December 2024

1a

Forensic accounting

You are the Audit Manager of Daud and Daud Associates, a firm of Certified Public Accountants, responsible for the audit of Bandia Ltd. The Finance Manager of Bandia Ltd. is suspected of embezzling funds through a complex scheme of fake invoices and off-the-book transactions. Your firm has been hired by the directors of Bandia Ltd. to conduct a forensic audit after allegations of financial mismanagement and fraud arose within the organisation.

Required:

(i) Describe TWO types of evidence you would gather in this situation.

(ii) Evaluate THREE potential challenges you might face during the forensic audit.

1b

Assurance and non-assurance engagements

You are a senior auditor in the audit of Mutaratibu Ltd., a small and medium-sized enterprise. Your client has approached you to provide assurance on their prospective financial information as they seek to secure additional financing. However, there are concerns that the forecasts are overly optimistic.

Required:

Discuss FIVE risks associated with providing assurance on prospective financial information.

2a

Professional and ethical considerations

Tech Solutions Ltd. is a mid-sized technology firm that has recently faced scrutiny due to various financial discrepancies. Cato Emily, the company's Chief Financial Officer (CFO) and a Certified Public Accountant, has been with Tech Solutions for over ten years. During an external audit, several breaches of the fundamental principles that professional accountants are expected to uphold were discovered.

Cato Emily maintained a close personal relationship with the Chief Executive Officer (CEO), Jack Jones, which compromised her objectivity in financial decision-making. She approved multiple transactions that directly benefited Jack Jones, including a lucrative contract awarded to a business owned by Jack’s sibling, without following proper procurement procedures or disclosures.
In a casual conversation with a friend employed at a competing firm, Emily disclosed Tech Solutions Ltd.’s strategic financial plans, including sensitive information about upcoming product launches and financial forecasts. This information ultimately leaked, causing considerable harm to Tech Solutions Ltd.’s competitive advantage.
Under pressure from Jack to enhance the company's financial performance prior to a merger negotiation, Emily directed the accounting team to inflate the revenue figures for the most recent quarter. She also failed to record certain liabilities, making the statement of financial position appear stronger than it actually was.
As Tech Solutions Ltd. sought to enter new, heavily regulated markets, Emily neglected to pursue the necessary training or hire external consultants with knowledge of the new regulatory requirements. Consequently, several regulatory violations occurred, placing the company at risk of fines and legal actions.

Required:

In each of the scenarios above, discuss:

(i) The professional code of ethics violated.

(ii) The ethical issue arising.

(iii) How each of the ethical issues arising may impact the audit.

2b

Concluding and reporting

After completing the audit of Maneno Company Ltd. for the year ended 31 December 2023, the auditor identified several material misstatements in the financial statements that management has refused to correct. Some of these misstatements could lead to a qualification of the audit opinion.

Required:

(i) Explain TWO types of audit opinion that the auditor is likely to give in this case.

(ii) Describe SIX ways on how the auditor would communicate the misstatements in his audit report.

3a

Audit evaluation and reviews

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.

3b

Assurance and non-assurance engagements

Describe FOUR benefits that accrue to businesses as a result of applying auditing and assurance services in their operations as per the provisions of ISA 210.

3c

Audit evaluation and reviews

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.

4a

Professional and ethical considerations

You are the audit engagement partner in the audit of Somesha Ltd. An audit trainee assigned to you is keen to understand how an audit firm can reduce its exposure to claims of negligence and how the auditor can restrict liability by making a liability limitation agreement with an audit client.

Required:

(i) Discuss THREE negative implications that a liability limitation agreement may have on the auditor or the client.

(ii) Suggest FOUR strategies that an audit firm may employ in order to reduce exposure to litigation claims.

4b

Contemporary issues and emerging trends

You are the audit manager of Jawabu Associates, a firm of Certified Public Accountants. You attended a professional training seminar in which “Integrated Reporting” featured prominently.

Required:

Summarise SIX principles that underpin the preparation and presentation of an Integrated Report.

5a

Contemporary issues and emerging trends

Remote auditing became commonplace activity for audit firms by aid of the proliferation of remote technology tools during the COVID19 pandemic. Remote auditing has continued to gain momentum and more organisations may embed it as a new way of working.

Required:

(i) Analyse THREE benefits and THREE challenges of remote auditing.

(ii) Highlight FOUR matters the auditor should consider during the initial planning of remote auditing.

5b

Audit framework and regulations

You are the Audit Manager of Will and Willow Associates, a firm of Certified Public Accountants who are the auditors of Tamtamu Group of Companies Ltd., for the year ended 30 June 2024. Tamtamu Group of Companies specialises in production and sale of healthy food products. The group has three subsidiaries namely; Dominion Delicacies Ltd., Stay Young Ltd. and Pemba Ltd. Your firm audits all components of the group with the exception of Pemba Ltd. which was acquired during the year.

The year-end is almost complete and the following matters have been raised by the audit senior for your attention:

Tamtamu Group of Companies Ltd.

This is a non-trading parent company, for the period under review, the directors decided to diversify the group’s activities in order to reduce risk exposure. Non-controlling interests representing long-term investments were consolidated into two companies. In the consolidated statement of financial position, these investments are accounted for as associates, as Tamtamu Ltd. is able to exert significant influence over the companies. As part of their remuneration, the directors of Tamtamu Ltd. receive a bonus based on the profit before tax of the group. In October 2023, 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.

Dominion Delicacies Ltd.

This company mills, blends, packages and distributes healthy flours and natural spices. During the year ended 30 June 2024, the company built a new processing area, at a total cost of Sh.8 million the amount was considered 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 February 2024. The processing area started operating on 1 May 2024. The estimated useful life of the extended factory is 15 years.

Stay Young Ltd.

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

Pemba Ltd.

This company is a new and significant acquisition purchased in January 2024. It is located in North Africa and has been purchased to supply peanuts and other ingredients for the goods produced by Stay Young Ltd. It is now supplying approximately half of the ingredients used in Stay Young Ltd.’s manufacturing. The country in which Pemba Ltd. is located has not adopted International Financial Reporting Standards (IFRSs), meaning that Pemba Ltd.’s financial statements are prepared using local accounting rules. The company uses local currency to measure and present its financial statements.

Pemba Ltd. is audited by a small local firm, Patel and Company Associates. Audit regulations in that country are not based on International Standards on Auditing.

Required:

Evaluate FIVE audit risks to be considered in your planning of the final audit of the consolidated financial statements for Tamtamu Group for the year ended 30 June 2024.

December 2024

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