AUE3701

ASSIGNMENT 2
SEMESTER 1
2022
UNIQUE NUMBER: 856602
&
EXAM PACK

AUE3701 ASSIGNMENT 2
SEMESTER 1 - 2022
UNIQUE NUMBER: 856602

DUE DATE: 4 MAY 2022

TO BE USED AS A GUIDELINE
REQUIRED:

1. With reference to the preliminary audit engagement activities:

Identify and describe the threats for each of the concerns listed and make suggestions of
safeguards that should be implemented to eliminate or reduce the threats.

1
 Threats Safeguards
Familiarity Threat because (CEO) of Zo-Jo is There should take another partner
the sister to the audit partner in charge. to be responsible for Zo-Jo audit.
CEO is a close family member to the
partner in charge.
Zo-Jo stores increased from 20 to 40 while Audit team should be increased.
audit team members remain constant this
leads to intimidation threat since Audit
incorporated does not have enough
capacity.
The trainee accountants who assisted Zo-Jo Trainee accountants who assisted Zo-Jo
with their accounting are the part of audit with their accounting should be removed
team. from audit team.
This leads to a self-review threat because
they are accounting their work.
Audit partner agreed to consult Audit Audit Incorporate should not be
Incorporate relating to preparation of tax involved in the preparation of tax return
returns for Zo-Jo. This leads to self-review for Zo-Jo
treat because Audit Incorporate is going to
audit tax return that they were involved in
preparation.

2
 2. With reference to the background information of Zo-Jo:
(a) Identify the risk indicators at the financial statement level.
(b) For each identified risk indicator, describe the risks of material misstatement for Zo-Jo
for the year ended 28 February 2022.
(a) Risk indicators
Zo-Jo is listed on JSE
Comply with Consumer Protection Act
68 of 2009 and the Competition Act 89
of 1998.
Go-Mart planning to open 20 stores in
South Africa.
Auditors are given pressure by the CFO to
finish audit early.
Shareholders promised to get dividend
before end of March 2022.
Special dividend will be declared if the
grossprofit margin of 60% achieved in
2022.
Zo-Jo’s system are automated
(computerized)
The personnel in the finance department
are new and inexperienced.
b) Description of risk of material
misstatement at the financial statement
level
Delisted due to noncompliance with JSE
listing requirements or due to failing to
maintain a certain profit level.
Failure to comply with both acts lead to
the taking of trading certificate or Zo-Jo
might be sued.
Increased competition leads to
reduction in prices and profits.
Errors and misstatements might be not
detected by auditors due to tight
deadline.
Failure to get dividend the shareholder
might sale their shares lead to decrease in
share price.
The financial statements might be
manipulated to receive gross profit margin
of 60%.
The system might be hacked, and data
might bemanipulated.
The system might be affected by virus.
This might be leads to errors in finance
due to lack of knowledge.
3
 3. With reference to the background information:

Explain how the scope and timing of Audit Incorporated’s audit strategy will be impacted
by the fact that Zo-Jo is a JSE listed entity and that it has 40 stores distributed all over
South Africa.

The time and scope will increase due to the following:

 An increase in the number of stores to 40 supermarket stores distributed all over

South Africa;

 Inexperienced personnel are being used in the finance department;

 Internal controls are not working properly.

4
4. With reference to the inventory of Zo-Jo:

(a) Describe the risks of material misstatement at the assertion level relating to the
inventory balance of Zo-Jo in the statement of financial position for the year ended 28
February 2022.

(b) For each risk described in (a), identify the applicable audit assertion(s).

(a) Description of the risks of material

misstatement at the assertion
b) Audit assertion(s)
misstatement at the assertion level
relating to the inventorybalance.
Wholesalers offers special prices this makes Valuation
difficult to quote exactly prices
Sometimes Zo-Jo makes arrangement with Rights and obligations
wholesalers to keep good purchased until
ZO-Jo have available space. This makes
difficult to
know whether the goods belong to Zo-Jo
because they are not available at the
premises.
Cost of inventory is determined according Accuracy, valuation and allocation.
to the first in first out cost formula and
measured at the lower of cost and net
realisable value.
Errors might be made in application of FIFO
Customers and staff are stealing the Completeness and valuation
goods which makes difficult to
determine closing
inventory
It difficult to determine the cost of good Accuracy, valuation and allocation.
that is expired, written of and outdated.
Some goods
might be recorded as outdated when they
are not
60% discount prices are given on the Accuracy, valuation and allocation
damaged goods. Some good may be
regarded as damaged when they are not.

