AUE3701 PACK ASS 2 2022 8m92ak
AUE3701 PACK ASS 2 2022 8m92ak
AUE3701 PACK ASS 2 2022 8m92ak
ASSIGNMENT 2
SEMESTER 1
2022
UNIQUE NUMBER: 856602
&
EXAM PACK
AUE3701 ASSIGNMENT 2
SEMESTER 1 - 2022
UNIQUE NUMBER: 856602
TO BE USED AS A GUIDELINE
REQUIRED:
Identify and describe the threats for each of the concerns listed and make suggestions of
safeguards that should be implemented to eliminate or reduce the threats.
1
Threats Safeguards
Familiarity Threat because (CEO) of Zo-Jo is There should take another partner
the sister to the audit partner in charge. to be responsible for Zo-Jo audit.
CEO is a close family member to the
partner in charge.
Zo-Jo stores increased from 20 to 40 while Audit team should be increased.
audit team members remain constant this
leads to intimidation threat since Audit
incorporated does not have enough
capacity.
The trainee accountants who assisted Zo-Jo Trainee accountants who assisted Zo-Jo
with their accounting are the part of audit with their accounting should be removed
team. from audit team.
This leads to a self-review threat because
they are accounting their work.
Audit partner agreed to consult Audit Audit Incorporate should not be
Incorporate relating to preparation of tax involved in the preparation of tax return
returns for Zo-Jo. This leads to self-review for Zo-Jo
treat because Audit Incorporate is going to
audit tax return that they were involved in
preparation.
2
2. With reference to the background information of Zo-Jo:
(b) For each identified risk indicator, describe the risks of material misstatement for Zo-Jo
for the year ended 28 February 2022.
3
3. With reference to the background information:
Explain how the scope and timing of Audit Incorporated’s audit strategy will be impacted
by the fact that Zo-Jo is a JSE listed entity and that it has 40 stores distributed all over
South Africa.
4
4. With reference to the inventory of Zo-Jo:
(a) Describe the risks of material misstatement at the assertion level relating to the
inventory balance of Zo-Jo in the statement of financial position for the year ended 28
February 2022.
(b) For each risk described in (a), identify the applicable audit assertion(s).
5
5. With reference to the calculation of planning materiality of Zo-Jo:
(a) Evaluate, with reasons, the method used for the calculation of the planning materiality
figure (in other words, criticise and explain in detail whether or not the basis of the
calculation is correct).
The audited amount used is wrong because it does not include the increase of stores
from 20 to 40.
The equity is suitable to calculate planning materiality should be included due the
nature of business.
Both inherent and detection risk should be included in the calculation of materiality.
Since the risk of material misstatement is high, we use the low range used therefore the
planning materiality is between R1 300 00 – R560 000.
6
6. With reference to the masterfile amendments to personnel and payroll:
7
7. With reference to the acquisition of inventory:
Formulate the tests of controls that you would perform to test the manual and automated
internal controls when acquiring inventory. If you make use of audit procedures using test
data to test the automated controls, limit your answer to invalid test data.
Communication skills – clarity of expression
Obtain the list of suppliers and inspect whether the order was placed to the supplier
on the list.
Inspect whether the system provide with the product that should take longer time to
reach the re-order.
Inspect for the printed reorder report for the adjustments made by Mr Mobise.
Inspect for the automatic notification which show that the inventory reaches reorder
level.
Inspect for email received by Mrs Cele as notification for the inventory system.
Enter a fictitious username and password and observe whether the system would
grant access.
Enter wrong password three times and observe whether the system is going to log
off.
8
PLEASE DO NOT PLAGIARISE!!
9
UNICALCULUS
AUE3701
EXAM PACK
AUE3701 EXAM PACK
CONTENTS
MAY/JUNE 2015……………………………………………………….3
OCT/NOV 2014………………………………………………………….8
MAY/JUNE 2014………………………………………………………..13
OCT/NOV 2014………………………………………………………….20
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Listed on the JSE AFS might be maternally misstated as the company might not comply with JSE
regulations resulting in the delisting of the company and affecting the going
concern of the company.
