MULUNGUSHI UNIVERSITY
SCHOOL OF BUSINESS STUDEIS
FINAL EXAM
ACADEMIC YEAR: 2017/2018,
SEMESTER 1
PROGRAMME(S) BAF IV
COURSE TITLE: AUDITING I
COURSE CODE: BAF-421
DATE OF EXAM 15th DECEMBER 2017
TIME ALLOWED: 3HOURS
GENERAL INSTRUCTIONS
1. THE EXAM BOOKLET HAS THREE PROBLEM TYPE QUESTIONS. ALL QUESTIONS
ARE COMPULSORY
Page 1 of 17
Question one (30 marks)
i) List and briefly explain 5 fundamental principals of ethical behavior for accountants
and auditors(5 marks)
ii) The following are situation involving ethical behavior .
a) John Sante is a chartered accountant, but not a partner, with three years’ professional
experience with KIC Zambia Chartered Accountants, a one office firm. He owns 2,500 shares
in an audit client of the firm, but he does not take part in the audit of the client and the amount
of stock is not material in relation to his total wealth.
b)Mr Banda is the appointed auditor of a large bank. He currently has a loan from the bank
secured by a first mortgage on his home.
c) A client requests assistance of Chongo, Chartered Accountant, in the installation of a
computer system for maintaining production records. Chongo has no experience in this type of
work and no knowledge of the client’s production records, so he has obtained assistance from
a computer consultant. The consultant is not in the practice of public accounting, but Chongo
is confident of his professional skills. Because of the highly technical nature of the work
Chongo is not able to review the consultant’s work.
d) Five small Zambian public accounting firms have become involved in an information
project by taking part in an inter-firm working paper review program were each audit firm
gives the its audit working papers from the audit work of their clients to another audit firm for
review. Under the program, each firm designates two partners to review the working papers,
including the tax returns and the financial statements of another public accounting firm taking
part in the program. At the end of each review, the auditors who prepared the working papers
and the reviewers have a conference to discuss the strengths and weaknesses of the audit. They
do not obtain authorisation from the audit client before the review takes place.
e) Grand Thornton Chartered Accountants currently audits BY Limited. The managing
director of BY Limited has asked Grand Thornton to provide management consulting services,
including the purchasing of new computers. Ms malawo, a partner of GrandThornton , is a
minor shareholder in a computer manufacturer and retailer that will sell the new computers to
BY Limited.
REQUIRED
For each situation outlined above, identify the ethical fundamental principle/s involved
and discuss whether they have been breached also discuss safeguard to reduce threats in
future (25 marks)
Note: You may wish to present your answer in form of a table, as follows
Fundamental principle/s involved
Discussion
of Safeguard to reduce
breach/no breach
Threat in Future
a
b
Page 2 of 17
Question two (30 marks)
An agricultural company, Dunavant , was established some years ago to assist local cotton
producers in the marketing of their product to the local and foreign markets. Producers sent
their product to Dunavant and were then given an advance payment, in the form of a loan. The
cotton was pooled and milled in the Dunavant gin and the milling costs, which were borne by
the producer, were offset against the initial loan along with receipts from the sale of cotton to
the market. The farmers and Dunavant split the profits in the proportion 40:60 respectively.
Dunavant was administered by a Board of directors (BoD) which comprised two Executive
Directors, the Managing Director (MD), the Finance Director (FD) and four non-Executive
Directors (NED) whose backgrounds were in farming and business. The board met monthly,
and, among other business, it reviewed the company’s credit risk and approved extensions to
customer credit limits at these meetings.
The MD was a charismatic person with a dominant personality who had a background in sales
and was determined to grow the company. In 2013, the MD established a trading arm that dealt
in cotton futures. The trading was conducted by a single employee and no limits were imposed
on trading. The Finance Director, a former business colleague and close friend of the MD, was
responsible for the preparation of the aged debtors analysis presented at monthly board
meetings.
The movement of cotton from producer to gin to storage and export facilities was
subcontracted to Fine Cotton Transport, a trucking company owned by the Finance Director ,
which was awarded the transport tender by the board in 2011.
