Auditing Hand Out

MORE REVISION SERIES-PAST QUESTIONS AND ANSWERS ON AUDITING & TAXATION- ICM- UK (ACCOUNTING & FINANCE)
JUNE 2005
AUDITING & TAXATION
QUESTIONS
PART A
1. Post balance sheet events can be ignored. Discuss. [10]
PART B
2. a) Explain the rights of an auditor. [10]
b) Explain the principal contents of an auditor‟s report. [10]
3. Explain briefly how you would verify the following items:

a) Freehold land and buildings
b) Investments
c) Stocks and work in progress
d) Trade creditors [5 each]
4. a) Explain the role of the internal audit department. [10]

b) Outline the stages of an audit. [10]
5. Explain the following terms:

a) Letter of engagement
b) ICQ
c) Internal controls
d) The dismissal of an auditor [5 each]
PART C
The following information applies to any personal tax calculations:
TAX RATES
10% on the first $3,000 of taxable income
20% on the next $27,000 of taxable income
40% on any further taxable income
PERSONAL ALLOWANCES
Single person $8,000
Additional allowance of $3,000 can be claimed by one of the partners in a marriage
PENSION CONTRIBUTIONS
Up to the age of 49 a maximum of 15% of gross pay can be paid tax free into a
qualifying pension fund.
From age 50 a maximum of 20% can be paid in.
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6. Corin, aged 56, is a single person who earns $48,000 per year. He has paid 5% of his
gross pay into a qualifying pension fund. Corin has also paid $600 in respect of
professional subscriptions.
Brian, aged 39, is married (and claims the additional allowance) and earns $46,000. He
has paid 6% of his gross pay into a qualifying pension. Brian has also paid $500 in
respect of expenses that are allowable against tax.
TASKS
Calculate the taxable pay and the total tax payable for EACH of the following:
a) Corin [7]
b) Brian [8]
7. The following is the summarized internal Profit & Loss account of KRE Ltd after its
first year of trading:
£
Sales 2,600,000
Cost of sales (1,300,000)
Distribution costs (450,000)
Administration expenses (290,000)
Depreciation of equipment (80,000)
Depreciation of IT equipment (30,000)
Other information:
Original cost of equipment 600,000
Original cost of IT equipment 150,000
Corporation tax (i.e. company taxation) is charged at 20% of the taxable profit.
Initial writing down allowances are:
 25% as regards equipment
 50% as regards IT equipment
Included in the distribution costs is £6,000, which is deemed non-allowable.
TASK
Calculate KRE Ltd‟s total taxable profit AND the total tax charge for the year.
[15]
8. Write short notes on THREE of the following:
a) The tax benefits of contributing to a pension plan
b) PAYE
c) The collector of taxes
d) Capital gains tax (CGT)
[5 each]
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SUGGESTED ANSWERS: JUNE 2005

Q1.
Post Balance Sheet Events
These are events, both favourable and unfavourable that occurs between the balance sheet date
and the date on which the financial statements are approved by the Board of Directors”. Post
balance sheet events fall into two categories, namely
1. Adjusting events
2. Non-adjusting events
Adjusting events are events that provide additional information or conditions existing at the
balance sheet date. Example is the discovery of error or fraud that shows that the accounts
were not correct after the balance sheet date. Another example is proposed dividends.
Non-adjusting events are events that arise after the balance sheet date and concern conditions
that do not exist at the balance sheet date. Such events will not have any effect on the balances
in the Profit and Loss Account or the Balance S heet. Examples are issue of shares, mergers and
acquisitions, strikes and labour disputes, changes in the exchange rate etc
IAS 10 /FRS 21 (Events after the Balance Sheet date) requires that the auditor should design
his audit procedures to ascertain whether such events exis t. He should perform post balance
sheet review before signing his report. He should be able to distinguish between adjustable
events, non-adjustable events, and their effect on the financial statement. Material post balance
sheet events require changes in the amounts to be included in the financial statement where:
a) It is an adjusting event or
b) It indicates that application of the going-concern concept is not appropriate.
A material post balance sheet event should be disclosed where it is a non-adjusting events
From the above, it can be concluded that post balance sheet events cannot be ignored and the
auditor has a duty to perform post balance sheet review to determine their effects on the financial
statement before signing his report.
Post-balance sheet events will be disclosed in the notes to the financial statements, in addition
to disclosure in the members‟ report. The financial impact of post-balance sheet events will
also be disclosed where it is known or can be estimated.
Q2a.
The rights of an auditor include the following:
a) Right of access at all times, to the books and accounts and vouchers of the company
b) The right to require from the officers including the directors of the company such
information and explanations necessary for the performance of his duties as an auditor.
c) The right to attend any general meeting of the company and to receive notices to any
meeting and to be heard on any part of the meeting which concerns him as an auditor
d) The right to be notified in writing, any intended resolution to remove him from office
as auditor of the company.
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e) The right before accepting appointment as an auditor of the company, to communicate

with the outgoing auditor (if any) and invite him to make any representations and
supply any information about the company (which he may or may not supply).
f) The right to contract with the company, in addition to the statutory duties, to undertake
or provide accounting, taxation and other services to the company.
Q2b. The principal content of an auditor’s report
The auditor‟s report should include the following basic elements

a. Title: An appropriate title such as “Auditor‟s Report” should be used to enable the
reader distinguish it from reports from others such as Management report
b. Addressee: The auditor‟s report should appropriately be addressed. The report is
normally addressed to the shareholders or the Board of Directors.
c. Identification of financial statements: The report should identify the financial
statements audited. It should show the name of the company, the accounts audited (e.g.
P&L and balance sheet) and the financial year
d. Reference to Auditing Standards or practices: The report should also indicate the
Auditing Standards followed e.g. International Standards on Auditing (ISA)
e. Opinion of the financial statement: The report should clearly state the auditors opinion
on the financial statement as to whether it shows a true and fair view of the entity‟s
financial position and the results of its operations (P & L accounts) or not.
f. Signature: The report should be signed in the name of the audit firm, the personal
name of the auditor or both the personal name and the name of the audit firm.
g. Auditor’s Address: The report indicate the address and location of the auditor‟s main
office
h. Date of Report: The report should be dated.
Q3a. Freehold land and Buildings
The following procedures will be followed in the verification of freehold land and buildings
a) Obtain a schedule of fixed assets
b) Examine a sample of title deeds and land registry certificate and conveyance
documents from solicitors and leases. Pay particular attention to mortgages and
securities over assets
c) Inspect the minutes of Board of Directors to ensure that, all title deeds, conveyances,
tenancy agreements and leases are properly authorised.
d) Check entries in the fixed assets register and trace back to source documents to ensure
it is properly stated at cost
e) Review the companies policy for depreciation and ensure that land is not depreciated
f) Check the calculations of the depreciation and ensure they are accurate
g) Where freehold or leasehold assets are let to third parties, inspect tenancy agreement
and check the rental income
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h) Physically inspect assets to ensure their existence

i) Check the classification and presentation of fixed assets in the balance sheet.
j) Ensure that, the amount stated in the financial information is in agreement with the
accounting records.
Q 3b Investment:
The following procedures can be followed to verify investment
a. Request for a list of all investment currently held by the client and distinguish
between quoted and unquoted. A reconciliation of the current book value and that
of the previous year should be made. Ask that the market value of all investment at
the end of the year should be shown i.e. the quoted investment.
b. Verify purchase or sale of investment during the year with documentary evidence
e.g. Contract notes or agreements
c. Scrutinize the directors Minutes book for proper authorization of purchase and sale
of investment.
d. If the investment is quoted, check the market value shown in the list with that of the
stock exchange values. In the case of unquoted ones inspection should be made of
the company‟s accounts and though there is no market value disclosed for unquoted
investment consideration should be given as to whether the net realizable value is
below cost for current assets and for fixed assets, whether a permanent fall in value
has occurred.
e. Physically inspect certificates and bonds, whether they are free from any charge.
f. To verify purchases examine contract notes and paid cheque counterfoils and for
disposals, vouch the income received.
g. Verify that all incomes have been received and properly treated in the financial
statement.
h. Compare investment income with previous year‟s and ensure that the basis of
recognizing income is consistent with previous years. Investigate any significant
fluctuations.
i. Ensure proper disclosure in the accounts.
Q3.c Stocks & work-in progress:

In verifying stocks and work in progress, perform the following audit procedures:
1. Review the system of internal control over stocks
2. Perform compliance tests on key controls relating to purchases, sales, creditors a nd
debtors
3. Physically check samples by counting selected items of stock
4. Observe stock taking (i.e. Attend stock taking )
5. Check on slow moving, obsolete stocks
6. Compare the current years stock with previous years stocks and note any
significant changes
7. Confirm that the stock valuation is in line with SSAP 9
8. Verify each work- in-progress item with a job card.
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Q3d Trade creditors

Follow the following audit procedure in the verification of trade creditors
1. Evaluate the system of internal control over purchase
2. Obtain a copy of the schedule of balances of creditors and confirm the balances with the
creditors control account
3. Examine a sample from the creditors ledger with aged lists
4. Enquire into any material debit balances on any of the creditors account
5. Check trade creditors to purchases and note down the credit period. If it is increasing, it may
suggest lack of funds
6. Circularise sample of creditors
7. Enquire into any exceptions received from the creditors‟ circularization
8. Check that all creditors are properly disclosed in the financial statement
Q4a.
The role played by internal Audit department includes the following:
i. It helps reduce the amount of detailed work to be carried out by the external auditors if
it is found to be reliable
ii. They review the system of accounting, financial and other operational controls of the
business and notify management and advice them on the best practice.
iii. They review and test compliances and accuracy of the companies policies
iv. They exist to review and improve the system of internal checks.
v. They also prevent fraud and helps in early detection of fraud and irregularities
vi. They undertake special investigation at the request of management.
Q4b.
The stages in an audit can be summarized as follows:
i. Background Research: - This involves a research into the history of the company, its
product, its present condition and future prospect, the location of all branches, any
problem in accounting system and changes in law or accounting practice which affect
the company.
ii. Preparation of the audit plan:- This involves preparing an overall audit plan which
shows how the audit work will be done, the staff who will do the work, the budgeted
time and cost
iii. Accounting system review: - This will involve the review of the adequacy of the
accounting system and documentations of transactions.
iv. Internal control system review: - It is a review of the internal control system to know
whether the client maintains proper or adequate books of accounts and whether the
books of accounts can be relied on for the preparation of the final account.
v. Substantive Testing: - This involves the tests of transactions and balances and other
procedures such as analytical review which seek to provide audit evidence as to the
completeness, accuracy and validity of the information contained in the accounting
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records or the financial statement. Substantive testing is necessary where there is weak
internal control or the item is extraordinary transaction.
vi. Analytical Review: - This is the study of relationships between elements of the financial
information expected to confirm a predictable pattern based on the organization‟s past
experiences and other non- financial information available.
vii. Analytical Review of financial statement:- This is where the auditor performs overall
analytical review of the financial statement to determine whether accounting policies
are acceptable and are used consistently , all items in the financial statement are
compatible to the best of his knowledge and also adequate disclosure of items.
viii. Preparation and signing of report:-This is where the auditor expresses his opinion in a
report as to whether the financial statement shows a true and fair view or not. The
report shows the person to whom the report is addressed, the financial statement
audited, the responsibilities of management and the auditor, the signature of the auditor
and the date of the report.
Q5a. Letter of Engagement (or Engagement letter)

This is a letter sent by the auditor to his client at the beginning of any new audit or
accountancy work. It sets out the terms of the engagement and forms the basis of the contract.
The engagement letter defines clearly, the extent of the auditors‟ responsibilities and the
responsibilities of the directors. It also provides a written confirmation of the auditor‟s
acceptance of the appointment. The client is required to acknowledge receipt of the letter and
state if it is in accordance with his understanding of the agreement.
Q5b. Internal Control Questionnaire- ICQ

It consists of a series of questions designed to establish which control exist in the accounting
system and any possible weaknesses. Internal control Questionnaire (ICQ) is a comprehensive,
all inclusive method of ascertaining, recording and evaluating a system of internal controls. It
is a pre-printed document designed by the auditor to be used in assessing the adequacy of the
clients accounting system. Internal Control Questionnaire helps audit staff familiarize
themselves with the client‟s accounting system quickly and more comprehensively
Q5c. Internal control: It is defined as the whole system of control, financial and otherwise
established by the management in other to carry on the business of the enterprise in an orderly
and efficient manner, ensure adherence to management policies, safeguard the assets and
secure as far as possible, the completeness and accuracy of the records. The individual
components of an internal control system are known as control or internal controls.
The main types of internal controls are

i. organization
ii. segregation of duties
iii. physical
iv. authorization and approval
v. arithmetical and accounting
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vi. personnel
vii. supervision
viii. management
Q5d. Dismissal of an auditor: - There are a number of procedures and rules to be followed before
an auditor of a company can be dismissed or removed. The companies Act 1985 (section 391)
has the following provisions/rules regarding the dismissal of an auditor
a. Auditors of a company can be removed by an ordinary resolution (i.e. a simple majority)
at an Annual General Meeting (AGM)
b. Written notices shall have been given to the company of the intention to move a resolution
to remove an auditor not less than 28 days.
c. On receipt of such intended resolution, the company shall forthwith send a copy to the
auditors concerned
d. The auditor shall have the right to make a written representation to the company and
request their notification to members. (Thus, if he does not want to be removed, he will
state his case and request the directors to send it to the members of the company.)
e. The auditor shall have the right to speak at the meeting on the subject of his intended
removal and if the representation have not been sent to members, he has the right to read
it out at the meeting
Q6. a) CORIN
COMPUTATION OF TAXABLE PAY AND TAX PAYABLE
$ $
Basic Salary 48,000
Less:
Contribution to pension Fund (5%) 2,400
Professional subscription 600 (3,000)
Less Personal allowance (single) (8,000)

TAXABLE PAY 37,000 TAX
PAYABLE
INCOME RATE TAX PAYABLE
First 3,000 10% 300
Next 27,000 20% 5,400
Excess 7,000 40% 2,800
Tax payable 8,500
NOTE: The total taxable income is 37,000 so first 3,000 attract 10% next 2,700 attracts 20%.
Total up, so this part is 3,000 + 27,000 =30,000
Remaining (37,000-30,000) = 7,000, so excess of 7,000 will attract 40%.
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Note how this is calculated throughout this handout.
Q6 b) BRIAN
CALCULATION OF TAXABLE PAY AND TAX PAYABLE
$ $
Basic Salary 46,000
Less:
Allowable expenses 500 (3,260)

Marriage allowance (3,000) (11,000)
TAXABLE PAY 31,740
TAX PAYABLE

First 3,000 10% 300
Next 27,000 20% 5,400
Excess 1,740 40% 696
Tax payable 6,396
Q7. KRE LTD
CALCULATION OF TAXABLE PROFIT AND TAX PAYABLE
Net Profit before tax 450,000

Add: Depreciation of IT equipments 30,000
Depreciation of Equipments 80,000
Non-allowable Distribution cost 6,000 116,000
Adjusted Net Profit 566,000
Less Capital Allowance:

IT Equipments (50%X150,000) 75,000
Equipments (25% X 600,000) 150,000 (225,000)
Taxable profit 341,000
Tax thereon @20% (341,000 X 20%) 68,200
WORKINGS: PROFIT AND LOSS ACCOUNT
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Sales 2,600,000
Gross profit 1,300,000
Distribution cost 450,000
Administrative expenses 290,000
Depreciation of equipments 80,000
Depreciation of IT equipments 30,000 (850,000)
Net profit before tax 450,000
Q8a) The tax benefits of contributing to a pension plan:
Contributing to a retire ment plan (i.e. pension) makes sense for practically all taxpayers. It is
one of the easiest and most powerful ways to reduce your overall tax burden. In fact if these
accounts were more accurately referred to as tax-reducing accounts people would likely take
greater notice of them. Tax avoidance is the primary objective that sparks taxpayer interest in
retirement accounts. The contribution you make to a retirement account is not applied towards
your adjusted gross income (AGI), therefore it will keep you in a lower tax bracket so you‟ll end
up paying less in taxes. The next benefit comes from having this money invested in a tax deferred
account so you can enjoy the substantial benefits of tax deferred compounding with the growth
which occurs in the account not being taxable until you retire and begin withdrawing funds.
Presumably at retirement you will be in a lower marginal tax bracket however even if you are not,
you will still come out ahead because the act of deferring taxes and the benefit of compounding
over many years will likely leave you with more funds accumulated in a retirement account even
if your tax rate is indeed higher in retirement.
b) PAYE: PAYE (Pay As You-Earn) is an amount collected by e mployers on behalf of the

government from employees. The tax collected during the year may be enough to discharge the
taxpayer's liability for tax. This is, in effect, a provisional payment of tax on the
employee's income. The amount withheld is determined partly by the employee's expected tax
allowances, exemptions and reliefs, and partly by tax tables that determine the amount of tax to be
deducted for the salary or wage paid to the employee.
PAYE is, in effect, a withholding tax administered separately by the tax authority. .
c) The collector of taxes: The Collector of taxes collects taxes and excises due to the town. The
tax collector deposits all moneys received, and must turn over to the treasurer all receipts at least
once a week. Tax Collectors also pursue delinquent accounts.
Non-payment of taxes may cause you to pay interest and additional collection charges.
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Additionally, non-payment of taxes may result in the loss of property. The Collector of Taxes is
an elected position with a three year term.
d) Capital Gains Tax (CGT): Capital Gains Tax is a tax charged on capital gains, a profit that
results from investments into a capital asset, such as stocks, bonds or real estate, which exceeds
the purchase price. Thus the profit realized on the sale of asset that was purchased at a lower
price. The most common capital gains are realized from the sale of stocks, bonds, precious metals
and property.
Capital gains tax was introduced in 1965 and is levied on gains arising from the disposal of assets
by individuals and trustees. Capital gains made by companies are subject to corporation tax. The
total capital gain is defined as the value of the asset when it is sold (or given away etc.) minus its
value when originally bought (or inherited etc.). As with income tax, there is a threshold below
which capital gains tax does not have to be paid. In 2006–07, this „exempt amount‟ is £8,800 for
individuals and £4,400 for trusts. This is subtracted from total capital gains to give taxable capital
gains. Taxable capital gains are in effect subject to income tax as if they were savings income.
Capital gains are taxed at 10% below the starting-rate limit, 20% between the starting- and basic-
rate limits, and 40% above the basic-rate limit. In practice, most capital gains are subject to 40%
tax.
SEPTEMBER 2005
AUDITING & TAXATION
QUESTIONS
PART A
1. Explain the term true and fair. [10]
PART B
2. a) Explain the role of internal questionnaires. [10]
b) Explain briefly the principal contents of a company‟s annual report and accounts.
[10]
a) Trade debtors
b) Investments
c) Share capital
d) Stock and work in progress [5 each]

a) Letter of weakness
b) Interim audit
c) The audit programme
d) Post balance sheet events [5 each]
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5. a) Explain the major data verification checks associated with entering financial data into
a computerized accounting system. [10]
b) The auditors work for the directors of a company. Discuss. [10]
PART C

TAX RATES
PERSONAL ALLOWANCES
Additional allowance of $3,000 can be claimed by one of the partners in a marriage
Up to the age of 49 a maximum of 15% of gross pay can be paid tax free into a qualifying
pension fund.
6. Yousef, aged 49, is a single person who earns $57,000 per year. He has paid 5% of his
gross pay into a qualifying pension fund. Yousef has also paid $500 in respect of
Ocean, aged 36, is married (and claims the additional allowance) and earns $53,000. He
has paid 6% of his gross pay into a qualifying pension. Ocean has also paid $800 in
TASKS
a) Yousef [7]
b) Ocean [8]
7. The following is the summarized internal Profit & Loss account of Rove Ltd. after its first
year of trading:
£
Sales 2,600,000
Other information:
25% as regards equipment
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50% as regards IT equipment

Included in the distribution costs are £10,000 which are deemed non-allowable.
TASKS
Calculate Rove Ltd.‟s total taxable profit AND the total tax charge for the year. [15]

a) Personal allowances
b) Schedule E
c) Tax avoidance
d) Tax codes [5 each]
SUGGESTED ANSWERS: SEPTEMBER 2005
Q1. True and Fair

Both the Companies Acts and Accounting standards require the financial statement of a company
to give a true and fair view. However, there is no legal definition of the term true and fair. The
meaning of true and fair can be broken down into two:
True: This means in accordance with facts

Fair: This means in accordance with expectations, relevance and objectivity free from bias etc.
The following quotations represent some authoritative views on the meaning of the term true and
fair
a) A true and fair view means appropriate classification and grouping of items... and
consistent application of generally accepted principles (ICA-Australia)
b) True and fair view implies that all statutory and other information is not only available
but is presented in a form which it can be properly and readily accepted (Sir Russell
Kettle)
In summary, there is no statutory or professional definition of true and fair view. However, to say
financial statement shows a true and fair view, the accounts must be prepared in accordance with
generally Accepted accounting principles and must conform to relevant statutory and regulatory
requirement and the accounts must not me misleading and should be free from bias.
Q2a. Internal control questionnaire (ICQ) plays the following roles in an audit:
i. It enables the auditor identify specific areas of weakness in the client accounting system
ii. It enable the auditor design a series of test in his audit program
iii. It helps audit staff familiarize themselves with the clients system quickly
iv. It is a major tool in ascertaining the clients accounting system
v. ICQ enables the auditor review and assess the adequacy of the clients system
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Q2b.
The main sections or content of an annual report include the following
a. Introductory material: Many annual reports begin with a brief or summary of the history
of the company and its objectives.
b. Operational reports and reviews: This section contains a report from the chairman as well
as individual reports from senior officers of the company. This section is usually
supported by a series of charts, and graphs statistical tables which compare the current
years achievement with the previous years
c. The Accounts: This is the main section of the annual report. It contains the statutory and
professional requirements of accounts. The accounts will show the main financial
statement (the profit and loss, the balance sheet, the cash flow statement), the auditor‟s
report, accounting policies, notes to the accounts, the directors report etc.
d. Shareholders information: This is shown at the end of the annual report and it is
presented as additional data. Shareholders information may include details about the
financial results over the past four or five years, names and addresses of major
shareholders, notices of Annual General Meetings and information about the companies
share prices
Q3a. Trade Debtors:-

The following procedure will be followed to verify debtors.
a. Obtain a list of all the balances of debtors.
b. Cast the list and agree the total to the general ledger control account balance
c. Select a sample of individual debtors account and test as follows.
- Trace debit entries to entries in the sales day book
- Check that dispatch notes have corresponding sales invoices
- Trace credit entries to the cash book
d. Circularize the sample selected
e. Examine all confirmations replied and investigate any exceptions
f. Consider the adequacy of bad debt provisions, sales returns and cash discounts
g. Consider the value stated in the balance sheet.
Q3b: Investment : verification of investment include the following audit procedure

1) Request for a list of all investment currently held by the client and distinguish between
quoted and unquoted.
2) Verify purchase or sale of investment during the year with documentary evidence.
3) Examine the Directors Minutes book for proper authorization of purchase and sale of
investment.
4) If the investment is quoted, check the market value shown in the list with that of the
stock exchange values.
5) Physically inspect certificates and bonds. If they have been deposited with a bank a
certificate stating in whose name they are registered and whether they are free from
any charge should be shown and this should be compared with the standard bank letter.
6) To verify purchases examine contract notes and paid cheque counterfoils and for
disposals, sold contracts.
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7) Vouch the income received.

