EXAMINATION
FACULTY OF BUSINESS AND MANAGEMENT
PROGRAMME(S):
BHR, BBF, BPA, BAF, BTH, BRE, BSW
BPL, BOA, BIB, BBA, DHR, DTH, DRE, DBF, DBA, DSW, DPL
SESSION: DAY/EVENING/WEEKEND
MODULE CODE AND TITLE: LEVEL:
Auditing Two 2.1, 2.2, 3.1 AND 3.2
DATE: TIME:
December, 2024
DURATION: TOTAL MARKS:
6 HOURS 100
EXAMINER/ LECTURER: MODERATOR:
WANDERA GERALD OBBO MR. BILL NKEETO
INSTRUCTIONS TO THE CANDIDATE/ STUDENT
1. V-class is the ONLY official examination platform.
2. Questions must be attempted in the answer booklet/sheet provided on V-class.
3. All queries should be directed to the examiner, Head of Department, or Dean.
4. You have SIX HOURS to complete this paper. No exam answer sheet shall be accepted
after the 6 hours (the system has closed).
5. This is an OPEN BOOK (Online) examination.
6. Attempt 4 Questions in total. All questions carry equal marks (25 marks each).
7. Section A has TWO COMPULSORY case-based Questions and choose any 2 other
questions in Section B.
8. Read each question carefully before beginning to type/write your answers.
9. Review the grades assigned to each question of the examination and allocate your
time accordingly.
10. Review your answers carefully before submitting your examination.
11. After submitting your exam answer sheet, Cross-Check to ensure your examination was
attached and sent to V-class and received a confirmation message.
SECTION A
Compulsory – Attempt Both Questions
FINANCIAL ECONOMICS AND STATEMENT INVENTIVENESS:
Globally, financial statement fraud accounts for ten per cent of occupational frauds (Association
of Certified Fraud Examiners, Citation2020). While this is the least common of the three major
fraud categories (asset misappropriation, corruption and financial statement fraud), it is the
costliest, resulting in a median loss of United States (US) $954000 in 2020 (Association of
Certified Fraud Examiners, Citation2020). Concerningly, an increase in financial statement fraud
is anticipated in the post-COVID-19 and far pandemic period (Association of Certified Fraud
Examiners, Citation2021). Financial statement fraud undermines the quality of financial data
utilized to make economic decisions. Poor economic decisions lead to financial loss for the
stakeholders and may have negative consequences for an economy due to an inefficient
allocation of resources (Pududu & De Villiers, Citation2016).
South Africa (SA) is no stranger to financial statement fraud, with the Steinhoff and Tongaat-
Hulett scandals being two of the largest frauds in recent years. The Steinhoff scandal broke in
December 2017 with the resignation of then-CEO Markus Jooste and the commencement of an
investigation into accounting irregularities, including overstating revenue and hiding losses in
off-balance-sheet companies (Hlobo et al., Citation2022; Rossouw & Styan, Citation2019).
These revelations resulted in the share price declining from ZAR45.65 at the start of trading on 6
December 2017 to ZAR17.61 by the close of the day (Van Der Linde, Citation2022). By the
close of trading on 8 December 2017, the share price had declined to ZAR6.00 and continued to
descend (Rossouw & Styan, Citation2019). A few months later, in 2018, fraud at Tongaat-Hulett
was revealed. The company’s financial results had been overstated by approximately ZAR4.5
billion through the overstatement of revenue and assets and the understatement of expenses
(Hlobo et al., Citation2022; Muzata & Marozva, Citation2022).
In addition to the frauds mentioned above, the PricewaterhouseCoopers (Citation2020) Global
Economic Crime and Fraud survey reported that SA had the third-highest occurrence of
economic crime in the world, after India and China. The survey revealed that 60% of SA
companies had been affected by fraud or economic crime between 2009 and 2020, compared to
47% of companies globally. The survey indicated that the percentage of companies experiencing
accounting and financial statement fraud in SA had increased from 22% in 2018 to 34% in 2020.
Notwithstanding the prevalence of fraud in SA and the related economic costs, companies’
responses to fraud prevention and detection have been ineffective. In Sub-Saharan Africa (a
region that includes SA), an external audit is the most common anti-fraud control, despite only
being responsible for the initial detection of 4% of frauds (Association of Certified Fraud
Examiners, Citation2020). Concerningly, several financial statement frauds are committed with
the auditor’s knowledge (Mongwe & Malan, Citation2020). Only 58% of companies in SA
reported having performed an investigation of their most severe fraud, and 59% of such frauds
were never reported to the board of directors, 66% were not reported to the appropriate regulator,
and 72% were never disclosed to the auditors (PricewaterhouseCoopers, Citation2020).
