.30 million and that no adjustments had been made in the financial statements in respect of the matters set out in items (a)(i), (ii) and (iii) above.

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November 2015

3 Questions

Question 4b

Describe the audit procedures that an auditor could perform to assess whether or not a client entity is a going concern.

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Question 3

You are a member of the audit team assigned to audit the financial statements of Elite Trading Co. Ltd., a listed company, for the year ended 31 August 2015. The detailed audit work was completed on Friday, 30 October 2015. The audit assignment partner has requested you to consider the auditor's responsibilities for identifying subsequent events and the audit procedures for examining subsequent events.

With respect to the financial statements of Elite Trading Co. Ltd., it is tentatively proposed as follows:

The audit report be signed on Thursday, 12 November 2015.
The financial statements be sent to the shareholders on Wednesday, 2 December 2015.
The annual general meeting of the company be held on Wednesday, 30 December 2015, in which meeting the shareholders will vote to approve the financial statements.

Required:

(a) Assess the responsibility of the auditors for detecting material subsequent events in the following periods:

(i) 31 August 2015 to 30 October 2015.

(ii) 30 October 2015 to 12 November 2015.

(iii) 12 November 2015 to 2 December 2015.

(iv) 2 December 2015 to 30 December 2015.

(b) Explain the audit procedures that you could use in the examination of subsequent events.

(c) Describe the work you would carry out for the period listed in (a) (ii) above.

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Question 1a

Your firm has been retained as the auditors of Solo Ltd., a retailer of books, music media and computer software. As part of the audit planning for the year ended 30 June 2015, your audit manager has asked you to assist with drafting of the audit programmes.

Required:

For each of the four (4) items listed below, describe the audit procedures that you would undertake in respect of the matters listed to ensure that the financial statements of Solo Ltd. are fairly stated.

(i). On 1 June 2015, Solo Ltd. relocated from its rented warehouse to a larger property in order to accommodate growth in the business. The lease on the old warehouse, which came to an end on 31 May 2015, contains a dilapidation clause which specifies that Solo Ltd. must carry out repairs to the warehouse in order to restore the property to the same condition it was in when the lease commenced. Work on the dilapidations commenced on the day Solo Ltd. vacated the property and it is expected to take three months to complete. The directors of Solo Ltd. have included the estimated cost of these works in the financial statements for the year ended 30 June 2015 at Sh.20 million.

(ii) In order to cope with its recent expansion, Solo Ltd. installed a new computer system during the year. The old computer system, which has now been disposed of, was replaced after three years, despite its initial useful life being assessed as five years. Solo Ltd. has capitalised the new system at a cost of Sh.60 million and is depreciating it at 20% per annum on a straight line basis.

(iii) Solo Ltd. maintains a perpetual inventory system. Monthly inventory reports analyse the age of items in three-month periods for all inventory up to one year old and as a single figure for all inventory older than one year old. Solo Ltd. has historically included a provision in its financial statements to cover both obsolete and damaged inventory equal to 10% of the total inventory cost.

(iv) Solo Ltd. pays a 5% commission to referees in return for them directing business to the company. The 5% commission is calculated using the retail price as advertised by Solo Ltd. The commission is payable at the end of the month following that in which Solo Ltd. receives payment from its customers. Solo Ltd.'s computer system generates a monthly statement of sales made on this basis together with a calculation of the commission due. However, due to a computer virus, the computer system has not calculated or paid any commission since 31 March 2015. A number of the largest referees have since contacted Solo Ltd. demanding payment of their own estimates of commission due. Solo Ltd. has not made provisions in the financial statements for unpaid commission.

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Pilot September 2015

5 Questions

Question 1b

You are an audit manager in Hasibu and Co. working on the audit of Safari Group (The Group), whose financial year ended on 31 March 2015. This is the first time you have worked on group audit. The draft consolidated financia! statements recognise profits before tax of Sh.600 million (2014 - Sh.900 million) and total assets of Sh.900 million (2014 - Sh.820 million). The group manufactures equipment used in telecommunication industry.

Goodwill of Sh.100 million is recognised in the group statement of financial position having arisen on several business combinations over the last few years. An impairment review was conducted in March 2015 by the group finance director, from which an impairment of Sh.5,000,000 is to be recognised in respect of goodwill.

The group finance director has prepared a file documentation to support the results of the impairment review, including notes on the assumptions used, his calculations and conclusions. He made the following comment: "I don't think you need any evidence other than that contained in my file. The assumptions used are straightforward, so you need to look into them in detail. The assumptions are consistent with how we conducted impairment reviews in previous years and your firm has always agreed with the assumptions used; so you can check that back to last year's audit file. All of the calculations have been checked by the head of group internal audit department".

The group finance director has also informed you that two members of the sales team are suspected of paying bribes in order to secure lucrative customer contracts. The internal audit team were alerted of this when they were auditing cash payments and found significant payments to several new customers being made prior to the contract being signed. The Director has asked if Hasibu & Co. could perform a forensic investigation into the alleged bribery payments.

Required:

(i) Discuss how professional skepticism should be applied to the statement made by the group finance director.

(ii) Explain the principal audit procedures to be performed on the impairment of goodwill.

(iii) Recommend two procedures to be used in performing a forensic investigation on alleged bribery payments.

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Question 2a

Define the term "environmental matters" and discuss the implication environmental matters have on company's financial statements.

