QUESTION 1 (15 marks)

You saw the following advertisement.

“We are Sunshine and Young Incorporated and we are the best auditors in the world. In today’s day and age, auditors are not to be trusted. Just the other day Kaygee- Empee Incorporated was fined for unethical billings of their clients. We believe there are a lot of auditors doing this; however, we are the only audit firm that will only charge you on hours worked. We have the best staff in the world with the only top-tier CA(SA) qualifications. You will find this nowhere else in the world.”

REQUIRED:

Based on the requirements of the Code of Professional Conduct discuss the suitability of the above advertisement. Only refer to the fundamental principle/s of professional ethics that were breached.
(15 marks)

Competency Framework Reference:

F1.4 Ethical Principles
a) Advise, from an ethical perspective, on the conduct and practices of a firm
and its staff involved in the rendering of assurance engagements (codes of ethics and other professional and legal requirements)

QUESTION 2 (15 marks)

Easy Auditors Incorporated has just heard that they have been awarded the external audit for Trucker (Pty) Ltd. Trucker (Pty) Ltd is a transport company that is responsible for the delivery of a wide variety of products for various customers. Easy Auditors are very excited about their appointment, as this comes at an audit fee of R3 million.

Easy Auditors Incorporated is currently busy with implementing internal control systems for Trucker (Pty) Ltd and therefore already knows all the systems. Easy Auditors immediately accepted the assignment and started with the planning of the audit.

REQUIRED:

Identify the fundamental principle(s) that have been breached, the type of threat(s) as well as the safeguards that Easy Auditors would need to implement based on the given scenario. You must justify your answer for both the fundamental principle(s) as well as the type of threat(s).(15 marks)

Competency Framework Reference:

F1.4 Ethical Principles
a) Advise, from an ethical perspective, on the conduct and practices of a firm and its staff involved in the rendering of assurance engagements (codes
of ethics and other professional and legal requirements)
I3 Professional ethics
b) Distinguish between ethical principles and rules of conduct, and apply the fundamental ethical principles of integrity, objectivity, professional competence and due care, confidentiality and professional behaviour in
different scenarios.

QUESTION 3 (20 marks)

John Frederick Kamalie (JFK) is the Professional Accountant for ABC Electronics (Pty) Ltd (ABC). JFK makes use of Monster (Pty) Ltd (Monster) as the supplier for any training material that ABC might require. JFK has been receiving all-expenses-paid international holidays from Monster for the past three years as a “Thank you” for their business.

JFK requested Monster to develop training material for their leadership teams for all the ABC offices in South Africa. The budget for the development is R2 000 000 which was agreed with Monster after taking into account the time needed as well as the relevant cost per training module. Once the training material was complete, ABC received an invoice of R2 500 000 from Monster. JFK has therefore set up a meeting with Monster to discuss the additional R500 000 that was invoiced.

During the meeting, the CEO of Monster, James Newlands, indicated that Monster spent more time on developing the training material than was originally anticipated and hence the reason for the additional R500 000 that was invoiced. However, based on JFK’s review of the training material, it is clear that the training material is basically the same as the training material developed for a previous year’s training, with only minor changes. JFK feels conflicted about approving the additional R500 000 based on the work done. However, he is worried if he doesn’t approve the additional R500 000 it might affect his holiday to Singapore that he planned for this year, which is normally paid by Monster.

REQUIRED:

Provide and discuss the threats in terms of the Code of Professional Conduct identified in the scenario. Also, provide safeguards for each of the threats identified.(20 marks)

Competency Framework Reference:

F1.4 Ethical Principles
a) Advise, from an ethical perspective, on the conduct and practices of a firm
and its staff involved in the rendering of assurance engagements (codes of ethics and other professional and legal requirements)
I3 Professional ethics
b) Distinguish between ethical principles and rules of conduct, and apply the fundamental ethical principles of integrity, objectivity, professional competence and due care, confidentiality and professional behaviour in
different scenarios.

QUESTION 4 (20 marks)

Freddy Kruger (Freddy) is the newly appointed CFO of Elm Street Training (Pty) Ltd (Elm Street). Elm Street is a training service provider, specifically in the arts and culture industry. Elm Street has struggled for the last two years to meet its sales targets due to the harsh trading conditions in the arts and culture space.

The Department of Arts and Culture has a wide portfolio where they develop, preserve, protect and promote Arts, Culture and Heritage. Elm Street has been tendering for a training contract with the Department of Arts and Culture for the past three years but with no success.

Freddy, therefore, devised a creative way of securing the current year’s R10 million training contract tender with the Department of Arts and Culture. Freddy, via Elm Street, can make a payment of R100 000 to secure the R10 million training contract which will enable Elm Street to supply training to the Department of Arts and Culture.

The payment was made into the personal bank account of the Procurement Director of the Department of Arts and Culture to ensure that Elm Street win the tender. Freddy has recorded the R100 000 as admin fees in Elm Street’s accounting records.

REQUIRED:

Discuss the concerns that you may have regarding the payment made to the personal bank account of the Procurement Director of the Department of Arts and Culture with reference to non-compliance with laws and regulations. Include as part of your discussion additional examples of non-compliance with laws and regulations.
(20 marks)

Competency Framework Reference:

F1.4 Ethical Principles
a) Advise, from an ethical perspective, on the conduct and practices of a firm
and its staff involved in the rendering of assurance engagements (codes of ethics and other professional and legal requirements)
I3 Professional ethics
c) Identify threats to ethical principles and apply appropriate safeguards to
facilitate ethical behaviour

QUESTION 5 (10 marks)

Please use the Describing information in column two to explain the meaning of the Definition / Concept in column one. Where the information relates to more than one definition, please indicate all. E.g. 5.1 a, b, and c.

QUESTION 6 (20 marks)

Ace (Pty) Ltd (Ace) is a company selling fast food products. They had a fantastic year of trading behind them and Trevor, the CFO of Ace cannot wait for the compilation of their financial statements. Ace’s current financial year ends on 28 February 2023. Trevor needs to make a decision on whether the financial statements must be audited or not. He usually compiles the financial statements himself as Ace has always had a Public Interest Score (PIS) of below 100. Trevor will again compile the financial statements for the 2023 financial year.

Trevor contacted you for advice since Ace’s public interest score for the 2023 financial year is 265. Trevor would not want to do an audit unless it is compulsory however he is uncertain of the options available to Ace.

REQUIRED:

Advise Trevor on whether Ace (Pty) Ltd will require an audit for the 2023 financial year in terms of the requirements of the Companies Act 2008. In your discussion make reference to the public interest score, the compilation of financial statements and the type of assurance engagements.(18 marks)

Assume Ace (Pty) Ltd does not want to do an audit for the 2023 financial year, advise them on the options available to them, if any.(2 marks)

Answers to Above Questions on Auditing Theory and Practice

Answer 1: An analysis of the given advertisement by sunshine and young incorporated indicates that there are significant issues identified with respect to professional ethics. It is evaluated that the advertisement leads to potential breaches of principles of integrity, professional behaviour, adequate competence and due care, and also the maintenance of adequate confidentiality in the advertisement.