UNIVERSITY EXAMINATIONS

May/June 2020

AUI3701
The Internal Audit Process: Planning the Engagement
100 Marks

2 Hours
This paper consists of 6 pages.

Instructions:

Save a copy of the examination paper before your start answering the questions.
Keep the Honesty Declaration in consideration throughout answering this paper.
Answer in a handwritten format or typed format on your computer, converted and
uploaded in a PDF format.
Write legible and clearly and DO NOT password-protect your PDF file.
Virus infected files will not be marked.
NO emailed submissions will be allowed.
Verify the file detail before final submission.

CONFIDENTIAL

THIS EXAMINATION QUESTION PAPER CONSISTS OF 6 PAGES.

Question Main Topic Marks

1 IPPF 24
2 Planning the audit 20
3 Preliminary survey 20
4 Fraud 22
5 Assurance vs consulting services 14
100

Please note:

Although the primary purpose of the examination is to test the candidate’s knowledge and
application of the subject matter, the candidate’s ability to organise and present such knowledge
in written language of an acceptable standard will be taken into consideration by the examiners.

[TURN OVER]
 CONFIDENTIAL

2 of 6 AUI3701
Take-Home Exam May/June 2020

QUESTION 1 24 marks

As an internal audit student you are aware that the International Professional Practice
Framework for Internal Auditors consists of three components (the definition of internal auditing;
the Code of Ethics; and the International Standards for the Professional Practice of Internal
Auditing).

REQUIRED

Consider the independent scenarios that follow below. For each of the scenarios, indicate and
name the components and/or codes that have been violated. Support your answer by
explaining the violation and indicating the requirements that should have been met.

Structure your answer as Reference to Professional Reason

follows: Permissible or not practice requirements (1 mark)
(1 mark) (2 marks)

e.g. Code – Objectivity or Standard 1000 – Purpose, Authority & Responsibility

REQUIRED MARKS

1.1 Peter Brown is a newly appointed internal auditor at Arthur and Sons
Accountants and Auditors. During the preliminary review for an audit at one
of the company’s key clients, Peter discovers a fraudulent transaction that
implicates the Chief Executive Officer (CEO) of the company. He raises the
matter with the audit manager for direction. Excited about his discovery,
Peter informs family and friends about what has transpired and tells them
that the CEO may also go to jail. (4)

1.2 Matthew, who is an internal audit manager with a company, is planning an

audit of the debtors section. Matthew has been involved with the client for
five years and has established a good relationship with the key personnel.
During an interview, the Chief Financial Officer (CFO) informs George that
he has been instructed to manipulate the debtors figure for the interim
financial reports in an effort to improve the company’s performance. Matthew
does not report the matter, because he has been promised a performance
bonus of R10 000. (4)

1.3 The external auditors complain that Mrs Schutte, who has recently been
appointed as the Chief Audit Executive (CAE), does not want to share
information with them regarding the audits performed by the internal audit
activity during the recent year. (4)

1.4 Frans Khumalo, an internal audit manager, has been assigned to the
planning of an audit at a department that is headed by his wife. (4)

[TURN OVER]
 CONFIDENTIAL

3 of 10 AUI3701
Take-Home Exam May/June 2020

1.5 John has just been appointed as an internal auditor at Moonlight (Pty) Ltd.
When he asks the Chief Audit Executive about the internal audit charter, the
CAE informs John that he does not see the need for an internal audit charter
as every staff member has a job description. The CAE informs John that he
has been the CAE for five years and although they never had a charter, the
internal audit activity has always been able to deliver according to the audit
plan. (4)

1.6 An internal audit manager informs you that he sees no need to know about
the company’s risk assessment. He further explains that the internal audit
engagements are very simple, because they audit only the financial
systems. Only if they have enough time left thereafter, do they perform other
types of audits. However, they are not compelled to do this. (4)

QUESTION 2 20 marks

Starlight (Pty) Ltd, a medium-sized retailer of light fittings, has implemented the following
control activities, among others, to address risks that they face in the various business cycles:

1 To gain access to the warehouse, warehouse employees must place their thumb on
a biometric reader. If the thumbprint is authorised, the turnstile is activated.
2. To effect monthly payments to creditors by electronic funds transfer, both the financial
accountant and the financial director must enter their unique passwords before the
payment will be “released”.
3 Comprehensive enquiries relating to a proposed (new) customer’s creditworthiness
are carried out by the credit manager.
4 Inventory cycle counts are conducted on different sections of the warehouse at the
end of every month.
5 Adjustments to the inventory masterfile arising from differences in quantities
identified by the cycle count must be
a. entered on properly designed, pre-printed sequenced masterfile amendment
forms by the warehouse controller; and
b. signed by the financial accountant after scrutiny of the supporting
documentation.
6 At the end of each working week, a clerk in the accounting department sequence
tests the dispatch notes and matches each dispatch note with a sales invoice.
7 When a credit note is made out for a customer, it must be cross-referenced to the
original sales invoice and presented to the financial accountant with the signed goods
returned note, original sales invoice and any customer documentation.