8) Verify that all incomes have been received and properly treated in the financial
statement.
9) Ensure proper disclosure in the accounts.
Q3c. Share Capital:

The verification of share capital:
a. Ensure that the number of shares and type of shares issued is within the limit authorized
by the companies Memorandum and Article
b. Ensure that the issue was properly authorized by inspecting the minutes of Directors
c. Ascertain and evaluate the system for the control of the issue of shares.
d. Agree total shares issued per draft accounts to shareholders register
e. Test the additions of shareholders register
f. Ensure that all monies received on application were contained in a specia l bank account
until allotment
g. Vouch the payment of underwriting and other fees
h. Where shares are issued not for cash, but for other consideration, vouch the agreement and
ensure that all entries are properly made
i. Check the value of share capital in the balance sheet and ensure that it is correctly stated.
Q3d: Stocks & work-in progress: In verifying stocks and work in progress, the following
procedures can be followed:
i. Review the system of internal control over stocks
ii. Perform compliance tests on key controls relating to purchases, sales, creditors and
debtors
iii. Physically check samples by counting selected items of stock
iv. Observe stock taking (i.e. attend stock taking )
v. Check on slow moving, obsolete stocks
vi. Compare the current years stock with previous years stocks and note any significant
changes
vii. Confirm that the stock valuation is in line with SSAP 9
viii. Verify each work- in-progress item with a job card.
Q4a. Letter of Weakness: It is a letter sent by the auditor to his client, bringing to his attention the
weakness found in the internal control system during the audit. This letter is also known as
management letter, letter of comment, letter of recommendation, post audit letter, internal control
letter The letter points out the weaknesses found in the internal control system and gives
recommendations to improve them. It is usually presented to the client in a meeting with the
auditor.
Q4b. Interim Audit: Is an audit that is conducted to cover a certain time or up to a certain date
within the financial period. It may be done to cover a month, a quarter or half year on the request
of a client. Some audit work such as verification of assets and liabilities may not be carried out
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during interim audit. These may be deferred to the final audit. The work done may include
ascertaining the system of accounting and internal controls, evaluation of the system for adequacy
and any possible weaknesses, design and performing compliance tests etc.
Q4c. Audit Program –The audit program essentially consists of a very detailed list of things to be
done in an audit engagement. It is a statement of decision to an audit engagement for the purpose
of indicating what to do, how to do it and when do it. The audit program develops and documents
the nature, timing and extent of planned audit procedures required to implement the overall audit
plan. The purpose is to assist the auditor to ascertain / determine the reliability of the accounting
records used in preparing the final account. It is normally on a printed form or booklet.
It ensures that no aspect of the audit work is over- looked and therefore gives a clear perspective
of work to be done by the auditor.
Q4d. Post Balance Sheet Events: Post Balance sheet events are those events both favourable and
unfavourable which occur between the balance sheet date and the date on which the financial
statements are approved by the Board of Directors”. Post balance sheet e vents fall into two
categories;
1. Adjusting events
balance sheet date. Example is the discovery of error or fraud that shows that the accounts were
not correct after the balance sheet date. Another example is proposed dividends.
Non-adjusting events are events that arise after the balance sheet date and concern conditions that
do not exist at the balance sheet date. Such events will not have any effect on the balances in the
Profit and Loss Account or the Balance Sheet. Examples are issue of shares, mergers a nd
Q5a. Data verification checks are controls designed to ensure that, data received for processing
are processed correctly. The following are some controls
a. Check digit: This is a detective control to establish the validity of numerical data such as
accounts numbers. One digits with a “block” of digits is produced by the mathematical
function of the other digits
b. Format checks: This checks any omission of details of items. Missing and duplicate
numbers are revealed for investigation
c. Existence check: These are checks on record fields to ensure that the data is valid for that
field. It checks correct codes wrongly used against a correct digits
d. Logical checks: these are used to ensure that, codes on the documents are acceptable in
the accounting system
e. Range checks: These are checks designed to ensure that the data in a certain lies within
predetermined limits or range. Outside range data are then rejected.
Q5b. Auditors do not work for the directors of the company. Rather the auditor is under a
statutory duty to report to the members of an enterprise as to whether or not, the accounts
prepared by the directors to be sent to the members of the enterprise gives a true and fair view and
- - 16 - -
have been prepared in accordance with the companies Acts (sec. 235). The auditor therefore
works for the members of the company who appoint him as auditors at an Annual General
Meeting (AGM). The work done by the auditor will be to report to the members as to:
a. whether proper accounting records have been kept
b. whether all returns have been received from branches
c. whether or not the accounts prepared are in agreement with the records
d. Whether the information and explanations given in the directors report is co nsistent with
the accounts and finally,
e. Whether in his opinion, the financial statement presents a true and fair of the company‟s
affairs at the balance sheet date and of its profit and loss for the period under review.
Q6. a) YOUSELF
$
Basic Salary 57,000
Less:

TAXABLE PAY 45,650
TAX PAYABLE

First 3,000 10% 300
Next 27,000 20% 5,400
Excess 15,650 40% 6,260
Tax payable 11,960
Q6 b.) OCEAN

$
Basic Salary 53,000
Less:
- - 17 - -

TAXABLE PAY 38,020
TAX PAYABLE

First 3,000 10% 300
Next 27,000 20% 5,400
Excess 8,020 40% 3,208
Tax payable 8,908
Q7. ROVE LTD
COMPUTATION OF TAXABLE PROFIT AND TAX PAYABLE

$
IT Equipments (50%X200, 000) 100,000

Equipments (25% X 500,000) 125,000 (225,000)
Taxable profit before tax 375,000
Tax thereon @22% (375,000 X 22%) 82,500
Sales 2,600,000
Net profit 480,000
- - 18 - -
Q8
a) Personal allowances:
Nearly everyone who lives in the UK is entitled to an Income Tax Personal Allowance. This is the
amount of income you can receive each year without having to pay tax on it. Depending on your
circumstances, you may also be able to claim certain other allowances
c) Schedule E:
Schedule E is used to report income or loss from rental real estate, royalties, partnerships, estates
and trusts. Schedule E is also used when reporting income/loss from S Corporations.
c) Tax avoidance:
Tax avoidance is legal. It involves individuals (or firms) managing their affairs in such a way that
they reduce their tax bills below what they otherwise might have been by lawful means,
sometimes by using loopholes in the tax law. Other terms are tax planning and tax mitigation.
Tax avoidance is the legal utilization of the tax regime to one's own advantage, in order to reduce
the amount of tax that is payable by means that are within the law. The use of legal methods
to modify an individual's financial situation in order to lower the amount of income tax owed.
This is generally accomplished by claiming the permissible deductions and credits. This
practice differs from tax evasion, which is illegal. Most taxpayers use some forms of tax
avoidance. For example, individuals who contribute to employer-sponsored retirement plans with
pre-tax funds are engaging in tax avoidance because the amount of taxes paid on the funds when
they are withdrawn is usually less than the amount that the individua l would owe today.
Furthermore, retirement plans allow taxpayers to defer paying taxes until a much later date, which
allows their savings to grow at a faster rate.
d) Tax codes:
A tax code is used by your employer or pension payer to calculate the amount of tax to deduct
from your pay or pension. A tax code is usually made up of several numbers and a letter, for
example: 117L or K497.
An employee's tax code is used by employers to calculate the amount of income tax that must be
withheld, or deducted, from the employee's wage or salary.
The tax code is the mechanism by which "pay as you earn" (PAYE) is operated in the UK,
making it possible for most employees to have paid exactly the right amount of income tax by the
end of each tax year. As a result, most employees in the UK do not have to complete an income
tax return.
In the UK, every person paid under the PAYE scheme is allocated a tax code. This code
describes to employers how much tax to deduct from an employee. Tax codes are usually adjusted
once a year to take into account any changes made in the National Budget, but can be altered
more often if someone has paid to much or too little tax the previous tax year.
- - 19 - -
DECEMBER 2005
AUDITING & TAXATION
QUESTIONS
PART A
1. Distinguish between internal check and internal control. [10]
PART B
2. a) Discuss the different forms of control expected to be found in a computerized
accounting system. [10]
b) Explain the principal factors involved in planning an audit. [10]
a) Debentures
b) Trade debtors
c) Freehold land and buildings
d) Loans made to other businesses [5 each]
4. Explain the following:
a) Walk-through tests
b) Compliance tests
c) Test-checks
d) Substantive tests [5 each]
5. a) Explain the legal duties of an auditor. [10]

b) Explain the principal contents that an auditor should refer to in a letter of engagement.
[10]
PART C
6. The following information applies to any personal tax calculations:
TAX RATES
10% on the first $3,000 of taxable income.
20% on the next $27,000 of taxable income.
40% on any further taxable income.
PERSONAL ALLOWANCES
Single person $8,000.
Additional allowance of $3,000 can be claimed by one of the partners in a marriage.
pension fund.
Leto, aged 39, is a single person who earns $49,000 per year. She has paid 5% of her gross
pay into a qualifying pension fund. Leto has also paid $700 in respect of professional
subscriptions.
Buster, aged 42, is married (and claims the additional allowance) and earns $63,000. He
has paid 6% of his gross pay into a qualifying pension. Buster has also paid $500 in
respect of expenses, which are allowable against tax.
- - 20 - -
TASKS
a) Leto [7]
b) Buster[8]
7. The following is the summarised internal Profit & Loss account of WIGANA Ltd. after its
£
Sales 2,900,000
Other information:
Included in the distribution costs is £9,000 which is deemed non-allowable.
TASK
Calculate WIGANA Ltd‟s total taxable profit AND the total tax charge for the year. [15]

a) Tax evasion
b) The collector of taxes
c) PAYE
d) Capital gains tax (CGT) [5 each]
SUGGESTED ANSWERS- DECEMBER 2005
Q1. Internal Checks: This is the area of internal control, which is exclusively concerned
with the prevention and early detection of fraud and errors. It invo lves arrangement of
accounting and other duties to ensure that, no single individual handles one transaction from
the beginning to the end and that the work of each individual is subject to independent
checks.
Internal control however, is the whole system of control(including internal checks),
financial and otherwise established by management in order to carry on the business of the
enterprise in an orderly and efficient manner, ensure adherence to management policies,
safeguard assets and secure as far as possible, the completeness and accuracy of the
- - 21 - -
records.
Q2a. Controls in a computerized system can be group into two forms:

(a) General Controls and
(b) Application Controls.
General Controls: These include
i. System development controls
ii. Documentation and record testing
iii. Access controls such as physical barriers
iv. Backup and reconstruction facilities
Application Controls: These include:
i. Check digit verification
ii. Format checks
iii. Sequence checks
iv. Range checks
v. Programmed controls
vi. Batch registers
vii. Input validity checks etc.
Q2b. The Auditor must plan the audit work if the work is to be done to a high standard of
skill and care. The following are some factors that are involved in planning the audit:
 An outline of the audit work to be done on each area of the clients‟ systems and the
financial statement
 A review of last year‟s working papers
 Changes in legislation (Accounting standards, auditing standards and other relevant
regulations)
 Analytical review of management accounts
 Changes in accounting system
 The staff who will be needed to do the work
 The timing of the work to be done
 Degree of reliance on internal controls
 The time budget and cost of the audit.
Q3a. Debentures: These are long-term liabilities and the verification procedures are as
follows:
a) Obtain a schedule of all debentures detailing the sums due at the beginning of the
year, additions and redemptions.
b) Obtain a copy of the debenture deed and note the terms and conditions of the
debentures. A copy must be made for the permanent file
- - 22 - -
c) Agree opening balance with last years working papers.

d) Check that the entries relating to issues of debentures and redemptions are correctly
recorded in the books
e) Verify the issue of new debentures with Board minutes and ensure that proper
approval was given
f) Vouch payments of interest and repayment of the debenture with the cashbook to see
if the amount paid as interest and repayment is correct.
g) Agree the total amount of debentures outstanding with the register of debenture
holders
h) If the debenture is secured, verify if the charge is registered at the company house.
i) Consider whether it is correctly disclosed in the balance sheet.
Q 3 b.Trade debtors
The following procedure will be followed to verity debtors.
i. Request for a list of all the balances of debtors.

ii. Total/Cast the list and agree the total to the general ledger control account balance
iii. Select a sample of individual debtors account and test as follows.
- Trace debt entries to entries in the sales day book
iv. Circularize the sample selected
v. Examine all confirmations replied and investigate any exceptions
vi. Consider the adequacy of bad debt provisions, sales returns and cash discounts
Q3c: Freehold land and Buildings

The following procedures will be used in the verification of freehold land and buildings
1. Obtain a schedule of fixed assets held by the company.
2. Examine a sample of title deeds and land registry certificate, conveyance documents from
solicitors and leases. Pay attention to mortgages and securities over assets
3. Inspect the minutes of directors to ensure that, all title deeds, conveyances, tenancy
agreements and leases are properly authorised.
4. Check entries in the fixed assets register and trace back to source documents to ensure it is
properly stated at cost
5. Review the companies policy for depreciation and ensure that land is not depreciated
6. Check the calculations of the depreciation and ensure they are accurate
7. Where freehold or leasehold assets are let to third parties, inspect tenancy agreement and
check the rental income
8. Inspect assets to ensure their existence
9. Check the classification and presentation of fixed assets
10. Ensure that, the amount stated in the financial information is in agreement with the
accounting records.
- - 23 - -
Q3d: Loans made to other Business: the following procedures will be used in the verification
a. Review authorization for granting of loan and advances if made during the year
b. The application for the loan and the receipts for the amounts must be inspected
c. Obtain a certificate from the borrower confirming the amount outstanding as at the balance
sheet date
d. Study the written agreement covering the loan (that is the terms as to interest and
repayment)
e. Review the possibility of non-payment. E.g. the type of collateral security
f. Check the receipts of all interest received on loan
g. Check that the loan is properly disclosed in the balance sheet.
Q4a Walk-through tests: Walk- through is the process of tracing one or more transactions
through the accounting system and observing the application of relevant aspect of the
internal control system.
Q4b Compliance Test: These are tests designed to obtain reasonable assurance that those
internal controls in the clients system were functioning properly and throughout the
period. In compliance tests, the auditor tests the controls and not transactions
invo lved. It is sometimes called test of controls. If the internal control is found to be
weak, then the auditor will perform more substantive tests. Thus, the results of
compliance test will determine the extent of substantive tests.
Q4c Tests-checks: This is an audit technique or procedure where a sample of population is
checked in detail and the result applied to the whole population. There are two
methods used in test checking: (a) Judgement sampling-where the selection of the
items to be tested are determined by the auditor‟s judgement and (b) Statistical
Sampling– where the selection of the items to be tested are by statistical or
mathematical principles.
Q4d Substantive tests: - This is defined as those tests of transactions and balances and
other procedures such as analytical review, which seek to provide audit evidence as to
the completeness, accuracy and validity of information contained in the accounting
records or financial statement. Substantive test are usually applied to transactions
when the internal control is found to be weak and therefore the auditor cannot rely on
it. It is also applied to extraordinary items and all assets and liabilities in the balance
sheet. When it is directed to the profit, the auditor will ensure that, all items (income
and expenses) recorded in the profit and loss have been earned or incurred and have
actually been included in the calculation of the profit or loss. The auditor will conduct
substantive test on the balance sheet to ensure the existence of assets and liabilities,
ownership of assets and responsibility of all liabilities, the correctness of their values,
how the items are presented etc. Some of the tools or methods used in substantive
testing include Inspection, Observation, Enquiry, Analytical review, Recalculation,
Vouching.
- - 24 - -
Q5a. The duties of an auditor

The statutory duty of an auditor is to report to the members of the company as to whether or not
the accounts prepared gives a true and fair view and have been properly prepared in accordance
with the companies Act 1985. To fulfill this, the auditor is required:
a.To make a report as to whether proper accounting records have been kept.
b. To report whether all returns have been received from branches
c.To report whether or not the accounts prepared are in agreement with the records
d. Whether the information and explanations given in the directors report is consistent with
the accounts
e.State whether the accounts and statements comply with the Companies Act and finally,
f. Whether in his opinion, the financial statement presents a true and fair of the company‟s
Q5b.
The form and content of audit engagement letters may vary for each client, but they would
generally include the following:
1. The objective of the audit of the financial statement
2. Management‟s responsibilities regarding proper accounting records and the financial
statement by establishing and maintain effective internal controls.
3. The auditors responsibilities to express his opinion on the financial statement
4. The scope of the audit work, including reference to applicable legislation such as the
companies Act and pronouncements of professional bodies such as the auditing standards,
accounting standards
5. The basis on which fees will be computed
6. The need to send letter of weakness to management
7. Any arrangement for the auditor to provide accounting and taxations services
8. Unrestricted access to whatever records, documentation and o ther information requested in
connection with the audit.
Q6. a) LETO
$
Basic Salary 49,000
Less

TAXABLE PAY 37,850
- - 25 - -
TAX PAYABLE

First 3,000 10% 300
Next 27,000 20% 5,400
Excess 7,850 40% 3,140
Tax payable 8,840
Q6 b.) BUSTER
$
Basic Salary 63,000
Less

TAXABLE PAY 47,720
TAX PAYABLE

First 3,000 10% 300
Next 27,000 20% 5,400
Excess 17,720 40% 7,088
Tax payable 12,788
Q7. WIGANA LTD

£ £
Net Profit 440,000

IT Equipments (50%X400, 000) 200,000
- - 26 - -
Equipments (25% X 600,000) 150,000 (350,000)

