QUESTION 1 (20 marks)

James Biggs is a new Trainee Auditor for Arthur Panders Incorporated. He has just completed his three-year degree and is very excited to join the firm. His father is the CEO of Basic Furniture (Pty) Ltd, and he indicated to Chester, one of the Partners of Arthur Panders, that Basic Furniture (Pty) Ltd is currently looking for auditors. Chester is very excited about the revenue opportunity that the audit of Basic Furniture Pty (Ltd) is presenting.

The following information is available from Chester’s notes regarding the meeting with the predecessor auditor, Jacobs and Miller Inc. of Basic Furniture (Pty) Ltd (the client). Basic Furniture (Pty) Ltd permitted Chester to meet with Jacobs and Miller Inc.

1. There were instances during the year when the client displayed a lack of integrity.

The CEO of Basic Furniture (Pty) Ltd was using the client list of one of their competitors that was shared with them by one of the staff members.
2. Audit fees for the last three audits are still outstanding due to disputes by Basic Furniture (Pty) Ltd on the fees charged by Jacoqbs and Miller Inc. based on previously agreed fees by both parties.
3. The client has a reputation for poor relationships with Jacobs and Miller Inc. due to the long outstanding audit fees as well as aggressive accounting policy changes.
4. No specialised skills are required for this audit, therefore, Arthur Panders should have the necessary resources to service the client. Arthur Panders also has enough resources to perform this audit, and no additional staff is required.
5. The client is known for aggressively applying accounting standards that present the most favourable picture for the client.
6. The change of auditors is due to the client having a difference of opinion with the auditors and then deciding to fire the auditors.
7. Management does not adhere to sound corporate governance principles;therefore, they don’t currently adhere to King IV.

8. The client permitted Chester to make contact with its bankers, legal counsel, etc.

9. The client is very adamant about keeping the audit fees low.

10. The client is known to restrict information relating to stock as it keeps consignment stock on behalf of another company, and it will be difficult to determine whether the stock belongs to the client.

REQUIRED:

Discuss the factors that Arthur Panders Incorporated must consider before accepting the audit of Basic Furniture (Pty) Ltd. In your answer, make sure that you include the following:
• Pre-conditions for an audit(3 marks)

• Assessment of a prospective client in determining whether to accept an audit. (17 Marks)

QUESTION 2 (10 marks)

Developing an audit plan is not always straightforward, and the larger and more complex the client, the more intricate the audit. Professional judgement and experience will play a large part in blending tests of controls, substantive testing, and other ISA procedures into a plan that meets the standard, that is, a plan which will ensure the audit is performed effectively to reduce audit risk to an acceptable level.

Match Column A to Column B to consider when looking for the three characteristics relating to the nature, timing, and extent of testing.

QUESTION 3 (40 marks)

Part A

A trainee (Mr. Jackal) provided the audit file for CMM News (Pty) Ltd, to his Audit Supervisor, Mr. Hyde. Mr. Hyde is reviewing the audit file and can see that in some instances, information is provided that is neither appropriate nor sufficient, and in other cases, the evidence provided is simply not adequate. Mr. Hyde called Mr. Jackal to discuss the importance of sufficient and appropriate audit evidence. Mr. Hyde indicated what audit evidence is and how Mr. Jackal should ensure that he collects sufficient and appropriate audit evidence.

Part B

Mr Hyde decided to do an audit evidence training session with Mr. Jackal and developed the following scenarios, which are about a previous client Mr. Hyde audited.

During the audit of Jameson (Pty) Ltd, a large Food chain retailer, the following evidence was obtained:
1. A list of fixed assets that one of your audit staff compiled reflecting the fixed assets that he had physically inspected at year-end.
2. A work-in-progress certificate from independent contractors currently involved in constructing additional warehousing for Jameson (Pty) Ltd. The certificate was given to you by the client.
3. The Operations Manager informed you that Jameson (Pty) Ltd owned all stock on hand at year-end.
4. You received confirmations from debtors on balances for a debtor’s circularisation that you, as the auditor, have done. The confirmations were sent directly to you as the auditor.
5. A goods receive note.

6. The financial director informed you that there are no bad debts for the current year.

7. You received the bank confirmation from Alba Bank with the bank balances of the client.
8. The accounts payable clerk informed you that all creditors are paid within 30 days of the statement.

9. The client provided you with a list of obsolete stock items where the related internal controls are effective.
10. You, as the auditor, set up meetings with ten employees to meet with them and discuss various items relating to their employment with the company.

REQUIRED:

Discuss with Mr. Jackal what is meant by audit evidence as referred to by Mr Hyde in

Part A. In your answer, refer to the following:

3.1 ISA 500 – The duty of the auditor relating to audit evidence (2 marks)

3.2 Sufficient audit evidence (3 marks)

3.3Appropriate audit evidence (2 marks)

3.4 Discuss the factors that you would consider in Part B, to assess the reliability of each of the above evidence for audit purposes.
Indicate the nature, source, and to which assertion each of the above evidence would be most relevant.

Present your answer under points 1-10 in the table below.

Your answer should include discussions on the source and nature of the evidence.

QUESTION 4 (30 marks)

You are the Audit Manager of the audit of Hexagon (Pty) Ltd. Hexagon (Pty) Ltd sells second-hand spare parts for trucks, cars, and bakkies. During the current year, the sales numbers increased by more than 50%, while the accounts payable numbers are in line with the prior year. You are reviewing the working papers for accounts payable and sales for the financial year ending 30 June 2023. You have picked up some errors on the working papers relating to testing the assertions for the following accounts.

Accounts Payable – R12 565 050
Sales – R225 180 300

You discussed the working papers with the trainee responsible for Sales and Accounts Payable. Her response was as follows:

Sales
Rights Hexagon (Pty) Ltd has the right to receive the sales amounts that are receivable.
Reliability All sales listed are reliable.
Accrual The sales that are receivable accrued to Hexagon (Pty) Ltd. Usefulness The sales are useful to Hexagon (Pty) Ltd.
Accuracy All details pertaining to sales were accurately disclosed in the financial statements.
Completeness All the above assertions have been dealt with.

Accounts Payable
Occurrence Accounts payable occurred. There are accounts that were not paid.
Validity Accounts payable are accounted for at the right amount in the right account.
Valuation The amount of accounts payable is valued at the correct amount.
Transparency Hexagon (Pty) Ltd has declared all accounts payable in its financial statements.
Completeness All the above assertions have been dealt with.
Accuracy Hexagon (Pty) Ltd has an obligation to make sure that accounts payable are accurate.

REQUIRED:

Discuss the trainee’s assertions for sales and indicate whether it is valid or not by justifying your answer.
Use the following table to present your answer:

Discuss the trainee’s assertions for accounts payable and indicate whether it is valid or not by justifying your answer.
Use the following table to present your answer:

Conclude whether the trainee has an adequate understanding of the assertions for Sales and Accounts Payable based on your determination in 4.1 and 4.2. (6 marks)

Get Answers on the Questions Above on Auditing

Answer 1: There are many factors that need to be considered before auditing the books of accounts of Basic Furniture Pty Ltd. The preconditions that need to be checked in conducting the audit are the integrity and ethical consideration, dispute in relation to fee, the reputation with the client etc.