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ARTT: MUHAMMAD IBRAHIM, ACA

QUESTION 01

A junior member on the audit team of 100 Ltd was, at the conclusion of the audit, requested to
make sure that the audit working papers were all properly filed and finalised. What struck him was
just how much information/evidence had been gathered on the audit. Having seen all of the

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evidence together he really felt that the audit team was in a strong position to certify the financial
statements as correct, rather than just stating in the audit report that “in our opinion, the financial

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statements present fairly in all material respects …..”

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He asked you his senior why, having done all this work, the financial statements had not been
certified as correct.

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Requirment: Respond to Junior

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ARTT: MUHAMMAD IBRAHIM, ACA

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ARTT: MUHAMMAD IBRAHIM, ACA

QUESTION 01

Having satisfactorily concluded the preliminary engagement activities in terms of

ISA 220 and ISQC 1, Kirsten Wild, the manager in charge of the audit requested a
trainee to draft an engagement letter. The trainee provided the following letter:

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To, The Shareholders

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Vortex (Pty) Ltd

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14 Wave Road
Springfield 0312

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Having carried out the preliminary investigation into your company, we are pleased

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to record our acceptance of the appointment as auditors and hereby confirm the

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terms of the engagement as follows:

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1. We will conduct the 31 July year-end audit for which we have been appointed
2. The engagement will be completed by 31 August IB
3. Our role is to certify the fair presentation of the financial statements
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4. Your role as management will be to provide our staff with all the information we require
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to gather sufficient, appropriate evidence of fair presentation

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5. We do not guarantee an unqualified audit report as auditing does have its

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limitations
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6. Fees will be a matter of negotiation, but will be based on prior years

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Please would you sign this letter, retain a copy, and return the original to us.
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I look forward to working on your audit.

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Signed: ..........................................
Audit manager
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YOU ARE REQUIRED TO:

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Identify any weaknesses in this letter. You are not required to redraft the letter, but
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you are required to indicate any information that has been omitted but which should
have been included. 08 marks
ARTT: MUHAMMAD IBRAHIM, ACA

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ARTT: MUHAMMAD IBRAHIM, ACA

Question 01
Consider each of the following situations individually:
1. The directors obtained fake title deeds for a fictitious property included in the company’s
statement of financial position.
2. The operations director used the company’s staff transport vehicles at the weekend as

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taxis for his own account.

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3. The chief buyer places orders with the supplier who provides the largest discount for the

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company but only if the supplier deposits five percent of the purchase price into the chief
buyer’s bank account, and provided the goods supplied are of the required quality.

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4. The directors accounted for a complex transaction in a manner which was the most
favourable for the company.

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5. The financial director elected not to disclose a contingent liability in the notes to the

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financial statements on the grounds that it might be harmful to the company. All

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information pertaining to the matter was deliberately hidden from the auditors.

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6. All scrap from the manufacturing activities of the company is sold for cash. The cash is
not accounted for in the records but is banked intact, and used to pay for the official, very
expensive year-end function held in December for all employees. The company has an
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October year-end.
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7. The financial director increased the sales revenue for the year by pre-invoicing a
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number of large orders which would be filled in the new financial year. All the
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customers concerned were related parties of the company.

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8. The warehouse manager, in collusion with a supplier and the warehouse administration
clerk, receives short deliveries from the supplier but has them recordedas full deliveries
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YOU ARE REQUIRED TO:

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Indicate whether each of the above amounts to misappropriation of assets or fraudulent

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financial reporting. Briefly justify your answers. 08 marks

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ARTT: MUHAMMAD IBRAHIM, ACA

QUESTION 02
According to ISA 240 – The auditor’s responsibilities relating to fraud in an audit of
financial statements, the auditor is required to recognise situations which may result in
misstatement in the financial statements arising out of the misappropriation of assets.
Consider the following:

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1. A client company which holds large quantities of inventory does not keep perpetual

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inventory records. Relations between the warehouse manager and the warehouse

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personnel are very poor as the warehouse manager does not treat his staff with respect.
2. A company which has a centralised accounting department makes all its payments (e.g.

