Marking Scheme for Advanced diploma year 111

Auditing and investigation- 6th Semester

No. Details Marks

Question no. one. Total marks =20 marks Full mark of 3
a) Management Consultant is an examination of the health of a will be issued if
business by a specialist is called management consultancy. student
demonstrate
Management consultancy relates only to specific problems and h/his skill in
provides solution only to those problems which are posed to it. It management
and is problem oriented. is always adhoc while involving external consultancy
experts. (4marks) idea
b) (4 marks) One mark for
S/No. MANAGEMENT AUDIT MANAGEMENT CONSULTANCY each point of
1 Institutional or individual Problem oriented. differentiation
oriented between
2 Overall review of all Dealing with specific problems and management
managerial policies, their solutions. consultancy
procedures and actions
3
and
Periodical but regular Casual and adhoc
4 Internal experts External experts.
management
audit
c) Step one diagnosing the problem - From the data given by Here student
customer it is clear that gross profit is affected by costs of is test his/her
production and not sales (as some time sales dropping are the ability to
sources of problem but not in this case) a constant increase in analyze the
manufacturing costs in clear indication that management is not situation and
efficient in production and acquisition of raw material and labor providing
cost. good solution
Possible reasons for high costs: on the said
1. It may be is inefficiency in finishing of bottles, problem.
2. Raw materials including bottles are purchased at high costs Discussion
comparatively, with example
3. There is an increase in production cost without will earn mark
corresponding increase in selling prices. easily.
What to do then? Answer is just
1. Client should buy read made bottles and compare the price an indicative;
with one that is finished within client factory, student may
2. Raw material should be purchased in big quantity to enjoy site other
bulk discount, relevant case.
3. Pay supplier on time to utilize cash discount,
4. JIT stock system if applicable could reduce storage costs.
5. Check possibility of increasing selling price but watch out
you competitors
6. Timing of purchase to avoid adverse exchange rate that will
render production costs to rise
7. Watch out company’s overheads, uses of Generator should
avoided unless is necessary.
8. Think about changing more automated machines rather than
old version. (12 marks)

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 Marking Scheme for Advanced diploma year 111
Auditing and investigation- 6th Semester

Question no. two. Total marks =20 Student is

a) expected to
Money laundering, at its simplest, is the act of making money that demonstrate
comes from Source A look like it comes from Source B. In that, h/she has
practice, criminals are trying to disguise the origins of money a Knowledge
obtained through illegal activities so it looks like it was obtained on money
from legal sources. Otherwise, they can't use the money because it laundering
would connect them to the criminal activity, and law-enforcement
officials would seize it. It is the process of making dirty money to
appear good one.
The most common types of criminals who need to launder money
are drug traffickers, embezzlers, corrupt politicians and public
officials, mobsters, terrorists and con artists
( 5 marks)
b) Stages/process of money laundering Full marks for
i. Placement - At this stage, the launderer inserts the dirty discussion of
money into a legitimate financial institution. This is often in these three
the form of cash bank deposits. This is the riskiest stage of process of
the laundering process because large amounts of cash are money
pretty conspicuous, and banks are required to report high- laundering
value transactions.
ii. Layering - Layering involves sending the money through
various financial transactions to change its form and make it
difficult to follow. Layering may consist of several bank-to-
bank transfers, wire transfers between different accounts in
different names in different countries, making deposits and
withdrawals to continually vary the amount of money in the
accounts, changing the money's currency, and purchasing
high-value items (boats, houses, cars, diamond) to change
the form of the money. This is the most complex step in any
laundering scheme, and it's all about making the original
dirty money as hard to trace as possible.
iii. Integration - At the integration stage, the money re-enters
the mainstream economy in legitimate-looking form -- it
appears to come from a legal transaction. This may involve
a final bank transfer into the account of a local business in
which the launderer is "investing" in exchange for a cut of
the profits, the sale of a yacht bought during the layering
stage. At this point, the criminal can use the money without
getting caught. It's very difficult to catch a launderer during
the integration stage if there is no documentation during the
previous stages.

c) Symptoms of money laundering Full mark for

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 Marking Scheme for Advanced diploma year 111
Auditing and investigation- 6th Semester

