UNIVERSITY EXAMINATIONS

Sept/Nov 2021

AUI3701
The Internal Audit Process: Planning the engagement

100 Marks

Duration: 2 Hours

This paper consists of 9 pages.

INSTRUCTIONS:

 Keep the Honesty Declaration in consideration throughout answering this paper

 Please log into The Invigilator App. You need to be connected to the internet in order to log
in and scan the QR code.
 Scan the QR code above once the examination formally commences. If you encounter
difficulty with scanning of the QR code you can also enter the QR access code at the bottom
of the QR code in order to start the assessment.
 Once the QR code is scanned, you can place your smartphone next to you. The Invigilator
App will notify you when an action is required. Ensure your media volume Is turned up.
 You may access your MyExams in the application if you only have one device by pressing
the ‘access LMS’ button.
 Please remember to keep your smartphone on charge for the duration of the assessment.
 Keep The Invigilator app open on your cell phone during the assessment. You are not
allowed to leave or minimise the application.
 When an action is required, a notification beep will be heard. Action the request.
 Please ensure you are connected to the internet in order to commence the examination as
well as at the end of the examination. No internet connection is needed during the
assessment.
 It is important to first upload your script to the MyExams. Uploading of app data is not time
sensitive and you can do it after you have uploaded your script to the MyExams.
 It is important to note that you have to adhere to the time limit in your MyExams assessment
as the invigilation time in the app could exceed the time allocated to complete your
assessment.
 You can click the "Finish Assessment" button in the app if you finish early.

Should you encounter any technical difficulty, please WhatsApp The Invigilator Helpdesk on 073 505
8273.

[TURN OVER]

Open Rubric
 CONFIDENTIAL

2 of 9 AUI3701
Sept/Nov 2021

Additional student instructions

1. Students must upload their answer scripts in a single PDF file (answer scripts must not be password
protected or uploaded as “read only” files)
2. Incorrect file format and uncollated answer scripts will not be considered.
3. NO emailed scripts will be accepted.
4. Students are advised to preview submissions (answer scripts) to ensure legibility and that the correct
answer script file has been uploaded.
5. Incorrect answer scripts and/or submissions made on unofficial examinations platforms (including the
invigilator cell phone application) will not be marked and no opportunity will be granted for resubmission.
6. Mark awarded for incomplete submission will be the student’s final mark. No opportunity for
resubmission will be granted.
7. Mark awarded for illegible scanned submission will be the student’s final mark. No opportunity for
resubmission will be granted.
8. Submissions will only be accepted from registered student accounts.
9. Students who have not utilised invigilation or proctoring tools will be subjected to disciplinary
processes (only include if applicable).
10. Students suspected of dishonest conduct during the examinations will be subjected to disciplinary
processes. UNISA has a zero tolerance for plagiarism and/or any other forms of academic dishonesty.
11. Students are provided one hour to submit their answer scripts after the official examination time.
Submissions made after the official examination time will be rejected by the examination regulations and
will not be marked.
12. Students experiencing network or load shedding challenges are advised to apply together with
supporting evidence for an Aegrotat within 3 days of the examination session.
13. Students experiencing technical challenges, contact the SCSC 080 000 1870 or email
Examenquiries@unisa.ac.za or alternatively email your module lecturer. ONLY communication from
your myLife account will be considered.
 CONFIDENTIAL

3 of 9 AUI3701
Sept/Nov 2021

Question Main Topic Marks

1 Preliminary survey 22
2 Part A - Risks and weakness 24
Part B - Assurance versus consulting services 16
3 Fraud 24
4 Enterprise Risk Management 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

4 of 9 AUI3701
Sept/Nov 2021
QUESTION 1 22 marks

You are an internal audit manager at Ascend Ltd. Ascend Ltd specialises in selling
mountaineering equipment nationwide.

The chief audit executive (CAE) has assigned a few junior internal auditors to you for the
upcoming accounts receivables audit. You are currently in the planning stage of this
engagement. You decide to prepare a quick training session for them, focussing on the
techniques for information gathering and analysis used during the planning of the audit.

