QUESTION ONE

Your firm has been approached by the directors of UB Bank Ltd. a newly formed commercial bank to undertake the audit for its first complete financial year ended 31 December 1996. Your manager has assigned you the responsibility for leading the team. You have had various discussions with the directors about the timetable and the respective responsibilities of management and the auditor. You have drafted a letter of engagement and have sent it to the managing director for approval and acceptance but the management has not yet responded to your letter.

Required:

1. Explain why a letter of engagement is sent before any new audit appointment is accepted. (4 marks)
2. Set out the main contents of a letter of engagement. (7 marks)
3. Itemise the actions you would take in response to the non-reply by the management to your draft engagement letter. (6 marks)
4. State when it might be necessary to re-draft an engagement letter and have it re-affirmed by the client’s management. (3 marks)

(Total: 20 marks)

QUESTION TWO

1. Describe the reasons for maintaining proper audit working papers. (4 marks)
2. The documents, records and related information listed below are normally maintained in ‘permanent’ audit file. In each case indicate the importance of maintaining the respective document, record and information.

• Memorandum and articles of association: (2 marks)
• Principal activities and locations; (2 marks)
• Specific legislation and regulations (2 marks)
• History including summary of results; (2 marks)
• Key staff; (2 marks)
• Description of accounting systems and internal control (2 marks)
• Organisation charts; (2 marks)
• Copy of letter of engagement (2 marks)

(Total: 20 marks)

QUESTION THREE

Your firm is the auditor of Mavoko Engineering Company Ltd. and you have been asked to suggest the audit work you would carry out in verifying trade creditors at the end of the financial year. You also attended the company’s annual stock take at the end of the year 31 December 1996.

Required:

Describe in detail the audit work you would carry out to verify:

1. The suppliers statements against the balances on the purchase ledger; (12 marks)
2. That purchases cut-off has been correctly carried out at the end of the year. (8 marks)

(Total: 20 marks)

QUESTION FOUR

Members of the accounting profession in common with other professions have taken steps to reduce professional risk as far as possible.

Required:

1. With reference to accounting profession, what is audit risk? (4 marks)
2. Outline the steps that the Institute of Certified Public Accountants of Kenya as taken to reduce the individual auditor’s exposure to risk. (7 marks)
3. Suggest specific actions an individual auditor or audit firm could take to minimise liability arising from audit risk. (9 marks)

(Total: 20 marks)

QUESTION FIVE

1. Explain why auditors carry out circularisation of debtors (6 marks)
2. Distinguish between ‘positive’ and ‘negative’ debtors circularisation procedures (2 marks)
3. Describe in detail the work you would carry out in scrutinising the replies tothedebtors circularisation and in confirming whether the debtors balances are collectable in the following situations:

• Where the debtor does not agree with the balance and states a difference; (6 marks)
• Where the debtor reports that he cannot confirm the balance; (2 marks)
• Where no reply is received from the debtor (4 marks)

(Total: 20 marks)

QUESTION SIX

During the final stages of the first audit of Nairobi National Bank Ltd. you request the client to provide you with a letter of representation. The client reads the representations you are requesting and refuses to furnish the letter. The client states its position to be as follows:

“You are asking us to tell you all manner of things which we appointed you to find out. You are requesting us to say such things as ‘all the transactions undertaken by the bank have been properly reflected in the accounting records’ and yet we pay you to carry out the audit. You should know whether these statements are true or not.”

Required:

1. Explain to the client the purpose of the letter of representation (6 marks)
2. Describe the nature of the content of a letter of representation. Your answer should be illustrated
3. With specific examples of items which may appear in a letter of representation (6 marks)
4. Explain the reliability of a letter of representation as audit evidence and the extent to which the
5. auditors could rely on this evidence. (5 marks)
6. Explain the consequence of your client’s refusal to furnish a letter of representation. (3 marks)

(Total: 20 marks)