1. Secretive client: the client who is reluctant to provide any five four
details of his identity and back ground. points each at
2. Untypical instruction: the client who has obvious 1.25 mark
reasons for using particular company.
3. Lack of economic purposes; the client’s transaction
lacks or includes steps which lack any obvious
economic purposes.
4. Nominees and trusts behind the fund management,
transfer, deposition etc
5. Holding client asset without convincing reasons
6. Suspect terrorist i.e country where drug production or
trafficking may be prevalent
(5marks)
d) Effects of money laundering. Student is
1. Social effects expected to
2. Economic effects discuss these
3. Taxation effects effects very
4. Security effects shortly
(5marks)
Question no. three, total marks=20
a) i Economy may be defined as “minimizing the cost of resources used
for an activity having regard to the appropriate quality”. Economy
relates to all types of resources such as physical, financial, human
and information. The question of economy is relevant to the
acquisition of resources. Auditors try to determine whether the
resources have been acquired in the right amount, at the right place,
and the right time, of right kind and at the right cost.
This by itself is not very easy. It presumes that there are standards
available to judge whether considerations of economy were kept in
view in acquiring resources. One example of a standard for
economy is to accept the lowest open bid for buying an asset.
(6
ii marks) Indicator of Economy:
1. Decisions are made with cost consciousness.
2. Poor quality output due to low quality input.
3. Suspension/delay in implementation of decisions due to rise
in market process.
4. Nonpayment/Settlement of certain obligations e.g. staff
overtime without justifiable reasons.
5. Existence of savings not matching with the level of
performance.
6. General, management becomes too conservative in making
decisions due to financial implications of those decisions.
(4 marks)

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 Marking Scheme for Advanced diploma year 111
Auditing and investigation- 6th Semester

b) Usefulness of the concept in public sector audit. Just points

mentioning.
1. The public sector in Tanzania is generally malfunctioning 2 marks for
due to mismanagement, misuse, and underutilization of every point
resources both financial, non-financial and human mentioned
resources.
2. The government budget is characterized of persistent
deficits due to excessive expenditures of the votes and
institutional budgets
3. Public officers are overstaffed due to uncontrolled
recruitment.
4. Fraud and embezzlement are rampant in the public sector
coffers due to lack of accountability
5. Public buildings and other tools eg. Vehicles are dilapidates
and become excessively obsolete due to lack of
maintenance, care, and misuse.
6. Government stores are heavily misused or stolen due to lack
of effective controls.
7. Some individuals are becoming millionaires in the public
system due to rampant irregularities in the use of public
moneys and other resources and also due to irregular
schemes of awarding tenders and opportunities.
8. Abuse of power, misuse of authority, override of regulatory
schemes and disregard of the law
a) Question no. four Two marks
1. Self-interest; for each point.
2. Self-review; One for
3. Advocacy; mentioning
4. Familiarity; and and other for
5. Intimidation. . giving
examples
1. Examples of circumstances that may create self-interest
threats include, but are not limited to:
• A financial interest in a client or jointly holding a financial
interest with a client.
• Undue dependence on total fees from a client.
• Having a close business relationship with a client.
• Concern about the possibility of losing a client.
• Potential employment with a client.
• Contingent fees relating to an assurance engagement.
• A loan to or from an assurance client or any of its directors
or officers.

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 Marking Scheme for Advanced diploma year 111
Auditing and investigation- 6th Semester

2. Examples of circumstances that may create self-review

threats include, but are not limited to:
• The discovery of a significant error during a re-evaluation
of the work of the auditor.
• Reporting on the operation of financial systems after being
involved in their design or implementation.
• Having prepared the original data used to generate records
that are the subject matter of the engagement.
• A member of the assurance team being, or having recently
been, a director or officer of that client.
• Performing a service for a client that directly affects the
subject matter of the assurance engagement.
3. Examples of circumstances that may create advocacy
threats include, but are not limited to:
• Promoting shares in a listed entity when that entity is a
financial statement audit client.
• Acting as an advocate on behalf of an assurance client in
litigation or disputes with third parties.
4. Examples of circumstances that may create familiarity
threats include, but are not limited to:
• A member of the engagement team having a close or
immediate family relationship with a director or officer of
the client.
• A member of the engagement team having a close or
immediate family relationship with an employee of the
client who is in a position to exert direct and significant
influence over the subject matter of the engagement.
• A former partner of the firm being a director or officer of
the client or an employee in a position to exert direct and
significant influence over the subject matter of the
engagement.
• Long association of senior personnel with the assurance
client.
5. Examples of circumstances that may create intimidation
threats include, but are not limited to:
• Being threatened with dismissal or replacement in relation
to a client engagement.
• Being threatened with litigation.
• Being pressured to reduce inappropriately the extent of
work performed in order to reduce fees.
(10
marks)

