Programme: BSc (Hons) Accounting with Finance
Cohort BACF/12/FT Aug
Examinations for 2013 - 2014 Semester I/
2013 Semester II
MODULE: ADVANCED AUDITING
MODULE CODE: ACCF 2113
Duration: 2 Hours 30 Minutes
Instructions to Candidates:
1. Number of questions four (4)
2. Question one in section A is compulsory and carries 40marks
3. Section B: Three questions, each carries 30 Marks
Attempt any two (2) questions
This question paper contains 4 questions and 6 pages.
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SECTION A: COMPULSORY
QUESTION 1 (40 MARKS)
Part A (10 marks)
What are the five types of tests auditors use to determine whether financial statements
are fairly stated? Identify which tests are performed to reduce control risk and which
tests are performed to reduce planned detection risk.
(10 marks)
Part B (10 marks)
The following are five audit procedures taken from an audit program:
(i)
Examine vendors’ invoices to verify the ending balance in accounts payable.
(ii) Examine the internal auditor’s initials on monthly bank reconciliations as an
indication of whether they have been reviewed.
(iii)
Multiply the commission rate by total sales and compare the result with
commission expense.
(iv) Discuss the duties of the cash disbursements clerk with him and observe whether
he has responsibility for handling cash or preparing the bank reconciliation.
(v)
Confirm accounts payable balances directly with vendors.
Required:
a. Indicate whether each procedure is a test of control, substantive test of transaction,
analytical procedure, or a test of details of balances.
b. Identify the type of evidence for each procedure.
(5 marks)
(5 marks)
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Part C (20 marks)
The following internal controls for the acquisition and payment cycle were selected from
a standard internal control questionnaire.
1. Approved price lists are used for acquisitions.
2. Dates on receiving reports are compared with vendors’ invoices before entry in
the acquisition journal.
3. Account classifications are reviewed by someone other than the preparer.
4. The cheque signer compares data on supporting documents with cheques.
Required:
a. For each control identify which element of the five categories of control activities
is applicable (separation of duties, proper authorization, adequate documents or
records, physical control over assets and records or independent checks on
performance).
(4 marks)
b. For each control state which transaction-related audit objective(s) is (are)
applicable.
(4 marks)
c. For each control, write an audit procedure that could be used to test the control
for effectiveness.
(4 marks)
d. For each control, identify a likely misstatement, assuming that the control does
not exist or is not functioning.
(4 marks)
e. For each likely misstatement, identify a substantive audit procedure to determine
whether the misstatement exists.
(4 marks)
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SECTION B: ANSWER ANY TWO QUESTIONS
QUESTION 2 (30 MARKS)
Part A (20 marks)
(i)
Briefly describe the three theories of ethical behaviour that can be used to
analyse ethical issues in accounting.
(ii)
(9 marks)
Each of the following situations involves a possible violation of the Code of
Ethics. For each situation, indicate whether it violates the Code. If it violates
the Code, explain why?
a) Janet Jett, professional accountant in business, formerly worked for Delta Disk
Drive. She is currently interviewing for a new position with Maxiscribe, another
manufacturer of disc drives. Jett has agreed to provide confidential information
about Delta’s trade secrets if she is hired by Maxiscribe.
(4 marks)
b) Brian Thorough, professional accountant in business, is currently employed as
controller of Trans Oil Company. He has discovered that Trans Oil has been
illegally paying government employees so that they will not charge Trans Oil with
dumping highly toxic chemicals into the rivers. Thorough discloses this
information to the office of attorney general.
(7 marks)
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Part B (10 marks)
Most organizations rely heavily on the use of information technologies to conduct
business, including the use of the Internet to buy and sell goods and services. As more
reliance is placed on information systems, business people often demand greater
assurances from their accuracy, availability and security. WebTrust and SysTrust are
examples of attestation services developed to address these assurance needs.
When performing WebTrust assurance services, the Auditing firm assesses whether
the company’s website complies with the five Trust Services principles.
Required:
List and explain briefly the five Trust Services principle.
(10 marks)
QUESTION 3 (30 MARKS)
PART A (12 MARKS)
International Standard on Quality Control (ISQC1) identifies six elements of a firm’s
system of quality control.
Required:
List and briefly explain the six elements of the quality control framework.
(12 marks)
PART B (18 MARKS)
(i) With respect to audit reports:Explain briefly what is meant by an:
(a) emphasis of matter paragraph;
(3 marks)
(b) other matter paragraph
(3 marks)
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(ii) For each of the following independent situations, indicate the type of financial
statements audit report that you would issue and briefly explain your reasoning.
Assume that each item is significant.
(a) Gelato Bros, leases its manufacturing facility from a partnership controlled by the
chief executive officer and major shareholder of Gelato. Your review of the lease
indicates that the rental terms are in excess of rental terms for similar buildings
in the area. The company refuses to disclose this related-party transaction in the
notes.
(8 marks)
(b) Johnstone Manufacturing Company has used the reducing balance method to
depreciate its machinery. During the current year, management switch to the
straight-line method because it felt it better represented the utilization of the
assets. You concur with its decisions. All information is adequately disclosed in
the financial statements.
(4 marks)
QUESTION 4 (30 MARKS)
(i) State four different types of revenue recognition fraud and explain what does
each involve?
(16 marks)
(ii) Discuss how an audit committee can help combat financial statements fraud.
(6 marks)
(iii) Briefly discuss the effect of financial statements fraud on the following:
(a) the shareholder;
(4 marks)
(b) the corporation executives/directors.
(4 marks)
***END OF QUESTION PAPER***
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