5
 5. With reference to the calculation of planning materiality of Zo-Jo:

(a) Evaluate, with reasons, the method used for the calculation of the planning materiality
figure (in other words, criticise and explain in detail whether or not the basis of the
calculation is correct).

Evaluation with reasons methods used for the calculation:

 The audited amount used is wrong because it does not include the increase of stores
from 20 to 40.

 The equity is suitable to calculate planning materiality should be included due the
nature of business.

 Both inherent and detection risk should be included in the calculation of materiality.

(b) Calculate the correct value of planning materiality.

Amount Low High

Indicator Budgeted %
R 000 R 000 R 000

Net profit before tax 26 000 5%-10% 1 300 2 600

Turnover 90 000 0.5%-1% 450 900
Gross profit 56 000 1%-2% 560 1 120
Total assets 31 000 1%-2% 310 620
Equity 57 000 2%-5% 1 140 2 850

Since the risk of material misstatement is high, we use the low range used therefore the
planning materiality is between R1 300 00 – R560 000.

6
6. With reference to the masterfile amendments to personnel and payroll:

(a) Identify and describe the weaknesses; and

(b) for each weakness, describe an improvement that can be made.

(a) Weakness (b) Improvement

All employees have access to the
The access to Masterfile must base on
employee Masterfile. Information can be
access rights
manipulated by anyone.
Username and password need to be entered
The password should be alphanumeric
to access Masterfile; no specifications given
and should not show on the screen.
for password.
All the human resources employees use the
Each employee should have unique
same password they might share with
other employees. username and password.
Mrs Abrahams is the one clerk who was
There should be segregation of duties
familiar with capturing of details of new
employee added must be approved by
employees on the Masterfile. She might
human resources manager.
add the ghost employees
When Masterfile updated by Mr Baker, no The changes appeared must be
one approved the changes appeared. approved bysenior personnel.

7
7. With reference to the acquisition of inventory:

Formulate the tests of controls that you would perform to test the manual and automated
internal controls when acquiring inventory. If you make use of audit procedures using test
data to test the automated controls, limit your answer to invalid test data.
Communication skills – clarity of expression

 Obtain the list of suppliers and inspect whether the order was placed to the supplier
on the list.

 Observe while Mr Mobise chief buyer reviews re-order.

 Inspect whether the system provide with the product that should take longer time to
reach the re-order.

 Inspect for the printed reorder report for the adjustments made by Mr Mobise.

 Inspect for the signature of CFO as form of approval of re-order report.

 Inspect for the automatic notification which show that the inventory reaches reorder
level.

 Inspect for email received by Mrs Cele as notification for the inventory system.

 Enter a fictitious username and password and observe whether the system would
grant access.

 Enter wrong password three times and observe whether the system is going to log
off.

 Inspect for the request sent to IT to reset the password.

8
PLEASE DO NOT PLAGIARISE!!

USE FOR COMPARISON

ONLY!!

9
UNICALCULUS

AUE3701

EXAM PACK
AUE3701 EXAM PACK

CONTENTS

MAY/JUNE 2015……………………………………………………….3

OCT/NOV 2014………………………………………………………….8

MAY/JUNE 2014………………………………………………………..13

OCT/NOV 2014………………………………………………………….20
3|Page

AUE 3701 JUNE 2015

1.1 SHORT COMING IN TERMS OF THE REQUIREMENTOF AUDIT DOCUMENTATION

-No name of who performed the audit work is provided

-No name of who reviewed the audit work
-No dates and extent of such review was given
-No significant matters arising from the audit was given
-Nature, timing and extent of audit procedures were not given

1.2 CHECKLIST OF THE ADDITIONAL CRITERIA TO BE CONSIDERED BEFORE ACCEPTING A

STATUTORY AUDIT ENGAGEMENT.

CHECKLIST QUESTION YES/NO

-Is there any condition which affects independence of the auditor? No
-Does ABC have sufficient knowledge about the audit client No
-Does ABC have sufficient personnel to perform the audit Yes
-Does ABC need an expert in terms of IFRS as they have a subsidiary Yes
4|Page

-Does Davies allow communication with previous auditor No

-Will Davie be able to pay audit fee considering penalties after being sued? No
-Does ABC have appropriately qualified personnel for the audit Yes
-Does ABC want consider itself with Davies whilst management integrity is questionable No

RISK INDICATOR AUDIT RISK AT FINANCIAL STATEMENT LEVEL

Listed on the JSE AFS might be maternally misstated as the company might not comply with JSE
regulations resulting in the delisting of the company and affecting the going
concern of the company.

