ECONOMICS AND MANAGEMENT SCIENCES

DEPARTMENT ACCOUNTTNG, AUDIT|NG AND TNCOME TAX

AUDITING 1A

JUNE 2OL5

Examiner: Elize Heyns

Moderator: E. Beukes

This question paper consists of 6 pages incruding

the cover page

lnstructions
1. READ THE qUEST|ONS CAREFULLY

2. ANSWER ALL THE QUESTIONS

3. WHERE APPROPRIATE, GIVE EXAMPTES IN ALL

ASPECTS OF THE ANSWER

4. WRITE YOUR FUtt NAME AND SURNAME ON

YOUR ANSWER PAPER

5. WRITE YOUR STUDENT NUMBER ON YOUR ANSWER

PAPER

6. SWITCH OFF YOUR CELI PHONE

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 QUESTION 1 (Totalfor eu.1: 3G Marks - GS minutesl
(A) STATE WHETHER THE STATEMENT !S TRUE OR FAISE:
(18 marks)

Statement/Question
1. Pr.
establish or continue with an auditor/client relationshio.
The Audit fee is not a term and condition that rormr p.rt of tl,e engagement
True/False
Letter.
3.TheAuditPlanismadeofthreecomponents:Nature@ True/False
tests
4. Stricter mate limits set by the auditor will result in more True/False
5. ltcanbesaidthatcontrolriskandinherent'isk,el'tffi True/False
and assessment, detection risk can be said to relate to responding to
assessed risk.
5. Collusion and management override are regarded as factorc which increase True/False
control risk.
7. lrrespective of the assessed risk of material misstatenrent, the ardito1" n,.rst True/False
design and perform substantive test for each material class of transaction,
and account balance.
8. Audit evidence is obtained to be sufficient and approp,".t" for, purposes of True/False
issuing the audit opinion. Sufficiency of audit evidence refers to the quality of
evidence obtained. Appropriate evidence refers to the quantity of evidence
obtained.
9. Having competent and trustworthy staff indicates a characteristic of good
True/False
internal control.

(B)YOU ARE REQUTRED TO:

(18 marks)

Select the most appropriate answer.

Eoch question counts 2 marks, unless stated otherwise.

L. ldentifiable aspects of lnternal Control are :

a. lnternal Control is a process; it is a means to an end, not the end itself.
b. lnternal Control is effected by people
c. lnternal Control provides absolute assurance that management goals will be achieved.
d. All of the above
e. (a)and (b)
f. (a) and (c)

2. Assertions about classes of transactions and events are as follows:

a. Occurrence
b. Completeness
c. Accuracy

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 d. Classification
e. All of the above
f. (a), (b) and (c)

Categories of substantive testing are:

a. Re-performance
b. Recalculation
c. lnspection
d. Analytical procedures
e. Enquiry
f. All of the above
g. (a), (b), (c) and (e)
4. lnternal controls have certain limitations. ldentify which
of these are limitations of internal
control: (3 marks)
a' internal control naturally is directed at routine transactions
rather than non-routine
transactions
b' The potential for human error due to carelessness, distraction,
mistakes of judgement
and the misunderstanding of instructions
c' The possibility of circumvention of internal controls through
the collusion of a member
of management, or an employee, with parties outside or inside
the entity
d' The possibility that procedures may become inadequate
due to changes in conditions
and therefore, compriance with procedures may deteriorate.
e' The cost to implement the control can exceed the benefit
as long as the control is
effective.
f. (a), (b), (c), (d), (e)
g. (a), (b), (c), (d)

5. What is the definition of a reportable irregularity?

a' An unlawful act/omission, committed by any staff member of the entity,
has the
potential(/likely to) lead to financial loss oR Fraud/theft
oR breach of fiduciary duty
b' An unlawful act/omission, committed by management of the entity, has
the
potential(/likely to) lead to financial loss oR Fraud/theft
oR breach of fiduciary duty

what are the characteristics of good rnternal control (3 marks)

a. Document design
b. lsolation of responsibilities
c. Segregation of duties
d. Monitoring & Supervision
e. Controlenvironment
f . Competent and trustworthy staff
g. Custody/accesscontrols

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 h. Comparison and reconciliation
i. Regular Meetings
j. All of the above
k. (a), (b), (c), (d), (fl, (e), (h)
L (a), (b), (c), (d), (f), (g), (h), (i)
m. (a), (b), (c), (e), (fl, (S), (h)

7. The assertions are best described as:

a' The representations by management which
are embedded in the financialstatements.
b' The accounting policies used in the financial statements.
c. The principres embodied in the reporting framework adopted
by the entity.
d' The disclosures made by the directors responsible
for the preparation of the financial
statements.

