the role of profit in a free market economy

The earning of profit is a necessary element in the operation of a free enterprise economy. It enhances the efficiency of a free market system in the following ways: • Normal profit is a cost of production; it is the cost of the entrepreneurship factor of production. It is the minimum amount that the entrepreneur

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The company has been audited by your firm for a number of years and this is the second year you have been responsible as manager for the audit. However, owing to your responsibilities for other audits you are only intending to make periodic visits to the company during the course of the audit and you will not be involved in any of the detailed audit work. Required Describe the way in which you would control the audit from the commencement of the work by the audit staff to the review stage by the partner immediately prior to him signing the audit report

b) Ways to control the audit 1. Scoping of the work and delegation First I would determine the scope of the work to be carried out and our client‘s expectation. Basing on this I will identify the staff that I will require to carry out the work. In doing this I will need to consider,

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A Company wishes to change from an old computerized system to a new computer based accounting system. Explain how and why both systems should run parallel prior to the change over to the new system

How and why both systems should run parallel prior to the change over to the new system. How The client should continue to process the information using the old system while at the same time implement the new system. The output from the new system should be compared with the output from the new system.

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You are the manager responsible for the audit of ABC Company, which has a turnover of KShs 750 million. The company has been audited by your firm for a number of years and this is the second year you have been responsible as manager for the audit. However, owing to your responsibilities for other audits you are only intending to make periodic visits to the company during the course of the audit and you will not be involved in any of the detailed audit work. Required; State the matters you would consider in planning the audit, prior to the commencement of the detailed audit work

Matters to consider when planning the audit In planning the audit the auditor will need to consider the following: 1. Understanding the accounting and internal control systems The auditor‘s cumulative knowledge of the accounting and in ternal control systems and the relative emphasis expected to be placed on tests of control and substantive procedures. 2.

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Explain the importance of having proper systems documentation

Importance of system documentation. i. Provides a basis for management to review the system prior to authorisation ii. Staff training on the use of system. iii. Implements smooth personnel changes and avoiding the problem that key employees may take with them all knowledge about the way the system works. iv. Revising existing systems and programs

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In carrying out an audit, the auditor appraises and tests the system of internal control in order to ascertain that it is capable of processing transactions or determining quantities and values completely and accurately. The auditor further carries out substantive tests in an attempt to ensure that the transactions, assets and liabilities recorded in the accounting records upon which the figures in the financial statements are based, are completely and accurately recorded.Required: List and briefly explain the substantive tests the auditor would carry out to verify the values attributed to: Trade debtors in a company’s financial statements and Trade creditors in a company’s financial statements

You are required to List and briefly explain the substantive tests the auditor would carry out to verify the values attributed to: i) Trade debtors in a company’s financial statements. Substantive tests are the tests that the auditor carries out to obtain evidence as to the completeness and validity of the balances reported in the

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You are carrying out the audit of ACB Computers limited for the year ended 31 December 2003. The company assembles microcomputers purchased from the Far East and sells them to retailers, and to individuals and other businesses. In the current year, there has been a recession and strong competition, which has resulted in a fall in sales and the profits. This has led to a trading loss and the company is experiencing going concern problems. Required; c) State the parties who may successfully sue you as auditor for negligence, and consider the arguments you could include in your defense when: The financial statements of ACB Computers Limited for the year ended 31 December 2003 do not mention any going concern problems and your audit report on these financial statements was unqualified and The company fails on 15 February 2004

Since ACB Computers Limited has failed within a year and the auditor had given an unqualified report, certain parties may be able to successfully sue him for negligence. The decision in the Caparo case is that only the company and the shareholders as a body can bring a claim for negligence against the auditor. It

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In the context of a computer based accounting system, explain the meaning of the following terms: Application controls and General controls

Application controls These are control procedures over the accounting system designed to provide reasonable assurance that all transactions are authorised, recorded and processed completely, accurately on timely basis. Application controls may be manual or programmed and are include • Controls over input • Controls over processing • Controls over output • Controls over master files

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The purchase accounting department receive the purchase invoice, check them to the purchase order and goods received note and post them to the purchase ledger. At the end of each month, payments are made to suppliers. The purchase ledger is maintained on a microcomputer. The main sundry creditors and accruals at the year-end include: a) Wages accruals and PAYE; b) VAT; c) Interest on loans overdrafts, telephone and electricity. Most employees‘ wages are paid weekly in arrears. You are required to describe in detail the audit work you will carry out to; Check suppliers‘ statements to the balances on the purchases ledger

The work I will perform in checking supplier‘s statements to the balances on the purchase ledger will include:  I will assess the system of control in the purchases system and its credibility. This will be based on the results of my tests of control, other investigations an my experience in previous years. Where the purchases

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