Auditing and assurance revision question and answer

Auditing and Assurance Revision Questions and Answers

a) Your audit firm, Kimani and Associates has been contracted the government to audit the procurement system followed the government.

i) Identify the likely risk areas that your firm may encounter in the audit.(5 marks)

ii) Suggest possible measures the government can implement to strengthen the internal control system on procurement. (5 marks)

b) Outline the audit procedures an audit firm should follow in the verification of a manufacturing company‘s liabilities. (10 marks)
(Total: 20 marks)

i) Kimani and associates
i) Key risk areas in government procurement system
– Fraudulent payments to suppliers
– Excessive fees for goods and services procured
– Inaccurate payments for goods and services
– Delays in paying for purchases resulting in damage to government reputation
– Breach of regulations, legal or company requirements

– Collusion between government procurement officers and suppliers for fictitious payments.
– Inflated prices for goods and services through collusion between suppliers and government procurement officers
– Payment for goods that were never ordered and delivered
– Non-compliance to procurement processes and procedures
– Lack of clearing defined procurement policies, processes and procedures
– Complex procedures not communicated to relevant procurement officers

ii) Possible measures to improve procurement system.
– Establish policy and procedures for procurement
– Policies, procedures for procurement properly communicated at all levels of management
– Set authorization and approval procedures for procurement with different levels covering different cost levels
– Procedures for negotiating the best deals in the market place for a place for specific bulk purchased
– Set up of a dedicated procurement section in which case all procurement requests should be made through this unit to maximize the benefit of any negotiated deals
– Have an approved list of suppliers, ensuring that no purchases made outside of that list without authorization
– Effective payment procedures
– Exception reports showing where transactions have not been authorized, where they fall outside of the established procedures.

b) Audit procedures for audit of liabilities
– Obtain a schedule of payables, with appropriate age analysis and check this with the control account and purchase ledger
– Separate debit and credit balances, debit balances being included in receivables. This is called grossing up
– Review the individual accounts with the largest throughput of transactions during the period – not necessarily the largest balances at the end of the year
– Review year end cut off procedures for purchases
– Review internal control over purchase system which ensures that all goods received are properly recognized as liabilities of the company
– Select a sample of supplier balances which should be based on the reciprocal of purchases turnover in which case monetary sampling unit should be used.
– Check whether all the liability balances are made up of specifications outstanding within a reasonable period
– Check whether all items have been authorized for payment
– Agree the liability amounts, reconcile with supplier statements
– Consider the need to perform a circulation of accounts payable, seeking direct confirmation of amounts due
– Review payments to payables and other liabilities just after the year end
– Perform analytical procedures on payables, comparing age analysis with previous periods and payable days.

= payables x 365 cost of sales

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