8. A significant risk is defined as:

a' The risk that there will be material misstatement
in an account heading which is
material to fair presentation.
b. A risk that, in the auditor's judgement, requires
special audit consideration.
c. A risk which is a combination of contror risk
and inherent risk.
d. None ofthe above.

2.t
(10 marks)
The words "materiarity" and "audit risk"
are used frequentry in auditing.

YOU ARE REQUIRED TO:

a) Define materiality in the context of auditing.

b) ln setting materiality the auditor uses professionaljudgement e)
to decide what the financiat
information the needs of the users of the financial
statements are. ln this context, what
assumptions may the auditor reasonabry make
about the users? (3)
c) lf a misstatement is detected, which is below the
materiality limit, can it be ignored? (2)
d) Define the term audit risk.
(3)

2.2

Prior to accepting an audit client, an auditor

must remember that before entering into a
contractual agreement there are some considerations
that need to be met, or investigated before
the auditor can enter into the client/auditor
relationship.

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 YOU ARE REQUIRED TO:
(5 marks)
Name the 3 main considerations for gathering "preliminary
engagement,, information.
For each of the 3 main considerations, elaborate stating
2 factorsthat could influence the
outcome of our investigation.

2.3
state and briefly explain 5 auditing postulates and the applicability
thereof in today's business
environment.
(10 marks)

2'4 (6 marks - I for component ,ltorexampte/application)

what are the components to use when designing an audit procedure,
explain each in a practical
example. (3 marks - 0.5 for component, 0.5 for example/application)
(G marks)

2.5
The Accounts Receivables ofEmpowered Brain (pty) Ltd amounted to NS 7g5,500, as at 2g
February 2015. This shows the net value after considering provision
for Bad Debts of NS 15,500.

Explain in the context of your audit, the assertions relevant

to the receivables balance of
Empowered Brain (pty) Ltd as at 28 Febru ary ZOLS.
(10 marks)

2.6 (E marks _ 2 marks each)

YouareamemberoftheQualitycontrolcommitteeofyourauditfirm,Jacksons&Jacksons,. part
of the committee's responsibility is to determine whether prospective
clients are acceptable and
whether existing clients should be retained. Being a relatively large practice,
numerous cases are
brought to the committee for review and the following list includes
a number of recent such cases
where the audit appointment is available.

1' shade extreme (Pty) Ltd, a chain of retail shops which sells pornographic
materials and
runs escort agencies.
2. 'Never-pay' (pty) Ltd, a company which owes its current auditors NS115
000 in audit fees.
The company claims that the auditors have overcharged.

YOU ARE REQUTRED TO:

Comment on the matters to which your committee should give consideration

in deciding on
whether to accept the above audit appointments. (6 marks)

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You are given the following independent scenarios:

Scenario 1 (6 marks)
Excel Accounting Services write up the accounting records of Jack & Sons Hardware store (pty) Ltd
and perform the annuat audit thereof.

Scenario 2
(5 marks)
James Kauta, a partner in an auditing firm, has been asked by a third party to provide an audit
report on a clients' computerized sales system, which he and a team
had recently designed and
implemented.

Scenario 3
(5 marks)
Angula & Partners have completed their audit for the period ending
31 December 2013 in March
20L4. As at 01 August2OL4, no payment of the audit fee has yet
been received. The audit team is
already planning the audit for the December 2014 year_end.

YOU ARE REQUIRED TO:

State for each scenario the following:

a) The type of threat, and the significance thereof
b) The fundamental principles threatened, and
c) Mention 2 relevont safeguards per scenario.

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