A drop in world cotton prices, imprudent futures trading and inadequate hedging led to a large
trading loss for the year ended 2013. In addition, during that year the MD had been aggressively
selling and had not sought BoD approval for credit limit extensions to the appropriate
receivable account of a significant favoured customer, Chipata cotton limited. The MD,
however, was unwilling to report the loss to the board and instead enlisted the Finance Director
and other employees to take various actions to offset the losses on the assurance that the trading
loss would be temporary and would turn around within the next six months. The Finance
Director prepared an aged debtors analysis for the board. The Chipata cotton limited account,
which exceeded the board-authorised credit limit by K5 million, was split by individual
contract and given different account names, Menda cotton services and Lite cotton Limited.
The analysis was manipulated so as to understate the total debtor’s position.
As the trading losses became apparent, the Finance Director asked the accounts clerk to
withhold all invoices received two months prior to year end, except for invoices received from
Fine Cotton Transport. The invoices were to remain unprocessed and unpaid in the clerk’s
bottom drawer and any inquiries from suppliers were to be ignored. The ginning costs were
falsely inflated to reduce the amount of profits distributed to farmers.
An audit was conducted for the year in question and an unmodified (favorable) report issued.
Prior to this, the discrepancies in the aged analysis were included in the auditors’ schedule of
proposed adjustments, which was given to the MD. In the month following the approval of the
audited accounts, Chipata cotton limited was placed in receivership. The total debt outstanding
represented more than 20% of total trade receivables to Dunavant .
REQUIRED
Page 3 of 17
a) Evaluate the corporate governance of Dunavant and explain how the Audit committee
could have prevented most of the questionable activities in Dunavant from
occurring.(10 marks)
b)In line with International Standards in Auditing (ISA 240) explain the difference
between fraud and error(5 marks)
c)List the fraudulent activities that you have identified in Dunavant company and
explain analytical and substantive test that the auditor would have employed to detect
and prevent the frauds identified(10 marks)
(You may present your answer in the tabular format below)
Fraudulent activities
Analytical and substantive tests
1
2
Question three (40 marks)
i) ISA 315 state that auditors should understand the entity and its environment sufficient to
identify and assess risk of material misstatements in financial statements.The risks can be
divided in two 2 business risks and audit risks.
a) Explain what business risk is and give three examples(6 marks)
b)Explain what audit risk is and give three examples(6 marks)
II) Mecor Zambia Products Pty Limited (MECOR) commenced operations in 1992 as a
manufacturer and distributor of plastic extrusion products in Zambia. The company produces
an extensive range of extruded plastic and rubber products including refrigerator door seals.
MECOR now acquires large quantities of raw product from a number of local, and
international suppliers. The finished product is mainly distributed to manufacturers of fixed
and mobile domestic and commercial refrigeration units throughout Central Africa.
MECOR was originally formed as a partnership between Peter Mwamba and Tedy Phiri. Both
founders were previously executives of an established rubber manufacturer, Kafue Rubber
Limited (Kafue Rubber). Being aware that Kafue Rubber was going to relocate to Ghana and
close its extrusion and moulding section, they established the partnership with Kafue Rubber’s
blessing. Both Mwamba and Phiri contributed an equal amount of equity in forming the
partnership in 1992, receiving equal shares in both equity and income of the partnership. As a
result of the success of the business, Mwamba and Phiri incorporated MECOR in 1999 so that
additional equity could be raised to finance the proposed expansion of operations. The Articles
of Association authorised MECOR to issue 2 million ordinary shares of K1 par value. Of these,
911,351 were issued as follows:
303,784 to Mwamba in exchange for his partnership interest;
303,784 to Phiri in exchange for his partnership interest;
151,892 to Mweemba in exchange for cash; and
151,891 to Koma, in exchange for cash.
Page 4 of 17
The cash injected into MECOR allowed for the proposed operational expansion to go ahead,
which in turn led to significant improvements in sales volume and margin.
A further issue of 493,654 shares occurred in 2002. The directors and shareholders permitted
Mwamba to purchase an additional 303,784 shares for cash, taking his holding to 607,568
shares or 43.2% of the company. The remaining 189,870 shares were bought in equal parcels
by 10 people not previously associated with MECOR.
