QUESTION 6

Lusaka City Council has been in existence as a local authority for a period of seven years now. Most of its income is generated from ground rates, rentals of its housing stock and levies from a public bus station. Other income is from fees it collects from public car parks it manages.

Due to changes in government policies, almost half of the councils income has been halved due to the fact that most of the housing stock had been sold to the sitting tenants resulting into loss of its main revenue.

A large number of households have stopped paying for garbage collection. Consequently, its financial position and profitability has deteriorated leading to financial institutions and creditors reducing the granting of loans and overdraft facilities. Utility companies have also cut off water and power supply to the main water treatment plant. The council has not paid wages and salaries for many months and this has resulted in industrial unrest and staff threatening to go on strike.

John Kenta, the mayor, has argued in one of the council meetings that he proposes other sources of income such as lease finance or listing on the stock exchange.

The major concern of the mayor concerning listing are the listing requirements which include the requirement to have financial statements audited by external auditors and also the setting up of an audit committee. The council will also be required to prepare prospective financial information which is currently not prepared.

Required:

1. State three (3) indicators that independent auditors would use to confirm the status of the clients going concern at the City Council. (3 marks)
2. State three (3) objectives and principles of public sector audit at the City Council. (3 marks)
3. Explain four (4) arguments against setting up an audit committee in an organization as proposed by John. (4 marks)
4. Explain five (5) audit procedures that an independent auditor can use to obtain audit evidence on any prospective financial information for Lusaka City Council. (5 marks)
5. Briefly describe five (5) benefits of agreed upon procedures over independent auditors substantive procedures. (5 marks)