COLLEGE OF BUSINESS AND ECONOMICS

DEPARTMENT COMMERCIAL ACCOUNTING

Subject: Auditing and Internal Control 2A

Subject Code: AIC22A2
Test: Test 1

Test date: 23 March 2018

Marks: 50 Marks
Duration: 1.5 Hour
Pages 3 (three) pages (including cover sheet)
No of questions 4 (Four)

Examiners: D de Villiers; B Kuzwayo & L Nzama

Internal moderator: J Mamaile

Information to students:

1. You are allowed to use a calculator.

2. An answer sheet/book will be supplied to you, in which you must write your answers in. If you
need another book/sheet, please ask the invigilator for another.
3. By writing this test and affixing your name and student number to the answer sheet/book, you
confirm that you are conversant with the test regulations of the University.
4. Use only a blue or a black pen to answer your questions. Answers given in pencil will not be
marked.
5. Make sure your handwriting is neat and easy to read. Set out your answer in a clear logical
manner.
6. Use the same numbers for your answers as those used for the questions in the test/examination
paper.
7. Hand your answer book to the invigilator at the end of the test/examination.
AIC22A2 – Test 1 - 2018

QUESTION 1 [10]

There is a split between ownership and management of most listed companies today. This is because the
companies grew from companies owned and managed by the same person into large public companies
where the owners and managers were not the same person any more.

REQUIRED:
1.1 Describe the main responsibility of the board of directors of a large listed company. (1)
1.2 Describe the difference between Executive Directors and Non-Executive Directors. (2)
1.3 What is the role of the external auditor in terms of the reports made by those managing the
company to the shareholders of the company? (1)
1.4 What is the role of internal auditors of the company? (1)
1.5 Indicate whether (i) external auditors and (ii) internal auditors are on the payroll of the company?
(2)
1.6 What are the functions of the audit committee of the company? (2)
1.7 Indicate whether the audit committee is a subcomponent of the external audit function or internal
audit function. (1)

QUESTION 2 [17]

There are a number of ways in which engagements carried out by professional accountants
can be classified, for example:
a) Assurance engagements
b) Non-assurance engagements
c) Reasonable assurance
d) Limited assurance
e) Absolute assurance

REQUIRED:
2.1) Briefly explain each of the above engagements terms. (10)
2.2) Describe the definition that is used to calculate the public interest score of an entity (4)
2.3) Based on the public interest score indicate when will a company be
(i) externally audited or (1)
(ii) be subjected to a review engagement or (1)
(iii) that no external audit need to be done. (1)

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AIC22A2 – Test 1 - 2018
QUESTION 3 [16]

The IFAC’s code of professional conduct requires professional accountants to identify threats that could
negatively impact on fundamental principles. Such threats should then be addressed by putting
safeguards in place. The IFAC’s code of professional conduct categorises possible threats into five broad
categories.

REQUIRED:
3.1) List the five categories of fundamental principles on which the Code of Professional conduct of
professional accountants is based. (5)
3.2) List the five categories of threats suggested by the Code of Professional conduct. (5)
3.3) Describe the steps which a professional accountant should carry out in applying the conceptual
framework in a general sense. (6)

QUESTION 4 [7]

4.1) What kind of threat would arise when a professional accountant values a client’s shares and then
leads the negotiations on sale of the client’s company? (1)

4.2) Malebo Mogale has been the partner in-charge of the audit of Uthango Ltd, a company listed in
the financial services sector of the JSE. Her father-in-law has received a big lump sum as a
retirement benefit and wants to purchase 100 000 Uthango Ltd’s shares at R45 each. Malebo has
advised him not to invest in the shares as the company is expected to do badly in the current
financial year. Is Malebo Mogale in contravention of the Code? Give reasons for your response.
(2)

4.3) Jan Jacobs, an audit manager, has been offered a high paying job at one of his clients. Explain
what impact would this have on the audit and how his firm should handle this situation. (2)

4.4) A cheque of an amount of R10 000 has arrived on your desk from a client, Busby & Co with
the following note:
“This cheque represents 10% of the money you saved the company as an auditor in uncovering
wages fraud. Obviously we still expect you to charge a fee for the work you have done, but we
hope that you will accept this with our gratitude.” What will be your response in this situation?
(2)