In 2012, one of MECOR’s major suppliers became insolvent. This created a significant
shortage of raw materials for MECOR, and as a result it lost customers to an overseas
competitor. MECOR quickly organised for raw materials to be supplied by a number of local,
and international companies. However, due to the reduction in sales and cash flow, MECOR
had to borrow funds for working capital in 2014.
Zambia National Commercial Bank PLS’s (ZANACO) loan agreement required MECOR to
provide annual audited financial reports. A modification(un favorable report) of these accounts
would trigger a default clause in the loan agreement, allowing ZANACO to demand full
repayment of the loan within 30 days of the date of the audit report. The company has since
grown, but still has some of the loan outstanding as management believes they are generating
a greater return with their existing assets.
The small accounting firm of KBM & Co was engaged to perform the audit, and has remained
the auditor of MECOR for the last nine years. An unmodified (favorable report) opinion has
been issued each year. The 10 minority shareholders are considering merging their holdings
and taking over the company with a view to introducing new systems and technology into the
business. Both Mwamba and Phiri are close to retirement and are seriously considering selling
the company. The consortium approached your firm, Grand Thorn & Co, for the purpose of
taking over the audit for the year ended 30 June 2017. Your firm has accepted the engagement
and has full cooperation management.
Required
a)In the above case study, (i) Identify the business risk (ii)their possible impact on the
financial statement (iii) How the auditor can assess and mitigate the risk. (14 marks)
(You may present your answer in the tabular format below)
Type of Business risks
Possible Impact on financial How to
mitigate
statement
(reduce) the risk
1
b)In the above case study, (i) Identify the audit risk (ii)their possible impact on the
financial statement (iii) How the auditor can assess and mitigate the risk. (14 marks)
(You may present your answer in the tabular format below on the next page)
Type of Audit risks
Possible Impact on financial How to
mitigate
statement
(reduce) the risk
1
End of exam
Page 5 of 17
MULUNGUSHI UNIVERSITY
SCHOOL OF BUSINESS STUDEIS
FINAL EXAM
ACADEMIC YEAR: 2018/2019
SEMESTER 1
PROGRAMME(S) BAF IV/BCOMIV
COURSE TITLE: AUDITING I
COURSE CODE: BAF-421
DATE OF EXAM 21st DECEMBER 2018
TIME ALLOWED: 3HOURS
GENERAL INSTRUCTIONS
1. THE EXAM BOOKLET HAS FOUR PROBLEM TYPE QUESTIONS. ALL QUESTIONS
ARE COMPULSORY
Page 6 of 17
Question one(25 mark)
Good corporate governance is said to be one of the key contributors of the company’s success.
a) Define what corporate governance is, and explain why an effective internal audit function
and the audit committee are referred to as one of the cornerstones of good corporate
governance? (8 marks)
b) International standard in audit 220(ISA 220) “quality control for audit financial statements”
gives 6 main requirements of quality control procedures for an audit of financial statements of
the audit firm.
List the any three of the six elements of quality control and provide one example of a policy
or procedure that can be used to fulfil each of the three elements listed. (9 marks)
c)After discussing the audit standard ISA 220 “quality control for an audit financial
statements”, one of your classmates thinks that auditing of audit firms should be one of the
ways of ensuring quality in the audit firms, but then your classmate is wondering as to who
audits, audit firms.
Explain clearly to your classmate as to who audits, audit firms and how quality control is
maintained in audit firms (8 marks)
Question two (25 mark
I) Among the fundamental principles of ethical behaviour for auditors is independence and
Competence and due care.
Explain the principles of independence and Competence and due care in relation to the
ethical behaviour for auditors.(7 marks)
II) Each of the following situations involves a possible violation of the Independence Rule of
the Code of Professional Conduct for auditors.
a) Mwape, a sole practitioner, has provided extensive advisory services to one of its audit
client,KDV. Among the advisory services that Mwape has provided are; Interpretation of
financial statements, provision of forecasts and other analyses, advising on potential
expansion plans, and advising on banking relationships but has not made any management
decisions. KDV is a privately held entity.
b) Moono auditing and accountancy services, has been asked by his audit client, POPS
furnitures , to help implement a new control system. Moono will arrange interviews for POPS
s hiring of new personnel and instruct and oversee the training of current entity’s personnel.
