QUESTION 3 (1) Adom Hotels operates a chain of 18 hotels located across the country. Each hotel has bedrooms, a restaurant and leisure club facilities. Most visitors to the restaurant and leisure club are hotel guests; however, these facilities are open to the public as well. Hotel guests generally charge any costs to their room but other visitors must make payment directly to the hotel staff. Page 3 of 5 During the year, senior management noticed an increased level of cash discrepancies and inventory discrepancies, and they suspect that some employees have been stealing cash and goods from the hotels. They are keen to prevent this from reoccurring and are considering establishing an internal audit department to undertake a fraud investigation. Required: (a) Explain how the new internal audit department of Adom Hotels could assist the directors in preventing and detecting fraud and error. (5 marks) (b) Describe additional functions, other than fraud investigations, the directors of Adom Hotels could ask the internal audit department to undertake. (5 marks) QUESTION 3 (ii) Koftown Flowers operates 25 food supermarkets. The company's year-end is 316 December 2019. The audit manager and partner recently attended a planning meeting with the finance director and have provided you with the planning notes below. You are the audit senior, and this is your first year on this audit. In order to familiarise yourself with Koftown Flowers, the audit manager has asked you to undertake some research in order to gain an understanding of Koftown Flowers, so that you are able to assist in the planning process. He has then asked that you identify relevant audit risks from the notes below and also consider how the team should respond to these risks. Koftown Flowers has spent GHS1.6 million in refurbishing all of its supermarkets; as part of this refurbishment programme their central warehouse has been extended and a smaller warehouse, which was only occasionally used, has been disposed of at a profit. In order to finance this refurbishment, a sum of GHS1.5 million was borrowed from the bank. This is due to be repaid over five years. The company will be performing a year-end inventory count at the central warehouse as well as at all 25 supermarkets on 31" December. Inventory is valued at selling price less an average profit margin as the finance director believes that this is a close approximation to cost. Prior to 2019, each of the supermarkets maintained their own financial records and submitted returns monthly to head office. During 2019 all accounting records have been centralised within head office. Therefore at the beginning of the year, each supermarket's opening balances were transferred into head office's accounting records. The increased workload at head office has led to some changes in the finance department and in November 2019 the financial controller left. His replacement will start in late December. Required: (a) List FIVE sources of information that would be of use in gaining an understanding of Koftown Flowers, and for each source describe what you would expect to obtain. (5 marks) Page 4 of 5 (b) Using the information provided, describe FIVE audit risks and explain the auditor's response to each risk in planning the audit of Koftown Flowers. (5 marks) (Total = 20 Marks)
