BSc (Hons) Accounting with Finance Cohort: BACF/10/FT Aug Examinations for 2011 – 2012 Semester I / 2011 Semester II MODULE: ADVANCED AUDITING MODULE CODE: ACCF 2113 Duration: 2 Hours 15 minutes Instructions to Candidates: 1. This paper consists of Sections A and B. 2. Section A is compulsory. 3. Answer any two questions from Section B. 4. Always start a new question on a fresh page. 5. Calculators may be used, but all relevant working must be shown clearly. 5. Total marks: 100. This question Paper contains 4 Questions and 7 pages. Page 1 of 7 SBMFEX70 SECTION A: COMPULSORY QUESTION 1: (40 MARKS) Part A (10 marks) (i) What is triple bottom-line reporting and what it has to do with sustainable development? (5 marks) (ii) Where there are potential environmental risks, an environmental audit may be carried out. Identify five potential environmental risks. (5 marks) Part B (10 marks) (i) What is a WebTrust? (4 marks) (ii) Dave is the owner of a store. To expand the business, he has decided to open an Internet site where potential customers can view the goods and place orders. Dave hires Karen who is an expert in constructing Websites for small businesses. Karen explains that even with a quality website and pictures of the merchandise for sale, customers may be reluctant to purchase on line from his Website. Explain the reason for Karen’s concern. (6 marks) Part C (10 marks) (i) What is the purpose of establishing a system of quality control for audit firms? (4 marks) (ii) List three elements of a system of quality control and provide one example of a policy related to each element. (6 marks) Page 2 of 7 SBMFEX70 Part D (10 marks) (i) How do auditors’ methods and procedures change when financial statement fraud is suspected. (4 marks) (ii) How might audit application for each of the following procedures indicate financial statement fraud: o Confirmation o Observation o Physical examination (6 marks) SECTION B: ANSWER ANY TWO QUESTIONS QUESTION 2: (30 MARKS) Part A (10 marks) The following questions are typically found in questionnaires used by auditors to obtain an understanding in the acquisition and payment cycle: 1) Are all receiving report pre-numbered and the numerical sequence checked by a person independent of the cheque preparation? 2) Is the custody of cheques after signature and before mailing handled by an employee independent of all payable, disbursing, cash and general ledger function? Required: a. For each of the preceding questions, state the transaction-related audit objective(s) being fulfilled if the control is in effect. (4 marks) b. For each internal control, list a test of control to test its effectiveness and identify the nature of the potential financial misstatement(s) if the control is not in effect. (6 marks) Page 3 of 7 SBMFEX70 Part B (10 marks) Below are some of the tests of controls and substantive test of transactions procedures commonly performed in the acquisition and payment cycle. Each is to be done on a sample basis. 1) Trace transactions recorded in the acquisition journal to supporting documentation, comparing the vendor’s name, total monetary amounts and authorization for acquisition. 2) Foot the cash disbursements journal, trace posting of the total to the general ledger and trace posting of individual cash disbursements to the accounts payable masterfile. 3) Review supporting document for clerical accuracy, correctness of account classification and reasonableness of expenditure in relation to the nature of the client’s operations. Required: a. State whether each of the above procedure is a test of control or substantive test of transaction. (4 marks) b. State the assertion(s) being verified by carrying out the above procedures. (6 marks) Page 4 of 7 SBMFEX70 Part C (10 marks) The following auditing procedures were performed in the audit of accounts payable: 1) Discuss with the accounts officer whether any amounts included on the accounts payable list are due to related parties or notes payable. 2) Obtain vendors’ statements from the controller and reconcile them to the listing of accounts payable. 3) Obtain vendors’ statements directly from vendors and reconcile them directly to the listing of accounts payable. 4) Examine the acquisitions and cash disbursements journals for the last few days of the current period and the first few days of the succeeding period looking for large and unusual transaction. 5) Obtain a list of accounts payables, re-add and compare with the general ledger. Required: a. For each procedure, identify the type of audit evidences used. (5 marks) b. Evaluate the need to have certain objectives satisfied by more than one audit procedures. (5 marks) Page 5 of 7 SBMFEX70 QUESTION 3: (30 MARKS) Part A (15 marks) (i) Briefly discuss the five fundamental principles of professional ethics? (10 marks) (ii) List five non-assurance services that may impair independence if provided to an audit client. (5 marks) Part B (15 marks) Each of the following situations involves a possible violation of the Code of Ethics. Indicate whether each situation violates the Code and if so, why? (i) Julia Roberto, a sole practitioner, has provided extensive advisory services for a client, Leather and Chains. She has interpreted financial statements, provided forecasts and other analyses, counselled on potential expansion plans and on banking relationships, but has not made any management decisions. (ii) Bob Lanzotti is the partner-in-charge of the audit of Fleet Mobile Homes. Over the years, he has become a golfing buddy of Fleet’s CEO, Jim Harris. During the current year, Lanzotti and Harris jointly purchased an exclusive vacation home in southern Spain. The vacation home represents more than 10% of Lanzotti’s personal wealth. (iii) Kraemeer & Kraemeer recently won the audit of Garvin Clothiers, a large manufacturer of women’s clothing. Jock Kraemeer has a substantial investment in Garvin prior to bidding on the engagement. In anticipation of winning the engagement, Kraemeer placed his shares of Garvin’s stock in a trust. (15 marks) Page 6 of 7 SBMFEX70 QUESTION 3: (30 MARKS) Part A (15 marks) (i) Explain why the inclusion of an emphasis of matter paragraph or other matter paragraph does not affect the auditor’s opinion. (ii) (6 marks) What are the three types of audit reports with modified opinions and when are these reports used? (9 marks) Part B (15 marks) For each of the following independent situations, indicate the type of financial statement audit report that you would issue and briefly explain your reasoning. Assume that each item is significant. (a) The management of Bonner Corporation has decided to exclude the statement of cash flows from its financial statements because it believes that its bankers do not find the statement to be very useful. (b) During your audit of Cuccia Coal Company, the controller, Tracy Tricks, refuses to allow you to confirm accounts receivable because she is concerned about complaints from her customers. You are unable to satisfy yourself about accounts receivable by other audit procedures and you are concerned about Tracy’s true motives. (c) On 31 January 2011, Asare Toy Manufacturing hired your firm to audit the company’s financial statements for the year 2010. You were unable to observe the client’s inventory on 31 December 2010. However, you were able to satisfy youself about the inventory balance using other auditing procedures. (15 marks) ***END OF QUESTION PAPER*** Page 7 of 7 SBMFEX70