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AIC22A2 – Test 1 - 2018

Memo to Test 1 (Mod A) – 2018

QUESTION 1 – Solution (Maximum 10 marks)

Any valid argument or the student can consider the following in his/her answer:

1.1 The Board is overall responsible for the whole company and everything that happens in it. 
They are responsible for running/managing the business on behalf of shareholders.  The board
should ensure proper governance of the enterprise and must direct the strategy of the business in
ensuring sustainability of the company. 
1.2 (i) Executive director: An executive director is involved in the management of the company
and is a full-time salaried employee of the company. 
(ii) Non-Executive director: The role of a non-executive director is to provide independent
judgement and advice on issues facing the company. They are required to attend board
meetings and also to maintain a broad knowledge of the economic environment, industry
and business of the company. 
1.3 The external auditor acts as an independent party to express an opinion on whether the reports
made by those managing the company to those that owns the company (shareholders) are fair .
1.4 Internal auditors are there to assist the board of directors and management of the company in
evaluating the efficiency and effectiveness of the company’s internal control systems and if the
risks faced by the company has been identified and addressed .
1.5 (i) External auditors: They are not on the payroll of the company 
(ii) Internal auditors: They are on the payroll of the company 
1.6 The audit committee of the company has functions such as to assists the Board with financial
functions like: review and approval of financial statements, appointment of external auditors ,
overseeing internal audit, internal controls, risk management and integrated reporting .
1.7 The audit committee is not a subcomponent of the external or internal audit function. The audit
committee overseeing that these two functions are executed the way it should be executed
ensuring that their work will benefit the company and its shareholders .

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AIC22A2 – Test 1 - 2018
MEMO TO QUESTION 2.1 (Maximum 10marks. (2 marks each) One mark per fact)
Any valid argument or the student can consider the following in his/her answer:

(a) Assurance engagement –

An engagement in which the professional accountant expresses a conclusion designed to enhance the
degree of confidence of the intended users (of the opinion) about the outcome of the evaluation of a
subject matter against certain criteria. 

For example the auditor expresses an opinion on the fair presentation of the financial statements
prepared by the directors, to enhance the confidence of users of those financial statements (provide an
increased level of credibility to the FS). 

(b) Non-assurance engagement –

An engagement in which the professional accountant does not express an opinion or comment on the
subject matter of the engagement. 

For example, the professional accountant is engaged to compile certain information without being
asked to comment on it in any way. 

(c) Reasonable assurance –

This conveys that the financial information on which the professional accountant is reporting is not
100% correct but that the professional accountant has carried out procedures which provide sufficient
appropriate evidence to satisfy the professional accountant that the financial information is free of
material misstatement (mistakes/errors, which, had these been known to the user of the financial
information, would have affected the decisions of that user). 

(d) Limited assurance –

- This type of assurance arise out of a review engagement 

- A review engagement is an audit that is smaller than a reasonable assurance audit therefor a
lesser type of assurance can be given as a reasonable assurance audit. 

(e) Absolute assurance–

An auditor cannot give absolute assurance as an outcome for work done . The auditor is restricted to
provide reasonable assurance because there are inherent limitations the auditor has in performing the
audit. 

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AIC22A2 – Test 1 - 2018
MEMO TO QUESTION 2.2 (Maximum 4 marks. One mark per fact)
Any valid argument or the student can consider the following in his/her answer:

An entity’s public interest score will be the sum of

- A number of points equal to the average number of employees during the financial year .
- One point for every R1 million (or portion thereof) of turnover .
- One point for every R1 million (or portion thereof) of 3 rd party liability at year end .
- One point for every individual who directly or 9indirectly has a beneficial interest in any of the
company’s shares/ member’s interests .

MEMO TO QUESTION 2.3 (Maximum 3 marks. One mark per fact)

Any valid argument or the student can consider the following in his/her answer:

(i) Companies should be externally audited when the public interest score is 350 points or
higher . Companies should also be externally audited when the public interest score is
between 100 and 349 when the Annual Financial Statements (AFS) has been internally
compiled .
(ii) Companies should be subjected to a review engagement when the public interest score is
between 100 and 349 when the Annual Financial Statements (AFS) has been externally
compiled . Companies should be subjected to a review engagement when the public
interest score is less than 100 
(iii) Companies that has a public interest score of less than a 100 should not be subjected to an
external audit or review engagement .

