Examination No.

__________________ THE PUBLIC ACCOUNTANTS EXAMINATION COUNCIL OF MALAWI 2008 EXAMINATIONS ACCOUNTING TECHNICIAN PROGRAMME PAPER TC 7: AUDITING
WEDNESDAY 26 NOVEMBER 2008 TIME ALLOWED : 3 HOURS 2.00 PM - 5.00 PM

INSTRUCTIONS 1. 2. 3. 4. 5. Number of questions on paper 7. FIVE questions ONLY to be answered. Each question carries 20 marks. Begin each answer on a fresh page. DO NOT OPEN THIS PAPER UNTIL YOU ARE INSTRUCTED BY THE INVIGILATOR.

This question paper contains 4 pages

2 This question paper must not be removed from the examination hall. 1. (a) (b) (c) Explain the meaning of the term Internal Control. 3 Marks

Mention and briefly describe the five components of internal controls. 15 Marks State the reasons for evaluating the internal control system of an organization by an external auditor. 2 Marks (TOTAL: 20 MARKS)

2.

Z Limited is a large tyre manufacturing company that has 300 employees on its payroll. The companys year end is 30 June and during the current financial year it purchased a large building for use as a warehouse at a cost of K250 million. The purchase was financed by a further issue of ordinary shares in the company for K150 million and by a debenture loan from an independent leasing and finance company. The loan was secured by a fixed charge over the building and is repayable over a period of four years. You have been assigned to the audit of the financial statements of Z Limited for the year ended 30 June 2007. In your audit assignment, you have been instructed to arrange for a bank confirmation letter from the companys bank and also to obtain copies of minutes of board meetings for the year. Your audit manager has confirmed that each of these is a good source of evidence as a means of verifying specific matters reflected in the companys financial statements. Required: (a) (b) State six matters that should be confirmed in the confirmation letter from Z Limiteds bank. 6 Marks Mention six matters that constitute useful evidence in the audit of Z Limiteds financial statements for the year ended 30 June 2007 that can be obtained from minutes of board meetings. 6 Marks Describe the audit procedures that your firm should carry out to verify the ownership and existence of the warehouse building which Z Limited purchased during the year. 5 Marks State the audit procedures that your firm should carry out to verify: (i) (ii) (iii) the amount of the loan from the finance company; the related interest charges; and the disclosure of the loan and of the related interest charges, in the financial statements of Z limited for the year ended 30 June 2007. 3 Marks (TOTAL: 20 MARKS)

(c)

(d)

Continued/ 3. (a) Describe the circumstances in which each of the following should be expressed in an auditors report: (i) (ii) (iii) (b) (c) Qualified opinion; Disclaimer of opinion; Adverse opinion. 2 Marks 2 Marks 2 Marks

Explain four factors that determine the extent of reliance that auditors may place on analytical procedures to reduce detection risk. 8 Marks Explain the nature and purpose of a management letter and state when and to whom it should be addressed. 6 Marks (TOTAL : 20 MARKS)

4.

M Limited is a small furniture manufacturing company whose year end is 31 May. Your firm of auditors has just been appointed as external auditors for M Limited. You, as a senior audit supervisor, are preparing to carry out detailed audit work on the companys financial statements. Two junior members of the audit team have asked you to explain the process of obtaining audit evidence and would want to know the factors that will influence your firms judgement in deciding what would be sufficient and appropriate evidence when auditing the financial statements of M Limited. They are also unsure about the specific procedures your firm will use to obtain audit evidence. Required: (a) Mention three factors that generally influence an auditors judgement in deciding what will be sufficient and appropriate evidence. Briefly comment on their relevance to your firms audit of M Limited. 4 Marks Describe each of the following procedures that are used to obtain audit evidence and for each procedure give two examples of when it may be used during the audit of the financial statements of M Limited: (i) (ii) (iii) (iv) Observation; Enquiry; Confirmation; Re-performance. 4 Marks 4 Marks 4 Marks 4 Marks (TOTAL: 20 MARKS)

(b)

Continued/ 5. You are an audit supervisor of MBJ and Company, Certified Accountants. The directors of B and B Enterprises wish to engage your firm as auditors of their company. At a brief meeting between the directors of B and B Enterprises and the partner of your firm, the formalities of the audit appointment process, including a letter of engagement and auditors rights were discussed. The existing auditors, Arnold and Company have not resigned but the directors of B and B Enterprise have informed your partner that they will not be re-appointed. The partner is now about to commence his client screening procedures. Required: (a) Briefly explain what information would be obtained from the previous auditor before deciding whether or not to accept appointment as auditor of B & B Enterprises. 4 Marks Mention six matters that the audit engagement partner of MBJ and Company should consider when screening B & B Enterprises. 6 Marks Explain the purpose of an engagement letter. 3 Marks State five important matters that should be included in a letter of engagement. 5 Marks State the rights that the new auditors of B & B enterprises should have with regard to: (i) (ii) Access to records; Information and explanations. 2 Marks (TOTAL : 20 MARKS)

(b)

(c) (d) (e)

Continued/ 6. Your firm has recently been re-appointed external auditors of a public company that is engaged in the business of manufacturing clothes. You are now in the process of planning your audit work on the physical stock take that will be carried out at the end of December 2008, the companys year-end. During your initial visit to the companys premises where you had a meeting with senior management, you discovered that the company has no perpetual inventory system in place, thus the value of stock in the accounts is derived from the stock-take at the year-end. Required: (a) (b) Describe the six tasks that you would carry out before the commencement of the stock-take. 6 Marks

State eight procedures that you would check during the stock-take to ensure that the companys staff have accurately recorded the stock. 8 Marks

(c) 7.

Describe the work that you would carry out and the matters that you would record at the stock-take. 6 Marks (TOTAL : 20 MARKS) ABC is a firm of public accountants and has decided to carry out lessons on computer based accounting systems for its staff who will be involved in the audit of a client engaged in merchandise business. The focus of the lessons is on the audit of sales and debtors system where a company sells from stock to customers on credit terms. Topics to be covered are as follows: the audit trail for sales and debtors transactions in a manual accounting system, the loss of visible audit trail in a computer based accounting system and audit test data packs. Required: (a) (b) Explain the term audit trail. 3 Marks

Commencing with dispatch of goods, mention and give reasons for the documents and accounting entries that should exist in an audit trail for recording credit sales transactions and recording debtors in a manual based accounting system. 8 Marks Explain why there is often a loss of visible audit trail in many computer based accounting systems. 5 Marks Describe the contents of an audit pack. 4 Marks (TOTAL: 20 MARKS)

(c) (d)

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