CHINHOYI UNIVERSITY OF TECHNOLOGY

SCHOOL OF BUSINESS SCIENCES AND MANAGEMENT

DEPARTMENT OF ACCOUNTING SCIENCES AND FINANCE

BSc (HONS) IN ACCOUNTANCY

COURSE: ADVANCED AUDITING

CODE: CUAC 409

DATE: AUGUST – DECEMBER 2021

DURATION: 3HOURS

INSTRUCTIONS TO CANDIDATES
1. Answer all questions.
2. Start a new answer on a new page.
3. Write clearly highlighting the main issues.
4. Each question carries 25 marks.

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Question 1

Abel & Co, Chartered Certified Accountants, recently held a staff training session on quality
control. The session concluded with staff being invited to raise matters from their experience
relating to the ethical rules on independence. Some of these matters are given below.

(a) Shortly before commencing the final audit of a large listed company, a junior staff member
on the audit team inherited a number of shares in that company. No action was taken because,
although representing a large investment for the staff member concerned, the number of shares
was totally immaterial with respect to the company. Moreover, the partner knew that, when the
company’s results were announced, the share price would rise and he did not think it was fair
to require the staff member to sell them now.

(b) The management accountant of another listed company client had an accident and was away
from work for three months. At the time of the accident the audit senior was winding up the
prior year’s audit and, because of his familiarity with the company’s management accounting
system, it was agreed that he would take over as management accountant for the three months.

(c) In its management letter to another audit client, Abel & Co warned the company that their
computer system lacked essential controls. The company decided to install a totally new
computer system and Abel & Co’s management consultancy department was appointed to
design the new system.

(d) Abel & Co was recently approached by a large company that was not, then, an audit client,
for a second opinion. The company was in dispute with its existing auditors who were
proposing to issue a modified auditor’s report because of disagreement over inventory
valuation. Abel & Co’s technical partner reviewed the evidence provided by the company and
advised the company that its accounting treatment was in order. Shortly afterwards Abel & Co
was invited to accept nomination as auditors. The reply to the letter of enquiry to the existing
auditors made it clear that the inventory valuation dispute was not as straight forward as the
company had made it out to be.

Required:

a. Discuss the possibility that Abel & Co had impaired their independence or otherwise
acted unprofessionally in each of the situations described. [16 marks]

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 b. Auditors should be independent (independence of mind) and should be seen to be
independent (independence of appearance).
Discuss the statement above explaining why the two states of independence are
important suggesting safeguards for each of them. [9 Marks]

Question 2

2a. Client: Planet World (Private) Limited

Year end: 28 February 2021 Working Paper AE103

Prepared by: Godfrey Date: 18 April 2021

Reviewed by: Johnson Date: 21 April 2021

Subject: Taxation and payroll statutory payments

One of your audit clerks on this engagement, Monique, has brought to your attention an
anomaly she came across during the audit of the salaries and associated costs section.

Planet has a total of 15 fulltime employees, and this has been agreed to various sources of
information such as employee contacts, salary payments and the logging in system. However,
when Monique was auditing recent correspondence with the National Social Security Authority
(NSSA) and Zimbabwe Revenue Authority (ZIMRA) she realised that they had indicated that
they only had 12 permanent employees. Furthermore, a recalculation of the pay as you earn
and NSSA contribution indicated that the amount being paid and indicated on the returns was
materially understated. An inspection of a sample of payrolls and returns for all twelve months
under the reporting period showed that the deductions for pay as you earn and NSSA
contributions by the employee were correctly calculated and deducted from each employee’s
gross salary. The amount on Planet’s trial balance is consistent with the understated returns and
payments.

Monique indicated to you that when she asked the group accountant, Tinashe, he just laughed
it off and said tough times call for tough actions. She has not been able to get any explanation
to the matter and based on Tinashe’s comment it is very apparent that this is highly unlikely
due to error but appears to be intentional.