Tax thereon@ 22% (164,000 X 22%) 36,080
Sales 2,900,000
Net profit 440,000
Q8.
a) Tax evasion: Tax evasion is the general term for efforts by individuals, firms, trusts and other
entities to evade taxes by illegal means.
Tax evasion usually entails taxpayers deliberately misrepresenting or concealing the true state of
their affairs to the tax authorities to reduce their tax liability, and includes, in particular, dishonest
tax reporting (such as declaring less income, profits or gains than actually earned; or overstating
deductions or expenses)
b) The collector of taxes: The Collector of taxes collects taxes and excises due and deposits all
moneys received, and must turn over to the treasurer all receipts at least once a week. Tax
Collectors also pursue delinquent accounts. Non-payment of taxes may cause you to pay interest
and additional collection charges. Additionally, non-payment of taxes may result in the loss of
property. The Collector of Taxes is an elected position with a three year term.
c) PAYE: PAYE (Pay As You-Earn) is an amount collected by employe rs on behalf of the

allowances, exemptions and reliefs, and partly by tax tables that determine the amount of tax to be
deducted for the salary or wage paid to the employee.
The UK introduced PAYE in 1944.
- - 27 - -
d) Capital gains tax (CGT): A capital gains tax (abbreviated: CGT) is a tax charged on capital
gains, the profit realized on the sale of a non- inventory asset that was purchased at a lower price.
The most common capital gains are realized from the sale of stocks, bonds, precious metals and
property.
by individuals and trustees. Capital gains made by companies are subject to corpor ation tax. The
gains. Taxable capital gains are in effect subject to income tax as if they were savings income:
treated as the top slice of income, capital gains are taxed at 10% below the starting- rate limit, 20%
between the starting- and basic-rate limits, and 40% above the basic-rate limit. In practice, most
capital gains are subject to 40% tax.
Note: A capital gain is a profit that results from investments into a capital asset, such
as stocks, bonds or real estate, which exceeds the purchase price. It is the difference between a
higher selling price and a lower purchase price, resulting in a financial gain for the
seller. Conversely, a capital loss arises if the proceeds from the sale of a capital asset are less
than the purchase price.
MARCH 2006
AUDITING & TAXATION
QUESTIONS
PART A
1. Explain the rights of an auditor of a limited company. [10]
PART B
2. Explain briefly the following types of audit:
a) Statutory
b) Non-statutory
c) Interim
d) Continuous
e) Management [4 each]
a) Trade creditors
b) The bank balance
c) Vehicles
- - 28 - -
4. a) Explain the role of an internal audit department. [10]

b) Explain what internal controls can be „built‟ into the typical financial accounting
system i.e. from the recording of each financial transaction to the production of the first
draft final accounts. [10]
5. Explain the stages of an audit. [20]
PART C
TAX RATES
PERSONAL ALLOWANCES
pension fund.
Mitzie, aged 38, is a single person who earns $55,000 per year. She has paid 6% of her
gross pay into a qualifying pension fund. Mitzie has also paid $600 in respect of
Frank, aged 46, is married (and claims the additional allowance) and earns $67,000. He
has paid 5% of his gross pay into a qualifying pension fund. Frank has also paid $700 in
TASKS
Calculate the taxable pay and the total tax payable for EACH of the follo wing:
a) Mitzie [7]
b) Frank [8]
7. The following data relates to REM Ltd.:

£
Internal profit before tax 495,000
Original cost of machinery 400,000
Original cost of computers 300,000
Expenses deemed to be non-allowable 8,000
Internal rates of depreciation charged in the Profit & Loss account:

Machinery 20% on cost
Computers 25% on cost
- - 29 - -
The relevant capital allowances allowed by the Inland Revenue are:

TASK
Calculate REM Ltd.‟s taxable profit AND the total tax charge for the year.
Note: corporation (or company) tax is levied at the rate of 25%. [15]

b) Capital gains tax (CGT)
c) Tax evasion
SUGGESTED ANSWERS- MARCH 2006

Q1 An auditor‟s includes the following
a) He has the right of access at all times, to the books and accounts and vouc hers of the
company
b) He has the right to require from the officers including the directors of the company, such
meeting and to be heard on any part of the meeting which concerns them as an auditor
d) The right to be notified in writing, any intended resolution to remove them from office as
auditors of the company
e) The right, before accepting appointment as auditors of the company, to communicate with
the outgoing auditor (if any) and invite him to make any representations and supply any
information about the company which he may or may not supply.
f) He also has the right to contract with the company, in addition to the statutory duties,
undertake or provide accounting, taxation and other services to the company.
Q2a. Statutory Audit: It is an audit carried out to meet statutory requirements. For example, the
company Act 1985 requires that, every company must have its accounts audited annual by an
independent auditor. The scope of the auditors work is determined by law/ statute.
Q2b. Non-Statutory Audit (or Private Audit): This type of audit is carried out at the request of
the owner of an enterprise. It is not required by statute. It is carried out in enterprises such as
partnerships, sole proprietorships, etc. The scope of audit work is determined by the client
(owner).
Q2c. Interim Audit: An Interim Audit is the audit which is carried out or conducted to cover a
certain time or up to a certain date within a financial period. Normally interim audit will be about
two-thirds of the way through the year e.g. September or October for December year end. It may
also be done to cover a month, a quarter or half year on the request of a client. Some audit work
- - 30 - -
such as verification of assets and liabilities may not be carried out during interim audit. These
may be deferred to the final audit. The work done may include ascertaining the system of
accounting and internal controls, evaluation of the system for adequacy and any possible
weaknesses, design and performing compliance tests etc.
Q2d. Continuous Audit:
Continuous audit is an audit that is carried out continuously during the financial year of the client.
Such an approach applied to enterprises where the volume of transaction is very large. The work
is so great that, the audit staffs are on the premises of the client almost the whole year round,
making several visits.
Q2e Management Audit: This is concerned with the examination of procedures laid down by
management and of its efficiency. The objective here is to arrive at an opinion on the efficiency of
management rather than on the financial statements. Areas covered by management audit includes
a) Relationships between management and shareholders
b) Current standing of the organization in relation to its industry and the general public.
c) Relationship between management and staff et
Q3a. Trade Creditors

Creditors can be verified by the following procedures
2. Obtain a copy of the schedule of balance of creditors and confirm the balances with the
3. Examine a sample from the creditor‟s ledger with aged lists
4. Enquire into any material debit balances on the creditors account
5. Check trade creditors to purchases and note down the credit period.
7. Examine all responses received from the circularization and investigate any exceptions
Q3b. Bank balance perform the following procedures apply

i. Appraise the system of internal control over bank
ii. Examine the bank reconciliation statement and note the following
a) that all uncleared cheques are cleared
b) that all payments or lodgments not credited at the balance sheet date have
been credited
c) Investigate any exceptions in the bank statement
iii. Check the arithmetical accuracy of the bank reconciliation statement(i.e. calculations)
iv. Trace cash payments and cash receipts to the various documents taking notes of cheque
numbers
v. Trace all contra entries, dishourned cheques, cancelled cheques
vi. Vouch any transfers to the petty cash book and other bank accounts
- - 31 - -
vii. Cast the bank column of the cash book

viii. Send the standard bank letter and check the information received with the bank statement
ix. Consider the value of bank balance in the balance sheet
Q3c. Vehicles:
The verification of vehicles will involve the following procedures
1. Obtain a schedule of list of motor vehicles (where a number of vehicles are held by the
client) and agree the total cost with the motor vehicle accounts in the ledger
2. Inspect the registration documents and ensure that they are registered in the name of the
company
3. Where the company registers the vehicle in the name of an employee or a third party, the
party concerned should sign the certificate acknowledging the companies ownership
4. Examine the insurance policy and note that insurance premium are paid on due dates
5. Review the depreciation policy and reasonableness of deprecation rates over vehicles.
6. Examine all purchase and disposals of vehicles during the year and ensure that proper
authority was given and properly accounted for in the accounts
7. Ensure that no collusion existed with outside agents on cheap sale prices
8. Inspect invoices of all purchases and cheques paid counterfoils
9. Physically inspect vehicles and compare repairs and fuel bills with car numbers.
10. Check the presentation and valuation of vehicles in the financial statement.
Q3d: Stocks & work-in progress: In verifying stocks and work in progress, the procedures are
a. Review the system of internal control over stocks
b. Perform compliance tests on key controls relating to purchases, sales, creditors and
debtors
c. Physically check samples by counting selected items of stock
d. Observe stock taking (i.e. Attend stock taking )
e. Check on slow moving, obsolete stocks
f. Compare the current years stock with previous years stocks and note any significant
changes
g. Confirm that the stock valuation is in line with SSAP 9
h. Verify each work- in-progress item with a job card.
Q4a. Role of Internal Audit department:

The role played by internal audit department includes the following
a. It helps reduce the amount of detailed work to be carried out by the external auditors.
b. The department reviews the system of accounting, financial and other operations controls
of the business and notify management and advice them.
c. They review and test compliances and accuracy of the companies policies
d. To review and improve the system of internal checks.
e. To prevent and early detection of fraud and irregularities
f. To undertake special investigation at the request of management.
- - 32 - -
Q4b. Internal control is the whole system of control financial and otherwise established by
management in order to carry on the business of the enterprise in an orderly and efficient
manner, ensure adherence to management policies, safeguard assets and secure as far as
possible, the completeness and accuracy of the records.
The following are the internal controls that can be “built” into a typical financial
accounting system
i. Segregation of duties: the functions of authorizing transactions; recording the

transactions; and custody of the associated assets should be undertaken by separate
staff.
ii. Organization: there should be a clear organization chart and all staff should have up
to date job descriptions that clearly indicate their responsibilities.
iii. Authorization and approval: all transactions and decisions should be formally
authorized by nominated staff.
iv. Physical: there should be suitable controls over access to offices, assets, controlled
stationery and computer systems.
v. Management: production of suitable financial and operational management
information; use of exception reports; critical review and enquiry by management.
vi. Arithmetical and accounting: checking / re-performing tasks carried out by others;
costing (adding up) orders, invoices, payroll etc; reconciliation between the bank and
accounting records; control accounts.
vii. Personnel: appointment of staff should be adequately controlled; all staff should be
suitably trained for their post and appraised regularly.
viii. Supervision: all staff and activities should be adequately supervised by someone who
understands the process and will detect deviations from accepted practice.
Q5. The stages in an audit can be summarized as follows

i. Background Research: - This will include a brief research into the history of the
company, its product, its present condition and future prospect, the location of all
branches, any problem in accounting system and changes in law or accounting practice
which affect the client.
ii. Preparation of the audit plan:- This involves preparing an overall audit plan showing how
the audit work will be done, the staff who will do the work, the budget time and cost
accounting and documentations of transactions.
iv. Internal control system review: - A review of the internal control system to know whether
the client maintains proper or adequate books of accounts and whether the books of
accounts can be relied on for the preparation of the finals account.
records.
- - 33 - -
vi. Analytical Review: - This involves the study of relationships between elements of the
financial information expected to confirm a predictable pattern based on the organization‟s
past experiences and also other financial and non- financial information available.
analytical review of the financial statement to determine whether accounting policies are
acceptable and are used consistently , all items in the financial statement are compatible to
the best of his knowledge and also adequate disclosure of items which needs to be
disclosed.
report as to whether the financial statement shows a true and fair view or not. The report
shows the person to whom the report is addressed, the financial statement audited, the
responsibilities of management and the auditor, the signature of the auditor and the date of
the report.
Q6. a) MITZIE
$
Basic Salary 55,000
Less:

TAXABLE PAY 43,100
TAX PAYABLE

First 3,000 10% 300
Next 27,000 20% 5,400
Excess 13,100 40% 5,240
Tax payable 10,940
- - 34 - -
Q6 b.) FRANK
$
Basic Salary 67,000
Less Relief:

TAXABLE PAY 51,950
TAX PAYABLE

First 3,000 10% 300
Next 27,000 20% 5,400
Excess 21,950 40% 8,780
Tax payable 14,480
Q7. REM LTD

$ $
Add: Non-allowable Expenses 8,000
Depreciation:
Computers (25% x 300,000) 75,000
Machinery (20% x 400,000) 80,000 163,000

Computers Equipments (40%X300, 000) 120,000
Machinery (25% X 400,000) 100,000 (220,000)
Tax thereon @25% (433,000 X 25%) 109,500
- - 35 - -
Q8
This is the amount of income you can receive each year without having to pay tax on it.
Depending on your circumstances, you may also be able to claim certain other allowances
Nearly everyone who lives in the UK is entitled to an Income Tax Personal Allowance.
b) A capital gains tax (abbreviated: CGT) is a tax charged on capital gains, the profit realized on
the sale of a non- inventory asset that was purchased at a lower price. The most common capital
gains are realized from the sale of stocks, bonds, precious metals and property.
by individuals and trustees. Capital gains made by companies are subject to corporation tax. The
gains. Taxable capital gains are in effect subject to income tax as if they were savings income:
treated as the top slice of income, capital gains are taxed at 10% below the starting- rate limit, 20%
between the starting- and basic-rate limits, and 40% above the basic-rate limit. In practice, most
capital gains are subject to 40% tax.
c) Tax Evasion: Exists when an individual, or group of individuals (such as a firm), conceal or
understate their incomes in order to avoid paying taxes. This may involve lying about one's
income, claiming deductions you are not entitled to, or not declaring income received in cash. The
latter - sometimes seen as part of the informal economy - can also lead to concealing sales and
thus evading indirect taxes, primarily VAT.
Tax evasion is illegal and may result in fines or imprisonment or both.
d) Tax codes
A tax code is used by employers or pension payer to calculate the amount of tax to deduct from
your pay or pension. A tax code is usually made up of several numbers and a letter, for example:
117L or K497.
An employee's tax code is used by employers to calculate the amount of income tax that must be
withheld, or deducted, from the employee's wage or salary. The tax code is the mechanism by
which "pay as you earn" (PAYE) is operated in the UK, making it possible for most employees to
have paid exactly the right amount of income tax by the end of each tax year. As a result, most
employees in the UK do not have to complete an income tax return.
- - 36 - -
JUNE 2006
AUDITING & TAXATION
PART A
PART B
2. a) Explain the process of approving an invoice for payment. You are advised to refer to
the relevant source documents to be examined in this process. [10]
b) Draft the body of a „clean‟ audit report. [5]
c) Explain the principal purpose of an audit trail. [5]

a) Trade debtors
b) Plant and equipment
c) Trade creditors
d) Bank balances [5 each]

a) Letter of weakness
b) Interim audit
c) The audit Programme
d) Post balance sheet events [5 each]
5. a) Explain the major data verification checks associated with entering financial data into
a computerized accounting system. [10]
PART C
TAX RATES
PERSONAL ALLOWANCES
Additional allowance of $3,000 can also be claimed by one of the partners in a marriage.
pension fund.
Louisa, aged 38, is a single person who earns $49,000 per year. She has paid 5% of her
gross pay into a qualifying pension fund. Louisa has also paid $400 in respect of
- - 37 - -
Carlos, aged 41, is married (and claims the additional allowance) and earns $59,000 per
year. He has paid 6% of his gross pay into a qualifying pension. Carlos has also paid $700
in respect of expenses which are allowable against tax.
TASKS
Calculate the taxable pay, and the total tax payable for EACH of the following:
a) Louisa [7]
b) Carlos [8]
7. The following is the summarized internal profit and loss account of Zanue Ltd. after its
£
Sales 2,900,000
Other information:
TASKS
Calculate Zanue Ltd‟s total taxable profit AND the total tax charge for the year. [15]

b) Schedule D
c) PAYE
d) The basic principles of taxation [5 each]
- - 38 - -
SUGGESTED ANSWERS- JUNE 2006
Q1 True and Fair:

No precise definition exists for the term true and fair. However, the term true and fair can be
broken down into two:
True: this means in accordance with facts
Fair: this means in accordance with expectations, relevance, and objectivity, free from bias.
The following quotations represent some authoritative views on the meaning of the term true and
fair
b) True and fair view implies that all statutory and other information is not only available but
is presented in a form which it can be properly and readily accepted (Sir Russell Kettle)
In summary, there is no statutory or professional definition of true and fair view. However, to say
financial statement shows a true and fair view, the accounts must be prepared in accordance with
generally Accepted accounting principles and must conform to relevant statutory and regulatory
and the accounts must not me misleading and should be free from bias.
Q2a. The following procedures are involved in approving payment of invoice

1. There must be procedures for issuing requisition notes and responsible persons for
such requisition
2. purchase order must be prepared and authorized
3. Goods received must be examined in terms of quantity, quality and conditions of the
items.
4. Check calculations of the supplier‟s invoice amount and ensure that they are correctly
priced.
5. ensure payment voucher accompanies the invoice
6. Ensure that expenditure is properly invoiced as shown by the purchase order.
Q2b. A “clean” audit report/unqualified audit report is normally given when the auditor is
satisfied in all material respect that the financial statements give a true and fair view.
The body of a clean report is as follows
“We have audited the financial statements on pages x-y in accordance auditing standards. In
our opinion, the financial statements give a true and fair view of the state of affairs as at 31st
December 200x and of its profit and loss for the year then ended and have been properly
prepared in accordance with the companies Act 1985”
- - 39 - -
Q2c. An audit trail: An audit trail, in relation to accounting, is a record left by the accounting
information system of movements in individual transaction data. This record, in the form of
references to the processing of the data, provides a trail of the processing of transactions and other
events entered into by the entity. The principal purpose of audit trail is that it enables the auditor
to quickly understand how data flows through the accounting information system.
An auditor may follow the audit trail of a transaction as part of a systems "walk-through" to
either obtain or verify their understanding of the accounting information system.
Q3a. Trade Debtors:

a) Examine the system of internal control over sales and debtors and test the effectiveness of
the system
b) Obtain a list of all the balances of debtors.
c) Cast or total the list and agree the total to the general ledger control account balance
d) Enquire into debtors with credit balances on a debtors account (as this is unusual)
e) Select a sample of individual debtors account and test as follows.
i. Trace debt entries to entries in the sales day book
ii. Check that dispatch notes have corresponding sales invoices
iii. Trace credit entries to the cash book
f) Circularize the sample selected
g) Examine all confirmations replied and investigate and exceptions
h) Consider the adequacy of bad debt provisions, sales returns and cash discounts.
i) Consider the valuation of debtors in the balance sheet.
Q3 b. Plant and Machinery:

The verification procedure will include the following
a) Examine the title document to establish that the plant& machinery is owned by the
company by inspecting the purchase invoice.
b) Ascertain that there is proper authorization and approval for the purchase by examining
directors‟ minutes.
c) Vouch the original invoices from the supplier and check the cost price and installation
d) Where installation is done by the company‟s staff, examine the wages and allowances paid
to the staff
e) Physically inspect the plant & machinery and examine the asset register
f) Vouch all disposals and verify that all cost and depreciation balances have been accounted
for.
g) Review the depreciation policy over plant and machinery and ensure that they are
consistently applied.
h) Check the calculation of depreciation and ensure that depreciation is accurate.
i) Consider the valuation in the balance sheet
- - 40 - -
Q3c. Trade Creditors:

Audit procedures include the following:
 Evaluate the system of internal control over purchases
 Obtain a copy of the schedule of balance of creditors and confirm the balances
with the creditors control account
 Enquire into any material debit balances on the creditors account
 Check trade creditors to purchases and note down the credit period.
 Circularise sample of creditors
 Check that all creditors are properly disclosed in the financial statement
Q3d. Bank balance: General verification procedures are:

 Appraise the system of internal control over bank
 Examine the bank reconciliation statement and note the following
i. That all uncleared cheques are cleared
ii. That all payments or lodgments not credited at the balance sheet date have been
credited
iii. Investigate any exceptions
 Check the arithmetical accuracy of the bank reconciliation statement
 Trace cash payments and cash receipts to the various documents taking notes of cheque
numbers
 Trace all contra entries, dishourned cheques, cancelled cheques
 Vouch any transfers to the petty cash book and other bank accounts
 Cast the bank column of the cash book
 Send the standard bank letter and check the information received with the bank statement
 Consider the value of bank balance in the balance sheet
Q4a. Letter of Weakness: It is a letter sent by the auditor to his client, bringing to his attention the
weakness found in the internal control system during the audit. This is letter also known as
management letter, letter of comment, letter of recommendation, post audit letter, internal control
letter The letter points out the weaknesses found in the internal control system and gives
recommendations to improve them. It is usually presented to the client in a meeting with the
auditor.
Q4b. Interim Audit is an audit that is conducted to cover a certain time or up to a certain date
within the financial period. It may be done to cover a month, a quarter or half year on the request
of a client. Some audit work such as verification of assets and liabilities may not be carried out
during interim audit. These may be deferred to the final audit. The work done may include
ascertaining the system of accounting and internal controls, evaluation of the system for adequacy
and any possible weaknesses, design and performing compliance tests etc.
- - 41 - -
Q4c. Audit Program –The audit program essentially consists of a very detailed list of things to
be done in an audit engagement. It is a statement of decision to an audit engagement for the
purpose of indicating what to do, how to do it and when do it. The audit program develops and
documents the nature, timing and extent of planned audit procedures required to implement the
overall audit plan. The purpose is to assist the auditor to ascertain / determine the reliability of the
accounting records used in preparing the final account. It is normally on a printed form or booklet.
It ensures that no aspect of the audit work is over- looked and therefore gives a clear perspective
of work to be done by the auditor.
Q4d. Post Balance Sheet Events: Post Balance sheet events are those events both favourable and
unfavourable which occur between the balance sheet date and the date on which the financial
statements are approved by the Board of Directors”. Post balance sheet events fall into two
categories, namely
1. Adjusting events
balance sheet date. Example is the discovery of error or fraud that shows that the accounts were
not correct after the balance sheet date. Another example is proposed dividends.
Non-adjusting events are events that arise after the balance sheet date and concern conditions that
do not exist at the balance sheet date. S uch events will not have any effect on the balances in the
Profit and Loss Account or the Balance Sheet. Examples are issue of shares, mergers and

a) Check digit verification
b) Format checks
c) Sequence checks
d) Range checks
e) Programmed controls
f) Batch registers
g) Input validity checks etc.
- - 42 - -
Q5b.The stages in an audit can be summarized as follows:

a. Background Research: - This involves a research into the history of the company,
its product, its present condition and future prospect, the location of all branches,
any problem in accounting system and changes in law or accounting practice
b. Preparation of the audit plan:- This involves preparing an overall audit plan
which shows how the audit work will be done, the staff who will do the work, the
budgeted time and cost
c. Accounting system review: - This will involve the review of the adequacy of the
d. Internal control system review: - It is a review of the internal control system to
know whether the client maintains proper or adequate books of accounts and
whether the books of accounts can be relied on for the preparation of the final
account.
e. Substantive Testing: - This involves the tests of transactions and balances and
other procedures such as analytical review which seek to provide audit evidence as
to the completeness, accuracy and validity of the information contained in the
accounting records or the financial statement. Substantive testing is necessary
where there is weak internal control or the item is extraordinary transaction.
f. Analytical Review: - This is the study of relationships between elements of the
financial information expected to confirm a predictable pattern based on the
organization‟s past experiences and other non- financial information available.
g. Analytical Review of financial statement:- This is where the auditor performs
overall analytical review of the financial statement to determine whether
accounting policies are acceptable and are used consistently , all items in the
financial statement are compatible to the best of his knowledge and also adequate
disclosure of items which
h. Preparation and signing of report:-This is where the auditor expresses his
opinion in a report as to whether the financial statement shows a true and fair view
or not. The report shows the person to whom the report is addressed, the financial
statement audited, the responsibilities of management and the auditor, the
signature of the auditor and the date of the report.
- - 43 - -
Q6. a) LOUISA

