nAmiBIA UniVERSITY OF SCIEnCE AnD TECHnOLOGY

Faculty of Management Sciences

Department of Accounting, Economics and Finance

QUALIFICATION: BACHELOR OF ACCOUNTING

QUALIFICATION CODE: 07BACC LEVEL: LEVEL 7

COURSE: AUDITING 310 COURSE CODE: GAU711S

SESSION: JUNE 2016 PAPER: THEORY

DURATION: 3 HOURS MARKS: 100

FINAL EXAMINATION QUESTION PAPER

EXAMINER(S) M DIKUUA

A KETJINGANDA

J VANWYK

MODERATOR: E BEUKES

INSTRUCTIONS

1. Answer ALL the questions.

2. Write clearly and neatly.

3. Number the answers clearly.

PERMISSIBLE MATERIALS

4. Examination paper.

5. Examination script.

THIS QUESTION PAPER CONSISTS OF 8 PAGES {Excluding this front page)

QUESTION 1 (20 Marks)

1. You received a memorandum from your audit manager stating that your tolerable rate of deviation for certain tests of controls to be conducted in the acquisitions cycle on the audit of Buy-It Ltd, should be increased from the prior year's tolerable rate of deviation.

2. Your evaluation of the extent to which management has failed to monitor internal controls in the payroll cycle of Messi Ltd, has led you to believe that an increase in the expected rate of deviation over the authorization of overtime payments on time records is necessary.

3. As a result of information obtained when conducting risk assessment procedures on the audit of Castles (Pty) Ltd, you have concluded that the risk of non-existent inventory being included in the inventory balance at year end is substantially higher than for the prior year's audit. You are about to select a sample of inventory items for existence testing.

4. Due to more efficient and timeous record keeping at Spartan (Pty) Ltd, your audit plan for the year-end audit will include meaningful subsequent receipts testing for the existence of debtors at year-end. This is likely to have an effect on the sample size for the planned positive debtors' circularization.

5. The audit manager on the audit of Bolton (Pty) Ltd has instructed the team that he would like to be in a position to gain more assurance from the operating effectiveness of controls so that less substantive work can be conducted.

6. On the audit of Folsom Ltd, the number of inventory items on the spare parts inventory masterfile has increased by three thousand (3 000). This is as a result of the company introducing a number of new products. For budgeting purposes the audit senior wants to know what effect the increased number of inventory items is likely to have on the sample size for items to be counted at the year-end inventory count. The sample will be statistically based.

7. Citizin Ltd, a large manufacturing company has a substantial amount of money invested in plant and equipment. The fixed asset register reveals thousands of items which vary greatly in value. The audit senior wishes to stratify the plant and equipment population by monetary value in an attempt to make the audit of this section more effective and efficient. However, he is unsure as to whether stratification will, in general terms, reduce sample sizes, all other factors being equal e.g. there is no increase in the risk of material misstatement.

YOU ARE REQUIRED TO

For each situation (1 - 7) above, indicate (giving explanations) whether the sample size will be increased or decreased. (20 Marks)

Consider each situation independently.

QUESTION 2 (10 Marks)

You are the staff partner in a small to medium-sized audit practice. One of your trainees has come to you for some help regarding audit reports. The following scenarios, which are NOT related, have been presented to you:

1. Your audit firm was appointed to perform the audit of a company for the year ended 28 February 2015. Your firm was only appointed on 15 March 2015 and therefore missed the company's inventory count which took place on 28 February 2015. The value of the company's inventory is considered to be material. Your audit team was, however, through other audit procedures, able to verify the existence and valuation of inventory at year-end.

2. Assume the same facts as stated in point number 1, except that your audit firm was NOT able to verify the existence and valuation of inventory at year-end through other audit procedures.

3. Certain sales transactions that took place during the year between the audit client and a party related to the audit client were identified by the auditor. These transactions took place well below the market rate. No disclosure of these related party transactions have been made in the financial statements. These transactions are considered by the auditor to be pervasive (fundamental) and cause the financial statements to be misleading.

4. During the audit of deferred taxation, it was discovered that a deferred tax liability on a finance lease was not accounted for. This deferred tax amount is material, but does not cause the financial statements to be misleading.

