Class Examples

Question 1

You have recently been appointed as the auditor of Whiskey (Pty) Ltd for the year ended 31 March
2018. This is the first year in which the financial statements are being audited, although the
organisation has been in existence for 15 years. The organisation was previously run as a sole
proprietor and was converted into a private company during the past year.

You made provision in your planning of the audit for the auditing of the opening balances. The
following is an extract from the statement of financial position of Whiskey (Pty) Ltd (before a
company had been established) at 31 March 2017:

Long-term loan payable: ABC Bank R250 000

Property, plant and equipment R140 000

Trade receivables R360 000

Bank R25 000

Inventory (perpetual system) R321 000

You were able to obtain sufficient, appropriate audit evidence regarding all of the account balances,
except for the opening balance of inventory. The opening balance of inventory is deemed to be
material but not pervasive to the entity’s financial position. Except for this matter, the financial
statements are fairly presented. The financial position at year end is fairly presented.

Required:

(1) Describe the audit procedures you would apply in order to verify each of the opening balances
mentioned above. (Submit your attempt, indicating how you marked yourself and your self-
reflection).

(2) Describe the type of audit report that will be issued by the auditor.
Question 2

You are the auditor of Mobi (Pty) Ltd (Mobi), a company which farms with grapes, for the financial
year ending 31 March 20xx. Mobi allegedly entered into a price fixing scheme with its major
competitors where they agreed among themselves to supply their grapes to grocery stores at a fixed
amount of R15 per kilogram. This price-fixing scheme was exposed by the media, where after legal
steps were taken against these grape farmers.

Required:

Describe the audit procedures that an auditor should perform in order to identify litigations and
claims involving Mobi (i.e. the completeness of litigations and claims).

Question 3

You are the auditor of ZZZ (Pty) Ltd for the financial year ending 31 March 20xx. While conducting
the year-end audit, you discovered that pending litigation claims which are material, but not
pervasive in nature, were not disclosed in the financial statements. Discussions with management
revealed that they are unwilling to include such a disclosure in the financial statements.

Required: Decide which type of audit opinion would be included in the audit report.

Question 4

During the audit of Viva (Pty) Ltd for the financial year ending 31 August 20xx, you became aware of
conditions and related business risks that cast significant doubt on the entity’s ability to continue as
a going concern.

Required:

(1) Describe the further audit procedures that you will perform after you have discovered the above
conditions and business risks.

(2) After you have performed the further audit procedures, you are of the opinion that the going
concern assumption is still appropriate, but a material uncertainty exists.

Question 5

You are satisfied that note 10 in the financial statements adequately discloses the conditions, the
fact that the company incurred a loss of R8 million during the current financial year and the fact that
its current liabilities exceeded its total assets by R2 million.

Required: Draft the relevant paragraph pertaining to the above that you would include in your audit
report.
Question 6

Your firm has been newly appointed as the auditors of Chemico Ltd, a wholesaler of medically used
chemicals. The period under review, for which you are responsible as senior trainee on the audit,
covers the year ended 31 August 2018. The company has one central warehouse and sells its
products to distributors and large pharmaceutical companies throughout the country. Inventory is a
material figure on the trial balance.

Opening balances

Since this is the first time that your firm is performing the audit, permission was obtained from the
client to contact the previous auditors to obtain more information regarding the opening balances.
The previously appointed auditor simply informed you that he was pressed for time and had to rush
the 2017 audit. He is therefore reluctant to allow you to review the 2017 audit working papers. This
has immediately made you wonder how reliable the opening balances are and why the auditor has
issued an unmodified audit report.

Inventory

While visiting the central warehouse of Chemico Ltd you established that perpetual inventory
records are maintained. Goods received notes and invoices are used to capture inventory
movements. While discussing the date and time to perform the physical annual inventory count, the
store manager informed you that the previous auditor has never attended the inventory count.

REQUIRED

Discuss your concerns associated with the work performed by the predecessor auditor on the
current audit. You are also required to discuss the potential effects on the current audit. 15 marks

Question 7

You are the newly appointed audit senior of Ice Is Nice Ltd (IIN), an existing audit client of ABC
Auditors. The financial year under review ended on 30 April 2018. IIN is a large ice cream
manufacturer and sells ice cream to 70 grocery stores throughout South Africa. IIN operates from
one central factory and warehouse situated in Johannesburg.

RELYING ON INFORMATION PRODUCED BY A MANAGEMENT’S EXPERT

IIN manufactures various flavours of ice cream whereby raw materials are converted into a finished
product with fixed and variable overheads. It is not a complex process to manufacture ice cream;
and the process can be easily understood by observing the production process. IIN employs a
registered production engineer, Mr Mechanic, on a contractual basis. Mr Mechanic has been a
contract worker for five years and is responsible for certifying and calculating cost pricing of the
work in progress. The auditors have set the risk of material misstatement of inventory at an
acceptable level.

USING THE WORK OF INTERNAL AUDITORS

IIN has an internal audit department. In an attempt to keep the audit fee for upcoming audits at an
acceptable level, the partner who is responsible for the audit of IIN and the audit committee of IIN
has suggested that the auditors place more reliance on the internal auditors.
REQUIRED

1 With reference to the information included under the heading RELYING ON INFORMATION
PRODUCED BY A MANAGEMENT’S EXPERT:

Describe the aspects you will consider in determining the nature, timing and extent of the
audit procedures when relying on the work of the engineer, Mr Mechanic. 9 marks

2 With reference to the information included under the heading USING THE WORK OF
INTERNAL AUDITORS:

Describe six aspects you need to consider when determining the nature and extent of work
of the internal auditors that can be used. 9 marks