New Client AFS may be maternally misstated, as material misstatements and errors could
go undetected as we are not familiar with the client.
Management’s integrity AFS may be maternally misstated. As the control environment might be
questionable compromised by management who lake integrity.
Laws and Regulations in industry AFS may be maternally misstated, as the entity might not comply properly with
the relevant laws and regulations, possibly resulting in material misstatements
of unrecorded liabilities, expenses
Outlets situated across South Control environment in other locations might not be operating effectively
Africa resulting in fraudulent activities.
Davies is holding company of AFS may be maternally misstated as IFRS/IFRS 10 might not be properly
Horses Pty(control of another accounted for.
5|Page
company)
Entity required to produce group Errors might occur during consolidations because it involves an intricate
financial statements process possibly resulting in material misstatements.
Pending significant litigation AFS may be maternally misstated because of the entity engaging in fraudulent
financial reporting to hide a going concern threat.
AFS may be maternally misstated as the going concern assumption might not
be properly accounted for and or disclosed.
1.4
a)First time that ABC b)Ponies has nine c)Ponies has an
Incorporated is distribution outlets internal audit
providing audit situated across SA
services to Ponies
3) TEST OF CONTROLS
a)Obtain a list of competition and perform the following ;
Inspect the opening date of entries and agree that it is one month prior to the
competition date.
Inspect that the closing date is 3days before competition
b) Inspect the minutes of the marketing committee meeting and agree that the role, date
and name was approved two months in advance.
c) Inspect a list of master file amendment form and inspect for the signature of the
chairperson.
d) Agree that the forms are sequenced and pre-printed by confirming that numbers from
001 to the last numbers exists
e) Observe access to the safe and confirm that the marketing committee is the only person
with access to it.
f) inspect for the signature of the marketing director as proof of comparison
g) test data by trying to gain access to the accounting application by entering a;
Password that does not consist of 8 characters
Password which is not a combination of symbols and digits
h) Observe the manager capture all data and agree that it is in accordance with the Ponies
master file amended form.
I) obtain a list of all logs with updates and inspect for the signature of the manager as proof
that he performed his duties.
b) Significant Deficiency
Deficiency exists when;
1. A control is designed , implemented or operated in such a way that it is unable to
prevent , or detect and correct misstatements in the financial statements on a timely
basis , or
2. A control necessary to prevent , or detect and correct , misstatements in the financial
statements on a timely basis is missing
Significant Deficiency
A deficiency or combination of deficiencies in internal control that in the auditors
professional judgment is of sufficient importance to ment the attention of those
charged with governance.
Sufficient resources
As there is a tight audit deadline, the partner should consider if only 5 guys will be able to
complete the audit within 2 weeks.
Pills 4 U has a complex manufacturing process, s will the audit team be expertise enough to
complete the audit of this complex process.
9|Page
All the audit clients of ABC are in the financial services industry and now are about to audit
a client in the pharmaceutical industry so will the audit team be competent enough and do
they have enough knowledge of the pharmaceutical industry.
Is there a need for experts or use of CAATS as the company’s systems are automated.
Audit Fee.
The method used to determine the audit fee is not professional
The audit fee should be determined using the amount of work put in thereby using hours
of the audit.
Conclusion.
The audit should have been accepted only after Hammer is excluded from the team and
also including experts to help with the pharmaceutical industry.
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- Detection Risk
- Risk that the auditor might not
have sufficient time to obtain
the audit evidence resulting in
maternal misstatement going
undetected.
- Detection Risk
- The annual Financial
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-Timing
Description of Aspect
Department.
-liquidity problems- Aim to increase
Profits
-Tight deadlines
-Number of audit Team- too few as
only 5 are available.
-Not familiar with the new company.
-Revenue/ Profit Recognition
Risk that joint and process costs are not included -Valuation
in inventory.
Risk that inventory is not carried at the lower of cost and NRV -Valuation
6a) Reasons that the auditor is interested in fraud that is committed at Pills 4U.
-Revenue is a high risk factor
As this fraud is perpetuated by the executive directors, this makes it a very serious issue.