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wages, salaries, creditors) by electronic funds transfer. Ten employees are provided with
the facilities on their computers to authorise and effect electronic transfers for their various
sections.

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3. The company reconciles its creditors ledger with creditors statements only at year-end.

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4. The company pays salaries well below the industry norm and adopts the attitude that “if

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staff don’t like it they can leave”.
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5. The company makes a significant number of cash sales.
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6. Management and other employees constantly complain about the company (many of
the complaints being unfounded). Company morale is low.
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7. There is inadequate authorisation of expenditure incurred by management and

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employees on behalf of the company, for example salesmen’s expense claims,

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management travel claims.

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ISA 240 classifies the factors which could lead to the risk of misstatement arising
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from misappropriation as follows:

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Classification a – incentives/pressures to misappropriate assets

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Classification b – opportunities to misappropriate assets

Classification c – attitudes/or rationalisation which suggest that misappropriation
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may take place.

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YOU ARE REQUIRED TO:

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Indicate into which classification each of the above risk factors (1–7) falls 3.5 marks
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ARTT: MUHAMMAD IBRAHIM, ACA

QUESTION 03

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Question 04

Your firm is the external auditor of Reliable limited. The directors of the Company discovered soon after the

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auditors report on the financial statements. The directors had raised some concerned that your firm did not
discovered a fraud during the audit.

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Requirement: Reply to Directors Comment 04 marks

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b. What would have been your reply if the directors had discovered an error instead of fraud. 04
marks

QUESTION 05
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You are the senior in charge of the audit of Butterfly (Pvt) Limited. When performing audit procedures
you found that there are several unidentified balances in the bank reconciliations provided by the
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accountant. You also found that the debtors schedule has not been agreed to the ledger and the
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client has not reconciled these amounts as of the year end. The debtor confirmations received during
the year did not agree with the ledger balances, and the accountant claims it is the debtors’ records
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that are in error. The audit partner is being pressured by finance manager to finalise the audit
procedures within a very short period compared to last year, due to the budgeting process that is
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scheduled to commence in a couple of weeks.

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Requirement: Evaluate the above situation and discuss the course of action (10 marks)
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QUESTION 06
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10 marks
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ARTT: MUHAMMAD IBRAHIM, ACA

QUESTION 01
Before your firm accepts any additional ongoing engagements, for example new audits, the partners meet to
decide on whether the engagement should be accepted.

1. Guptique (Pty) Ltd a company which sells equipment to the mining industries, has approached your
firm with an offer that you take over the audit of the company. A significant amount of additional non-
audit work has also been promised. Two of the five shareholders of the company who are also
executive directors were recently alleged to have been involved in tender fraud but nothing has been

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proved. They have both denied any involvement. The current auditors have indicated their intention
to not make themselves available for reappointment.

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2. Middleman (Pty) Ltd, a medium-sized company which is about to expand considerably through a BB
BEE deal that involves a large listed company. The listed company requires that Middleman (Pty)
Ltd be externally audited annually. Our firm has no experience in the industry in which Middleman
(Pty) Ltd and the listed company operate.

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3. Stonebridge (Pty) Ltd, a small company which is owned by Harry Jack, the father of one of your
firm’s partners. Harry Jack believes that having the company audited externally adds to its credibility

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when negotiating with prospective business partners.

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4. Mishin (Pty) Ltd, is a medium-sized company in the light engineering sector. The directors informed

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your firm that they were changing their auditors because their previous auditors had “different views”
to them (the directors) on which accounting policies were appropriate for their company. They have
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declined to provide specific details. The previous auditors would not comment on this stating only
that the directors of Mishin (Pty) Ltd had not given them permission to discuss the company’s affairs.

YOU ARE REQUIRED TO: Discuss the matters to which your firm should consider, when deciding on
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whether to accept the above prospective audit appointments. 10 marks
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QUESTION 02
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In terms of ISA 300 – Planning an audit of financial statements, the engagement partner and the key
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engagement team members must establish the audit strategy and develop the audit plan. Your audit firm has
recently been appointed as auditors of Action Ltd, a listed company, and you have been assigned to assist
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with planning the audit for the30 June 2020 year-end. You have ascertained, inter alia, that:
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1. Action Ltd is engaged in importing sports equipment.