Column A
1. Analytical review procedures can assist
the auditor to …
2. Monetary-unit sampling (MUS) is most
useful when the internal auditor …
3. Attribute sampling is used when the
internal auditor needs to …
4. Auditing around the computer involves
… errors in a population.
5. Ratio analysis is generally used to
analyse financial statements and
measure performance. Liquidity ratios
measures …
6. Computer-assisted audit tools and
techniques (CAATTs) are especially
used…
7. Analytical review procedures in which
current financial statements are
compared with budgets or previous
statement are primarily intended to
determine …
8. Flowcharts are used by internal auditors
to …
9. An internal control questionnaire is
used to …
10. A sampling risk …
Column B
A. overall reasonableness of financial
statement contents.
B. determine compliance with corporate
procedures regarding inventory levels.
C. expects to find several material
misstatements in the sample.
D. estimate the number of compliance
E. arises from human error, such as the
internal auditor’s failure to recognise an
error when performing an engagement
procedure.
F. gain an understanding of the audit client’s
controls.
G. adequacy of financial statement
disclosure.
H. is concerned about overstatements.
I. Testing the computer system for
consistency and accuracy in processing.
J. show that there is in fact an irregularity in
the population.
K. where large volumes of data are kept in
multiple locations.
L. provide a graphical representation of a
system to analyse and identify the
strengths and weaknesses of internal
controls and the appropriate areas for
audit emphasis.

[TURN OVER]
 CONFIDENTIAL

5 of 9 AUI3701
Sept/Nov 2021
M. the organisation’s ability to pay its current
liabilities and operating costs.
N. determine specific trends, identifying
possible risk-areas as well as indicating
possible misstatements in the financial
statements.
O. the organisation’s ability to meet its long-
term obligations.
P. is when the results of the sample differ
from the results that would have been
obtained if the total population was
investigated.

(Adapted from CIA Gleim Review and Advanced Internal Audit Topics)

REQUIRED Marks

1.1 Match the terms in column A with their corresponding definition/uses in column (15)
B. Your answer should be in the following format, for example - 1. P

1.2 List the documentation that an internal auditor would need to obtain as (7)
background information to gain an understanding of the upcoming internal
audit.

QUESTION 2 40 marks
PART A

You are an internal audit manager of Livesmart Ltd, a company that manufactures home
appliances. You are in the planning stage for the internal audit of the purchasing and payment
process. One of your internal auditors has compiled the following system description for the
purchasing cycle:

Number Description

A Identify the need and place the order

A1 There are six (6) warehouses on the premises, and each is under the control of a
storeman. The warehouse is quite crowded and there is no separate goods
receiving area in the warehouse. Each storeman has physical control over and is
responsible for his specific warehouse and maintaining the perpetual inventory
records.

[TURN OVER]
 CONFIDENTIAL

6 of 9 AUI3701
Sept/Nov 2021
The nature and type of inventory items kept at the warehouses are not unique to
each warehouse; leading to frequent inter-warehouse transfers when a warehouse
runs out of stock.

A2 When a storeman feels that his inventory levels are beginning to decrease, he
completes a pre-numbered requisition in two-fold. The original is sent to the central
purchasing section and the copy remains in the requisition book.

A3 At the purchasing section all purchasing requisitions are filed according to the
inventory item number (6 numerical characters). To be able to qualify for bulk
discounts, the requisitions are kept for two weeks before ordering. The storemen
are asked to see to it that all requests are sent through before every second Friday.

A4 Every second Friday, all purchase requisitions are taken per inventory item, added
and a preliminary purchasing total is calculated based on the previous prices paid
for the items. The purchase requisitions are then handled as follows:

 If the specific inventory item is less than R10 000, a purchase order (PO) is
completed using the previous supplier for that item. This order is completed
by the purchase clerk and approved by the purchasing manager.
 If the total value of the purchase exceeds R10 000, quotations are
requested from three suppliers. The PO is completed and submitted with
the three quotations to the purchase manager for approval.

A5 The PO is distributed as follows; the original is mailed to the supplier; one copy is
sent to the receiving department and one copy remains in the order book.

B Receipt of inventory

B1 When received, goods are checked, compared to the purchase order and a pre-
numbered goods received note (GRN) is completed. The GRN is distributed as
follows:

Original: sent to supplier.

Copy 1: sent to the accounting department together with the PO used for checking.

Copy 2: accompanied with goods to the warehouse. Where more than one
warehouse is involved, photocopies are made and the applicable number of items
per specific warehouse is written in copy 2 and the photocopy.

Copy 3: remains in the GRN book.

