The University of Zambia

Graduate School of Business

(GSB)
EXAMINATION

Time: 3 hours
Subject: Audit & assurance (BAF 3211)
Date: 21/10/2023
Level: 3rd & 4th year

EXAMS INSTRUCTIONS
1. Read the examination instruction very carefully
2. Two sections marked A and B
3. Section A Compulsory
4. Section B has four questions – answer any three
 SECTION A
Question 1
You are the audit senior of Adamson & Co and are planning the audit of Ciabatta Co (‘Ciabatta’) for the
year ended 30 September 20X4. The company produces printers and has been a client of your firm for
two years; your audit manager has already had a planning meeting with the finance director. He has
provided you with the following notes of his meeting and financial statement extracts.

Ciabatta's management were disappointed with the 20X3 results and so in 20X4 undertook a number of
strategies to improve the trading results. This included the introduction of a generous sales-related
bonus scheme for their salesmen and a high profile advertising campaign. In addition, as market
conditions are difficult for their customers, they have extended the credit period given to them.

The finance director of Ciabatta has reviewed the inventory valuation policy and has included additional
overheads incurred this year as he considers them to be production related. He is happy with the 20X4
results and feels that they are a good reflection of the improved trading
Levels.

FINANCIAL STATEMENT EXTRACTS FOR THE YEAR ENDED 30 SEPTEMBER

Draft Actual
20X4 20X3
Km Km
Revenue 23.0 18.0
Cost of sales (11.0) (10.0)
Gross profit 12.0 8.0
Operating expenses (7.5) (4.0)
Profit before interest and taxation 4.5 4.0

Inventory 2.1 1.6

Receivables 4.5 3.0
Cash - 2.3
Trade payables 1.6 1.2
Overdraft 0.9 -

Require

Among the information above:

i. Calculate five ratios, for both years, which would assist the audit senior in planning the audit. (6
marks)
ii. From a review of the above information and the ratios calculated, explain the audit risks and
describe the appropriate responses to these risks. (12 marks)
iii. Discuss the use of analytical procedures at each stage of the audit process, from planning
through to finalisation. (7 marks)
(Total = 25 marks)
 SECTION B

Question 2

You are the auditor of Greyson Ltd (‘Greyson'), a company which manufactures and sells small cuddly
toys by mail order. The company is managed by Mr Muzungu and two assistants. Mr Muzungu
authorises
important transactions such as wages and large orders, one assistant maintains the payables ledger and
orders inventory and pays suppliers, and the other assistant receives customer orders and despatches
cuddly toys. Due to other business commitments Mr Muzungu only visits the office once per week.

At any time, about 100 different types of cuddly toys are available for sale. All sales are made cash with
order - there are no receivables. Customers pay using credit cards and occasionally by sending cash.

You are planning the audit of Greyson and are considering using some of the procedures for gathering
audit evidence recommended by ISA 500 as follows:

i. Analytical procedures
ii. Inquiry
iii. Inspection
iv. Observation
v. Recalculation

Required

(a) For each of the above procedures:

i. Explain its use in gathering audit evidence (5 marks)
ii. Describe one example for the audit of Greyson (5 marks)

(b) Discuss the suitability of each procedure for Greyson, explaining the limitations of each. (10 marks)

List and explain five (5) financial statement assertions relating to classes of transactions and events and
related disclosures. (5 marks)
(Total = 25 marks)

Question 3
Management is responsible for putting in place adequate controls in an organisation to enable it achieve
its objectives. The internal audit department is one of the controls that managements in most large
organisations put in place. Internal auditors are employees of the organisation and as such their
objectivity in the conduct or their work is brought into question. There are different views as to the
reporting lines of the internal audit department. It is becoming common for entities to outsource
internal audit services. Most external audit firms do offer internal audit services in addition to assurance
services.