5. The company has a very large debtors book. The directors of the company are very secretive of this debtors book and will give your audit team permission to perform a debtors circularization. The directors will also not provide you with subsequent bank statements as they consider these not to be relevant to the current audit. The impact of this limitation is considered to be material and fundamental.

YOU ARE REQUIRED TO

Indicate, with reasons, the type of audit opinion that will be issued by your audit firm to the company for each of the scenarios presented above. (1 0 Marks)

Answer in tabular form as follows:

ISSUE NO. TYPE OF AUDIT EXPLANATION REPORT

QUESTION 3 (30 Marks)

You are a newly appointed internal auditor at Windhoek Bagzz (Pty) Ltd. The company is a

manufacturer of backpacks and bags for sporting equipment. The company employs

approximately 120 hourly paid semi-skilled workers, equally spread over the three sections -

cutting, stitching and finishing. Each section has a section supervisor who reports to the

factory foreman. The wage payroll system is currently completely manual, but management

now wish to computerise the system. As the first phase you have been asked to evaluate the

system so that the company will have a better understanding of what weaknesses the

computerised system must address. Your initial enquiries have revealed the following:

1. Wages are paid every 2 weeks. The wage period runs from a Thursday morning to a

Wednesday afternoon 2 weeks later. The work day commences at 07:30am and

employees work a daily 8-hour shift.

2. On arrival at their section, employees report to their section supervisor who records

their presence by ticking the appropriate column on the daily time sheet. (see point

7 below)

3. Work periods are controlled by a factory siren (hooter). Employees commence work

when they hear the siren at 07:30am and end the days shift at 04:30pm, again when

the siren sounds. The siren is also used to control tea and lunch breaks.

4. Workers are not required to sign themselves out at the end of the day, but if they

continue to work after 04:30pm, they must notify their section supervisor. On

reporting for work the following day they must inform their section supervisor of the

number of hours overtime they worked the previous afternoon/evening. The section

supervisor records this on the daily time sheet against the employee's name.

5. Three (3) administration clerks from the accounting department are responsible for

certain payroll functions. An administration clerk is allocated to each of the 3 sections

i.e. cutting , stitching and finishing.

6. Each administration clerk maintains a ledger of all wage earners in the section for

which he is responsible. The factory foreman is responsible for hiring and dismissing

staff (as well as receiving notices of resignation). When a change must be made to

the employee ledger, the foreman sends a completed, pre-printed, sequenced

"Employee Engagement I Dismissal/ Resignation Form" to the section administration

clerk. This contains full details of the employee, e.g. date of engagement I dismissal,

grade and pay scale. The clerk updates his ledger, and files the instruction from the

foreman .

7. On Wednesday morning the administration clerks prepare the daily time sheets for

their section for the following wage period. Daily time sheets are pre-printed and

sequenced (each section has its own unique sequence). The sheets consist of a

column for the names of employees in the section, as well as a column for each day

of the working week in which the section supervisor can tick off each employee's

(daily) attendance and enter any overtime worked.

8. Before ?am on a Thursday morning, the administration clerks take the daily time

sheets (for the following wage period) to the supervisor of the section for which they

are responsible, and collect the completed wage period's time sheets. The supervisor

and the administration clerk sign the completed wage period's time sheets to

acknowledge the transfer.

9. The administration clerks then prepare the weekly payroll for their section. They

calculate the normal hours worked (each "tick" represents 8 hours) and the overtime

hours for each employee from the daily time sheets. The employees hourly pay rate

is obtained from the employee ledger and overtime is calculated at the rate of one

and a half times the normal wage rate. Using the relevant schedules and tables, the

administration clerks calculate PAYE, UIF and medical aid deductions and calculate

the net wage payable to each employee as well as the total wages (and deductions)

payable for their section. The payroll is pre-printed, well designed and pages are

numerically sequenced in a bound book.

10. Once the payrolls for the 3 sections have been prepared, they are sent to the factory

accountant who reperforms the calculations on the payrolls, makes any corrections,

and signs the payrolls to acknowledge his control procedures. He then prepares and

signs cheques for the net wages and all deductions to be paid over e.g. PAYE. The

cheques are sent to the financial accountant for a second signature and the payrolls

are returned to the respective administration clerks. The factory accountant also

prepares a coinage schedule.

