Kibabii University has approached you as an auditor to
investigate on the financial position of Kibabii Diploma
College which has been recently advertised to be sold and your client is waiting for your advice to whether to buy or not. Enumerate the steps to be undertaken.
i.
Prior to commencement detailed enquiries concerning Kibabii
Diploma College. a) I have to acquire a letter of appointment (engagement letter) to set him out with terms of appointment. The letter explains; The purpose and aim as to why you are taking an investigation. Gives instructions from the client: explaining the purpose, degree of secrecy required, whom to approach as an auditor, whom to report to, time frame and datelines. b) Preliminary review; this brief review helps one to decide whether the proposal is viable or not. It should be abandoned immediately if its not feasible to save the clients resources and time, but if feasible decide on whether the clients instructions are appropriate which may help you determine on the size of investment; either to be reduced or increased. The review covers: The reason for the vendor selling the business Capital resources in the business How dependent is the vendor The key personnel and the agreement service The degree of dependence on particular customers The rate of return compared to similar businesses Type of the business; its vulnerability and how seasonal it is. c) Background information; I have to decide what the kind of information is required and how it should be presented to the client. This entails: The scope and purpose of investigation, period on review, sources of information and the references to the facts. General information including the history and nature of the business, raw material and suppliers, facilities, premises, management, employees, accounting and costing system. Trading results which includes the sales, gross profit, net profits and dividends. d) I should seek permission from the vendor to get information from the auditors/accountants of Kibabii Diploma College to obtain supporting schedules. I have to get audited accounts, tax computation of previous years. e) Bring the client and the proprietor in to contact as a basis for future negotiations and obtain maximum cooperation for the investigation work. f) I have to find out the main reasons as to why Kibabii Diploma College is on sale. g) I need to get a letter of authority to help me approach solicitors, lenders and bankers of the College to be purchased.
h) Establish relationship with the client, subject of investigation and I should try to get professional advisor so that to be approached by vendor for advice.
ii) During the actual investigation work.
Here I have to:
a. Decide the duration to be taken (months, years) b. Get copies of detailed accounts, ensure consistency and if not I have to make adjustments. c. Review the accounts critically to discover window dressing in view of the fact that Kibabii Diploma is contemplating to be sold. d. Verify values of assets, in particular ascertain the realizable value of stocks and sundry debtors. e. Ensure that all known liabilities have been disclosed in the accounts including the contingent liabilities. f. Consider and make adjustments which will take in to account the following; Past trading figures which might past income or expenditure and not applicable in the future. g. Make sure that the stock have not been overstated by overvaluation, sales have not been overstated I.e use factitious documents, purchases not understated, assets- depreciation may be understated. h. Establish the reliability of accounts i.e analysis of sales, management policy and tax position.
KIBABII
UNIVERSITY
NAME: ANTONY N. MUKHOLI
REG NO.: DBM/0601/15 FACULTY: SOBE COURSE CODE:DAB COURSE TITLE: PRINCIPLES OF AUDITING TASK: ASSIGNMENT LECTURER: MR. BARASA WANYONYI
KIBABII
UNIVERSITY
NAME: LILIAN N. MASINDE
REG NO.: DBM/0583/15 FACULTY: SOBE COURSE CODE: COURSE TITLE: PRINCIPLES OF AUDITING TASK: ASSIGNMENT LECTURER: MR. BARASA WANYONYI