Required

i. Explain, with reasons, why the internal audit department should or should not report to the
following in the organisation:
 The board of directors (3 marks)
 The Financial Controller (2 marks)
ii. Discuss the potential problems of the same audit firm offering assurance services and also
internal audit services clearly explaining how they can be overcome. (6 marks)
iii. Explain the advantages and disadvantages to a company of outsourcing internal audit services.
(8 marks)

ISA 500 Audit evidence requires auditors to design and perform audit procedures that are appropriate in
the circumstances for the purposes of obtaining sufficient appropriate audit evident.

Required

Discuss the importance of the evidence that the auditor gathers during the course of the audit and
explain the meaning of sufficient appropriate audit evidence. (6 marks)

(Total marks = 25 marks)

Question 4
a) For 20 years and in 80 countries, Helpbonse, a Non-Governmental Organisation (NGO) has
empowered people in developing appropriate survival business skills needed in the modern global
environment. It delivers technical and management assistance in all sectors of the economy. A core
aspect of its mission statement is the promotion of broad-based economic growth and vibrant
communities. Its headquarters is in Mwinilunga, in Northwestern Province.

Helpbonse recently recruited an Internal Auditor following recommendations made by the

External Auditor. The controls have always been assessed as poor. A number of frauds have gone
undetected and most donors want to stop supporting Helpbonse. Management has repeatedly refused
to provide the much needed representations to the external auditors. The Governing
Board is excited about the recruitment of the Internal Auditor. One of the board members is confident
that all the outstanding issues in the management letter will be resolved.

Required

i. Define internal audit. (2 marks)

ii. List and explain three (3) differences between internal and external auditors. (6 marks)
 iii. Discuss the role of the Internal Auditor in the prevention, detection and correction of fraud. (5
marks)
iv. Discuss some of the activities that could be undertaken by the internal auditor of Helpbonse. (5
marks)

i. Distinguish between a representation letter and a management letter. (4 marks)

ii. State three (3) possible actions to be taken by external auditors if management does not provide
the requested written representations. (3 marks)

(Total = 25 marks)

Question 5

Define the going concern basis of accounting and briefly explain the auditor's responsibilities in relation
to going concern in accordance with ISA 570 (Revised) Going concern.
(6 marks)

M.SHAWN Ltd (‘M.SHAWN’) is an established pharmaceutical company that has for many years
generated
90% of its revenue through the sale of two specific cold and flu remedies. M.SHAWN has lately seen a
real growth in the level of competition that it faces in its market and demand for its products has
significantly declined. To make matters worse, in the past the company has not invested sufficiently in
new product development and so has been trying to remedy this by recruiting suitably trained scientific
staff, but this has proved more difficult than anticipated.

In addition to recruiting staff, the company also needed to invest K2m in plant and machinery. The
company wanted to borrow this sum but was unable to agree suitable terms with the bank; therefore it
used its overdraft facility, which carried a higher interest rate. Consequently, some of M.SHAWN’s
suppliers have been paid much later than usual and hence some of them have withdrawn credit terms
meaning the company must pay cash on delivery. As a result of the above the company’s overdraft
balance has grown substantially.

The directors have produced a cash flow forecast and this shows a significantly worsening position over
the coming 12 months.

The directors have informed you that the bank overdraft facility is due for renewal next month, but they
are confident that it will be renewed. They also strongly believe that the new products which are being
developed will be ready to market soon, and hence trading levels will improve and therefore that the
company is a going concern. Therefore, they do not intend to make any disclosures in the accounts
regarding going concern.

Required

i. Explain the audit procedures that the auditor of M.SHAWN should perform in assessing whether
or not the company is a going concern. (6 marks)
 ii. Identify any potential indicators that the company is not a going concern and describe why
these could impact upon the ability of the company to continue trading on a going concern
basis. (7 marks)

(c)

The auditors have been informed that M.SHAWN’s bankers will not make a decision on the overdraft
facility until after the audit report is completed. The directors have now agreed to include going concern
disclosures.

Required

Describe the impact on the audit report of M.SHAWN if the auditor believes the company is a going
concern but a material uncertainty exists. (6 marks)

(Total marks = 25 marks)

END OF EXAM