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AIC22A2 – Test 1 - 2018
MEMO TO QUESTION 3.1 (Maximum 5 marks. One mark per fact)
Any valid argument or the student can consider the following in his/her answer:

Integrity 
Objectivity 
Professional competence and due care 
Confidentiality 
Professional behaviour 

MEMO TO QUESTION 3.2 (Maximum 5 marks. One mark per fact)

Any valid argument or the student can consider the following in his/her answer:

Self-interest threats: 
Self-review threats: 
Advocacy threats: 
Familiarity threats: 
Intimidation threats: 

MEMO TO QUESTION 3.3 (Maximum 6 marks. One mark per fact)

Any valid argument or the student can consider the following in his/her answer:

a Identify threats to their compliance with the fundamental principles .

* this should be a conscious effort to consider all ethical (professional conduct)
implications relating to the particular situation e.g. a new appointment, promoting the
firm , etc.

b. Evaluate the significance of the threat 

* unless the threat is clearly insignificant the chartered accountant is required to apply
appropriate safeguards .
* there is no set of rules which can be applied to determine whether a threat is significant
. The decision
• will be a matter of professional judgement 
• must take into account the public interest – generally the greater the public
interest, the more likely that the threat will be significant 
• should be one which a reasonable and informed third party, having knowledge of
all relevant information, would take .

c. Apply appropriate safeguards when necessary 

* the safeguards should eliminate or reduce the threat to an appropriate level
(insignificant) which ensures that the chartered accountant’s compliance with the
fundamental principles .
* there will be situations where no safeguard can address the threat; in which case the
chartered accountant will need to withdraw from (not enter into) the relationship,
transaction, engagement , etc.
* safeguards fall into two categories, i.e. safeguards created by the profession, legislation
or regulation, or safeguards in the work environment .

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AIC22A2 – Test 1 - 2018
QUESTION 4.1 – Solution (Maximum 1 marks)
Advocacy threat 

QUESTION 4.2 – Solution (Maximum 2 marks)

Any valid argument or the student can consider the following in his/her answer. Also award a mark for
mention of ‘insider trading’ without mentioning it as an ‘Act’.

Malebo Mogale is in contravention of the Code 

She has failed to protect confidential information Her actions could also result in contravention of the
Insider Trading Act. 

QUESTION 4.3 – Solution (Maximum 2 marks)

Any valid argument or the student can consider the following in his/her answer:

Jan Jacobs’s integrity, objectivity and professional behaviour may be compromised because of the job
offer. He may overlook issues that arise during the audit in order not to jeopardise the job off. 
This will affect Jan’ independence. There is a self-interest threat

The audit firm should either

- Remove Jan Jacobs from the audit as an engagement manager; or 
- Have the key audit work that was performed by Jan Jacobs reviewed by another professional
accountant independent of the engagement. 
The matter should be discussed with the audit committee and the safeguard to be implemented be
agreed upon. 

QUESTION 4.4– Solution (Maximum 2 marks)

Any valid argument or the student can consider the following in his/her answer:

Discussion
This amounts to a "gift" from a client (R10 000 cannot be regarded as insignificant) and
should not be accepted, as it would at very least be seen to compromise my
independence. (Code Section 290). 
It would also affect the relationship between myself and the client (“familiarity” threat)
and may compromise my objectivity on a future occasion when my client requires a
"favour". It could also give rise to a self interest threat – overlook certain matters to
keep a generous client! 
Acceptance of the cheque would therefore compromise a fundamental principle of the
Code of Professional Conduct and hence be deemed "improper conduct" in terms of
Disciplinary Rule 2.1.20. 
Action

Return the cheque to the client explaining my position as tactfully as possible. 

Submit my fee calculated in the CORRECT manner uninfluenced by the fact that the
client is prepared to pay more. 
My fee should be appropriate (Section 240) and based on:
* time spent
* level of training and experience required
* degree of responsibility undertaken
* skill and knowledge

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