[TURN OVER]
 CONFIDENTIAL

7 of 9 AUI3701
Sept/Nov 2021
C Recording of the purchasing transaction

C1 The purchase transaction (GRN and PO) is coded by the accounting department
with the appropriate general ledger accounts. Subsequently, GRNs are counted,
and the total number of documents are written on the top of the first GRN. The
documents are then sent to the computer room.

C2 The GRNs are received by the data entry operator for input into the system. The
operator reconciles the number of documents with the total as written on the first
GRN. The documents are then individually entered. After the entry is done, the
purchasing account is debited, and the supplier account is credited. The first GRN
is stamped “CAPTURED” as proof that the batch is captured.

The GRNs are sent back to the accounting department and filed per supplier.

REQUIRED MARKS

2.1 Identify and explain eight (8) weaknesses and its corresponding risk in (24)
the current system.

Structure your answer in the following format:

Weakness - 1½ mark for each Risk - 1½ mark for each valid

valid weakness risk

Please note: You should use the proper wording of a weakness (Lack of
…, inadequate, insufficient … etc) in explaining your weakness. Half
marks will be deducted if proper wording is not used.

(Adapted Performing Internal Audit Engagements)

PART B
After the finalisation of the purchasing and payment audit, the CEO discussed with the chief
audit executive (CAE) that he wants internal audit activity to do the following engagement:

The CEO and senior management are worried about the drastic changes that were needed for
the accounting and management information systems. They were surprised that the company
still used the manual system to account for the majority of transactions. The general and
[TURN OVER]
 CONFIDENTIAL

8 of 9 AUI3701
Sept/Nov 2021
subsidiary ledgers are computerised but consist of a batch system functioning with outdated
equipment. They plan to convert the purchasing and payment process cycle to a complete real-
time system. They want to request the internal audit department to assist with providing advice
on recommending appropriate controls for implementation in the new system.

REQUIRED MARKS

2.2 Conclude whether this assignment is an assurance or consulting service. (16)

In your discussion, provide the definitions of both services, five (5)
differences between them and the conclusion with your reasoning.

QUESTION 3 14 marks

You are the CAE at Imagine Ltd, an engineering company based in Cape Town, with operations
throughout South Africa. At an executive committee (EXCO) meeting, the audit committee
chairperson enquires about enterprise risk management (ERM) and what it entails. You provide
the following ERM activities as examples to the committee:

1. Reviewing the management of key risks

2. Accountability for risk management
3. Developing ERM strategy for board approval
4. Implementing risk responses on management’s behalf
5. Maintaining and developing the ERM framework
6. Evaluating the reporting of key risks
7. Imposing risk management processes
8. Coaching management in responding to risks

You also suggest control risk self-assessment (CRSA) workshops to be provided across the
organisation to foster control awareness throughout the company.

REQUIRED MARKS

3.1 For the abovementioned ERM activities, classify each activity as one of (8)
the following:

 Core internal audit roles, or

 Legitimate internal audit roles with safeguards, or
 Roles internal auditing should not undertake.

3.2 Provide six (6) tips on the steps that can be taken to promote the (6)
implementation of CRSA within the organisation.

[TURN OVER]
 CONFIDENTIAL

9 of 9 AUI3701
Sept/Nov 2021

QUESTION 4 24 marks

The three elements of fraud are 1) pressure/incentive; 2) rationalisation and 3) opportunity.

Consider the following:

1. A client company which holds large quantities of inventory does not keep perpetual
inventory records.
2. Relations between the warehouse manager and the warehouse personnel are very poor
as the warehouse manager does not treat his staff with respect.
3. A company which has a centralised accounting department makes all its payments (e.g.,
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.
4. The company reconciles its creditors ledger with creditors statements only at year-end.
5. The company pays salaries well below the industry norm and adopts the attitude that “if
staff don’t like it, they can leave”.
6. The company makes a significant number of cash sales.
7. Management and other employees constantly complain about the company and
company morale is low.
8. There is inadequate authorisation of expenditure incurred by management and
employees on behalf of the company e.g., salesmen’s expense claims and management
travel claims.

REQUIRED MARKS

4.1 Indicate into which element of fraud each of the above risk factors (1 to 8) (16)
falls, and give a brief explanation as to why each of the factors would
increase the fraud risk of misappropriation. Use the table below to provide
your answer:

Element of fraud Explanation

1. 1.

4.2 Discuss eight (8) roles and responsibilities relating to fraud, of an internal (8)
auditor, when conducting audit engagements.

(Adapted from Graded Questions on Auditing 2019)

©
Unisa 2021