FACULTY/COLLEGE College of Business and Economics

SCHOOL School of Economics

DEPARTMENT Acountancy
CAMPUS(ES) APK
MODULE NAME Audit 200
MODULE CODE AUD2B01
SEMESTER Second
ASSESSMENT OPPORTUNITY, Final Assessment Opportunity
MONTH AND YEAR November 2019

ASSESSMENT DATE 22 November 2019 SESSION 09:00 – 12:00

ASSESSOR(S) Mrs C Hohls-Du Preez and Ms M Marchbank
MODERATOR(S) Mrs P Rama and Ms K Dempsey
DURATION 37,5 min READING TIME TOTAL MARKS 125
150 min WRITING TIME

NUMBER OF PAGES OF QUESTION PAPER (Including cover page) 8

INFORMATION/INSTRUCTIONS:
_________________________________________________________________________
 This is a closed-book assessment.
 There are 2 questions. EACH question MUST be answered.
 Answer each question in a separate book. Take note of which colours to use per question.
Question 1 and Question 2 RED BOOK
 Read the questions carefully and answer only what is required.
 Number your answers clearly and correctly as per the question paper.
 Write neatly and legibly on both sides of the paper in the answer book, starting on the
first page.
 Delete all (even single open lines) open spaces on your answer sheets with pen. Pages
on your answer sheets that contain open spaces will be marked as such and those pages
will not be eligible for a remark.
___________________________________________________________________

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 ALL QUESTIONS MUST BE ANSWERED IN THE RED COLOURED BOOK.

QUESTION 1 10 MARKS

1. An audit conducted in accordance with the ISA’s will provide what

kind of assurance?
2 marks

2. Payroll expenses have assertions that are about classes of

transactions and events for the period under audit; the correct pair of
assertions for payroll expenses would be:
2 marks

3. Happy Auditors Incorporated has discovered during planning that

the controls of the company Fast Tyres Limited, are not operating
effectively; this would require the auditor to do more:
2 marks

4. Risk of loss of market share due to competitors with new & improved
products/new entrants to the market is best described as the following
business risk:
2 marks

5. When evaluating the internal audit function, which of the following is

not an aspect that the auditor must consider?
2 marks

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QUESTION 2 111 MARKS

You are currently a third year audit trainee at Local Auditors Incorporated (hereafter
LA). LA is a medium sized audit firm with offices in the Gauteng Province. Their two
main offices are situated in Sandton and Pretoria. You are part of the audit team
auditing Krishnee’s foods. This is the third year your company has been auditing
Krishnee’s foods. Their financial year-end is 31 October 2019.

Krishnee Naidoo is a well-established business woman in South-Africa. Krishnee has

a real passion for food and started her own company 20 years ago. Initially the
company just focused on providing small, take away type of food in the Student Centre
at the University of Johannesburg’s Kingsway campus, but during the last 10 years
the company has grown into a whole network of companies. Please see the
organisational structure below:

Krishnee's
foods

Taj Mahal
Take Away

Fantasy Linguini's
Lijo tse
Parties & Pizza &
Ntle
Cakes Pasta
Taj Mahal Take Away

Krishnee opened the Taj Mahal in 2000. It was the first company she started.
Although she studied Business Management, she stated that opening her own
business is still a very daunting task. You learn everything as stipulated in textbooks,
however application of this in the real world always proves as very difficult and you
feel rather unprepared.

Taj Mahal is a medium-sized take away shop in the Student Centre of the University
of Johannesburg’s Kingsway Campus. Their main focus is to provide authentic Indian
cuisine that students can afford. Revenue has begun to decline over the past two
years and thus Krishnee decided to add additional items to the menu. The additional
items focus more on “student type” food such as “slap chips”, hamburgers and toasted
sandwiches.

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Krishnee recently installed new computer systems in all her businesses so that she
will have one integrated system where she can see exactly how each of the companies
are performing. When you work on the system at the different locations, you will only
have access to the financial information of that specific company. There are controls
in place to ensure that only Krishnee and her financial manager have access to the
consolidated financial information of the entire business.