$
Basic Salary 49,000
Less:

TAXABLE PAY 38,150
TAX PAYABLE

First 3,000 10% 300
Next 27,000 20% 5,400
Excess 8,150 40% 3,260
Tax payable 8,960
Q6b.) CARLOS
$
Basic Salary 59,000
Less:
Less Personal allowance (single) 8,000

Marriage Allowance 3,000 (11,000)
TAXABLE PAY 43,760
TAX PAYABLE

First 3,000 10% 300
Next 27,000 20% 5,400
Excess 13,760 40% 5,504
Tax payable 11,204
- - 44 - -
Q7. ZANUE LTD

£
Net Profit 640,000
IT Equipments (50%X240, 000) 120,000

Equipments (25% X 600,000) 150,000 (270,000)
Tax thereon@ 22% (488,000 X 22%) 107,360

Sales 2,900,000
Net profit 640,000
Q8
Almost everyone who lives in the UK is entitled to an Income Tax Personal Allowance. This is
the amount of income you can receive each year without having to pay tax on it. Depending on
your circumstances, you may also be able to claim certain other allowances
b) Schedule D
An income tax form used by taxpayers to report their realized capital gains or losses. Investors
are required to report their capital gains (and losses) from the sales of assets, which result in
different cash values being received for them than what was originally paid, in order to calculate
some amount of taxation to the income and wealth that is generated through investment activities.
c) PAYE (Pay As You-Earn) is an amount collected by e mployers on behalf of the government

from employees. The tax collected during the year may be enough to discharge the taxpayer's
- - 45 - -
liability for tax. This is, in effect, a provisional payment of tax on the employee's income. The
amount withheld is determined partly by the employee's expected tax allowances, exemptions and
reliefs, and partly by tax tables that determine the amount of tax to be deducted for the salary or
wage paid to the employee.
d) The basic principles of taxation:

The basic principles of taxation refer to the general principles that every good tax system should
have. In 1776, Adams Smith in his book “the Wealth of Nations” laid down four basic principles
that should be seen in every good tax system. These are
1. The principle of Equity: Taxes should be fair to different individuals and should reflect
a person‟s ability to pay. The ability-to-pay principle holds that people‟s taxes should be
based upon their ability to pay, usually as measured by income or wealth.
2. certainty: It should be certain, not arbitrary
3. Convenience : it should be convenient in terms of timing and payment.
4. efficiency: it should be administratively efficient with a relatively small cost of collection
as a proportion of the revenue raised.
SEPTEMBER 2006
AUDITING & TAXATION
PART A
1. Explain the principal contents of FRS 21 (events after the balance sheet date). [10]
PART B
a) Trade debtors
b) Freehold property
c) Trade creditors
d) bank balances [5 each]
4. a) Explain the legal duties of an auditor. [10]
b) Explain the importance of a letter of engagement. [10]
a) ICQ
b) Internal controls
c) Audit trail
d) True and fair [5 each]
PART C
TAX RATES
- - 46 - -
PERSONAL ALLOWANCES
Additional allowance of $3,000 can also be claimed by one of the partners in a marriage.
pension fund.
6. Chorley, aged 43, is a single person who earns $57,000 per year. He has paid 5% of his
salary into a qualifying pension fund. Chorley has also paid $800 in respect of professional
subscriptions.
Sunita, aged 32, is married (and claims the additional allowance) and earns $64,000. She
has paid 5% of her gross pay into a qualifying pension fund. Sunita has also paid $400 in
TASKS
a) Chorley [7]
b) Sunita [8]
7. The following is the summarised internal profit and loss account of Huish Ltd. after its
£
Sales 2,400,000
Other information:
Included in the administration expenses is £7,000 which is deemed non-allowable.
TASKS
Calculate Huish Ltd.‟s total taxable profit AND the total tax charge for the year. [15]

a) PAYE
b) Schedule D
c) Capital gains tax (CGT)
- - 47 - -
SUGGESTED ANSWERS- SEPTEMBER 2006

Q1. FRS 21 (Events afte r the Balance Sheet Date): It is defined as “Those events both
favourable and unfavourable which occur between the balance sheet date and the date on which
the financial statements are approved by the Board of Directors
FRS 21 sets out the recognition and measurement requirements for two types of event after the
balance sheet date:
Adjusting event: An event after the reporting period that provides further evidence of
conditions that existed at the end of the reporting period, including an event that indicates that
the going concern assumption in relation to the whole or part of the enterprise is not
appropriate. For example, the settlement of a court case that confirms the entity had a present
obligation at the balance sheet date.
Non-adjusting event: An event after the reporting period that is indicative of a condition that
arose after the end of the reporting period. For example, a decline in market value of
investments between the balance sheet date and the date when the financial statements are
authorized for issue.
Accounting Treatment
 Adjust financial statements for adjusting events

 Do not adjust for non-adjusting events
 If an entity declares dividends after the reporting period, the entity shall not recognize
those dividends as a liability at the end of the reporting period. That is a non-adjusting
event.
Disclosure : Non-adjusting events should be disclosed if they are of such importance that non-
disclosure would affect the ability of users to make proper evaluations and decis ions. The required
disclosure is (a) the nature of the event and (b) an estimate of its financial effect or a statement
that a reasonable estimate of the effect cannot be made.
If non-adjusting events after the balance sheet date are material and non-disclosure could
influence the economic decisions of users the entity should disclose the nature of the event and an
estimate of its financial effect or a statement that such an estimate cannot be made. FRS 21
supersedes the existing UK accounting requirements in this area which were set out in SSAP 17
„Accounting for post balance sheet events'.
Q2.The stages in an audit can be summarized as follows:
- - 48 - -
the client.
ii. Preparation of the audit plan:- This involves preparing an overall audit plan which shows
how the audit work will be done, the staff who will do the work, the budgeted time
and cost
records or the financial statement. Substantive testing is necessary where there is
weak internal control or the item is extraordinary transaction.
information expected to confirm a predictable pattern based on the organization‟s
past experiences and other non- financial information available.
compatible to the best of his knowledge and also adequate disclosure of items which
audited, the responsibilities of management and the auditor, the signature of the
auditor and the date of the report.
Q3 a) Trade debtors:
a) Determine the system of internal control over sales and debtors and test the effectiveness
of the system
c) cast the list and agree the total to the general ledger control account balance
d) Enquire into debtors with credit balances
i) Consider the valuation of debtors in the balance sheet
- - 49 - -
Q3b. Freehold property

The following procedures will be employed in the verification.
1. Obtain a schedule of fixed assets
2. Examine a sample of title deeds and land registry certificate, conve yance documents from
solicitors and leases. Pay particular attention to mortgages and securities over assets
4. Check entries in the fixed assets register and trace back to source documents to ensure it is
properly stated at cost
7. Where freehold or leasehold assets are let to third parties, inspect tenancy agreement and
8. Physically inspect assets to ensure their existence
accounting records.
Q3c. Trade Creditors

Creditors can be verified using the following procedures
Q3d. Bank balance

In the verification of bank balance, I will perform the following procedures
i. Appraise the system of internal control over bank
ii. Examine the bank reconciliation statement and note the following
a. That all uncleared cheques are cleared
b. That all payments or lodgments not credited at the balance sheet date have been
credited
c. Investigate any exceptions
iii. Check the arithmetical accuracy of the bank reconciliation statement

iv. Trace cash payments and cash receipts to the various documents taking notes of cheque
numbers
v. Trace all contra entries, dishourned cheques, cancelled cheques
vi. Vouch any transfers to the petty cash book and other bank accounts
- - 50 - -
vii. Cast the bank column of the cash book

viii. Send the standard bank letter and check the information received with the bank statement
ix. Consider the value of bank balance in the balance sheet
Q4a. The duties of an auditor

The statutory duty of an auditor is to report to the members of the company as to whether or not
the accounts prepared gives a true and fair view and have been properly prepar ed in accordance
with the companies Act 1985. To fulfill this, the auditor is required:
1. To make a report as to whether proper accounting records have been kept.
2. To report whether all returns have been received from branches
3. To report whether or not the accounts prepared are in agreement with the records
4. Whether the information and explanations given in the directors report is consistent with
the accounts
5. State whether the accounts and statements comply with the Companies Act and finally,
6. Whether in his opinion, the financial statement presents a true and fair of the company‟s
Q4b.
The engagement letter has the following importance
a. It defines clearly the extent of the auditors work to be done under the contract.
b. It minimizes any misunderstanding between the auditor and the management
c. It serves as a confirmation of the verbal agreement reach between auditor and his
client earlier.
d. The letter assist in drawing distinction between the work of the auditor and other
work such as management consultancy, taxation and accountancy
e. The letter indicates the basis on which fees are to be charged
f. It educates the client by explaining how in general terms the audit will be conducted.
Q5a. Internal Control Questionnaire- ICQ

Internal control Questionnaire (ICQ) is a comprehensive, all inclusive method of ascertaining,
recording and evaluating a system of internal controls. It is a pre-printed document designed by
the auditor to be used in assessing the adequacy of the client‟s accounting system. It consists of a
series of questions designed to establish which control exist in the accounting system and any
possible weaknesses. Internal Control Questionnaire helps audit staff familiar ize themselves with
the client‟s accounting system quickly and more comprehensively.
Q5b. Internal control: It is defined as the whole system of control, financial and otherwise
established by the management in other to carry on the business of the enterprise in an orderly and
efficient manner, ensure adherence to management policies, safeguard the assets and secure as far
as possible, the completeness and accuracy of the records. The individual components of an
internal control system are known as control or internal controls.
- - 51 - -

i. organization v. arithmetical and
ii. segregation of duties accounting
iii. physical vi. personnel
iv. authorization and vii. supervision
approval viii. management
Q5c. Audit Trail:
An audit trail, in relation to accounting, is a record left by the accounting information system
of movements in individual transaction data. This record, in the form of references to the
processing of the data, provides a trail of the processing of transactions and other events
entered into by the entity. While some accounting information systems provide a visible and
complete audit trails, others may provide an invisible and/or incomplete trail. A visible audit
trail may be in the form of documentation (a paper trail) or an electronic tra il. Accounting
information systems have a number of audit trails: for example, trails of different transaction
cycles and/or of different computer applications.
Depending on the accounting information system, the trail may start from the moment data
about the event is first captured within the system to the time of its ultimate disposition in the
financial statements. Auditors look for a complete and visible audit trails as such a trail allows
the auditor to quickly understand how data flows through the accounting information system.
An auditor may follow the audit trail of a transaction as part of a systems "walk-through" to
either obtain or verify their understanding of the accounting information system.
Q5d. True and Fair:

Auditors of the published accounts of companies are required to form an opinion as to whether
the accounts they audit show a „true and fair view‟ of the organization's affairs. This is an
important concept in the UK.
The meaning of true and fair can be broken down into two:

The following quotations represent some authoritative views on the meaning of the term true
and fair
but is presented in a form which it can be properly and readily accepted (Sir Russel
Kettle)
There is no statutory or professional definition of true and fair view. However, to say financial
statement shows a true and fair view, the accounts must be prepared in accordance with
generally Accepted accounting principles and must conform to relevant statutory and
regulatory and the accounts must not me misleading and should be free from bias.
- - 52 - -
Q6. a) CHORLEY
$
Basic Salary 57,000
Less
TAXABLE PAY 45,350
TAX PAYABLE

First 3,000 10% 300
Next 27,000 20% 5,400
Excess 15,350 40% 6,140
Tax payable 11,840
Q6 b.) SUNITA

$
Basic Salary 64,000
Less

TAXABLE PAY 49,400
TAX PAYABLE

First 3,000 10% 300
Next 27,000 20% 5,400
Excess 19,400 40% 7,760
Tax payable 13,460
- - 53 - -
Q7. HUISH LTD
Net Profit 590,000

Non-allowable administration expenses 7,000 137,000
IT Equipments (50%X200, 000) 100,000

Equipments (25% X 500,000) 125,000 (225,000)
Tax thereon@22% (502,000 X 22%) 110,440
Sales 2,400,000
Net profit 590,000
Q8.
a) PAYE: PAYE (Pay As You-Earn) is an amount collected by employe rs on behalf of the
allowances, exemptions and reliefs, and partly by tax tables that determine the amount of tax to
be deducted for the salary or wage paid to the employee.
PAYE is, in effect, a withholding tax administered separately by the tax authority.
- - 54 - -
b) Schedule D
It is an income tax form used by taxpayers to report their realized capital gains or losses.
Investors are required to report their capital gains (and losses) from the sales of assets, which
result in different cash values being received for them than what was originally paid, in order
to affix some amount of taxation to the income and wealth that is generated through investment
activities.
c) Capital gains tax (CGT): A capital gains tax (abbreviated: CGT) is a tax charged on capital
gains, the profit realized on the sale of a non- inventory asset that was purchased at a lower
price. The most common capital gains are realized from the sale of stocks, bonds, precious
metals and property.
Capital gains tax was introduced in 1965 and is levied on gains arising from the disposal of
assets by individuals and trustees. Capital gains made by companies are subject to corporation
tax. The total capital gain is defined as the value of the asset when it is sold (or given away
etc.) minus its value when originally bought (or inherited etc.). As with income tax, there is a
threshold below which capital gains tax does not have to be paid. In 2006–07, this „exempt
amount‟ is £8,800 for individuals and £4,400 for trusts. This is subtracted from total capital
gains to give taxable capital gains. Taxable capital gains are in effect subject to income tax as
if they were savings income: treated as the top slice of income, capital gains are taxed at 10%
below the starting-rate limit, 20% between the starting- and basic-rate limits, and 40% above
the basic-rate limit. In practice, most capital gains are subject to 40% tax.

The basic principles of taxation refer to the general principles that every good tax system
should have. In 1776, Adams Smith in his book “the Wealth of Nations” laid down four basic
principles that should be seen in every good tax system. These are
1. The principle of Equity: Taxes should be fair to different individuals and should
reflect a person‟s ability to pay. The ability-to-pay principle holds that people‟s taxes
should be based upon their ability to pay, usually as measured by income or wealth.
4. efficiency: it should be administratively efficient with a relatively small cost of
collection as a proportion of the revenue raised.
- - 55 - -
DECEMBER 2006
AUDITING & TAXATION
PART A
PART B
2. Explain the following:
a) Compliance tests
b) test-checks
c) Substantive tests
d) Walk-through tests [5 each]
b) The bank balance
c) Investments
4 a) Explain the role of an internal audit department. [10]

b) Explain what internal controls can be „built‟ into the typical financial accounting system
i.e. from the recording of each financial transaction to the production of the first draft
final accounts. [10]
PART C

TAX RATES
PERSONAL ALLOWANCES
6. Darius, aged 45, is a single person who earns $59,000 per year. He has paid 5% of his
gross pay into a qualifying pension fund. Darius has also paid $800 in respect of
Boris, aged 41, is married (and claims the additional allowance) and earns $63,000. He
has paid 5% of his gross pay into a qualifying pension fund. Boris has also paid $500 in
- - 56 - -
TASKS
a) Darius [7]
b) Boris [8]
7. The following data relates to SUS Ltd.:

£
Internal rates of depreciation charged in the profit and loss account:


Corporation tax (company tax) is charged at 24% of taxable profit. [15]
TASK
Calculate SUS Ltd.‟s taxable profit AND the total tax charge for the year.

c) PAYE
d) Tax codes [5 each}
SUGGESTED ANSWERS- DECEMBER 2006
Q1 The rights of an auditor includes the following

a) The right of access at all times, to the books and accounts and vouchers of the company
b) He has the right to require from the officers including the directors of the company,
such information and explanations necessary for the performance of his duties as an
auditor.
d) The right to be notified in writing, any intended resolution to remove the fro m office as
- - 57 - -
e) The right, before accepting appointment as auditors of the company, to communicate

supply any information about the company which he may or may not supply.
f) He also has the right to contract with the company, in addition to the statutory duties,
undertake or provide accounting, taxation and other services to the company.
Q2a. Compliance Test:

These are tests designed to obtain reasonable assurance that those internal controls
in the clients system were functioning properly and throughout the period. In
compliance tests, the auditor tests the controls and not transactions invo lved. It is
sometimes called test of controls. If the internal control is found to be weak, then
the auditor will perform more substantive tests. Tests of control include observation
of an internal control procedure being performed, inspection of evidence that the
control procedure was performed (and performed at the appropriate time), and inquiry
about how and when the procedure was performed.
Q2b Tests-checks : This is an audit technique or procedure whereby a sample of

population is checked in detail and the result applied to the whole population.
There are two methods used in test checking: (a) Judgement sampling- where the
selection of the items to be tested are determined by the auditor‟s judgement and
(b) Statistical Sampling– where the selection of the items to be tested are by
statistical or mathematical princ iples.
Q2c Subs tantive tests : - This is defined as those tests of transactions and balances and
other procedures such as analytical review, which seek to provide audit evidence as to the
completeness, accuracy and validity of information contained in the accounting records or
financial statement. Thus Substantive procedures (or substantive tests) are those activities
performed by the auditor that gather evidence as to the completeness, validity and/or accuracy
of account balances and underlying classes of transactions.
Substantive test are usually applied to transactions when the internal control is found
weak and therefore the auditor cannot rely on it. It is also applied to extraordinary items
and all assets and liabilities in the balance sheet. When it is directed to the profit, the
auditor will ensure that, all items (income and expenses) recorded in the profit and loss
have been earned or incurred and have actually been inc luded in the calculation of the
profit or loss. The auditor will conduct substantive test on the balance sheet to ensure the
existence of assets and liabilities, ownership of assets and responsibility of all liabilities,
the correctness of their values, how the items are presented etc. Some of the tools or
methods used in substantive testing include
1. Inspection
2. Observation
3. Enquiry
- - 58 - -
4. Analytical review
5. Recalculation
6. Vouchin
- - 59 - -
Q2d Walk-through tests: A walk-through refers to the auditor selecting a small sample of
representative transactions or economic events and tracing (or "walking") them through the
accounting information system. The walk-through may be (a) through just part of the system or
(b) from the time the transactions or events were first captured and input as data to their final
disposition in the financial statements. This is similar to following a transaction along the
transaction cycle's audit trail.
The purpose of the walk-through may be either for the auditor to identify specific control
procedures in an accounting information system or to confirm the system the auditor has
previously documented in the working papers is the system that is operating at the time of the
audit. In some instances, it may be more economical for the auditor to obtain/confirm this
information by other means, such as through discussions with client personnel. Thus, Walk-
through test involves as tracing one or more transactions through the accounting system and
observing the application of relevant aspect of the internal control system.