11. On receipt of the payrolls the administration clerks prepare pre-printed paypackets

for each employee in their section by writing the details of the employee and the

period's wages onto the paypacket.

12. On the Friday morning of the wage payout, Windhoek Bagzz (Pty) Ltd's security

section takes the cheque and the coinage schedule to the bank. The cash is placed

in three numbered bank bags (per instruction from Windhoek Bagzz (Pty) Ltd),

sealed and delivered to the administration clerks by security. The three

administration clerks make up the paypackets for their section according to the

payroll.

13. At 3pm on a payout Friday, the administration clerks (accompanied by a security

guard) distribute the paypackets from three pay points within the factory. Wage

earners must present their staff identity card, and sign the payroll next to their names

on receiving their wages. As there are only approximately 40 wage earners per

section , the payout is completed without significant delay (Note: do not concern

yourself with unclaimed wages) .

14. During the course of the following week, the administration clerks update the

employee ledger with details of each employee's wages and deductions.

YOU ARE REQUIRED TO

Identity and explain the weaknesses in the payroll cycle of Windhoek Bagzz (Pty) Ltd

based on the information given above. Your explanation must convey why you believe that

the weaknesses you have identified are a valid weaknesses. (30 marks)

QUESTION 4 (30 Marks)

You are the manager in charge of the audit of Windhoek Warehouse Point (Pty) Ltd (WWP), the largest wholesale company operating out of 10 warehouse locations located in Windhoek, Walvisbay, Rundu, Oshakati and Keetmanshoop. This will be the second year in which you have conducted the audit. The company has a public interest score of 300 and prepares its financial statements internally in terms of I FRS.

During March your senior commenced with planning the audit for the current year (Financial Year end - 301

h of June) by updating the audit file workpaper on understanding the entity and its environment and has made the following notes:

1. My discussions with Dean Andrew, the newly appointed financial manager were very concerning. He has recently returned from extended travels around the world and he seemed very nervous. He is definitely not up to date with the latest International Financial Reporting Standards- IFRS. He is unlikely to receive much help from the financial director because, as noted in last year's file he is also not up to date with the latest I FRS, choosing to delegate accounting matters to the financial manager.

2. Avid Investors (Pty) Ltd has purchased 25% share in WWP (Pty) Ltd ( it is a company which has recently been in the news for alleged foreign exchange control transgressions), and has managed to appoint two directors onto the board of WWP (Pty) Ltd as a condition of the company purchasing the 25% of the shareholding. Avid Investors (Pty) Ltd will be the largest shareholder.

3. WWP (Pty) Ltd's liquidity position has worsened since the prior year's financial year­end, and the intentions seems to be, according to Dean Andrew, that Avid Investors (Pty) Ltd will provide loan capital as required.

4. My discussions with Blake Josh, the internal audit manager, revealed that 4.1 his department uncovered an extensive fraud in the purchasing department

which has cost the company a great deal of money. Fortunately for us, the fraud wasn't underway when we conducted the audit in the prior year.

4.2 Avid Investors (Pty) Ltd have used their influence on the Board to do away with the with the audit committee as "cost cutting exercise" and Blake Josh is concerned that his department may be next. The department is at present strong and competent.

4.3 A new computerised salary and wage system has been implemented.

5. Despite some poor trading results in some regions, WWP (Pty) Ltd has kept warehouses in all of the major town centres around Namibia operational. Inventory level remains high.

6. The credit control function has been decentralised and is carried out by the regional offices. Credit terms are still set by the sales director and the financial director and have recently been extended in an attempt to boost sales.

7. The audit deadline will be 21 working days after year end. 8.

YOU ARE REQUIRED TO

Discuss the effect that the information above will have on the overall audit strategy (30 Marks)

QUESTION 5 (10 Marks)

Continual and rapid changes as well as complexity of business, organisational dynamics and

the regulatory environment require companies to establish and maintain an effective internal

audit.

YOU ARE REQUIRED TO

Explain the difference between internal and external auditors. (10 marks)

END OF EXAMINATION PAPER