2. Its head office (and one warehouse) is located in Tshwane, and it has distribution warehouses in four
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other major cities.

3. The turnover of the company is around R900m per annum and the company is consistently profitable.
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4. There is a workforce of 250 employees spread around the five locations, for example buyers, admin
clerks, warehouse personnel.
5. The company has an internal audit division which is regarded as very efficient and effective.
6. The company’s systems are all computerized and are resident on a wide area network and local area
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networks.
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7.The company sells to the retail sports trade and has in excess of 8 000 debtors. It sells only on credit.
8. The reporting deadline is 28 July 2020.
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9. The year-end inventory count takes place on either the last or second last Sunday of the financial year but
at least seven days before the end of the year,
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to facilitate the clearing of problems before year-end. All inventory is counted at the same time.
10. The board of Action Ltd is regarded as highly competent and enjoys a good reputation in the business
world. Because of the late appointment, the audit committee has requested a monthly meeting with the
auditors to discuss audit progress commencing with a meeting in April.

Requirment: Discuss how the above information could affect your audit strategy
ARTT: MUHAMMAD IBRAHIM, ACA

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Requirement: Required: Discuss the audit risks that exist in the above scenario and suggest the key audit
procedures that you would perform to address those risks. (22)
ARTT: MUHAMMAD IBRAHIM, ACA

QUESTION 02

You are on the audit team of Chemtrade (Pty) Ltd, a company which manufactures and distributes a range
of industrial chemical products to other manufacturers. Whilst conducting risk assessment procedures on
the 31 March 2016 audit, you gathered the following information inter alia, about the company:

1. During the course of the year Edgar Hoover the newly appointed chairman of the company,

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requested the resignation of the financial director John Dillinger, a conservative, independently
minded and well respected chartered accountant who had been at Chemtrade (Pty) Ltd for some

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years. John Dillinger had angered the chairman by refusing to implement certain accounting

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policies which would improve the performance of the company as reflected in the financial
statements. As their working relationship had become untenable, John Dillinger resigned.

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2. 2. John Dillinger had been replaced by Floyd Nelson, a young and inexperienced but aggressive
chartered accountant whom the chairman had recruited from another company. Floyd Nelson was

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also appointed as chairman of the audit committee by Edgar Hoover. John Dillinger has sued the
company for Rs. 5 million in respect of monies due to him when he left the company some months

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prior to year-end.

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3. During the financial year, the company had ceased production of a particular range of chemicals
which it only exported to Europe. However, due to the economic downturn in Europe, the orders
for this range of chemicals have virtually ceased. Because the company had, and still has, a very
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large stockpile of this range of chemicals, the plant and equipment used in the manufacture of
these products has been lying idle for the seven months prior to the year-end. According to the
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production manager, there are no plans to commence with production of this range or to adapt the
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plant and equipment to manufacture another type of chemical.

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4. During the financial year, a government environmental agency filed a lawsuit against the company
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for the material sum of nearly R10m for what it describes as “extensive environmental damage to
certain wetland areas”. The matter is being handled by the company’s lawyers, but at the financial
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year end the matter was unresolved. Should the decision go against the company, there could be
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serious consequences other than financial for the company, e.g. loss of certain manufacturing
licences.
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5. An analysis of the accounts receivable balance at year-end revealed that the percentage of debt
owed by foreign debtors (in Europe) had increased substantially compared to the prior year due
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mainly to the fact that the company’s trading partners in Europe are taking considerably longer to
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pay than they had in prior years. Management attributes this to the economic downturn in the
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European markets. Sales to this market in prior years have been material.
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REQUIRMENT: a. Identify and evaluate the audit risk in the above scenario 10 marks

b. Bifurcate the above risk into FS level or Assertion level 05 marks

c. If the risk is at assertion level also identify the assertion to which it relates 05 markss
ARTT: MUHAMMAD IBRAHIM, ACA

