Auditing 288 388 2024

CHAPTER 1
Suggested Solutions
INTRODUCTION AND BACKGROUND
1.1 Suggested Solution 12 marks

1. The different types of auditors

• Independent auditor (external auditor)
• Internal auditor
• Government auditor – Public auditor

2. Different types of audits

• Financial statement audit
• Compliance audit
• Operational or Performance audit

3. Different types of services

• Assurance
- Reasonable assurance - Audit
- Limited assurance - Independent review
• Non-assurance
- Consultation services
• technology
• international
• financial planning
• taxation
- Compilation
- Agreed upon procedures

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1.2 20 marks

(a)The objective of an audit is

• To express an opinion on the financial statements (1)
• that they are free of material misstatement, and (1)
• that they are a fair representation in all material aspects (1)
• of the financial position and performance of the company in accordance with
the appropriate financial reporting framework. (1)
AVAILABLE 4
MAXIMUM 3

− The auditors’ opinion:

• Enhances the credibility of the financial statements, but (1)
• does not warrant the future feasibility of the business; and (1)
• does not warrant the capability and effectiveness with which management
manages the operations of the entity. (1)

− An audit is performed in accordance with ISA’s and provides reasonable

assurance that the statements are overall free from material misstatement. The
inherent limitations of an audit may however be the cause of material
misstatements not being traced. (1)
These inherent limitations include:
o The nature of financial reporting where management use judgement in
preparing financial statements when applying of IFRS and making
estimates. (1)
o The nature of audit procedures performed when considering practical and
legal limitations on audit. (1)
o The fact that management provides documentation and explanation on
which to base conclusions which may be intentionally or unintentionally
incorrect. (1)
o Management may try to hide fraud. (1)
o Timeliness of financial reporting and balance between benefit and cost (1)
o Reliability of evidence versus cost. (1)
o Time and resources available and the use of sampling and not 100% testing
when performing the audit. (1)
AVAILABLE 11
MAXIMUM 9

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(b) Duties and responsibilities of an auditor

• To communicate opinion; (1)
• to investigate annual financial statements; (1)
• to ensure that appropriate accounting records have been kept in accordance
with the Company’s requirements (1)
• that minute books + attendance registers in respect of company, directors’ and
managers’ meetings have been kept in the appropriate form as required by the
Companies Act (1)
• to acquire all the information and explications that to his knowledge and
conviction are necessary for the purpose of the performance of duties; (1)
• to ascertain that annual financial statements agree with his accounting records
and accounts; (1)
• to investigate accounting records of company and to perform tests and other
audit procedures he finds necessary to ensure that annual financial statements
(1)
• reasonably reflect the financial position of the company and
• the results of its operations
o in accordance with generally accepted accounting practice, applied on
a basis that is compatible with that of the previous year;
• directors’ report: is not in breach of or its meaning distorted with a reasonable
interpretation of the annual financial statements and accompanying notes; (1)
• to adhere to any appropriate requirements of the Auditing Profession Act at all
times. (1)
AVAILABLE 9
MAXIMUM 8
GRAND TOTAL 20

1.3 14 marks
ULLS LTD
MEMORANDUM FROM THE AUDITORS
To: Mr Fourie Hougaard
From: Mr X
Date: 11 April 2011
Subject: Answers to questions on audit concepts
(1/2 mark each - total 2)

1. WHAT IS AN AUDIT?
• It is the systematic process of the
• collecting & evaluating of evidences and information objectively
• of assertions on economic operations and events made by management
of an entity.
• in accordance with laid-down criteria, quantitive and or qualitative.
• Results are communicated to users in writing.
MAXIMUM: 3

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2. OBJECTIVE OF AN AUDIT
• To express an opinion on the financial statements (1)
• that they are free of material misstatement, and (1)
• that they are a fair representation in all material aspects (1)
• of the financial position and performance of the company in accordance
with the appropriate financial reporting framework. (1)
AVAILABLE: 4
MAXIMUM: 3
3. REASONABLE ASSURANCE

An audit is performed in accordance with IAS’s and provides reasonable assurance

that the statements are overall free from material misstatement. The inherent
limitations of an audit set out in the ISA’s may however be the cause of material
misstatements not being traced. (1)

These inherent limitations include:

o The nature of financial reporting where management use judgement in
preparing financial statements when applying of IFRS and making
estimates. (1)
o The nature of audit procedures performed when considering practical and
legal limitations on audit. (1)
o The fact that management provides documentation and explanation on
which to base conclusions which may be intentionally or unintentionally
incorrect. (1)
o Management may try to hide fraud. (1)
o Timeliness of financial reporting and balance between benefit and cost (1)
o Reliability of evidence versus cost. (1)
o Time and resources available and the use of sampling and not 100% testing
when performing the audit. (1)
AVAILABLE: 8
MAXIMUM: 8

1.8 - Suggested solution 19 Marks

1)
(b) The objective of an audit is
• To express an opinion on the financial statements (1)
• that they are free of material misstatement, and (1)
• that they are a fair representation in all material aspects (1)
• of the financial position and performance of the company in accordance with
the appropriate financial reporting framework. (1)
The audit
• does not guarantee the survival of the business; and (1)
• also does not aim to detect fraud (1)
• does not warrant the capability and effectiveness with which management
manages the operations of the entity. (1)

AVAILABLE 7
MAXIMUM 4

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2)
An audit is performed in accordance with ISA’s and provides reasonable assurance
that the statements are overall free from material misstatement. The inherent
limitations of an audit set out in the ISA’s may however be the cause of material
misstatements not being traced. (1)
These inherent limitations include:
o The nature of financial reporting where management use judgement in
preparing financial statements when applying of IFRS and making
estimates. (1)
o The nature of audit procedures performed when considering practical and
legal limitations on audit. (1)
o The fact that management provides documentation and explanation on
which to base conclusions which may be intentionally or unintentionally
incorrect. (1)
o Management may try to hide fraud. (1)
o Timeliness of financial reporting and balance between benefit and cost (1)
o Reliability of evidence versus cost. (1)
o Time and resources available and the use of sampling and not 100% testing
when performing the audit. (1)

AVAILABLE 8
MAXIMUM 8

3)
The postulates, in other words, the corner stones of audit are based on:
• Information subjected to an audit is verifiable. (1)
• The information subjected to an audit must be compiled or prepared in
accordance with an identified set of criteria. (1)
• The process of creating an opinion consists of the collection of persuasive
audit evidence in accordance with a risk approach. (1)
• The auditor’s opinion is expressed in the form of a report on the audited
information. (1)
• When the auditor investigates information with the purpose of expressing an
opinion about it, he acts exclusively in his capacity as auditor. (1)
• An audit must be performed by a person who is independent from the
entity being audited and who is able to make objective decisions and
come to unbiased conclusions. (1)
• The professional status of an independent auditor imposes commensurate
professional obligations. (1)

AVAILABLE 7
MAXIMUM 6
BULLET PRESENTATION: 1