As Krishnee is not an expert in Information Technology, she made use of a service

provider to help with the development and installation of the new system. Last week
there was a fire in her shop and she lost all the data that was on the computer system.
When she spoke to the service provider on how to retrieve the data, he indicated that
this should not be a problem.

Fantasy Parties & Cakes

Fantasy Parties and Cakes (hereafter FPC) have been in operation for the past five
years. This will be the second year that your company is auditing FPC.

The current economic situation in South Africa, constant increase in petrol prices and
the fear of a downgrade by the rating agency Moody’s has led to a significant drop in
revenue as it appears that people do not have money to spend on extravagant cakes
and parties anymore. The market has also become increasingly competitive as
companies drop their prices in an attempt to “survive”. In the past FPC used to be
fully booked for November / December year-end functions by July already, however,
this year their biggest customers have not yet even made a reservation. The year-
end functions normally provide a significant increase in revenue. FPC’s management
is of the opinion that they will not meet the budgeted figures for this year and are
considering a loan from the holding company to be in a position to pay annual
Christmas bonuses this year.

During the prior year audit you noticed lots ofcommunication taking place with regards
to ethical values, but this year there has barely been any communication taking place.
It appears as though management is acting in a very “dictator like” style and staff do
not have the freedom to talk to management.

Besides the obvious risk (significant drop in revenue) you cannot find any risk register
and the controls with regards to reconciliations, like reviewing by senior staff, do not
appear to be in place.

You also found that payments are being made without the necessary approval from
management and creditor’s bank accounts are changed without the necessary
supporting documentation as received from the creditors.

Although FPC provides a service, they also have a reasonable sized Fixed Asset
Register. The assets in this register are used to bake the cakes and make the food
for the parties, but there are also a significant amount of props and jumping castles
that are used when setting up parties at the locations and they have a fleet of seven
vehicles used to transport the relevant props and equipment to the various party
locations.

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The second year trainee completed the materiality calculation and provided you with
the work paper and calculation below:

Client: Fantasy Parties and Financial Yearend: 31

Cakes October 2019
Prepared by: A Trainee
Reviewed by: T Rainee
Date: 10 November 2019 WP 241
Calculation of materiality.

Purpose:
The purpose of this working paper is to determine the materiality amount for
the 2019 financial year.

Indicator Percentage Amount Low Range High Range

Turnover ½% - 1% 30 000 000 150 000 300 000
Gross profit 1% - 2% 18 000 000 180 000 360 000
Net Profit 2% - 5% 3 000 000 60 000 150 000
Fixed Assets 1% - 2% 54 000 000 540 000 1 080 000
Equity 5% - 10% 31 000 000 1 550 000 3 100 000

Audit risk is assessed as low and therefore the high range will be used.

As FPC provides a service, only the SCI will be used to determine materiality.

Since we audited FPC last year, we will be making use of the prior year audited
figures to calculate materiality.

Conclusion:
Due to all of the above the materiality will be set at R 3 100 000.

Linguini’s Pizza & Pasta

Your company has been auditing Linguini’s Pizza & Pasta (Hereafter LPP) since its
opening in 2014. LPP used to be in the student center at the Bunting Road Campus
but has moved to Campus Square during the current financial year. While doing a site
visit, you noticed that they now have a bar in the restaurant and are selling alcohol.
Back at head office, you asked for the relevant documentation regarding the license
to sell alcohol, but management couldn’t provide you with a license or application
forms.

