Revision question on auditing and assurance NBAA C2 May 2017

Michael retired six months ago from public service and received retirement lump sum benefits amounting to TZS 60 million. Michael used part of retirement benefits in buying a house that he is living in and invested the remaining balance of TZS 35 million in the business in the business of importing and selling motor vehicle spare parts. He sets up Imara spare ltd and it was the only spare shops in the locality.

Michael rents a shop at the city center were rentals are relatively high and keep rising. He employs five staff and he has nominated one of them to manage the business as he has dedicated most of his time out of town marketing his business.

Tanzania has recently experienced increase in investments and plants. Motor vehicle industry is one of the sector which has been affected as one of the major Chinese vehicle manufacturing company has recently set up plant in Mbagala Charambe. The company imports various materials such as car half-cut in bulk and therefore enjoy bulk purchase discounts and is given longer credit periods. The competitor converts the materials into spares which are ultimately offloaded in the city at cheaper prices than that offered by Michael.

Michael imports its spares largely from Japan, the UK and Singapore where he pays in foreign currency, mainly in United States dollars which has recently appreciated over the Tanzanian shilling.
As one of his marketing strategies Michael sells his products on credit to customers whose purchases are at least TZS 3,500,000. This strategy has paid off by increasing sales revenue but the business is now facing a deteriorating cash flow position and Michael has now been forced to borrow TZS 35 million from his bankers so as to maintain his working capital. The loan has been agreed at a floating interest rate and Michael secured the loan by floating charge of the business inventory.

Michael does the ordering of all spares and once the items are received the shop manager is tasked with the responsibility of storage and record keeping of all inventories as well as cash collections. The manager monitors the stock and when the stock decreases he he calls Michael who immediately orders more stock. The manager is considered very honest and therefore no inventory count is really undertaken and the manager prepares the schedule of closing inventory of the spares in the period end. No stock loss has so far been reported or come to the attention of Michael.

All cash received during the week is kept in the safe in the shop and is handed over to Michael on weekly basis. At the end of the month, Michael pays staff from the cash collections for the last week of the month and no record of money paid are maintained.
Michael has not been deducting PAYE and social security contribution from the employees emoluments, although the emoluments of all the employees are above the exempt threshold. The Tanzania Revenue Authority as well as Social Security Regulatory Authority have started their inspections on compliance to tax and social security regulations respectively and there are stiff penalties for non compliance. The law provides that employers who have not submitted statutory deductions for a period exceeding six (6) months may be liable for revocation of their business licenses.

    • Suggest five suitable controls that should be put in place in Imara spares Ltd.
    • for each control suggested in (i), state the control objective.
  • explain five business or other risk in Imara spares Ltd.

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