The following procedures will be employed in the verification of freehold land and buildings
i. Obtain a schedule of fixed assets
ii. Examine a sample of title deeds and land registry certificate, conveyance documents
from solicitors and leases. Pay particular attention to mortgages and securities over
assets
iii. Inspect the minutes of directors to ensure that, all title deeds, conveyances, tenancy
iv. Check entries in the fixed assets register and trace back to source documents to ensure
v. Review the companies policy for depreciation and ensure that land is not depreciated
vi. Check the calculations of the depreciation and ensure they are accurate
vii. Where freehold or leasehold assets are let to third parties, inspect tenancy a greement
viii. Physically inspect assets to ensure their existence
ix. Check the classification and presentation of fixed assets
x. Ensure that, the amount stated in the financial information is in agreement with the
accounting records.
Q3b Bank balance

Bank balance can be verified using the following audit procedures:
a. Appraise the system of internal control over bank
b. Examine the bank reconciliation statement and note the following
credited
- - 60 - -
c. Check the arithmetical accuracy of the bank reconciliation statement

d. Trace cash payments and cash receipts to the various documents taking notes of cheque
numbers
e. Trace all contra entries, dishourned cheques, cancelled cheques
f. Vouch any transfers to the petty cash book and other bank accounts
g. Cast the bank column of the cash book
h. Send the standard bank letter and check the information received with the bank
statement
i. Consider the value of bank balance in the balance sheet
Q3c: Investment : The following procedures can be followed in the verification of investment
1) Request for a list of all investment currently held by the client and distinguish
between quoted and unquoted. A reconciliation of the current book value and that
of the previous year should be made. Ask that the market value of all investment at
the end of the year should be shown i.e. the quoted.
2) Verify purchase or sale of investment during the year with documentary evidence.
E.g. Contract notes or agreements
3) Examine the Directors Minutes book for proper authorization of purchase and sale
of investment.
stock exchange values. In the case of unquoted ones inspection should be made of
the company‟s accounts and though there is no market value disclosed for unquoted
has occurred.
any charge should be shown and this should be compared with the standard bank
letter.
statement.
9) Ensure proper disclosure in the accounts
Q3.d Stocks & work-in progress:

In verifying stocks and work in progress, the following procedures will apply
a) review the system of internal control over stocks
b) perform compliance tests on key controls relating to purchases, sales, creditors and
debtors
c) physically check samples by counting selected items of stock
d) observe stock taking (i.e. attend stock taking )
- - 61 - -
e) check on slow moving, obsolete stocks

f) compare the current years stock with previous years stocks and note any significant
changes
g) confirm that the stock valuation is in line with SSAP 9
h) Verify each work- in-progress item with a job card.
Q4a. The role of the internal audit department:

The role played by internal department includes the following:
i. It helps reduce the amount of detailed work to be carried out by the external
auditors if it is found to be reliable
ii. They review the system of accounting, financial and other operations of the
iii. They Review and test compliances and accuracy of the companies policies
Q4b. Internal control is the whole system of control financial and otherwise established
by management in order to carry on the business of the enterprise in an orderly and
efficient manner, ensure adherence to management policies, safeguard assets and secure
as far as possible, the completeness and accuracy of the records.
The following are the internal controls that can be “built” into a typical financial
accounting system

transactions; and custody of the associated assets should be undertaken by
separate staff.
ii. Organization: there should be a clear organization chart and all staff should
have up to date job descriptions that clearly indicate their responsibilities.
iv. Physical: there should be suitable controls over access to offices, assets,
controlled stationery and computer systems.
information; use of exception reports; critical review and enquiry by
management.
vi. Arithmetical and accounting: checking / re-performing tasks carried out by
others; costing (adding up) orders, invoices, payroll etc; reconciliation between
the bank and accounting records; control accounts.
vii. Personnel: appointment of staff should be adequately controlled; all staff
should be suitably trained for their post and appraised regularly.
- - 62 - -
viii. Supervision: all staff and activities should be adequately supervised by

someone who understands the process and will detect deviations from accepted
practice.
Q5. The stages in an audit can be summarized as follows:

the client.
ii. Preparation of the audit plan:- This involves preparing an overall audit plan which
shows how the audit work will be done, the staff who will do the work, the budgeted
time and cost
internal control or the item is extraordinary transaction.
experiences and other non- financial information available.
compatible to the best of his knowledge and also adequate disclosure of items.
and the date of the report.
- - 63 - -
Q6. a) DARIUS

$
Basic Salary 59,000
Less
TAXABLE PAY 47,250
TAX PAYABLE

First 3,000 10% 300
Next 27,000 20% 5,400
Excess 17,250 40% 6,900
Tax payable 12,600
Q6 b.) BORIS

$
Basic Salary 63,000
Less

Marriage allowance (3,000)
TAXABLE PAY 48,350
TAX PAYABLE

First 3,000 10% 300
Next 27,000 20% 5,400
Excess 18,350 40% 7,340
Tax payable 13,040
- - 64 - -
Q7. SUS LTD
Net Profit before Tax 580,000

Add: Non-allowable Expenses 6,000
Depreciation: Machinery (500,000 x 20%) 100,000
Computers (200,000 x 25%) 50,000 156,000

Computers Equipments (50%X200, 000) 100,000
Machinery (25% X 500,000) 125,000 (225,000)
Tax thereon@ 24% (511,000 X 24%) 122,640
Q8
This is the amount of income you can receive each year without having to pay tax on it. Nearly
everyone who lives in the UK is entitled to an Income Tax Personal Allowance. Depending on
b) Capital gains tax (CGT): A capital gains tax (abbreviated: CGT) is a tax charged on capital
threshold below which capital gains tax does not have to be pa id. In 2006–07, this „exempt
- - 65 - -
d) Tax codes: Tax code (PAYE)
A tax code is used by your employer or pension payer to calculate the amount of tax to deduct
from your pay or pension. If you have the wrong tax code you could end up paying too much
or too little tax.
A tax code is usually made up of several numbers and a letter, for example: 117L or K497.
An employee's tax code is used by employers to calculate the amount of income tax that must
be withheld, or deducted, from the employee's wage or salary.
The tax code is the mechanism by which "pay as you earn" (PAYE) is operated in the UK,
making it possible for most employees to have paid exactly the right amount of income tax by
the end of each tax year. As a result, most employees in the UK do not have to complete an
income tax return.
In the UK, every person paid under the PAYE scheme is allocated a tax code by HM
Revenue & Customs. This is in the form of a number followed by a letter or letters, or a letter
followed by numbers. This code describes to employers how much tax to deduct from an
employee. Tax codes are usually adjusted once a year to take into account any changes made in
the National Budget.
MARCH 2007
AUDITING & TAXATION
PART A
PART B
a) Trade debtors
b) Vehicles
c) Stock and work in progress
- - 66 - -

b) Internal control
c) Verification checks
d) ICQ [5 each]
5. a) The auditor works for the shareholders. Discuss. [10]

PART C
TAX RATES
PERSONAL ALLOWANCES
Additional allowance of $3,000 can also be claimed by one of the partners in a
marriage.
6. Rebecca, aged 42, is a single person who earns $67,000 per year. She has paid 5% of
her gross pay into a qualifying pension fund. Rebecca has also paid $600 in respect of
Etienne, aged 49, is married (and claims the additional allowance) and earns $74,000
per year. He has paid 6% of his gross pay into a qualifying pension. Etienne has also
paid $500 in respect of expenses which are allowable against tax.
TASKS
a) Rebecca [7]
b) Etienne [8]
7. The following is the summarized internal profit and loss account of Stevmar Ltd after
its first year of trading:
£
Sales 3,300,000
- - 67 - -
Other information:
TASK
Calculate Stevmar Ltd‟s total taxable profit AND the total tax charge for the year. [15]

c) PAYE

Q1 True and Fair:
Both Companies acts and accounting standards require the financial statement of a company to
give a true and fair view. However, there is no legal definition of the term true and fair. The
meaning of true and fair can be broken down into two:
and fair
Kettle)
In summary, there is no statutory or professional definition of true and fair view. However, to
say financial statement shows a true and fair view,, the accounts must be prepared in
accordance with generally Accepted accounting principles and must conform to relevant
statutory and regulatory and the accounts must not me misleading and should be free from
bias.
- - 68 - -
Q2a: The rights of an auditor includes the following

a) Right of access at all times, to the books and accounts and vouchers of the company
b) Right to require from the officers including the directors of the company, such
information and explanations necessary for the performance of his duties as a n auditor.
d) The right to be notified in writing, any intended resolution to remove them from office
as auditors of the company
e) The right, before accepting appointment as auditors of the company, to communicate
f) The right to contract with the company, in addition to the statutory duties, undertake or
provide accounting, taxation and other services to the company.

a. Title: an appropriate title such as „Auditor‟s Report‟ should be used to enable the reader
to distinguish it from reports from others, e.g. Management report
b. Addressee: The auditor‟s report should appropriately be addressed and this is usually
addressed to the shareholders or the board of directors.
c. Identification of financial statements: The report should identify the financial
statements audited by the auditor. It includes the name of the company, the accounts
audited (e.g. P&L and balance sheet and the financial year
d. Reference to Auditing Standards or practices: The report should also indicate the
auditing standards followed. Example International Standards on Auditing (ISA)
e. Opinion of the financial statement: The report should clearly state the auditors opinion
f. Signature: the report should be signed in the name of the audit firm, the personal name
of the auditor or both the personal name and the name of the audit firm.
g. Auditor’s Address: The report should indicate the address and location of the auditor‟s
main office
h. Date of Report: the report should be dated.
a) Determine the system of internal control over sales and debtors and test the
effectiveness of the system
- - 69 - -

Q3b. Vehicles:
The verification of vehicles will involve the following procedures
a. Obtain a schedule of list of motor vehicles (where a number of vehicles are held by the
client) and agree the total cost with the motor vehicle accounts in the ledger
b. Inspect the registration documents and ensure that they are registered in the name of the
company
c. Where the company registers the vehicle in the name of an employee or a third party,
the party concerned should sign the certificate acknowledging the company‟s
ownership
d. Examine the insurance policy and note that insurance premium are paid on due dates
e. Review the depreciation policy and reasonableness of deprecation rates over vehicles.
f. Examine all purchase and disposals of vehicles during the year and ensure that proper
authority was given and properly accounted for in the accounts
g. Ensure that no collusion existed with outside agents on cheap sale prices
h. Inspect invoices of all purchases and cheques paid counterfoils
i. Physically inspect vehicles and compare repairs and fuel bills with car numbers.
j. Check the presentation and valuation of vehicles in the financial statement.
Q3d: Stocks & work-in progress: In verifying stocks and work in progress, the following
procedures applies
i. Review the system of internal control over stocks
ii. Perform compliance tests on key controls relating to purchases, sales, creditors
and debtors
iii. Physically check samples by counting selected items of stock
iv. Observe stock taking (i.e. attend stock taking )
v. Check on slow moving, obsolete stocks
vi. Compare the current years stock with previous years stocks and note any
significant changes
vii. Confirm that the stock valuation is in line with SSAP 9
viii. Verify each work- in-progress item with a job card.
Q3d Bank Balance: This will be verified using the following procedures
- - 70 - -
credited
numbers
statement

accountancy work. It sets out the terms of the engagement and forms the bas is of the contract.
Q4b. Internal control: it is defined as the whole system of control, financial and otherwise
established by the management in other to carry on the business of the enterprise in an orderly
and efficient manner, ensure adherence to management policies, safeguard the assets and
secure as far as possible, the completeness and accuracy of the records. The individual
components of an internal control system are known as control or internal controls.
i. organization
ii. segregation of duties
iii. physical
iv. authorization and approval
v. arithmetical and accounting
vi. personnel
vii. supervision
viii. management
Q4c: Verification checks:

It is an audit technique which seeks to substantiate the existence, ownership, valuation of
assets and liabilities and the manner in which they are recorded in the books of accounts.
Q4d. Internal Control Questionnaire- ICQ

Internal control Questionnaire (ICQ) is a comprehensive, all inclusive method of ascertaining,
recording and evaluating a system of internal controls. It is a pre-printed document designed by
- - 71 - -
the auditor to be used in assessing the adequacy of the clients accounting system. It consists of
a series of questions designed to establish which control exist in the accounting system and any
possible weaknesses. Internal Control Questionnaire helps audit staff familiarize themselves
with the client‟s accounting system quickly and more comprehensively
Q5a. The auditor is under a statutory duty to report to the members of an enterprise as to
whether or not, the accounts prepared by the directors to be sent to the members of the
enterprise gives a true and fair view and have been prepared in accorda nce with the companies
Acts (sec. 235). The auditor therefore works for the members of the company who appoint him
as auditors at an Annual General Meeting (AGM). The work done by the auditor will be to
report to the members as to:
d. Whether the information and explanations given in the directors report is consistent
with the accounts and finally,
e. Whether in his opinion, the financial statement presents a true and fair of the
company‟s affairs at the balance sheet date and of its profit and loss for the period
under review. From the above discursion, it can be concluded that Auditors do not
work for the directors of the company but rather work and repost to the members of the
company.
Q5b. The stages in an audit can be summarized as:

i. Background Research: - this will include investigation into the history of the company,
its product, its present condition and future prospect, the location of all branches,
any problem in accounting system and changes in law or accounting practice
ii. Preparation of the audit plan:- This involves preparing an overall audit plan showing
how the audit work will be done, the staff who will do the work, the budget o time
and cost
iv. Internal control system review: - A review of the internal control system to know
books of accounts can be relied on for the preparation of the finals account.
procedures such as analytical review which seek to provide audit evidence as to
the completeness, accuracy and validity of the information contained in the
accounting records or the financial statement. Substantive testing is necessary
where there is weak internal control or the item is extraordinarily transaction. It is
also applied to all assets and liabilities at the balance sheet date.
information expected to confirm a predictable pattern based on the organization‟s
- - 72 - -
past experiences and also other financial and non- financial information available.
Analytical review is an economic way of obtaining audit evidence.
analytical review of the financial statement to determine whether accounting
policies are acceptable and are used consistently , all items in the financial
statement are compatible to the best of his knowledge and also adequate disclosure
of items which needs to be disclosed.
audited, the responsibilities of management and the auditor, the signature of the
auditor and the date of the report.
Q6. a) REBECCA
$
Basic Salary 67,000
Less
TAXABLE PAY 55,050
TAX PAYABLE

First 3,000 10% 300
Next 27,000 20% 5,400
Excess 25,050 40% 10,020
Tax payable 15,720
- - 73 - -
Q6 b.) ETIENNE
$
Basic Salary 74,000
Less

TAXABLE PAY 58,060
TAX PAYABLE

First 3,000 10% 300
Next 27,000 20% 5,400
Excess 28,060 40% 11,224
Tax payable 16,924
Q7. STEVMAR LTD
Net Profit 740,000

IT Equipments (50%X400, 000) 200,000

Equipments (25% X 800,000) 200,000 (400,000)
Tax thereon @23% (480,000 X 23%) 110,400
- - 74 - -
Sales 3,300,000
Net profit 740,000
Q8.
This is the amount of income you can receive each year without having to pay ta x on it. Nearly
b) Capital gains tax (CGT): A capital gains tax (abbreviated: CGT) is a tax charged
on capital gains, the profit realized on the sale of a non-inventory asset that was purchased at
a lower price. The most common capital gains are realized from the sale of stocks, bonds,
precious metals and property.
- - 75 - -
As with many of the United Kingdom‟s institutional arrangements, the way in which the state
collects income tax through PAYE owes much of its form and structure to the peculiarities of
the era in which it was devised.

collection as a proportion of the revenue raised/
JUNE 2007
AUDITING & TAXATION
PART A
PART B
2. a) Explain the major data verification checks associated with entering financial data
into a computerized accounting system. [10]
b) The external auditors work for the directors of a company. Discuss. [10]
a) Trade debtors
b) Investments
c) Trade creditors
4. a) Explain the role of internal questionnaires. [10]

a) Post balance sheet events
b) Going concern
c) Audit trail
d) Accounting standards [5 each]
- - 76 - -
PART C

TAX RATES
PERSONAL ALLOWANCES
marriage.
6. Gavin, aged 49, is a single person who earns $54,000 per year. He has paid 5% of his
salary into a qualifying pension fund. Gavin has also paid $600 in respect of
Surinda, aged 34, is married (and claims the additional allowance) and earns $69,000.
She has paid 5% of her gross pay into a qualifying pension fund. Surinda has also paid
$700 in respect of expenses that are allowable against tax.
TASKS
a) Gavin [7]
b) Surinda [8]
7. The following is the summarized internal profit and loss account of Lewis Ltd after its
£
Sales 2,700,000
Other information:
- - 77 - -

Included in the administration expenses is £8,000 which is deemed non-allowable.
TASKS
Calculate Lewis Ltd‟s total taxable profit AND the total tax charge for the year. [15]

b) Tax avoidance
c) Capital gains tax (CGT)
SUGGESTED ANSWERS-JUNE 2007
Q1 True and Fair:

and fair
but is presented in a form which it can be properly and readily accepted (S ir Russell
Kettle)
accordance with generally Accepted accounting princip les and must conform to relevant
bias.

- - 78 - -
i. Check digit verification

ii. Format checks
iii. Sequence checks
iv. Range checks
v. Programmed controls
vi. Batch registers
vii. Input validity checks etc.
Q2b. The auditor is under a statutory duty to report to the members of an enterprise as to
enterprise gives a true and fair view and have been prepared in accordance with the companies
under review.
From the above discursion, it can be concluded that Auditors do not work for the directors
of the company but rather work and repost to the members of the company.
a) examine the system of internal control over sales and debtors and test the effectiveness
of the system
b) Then obtain a list of all the balances of debtors.
f) circularize the sample selected
g) examine all confirmations replied and investigate and exceptions
- - 79 - -
Q3b: Investment :
quoted and unquoted. A reconciliation of the current book value and that of the
previous year should be made. Ask that the market value of all investment at the end
of the year should be shown i.e. the quoted.
2) Verify purchase or sale of investment during the year with documentary evidence. E.g.
Contract notes or agreements
investment.
stock exchange values. In the case of unquoted ones inspection should be made of the
company‟s accounts and though there is no market value disclosed for unquoted
has occurred.
letter.
statement.
Q3c: Trade Creditors:

Q3d. Stocks & work-in progress: in verifying stocks and work in progress, the following
audit procedures will apply
debtors
d. Observe stock taking (i.e. attend stock taking )
- - 80 - -

changes
h. Verify each work- in-progress item with a job card.
i. It enables the auditor identify specific areas of weakness in the client accounting
system
Q4b. The engagement letter has the following importance

client earlier.
f. It educates the client by explaining how in general terms the audit will be
conducted.
Q5a. Post Balance Sheet Events

It is defined as “Those events both favourable and unfavourable which occur between the
balance sheet date and the date on which the financial statements are approved by the Board of
Directors”. Post balance sheet events fall into two categories, namely
1. Adjusting events
in the Profit and Loss Account or the Balance Sheet. Examples are issue of shares, mergers and
- - 81 - -
Q5b: Going Concern:

The going concern concept assumes that a business or enterprise will continue in
operational ex istence for the foreseeable future. This means that the financial statements
being audited are drawn up or prepared on the assumption that there is no intention or
necessity liquidate or curtail significantly the scale of operation.
Q5c. Audit Trail:
An audit trail, in relation to accounting, is a record left by the accounting information system
trail may be in the form of documentation (a paper trail) or an electronic trail. Accounting
Q5d. Accounting Standards: These are rules and regulations postulated by the
accountancy profession that underlie the preparation of accounts. They are Specific
accounting policies concerning particular topics or industries, providing descriptions of
acceptable methods of treating elements of accounting. These standards are prepared for
standardizing the preparation of financial statement and all accountants are required to
conform to these standards. Accounting standards include SSAPs, IAS, GAAP, FRS, IFRS
etc.
Q6. a) GAVIN
$
Basic Salary 54,000
Less:
TAXABLE PAY 42,700
- - 82 - -
TAX PAYABLE
First 3,000 10% 300
Next 27,000 20% 5,400
Excess 12,700 40% 5,080
Tax payable 10,780
Q6b.) SURINDA
$
Basic Salary 69,000
Less:

TAXABLE PAY 53,850
TAX PAYABLE

First 3,000 10% 300
Next 27,000 20% 5,400
Excess 23,850 40% 9,540
Tax payable 15,240
Q7. LEWIS LTD

£
Net Profit 650,000
- - 83 - -
IT Equipments (50%X200, 000) 100,000

Equipments (25% X 600,000) 150,000 (250,000)
Tax thereon @20% (568,000 X 20%) 113,600

$
Sales 2,700,000
Net profit 650,000
Q8. REFER TO PREVIOUS NOTES FOR THIS QUESTION)
SEPTEMBER 2007
AUDITING & TAXATION
PART A
1. Distinguish between internal control and internal check. [10]
PART B
b) Explain the importance of the true and fair view. [10]
a) Loans made to other businesses
b) Share capital
c) Stocks and work in progress
d) Freehold land and buildings [5 each]
4. a) Explain the process involved in approving the payment of an invoice.
[10]
b) Explain the principal functions of an ICQ. [10]
5. a) List and explain the principal data verification checks associated with computer
data entry. [10]
b) Explain the importance and usual contents of a letter of engagement. [10]
- - 84 - -
PART C
TAX RATES
PERSONAL ALLOWANCES
pension fund.
6. Carlos, aged 47, is a single person who earns $47,000 per year. He has paid 6% of his
gross pay into a qualifying pension fund. Carlos has also paid $600 in respect of
professional subscriptions. Kathy, aged 39, who earns $54,000, is married (and claims
the additional allowance). She has paid 5% of her gross pay into a qualifying pension
fund. Kathy has also paid $500 in respect of expenses which are allowable against tax.
TASKS
a) Carlos [7]
b) Kathy [8]
7. The following is the summarized internal profit and loss account of Creekit Ltd after its
£
Sales 2,600,000
Distribution costs (excluding depn.) (450,000)
Administration expenses (excluding depn.) (290,000)
Other information:
- - 85 - -
TASK
Calculate Creekit Ltd‟s total taxable profit AND the total tax charge for the year. [15]

a) PAYE
b) Personal allowances
c) The difference between tax avoidance and tax evasion.
SUGGESTED ANSWERS-SEPTEMBER 2007

Q1 Internal Checks: This is the area of internal control which is exclusively concerned
with the prevention and early detection fraud and errors. It involves arrangement of
accounting and other duties to ensure that, no single ind ividual handles one transaction
from the beginning to the end and that the work of each individual is subject to
independent checks.
Internal control on however the whole system of control(including internal checks),

financial and otherwise established by management in order to carry on the business of
the enterprise in an orderly and effic ient manner, ensure adherence to management
policies, safeguard assets and secure as far as possible, the completeness and accuracy
of the records.
Q2a. The rights of an auditor includes the following

1. Right of access at all times, to the books and accounts and vouchers of the company
2. Right to require from the officers including the directors of the company, such
3. The right to attend any general meeting of the company and to receive notices to any
4. The right to be notified in writing, any intended resolution to remove the from office as
5. The right, before accepting appointment as auditors of the company, to communicate
6. The right to contract with the company, in addition to the statutory duties, undertake or
Q2b: The importance of True and fair View