Lijo Tse Ntle

You have been approached by Lijo Tse Ntle Limited (hereafter LTN) to audit their
company. The financial year-end is 31 October 2019. LTN specializes in selling
catering equipment for government departments only – be it local governments or
international governments. The quality of the catering equipment is world renowned

5
as this is the same quality that famous chefs use in their restaurants. They have been
winning the tenders annually from the respective governments sectors both locally and
internationally. They have their head office in Gauteng, Pretoria and several other
branches in Kwa-Zulu Natal, Cape Town, Free State, Limpopo, North West;
Mpumalanga and internationally in the United States of America (USA). LTN has
recently been listed on the Johannesburg Stock Exchange (JSE). Management of the
company have indicated that they do not care for any Corporate Governance issues.

Management information:
LTN has been in operation for the past three years. Krishnee foods hold a 30% interest
while the balance of the interest is held by the JSE board. Management of LTN are as
follows:
 CFO: Mandi Makizela (recently appointed CFO after the previous CFO left after
beng implicated for fraud).
 Financial controller (FC): Karabo Ntuli has been the FC for the past three years.
 Human resource director: James Mtali newly appointed and not yet familiar with
the company.

Background information:
 Sales is a mixture of 40% local and 60% international sales. The international sales
occur in the USA and are denominated US dollars.
 Recently LTN has made news about being connected to the BORATA scandal (it
was found LTN was also linked to the bribing of government officials for tenders),
suggesting that they had been awarded tenders unfairly and that there appears to
be some allegations that significant annual bribes have been paid to secure these
tenders.
 One of their competitors; Best Catering Suppliers (Pty) Ltd have therefore initiated
legal proceedings against LTN for unfair contract awarding and for the loss of R20
million rand in sales.
 The CFO has decided not to adhere to the changes that the Food and Health sector
of South Africa has required the company to implement and has been found saying
they will have to prove that there has been non-compliance and that it will take a
while.
 A large number of experienced accounting staff have resigned in the past two
months and these roles have yet to be filled as the CFO has said that the current
staff complement must simply step up to the plate.
 Management’s remuneration is directly proportional to the profit for the year; that
is bonuses are paid as long as the profit margins are maintained at least 13%
higher than the prior financial year end.
 Many local municipalities due to their poor management of resources, have
stopped paying their accounts and LTN’s accounts receivable has grown
substantially and the CFO refuses to make a provision for these accounts as this
will affect the profit which will affect their bonuses.
 Following the financial strain that LTN has been under as a result of the decline is
cash collections, LTN will be applying for overdrafts to bridge the gap of cash that
they are experiencing at the moment.
 The audit needs to be done as soon as possible as there is a deadline with the
bank that LTN is applying for the overdraft. The audit should therefore be
completed in less than a week.

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 LTN owns 60% in another company, Knives & Forks (Pty) Ltd and is relying heavily
on these results to boost their statement of financial position. The subsidiary has
the same year end but is audited by different auditors.

Other matters:
 This is the busiest time of year for your audit firm. You already have three audits
running concurrently and your staff are fully booked.
 The CFO has refused your audit firm permission to contact the previous auditors
saying that they will only tell you lies.
 The CFO has said that the engagement letter will only be signed once he gets the
unqualified audit report from your audit firm.
 The audit partner, Tito Ldasi has decided to accept the audit as the audit fees are
substantially higher than they quoted the client.

Trade receivables:
One of the staff members, Lana Lay has indicated to you that during the planning
phase; the accounts receivable accounts and revenue/sales accounts have journal
entries that were passed by the CFO as he said these are sales that will occur before
year-end. Lana also indicated that these are not really sales, as there was no sales
order etc. at all. The staff member provides you with the following journal entry that
she was instructed to pass by the CFO:
Cr. Sales 1,000,000
Cr. Vat output 150,000
Dr. Trade receivables 1,150,000

In addition to the trade receivables, Lana also informed you that the 31 October 2019
VAT return was completed by her and the VAT output that is payable R1,278,909; the
CFO has also given her a list of invoices that he said she must still claim against the
VAT output payable amounting to VAT input of R1,450,000 – when she asked for the
invoices; she noted that the invoices were not made out in the name of the company
LTN but rather in another company, called LTN Close Corporation. Lana did raise this
issue with the CFO, but his reply was that if she does not do as he says he will fire
here.