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 Marking Scheme for Advanced diploma year 111
Auditing and investigation- 6th Semester

b Gifts and Hospitality Full marks for

discussion of
1. A professional auditor, or an immediate or close family the matter
member, may be offered gifts and hospitality from a client.
Such an offer ordinarily gives rise to threats to compliance
with the fundamental principles. For example, self-interest
threats to objectivity may be created if a gift from a client is
accepted; intimidation threats to objectivity may result from
the possibility of such offers being made public.
2. The significance of such threats will depend on the nature,
value and intent behind the offer. Where gifts or hospitality
which a reasonable and informed third party, having
knowledge of all relevant information, would consider
clearly insignificant are made a auditor may conclude that
the offer is made in the normal course of business without
the specific intent to influence decision making or to obtain
information. In such cases, the auditor may generally
conclude that there is no significant threat to compliance
with the fundamental principles.
3. If evaluated threats are other than clearly insignificant,
safeguards should be considered and applied as necessary to
eliminate them or reduce them to an acceptable level. When
the threats cannot be eliminated or reduced to an acceptable
level through the application of safeguards, a auditor should
not accept such an offer
A auditor should not engage in any business, occupation or activity
that impairs or might impair integrity, objectivity or the good
reputation of the profession and as a result would be incompatible
with the rendering of professional services. (10 marks)
Question no. five. Student
a)  An enquiry into the state of affairs of a business for a should
special purpose. provide clear
 It is a searching examination of the accounts and records of definition of
a business to know its actual earning capacity and its real investigation
financial position in order to
 Investigation involves enquiry into facts behind the books earn full
and accounts, into the technical financial and economic marks
position of the business or organization

( 4 marks)

b) Investigations may be broadly divided into three classes: Two marks

1. Investment or finance Investigation on behalf of: for every
i. A prospective investor who consider point. One for
• purchasing, listing and
• becoming a partner, other for

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 Marking Scheme for Advanced diploma year 111
Auditing and investigation- 6th Semester

ii. flotation of a company to take over a business explaining

• A company which is purchasing a business
• A creditor who is asked to give or extend existing credit, or
to lend money to the business
2. Mismanagement
This investigation may be undertaken on behalf of a:
 Committee of creditors, where insolvency is suspected;
 Committee of members, where mismanagement is alleged;
 Trustee or beneficiary under the relevant statute.

3. Fraud and Corruption

This investigation may be undertaken on behalf of the:
 Proprietors, to detect or to ascertain the extent of
defalcations;
 Revenue and Tax authorities, where evasion of tax is
suspected;
 Bribery, and other similar crimes committed by people
holding positions of trust
(10 marks)
c) 1. Real Earinging Capacity Student is
expected to
 Actual profit may be different from what shown in P/L, mention these
Redrafted P/L in tabulated form, Making adjustments to three points
prepared P/L., Be in position to make comparisons to and by
previous years, Will the business continue to earn same explaining,
profit after acquired? he/she should
earn 9 marks
 Deductions from net profit one marks is
for giving
 Capital profit or exceptional in nature, Income from assets examples
not taken over by the purchaser, Rent if the building is not suitable for
taken over by purchaser, Reasonable sums of managerial this case.
remuneration if not added before, Capital profit or non-
recurring in its nature, Income from assets not taken over by
the buyer, Rent if building is not taken, Reasonable sums of
managerial remuneration, Any additional expenditure that
purchaser going to incur after purchase,

 Additions to profits:

 Capital losses or loss of exceptional nature, Any capital

expenditure charged to the revenue, Interest on borrowing
when buyer does not need it, Rent is the buyer going to buy
the building as well, Any excessive provision for bad debt
and other, Any excessive cash discounts, Charges not
incidental to business, Investigator will pay attention on:

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 Marking Scheme for Advanced diploma year 111
Auditing and investigation- 6th Semester

Gross profit to sale ratio, stock to sale ratio, Trade expenses

to sale ratio, Check any variations in those period covered
under investigation, Falsification to accounts

2. Intrinsic worth of the business

Financial stability of the business, Check proper valuation on assets
and liabilities if they are going concern (not over or under
valuation), Goodwill valuation, Adequacy of provision for depr.
Bad and doubtful debt. Adequacy of capital employed in business,
WC vs. their requirements and availability, Loan capital to fixed
assets of the business, Assets not to be taken ( asset not to
taken/t/assets), Check obsolete asset, Arrange B/S for required
period in tabulate form, Compare movement of various assets
during the period, Check debtor to sales ratio and trends (speed
whereby account are collected), Check creditor to purchases ratio
and trends (trends of business toward prompt payments), Capital
fixed up in assets, Carrying out a detailed vouching of the capital
items to determined that assets with revenue nature have been
capitalized

3. Future prospects of the business

Inquire into number of and nature of the customers, Dependence of
existing owner to the business, customers and suppliers willingness
to support new bus, Possibility of competition, Does old owner
continue with same business in direct magnitude with new
business, What is the market goodwill of the business, Skilled and
semi-skilled workers, Lease right, time to finish contract, Contract
with the employees, redundancy costs, years of the services
remained, If is limited company: authorized, issued shares capital,
Calls in arrears, uncalled liability, Dividend paid and in arrears,
Creditors-security issued for loan
( 10 marks)
End of the paper

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