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