POPS furniture is a privately held company. Moono will make all hiring decisions and
supervise employees once they are trained.
c) KPMG recently won the audit of Kafue textiles, a large manufacturer of women’s clothing.
John one of the partners of KPMG had a substantial investment in Kafue textiles prior to
bidding on the engagement. In anticipation of winning the engagement, John placed his shares
of Kafue textiles in a blind trust, (an arrangement in which the financial holdings of a person
in an influential position are placed in the control of a fiduciary in order to avoid a possible
conflict of interest)
Page 7 of 17
d) BML audit firm and consultancy is auditing Minwood holdings apartments in which the
parents of Banda a member of the audit firm own a unit and reside. The unit is material to the
parents’ net worth, and Banda is on the audit team that is participating in the engagement.
e) Solo , a sole practitioner, audited auto world ’s, financial statements for the year ended
December 2017 and was issued stock by the entity as payment of the audit fee. Solo is planning
to disposed of the stock before commencing fieldwork planning for the audit of the next year’s
December 2018 financial statements.
f) T & T Corporation requires an audit for the current year 2018. However, T & T has not
paid Grandthorton the fees due for tax-related services performed two years ago.In December
2017 .T & T issued Grandthorton a note for the unpaid fees, and Grand Thornton has
proceeded with the audit services for the current year.
For each of the above situations Indicate with reasons, whether each situation violates the
Code of independence and suggest future safe guards (18 marks) (you may present you
answer in the format below)
Violates or /does
Why
it Future safeguard
not violate
Violates/or why
does not violate
A
B
C
D
E
F
Question three (25 marks)
i)
ISA 315 Identifying and Assessing the Risks of Material Misstatement identifies
Audit risk and business risk as the two major elements of total risk .
Required: Differentioate Audit risk from business risk(5 marks)
ii)
The audit firm of PWC evaluates the risk of material misstatement by
disaggregating the total risk into its main components and sub components as
indicated below
1) Inherent risk, 2)Control risk, 3) Detection risk 4) Operational risk,5)Finance risk
and 6)Compliance risk.
Required:
For each of the scenarios below, select the component of risk that is most directly
illustrated. The components may be used once, more than once, or not at all.
Also suggest the effect on the financial statement and how the auditor might mitigate
the risk (you may present your answer in the format below)(20 marks)
Page 8 of 17
Scenario
Component of risk
Effect on the How
financial
reduce
statement
risk
to
the
1
2
1) A client fails to discover employee fraud on a timely basis because bank accounts
are not reconciled monthly
2) The client’s business mainly deals with Cash sales which is more susceptible to theft
than credit sales
3) Confirmation of receivables by a new audit staff fails to detect a material
misstatement
4) Disbursements (payouts) have occurred without proper approval
5) There is inadequate segregation of duties in the payroll section.
6) Technological developments make a major product obsolete
7) The client is very close to violating debt covenants
8) XYZ Company, a client, lacks sufficient working capital to continue operations
Question Four (25 marks)
One of the audit clients Airtel has presented the income statement below to the audit firm
Earnest and Young where you work as an assistant auditor.
Airtel Income Statement for the year ended December 31, 2018
ZMK
Revenue
1,392,000
Cost of goods sold
680,480
Gross profit
711,520
Distribution Administration expenses
367,200
Profit from Operation
344,320
Other income
Gain on sale of equipment
56,000
Income before taxes
400,320
Income taxes
118,400
Net income
281,920
The audit partner has decided that 5% income before taxes benchmark is appropriate for overall
materiality and tolerable misstatement has been estimated to be 60% of overall materiality.