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ARTT: MUHAMMAD IBRAHIM, ACA

QUESTION 01

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Legal provision relates to the suit filed by one of the customer, the matter is currently pending in Sindh

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High Court

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QUESTION 02 IB
The Company has sold goods to One of the customer amounting to Rs. 300 million. As part of the audit
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procedure, the auditor has sent the confirmation and the customer confirmed the amount of Rs. 300
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million. However the auditor has acquired some information which suggest that customer is facing financial
difficulties.
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Requirement: Identify, evaluate and assess the audit risk in the above situation. Also mention the audit
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procedures to be performed in the above situation. 08 marks

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Question 03
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You are the senior-in-charge of the audit of New Lanka Manufacturers PLC. The value of inventory of the entity
at the end of the year is a significant part of its statement of financial position. You are in the process of carrying
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out substantive procedures on the valuation of inventories.

Identify three (03) substantive procedures that an auditor could apply to verify the valuation of inventories. (3
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marks)

QUESTION 04
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ARTT: MUHAMMAD IBRAHIM, ACA

QUESTION 05

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QUESTION 06
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10 marks
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ARTT: MUHAMMAD IBRAHIM, ACA

QUESTION 01

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During the year the directors decided to expand their customer base in the “spares outlets”
category, and to achieve this they implemented the following:
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4.1 Creditworthiness checks for the new account holders became less strict and payment
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terms were extended.

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4.2 The “cash back” incentive scheme. In terms of this scheme, customers will receive a
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cash payment from the company of between 5% and 15% of their total purchases from
Instant Energy (Pty) Ltd for each three-month period, i.e. four times a year.
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At the meeting with your audit manager he posed the following questions to establish
whether you understood your responsibilities:
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(a) Can you identify the two assertions relating to debtors which you consider aremost
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at risk for this audit and how would you justify your choice? (3)
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(b) As per above information which categories of customer could be send positive
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confirmation? 02 marks
(c) Can you discuss with me the procedures you intend carrying out in respect of
the allowance for bad debts?04 marks
Requirement: Respond to the manager questions
ARTT: MUHAMMAD IBRAHIM, ACA

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ARTT: MUHAMMAD IBRAHIM, ACA

Question 01
1. If control risk and inherent risk are assessed by the auditor as high, the auditor will need to ensure that
detection risk remains high if the audit risk is to be reduced to an acceptably low level. True or false? Justify.
(1,5)
2. The only component of audit risk which the auditor can control is detection risk.True or false? Justify. (1)
3. Inherent risk plus control risk equal the risk of material misstatement. True or false? Justify. (1,5)
4. It is solely the inherent limitations of internal control which prevent the auditor from reducing audit risk to

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nil. True or false? Justify. (1,5)
5. Detection risk is restricted to either the risk that the auditor will select inappropriate audit procedures or

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that the risk that the auditor will misapply an appropriate procedure. True or false? Justify. (1,5) 6. Explain

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the link, if any, between audit risk and audit evidence. (2)
7. Explain the link, if any, between risk assessment procedures and audit risk. (3)
8. Explain why the introduction of a new accounting standard (IFRS) may increase the auditor’s assessment
of audit risk. (3)

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QUESTION 02

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1.You received a memorandum from your audit manager stating that your tolerable rate of deviation for
certain tests of controls to be conducted in the acquisitions cycle on the audit of Buy-It Ltd, should be

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increased from the prior year’s tolerable rate of deviation.

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2. Your evaluation of the extent to which management has failed to monitor internal controls in the payroll

authorization of overtime
payments on time records is necessary.
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cycle of Messi Ltd, has led you to believe that an increase in the expected rate of deviation over the

3. As a result of information obtained when conducting risk assessment procedures on the audit of Castles
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(Pty) Ltd, you have concluded that the risk of nonexistent inventory being included in the inventory balance
at year end is substantially higher than for the prior year’s audit. You are about to select a sample of
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inventory items for existence testing.