True and fair view is important because accounts cannot give a view in an abstract way. The
view given by the accounts and financial information cannot be divorced from the perceptions
of the users of accounting information. The auditor in his opinion states whether the financial
- - 86 - -
statement shows a true and fair view so that the reader can have belief in them. The true and
fairness of an account gives credibility to the information contained in the financial statement.
Q3a. Loans Made to other Business

The following audit procedures will be employed in the verification:
c. Obtain a certificate from the borrower confirming the amount outstanding as at the
balance sheet date
repayment)
Q3b. Share Capital

The following procedures will be followed in the verification of share capital
a. Ensure that the number of shares and type of shares issued is within the limit authorized
by the companies Memorandum and Article
b. Ensure that the issue was properly authorized by inspecting the minutes of Board of
Directors
c. Ascertain and evaluate the system for the control of the issue of shares.
d. Agree total shares issued per draft accounts to shareholders register
e. Test the additions of shareholders register
f. Ensure that all monies received on application were contained in a special bank account
until allotment
g. Vouch the payment of underwriting and other fees
h. Where shares are issued not for cash, but other consideration, vouch the agreement and
ensure that all entries are properly made
i. Check the value of share capital in the balance sheet and ensure that it is correctly
stated.
Q3c. Stocks & work-in progress: In verifying stocks and work in progress, the following
procedures will be followed:
a) review the system of internal control over stocks
b) perform compliance tests on key controls relating to purchases, sales, creditors
and debtors
c) physically check samples by counting selected items of stock
d) observe stock taking (i.e. attend stock taking )
e) check on slow moving, obsolete stocks
f) compare the current years stock with previous years stocks and note any
significant changes
- - 87 - -
g) confirm that the stock valuation is in line with SSAP 9

h) Verify each work- in-progress item with a job card
Q3d. Freehold land and Buildings

2. Examine a sample of title deeds and land registry certificate, conveyance
documents from solicitors and leases. Pay particular attention to mortgages and
securities over assets
4. Check entries in the fixed assets register and trace back to source documents to
ensure it is properly stated at cost
5. Review the companies policy for depreciation and ensure that land is not
depreciated
7. Where freehold or leasehold assets are let to third parties, inspect tenancy
agreement and check the rental income
accounting records.
Q4a.
The following procedures are involved in approving payment of invoice
1. There must be procedures for issuing requisition and responsible persons for such
requisition
2. purchase order must be prepared and authorized
3. Goods received must be examined in terms of quantity, quality and conditions of
the items.
4. Check calculations of the supplier‟s invoice amount and ensure that they are
correctly priced.
5. ensure payment voucher accompanies the invoice
6. Ensure that expenditure is properly invoiced as shown by the purchase order.
Q4b. Functions of Internal Control Questionnaires

These documents can have several functions which includes the following:
a. A method of ascertainment of the system
b. Enabling the auditor to review and assess the adequacy of the system
c. Enabling the auditor to identify areas of weakness
d. Enabling the to design a series of tests (audit program) in the audit process
e. Enabling the audit staff to familiarize themselves with the system quickly and
comprehensively.
- - 88 - -
Q5a. Data verification checks are controls designed to ensure that, data received for processing
are processed correctly. The following are some controls
a. Check digit: this is a detective control to establish the validity of numerical data such as
b. Format checks: This checks any omission of details of items. Missing and duplicate
c. Existence check: These are checks on record fields to ensure that the data is valid for
that field. It checks correct codes wrongly used against a correct digits
d. Logical checks: these are used to ensure that, codes on the documents are acceptable in
e. Range checks: These are checks designed to ensure that the data in a certain lies within
Q5b.The form and content of audit engagement letters may vary for each client, but they would
generally include the following:
1. The objective of the audit of the financial statement
2. Management‟s responsibilities regarding proper accounting records and the financial
statement by establishing and maintain effective internal controls.
3. The auditors responsibilities to express his opinion of the financial statement
4. The scope of the audit work, including reference to applicable legislation such as the
companies Act and pronouncements of professional bodies such as the auditing
standards, accounting standards
5. The basis on which fees will be computed
6. The need to send letter of weakness to management
7. Any arrangement for the auditor to provide accounting and taxations services
8. Unrestricted access to whatever records, documentation and other information
requested in connection with the audit.

client earlier.
conducted.
- - 89 - -
Q6. a) CARLOS
$
Basic Salary 47,000
Less Relief:
TAXABLE PAY 35,580
TAX PAYABLE

First 3,000 10% 300
Next 27,000 20% 5,400
Excess 5,580 40% 2,232
Tax payable 7,932
Q6 b.) KATHY
$
Basic Salary 54,000
Less Relief:

TAXABLE PAY 39,800
TAX PAYABLE

First 3,000 10% 300
Next 27,000 20% 5,400
Excess 9,800 40% 3,920
Tax payable 9,620
- - 90 - -
Q7. CREEKIT LTD

£
Net Profit 320,000
IT Equipments (50%X180, 000) 90,000

Equipments (25% X 500,000) 125,000 (215,000)
Tax thereon @25% (250,000 X 25%) 62,500
Sales 2,600,000
Net profit 320,000
Q8.
a) PAYE: PAYE (Pay As You-Earn) is an amount collected by employe rs on behalf of the

- - 91 - -
b) Personal allowances:
This is the amount of income you can receive each year without having to pay tax on it. N early
c) Tax avoidance is the legal utilization of the tax regime to one's own advantage, in order to
reduce the amount of tax that is payable by means that are within the law. By contrast tax
evasion is the general term for efforts to not pay taxes by illegal means. The term tax
mitigation is a synonym for tax avoidance. Its original use was by tax advisors as an
alternative to the pejorative term tax avoidance
d) Capital gains tax (CGT): A capital gains tax (abbreviated: CGT) is a tax charged on capital
DECEMBER 2007
AUDITING & TAXATION
PART A
PART B
2. a) Discuss the different forms of control expected to be found in a computerized
accounting
system. [10]
b) Explain the principal factors involved in planning an audit. [10]

a) Investments
b) Trade creditors
- - 92 - -
4. a) Outline the stages of an audit. [10]

b) Explain the role of an internal audit department. [10]
5 Explain the following terms:
a) ICQ
b) Letter of engagement
c) The dismissal of an auditor
d) Test checking [5 each]
PART C

TAX RATES
PERSONAL ALLOWANCES
6. James, aged 45, is a single person who earns $56,000 per year. He has paid 6% of his
gross pay into a qualifying pension fund. James has also paid $800 in respect of
Martin, aged 58, is married (and claims the additional allowance) and earns $78,000.
He has paid 20% of his gross pay into a qualifying pension. Martin has also paid $700
in respect of expenses which are allowable against tax.
TASKS
a) James [7]
b) Martin [8]
7. The following is the summarised internal profit and loss account of ROWIG Ltd after
£
Sales 2,800,000
- - 93 - -
Other information:
TASK
Calculate ROWIG Ltd‟s total taxable profit AND the total tax charge for the year. [15]

a) Tax evasion
b) The basic principles of taxation
c) PAYE
SUGGESTED ANSWERS-DECEMBER 2007

Q1. The rights of an auditor includes the following
4. The right to be notified in writing, any intended resolution to remove them from office

a) System development controls
b) Documentation and record testing
c) Access controls such as physical barriers
- - 94 - -
d) Backup and reconstruction facilities

Application Controls : These include:
1. Check digit verification
2. Format checks
3. Sequence checks
4. Range checks
5. Programmed controls
6. Batch registers
7. Input validity checks etc.
Q2b. The Auditor must plan the audit work if the work is to be done to a high standard of
skill and care. The following are some factors that are involved in planning the audit:
a. An outline of the audit work to be done on each area of the clients‟ systems and
the financial statement
b. A review of last year‟s working papers
c. Changes in legis lation (Accounting standards, auditing standards and other
relevant regulations)
d. Analytical review of management accounts
e. Changes in accounting system
f. The staff who will be needed to do the work
g. The timing of the work to be done
h. Degree of reliance on internal controls\
i. The time budget and cost of the audit.
Q3a: Investment : The following procedures can be followed in the verification of investment
investment.
has occurred.
- - 95 - -
letter.
statement.
Q3b: Trade Creditors: Audit procedures

7. Check that all creditors are properly disclosed
Q3.c Freehold land and Buildings

2. Examine a sample of title deeds and land registry certificate, conveyance documents
from solicitors and leases. Pay particular attention to mortgages and secur ities over
assets
4. Check entries in the fixed assets register and trace back to source documents to ensure
7. Where freehold or leasehold assets are let to third parties, inspect tenancy agreeme nt
accounting records.
- - 96 - -
Q3d Loans Made to other Business:

balance sheet date
repayment)
Q4.a The stages in the modern audit can be summarized as:
a. Background Research: - This will include a brief research of the history of the
company, its product, its present condition and future prospect, the location of all
branches, any problem in accounting system and changes in law or accounting practice
b. Preparation of the audit plan:- This involves preparing an overall audit plan showing
how the audit work will be done, the staff who will do the work, the budget o time and
cost
c. Accounting system review: - This will involve the review of the adequacy of the
d. Internal control system review: - A review of the internal control system to know
e. Substantive Testing: - This involves the tests of transactions and balances and other
internal control or the item is extraordinarily transaction. It is also applied to all assets
and liabilities at the balance sheet date.
f. Analytical Review: - This is the study of relationships between elements of the
financial information expected to confirm a predictable pattern based on the
organization‟s past experiences and also other financial and non- financial information
available. Analytical review is an economic way of obtaining audit evidence.
g. Analytical Review of financial statement:- This is where the auditor performs overall
needs to be disclosed.
h. Preparation and signing of report:-This is where the auditor expresses his opinion in a
- - 97 - -
and the date
Q4b.The role played by internal department includes the following:

1. It helps reduce the amount of detailed work to be carried out by the external auditors if
it is found to be reliable
2. They review the system of accounting, financial and other operations of the business
and notify management and advice them on the best practice.
3. They Review and test compliances and accuracy of the companies policies
4. They exist to review and improve the system of internal checks.
5. They also prevent fraud and helps in early detection of fraud and irregularities
6. They undertake special investigation at the request of management.
Q5a Internal Control Questionnaire- ICQ

Q5b. Letter of Engagement (or Engagement letter)
Q5c. Dismissal of an auditor: - There are a number of procedures and rules to be followed
before an auditor of a company can be dismissed or removed. The companies Act 1985
(section 391) has the following provisions/rules regarding the dismissal of an auditor
a. Auditors of a company can be removed by an ordinary resolution (i.e. a simple
majority) at an Annual General Meeting (AGM)
b. Written notices shall have been given to the company of the intention to move a
resolution to remove an auditor not less than 28days.
c. On receipt of such intended resolution, the company shall forthwith send a copy to the
auditors concerned
d. The auditor shall have the right to make a written representation to the company and
e. The auditor shall have the right to speak at the meeting on the subject of his intended
removal and if the representation have not been sent to members, he has the right to
read it out at the meeting
- - 98 - -
Q5d. Tests-checks: This is an audit technique or procedure where a sample of population

is checked in detail and the result applied to the whole population. There are two methods
used in test checking: (a) Judgement sampling- where the selection of the items to be
tested are determined by the auditor‟s judgement and (b) Statistical Sampling– where the
selection of the items to be tested are by statistical or mathematical principles.
Q6. a) JAMES
$
Basic Salary 56,000
Less Relief:
TAXABLE PAY 43,840
TAX PAYABLE

First 3,000 10% 300
Next 27,000 20% 5,400
Excess 13,840 40% 5,536
Tax payable 11,236
Q6 b.) MARTIN
$
Basic Salary 78,000
Less Relief:

TAXABLE PAY 50,700
- - 99 - -
TAX PAYABLE

First 3,000 10% 300
Next 27,000 20% 5,400
Excess 20,700 40% 8,280
Tax payable 13,980
Q7. ROWIG LTD

£
Net Profit 430,000
Non-allowable Distribution expenses 7,000 77,000
IT Equipments (50%X500, 000) 250,000

Equipments (25% X 500,000) 125,000 (375,000)
Tax thereon @20% (132,000 X 20%) 26,400
Sales 2,800,000
Net profit 430,000
Q8. REFER TO PREVIOUS NOTES
- - 100 - -
MARCH 2008
AUDITING & TAXATION
PART A
1. Explain the true and fair view. [10]
PART B
2. Explain the following types of audit:
a) Statutory
b) Non-statutory
c) Continuous
d) Interim
e) Management [4 each]
b) The bank balance
c) Investments
4. a) Explain the role of an internal audit department. [10]
b) Explain what internal controls can be „built‟ in to the typical financial accounting
system i.e. from the recording of each financial transaction to the production of the first
draft final accounts. [10]
5. Fully explain the stages of an audit. [20]
PART C

TAX RATES
PERSONAL ALLOWANCES
6. Grace, aged 43, is a single person who earns $47,000 per year. She has paid 5% of her
gross pay into a qualifying pension fund. Grace has also paid $700 in respect of
Vincent, aged 39, is married (and claims the additional allowance) and earns $61,000.
He has paid 5% of his gross pay into a qualifying pension fund. Vincent has also paid
$800 in respect of expenses, which are allowable against tax.
- - 101 - -
TASKS
a) Grace [7]
b) Vincent [8]
7. The following data relates to LBW Ltd:

£
Internal rates of depreciation charged in the profit and loss account:


Corporation tax (company tax) is charged at 20% of taxable profit.

TASK
Calculate LBW Ltd‟s taxable profit AND the total tax charge for the year. [15]
.
c) PAYE
d) Tax codes [5 each}
SUGGESTED ANSWERS-MARCH 2008
Q1. True and Fair: The Companies Acts and Accounting Standards require the financial
statement of a company to give a true and fair view. However, there is no legal definition of
the term true and fair. The meaning of true and fair can be broken down into two:
and fair
- - 102 - -
Kettle)
accordance with generally Accepted accounting principles and must conform to relevant
bias.
Q2.a Statutory Audit: These are audit carried out to meet statutory requirements. For example,
the company Act 1985 requires that, every company must have its accounts audited annual by
an independent auditor. The scope of the auditors work is determined by law/ statute.
(owner).
Q2c Continuous Audit:

Continuous audit is one that is carried out continuously during the financial year of the client.
Such an approach applied to enterprises where the volume of transaction is very large. The
work is so great that, the audit staffs are on the premises of the client almost the whole year
round, making several visits.
Q2d Interim Audit: Interim Audit is the one that is carried out or conducted to cover a certain
time or up to a certain date within a financial period. Normally interim audit will be about two-
thirds of the way through the year. E.g. September or October for December year end. It may
also be done to cover a month, a quarter or half year on the request of a client. Some audit
work such as verification of assets and liabilities may not be carried out during interim audit.
These may be deferred to the final audit. The work done may include ascertaining the system
of accounting and internal controls, evaluation of the system for adequacy and any possible
weaknesses, design and performing compliance tests etc.
Q2e Management Audit: This is concerned with the examination of procedures laid down by
management and of its efficiency. The objective here is to arrive at an opinion on the
efficiency of management rather than on the financial statements. Areas covered by
management audit includes
c) Relationship between management and staff etc
- - 103 - -

a) Obtain a schedule of fixed assets
b) Examine a sample of title deeds and land registry certificate, conveyance documents
from solicitors and leases. Pay particular attention to mortgages and securities over
assets
c) Inspect the minutes of directors to ensure that, all title deeds, conveyances, tenancy
d) Check entries in the fixed assets register and trace back to source documents to ensure
e) Review the companies policy for depreciation and ensure that land is not depreciated
f) Check the calculations of the depreciation and ensure they are accurate
g) Where freehold or leasehold assets are let to third parties, inspect tenancy agreement
h) Physically inspect assets to ensure their existence
i) Check the classification and presentation of fixed assets
j) Ensure that, the amount stated in the financial information is in agreement with the
accounting records.
Q3b. Bank balance

1. Appraise the system of internal control over bank
2. Examine the bank reconciliation statement and note the following
credited
3. Check the arithmetical accuracy of the bank reconciliation statement
4. Trace cash payments and cash receipts to the various documents taking notes of cheque
numbers
5. Trace all contra entries, dishourned cheques, cancelled cheques
6. Vouch any transfers to the petty cash book and other bank accounts
7. Cast the bank column of the cash book
8. Send the standard bank letter and check the information received with the bank
statement
9. Consider the value of bank balance in the balance sheet
Q3c: Investment : The following procedures can be followed in the verification of investment
- - 104 - -
investment.
has occurred.
letter.
statement.
Q3d. Stocks & work-in progress: in verifying stocks and work in progress, the following audit
procedures will apply
debtors
d. Observe stock taking (i.e. attend stock taking )
changes
h. Verify each work- in-progress item with a job card
Q4a. The role played by internal department includes the following

a. to reduce the amount of detailed work to be carried out by the external auditors if it is
found to be reliable
b. To review the system of accounting, financial and other operations of the business and
notify management and advice them.
c. Review and test compliances and accuracy of the companies policies
d. To review and improve the system of internal checks.
e. To prevent and early detection of fraud and irregularities
f. To undertake special investigation at the request of management
- - 105 - -
Q4b. The following are the internal controls that can be “built” into a typical financial
accounting system

transactions; and custody of the associated assets should be undertaken by
separate staff.
ii. Organization: there should be a clear organization chart and all staff sho uld
have up to date job descriptions that clearly indicate their responsibilities.
iv. Physical: there should be suitable controls over access to offices, assets,
controlled stationery and computer systems.
information; use of exception reports; critical review and enquiry by
management.
vi. Arithmetical and accounting: checking / re-performing tasks carried out by
others; costing (adding up) orders, invoices, payroll etc; reconciliation between
the bank and accounting records; control accounts.
vii. Personnel: appointment of staff should be adequately controlled; all staff
should be suitably trained for their post and appraised regularly.
viii. Supervision: all staff and activities should be adequately supervised by
someone who understands the process and will detect deviations from accepted
practice.
Q5. The stages in an audit can be summarized as:

1) Background Research: - This will involve a review of the history of the company, its
the client.
2) Preparation of the audit plan:- This involves preparing an overall audit plan showing
cost
3) Accounting system review: - This will involve the review of the adequacy of the
4) Internal control system review: - A review of the internal control system to know
5) Substantive Testing: - This involves the tests of transactions and balances and other
- - 106 - -
6) Analytical Review: - This is the study of relationships between elements of the financial
experiences and also other financial and non- financial information available.
7) Analytical Review of financial statement:- This is where the auditor performs overall
analytical review of the financial statement to determine whether accounting po licies
8) Preparation and signing of report:-This is where the auditor expresses his opinion in a
and the date
Q6. a) GRACE

$
Basic Salary 47,000
Less Relief:
TAXABLE PAY 35,950
TAX PAYABLE

First 3,000 10% 300
Next 27,000 20% 5,400
Excess 5,950 40% 2,380
Tax payable 11,236
- - 107 - -
Q6 b.) VINCENT
$
Basic Salary 61,000
Less Relief:

TAXABLE PAY 46,150
TAX PAYABLE

First 3,000 10% 300
Next 27,000 20% 5,400
Excess 9,800 40% 6,460
Tax payable 16,150 12,160
Q7. LBW LTD
Net Profit 640,000

Add: Depreciation of computers 62,500
Depreciation of machines 100,000
Non-allowable expenses 8,000 170,500
Computers (50%X250, 000) 125,000

Machines (25% X 500,000) 125,000 (250,000)
Tax thereon @20% (560,500 X 20%) 112,100
- - 108 - -
WORKINGS
Depreciation of Machinery (500,000 x 20%) 100,000

Depreciation of -computers (250,000 x 25%) 62,500
Q8. REFER TO PREVIOUS NOTES
JUNE 2008
AUDITING & TAXATION
PART A
1. Distinguish between internal control and internal check. [10]
PART B
a) Trade creditors
b) Provision for doubtful debts
c) Stock and work in progress
b) Non-statutory audit
c) Management audit
d) ICQ [5 each]
ART C
The following information applies to any personal tax calc ulations:
TAX RATES
PERSONAL ALLOWANCES
marriage.
- - 109 - -
6. Isaac, aged 51, is a single person who earns $59,000 per year. He has paid 6% of his
gross pay into a qualifying pension fund. Isaac has also paid $500 in respect of
Sophie, aged 42, is married (and claims the additional allowance) and earns $68,000
per year. She has paid 5% of her gross pay into a qualifying pension. Sophie has also
paid $700 in respect of expenses which are allowable against tax.
TASKS
a) Isaac [7]
b) Sophie [8]
7. The following is the summarized internal profit and loss account of Adu-Tutu Ltd after
£
Sales 3,600,000
Distribution costs (not including the depreciation charge) (520,000)
Administration expenses (not including the depreciation charge) (340,000)
Other information:
TASK
Calculate Adu-Tutu‟s Ltd‟s total taxable profit AND the total tax charge for the year.
[15]

c) PAYE
- - 110 - -

independent checks.
of the records.

information and explanations necessary for the performance o f his duties as an auditor.

