QUESTION ONE (20)

PART A: Audit Planning and Risk Assessment (10)

As an auditor at Zenith Auditors Inc., you have been assigned to audit Rize Manufacturing (Pty) Ltd, a solar panel production company experiencing rapid expansion due to increased demand for renewable energy. However, the company’s internal control systems have not evolved to match its growth, raising concerns about financial reporting and operational risks.

REQUIRED:

1. Outline the critical steps involved in planning an audit engagement for Rize Manufacturing (Pty) Ltd. (5)
2. Identify and analyze three significant risks of material misstatement at the financial statement level for this company. (5)

PART B: Ethical Considerations and Fraud Risk (10)

During audit planning, you learn that Rize Manufacturing’s CFO is pressuring the finance team to recognize revenue prematurely to meet investor expectations.

REQUIRED:

1. Discuss the ethical responsibilities of an auditor in this situation and the professional considerations involved. (5)
2. Describe the audit procedures you would implement to assess the risk of fraudulent financial reporting. (5)

QUESTION TWO (30)

Analytical Procedures in Risk Assessment

While auditing SunSmart Energy (Pty) Ltd, a renewable energy firm in Johannesburg, you conduct analytical procedures to evaluate material misstatement risks. The company’s financial statements reflect a notable increase in revenue but a concurrent decline in cash flows from operations.

REQUIRED:

1. Explain the purpose of analytical procedures in risk assessment and their role in detecting financial discrepancies. (5)
2. Identify and describe four essential attributes that data must possess for reliable analytical procedures. (5)
3. Discuss the key factors an auditor should consider when determining whether analytical procedures are suitable as substantive tests. (10)
4. Propose three analytical procedures you would apply to assess the financial position of SunSmart Energy (Pty) Ltd, based on the given scenario. (10)

QUESTION THREE (20)

Case Study: Audit of a Retail Business in South Africa

BACKGROUND: FastGro Retail (Pty) Ltd, a nationwide supermarket chain, is encountering financial difficulties due to rising operational costs and intensified competition. To sustain sales, the company has extended credit terms for customers, causing a significant increase in accounts receivable. Additionally, a whistleblower has reported potential fraudulent activities within the sales department.

REQUIRED:

1. Identify and discuss three key audit risks associated with FastGro Retail’s revenue and receipts cycle. (5)
2. Describe the audit procedures necessary to verify the existence and valuation of accounts receivable. (10)
3. Recommend two critical internal controls that FastGro Retail (Pty) Ltd should implement to mitigate fraud risks in its sales cycle. (5)

Answers to Above Questions on Auditing

Answer 1:

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