(Adapted from Graded Questions on Auditing)

REQUIRED Marks

2.1 For the assurance audit of the payroll function, list the steps in the planning
phase. (8)

[TURN OVER]
 CONFIDENTIAL

4 of 10 AUI3701
Take-Home Exam May/June 2020

2.2 Discuss the risk(s) that each of the internal controls above are intended to
address. (12)

QUESTION 3 20 marks

Tumi Moloi works in an audit firm (Solutions Inc) that provides external and internal audit
services. Tumi was assigned as the internal auditor for Ubuntu Ltd. Ubuntu Ltd manufactures
various tinned foods to major supermarkets nationwide. This is the first audit Solutions Ltd has
provided to Ubuntu Ltd.

Tumi was very excited to start the audit despite having a vague recollection of the preliminary
survey procedures. However, since she had not kept any notes from university, she decided to
conduct the preliminary survey using her limited knowledge.

Tumi knew she had to have a meeting with the client’s management, so she immediately drove
over to Ubuntu Ltd. The audit client was not expecting her and was not available for a meeting.
Tumi decided to have a meeting with the available clerks at the company. They chatted in
general about how the company works and how all the departments fit in with each other.
Satisfied with her meeting, Tumi walked alone through the premises and was amazed at the
machinery they have.

During her walk, one clerk gave her Ubuntu Ltd’s financial statements to browse through. She
quickly analysed the financial statements and compared the ratios to the previous year’s
figures.

REQUIRED Marks

3.1 Briefly describe the recommended correct steps of a preliminary survey and
criticise how Tumi conducted her preliminary survey. Answer this question
by using the following table format:

Basic preliminary survey steps Examples of Tumi’s deviation from

(10 marks) the recommended preliminary survey
step
(10 marks)
(20)
(Adapted: Internal Auditing: An Introduction)

QUESTION 4 22 marks

You are an internal audit manager at Logic Ltd. While conducting a survey to become familiar
with the organisation, you became aware of the following facts regarding the director of
maintenance, Randy, and his brother, Jan:

• Randy has sole custody of the vehicles and related replacement parts.

[TURN OVER]
 CONFIDENTIAL

5 of 10 AUI3701
Take-Home Exam May/June 2020

• Jan (Randy’s brother) is in charge of the inventory control section of the organisation.
Both of them come from a family of low income but they have risen rapidly in the
organisation.
• To some, however, they seem to be somewhat paradoxical. On the one hand, they follow
their conservative roots – they have saved enough money to purchase a light twin-engine
airplane, a big farm in the Kalahari and quad bikes for their respective children. On the
other hand, they demonstrate some excessive tendencies. They fly their airplanes to
gambling resorts on weekends and according to friends, rarely win. Management views
these trips as justifiable for their hard work since Randy and Jan never take the two
weeks’ vacation leave they earn during the year.
• Both are tireless workers. They are often the last to leave work at night and the first to
arrive in the morning. When they work late, they often allow the security guards to leave
early.
• A few months ago, Jan was informed that he was to be transferred but he rejected the
transfer and requested to remain where he was.

(Advanced Internal Audit Topics, Adapted)

REQUIRED Marks

4.1 Discuss eight (8) indicators (red flags) of potential fraud in the above
scenario. (8)

4.2 List six (6) initiatives or measures that management could implement for
fraud prevention. (6)

4.3 Discuss the internal auditor’s responsibility regarding fraud when conducting
assurance engagements. (8)

QUESTION 5 14 marks

The CEO of Salsa Limited requested in a meeting with the chief audit executive (CAE) an
internal audit activity to assist in the process of computerising the sales order function.

He explained the current system and his requirements of the new computerised system as
follows: “Customers phone in their orders to the sales order clerk. I would like to keep it this
way but I want a system which will allow the sales order clerk to authorise or reject a sale from
a customer who is over the credit limit. I do not want to automatically deny the customer a sale
as I feel that it is not good customer relations. I understand that I will need to
upgrade/computerise the rest of the revenue and receipts cycle, train staff, including the debtors
clerks and sales order clerks, and is quite prepared to incur the expenditure. However, for now
I want to get sales ordering right as this is where it all starts. I need the internal audit activity to
assist by recommending the controls that should be in place to ensure the accuracy and
completeness of all orders placed as well as to ensure that no orders are accepted from debtors
over their credit limit.”

[TURN OVER]
 CONFIDENTIAL

6 of 6 AUI3701
Take-Home Exam May/June 2020

REQUIRED Marks

5.1 Complete the following table on the differences between assurance and
consulting services:

Assurance Consulting
Definition Assurance service is Consulting service is
defined as defined as
(a)________________ (b)________________
__________________ __________________
____________ ________________
(1½) (2½)

Number of parties Assurance services Consulting services

consists of 3 parties, consist of 2 parties,
namely: namely:
• (c)________ • (f)________
• (d)________ • (g)_______
• (e)________ (2)
(3)
Example of services • (h)_____ • (j)_______
• (i)_____ • (k)_______
(2) (2)
(13)

5.2 State whether the request by the CEO of Salsa Limited is an assurance or
consulting service. (1)
©
Unisa 2020