1. Title: an appropriate title such as „Auditor‟s Report‟ should be used to enable the reader
2. Addressee: The auditor‟s report should appropriately be addressed and this is usually
3. Identification of financial statements: The report should identify the financial
4. Reference to Auditing Standards or practices: The report should also indicate the
5. Opinion of the financial statement: The report should clearly state the auditors opinion
6. Signature: the report should be signed in the name of the audit firm, the personal name
- - 111 - -
7. Auditor’s Address: The report should indicate the address and location of the auditor‟s
main office
8. Date of Report: the report should be dated.

Trade creditors can be verified by the audit procedure below.
Q3b. Provision for bad de bts:

The following audit procedures will apply:
1. Examine debts against which specific provisions have been made in line
with information from debt collection agencies or solic itors.
2. Where provision is based on aged analysis, check whether proper analys is
has been prepared and consider the reasonableness and consistency of the
formulas.
3. Check the make- up of the debtors balance
4. Consider whether cheques issued by debtors have been dishonoured for lack
of funds
5. Considers reports from solicitors to see if customers have been declared
bankrupt
6. Compare the current provision with the previous year and investigate any
material difference
Q3c. Stocks & work-in progress: Audit procedure for verifying stocks and work in progress
a) Review the system of internal control over stocks
b) Perform compliance tests on key controls relating to purchases, sales, creditors and
debtors
c) Physically check samples by counting selected items of stock
d) Observe stock taking (i.e. attend stock taking )
e) Check on slow moving, obsolete stocks
f) Compare the current years stock with previous years stock s and note any
significant changes
g) Confirm that the stock valuation is in line with SSAP 9
h) Verify each work- in-progress item with a job card.
- - 112 - -
Q3d. Bank balance: Audit procedures for bank balance

ii. That all payments or lodgments not credited at the balance sheet date have
been credited
numbers
statement
Q4a. Letter of Weakness: - (other names for this letter are management letter, letter of
comment, letter of recommendation, post audit letter, internal control letter). It is a letter sent
by the auditor to his client bringing to his attention the weakness found in the internal control
system during the audit. The letter points out the weaknesses in the internal control system and
gives recommendations to improve them. It is usually presented to the client in a meeting with
the auditor.

(owner).
Q4c. Management Audit: This is concerned with the examination of procedures laid down by
efficiency of management rather than on the financial state ments. Areas covered by
- - 113 - -
c) Relationship between management and staff etc

Q5a. Q5a. The auditor is under a statutory duty to report to the members of an enterprise as to
under review.
From the above discursion, it can be concluded that Auditors works for the members
(shareholders) of the company but not the directors of the company
Q5b. The stages in an audit include the following:

 Background Research: - This will involve a review of the history of the company, its
the client.
 Preparation of the audit plan:- This involves preparing an overall audit plan showing
cost
 Accounting system review: - This will involve the review of the adequacy of the
 Internal control system review: - A review of the internal control system to know
 Substantive Testing: - This involves the tests of transactions and balances and other
- - 114 - -

 Analytical Review: - This is the study of relationships between elements of the financial
 Analytical Review of financial statement:- This is where the auditor performs overall
 Preparation and signing of report:-This is where the auditor expresses his opinion in a
and the date
Q6. a) ISAAC
$
Basic Salary 59,000
Less Relief:
TAXABLE PAY 46,960
TAX PAYABLE
First 3,000 10% 300
Next 27,000 20% 5,400
Excess 16,960 40% 6,784
Tax payable 11,236
- - 115 - -
Q6 b.) SOPHIE
$
Basic Salary 68,000
Less Relief:

TAXABLE PAY 52,900
TAX PAYABLE

First 3,000 10% 300
Next 27,000 20% 5,400
Excess 22,900 40% 9,160
Tax payable 14,860
Q7. ADU-TUTU LTD
Net Profit 890,000

Adjusted Net Profit 1,048,000
IT Equipments (50%X500, 000) 250,000

Equipments (25% X 900,000) 225,000 (475,000)
Tax thereon @22% (573,000 X 22%) 126,060
- - 116 - -
Sales 3,600,000
Depreciation of IT equipments 50,000 (1,010,000)
Net profit 890,000
Q8.REFER TO PREVIOUS NOTES
SEPTEMBER 2008
AUDITING & TAXATION

PART A
PART B
2.a) Explain the major data verification checks associated with entering financial data into
computerized accounting system. [10]
b) Outline the concept of INDEPENDENCE as regards an auditor. [5]
c) Explain the importance of SEGREGATION of duties. [5]

a) Investments
b) Bank balances
c) Trade creditors
4. a) Explain the role of an internal auditor. [10]


a) Post balance sheet events
b) The auditor‟s opinion
c) Audit trail
d) Accounting standards [5 each]
PART C
- - 117 - -

TAX RATES
PERSONAL ALLOWANCES
marriage.
6. Sarjo, aged 42, is a single person who earns $59,000 per year. He has paid 6% of his
salary into a qualifying pension fund. Sarjo has also paid $700 in respect of
Abdula, aged 39, is married (and claims the additional allowance) and earns $71,000.
He has paid 5% of his gross pay into a qualifying pension fund. Abdula has also paid
$500 in respect of expenses that are allowable against tax.
TASKS
a) Sarjo [7]
b) Abdula [8]
7. The following is the summarized internal profit and loss account of Lucio Ltd after its
£
Sales 3,250,000
Other information:
- - 118 - -
Included in the distribution costs is £5,000 of entertaining expenses which have been
deemed non-allowable as regards tax.
TASKS
Calculate Lucio Ltd‟s total taxable profit AND the total tax charge for the year. [15]

b) Tax avoidance
c) PAYE
d) The basic principles of taxation [5 each
SEPTEMBER 2008: SUGGESTED ANSWERS
Q1. The rights of an auditor includes the following

Q2 a)
A verification check ensures that data is correctly transferred into a computer from the medium
that it was originally stored on. Verification checks are usually used to check that information
written on a data collection form has been correctly typed into a computer by a data entry
worker.
Data verification checks are controls designed to ensure that, data received for processing are
processed correctly. The following are some controls
- - 119 - -
b. On-Screen Prompts : After a user has entered some data it is redisplayed on the screen.
The user is prompted to read the data and confirm that it has been entered correctly. If
the user has entered any data incorrectly he should respond that the data is inaccurate
and retype the incorrect parts.
c. Dual Input: This method is used when data is entered at the keyboard. The data to be
entered is typed in twice by two different operators. The two copies of the data are then
compared. Any differences are detected. The operators will be prompted to retype the
sections that differ until both copies agree. When the two copies agree it is assumed by
the computer that the data has been entered correctly.
d. Format checks: This checks any omission of details of items. Missing and duplicate
e. Existence check: These are checks on record fields to ensure that the data is valid for
f. Logical checks: these are used to ensure that, codes on the documents are acceptable in
g. Range checks: These are checks designed to ensure that the data in a certain lies within
Q2b. Auditor independence refers to the independence of the auditor from parties, that have
an interest in the financial statements of an entity. It is essentially an attitude of mind
characterized by integrity and an objective approach to the audit process. The concept
requires the auditor to carry out his work freely and in an objective manner.
The purpose of an audit is to enhance the credibility of financial statements by providing

written reasonable assurance from an independent source that they present a true and fair view
in accordance with an accounting standard. This objective will not be met if users of the audit
report believe that the auditor may have been influenced by other parties, more specifically
company directors or by conflicting interests (e.g. if the auditor owns shares in the company to
be audited). In addition to technical competence, auditor independence is the most important
factor in establishing the credibility of the audit opinion.
Q2c)
Segregation of duties is one of the key concepts of internal control and is the most difficult and
sometimes the most costly one to achieve. In essence, SoD implements an appropriate level of
checks and balances upon the activities of individuals.
Separation of duty, as a security principle, has as its primary objective the prevention of fraud
and errors. This objective is achieved by disseminating the tasks and associated privileges for a
specific business process among multiple users. This principle is demonstrated in the
- - 120 - -
traditional example of separation of duty found in the requirement of two signatures on a

check.
Segregation of duties is critical to effective internal control because it reduces the risk
of mistakes and inappropriate actions. It helps fight fraud by discouraging collusion.
In general, the following functions should be separated among employees:
 Approval
 Accounting/reconciling
 Asset custody
No one person should:
 Initiate a transaction
 Approve a transaction
 Record a transaction
 Reconcile balances
 Handle assets
 Review reports
Q3.a Investment:
The following procedures can be employed to verify investment
a. Request for a list of all investment currently held by the client and distinguish
between quoted and unquoted. A reconciliation of the current book value and
that of the previous year should to be made. Ask t hat the market value of all
investment at the end of the year should be shown i.e. the quoted.
b. Verify purchase or sale of investment during the year with documentary
evidence. E.g. Contract notes or agreements
c. Scrutinize the directors Minutes book for proper authorization of purchase and
sale of investment.
d. If the investment is quoted, check the market value shown in the list with that of
the stock exchange values. In the case of unquoted ones inspection should be
made of the company‟s accounts and though there is no market value disclosed
for unquoted investment consideration should be given as to whether the net
realizable value is below cost for current assets and for fixed assets, whether a
permanent fall in value has occurred.
e. Physically inspect certificates and bonds. If they have been deposited with a
bank a certificate stating in whose name they are registered and whether they
are free from any charge should be shown and this should be compared with the
standard bank letter.
f. To verify purchases examine contract notes and paid cheque counterfoils and
for disposals, vouch the income received.
- - 121 - -
g. Verify that all incomes have been received and properly treated in the financial
statement.
h. Compare investment income with previous year‟s and ensure that the basis of
recognizing income is consistent with previous years. Investigate any
significant fluctuations.
i. Ensure proper disclosure in the accounts.
Q3b. Bank balance

a) Appraise the system of internal control over bank
b) Examine the bank reconciliation statement and note the following
been credited
c) Check the arithmetical accuracy of the bank reconciliation statement
d) Trace cash payments and cash receipts to the various documents taking notes of cheque
numbers
e) Trace all contra entries, dishourned cheques, cancelled cheques
f) Vouch any transfers to the petty cash book and other bank accounts
g) Cast the bank column of the cash book
h) Send the standard bank letter and check the information received with the bank
statement
i) Consider the value of bank balance in the balance sheet
Q3c Trade creditors

Follow the following audit procedure in the verification of trade creditors
2. Obtain a copy of the schedule of balances of creditors and confirm the balances with the
4. Enquire into any material debit balances on any of the creditors account
7. Enquire into any exceptions received from the creditors‟ circularization
Q3d. Stocks & work-in progress:

In verifying stocks and work in progress, I will perform the following audit procedures:
1. review the system of internal control over stocks
- - 122 - -
2. perform compliance tests on key controls relating to purchases, sales, creditors and
debtors
3. physically check samples by counting selected items of stock
4. observe stock taking (i.e. attend stock taking )
5. check on slow moving, obsolete stocks
6. compare the current years stock with previous years stocks and note any significant
changes
7. confirm that the stock valuation is in line with SSAP 9
8. Verify each work- in-progress item with a job card.
Q4 a : The duties of the internal auditor includes the following
 Manage the Internal Audit function.
 Keep current on trends in accounting and auditing.
 Develop more detailed audit techniques and procedures for specific areas assigned
if necessary.
 Safeguard work papers and do not disclose matters of a confidential nature.
 Perform financial statement review.
 Review the internal audit plan, ensure compliance and effectiveness and meet with
the chief audit executive regularly.
 Review the external audit plan, ensure the performance of the external auditors and
meet separately with them.
 Review plan to comply with laws and regulations, and communicate required code
of conduct to company personnel.
 Report to board of directors and shareholders and keep avenue of communication

open between internal audit, external auditors and the board.
Q4 b.
client earlier.
- - 123 - -
conducted.
Q5a. Post Balance Sheet Events

It is defined as “Those events both favourable and unfavourable which occur between the
balance sheet date and the date on which the financial statements are approved by the Board of
Directors”. Post balance sheet events fall into two categories, namely
1. Adjusting events
Q5b: auditor’s opinion
The audit opinion is that part of the auditor's report to the members of an entity in which the
auditor expresses an opinion on the extent to which the financial statements are materially
misstated. The fact that it is an opinion, and not a certification, is meant to indicate to financial
statement users that the auditor is providing reasonable assurance, and not complete assurance,
as to whether or not the financial statements are materially misstated.
Where the auditor is satisfied that the financial statements fairly present the financial position
and results of the entity, the auditor issues what is referred to as an unqualified audit opinion.
An unqualified audit opinion, or a "clean" opinion, is one without any restricting or limiting
circumstance . Thus, an unqualified audit opinion begins with the words:
"In my opinion, the financial statements present fairly the financial position of [name of
entity] as at June 30, 200X and the results of its operations and its cash flows for the
year then ended."
Where the auditor is not satisfied that the financial statements fairly present the financial
position and results of the entity, or that they are not consistent with the auditor's knowledge of
the business, in other words, where the auditor believes that the financial statements contain a
material misstatement, the auditor issues either a qualified audit opinion or an adverse
opinion.
- - 124 - -
Where the auditor believes that the financial position is true and fair "except for" a particular
matter, the auditor issues a qualified audit opinion that identifies a restriction or limitation to
the auditor's opinion. For example:
"In my opinion, except for the effects on the financial report of the matters referred to
in my report above, the financial statements present fairly the financial position of
[name of entity] as at June 30, 200X and the results of its operations and its cash flows
for the year then ended."
If the nature and materiality of the misstatement(s) is such that the auditor believes the
financial statements cannot provide a true and fair view, even with a qualification, the auditor
issues an adverse opinion. In this case, the audit opinion states that ".. the fina ncial statements
do not present fairly the financial position ...".
However, if the auditor is unable to gather sufficient appropriate evidence to form an opinion,
the auditor provides what is referred to as an inability opinion. In this instance, the audit
report states that "I am unable to and do not express an opinion as to whether the financial
statements present fairly the financial position ..."
Q5c. Audit Trail:
An audit trail, in relation to accounting, is a record left by the accounting informatio n system
trail may be in the form of documentation (a paper trail) or an electronic trail. Accounting
Q5d. Accounting Standards: These are rules and regulations postulated by the
accountancy profession that underlie the preparation of accounts. They are Specific
accounting policies concerning particular topics or industries, providing descriptions of
acceptable methods of treating elements of accounting. These standards are prepared for
standardizing the preparation of financial statement and all accountants are required to
conform to these standards. Accounting standards include SSAPs, IAS, GAAP, FRS, IFRS
etc.
- - 125 - -
Q6. a) SARJO
$
Basic Salary 59,000
Less Relief:
TAXABLE PAY 46,760
TAX PAYABLE

First 3,000 10% 300
Next 27,000 20% 5,400
Excess 16,760 40% 6,704
Tax payable 11,236
Q6 b.) ABDULA

$
Basic Salary 71,000
Less Relief:
TAXABLE PAY 55,950
TAX PAYABLE
First 3,000 10% 300
Next 27,000 20% 5,400
Excess 25,950 40% 10,380
Tax payable 16,080
- - 126 - -
Q7. ADU-TUTU LTD
Net Profit 530,000

IT Equipments (50%X250, 000) 125,000

Equipments (25% X 750,000) 187,500 (312,500)
Tax thereon @21% (412,500 X 21%) 86,625
Sales 3,250,000
Net profit 530,000
Q8.
b) PAYE: PAYE (Pay As You-Earn) is an amount collected by e mployers on behalf of the

- - 127 - -
c) Tax avoidance is the legal utilization of the tax regime to one's own advantage, in order to
reduce the amount of tax that is payable by means that are within the law. By contrast tax
evasion is the general term for efforts to not pay taxes by illegal means. The term tax
mitigation is a synonym for tax avoidance. Its original use was by tax advisors as an
alternative to the pejorative term tax avoidance

collection as a proportion of the revenue raised/
DECEMBER 2008
AUDITING & TAXATION
PART A
1. Explain what post balance sheet events are (SSAP 17 or IAS 10 is the relevant standard).
[10]
PART B
2. a) Explain the role of internal questionnaires (ICQs). [10]

a) Trade debtors
b) Fixed assets
c) Loans
- - 128 - -

a) Internal control
b) The true and fair view
c) Techniques of audit testing
d) An audit plan [5 each]

b) Explain the various data verification checks associated with computerized accounting
system. [10]
PART C
TAX RATES
PERSONAL ALLOWANCES
marriage.
6. Sophie, aged 58, is a single person who earns $88,000 per year. She has paid 20% of
her gross pay into a qualifying pension fund. Sophie has also paid $700 in respect of
Lucas, aged 34, is a married person (and claims the additional allowance) and earns
$46,500 per year. He has paid 5% of his gross earnings into a qualifying pension plan.
Lucas has also paid $500 in respect of expenses which are allowable against tax.
TASKS
a) Sophie [7]
b) Lucas [8]
7. The following is the summarized internal profit and loss account of Marnat Ltd after its
£
Sales 3,800,000
Administration expenses (370,000
Depreciation of equipment (110,000
- - 129 - -

Other information:
TASK
Calculate Marnat Ltd‟s total taxable profit AND the total tax charge for the year. [15]

c) PAYE
DECEMBER 2008: SUGGESTED ANSWERS
Q1: Post Balance Sheet Events
These are events both favourable and unfavourable occurring between the balance sheet date
and the date on which the financial statements are approved by the Board of Directors”. Post
balance sheet events fall into two categories, namely
1. Adjusting events
were not correct after the balance sheet date. Anothe r example is proposed dividends.
AS 10, Events afte r the Balance Sheet Date
IAS 10 and SSAP 17 both distinguish 'adjusting events' from 'non-adjusting events'. Adjusting
events provide evidence of conditions that existed at the balance sheet date. Non-adjusting
- - 130 - -
events are indicative of conditions arising after the balance sheet date. However, IAS 10
applies the distinction more robustly. Among the effects are:
Dividends to holders of equity instruments declared after the balance sheet date are not
recognized as liabilities.
Dividends declared by subsidiaries after the balance sheet date are not recognized by the parent
as income of the previous period.
Accounting treatment
Adjust financial statements for adjusting events – events after the balance sheet date that
provide further evidence of conditions that existed at the end of the reporting period, including
events that indicate that the going concern assumption in relation to the whole or part of the
enterprise is not appropriate.
Do not adjust for non-adjusting events – events or conditions that arose after the end of the
reporting period.
If an entity declares dividends after the reporting period, the entity shall not recognize those
dividends as a liability at the end of the reporting period. That is a non-adjusting event.
i. It enables the auditor identify specific areas of weakness in the client accounting
system
Q2 b.
client earlier.
- - 131 - -
conducted.
Q3 a. Trade debtors
a. Obtain a list of all the balances of debtors.
b. Cast the list and agree the total to the general ledger control account balance
c. Select a sample of individual debtors account and test as follows.
- Trace debt entries to entries in the sales day book
d. Circularize the sample selected
e. Examine all confirmations replied and investigate any exceptions
f. Consider the adequacy of bad debt provisions, sales returns and cas h discounts
Q3b: Loans: The following procedure will be followed in the verification of loans.
1. Review authorization for granting of loan and advances if made during the year
2. The application for the loan and the receipts for the amounts must be inspected
3. Obtain a certificate from the borrower confirming the amount outstanding as at the
balance sheet date
4. Study the written agreement covering the loan (that is the terms as to interest and
repayment)
5. Review the possibility of non-payment. E.g. the type of collateral security
Q3c. Fixed Assets

The audit procedure associated with fixed assets can be summarised as follows
a) Ownership: Check to see that, the title to the asset is clearly vested in the company(i.e.
if the asset belongs to the company and in the company’s name)
b) Existence: Check that, the asset exist at the date of the balance sheet and reliable
evidence is available to attest to the existence
c) Valuation: That the assets are stated at a value which is consistent with the accounting
principles and assumptions
d) Presentation: That the assts are presented in accordance with best practice and with the
due regards for the legal requirements in force at the time.
Q3d. Bank balance

1. Appraise the system of internal control over bank
2. Examine the bank reconciliation statement and note the following
i. That all un-cleared cheques are cleared
credited
- - 132 - -