Other unrelated matters:

One of your other friends, Lily Hlali recently qualified as a Chartered Accountant in
February 2019. She had a lifelong dream to start her own audit firm. She has emailed
you some questions in the email below:

7
To: you@localauditors.co.za
From: LHlali@newtownauditors.co.za
Date: 31 October 2019
Subject: Audit firm queries

Dear Friend,
Thank you so much for taking my call the other day. I really appreciate your input!
Below is the information that you requested:
1. The company we registered is a (Pty) Ltd.
2. There are 5 directors who are all audit partners in the audit firm and their details are
as follows:

Teddy Zumi* – has not passed the second board exam, the APC yet. Has completed
their articles at a Big Four audit firm and has been signed off as competent.

Stefani Ngoma – has passed all her exams and completed her articles as well.

Lily Hlali* - has passed all her exams and completed her articles as well.

Steli Sokusza* – has not passed board one yet (ITC), she will try to pass in January
2020 and has completed her articles as well.

Samual Xa – has passed all board exams but has not completed their articles; he has
a year to go.

Only the directors indicated by the * are shareholders.

The audit practice has already accepted three new engagements and are excited to
gain more clients.

Thanks,

Lily

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 FACULTY/COLLEGE College of Business and Economics
SCHOOL School of Economics
DEPARTMENT Acountancy
CAMPUS(ES) APK
MODULE NAME Auditing 200
MODULE CODE AUD2B01
SEMESTER Second
ASSESSMENT OPPORTUNITY, Final Assessment Opportunity
MONTH AND YEAR November 2019

ASSESSMENT DATE November 2019 SESSION 09:00 – 12:00

ASSESSOR(S) Mrs C hohls-Du Preez and Ms M Marchbank
MODERATOR(S) Mrs P Rama and Ms K Dempsey
DURATION 37,5 min READING TIME TOTAL MARKS 125
150 min WRITING TIME

NUMBER OF PAGES OF QUESTION PAPER (Including cover page) 5

INFORMATION/INSTRUCTIONS:
___________________________________________________________________________
 This is a closed-book assessment.
 There are 2 questions. EACH question MUST be answered.
 Answer each question in a separate book. Take note of which colours to use per question.
Question 1 and Question 2 RED BOOK
 Read the questions carefully and answer only what is required.
 Number your answers clearly and correctly as per the question paper.
 Write neatly and legibly on both sides of the paper in the answer book, starting on the
first page.
 Delete all (even single open lines) open spaces on your answer sheets with pen. Pages
on your answer sheets that contain open spaces will be marked as such and those pages
will not be eligible for a remark.
_________________________________________________________________________

1
 ALL QUESTIONS MUST BE ANSWERED IN THE RED COLOURED BOOK.

QUESTION 1 10 MARKS
6. An audit conducted in accordance with the ISA’s will provide what kind of
assurance?
a. Reasonable.
b. Absolute.
c. No assurance.
d. None of the above.
2 marks
7. Payroll expenses have assertions that are about classes of transactions and
events for the period under audit; the correct pair of assertions for payroll
expenses would be:
a. accuracy and existence.
b. rights and obligations.
c. occurrence and classification.
d. valuation and allocation.
2 marks

8. Happy Auditors Incorporated has discovered during planning that the

controls of the company Fast Tyres Limited do not work (failed); this would
require the auditor to do more:
a. test of controls.
b. substantive procedures.
c. bank confirmations.
d. refuse the audit engagement.
2 marks

9. Risk of loss of market share due to competitors with new & improved
products/new entrants to the market is best describes the following business
risk:
a. interest risk.
b. commodity risk.
c. currency risk.
d. competition risk.
2 marks

10. When evaluating the internal audit function, which of the following is not an
aspect that the auditor must consider?
a. Timing of the work performed.
b. Objectivity.
c. Technical competence and skills.
d. Application of a systematic and disciplined approach.