New Client AFS may be maternally misstated, as material misstatements and errors could
go undetected as we are not familiar with the client.

AFS may be fraudulently maternally misstated by management because the

new auditors have limited knowledge of the entity.

Management’s integrity AFS may be maternally misstated. As the control environment might be
questionable compromised by management who lake integrity.

Laws and Regulations in industry AFS may be maternally misstated, as the entity might not comply properly with
the relevant laws and regulations, possibly resulting in material misstatements
of unrecorded liabilities, expenses

Outlets situated across South Control environment in other locations might not be operating effectively
Africa resulting in fraudulent activities.

Davies is holding company of AFS may be maternally misstated as IFRS/IFRS 10 might not be properly
Horses Pty(control of another accounted for.
5|Page

company)

Entity required to produce group Errors might occur during consolidations because it involves an intricate
financial statements process possibly resulting in material misstatements.

AFS may be maternally misstated, as related party transactions might not be

properly consolidated.

AFS may be maternally misstated as the consolidation might not be properly

done in terms of IAS 27

Pending significant litigation AFS may be maternally misstated because of the entity engaging in fraudulent
financial reporting to hide a going concern threat.

AFS may be maternally misstated as the going concern assumption might not
be properly accounted for and or disclosed.

1.4
a)First time that ABC b)Ponies has nine c)Ponies has an
Incorporated is distribution outlets internal audit
providing audit situated across SA
services to Ponies

SCOPE increase increase decrease

TIMING Interim procedures Interim procedures Year end

then roll, forward then roll forward

2a) Risk of material misstatement at the assertion level for revenue

Description of risk Audit Assertion
Risk that discount is incorrectly calculated Accuracy
Risk that the discount is calculated on sales which does not exceed R1000 Accuracy
Risk that rental income is included as part of revenue Occurrence
Risk that revenue is manipulated to earn bonuses Occurrence
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3) TEST OF CONTROLS
a)Obtain a list of competition and perform the following ;
Inspect the opening date of entries and agree that it is one month prior to the
competition date.
Inspect that the closing date is 3days before competition
b) Inspect the minutes of the marketing committee meeting and agree that the role, date
and name was approved two months in advance.
c) Inspect a list of master file amendment form and inspect for the signature of the
chairperson.
d) Agree that the forms are sequenced and pre-printed by confirming that numbers from
001 to the last numbers exists
e) Observe access to the safe and confirm that the marketing committee is the only person
with access to it.
f) inspect for the signature of the marketing director as proof of comparison
g) test data by trying to gain access to the accounting application by entering a;
Password that does not consist of 8 characters
Password which is not a combination of symbols and digits
h) Observe the manager capture all data and agree that it is in accordance with the Ponies
master file amended form.
I) obtain a list of all logs with updates and inspect for the signature of the manager as proof
that he performed his duties.

4a) Deficiencies in internal controls (weaknesses)

1. Andrew has not taken leave for the past five years
Employees should take leave regularly to avoid over reliance on employees such as
Andrew
Not taking leave may result in Andrew overriding controls
2. No review is done to the payment list prepared by Andrew
Review is necessary to confirm the accuracy and completeness of the payment list
prepared by Andrew
3. Andrew saves the payment list in a folder named Andrew’s folder
Company’s files should not be saved in his name but rather indicate that they are
7|Page

Company files eg payment list folder

4. All employees have access to all information stored.
Only selected managers should have access.
Access should be granted through the use of a password which is encrypted , alphanumeric
and also symbols.
5.Information stored is backed up and stored on site.
Information should also be backed up off site in case anything happens onsite and it
is lost
6. He replaces the previous payment list with the current one.
All previous lists should be kept as proof for future purposes
7. Senior accountant loads the EFT payments without reviewing
Review should be done before loading
8. CFO releases the funds without reviewing
9. Only the CFO can release the funds through his password
Two independent people should do this together

b) Significant Deficiency
Deficiency exists when;
1. A control is designed , implemented or operated in such a way that it is unable to
prevent , or detect and correct misstatements in the financial statements on a timely
basis , or
2. A control necessary to prevent , or detect and correct , misstatements in the financial
statements on a timely basis is missing

Significant Deficiency
A deficiency or combination of deficiencies in internal control that in the auditors
professional judgment is of sufficient importance to ment the attention of those
charged with governance.

