PRACTICE QUESTIONS

QUESTION 1
You are the audit senior responsible for the audit of Swandive (Pty) Ltd, a South African
company. Your audit manager has informed you that a fraud incident occurred during
the financial year under review. A payroll clerk created fictitious employees on the
payroll system, and the salaries were paid into the clerk’s personal bank account. The
clerk has since resigned. However, the audit manager is concerned that additional
undetected payroll fraud may have occurred in the Human Resources and Payroll
Department.
Required:
Describe audit procedures that should be undertaken during the audit of wages in
response to the increased risk of payroll fraud at Swandive (Pty) Ltd. (5 marks)
QUESTION 2

Jackdaw Motor Cars (Pty) Ltd (Jackdaw) manufactures a range of motor vehicles and
its financial year-end is 31 January 2015. You are the audit supervisor at Puffin
Incorporated, and you are currently preparing the audit programmes for the year-end
audit of Jackdaw. During the planning phase, your audit manager highlighted several
matters identified during the risk assessment procedures.
Land and Buildings
Jackdaw has a policy of revaluing its land and buildings on a rolling basis over a five-
year period.
During the current financial year, Jackdaw appointed an independent external valuer to
revalue a number of properties, including a warehouse acquired in May 2014.
Depreciation is charged on a pro rata basis.
Work in Progress
Jackdaw operates a continuous 24/7 production process for manufacturing motor
vehicles. An inventory count will be conducted at year-end, and Puffin Inc. will attend.
You are responsible for auditing work in progress (WIP) and will participate in both the
inventory count and final audit procedures. WIP comprises partially assembled vehicles
at year-end and is expected to be material to the financial statements. Jackdaw values
WIP based on the percentage of completion, applying standard costs accordingly.
During the audit, your team identified an error in the valuation of WIP, as a number of
assumptions used are based on outdated information. The directors of Jackdaw have
indicated they are unwilling to adjust the financial statements.
Required:
Explain the steps Puffin Inc. should now take and the possible impact on the audit
report in light of the directors’ refusal to amend the financial statements. (5 marks)
QUESTION 3
Ubuhle Boutique Hotels (Pty) Ltd operates a chain of 18 boutique hotels across
South Africa. Each hotel includes luxury accommodation, an in-house restaurant, and
wellness spa facilities. While most restaurant and spa customers are hotel guests who
charge expenses to their rooms, members of the public also regularly use these
facilities and are required to pay directly at the point of service.
During the current financial year, senior management has observed an increase in both
cash shortfalls and inventory losses at several locations. There is a growing concern
that employees may be involved in the misappropriation of funds and goods. In
response, the board is considering setting up an internal audit function to investigate
potential fraud and strengthen internal controls.
Required:
Explain how the new internal audit department at Ubuhle Boutique Hotels (Pty) Ltd
could assist the directors in preventing and detecting fraud and error.
(3 marks)

QUESTION 4

One of your audit clients is Tya (Pty) Ltd, a company that supplies petrol, aviation fuel,
and similar oil-based products to the South African government. Although Tya (Pty) Ltd
is not listed on the Johannesburg Stock Exchange (JSE), it adheres to corporate
governance best practices as outlined in the King IV Report on Corporate Governance.
The audit for the financial year is complete, except for the issue outlined below.
As part of Tya (Pty) Ltd's service agreement with the government, the company is
required to maintain an emergency inventory reserve of 6,000 barrels of aviation fuel.
This reserve is intended for use in the event of an interruption to aviation fuel supply
due to unexpected circumstances such as a natural disaster or terrorism.
Historically, the fuel has been valued at cost price of R285 per barrel. The current
market price is R2,280 per barrel. Although the audit work is otherwise complete, the
directors have now decided to reflect the "real" value of this reserve by valuing the
closing inventory of aviation fuel at market value, which does not comply with IFRS.
The draft financial statements show a profit of approximately R9 million and net assets
of R3.06 billion. After discussions, the directors agree to value the reserve at R285 per
barrel.
However, shortly thereafter, the directors present you with a new version of the financial
statements, this time reporting an emergency reserve of 60,000 barrels (instead of
6,000). This change increases the company’s reported profit significantly.
When queried, the finance director explains that the adjustment was made in
anticipation of expected changes in emergency reserve regulations that may come into
effect in the next six months. The company has not yet purchased the additional
inventory and no liability is shown in respect of the future acquisition.
The finance director also reminds you that:
• The company’s contract with the government requires it to show a profit annually.
• A review of the company’s bank loans is due in three months.
• If your audit firm issues a qualified audit opinion on the financial statements due
to this inventory issue, the board will not recommend your firm for reappointment
at the next annual general meeting.
Despite further discussions, the finance director refuses to amend the financial
statements to remove the fictitious inventory.

Required:
(i) State the external auditor’s responsibilities regarding the detection of fraud. (4 marks)
(ii) Discuss to which groups the auditors of Tya (Pty) Ltd could report the ‘fictitious’
aviation fuel inventory. (6 marks)