1. What is the criterion of prudent management laid down by the Building Societies Act?
  2. In drawing up the audit programme, which areas should particular attention be paid to which are of particular significance or unique to building societies? In which areas should substantive tests concentrate on?


  1. What areas constitute significant banking markets?
  2. Give examples in the following control areas of controls which may be compliance tested over customers accounts and cash.
      1. Segregation of duties
      2. Physical
      3. Authorisation and approval
      4. Arithmetical and accounting
      5. Supervision


Muungano Hardwares Ltd. a wholly owned subsidiary of MK Holdings Ltd. is a leading hardware manufacturer in the country. Approximately 80% of the products are sold to distributors, and the remaining portion to a small number of retailers.

While receiving the audited accounts for the year ended 31 December 2003 the directors of MK Holdings have noticed that Muungano had incurred a trading loss. This was due to a substantial fall in the gross profit margin compared with previous years.

Your firm has been appointed as auditors of the Muungano group of companies for the first year in 203. The directors of MK Holdings have requested your firm to carry out an investigation to find the reasons for the dramatic fall in the Muungano's gross profit margin.

The group internal auditor of Muungano, whose work you have concluded you can place reliance on, has informed you that:

i. The directors had not expected the loss incurred in 1989 since the monthly accounts upon which they rely are calculated using historical gross profit percentage.

ii. The company does not have a proper system of comparing actual costs with estimate costs and does not maintain basic stock records.

iii. The range of products manufactured and sold by the company has not changed significantly in the past 5 years.

iv. Purchases and sales cut off were correctly carried out on 31 December 1989.

v. In certain areas the standard of the work performed by the previous auditors was not as high as would be normally expected.


Describe the investigations you would make and the work you would carry out to find the reasons for the fall in gross profit margin for the year ended 31 December 1989.

(Total: 18 Marks)


  1. In addition to the statutory audit, the auditors of insurance companies are required to report on various other schedules submitted to the Commissioner of Insurance. Name these other schedules.
  2. What are the important control objectives relating to premium and claims that are unique to the insurance business?
  3. What important ratios need to be considered by the auditor?
  4. What substantive tests of detail (on areas known as technical provisions) are of importance to the auditor?