-this gives the auditors reason to believe that material misstatements exist in a majority of
accounts.
-this fraud might be hiding a going concern problem
Misappropriation of Assets
-Involves the theft of an entity’s assets and is often perpetuated by employees in relatively
small immaterial amounts
1. Factors that the partner in charge should have considered before accepting the audit.
Independence of the auditor.
Mr Douglas was a close school friend of Combat TB CEO.
This places a threat to his Independence as an Auditor
Threat to independence which arises are:
Familiarity threat.
Self interest threat.
As Douglas has a significant influence in the company, he has a self interest and affects
his objectivity and independence.
Self interest threat and intimidation threat arises.
Partner in charge should apply appropriate safeguards by removing Douglas from the
client.
Integrity of Management
The partner in charge should make a decision whether the firm is prepared to deal with
a company as Combat where integrity of management is questionable.
Previous Auditors
As Permissions to contact was denied, XYZ should seek legal advice on this subject
matter.
Auditors should have the right to contact previous auditors with permission of the
client.
XYZ should decide whether it still wants to associate itself with the client.
Resources.
Does XYZ have the necessary knowledge of the Pharmaceutical industry
Is S staff sufficient for the audit.
Audit Fee.
As severe penalties could threaten its ability t continue operations, will it be able to pay
the audit fee.
Conclusion
This audit should have not been accepted.
2. Sources of information to utilities to obtain understanding of the entity.
Employees – They have information about the working conditions and operations within
the entity.
Customers- information about services provided and reliability and quality of services.
General Nature and Characteristics of internal control.
- Reliability of the entity’s financial reporting.
- Effectiveness and efficiency of its operation.
- Its compliance with applicable laws and regulations.
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Investments.
- Planned or recently executed acquisitions.
- Capital Investment activities.
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2. Pending Litigation
(Supplying Medicines without Approval) -A.F.S maybe materially misstated as the going
concern assumption might not be properly
accounted.
- A.F.S maybe materially misstated because of the
entity engaging in fraudulent financial reporting to
hide a going concern threat.
Indicator Description
6. Tight Deadline - A.F.S maybe materially misstated as management
might not have sufficient time to properly account and
disclose post- balance sheet event.
-Risk that the auditor might not have sufficient time to obtain
the audit evidence
7. Listed on the JSE. -AFS might be materially misstated as the company might
Not Comply with JSE regulations resulting in the delisting of the
company and affecting the Going Concern of the company.
-Revenue, Gross Income and - all indicators should be taken into account
Total Equity were not considered. Because both the balance sheet and income
Indicators matter.
-A percentage range should be -The percentage range per each indicator should
Used be used to determine whether lower or upper
Should be used.
Test of Controls.
- to submit an order request with incomplete fields to ensure the error message,
appears.
- Perform sequence testing of all internal sales order.
- Attempt to enter incorrect user code at the printer to ensure only Mrs Piper’s is
allowed.
- Inspect evidence and sequence check by Ms Piper inspects the signature.
- Enquire the process to initiate the order from Ms Piper.
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- The draft identifies a matter that does not qualify to be a deficiency of internal control.
- Only a description was given no potential effects of the deficiency were discussed.
- Auditors have no responsibility to express opinion on internal controls.
- It is concerning that they said he deficiency identified is the only deficiency yet there
were deficiencies in the revenue cycle which are significant.
- Management may use this communication with third parties if required by law or
regulation.
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OCT/NOV2015
1 Aspects that the Auditor will consider when developing the Audit Plan.
Nature
-The nature of audit procedures means a selection between test of controls, substantive
or a combined approach.
- These depend on the risk of material misstatement in the audit client.
- The following aspects will be considered:
* Most of company’s systems are automated. – This gives a reason to test the operating
Effectiveness of controls, thereby using Test of Controls.
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Well established Internal Audit department– This might mean that the control
system is operating well and therefore giving a lesser need to test controls.
Disagreement on the accounting treatment of leases. – This gives a need to test the
numbers in detail using substantive procedure..
Based on this a combined approach will be chosen.