Required
a) Explain what overall materiality is and state some factors that the partner would have
considered in deciding the 5 percent benchmark (5 marks)
b) Explain what tolerable misstatement is and state some factors that the partner would
have considered in deciding the 60 percent benchmark.(5 marks)
c). Calculate the overall materiality, and tolerable misstatement. (2 marks)
Page 9 of 17
d). During the course of the audit, the auditors discover that the revenue account has an
invoice which was misstated by K8,200 explain the action that the auditors will take(3 marks)
e) Further, the auditors discover that in the distribution and Administration expenses
account some invoices have been misstated by K17, 500.Explain the action that the auditors
will take (3 marks)
f) Taking into account the two errors in (d) and (e) above, state the recommendations and
explain the final decision that the auditor will make (7 marks)
End
Page 10 of 17
MULUNGUSHI UNIVERSITY
SCHOOL OF BUSINESS STUDIES
FINAL EXAM
ACADEMIC YEAR: 2019/2020
SEMESTER 1
PROGRAMME(S) BAF IV/BCOMIV
COURSE TITLE: AUDITING I
COURSE CODE: BAF-421/BAC-421
DATE OF EXAM 20th DECEMBER 2019
TIME ALLOWED: 3HOURS
GENERAL INSTRUCTIONS
1. THE EXAM BOOKLET HAS FOUR PROBLEM TYPE QUESTIONS. ALL
QUESTIONS ARE COMPULSORY
2. Attached is the extract from CEC 2018 Annual report
Page 11 of 17
Question one (30 marks)
a) Answer the following statements true or false if its false give the correct statement (10
marks)
i) The primary purpose of a compliance audit is to determine whether the financial statements
are prepared in compliance with generally accepted accounting principles.
ii) The objective of the audit of financial statements by an independent auditor is to verify that
the financial statements are free of misstatements and accurately represent the company's
financial position and results of operations.
iii) A lack of controls over payments to vendors can cause revenue fraud.
iv)In a financial statement audit, inherent risk is evaluated to help an auditor asses the risk the
internal control system will not detect a material misstatement of a financial statement assertion
V) Results of compliance audits are typically reported to the company's management rather
than to a broad spectrum of outside users.
vi) Planned detection risk determines the amount of substantive evidence the auditor plans to
accumulate.
(b)International Standard on Auditing (ISA) 315 deals with the auditor's responsibility to
identify and assess the risks of material misstatement in the financial statements, through
understanding the entity and its environment, including the entity's internal controls.
Explain the significance of and relationships between audit risk, financial statement risk
and detection risk. (6 marks)
(c) Using your knowledge of the relationships among acceptable audit risk, inherent risk,
control risk, planned detection risk, performance materiality, and planned evidence,
State the effect that changing each of the following factors, while the other factors remain
unchanged will have on planned work and evidence (state whether it will increase or
decrease the planned audit work and evidence ) (5 marks)
1.
2.
3.
4.
5.
an increase in acceptable audit risk
an increase in inherent risk
a decrease in control risk
an increase in planned detection risk
an increase in performance materiality
________
________
________
________
________
(d) The audit firm where you are on attachment has the audit client JCC, an importer and
wholesaler of inexpensive, non-branded second hands clothes (Salaula). It has a high turnover
of staff, its accounting systems are old and out-of-date and its controls, including credit control,
are poor. Accounting errors are frequent. Despite this, sales have increased. An economic
downturn has resulted in a number of smaller customers being unable to pay their debts but
this has been more than compensated for by an overall increase in sales of less expensive
clothes. JCC’s customers comprise market traders, independent shops and Internet retailers.
Required:
Page 12 of 17
Basing on the information given above describe the audit risks likely to be associated with
the audit of JCC’s, the possible effect on the financial statement and an audit approach
that is likely to reduce those risks to an acceptable level. (9 marks) you may present you
answer in the following format.
Statement from
scenario
Type of
risk(inherent,
control or
detection)
Possible
effect on the
financial
statement
audit approach
to reduce risks
QUESTION 2(20 marks)
i)International Standard in Auditing ISA 320. “Materiality in planning and performing
an audit” explains how auditors carry out their work. Calculating materiality involves the
exercise of professional judgement. Working to an appropriate level of materiality is critical to
prevent over-auditing, and to ensure that misstatements likely to affect user decision making
are not overlooked. Performance materiality deals with risks relating to undetected and
uncorrected misstatements.
Required:
Explain the key elements of materiality and performance materiality. (5 marks)
(ii) Grand Thornton is auditing one of the clients which manufacture domestic electrical
appliances. 0.5 % of total revenue has been set as the benchmark of materiality, while
performance materiality has been set at a percentage , between, 50% of materiality in relatively
high risk situations such as for complex financial instruments that are included in net assets
and, 90% in lower risk situations such as revenue and expenses.