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Question 2b

You are the audit manager of Kilimanjaro Co., a company which designs and manufactures aircraft engine parts. The audit of the financial statements for the year ended 31 December 2015 is nearing completion and you are reviewing the papers addressing the going concern section of the audit file. The draft financial statements recognise a loss of Sh.50 million (2014 - profit Sh.76 million) and total assets of Sh.138 million (2014 - Sh.144 million).

The audit senior has left the following note for your attention:

"I have performed analytical review on Kilimanjaro Co's year end financial statements. The current ratio is 0.8 (2014-1.2), the quick ratio is 0.5 (2014 - 1.6). The latest management accounts show that ratios have deteriorated further since the year end, and the company now has a cash balance of only Sh.2,500,000. Kilimanjaro Co. has a longterm loan outstanding of Sh.8 million with a covenant attached, which states that if the current ratio falls below 0.75, the loan can be immediately be recalled by the lender.

You are also aware that one of the Kilimanjaro Co.'s best selling product Mofire, has become technically obsolete during 2015 as customers now prefer more environmentally friendly engine parts. Historically the Mofire has generated 45% of the company's revenue. In response to customers preference, Sh.130m has been spent on designing a new product G-fire, due to launch in February 2016 which will be marketed as an environmentally friendly product.

A cash flow forecast has been prepared for the year ending 31 December 2016, indicating that based on certain assumptions, the company cash balance is predicted to increase to Sh.22 million by the end ofthe forecast period.

Assumptions include:

Successful launch of the G-fire product.
The sale of plant and machinery which was used to manufacture Mofire generating cash proceeds of Sh.0.5 million, forecast to take place in January 2016.
A reduction in payroll costs of 15%, caused by redundancies in the Mofire manufacturing plant.
The receipt of grant of Sh.300,000 from a government department which encourages innovation in environmentally friendly products, scheduled to be received in February 2016.

Required:

(a) Explain the matters which cast doubt on the going concern status of Kilimanjaro Co.

(b) Explain the audit evidence you should expect to find in your file review in respect of the cash flow forecast.

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Question 3a

Kenya Lab Instruments Ltd. is an established manufacturing company producing laboratory instruments. The following extracts are from the company's final draft statement of financial position and income statement for the year ended 30 April 2015.

Income statement:

	Year 2015 (Sh.000)	Year 2014 (Sh.000)
Sales	351,760	378,845
Gross profit	243,993	286,505
Net profit	40,076	38,773
Statement of financial position:
Fixed Assets:
Cost	183,060	176,400
Accumulated depreciation	(114,993)	(105,840)
	68,067	70,560
Current Assets:
Stock	185,336	86,111
Debtors	67,627	63,141
	252,963	149,252
Current Liabilities:
Creditors	20,691	17,379
Overdraft	95,461	37,634
	116,152	55,013
Net Assets	204,878	164,799

The following issues arose during the audit assignment of which you are the manager:

Sales during the second half of the year were 40% below those in the first half.
Kenya Lab Instruments Ltd.'s main competitor Focus Instruments Ltd. has launched a new range of specialist equipment causing Kenya Lab Instruments Ltd.'s forward orders to fall significantly.
The current overdraft limit is Sh.700 million.
Plant and machinery costing of Sh.40 million, is fully depreciated and the production director advises that new machinery must be acquired within one year to avoid incurring excessive repair costs.

Required:

A file memorandum reviewing the above results and information and raising any issues which need to be resolved prior to the signing of the audit report.

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Question 4a

Your firm audits H-Pound Ltd., a recognised East Africa's premier engineering construction and infrastructure company that undertakes construction contracts which include roads, bridges, warehouses, factories and offices. H-Pound Ltd. customers include governments and businesses. Recent cut-backs in local government expenditure have resulted in fewer contracts being started this year than budgeted.

The statement of accounting policy for construction contracts in H-Pound financial statements provides as follows:

"Revenue is recognised using the percentage of completion method, calculated on the basis of costs incurred as a percentage of expected costs.

"Anticipated losses are provided for in full as soon as the possibility of loss is forecast".

Direct costs attributed to specific contracts include:

Architect's design costs, legal fees and engineering assistance.
Material issued to site.
Site supervision (apportioned foreman's salaries).
Site labour costs (allocated from the payroll and subcontractors invoices).
Costs of hiring suitable building and leasing plant and equipment.
Depreciation of plant, equipment and vehicles.
Transportation costs of resources such as materials between sites.
Insurance and telephone.

Indirect expenses incurred by H-Pound Ltd.'s head office which relates to construction activities are attributed to the project at 70% of direct costs.

Last year, your firm qualified the auditor's report due to lack of evidence to support the client's schedule of estimated costs to completion.

During the year, a quantity surveyor joined the client's management team to undertake the following:

Supervise monthly physical counts at the major construction sites.
Monitor costs to date against the monthly rolling budget.
Prepare year-end schedules by contract of total cost of completion (that is direct costs incurred to the balance sheet date, attributable overheads and estimated costs to completion).

You are satisfied that the quantity surveyor is appropriately qualified and experienced.

Required:

(i) Explain the principal audit risks to be considered when placing the approach to the final audit for the year ending 30 September 2015.

(ii) Explain the nature and extent of reliance which you should seek to place on the work ofthe quantity surveyor.

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