MERU UNIVERSITY OF SCIENCE AND TECHNOLOGY
P.O. Box 972-60200 – Meru-Kenya.
Tel: 020-2069349, 061-2309217. 064-30320 Cell phone: +254 712524293, +254 789151411
Fax: 064-30321
Website: [Link] Email: info@[Link]
University Examinations 2016/2017
THIRD YEAR SECOND SEMESTER EXAMINATION FOR THE DEGREE OF BACHELOR OF
COOPERATIVE MANAGEMENT
AND
FOURTH YEAR FIRST SEMESTER EXAMINATION FOR THE DEGREE OF BACHELOR OF
COMMERCE
BFC 3427: ADVANCED AUDITING
DATE: JUNE 2017 TIME: 2 HOURS
INSTRUCTIONS: Answer question one and any other two questions
QUESTION ONE (30 MARKS)
The significance of independence in the work of the independent auditor is so well established that
little, justification is needed to establish this concept as one of the cornerstones of auditing theory
and practice.
a)
(i) Explain why it is necessary for an auditor to be independent. (6 Marks)
(ii) Practicing Certified Public Accountants and Institute of Certified Public Accounts have
consistently pointed out that for effective independent external audit, auditors must have:
1. Programming independence
2. Investigative independence
3. Reporting independence
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Discuss the above three aspects of the auditors independence. (6 Marks)
b)
(i) Explain critically how the 2010 constitution of Kenya legally protect the professional
independence and tenure of the office of the Auditor General of the republic of Kenya.
(6 Marks)
(ii) Explain how the Accountant Act, the Companies Act, the Societies Act protect the
professional independence and tenure of the office of the auditor in the companies and co-
operatives entities. (6 Marks)
c) Discuss some of the legislative challenges to the independence of the office of the auditors both
in public and private sectors. (6 Marks)
QUESTION TWO (20 MARKS)
The audit of operational and capital commitment (budgets) is considered a relatively minor activity
by many practicing accountant\s (auditors) yet budgets are of considerable importance to
shareholders and other users of financial statements.
Required:
a)
(i) Highlight what distinguishes a capital commitment from a creditor. (3 Marks)
(ii) Show why it is necessary to disclose capital commitment and what information does such
disclosure give to users of financial statements. (5 Marks)
b) As noted from county financial reports, in one of the 47 counties of Kenya members of County
Assemblies foreign travelling allocation was shs.10 million. However, the actual expenditure was
shs.28 million, resulting into an over expenditure of shs.18 million.
(i) Explain the term budgetary allocation. (2 Marks)
(ii) As an auditor, explain how the over expenditure would be reported in the financial
statements issued to members and tax payers. (2 Marks)
(iii) In your audit report, explain the recommendations you would make to management
(senate) for purposes of expenditure controls in future. (3 Marks)
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c) Discuss the steps you would take in your audit to verify the validity of a co-operative society
budgetary allocation for purchase office buildings shs.950 million at Meru town that requires
members to forego dividends, for 10 years, when the price of land and construction cost of the
same structure same architectural building, put together would cost at a fair value of shs.600
million and when a recently acquired property in the same vicinity with of similar design was
exchanged for shs.550 million in cash. (5 Marks)
QUESTION THREE (20 MARKS)
Your audit firm has been appointed by the shareholders of Meru Dairies Co-operative Creameries.
The audit engagement required you, the auditor to:
1. Review the statement of comprehensive income for the year ended 30 June 2017.
2. Review the statement of financial position as at 30.4.2017.
3. Review flows of cash in and out of the firm and report accordingly to the shareholders.
Required:
a) Explain how you would reconcile the costing records of raw material, raw milk and casual labour
with those of the finance accounts (Ledger accounts). (3 Marks)
b) Explain the tasks to be included for a critical review, of the statement of comprehensive income
for the year 30.6.17. (10 Marks)
c) One of the task in (b) above is to ensure that all sales of milk are properly and accurately captured
in the accosting systems, and that both the debtors control account and cash receipts are all in
agreement with the sales figure in the income statements, explain how you establish the accuracy
of sales returns, discounts, special offers, bad debts of written offs, spoilt milk, stolen milk if any.
(3 Marks)
d) Explain, critically as to why, on annual basis companies, cooperatives and all other corporate
entities have to spend their very scarce resources hiring auditors to audit financial statements and
report their audit finding to shareholders: is not another way of wasting financial resources?
(4 Marks)
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QUESTION FOUR (20 MARKS)
ISA 107 and ISA 315, points out that the basis of modern approach to auditing even before review of
accounts is for the auditor to assess the control environment of the entity, understand it and evaluate
its strength as a system and instrument of protecting the investments (assets) of the shareholders.
Hence the best method of auditing therefore is to review the client corporate governance, level of
oversight and the level of stakeholders participation in the affairs and transactions of the entity,
including the internal controls.
Required:
a) Explain the concept of corporate governance with regard to county governments, companies and
cooperative societies. (4 Marks)
b) Briefly discuss the attributes of good cooperate governance in a corporate entity. (5 Marks)
c) Explain why it is important for shareholders through their directors to oversight the managers of a
company or cooperative on a regular basis. (4 Marks)
d) Explain why it is important for citizens, members of parliament, members of county assemblies to
participate in budget making and financial reporting by government ministries and departments
both at county and national levels. (4 Marks)
e) Discuss the reasons behind the low levels of oversight and shareholders/stake holders public
participation in financial affairs in Kenya, and the effects of such low levels of oversight and
public participation in financial reporting to national economy. (3 Marks)
QUESTION FIVE (20 MARKS)
ISA 500 requires auditors to obtain sufficient and appropriate audit evidence in order to draw
reasonable conclusions on which to base his or her audit opinion. At the same time ISA 520,
requires auditors to exercise skill and knowledge when using analytical procedures for audit
evidence. ISA 530 requires the use of same skill on use of audit sampling and other selective testing
procedures when performing audit tests on samples of element of financial statements.
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Required:
a) Explain the term:
(i) Audit evidence. (2 Marks)
(ii) Audit sampling. (2 Marks)
(iii) Analytical procedures (2 Marks)
(iv) Skill and knowledge with regard to audit evidence gathering through audit sampling.
(2 Marks)
(v) Audit test. (2 Marks)
b) Discuss the risks and challenges associated with insufficient and inappropriate audit evidence.
(4 Marks)
c) Show the benefits of statistical audit sampling over the judgmental approach on evidence
gathering through audit sampling. (4 Marks)
d) Explain why the auditors concern for materiality and his/her assessment of internal controls in a
corporate entity have direct impact on whether to choose statistical approach or judgment
approach in evidence gathering. (2 Marks)
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