The following figures have been extracted from the draft financial statements of the client
together with respective audit verified figures.
Item
Value in client financial
audit verified value
statement
Total revenue
K1,010m
K950m
Profit before tax
150m
160m
Net assets
1,500m
1,250m
Competition in the market has increased resulting in several product lines being discontinued
during the period. They accounted for K15m of revenue in the current year. A related provision
for the write-down of inventory of K8m has been made in the current period.
Required
a) Explain the decision that the auditor is likely to reach in respect of revenue profit and
net assets and on the overall financial statement.(10 marks)
Page 13 of 17
b) Explain the factors you will take into account when considering whether separate
reference should be made to the discontinued product lines in the current Period’s financial
statements. (5 marks)
Question 3(25 marks)
i)Describe what corporate governance is and why you thick Lusaka Securities Exchange
(LuSE) has made it mandatory for all listed companies at LuSE to follow this code.(5
marks)
ii) Use the extract of governance from Copperbelt Energy Corporation (CEC) 2018 Annual
reports attached at the end of the exam paper to answer the following question.
Basing on any 4 requirement for the LuSE code of corporate governance evaluate the
corporate governance of CEC, you may present the information as in the table below ( 10
marks)
Bench mark(LuSE code
requirements
Current company status(
CEC)
Evaluation
1
2
3
4
iii)Bwalya is a first-year auditor for KPMG, a large public accounting firm. She has been
assigned to the audit of PEP, a clothing retailer with retail outlets throughout the Zambia. This
audit has proved troublesome in the past, and during a staff meeting preceding the audit, the
supervisor Mori on the audit, says: “We are going to be required to work several hours ‘offthe-clock’ each week until this audit is completed.” He also observes that the client is putting
a great deal of pressure on the firm to maintain an acceptable level of fees.
Bwalya has just been to staff training school, where it was emphasized that not charging a client
for hours actually worked is a violation of KPMG’s employment policy, a violation that could
cause her to be dismissed. She also knows that only staff personnel are paid overtime and that
supervisors are evaluated on successfully completing audits within allowable budgets. Bwalya
discusses the issue with Jed, a second-year staff accountant. Jed says, “Don't worry, if you go
along nobody will find out and the supervisor Mori will give you a good evaluation.” John also
says that the supervisor is very highly regarded by the senior members of the firm and is likely
to be promoted to manager in the near future.
Required:
A) Is it ethical for Bwalya to work hours and not charge them to the client? Explain
(4 marks)
b) How can Bwalya Use the American Accounting Association (AAA) model
approach to resolve this ethical dilemma and what could you do if you were in Bwalya
s situation (6 marks)
Page 14 of 17
Question 4(25 marks)
The following information has been identified by the audit team thus far during preliminary
engagement activities of YWCA.
YWCA provides youth support services for children ages 5 to 12, including education
support, physical development opportunities, and counselling.
YWCA has the following personnel:
 Office manager, who performs the accounting and has been with YWCA for over five
years. Your audit firm has a good rapport with the office manager.
 Executive director, who has also worked at YWCA for over five years. Your audit firm
also has a good rapport with the executive director
 Resource development manager, who started at the end of the previous fiscal year
 Mary, a program manager, who has been at the organization for just over three years
 Sam , the other program manager, who had been at the organization for almost two
years
 Certified counsellor, who works as needed based on client needs. The counsellor also
works for a nearby city school district. The counsellor is considered an employee for
insurance coverage purposes, based on legal advice.
During the year, Sam was let go due to budget concerns, and his work was moved to
Mary. The office manager's hours were cut to part time.
YWCA receives about 50 percent of its support from individual donations, most of
which come from an annual dinner and silent auction. Revenue from the annual dinner
was down about 20 percent from the prior year. YWCA receives the other 50 percent
of its support from corporate and foundation grants. The grants are for general purposes,
and the only requirement is an annual report explaining what the organization
accomplished. The organization includes in its report how many clients were served
and a spotlight on the story of one client. The reports are prepared by the resource
development manager, and the executive director receives copies.