Given the country’s high levels of fraud, SA provides a unique environment to study the
detection of financial statement fraud. The country has the third-largest economy in Africa and is
an emerging economy (World Bank, Citation2020), and is characterized by a small stock
exchange, an insider economy, concentrated ownership and weak legal enforcement. These
factors increase the risk of fraud (Pududu & De Villiers, Citation2016). Although investors in a
high-risk country should be able to better detect manipulated financial statements, SA investors
struggle to do so (Rabin, Citation2016). Despite these negative characteristics, SA has, until
2017, consistently ranked highly in the World Economic Forum’s (Citation2017) Global
Competitiveness Report in terms of strong investor rights, the strength of auditing and financial
reporting standards, protection of minority shareholders, efficiency of corporate boards and firm
ethical behaviour. Following the revelations around the Steinhoff scandal, SA’s rankings in the
Global Competitiveness Reports declined markedly post-20
Given SA’s prevalence of fraud, the inability of investors to detect misrepresented financial
statements, and the limited academic literature on fraud detection,
1a) Using the above extract and your knowledge of auditing identify how frauds can be
committed in the economic financial or system and any roles that can be played by the auditors
as safeguards to the challenges of frauds? (15Marks)
1b) Using your knowledge of the phases in the audit of financial statement, comprehensively
under the following headings underscore your considerations for audit in avoiding any
misstatement in the financial statement isometrics.
I. Planning
II. Risk Assessment
III. Substantiative testing
IV. Audit strategy and plan
V. Gathering audit evidence and control Testing (10Marks)
CASE STUDY TWO
You have been given the financial statements of Mid Field a multinational company situated in
South Sudan with its Headquarters in Uganda. The financial information is here as below
Midfield Income statement as at
31/12/2023
Particulars
Revenue USD
Net sales 11,750,000
Interest Revenue 2,900,000
Other revenue 5,600,000
Total revenue 20,250,000
Cost of goods sold
Material 3,500,000
labour cost 2,000,000
overhead 500,000
Total cost of goods 6,000,000
Gross profit 14,250,000
Operating expenses
Selling expesnes 3,450,000
Administrative expenses 2,680,000
General expenses 750,000
Opex Total 6,880,000
EBITDA=Gross profit -Opex 7,370,000
Depreciation& Amortisation (DA) 620,000
Operating Profit EBIT
EBIT=EBITDA-DA 6,750,000
Interest Expenses 460,000
Earning before Tax (EBT)
EBT=Operating profit-Interest expense 6,290,000
Corporate Tax 4,252,500
Net income 2,037,500
In reviewing financial information given above you detect that the net sales, cost of goods sold,
operating expenses, depreciation and selling expenses are all misreported in matters that
currently pervasive and financial creative in context
2a) Using your findings, discuss matters of the auditors’ consideration for fraud risks as guided
by different international standard of Auditing including IAS 240 (15 Marks)
2b) Document significance of exercising Professional Skepticism in an audit climate? (10
Marks)
IAS 250 requires the auditors to obtain understanding of legal and regulatory framework
applicable to the entity and how entity is complying with such laws and regulations.
SECTION B
Attempt TWO Questions
3a) Using your knowledge as an audit expert state and discuss the audit procedure that should be
performed to help identify instances of non-compliance with other laws and regulations that may
have material effect on the financial statements. (10 Marks)
3b) Audit Procedures required to be performed by the auditors when Non-Compliance Is
Identified or Suspected (10 Marks)
3c) Reporting procedures required to be done by auditor of the Identified or Suspected Non-
Compliance (5 Marks)
MTN Uganda has a lot of business activities that require management to take serious
consideration to ensure safety and therefore objectives of the business to be achieved.
4a) Discuss in details what in internal control is and components that should be considered in
business environment like that of Mobile Telecom Networks. (15 Marks)
4b) In your view as an auditor why should management of any organization consider internal
controls as important in any business environment (10 Marks)
5a) write short notes on the following for audit purpose in business operations.
I. Assets,
II. liability,
III. Non-operating expenses
IV. interest income
V. owners’ equity
VI. Fixed asset register (10 Marks)
5b) With precision and as a senior auditor present to management of your choice on the
following financial statement assertation highlighted below mentioning some of the users who
could be interested?
I. Completeness
II. Occurrence
III. Rights and obligations
IV. Accuracy
V. Cut off
VI. Valuation and allocation
VII. Existence
VIII. Classification and understandability (15 Marks)
Threats to auditors’ independence are real and will always be met in the auditing exercise
6a) Identify some of the threats to auditors that you as an auditor you anticipate to encounter and
possible safeguards to moderate the work of auditors (10 Marks)
6b) Identify and discuss some of the basic principles expected of professional auditors in the
industry (10 Marks)
6c) Address the Audit committee on rights and duties as an auditor in the audit practice (5
Marks)
-------Good Luck-------