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4. Due to more efficient and timeous record keeping at Spartan (Pty) Ltd, your audit plan for the year end
audit will include meaningful subsequent receipts testing for the existence of debtors at year end. This is
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likely to have an effect on the sample size for the planned positive debtors circularization.
5. The audit manager on the audit of Bolton (Pty) Ltd has instructed the team that he would like to be in a
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position to gain more assurance from the operating effectiveness of controls so that less substantive work
can be conducted.
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6. On the audit of Folsom Ltd, the number of inventory items on the spare parts inventory master file has
increased by 3 000. This is as a result of the company introducing a number of new products. For budgeting
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purposes, the audit senior wants to know what effect the increased number of inventory items is likely to
have on the sample size for items to be counted at the year-end inventory count. The sample will be
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statistically based.
7. Citizin Ltd, a large manufacturing company has a substantial amount of money invested in plant and
equipment. The fixed asset register reveals thousands of items which vary greatly in value. The audit senior
wishes to stratify the plant and equipment population by monetary value in an attempt to make the audit of
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this section more effective and efficient. However, he is unsure as to whether stratification will, in general
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terms, reduce sample sizes, all other factors being equal e.g. there is no increase in the risk of material
misstatement.
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YOU ARE REQUIRED TO:

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Indicate what the effect on the relevant sample sizes would be for each of the situations
described (in 1–7) above. Consider each situation separately and justify your
answer for each. 10 marks
ARTT: MUHAMMAD IBRAHIM, ACA

QUESTION 03
The following four situations have arisen at different audit clients:
1. A trainee accountant was conducting audit procedures on sequenced requisitions for EFT payments

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(selected by requisition number) using statistical sampling. A requisition (number req 1728) that had been
identified by random

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selection for inclusion in the sample was missing. The trainee failed to realise it was missing and simply

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chose the next requisition (number 1729) in the sequence for his sample. An investigation into the missing
requisition would
have revealed a material fraud. (2)

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2. When designing audit procedures to be implemented in the revenue cycle, the trainee omitted a procedure
which required the tracing of invoices to the sales journal. As a result a substantial number of unrecorded
sales remained undetected by the auditor. (2)

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3. Using a statistical sampling method, a trainee selected a sample from the inventory master file of a large

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wholesaler of consumer goods. The sample was used for testing of inventory for existence by physical count.

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The trainee carried out the sampling exercise correctly and efficiently enabling him to satisfyhimself that the
inventory balance did not contain material misstatement arising from the inclusion of non-existent inventory.
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However, a few days later the company’s internal audit department unexpectedly picked up a major fraud in
the warehousing section which led to the discovery of non-existent inventory in the inventory master file. (2)

The audit senior planned to obtain his assurance in respect of the client's allowance for doubtful debts in part
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from tests of controls over credit controland in part from analytical review procedures on doubtful debts
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applied at year
end. The auditor failed to detect that the allowance was materially understated. An enquiry into the
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procedures employed by the trainee revealed that the trainee had set his tolerable rate of deviation too high
when conducting his tests of controls. Breakdowns (deviations) in key controls over the granting of credit
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were not detected. (3)

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YOU ARE REQUIRED TO:

(a) Explain sampling risk and non-sampling risk (do not simply give definitions).(6)
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(b) Indicate, with reasons, whether the situations described above (1–4) should be
categorised as sampling risk or non-sampling risk. (9)
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ARTT: MUHAMMAD IBRAHIM, ACA

QUESTION 04
You are an audit manager at Fergusson and Co. You are reviewing the plan of the audit of a manufacturing
company, Rowz (Pty) Ltd. The planning has been done by Steven Denham, the senior on the audit. This is
his first large audit as senior. Fergusson and Co, as part of their standard planning procedures, requires the
completion of a pre-printed document titled “Sampling Methods”, which details the sampling methods to be
used on all major areas of an audit.
Steven Denham's completed “Sampling Methods” form for the upcoming Rowz (Pty) Ltd audit, part of which,

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is reproduced below:

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10 marks
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