QUESTION 1 (20 marks, 30 minutes)

You have recently obtained your BCom qualification, and your university lecturer has requested you to take the position of a tutor for Auditing level 2 students. Having taken the position as a tutor, the students posed the following questions during your session on the topic below.

“The auditor is often described as the guard dog of his/her client and the public in general. An audit increases the credibility of the financial statements and plays an important role in the capital markets of the world”.

Required:

The students requested you to:

1.1. List the possible benefits of an audit; you are also required to name the parties that will benefit from an audit. (10 marks)
1.2. List the postulates in auditing that assist an auditor with solving problems. Considering that an auditor must have the ability to solve problems and must be able to provide a solution. (10 marks)
QUESTION 2 (20marks, 30 Minutes)

You are the director at Dello Inc., which has been appointed as auditors of Diestel (Pty) Ltd (Diestel), a cold beverage wholesale supplier servicing the Gauteng area. You were as a designated auditor.

Diestel buys its products directly from various beverage manufacturers, and then resells them to independent shops and retail chains. Diestel currently owns a fleet of 12 delivery vehicles, with which it makes its deliveries to its customers.

During your review of the audit file, you could find no substantive documentation for an amount of R400,000 claimed as a deduction when the second provisional tax return was completed by the financial manager and signed off by the financial director, Mrs. Botha. Further investigations revealed that this amount was the total of all traffic fines issued during the financial year to the company’s delivery vehicle drivers.

Subsequently, you set up a meeting with Mrs. Botha and were stunned by her response: she believed traffic fines received by delivery vehicle drivers for speeding, illegal parking and so on could be claimed as a deduction from taxable income. She reasoned that the fines had been issued in the production of income. She argued that the faster the deliveries were made, the more profitable the company would be. Mrs Botha insisted that these deductions be made, as the South African Revenue Service would not pick them up.

Required

1. Discuss whether Mrs. Botha’s treatment of the traffic fines constitutes a reportable

irregularity in terms of the Auditing profession Act 26 of 2005. (14 marks)

2. Discuss the actions that should be taken by the auditor in terms of the Auditing Profession Act 26 of 2006, if you have concluded that Mrs. Botha’s treatment of the traffic fines constituted a reportable irregularity. (6 marks)
QUESTION 3 (20 marks 30 minutes)

Whilst conducting procedures on various cycles on the audit of Hallmark (Pty) Ltd a wholesaler of stationery and paper products, the following situations arose:

1. Several customer invoices which had subsequently been entered into the sales journal were found not to have been issued by Hallmark (Pty) Ltd.
2. No sale invoices have been raised for several Hallmark (Pty) Ltd dispatch (delivery)

notes which had been signed by the customer and matched to customer’s order.

3. VAT on all sales for the month of January (financial year-end 31 March) had been charged at 10% (instead of 15%) due to an error in processing. By year end no correction of this error had taken place.
4. A number of credit sales made in the first two weeks of the new financial year were included in the March sales due to a mix up with dates on the dispatch notes.
5. Numerous errors were found in the treatment and calculation of discount allowed to customers.
6. The financial statements have been prepared by the CEO who has an MBA

qualification and has no knowledge of the entity’s reporting framework.

7. No provision for impairment of debts has been provided for in the financial statements.

8. Transactions not relating to the current accounting period were included in the reported financial results for the current period.
9. Several fixed assets were not depreciated since the CEO does not believe the deprecation concept makes sense to him.
10. About R10million worth of revenue was recognized before the goods were manufactured when the agreement with the customer clearly stipulates that goods must be delivered before the payment by the customer can be made. The customer made a prepayment of the order to assist with the cash flow challenges.

YOU ARE REQUIRED TO:

Identify and briefly discuss the assertions which would be affected by each of the above(20 marks)

(Hint: some of the 10 observations above cash affect more than one assertion)Question 4 (25 marks, 37,5 minutes)

You are senior in an audit engagement. The trainees have the following questions pertaining to the Companies Act 2008.

The Companies Act 2008 and its accompanying Regulations 2011 require that every company

and close corporation calculate what is termed its “public interest score”.

YOU ARE REQUIRED TO:

(a) Explain the term public interest score and how it is calculated. (8 marks)

(b) Explain what happens to a company that has a public interest score that is below 350, say 349 but above 100, owner managed, but financial statements externally complied. (5 marks)

(c) Explain fully, the link between the public interest score of a private company and the type of assurance engagement (if any) to which the company must subject its annual financial statements. (10 marks)

(d) Briefly explain how a company that is not required to have its annual financial statements audited in terms of the Companies Act or its public interest score, may voluntarily elect an audit. (2 marks)
QUESTION 5 (5 marks, 7.5 minutes)

Mr Steinhoff is a Chartered Accountant registered with SAICA. He works as an internal auditor at Dischem Ltd. Whilst undertaking his work on sales division at Dischem, he detects fictitious sales recorded by the sales clerk.

Furthermore, the sales clerk offers to bribe Mr Steinhoff by paying a substantial amount into his bank account in return for the silence.

You are required to:

Discuss the matter with reference to the Code of Professional conduct. (5 Marks)

Question 6 (10 Marks – 15minutes)

You have recently joined an established, medium sized firm of auditors as a junior partner. Because of your knowledge of the relevant pronouncement, Sam Sandman, the senior partner, discussed the following situations with you:

1. Your firm acts as auditors to Small Ltd and as financial advisers to Ben Big, one of its directors. Ben Big had instituted a legal action against the company for breach of contract and has sought your firm’s advice relating to certain financial aspects relating to Small Ltd. (5)

2. The chief accountant of Cruz Ltd, a public, but unlisted company, audited by your firm, left unexpectedly. The company has asked your firm to maintain its accounting records for the remaining three months of its financial year until they can appoint a suitable accountant. (5)

Required:

Discuss each of the situations above in terms of the Code of Professional conduct. (Include in your answer the threats to professional conduct, threats to the fundamental principles and the safeguards).

Answers to Above Questions on Auditing

Answer 1: There are significant benefits that can be possible from audit and there are different parties that directly benefit from it. The main benefits of audit include enhanced credibility, improved transparency, higher chances of detection of errors and frauds in the books of accounts, and better attainment of compliance with regulatory standards and procedures. When it comes to the parties that benefit from audit, it includes all the major stakeholders such as shareholder, management, creditor, debtor, employees, customers, regulatory authorities etc.