Timing
Tight Audit Deadline – Auditors will need to perform other procedures before year
end to meet the deadline.
Wide range of services – Auditors will need sufficient time to perform procedures
concerning all these wide range of services.
Based on this, some procedures will have to be performed before year end.
Extent
* Audit firm mainly renders services in the construction industry so they will need to
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1.Listed -The AFS might be materially misstated as the company might not
comply with JSE regulations, resulting in the delisting of the
company and affecting the going concern of the company.
2.Industry regulated by local - The AFS might be materially misstated as the entity might not
aviation laws and regulations comply with Laws and regulations, possibly resulting in material
misstatements for unrecorded liabilities expense.
3.Expanding its operations - The AFS might be materially misstated as the control
environment in other location might not be operating effectively
resulting in fraudulent activities.
-Risk that the auditor might not have sufficient time to obtain the
audit evidence resulting in material misstatement going
undetected.
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5.Financials to be used to assist - The AFS might be materially misstated as directors might engage
with the Application of license in fraudulent financial reporting i.e overstatement of assets and
profits and understatement of liabilities and expenses to ensure
license will be obtained
6. Mr Ngubane’s wife has a - The AFS might be materially misstated as directors might engage
significant shareholding / owner of in fraudulent financial reporting to present the performance and
entity. position of the entity in a more favorable light.
7.Disagreement with previous - The AFS might be materially misstated as the control
auditors/ management integrity is environment might be compromised by management who lack
questionable integrity.
3. Fleet of Aircraft
-Risk that operating leased aircraft are included as part of RCA own craft Rights
-Risk that foreign exchange losses and gains are included as part of cost of Valuation
aircraft.
-Risk that cost of aircraft is translated at incorrect spot rates on acquisition Valuation
dates
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Steps to be followed
Firstly asses the risk of maternal misstatement in the annual financial statements.
Consider the amount of misstatements (qualitative), namely individual or in
aggregate.
The nature of accounts and possible misstatements (qualitative).
If the risk is high then use the low range of figures and if it is low, use the high range
of figures.
As the risk is assessed as high. Use the low range.
As the company is capital intensive use, total assets as the basis of calculation.
This is because its value lies in assets.
References that Red Crane MO1 requires an audit, - This is wrong as Red Crane is a
public company, the law requires it to be audited not its MO1.
The form of the letter is incorrect as they put it in point form instead of specific
paragraphs.
No objectives and scope was provided in the report.
Wrong reason of conducting the audit was provided – They gave it as certify the
statement.
The actual objective is to express an opinion on the financials.
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Observe the placing of orders and confirm that it is affected by the buying clerks by
inspecting their ids.
Generate a list from the system of all placed orders and inspect that the order forms are
sequenced and prenumbered.
Obtain a list of all approved supplies and inspect that the buying clerks places the orders
with only those on the list.
Observe the placing of orders by clerks and confirm that a drop down appears to choose
a supplier.
Try placing an order and leave out some other fields and confirm if an error message
appears.
Generate a list of approved prices and inspect an order that was placed and agree to
prices that used.
Observe if the acquisitions manager approves all purchases orders by entering a unique
password.
Inspect if the password consists of at least 8 characters with a variation of alphabetic,
numeric and symbols.
Observe if a designated receiving section exists.
Enquire from management the follow up of orders on the exception report.
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Inspect and observe that 2 junior accountants are responsible for capturing and 2
seniors for approving.
Test data by entering a password that does not consist of eight characters (i.e less) and
observe if the EFT is authorized.
Observe the set up of terminals and confirm that they are limited to the accountants in
the accounting department.
Try accessing the terminals and observe if they switch off after 3 unsuccessful attempts.
Obtain a list of unsuccessful attempts for the past 3 weeks and confirm that it is
reviewed weekly by the CFO.
For payments above R 150 000, inspect for the signature of the CFO as proof of
authorization.
Inspect a list of monthly reconciliations and confirm by inspecting the signatures of the
CFO as proof of authorization.
Inspecting the signature that the senior accountants prepared them.
Inspect for the signature of the CFO as proof of authorization.