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Required:

With reference to Working Paper AE103 describe the action you would take in light of the
matter raised by monique with reference to ISA250 (Consideration of Laws and Regulations
in an Audit of Financial Statements). (7 marks)

2b.

I. Explain the terms Fraud and Error clearly distinguishing the two. (6 marks)
II. Explain why literature on the Fraud Triangle is important to management with regard
to the minimisation of Fraud. (12 marks)

Question 3

You are a Certified Public Accountant tasked with planning the external audit for a new client
of the firm. You have looked at some of the background information given to you by your
manager and have noted that the client has an Audit Committee and a team of three Internal
Auditors plus the Head of Internal Audit. The Internal Auditors report to the Finance Director
who then reports to the Audit Committee on a quarterly basis. The Head of the internal audit
function was appointed by the Finance Director and has a vast amount of business experience
but is not a Qualified Internal Auditor. For the year under audit, the Internal Auditors have
been working on the following:

 Reviewing the policies and procedures for capital expenditure, data protection, email
and internet usage, and travel and subsistence.
 Auditing the marketing function.
 Testing the controls over the sales transaction cycle and the banking function.
 Checking compliance with health and safety legislation.

Required:

a. Discuss the statement that “…an external auditors does what the internal auditor does.’
(10 marks)

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 b. Based upon the areas of work performed by the internal audit function for the year
under audit, discuss which areas the External Auditors could rely on. (6 marks)
c. Discuss the issues an External Auditor should assess in order to rely on the work of the
Internal Auditor. (9 marks)

Question 4

You are an audit senior in Staple and Co and you are commencing the risk based audit planning
of Smoothbrush Paints Co for the year ending 31 August 2021. Smoothbrush Paints Co is a
paint manufacturer and has been trading for over 50 years, it operates from one central site,
which includes the production facility, warehouse and administration offices. Smoothbrush
sells all of its goods to large home improvement stores, with 60% being to one large chain store
Homewares. The company has a one year contract to be the sole supplier of paint to
Homewares. It secured the contract through significantly reducing prices and offering a four
month credit period, the company’s normal credit period is one month. Smoothbrush has
reduced the level of goods directly manufactured and instead started to import paint from South
Asia. Approximately 60% is imported and 40% manufactured. Within the production facility
is a large amount of old plant and equipment that is now redundant and has minimal scrap
value. Purchase orders for overseas paint are made six months in advance and goods can be in
transit for up to two months. Smoothbrush accounts for the inventory when it receives the
goods. To avoid the disruption of a year-end inventory count, Smoothbrush has this year
introduced a continuous inventory counting system.

The warehouse has been divided into 12 areas and these are each to be counted once over the
year. The counting team includes a member of the internal audit department and a warehouse
staff member. The following procedures have been adopted:

1. The team prints the inventory quantities and descriptions from the system and these
records are then compared to the inventory physically present.
2. Any discrepancies in relation to quantities are noted on the inventory sheets, including
any items not listed on the sheets but present in the warehouse area.
3. Any damaged or old items are noted and they are removed from the inventory sheets.

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 4. The sheets are then passed to the finance department for adjustments to be made to the
records when the count has finished.
5. During the counts there will continue to be inventory movements with goods arriving
and leaving the warehouse. At the year-end it is proposed that the inventory will be
based on the underlying records.

Traditionally Smoothbrush has maintained an inventory provision based on 1% of the

Finance Director

In May 2021 Smoothbrush had a dispute with its finance director (FD) and he immediately left
the company. The company has temporarily asked the financial controller to take over the role
while they recruit a permanent replacement. The old FD has notified Smoothbrush that he
intends to sue for unfair dismissal. The company is not proposing to make any provision or
disclosures for this, as they are confident the claim has no merit.

Required

a) Explain the steps to be taken when preparing a risk-based audit. (10 marks)

b) Explain four (4) audit risks identified at the planning stage of the audit of Smoothbrush
Paints Co and suggest safeguards for the risks. (15 marks)

END OF PAPER

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