3. Check the arithmetical accuracy of the bank reconciliation statement
4. Trace cash payments and cash receipts to the various documents taking notes of cheque
numbers
5. Trace all contra entries, dishourned cheques, cancelled cheques
6. Vouch any transfers to the petty cash book and other bank accounts
7. Cast the bank column of the cash book
8. Send the standard bank letter and check the information received with the bank
statement
9. Consider the value of bank balance in the balance sheet
Q4a. REFER TO PREVIOUS NOTES
- - 133 - -
MORE REVISION SERIES-PAST QUESTIONS AND ANSWERS ON AUDITING-ICM (ACCOUNTING & FINANCE)
Q4b. True and Fair:


and fair
Kettle)
Q4.c: These are techniques for collecting audit evidence and may include the following
 Physical examination and count
 Confirmation (usually by external source and should be in writing)
 Vouching/ Examination of original documents ( i.e. comparing original documents
with entries in the books
 Re-computation: Additions, calculations etc
 Enquiry ( i.e. asking questions)
 Observation ( especially the internal control system)
 Re-tracing bookkeeping entries
Q4d Audit plan
The audit plan is a description of the expected scope and conduct of the audit. Auditors
initially prepare the audit plan during the audit planning stage, but may revise the plan
throughout the audit. As the audit plan is important evidence that the audit will be carried out
in accordance with auditing standards and practice statements, auditors document the audit
plan in the audit working papers. The audit plan includes the documentation of:
 The audit approach for each material account balance assertion and the basis for its
determination. Where an in-depth approach for any account balance assertion has been
selected, the audit approach in respect of each related class of transaction is also
documented.
- 134 -
 The time and activity budget, indicating the evidence which each audit staff member is
to gather and evaluate, when it is to be gathered and the expected time to be spent on
such activity.
 The staff planning schedule, indicating when and for how long audit staff members
have been scheduled to work on the engagement and what work they have been
scheduled to do. It may be expressed in hours or other units of time and then costed at
the audit firm's standard rate for each staff member, to provide a budgeted standard cost
for the entire audit engagement.
 (optionally) an audit stage planning schedule, setting out the weeks (or months) during
which the audit team will perform work in each audit stage and the estimated time the
audit team will spend on each activity in each audit stage.
Q5a. Auditors do not work for the directors of the company. Rather the auditor is under a
statutory duty to report to the members of an enterprise as to whether or not, the accounts
prepared by the directors to be sent to the members of the enterprise gives a true and fair view
and have been prepared in accordance with the companies Acts (sec. 235). The auditor
therefore works for the members of the company who appoint him as auditors at an Annual
General Meeting (AGM). The work done by the auditor will be to report to the members as to:
under review.
Q5 b
A verification check ensures that data is correctly transferred into a computer from the
medium that it was originally stored on. Verification checks are usually used to check that
information written on a data collection form has been correctly typed into a computer by a
data entry worker.
Data verification checks are controls designed to ensure that, data received for processing are
processed correctly. The following are some controls
b. On-Screen Prompts : After a user has entered some data it is redisplayed on the screen.
The user is prompted to read the data and confirm that it has been entered correctly. If
the user has entered any data incorrectly he should respond that the data is inaccurate
and retype the incorrect parts.
- 135 -
c. Dual Input: This method is used when data is entered at the keyboard. The data to be
entered is typed in twice by two different operators. The two copies of the data are then
compared. Any differences are detected. The operators will be prompted to retype the
sections that differ until both copies agree. When the two copies agree it is assumed by
the computer that the data has been entered correctly.
d. Format checks: This checks any omission of details of items. Missing and duplicate
e. Existence check: These are checks on record fields to ensure that the data is valid for
f. Logical checks: these are used to ensure that, codes on the documents are acceptable in
g. Range checks: These are checks designed to ensure that the data in a certain lies within
Q6. a) SOPHIE
$
Basic Salary 88,000
Less Relief:
TAXABLE PAY 61,700
TAX PAYABLE
First 3,000 10% 300
Next 27,000 20% 5,400
Excess 31,700 40% 12,680
Tax payable 18,380
- 136 -
Q6 b.) LUCAS

$
Basic Salary 46,500
Less Relief:
TAXABLE PAY 32,675
TAX PAYABLE
First 3,000 10% 300
Next 27,000 20% 5,400
Excess 2,675 40% 1,070
Tax payable 6,770
Q7. MARNAT LTD
Net Profit 790,000

IT Equipments (50%X500, 000) 250,000
Equipments (25% X 900,000) 225,000 (475,000)
Tax thereon @22% (483,000 X 22%) 106,260

Sales 3,800,000
Net profit 790,000
- 137 -
Q8
b) Capital gains tax (CGT): A capital gains tax (abbreviated: CGT) is a tax charged
gains to give taxable capital gains.
employee's income. The amount withheld is determined partly by the employee's expec ted tax
2. Certainty: It should be certain, not arbitrary
4. Efficiency: it should be administratively efficient with a relatively small cost of
- 138 -
MARCH 2009
AUDITING & TAXATION

PART A
1. Distinguish between Internal Check and Internal Control. [10]
PART B
2. a) Explain the process of approving an invoice for payment. You are advised to refer
to the relevant source documents involved in this process. [10]
b) Explain the term audit sampling. [10]

a) Trade creditors
b) Bank balances
4. a) Outline the stages of an audit. [10]

b) Explain the role of an internal audit department. [10]
5 Explain the following terms:

a) Letter of engagement.
b) The true and fair view
c) The dismissal of an auditor
d) An audit plan [5 each]
PART C

TAX RATES
PERSONAL ALLOWANCES
- 139 -
6. Martha, aged 49, is a single person who earns $62,000 per year. Martha has paid 6% of
her gross pay
Into a qualifying pension fund. Martha has also paid $300 in respect of professional
subscriptions.
Norris, aged 52, is married (and claims the additional allowance) and earns $79,000.
Norris has paid 10% of his gross pay into a qualifying pension. Norris has also paid
$600 in respect of expenses which are allowable against tax.
TASKS
a) Martha [7]
b) Norris [8]
7. The following is the summarised internal profit and loss account of Marchon Ltd after
£
Sales 2,600,000
Depreciation of equipment (45,000)*
Depreciation of IT equipment (25,000)*
* Not included in either distribution costs or administration expenses.
Other information:
TASKS
Calculate Marchon Ltd‟s total taxable profit AND the total tax charge for the year. [15]

a) Tax evasion
b) The basic principles of taxation
c) Personal allowances
- 140 -
independent checks.
of the records.
Q2a. The following procedures are involved in approving payment of invoice

 There must be procedures for issuing requisition notes and responsible persons for such
requisition
 purchase order must be prepared and authorized
 Goods received must be examined in terms of quantity, quality and conditions of the
items.
 Check calculations of the supplier‟s invoice amount and ensure that they are correctly
priced.
 ensure payment voucher accompanies the invoice
 Ensure that expenditure is properly invoiced as shown by the purchase order.
Q2b. AUDIT SAMPLING
Sampling is the application of an audit procedure to less than 100% of the items within an
account balance or class of transactions for the purpose of evaluating some characteristic of all
the items within the balance or class of transactions.
Audit sampling refers to the examination of less than 100% of the units comprising a
population where (i) each unit has a chance of being selected, and (ii) the objective is to draw a
conclusion about the characteristics of the population. Audit sampling may be performed using
either statistical or non-statistical techniques. Statistical techniques, which are not dealt with in
these pages, additionally require (i) the units in the population to have the same chance of
being selected (ii) the items for examination to be selected randomly and (iii) the conclusion to
be drawn using tables or formulas based on probability theory
Sampling is performed because it is more efficient than testing 100% of a population. By

definition, any procedure that does not examine 100% of the items in question is a sampling
procedure.
- 141 -

Q3b. Bank balance: Audit procedures for bank balance

been credited
numbers
statement
Q3c: Freehold land and Buildings

The following procedures will be used in the verification of freehold land and buildings
 Obtain a schedule of fixed assets held by the company.
 Examine a sample of title deeds and land registry certificate, conveyance documents
from solicitors and leases. Pay attention to mortgages and securities over assets
 Inspect the minutes of directors to ensure that, all title deeds, conveyances, tenancy
 Check entries in the fixed assets register and trace back to source documents to ensure it
is properly stated at cost
 Review the companies policy for depreciation and ensure that land is not depreciated
 Check the calculations of the depreciation and ensure they are accurate
 Where freehold or leasehold assets are let to third parties, inspect tenancy agreement and
- 142 -
 Inspect assets to ensure their existence

 Check the classification and presentation of fixed assets
 Ensure that, the amount stated in the financial information is in agreement with the
accounting records.
Q3d: Loans made to other Business: the following procedures will be used in the verification
balance sheet date
repayment)
Q4a. . The stages in an audit include the following:

the client.
cost
- 143 -
and the date
Q4b. The role of the internal audit department:

The role played by internal department includes the following:
i. It helps reduce the amount of detailed work to be carried out by the external
auditors if it is found to be reliable
ii. They review the system of accounting, financial and other operations of the
iii. They Review and test compliances and accuracy of the companies policies

Q5b. True and Fair:


and fair
c) A true and fair view means appropriate classification and grouping of items... and
d) True and fair view implies that all statutory and other information is not only available
Kettle)
- 144 -
Q5c. Dismissal of an auditor: - There are a number of procedures and rules to be followed
before an auditor of a company can be dismissed or removed. The companies Act 1985
(section 391) has the following provisions/rules regarding the dismissal of an auditor
f. Auditors of a company can be removed by an ordinary resolution (i.e. a simple
majority) at an Annual General Meeting (AGM)
g. Written notices shall have been given to the company of the intention to move a
resolution to remove an auditor not less than 28 days.
h. On receipt of such intended resolution, the company shall forthwith send a copy to the
auditors concerned
i. The auditor shall have the right to make a written representation to the company and
j. The auditor shall have the right to speak at the meeting on the subject of his intended
removal and if the representation have not been sent to members, he has the right to
read it out at the meeting
Q5d Audit plan
The audit plan is a description of the expected scope and conduct of the audit. Auditors
initially prepare the audit plan during the audit planning stage, but may revise the plan
throughout the audit. As the audit plan is important evidence that the audit will be carried out
in accordance with auditing standards and practice statements, auditors document the audit
plan in the audit working papers . The audit plan includes the documentation of:
 The audit approach for each material account balance assertion and the basis for its
determination. Where an in-depth approach for any account balance assertion has been
selected, the audit approach in respect of each related class of transaction is also
documented.
 The time and activity budget, indicating the evidence which each audit staff member is
to gather and evaluate, when it is to be gathered and the expected time to be spent on
such activity.
 The staff planning schedule, indicating when and for how long audit staff members
have been scheduled to work on the engagement and what work they have been
scheduled to do. It may be expressed in hours or other units of time and then costed at
the audit firm's standard rate for each staff member, to provide a budgeted standard cost
for the entire audit engagement.
- 145 -
 (optionally) an audit stage planning schedule, setting out the weeks (or months) during
which the audit team will perform work in each audit stage and the estimated time the
audit team will spend on each activity in each audit stage.
Q6. a) MARTHA
$
Basic Salary 62,000
Less Relief:
TAXABLE PAY 49,980
TAX PAYABLE
First 3,000 10% 300
Next 27,000 20% 5,400
Excess 19,980 40% 7,992
Tax payable 13,692
Q6 b.) NORRIS

$
Basic Salary 79,000
Less Relief:
TAXABLE PAY 59,500
TAX PAYABLE
First 3,000 10% 300
Next 27,000 20% 5,400
Excess 29,500 40% 11,800
Tax payable 17,500
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Q7. MARNAT LTD
Net Profit 320,000

IT Equipments (50%X400, 000) 200,000
Equipments (25% X 600,000) 150,000 (350,000)
Tax thereon @21% (48,000 X 21%) 10,080

Sales 2,600000
Depreciation of IT equipments 25,000 (880,,000)
Net profit 320,000
Q8
a) Tax evasion: Tax evasion is the general term for efforts by individuals, firms, trusts and
other entities to evade taxes by illegal means.
Tax evasion usually entails taxpayers deliberately misrepresenting or concealing the true state
of their affairs to the tax authorities to reduce their tax liability, and includes, in particular,
dishonest tax reporting (such as declaring less income, profits or gains than actually earned; or
overstating deductions or expenses)
b) The basic principles of taxation:

2. Certainty: It should be certain, not arbitrary
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4. Efficiency: it should be administratively efficient with a relatively small cost of
c) Personal allowances:
d) Capital gains tax (CGT): A capital gains tax (abbreviated: CGT) is a tax charged
tax. The total capital gain is defined as the value of the asset whe n it is sold (or given away
etc.) minus its value when originally bought (or inherited etc.).
JUNE 2009
AUDITING & TAXATION

PART A
1. Exp lain the true and fair view. [10]
PART B
2. a) Discuss the different forms of control expected to be found in a co mputerized accounting

system. [10]
b) Exp lain the principal factors involved in planning an audit. [10]
3. Exp lain briefly how you would verify the fo llo wing items:
a) Debentures
b) Trade debtors
c) Freehold land and build ings
d) bank balances [5 each]
4. Exp lain the following terms:

a) A non-statutory audit
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b) Co mpliance tests
c) Test-checks
d) ICQ [5 each]
5 a) Exp lain the legal duties of an auditor. [10]

b) Exp lain the principal contents that an auditor should refer to in a letter of engagement. [10]
PART C

TAX RATES
10% on the first $3,000 of taxable inco me
20% on the next $27,000 of taxable inco me
40% on any further taxable inco me
PERSONA L A LLOWANCES
Up to the age of 49 a maximu m of 15% of gross pay can be paid tax free into a qualifying pension fund.
Fro m age 50 a maximu m o f 20% can be paid in.
6. Jero me, aged 43, is a single person who earns $56,000 per year. Jero me has paid 6% of his gross pay
Into a qualify ing pension fund. Jerome has also paid $600 in respect of professional subscriptions.
Nizam, aged 48, is married (and claims the additional allowance) and earns $69,000. Nizam has p aid 8%
of his gross pay into a qualifying pension. Nizam has also paid $800 in respect of expenses which are
allo wable against tax.
TASKS
a) Jero me [7]
b) Nizam [8]
7. The following is the summarised internal profit and loss account of Forrover Ltd after its first year of
trading:
£
Sales 2,600,000
Admin istration expenses (240,000)
Depreciat ion of equip ment (40,000)
Depreciat ion of IT equip ment (50,000)
Other in formation:
Original cost of IT equip ment 400,000
Corporation tax (i.e. company taxation) is charged at 20% of the taxab le profit.
Initial writing down allo wances are:
50% as regards IT equip ment
Included in the distribution costs are £8,000 wh ich are deemed non -allowab le.
TASKS
Calculate Forrover Ltd‟s total taxable profit AND the total tax charge for the year. [15]
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a) Tax avoidance
b) The collector of taxes
c) PA YE

Q1

and fair
e) A true and fair view means appropriate classification and grouping of items... and
f) True and fair view implies that all statutory and other information is not only available
Kettle)

supply any information about the company which he may or may not supp ly.

- 150 -
9. Title: an appropriate title such as „Auditor‟s Report‟ should be used to enable the reader
10. Addressee: The auditor‟s report should appropriately be addressed and this is us ually
11. Identification of financial statements: The report should identify the financial
12. Reference to Auditing Standards or practices: The report should also indicate the
13. Opinion of the financial statement: The report should clearly state the auditors opinion
14. Signature: the report should be signed in the name of the audit firm, the personal name
15. Auditor’s Address: The report should indicate the address and location of the auditor‟s
main office
16. Date of Report: the report should be dated.

Q3b. Provision for bad de bts:

The following audit procedures will apply:
7. Examine debts against which specific provisions have been made in line
with information from debt collection agencies or solic itors.
8. Where provision is based on aged analysis, check whether proper analys is
has been prepared and consider the reasonableness and consistency of the
formulas.
9. Check the make- up of the debtors balance
10. Consider whether cheques issued by debtors have been dishonoured for lack
of funds
11. Considers reports from solicitors to see if customers have been declared
bankrupt
- 151 -
12. Compare the current provision with the previous year and investigate any
material difference
Q3c. Stocks & work-in progress: Audit procedure for verifying stocks and work in progress
i) Review the system of internal control over stocks
j) Perform compliance tests on key controls relating to purchases, sales, creditors and
debtors
k) Physically check samples by counting selected items of stock
l) Observe stock taking (i.e. attend stock taking )
m) Check on slow moving, obsolete stocks
n) Compare the current years stock with previous years stocks and note any
significant changes
o) Confirm that the stock valuation is in line with SSAP 9
p) Verify each work- in-progress item with a job card.
Q3d. Bank balance: Audit procedures for bank balance

j. Appraise the system of internal control over bank
k. Examine the bank reconciliation statement and note the following
iv. That all uncleared cheques are cleared
v. That all payments or lodgments not credited at the balance sheet date have
been credited
vi. Investigate any exceptions
l. Check the arithmetical accuracy of the bank reconciliation statement
m. Trace cash payments and cash receipts to the various documents taking notes of cheque
numbers
n. Trace all contra entries, dishourned cheques, cancelled cheques
o. Vouch any transfers to the petty cash book and other bank accounts
p. Cast the bank column of the cash book
q. Send the standard bank letter and check the information received with the bank
statement
r. Consider the value of bank balance in the balance sheet
Q4a. Letter of Weakness: - (other names for this letter are management letter, letter of
comment, letter of recommendation, post audit letter, internal control letter). It is a letter sent
by the auditor to his client bringing to his attention the weakness found in the internal control
system during the audit. The letter points out the weaknesses in the internal control system and
gives recommendations to improve them. It is usually presented to the client in a meeting with
the auditor.

This is a letter sent by the auditor to his client at the beginning of any new aud it or
- 152 -
(owner).
Q4c. Management Audit: This is concerned with the examination of procedures laid down by
efficiency of management rather than on the financial statements. Areas covered by
d) Relationships between management and shareholders
e) Current standing of the organization in relation to its industry and the general public.
f) Relationship between management and staff etc

Q5a. Q5a. The auditor is under a statutory duty to report to the members of an enterprise as to
f. whether proper accounting records have been kept
g. whether all returns have been received from branches
h. whether or not the accounts prepared are in agreement with the records
i. Whether the information and explanations given in the directors report is consistent
j. Whether in his opinion, the financial statement presents a true and fair of the
under review.
From the above discursion, it can be concluded that Auditors works for the members
(shareholders) of the company but not the directors of the company
- 153 -
Q5b. The stages in an audit include the following:

the client.
cost
report as to whether the financial statement shows a true and fair vie w or not. The
and the date
Q6. a) ISAAC
$
Basic Salary 59,000
Less Relief:
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TAXABLE PAY 46,960
TAX PAYABLE
First 3,000 10% 300
Next 27,000 20% 5,400
Excess 16,960 40% 6,784
Tax payable 11,236
Q6 b.) SOPHIE
$
Basic Salary 68,000
Less Relief:

TAXABLE PAY 52,900
TAX PAYABLE

First 3,000 10% 300
Next 27,000 20% 5,400
Excess 22,900 40% 9,160
Tax payable 14,860
Q7. ADU-TUTU LTD
Net Profit 890,000
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Adjusted Net Profit 1,048,000
IT Equipments (50%X500, 000) 250,000

Equipments (25% X 900,000) 225,000 (475,000)
Tax thereon @22% (573,000 X 22%) 126,060
Sales 3,600,000
Net profit 890,000
Q8.REFER TO PREVIOUS NOTES
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MORE REVISION SERIES-PAST QUESTIONS AND ANSWERS ON AUDITING & TAXATION- ICM- UK (ACCOUNTING & FINANCE)

1. Post balance sheet events can be ignored. Discuss. [10]

3. Explain briefly how you would verify the following items:

4. a) Explain the role of the internal audit department. [10]

5. Explain the following terms:

SUGGESTED ANSWERS: JUNE 2005

e) The right before accepting appointment as an auditor of the company, to communicate

Q2b. The principal content of an auditor’s report

The auditor‟s report should include the following basic elements

Q3a. Freehold land and Buildings

h) Physically inspect assets to ensure their existence

Q3.c Stocks & work-in progress:

Q3d Trade creditors

Q5a. Letter of Engagement (or Engagement letter)

Q5b. Internal Control Questionnaire- ICQ

The main types of internal controls are

COMPUTATION OF TAXABLE PAY AND TAX PAYABLE

Less Personal allowance (single) (8,000)

Note how this is calculated throughout this handout.

CALCULATION OF TAXABLE PAY AND TAX PAYABLE

Less Personal allowance (single) (8,000)

INCOME RATE TAX PAYABLE

Q7. KRE LTD

CALCULATION OF TAXABLE PROFIT AND TAX PAYABLE

Net Profit before tax 450,000

Less Capital Allowance:

WORKINGS: PROFIT AND LOSS ACCOUNT

Q8a) The tax benefits of contributing to a pension plan:

b) PAYE: PAYE (Pay As You-Earn) is an amount collected by e mployers on behalf of the

4. Explain the following terms:

The following information applies to any personal tax calculations:

50% as regards IT equipment

8. Write short notes on THREE of the following:

SUGGESTED ANSWERS: SEPTEMBER 2005

Q1. True and Fair

True: This means in accordance with facts

Q3a. Trade Debtors:-

Q3b: Investment : verification of investment include the following audit procedure

7) Vouch the income received.

Q3c. Share Capital:

CALCULATION OF TAXABLE PAY AND TAX PAYABLE

Less Personal allowance (single) (8,000)

INCOME RATE TAX PAYABLE

CALCULATION OF TAXABLE PAY AND TAX PAYABLE

Less Personal allowance (single) (8,000)

INCOME RATE TAX PAYABLE

Q7. ROVE LTD

COMPUTATION OF TAXABLE PROFIT AND TAX PAYABLE

Less Capital Allowance:

IT Equipments (50%X200, 000) 100,000

Tax thereon @22% (375,000 X 22%) 82,500

WORKINGS: PROFIT AND LOSS ACCOUNT

5. a) Explain the legal duties of an auditor. [10]

8. Write short notes on THREE of the following:

SUGGESTED ANSWERS- DECEMBER 2005

Q2a. Controls in a computerized system can be group into two forms:

c) Agree opening balance with last years working papers.

i. Request for a list of all the balances of debtors.

Q3c: Freehold land and Buildings

Q5a. The duties of an auditor

COMPUTATION OF TAXABLE PAY AND TAX PAYABLE

Less Personal allowance (single) (8,000)

INCOME RATE TAX PAYABLE