THE PUBLIC ACCOUNTANTS EXAMINATIONS BOARD A Committee of the Council of ICPAU CPA(U) EXAMINATIONS LEVEL ONE AUDIT THEORY — PAPER 7 WEDNESDAY, 27 NOVEMBER 2013 INSTRUCTIONS TO CANDIDATES 1, Time allowed: 3 hours 15 minutes. ‘The first 15 minutes of this examination have been designated for reading time, You may not start to write your answer during this time. 2. This examination contains Sections A, B and C. 3, Section A is bound separately from Sections B and C. 4, Attempt all the 20 multiple-choice questions in Section A. Each question carries 1 mark, '5, Attempt the compulsory question in Section B carrying 30 marks. 6. Attempt two of tre three questions In Section €, Each question carries 25 marks. 7. Write your answer to each question on @ fresh page in your answer booklet. ‘8 Please, read further instructions on the answer bookiet, before attempting any question. © 2013 Public Accountants Examinations BoardSECTION B This section has one compulsory question to be attempted. Question 2 ISA 300: Planning an Audit of Financial Statements, requires the auditor to plan ‘the audit so that the engagement is performed in an effective manner. Requit (@) Explain why itis important for an auditor to carry out audit planning. (8 marks) (b) Identify the contents of a permanent aut fle. (6 marks) (©) Explain the circumstances under which auditors may disclose information ‘concerning their cients to third parties. (8 marks) (@) Explain the Importance of using audit working papers in the audit of a ‘company's finandeal statements. (8 marks) (Total 30 marks) SECTION C Attempt two of the three questions in this section. Question 3 (a) Explain the circumstances that may make the objectivity of an auditor to be impaired or appear to be Impaired in carrying out an audit assignment. (8 marks) (b) Describe the steps an aucltor should take to guard against situations that ‘may impair his/her objectivity when carrying out an audit assignment. (8 marks) (©) _Indentify circumstances under which an auditor should resign from en ‘audit assignment. (4 marks) (@) Apple Ltd is a manufacturing company which requires large volumes of Inventory. They have been experiencing challenges with their Inventory control system le, re-order levels, reconciliations, valuation methods and ‘obsolete items, Given these challenges, Apple Lid needs services of an external consultant to spearhead the development of a new inventory control system. November 2013 Pagezora‘Aust Theory ~ Paper 7 Required Explain the factors that Apple Ltd should take into consideration when considering the appointment ofan external consultant (5 marks) (Total 25 marks) Question 4 (@) You have been eppointed the auditor of TBL trading company with five branches. Each of the branches keeps cash and all their sales are done on cash basis. Accounting records are kept at the branches but periodically the branches make returns to the head office, Required: (Identify and explain the objective of auditing cash in a trading company, (5 marks) (i) Describe how audit evidence can be obtained as regards to the objective of auciting cash at the end of the financial year. (5 marks) (©) Explain the eifferences between the roles ofthe internal auditor and the external auditor. (@ marks) (© Explain the factors that an external aueltor should consider before relying an the work performed by an internal auditor, (7 marks) (Total 25 marks) Question 5 ‘Tracy Company Limited (TLC) Is involved in the growing of tomatoes. The company had a contract with a tomato sauce manufacturing company which expired sic months to the end ofthe financial year to October 2012. The tomato sauce company was thelr major customer and 80% of ther sales were to this company. Due to the expiry of the contract, TLC’s sales dropped drastically. This caused a loss in the financial year ending 31 October 2013. TCL is, therefore, unable to clear thei abilities as trey fall due including fallure to service the bank loan for four months, The bank is now threatening court action. ‘You are a senior auditor in ABD and Co. Certified Public Accountants and have been appointed to head the audit team in cherge of auditing TCL,‘Audit Theory — Paper 7 Required: (@) Explain the concept of ‘going concern’, (3 marks) (©) Identify and explain the factors that indicate going concern issues at TCL. (7 marks) (©) Explain the responsibilities of the directors of TCL and ABD Certified Public ‘Accountants as regards to going concern, (g marks) (@) State the three basic reasons why an auditor may be unable to express ‘an unqualified audit opinion. (7 marks) (Total 25 marks) 7 November 2013,