The assets of the organization consist of cash, a small inventory of program supplies
(for example, books, athletic equipment, and art supplies), office equipment (for
example, computers and a copier), program equipment (such as computers), and office
furniture. The liabilities of the organization consist of accounts payable and payroll
related liabilities. The significant expenses of the organization are payroll, employee
benefits, facility lease, program supplies, office supplies, and insurance. YWCA no
temporarily restricted or permanently restricted net assets.
Supplies are ordered or purchased for reimbursement by the various managers. Invoices
are approved by the executive director for payment. Disbursements are made weekly
for approved invoices. Rent is the only nonpayroll exception for which the organization
receives no invoice. The office manager pays rent for the following month during the
last week of the current month. Cheques are attached to the supporting documentation
when submitted to the executive director for signature. The executive director and the
board president are the only authorized personnel to sign cheques. The office manager
mails payments once the cheques have been signed.
Payroll is semi-monthly, and employees are paid the last day of the pay period. Time
sheets are turned in the day before the last day of the pay period with estimated hours
for the last day. The counsellor is the only exception. If she has hours on the last day of
the pay period, they are included in the next pay period. If time sheets are for other than
four or eight hours per day, inclusive of all time such as for vacation, the office manager
has the executive director approve the time sheet. The executive director approves all
of the counsellor’s time sheets. The payroll cheque register is submitted with payroll
Page 15 of 17



cheques to the executive director for signature. The executive director distributes
payroll cheques to the employees.
Dinner tickets are sold by all personnel and board members. Unsold tickets are returned
to the Resource Development Manager (RDM). The RDM provides the office manager
with a schedule of tickets sold reconciled to funds received on a weekly basis starting
two months before the dinner, with increasing frequency within the last two weeks of
the event. Items donated for the silent auction are inventoried by the RDM, with every
donor receiving a thank you letter listing the item(s) donated. Payment for auction items
won must be made at time of the auction. The RDM and one of the program managers
accept the cheques or complete credit card charge slips for the amounts of the winning
bids and then attach them to the bid slip. Some items are paid for with cash, and there
are a few cash donations. In both circumstances, the payer receives a receipt for
payment. A duplicate receipt is attached to the bid slip, and general donation receipts
are put in a separate envelope.
The day after the dinner, the office manager copies the checks and prepares deposits.
The office manager likes to have a separate deposit for auction money and general
donation money. Either that day or the next, the office manager processes the credit
card charges.
Grant funds are received annually or quarterly, depending on the grant. Grant
correspondence and copies of checks are provided to the RDM. Contribution revenue
is recorded when the organization is notified that the grant is approved, which may be
when the grant funds are received or the first quarter funds are received. Deposits are
written up by the office manager and taken to the bank by whoever is available to do
so.
Bank statements are opened by the executive director. The bank does not return cheques
or provide copies of cheques. However, the executive director does have online access
to the bank account and checks the bank balance at least twice a week. If she does not
recognize the amount of a cheque that has cleared, she views the cheque online. The
bank reconciliation is performed by the office manager on a timely basis.
Costs are allocated on a functional basis as follows:
Program services include payroll and related costs for program managers and 90
percent of payroll and related costs for the executive director; 70 percent of the facility
lease and property insurance; program supplies; liability insurance; and other direct
costs.
Management and general costs include payroll and related costs for the office manager;
half of the payroll and related costs for the resource development manager; 10 percent
of the payroll and related costs for the executive director; 30 percent of the facility lease
and property insurance; office supplies; errors and omission insurance; and audit fees.
Fundraising costs include half of the payroll and related costs for the RDM; office
supplies and postage directly for the dinner or grant reports; and the cost of the dinner,
including facility rental, catering, and more.
Subsequent to year-end, one of the foundations gave notification that it will not be able
to provide a grant for the next fiscal year due to the poor performance of the
foundation's investments. The executive director laid off the RDM and is currently
performing the RDM's tasks.
Required
a) You are part of the audit team for YWCA. What are the fraud risk factors you
will identify in the audit team discussion? (7 marks)
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b) Auditing standards requires the auditor to presume that risks of fraud in revenue
recognition exist. What procedures could the audit team perform to address this risk?
(9marks)
3. What procedures could your audit team perform to address the fraud risk of
management override of controls? (9 marks)
End
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