2 marks

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QUESTION 2 111 MARKS
YOU ARE REQUIRED TO: MARKS:

a. With reference to Linguini’s Pizza & Pasta on page 4:

1. What is the ethical issue according to the Code of (2)

Professional Conduct? Justify your answer (1)
2. What section of the CPC is applicable?
3. According to the CPC, what are the auditor’s specific (7)
responsibilities?

b. With reference to Lijo Tse Ntle on page 5:

1. With reference to pre-engagement activities, fully discuss

with reasons, what Local Auditors Inc should have
considered when deciding whether or not the audit of LTN
should have been accepted. (8)
2. Identify the auditing standard that is applicable to quality
control at firm level. (1)
3. Based on the auditing standard that you have identified in 2.
above; list the elements applicable to a firm’s systems of
quality control. (7)

c. With reference to Fantasy Parties and Cakes on page 3:

1. Identify and discuss what LA should consider when

obtaining information about the following:
a. Information about the entity and its environment. (5)
b. Information about the control environment. (3)
2. Do you agree with the risk assessment of the trainee?
Justify your answer. (4)
3. Do you agree with the indicator used to calculate
materiality? Justify your answer. (2)
4. Do you agree with the figures used to calculate materiality?
Justify your answer. (3)
5. Based on what you know about Fantasy parties and cakes
what audit approach will be used for the current year audit?
Justify your answer. (2)
6. With reference to ISA240, what are the Risk Assessment
Procedures that an auditor must perform? (4)
7. With reference to ISA240, what are the responses to the
assessed risks of material misstatements due to fraud
available to the auditor? (3)

d. With reference to Taj Mahal Take Away on page 3:

3
 1. Which specific general control should be implemented to
limit access to the entire system? (1)
2. Advise Krishnee on what controls should be implemented
to ensure that, in the event of a disaster, she will be able to
continue her operations? (6)
3. In order to make sure responsibilities are clear when
making use of a Service Provider, a service level
agreement has to be signed, discuss five (5) elements that
should be included in the service level agreement. (5)
4. List three characteristics of an IT environment and their
considerations.
Your answer should be in the following format:

Consideration Characteristics
(6)
Table Format (1)

e. With reference to Lijo Tse Ntle on page 5:

1. Identify and discuss the audit risks of material misstatement

on a financial statement level apparent from the information
that you may consider relevant during the planning of Lijo (11)
Tse Ntle audit as at 31 October 2019. Your answer must be
answered in the following format:

No. Risk Indicator (no marks Description of risk

awarded for this!)
1.
Table Format (1)

2. Based on your assessment in 1. above; what is the overall

assessment of audit risk? Justify your answer. (3)

f. With reference to Lijo Tse Ntle on page 5:

1. List the procedures for obtaining audit evidence. (4)

2. When using information produced by the entity, what
should the auditor consider? (2)
3. With respect to Trade receivables; what are the specific
concerns at an assertion level? (1)
4. Provide the correcting journal for Trade receivables based
on your concern identified in 3 above. (3)
5. Identify and list the assertions that are applicable to the
trade receivables account for balances at the end of the
period. (4)
6. Assuming there was a sales order for the sales; provide
one substantive procedure that you would perform to
confirm the assertion of your choice. (1)

4
g. With reference to Lijo Tse Ntle on page 5:
1. With reference to the email received from Lily, do you agree
with the establishment of the audit firm Newtown Auditors
(Pty) Ltd? Provide reasons for your answer. (5)
2. With reference to Lijo Tse Ntle, discuss whether the
information that was supplied to you by the staff member of
LTN regarding the VAT issue, would this constitute a
Reportable Irregularity in terms of the APA Act? (5)

TOTAL FOR QUESTION 2 (111)

OVERALL PRECISION AND INTERPRETATION MARKS (4)
TOTAL FOR THE EXAM (125)