QUESTION 1 (30 marks)

During the audit of Taylors (Pty) Ltd, a large luxury travel luggage retailer, the following evidence was obtained:

1. The Financial Director informed you that all stock on hand at year-end was owned by Taylors (Pty) Ltd.
2. The Financial Director presented you with an email copy of a confirmation of a balance owed by a customer who lives in Ghana.
3. A list of fixed assets that one of your audit staff compiled reflecting the fixed assets which he had physically inspected at year-end.
4. A work-in-progress certificate from independent contractors currently involved in the construction of additional warehousing for Taylors (Pty) Ltd.
5. A goods received note.

REQUIRED:

Discuss the factors you would consider in assessing the reliability of each of the above evidence for audit purposes. Present your answer under points 1-5 as above.
Your answer should include discussions on the source and nature of the evidence.(20 marks)

Indicate to which assertion each of the above evidence would be most relevant.(5 marks)

Explain the term “corroborative evidence”. Give two examples of “corroborative evidence” (these examples need not relate to Taylors (Pty) Ltd).(5 marks)

QUESTION 2 (30 marks)

You are the manager of the audit of InvestProp (Pty) Ltd (IP). You are currently reviewing the finance and investment cycles for the financial year ending 31 March 2022. You have called the trainee on the audit to explain to you the assertions she will be testing relating to the following accounts:
Interest received – R145 462 Long-term liabilities – R4 185 000

Her response was as follows:

Interest received
Rights IP has the right to receive interest because it issued a loan.
Accrual Interest which is owed to IP at 31 March 2022 which has not yet been received and has been included in the balance of R145 462.
Obligation Entities that paid the interest are obliged to do so because they entered into a contract.
Valuation The amount of R145 462 is the correct amount of interest that has or should be paid to IP in respect of loans that they have issued.

Long-term liabilities
Occurrence The loans have already been received by IP i.e. they have occurred.
Validity The loans are not illegal and have not been obtained from illegal sources such as loan sharks.
Accuracy All details pertaining to the loan have been accurately disclosed in the financial statements.
Transparency IP has declared all loans in its financial statements i.e. they are not hiding any amounts the company owes.

REQUIRED:

Briefly discuss whether the trainee has an adequate understanding of the assertions for Interest received and Long-term liabilities and explain your reasoning.(5 marks)

List the trainee’s assertion and indicate whether it is valid or not by justifying your answer.(10 marks)

List the correct assertions for Interest received and Long-term liabilities and explain what each assertion tests.(15 marks)

QUESTION 3 (24 marks)

First Eastern Batteries (Pty) Ltd (FEB) is an Eastern Cape manufacturer of batteries for the local motor vehicle industry. Its manufacturing processes are labour intensive and, as a result, its payroll makes up a large percentage of its operating expenses.

The following procedures were carried out during the audit of the payroll cycle:
1. A sample of pay rates was selected from the wage records and compared to details in the relevant employee’s personnel file.
2. The reconciliation of each week’s wages to the prior week was inspected to determine whether the financial accountant had signed it to acknowledge her review thereof.
3. A trainee accountant was sent to observe the ‘clocking in’ process for factory employees.
4. Re-performing the leave pay accrual at the financial year-end.
5. Review of the payroll ledger accounts for any ‘out of the ordinary’ entries which require further investigation.

REQUIRED:

Briefly describe the seven types of audit procedures for obtaining audit evidence.(14 marks)

Explain the difference between tests of controls and substantive procedures.(5 marks)

Indicate for procedures 1 – 5 above whether the procedure is a test of control, a substantive procedure or both.(5 marks)

QUESTION 4 (16 marks)

You are a third-year trainee accountant and you have found that you enjoy engaging with the new trainees and helping them understand the auditing process. One of the newest trainees has come to you to ask you to help with her understanding of the Audit process. She has asked whether the following statements she made are correct or incorrect and the reason for this.

1. Once the engagement letter for a new audit client has been signed by the client, preliminary engagement activities can begin.
2. Determining the audit strategy is regarded as a preliminary audit engagement activity.
3. In terms of the ISAs, an audit engagement can only be accepted if the auditor has established with the client that the preconditions for an audit are present.
4. One of the preconditions for an audit is that there is an acknowledgement from management that there is compliance with the King IV report on corporate governance.
5. The auditor needs to negotiate with the management if management wants to impose a limitation on the scope of the auditor’s work prior to accepting the audit engagement. The auditor needs to minimise the limitation as much as possible.
6. The management letter must not include a paragraph that states that the auditor is responsible for the detection of fraud but not the prevention.
7. The audit plan is best described as the nature, timing and extent of planned risk assessment procedures, ‘further’ and ‘other’ procedures.
8. Planning materiality for an audit is not changed once it has initially been set.
9. The auditor needs to authorise journal entries to correct factual misstatements when carrying out the concluding stage of the audit.
10. Determining relevant sample sizes will not be part of the audit strategy.

REQUIRED:

Indicate whether each of the above statements is correct or incorrect. If the statement is incorrect, state why.(16 marks)

Answers to Above Questions on Auditing

Answer 1: The various factors that would be considered in assessing the reliability of each of the above evidence for audit purposes are discussed as follows:
1) In order to evaluate the financial director information about the stock on hand at year end, initially the creditors books of accounts will be checked to see if there is any stock unpaid to them, in order to evaluate its ownership. An assessment of inventory in hand would be carried out against the records maintained. The inventory recording method in the books of account would be critically evaluated to identify any discrepancies in inventory according process.

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