A written communication of significant deficiencies in internal control shall be included

by the auditor which is a description of the deficiencies and an explanation of their
potential effects.
8|Page

AUE 3701 - OCTOBER/ NOVEMBER 2014

1. Factors that the Partner in Charge of the Audit of Pills 4 U should have considered before
accepting the audit.

Sufficient resources

As there is a tight audit deadline, the partner should consider if only 5 guys will be able to
complete the audit within 2 weeks.
Pills 4 U has a complex manufacturing process, s will the audit team be expertise enough to
complete the audit of this complex process.
9|Page

All the audit clients of ABC are in the financial services industry and now are about to audit
a client in the pharmaceutical industry so will the audit team be competent enough and do
they have enough knowledge of the pharmaceutical industry.
Is there a need for experts or use of CAATS as the company’s systems are automated.

Independence of the Audit Partner.

As Mr Hammer has received chronic medicine for free, his independence is greatly
impaired.
Hammer has an interest in Pills 4 U as he is looking forward to receive medicine in the
future.
Self interest threat to independence and objectivity are created.
Intimidation threat is also created.
Mr Hammer should not be part of the audit team.

Contacting Previous Auditor.

ABC should obtain permission to contact the previous auditors .
A written letter should be sent to the auditors confirming if there is a reason not to accept
the engagement.

Audit Fee.
The method used to determine the audit fee is not professional
The audit fee should be determined using the amount of work put in thereby using hours
of the audit.

Conclusion.
The audit should have been accepted only after Hammer is excluded from the team and
also including experts to help with the pharmaceutical industry.
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2. Risk Indicator Audit Risk Component Description of Risk

- Inherent Risk - The annual financial

Statement maybe maternally
3. - Tight Deadline
misstated, as management
might not have sufficient time
to properly account and
disclose post balance sheet
event.

- Detection Risk
- Risk that the auditor might not
have sufficient time to obtain
the audit evidence resulting in
maternal misstatement going
undetected.

-Majority of - Inherent Risk

- The annual Financial
personnel in the
statement maybe maternally
finance leaving
misstated, as the going
concern assumption might not
be properly accounts for
/disclosed.

-Finance Personnel - The annual Financial

Leaving statement maybe maternally
misstated because of the
- Control Risk
entity engaging in fraudulent
financial reporting to hide a
going concern.
-New Client

- Detection Risk
- The annual Financial
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statement (AFS) error might

be occurring in the
preparation of Financial
rerecords.

The AFS may be materially misstated,

as material misstatement and error
-Liquidity Problems -Inherent Risk could go undetected as we are not
familiar with the client.

-The AFS maybe fraudulently

- Inherent Risk
materially misstated by management
because the new auditors have
limited knowledge of the entity.

- The AFS maybe fraudulently

3. Components of
materially misstated as the going
the Audit Strategy
concern assumption might not be
properly accounted for / disclosed.

-Scope - The AFS maybe fraudulently

materially misstated because of the
entity engaging in fraudulent finances
reporting to hide a going concern
threat.

-Timing
Description of Aspect

-Complex manufacturing Process

-Direction -First Audit in the Pharmaceutical
-Finance Personnel leaving
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Department.
-liquidity problems- Aim to increase
Profits

-Tight deadlines
-Number of audit Team- too few as
only 5 are available.
-Not familiar with the new company.
-Revenue/ Profit Recognition

4a) Description of the Risk Assertions

Risk that foreign exchange gains and loses is included -Valuation

in the cost price of raw materials

-Risk that the value of inventory is converted using - Valuation

the incorrect spot rates.

- Risk that inventory is recognised before risk and - Rights

Rewards transfer to the entity.

Risk that joint and process costs are not included -Valuation
in inventory.

Risks that medicines stored on behalf of others are - Existence

recognised as Pills 4 U inventory.
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Risk that the expert is not properly qualified to -Valuation

Value inventory.

Risk that inventory is not carried at the lower of cost and NRV -Valuation

5. Tests of Control to test the manual and automated internal Control

- Observe the physical location of the factory and confirm that it has an entry / exit point of
each of the 5 sections .
-Observe while a wage tries to gain access to the factory if he is activating the turnstile.
-Observe if he passes his clock- card through the clever clock to have the time pointed on it.
-Also agree the time of clock in if it is between 7:30 – 8:00 and clocking out 15:30 – 1w6:00
-Inspect for the ID of the guard at the turnstile and confirm that it is the forearm.
Inspect for the signatures of Mr Zzzo to confirm that he prepared the monthly schedule.
-Inspect the schedule for the hours of overtime worked and both instances where one worked
more than 10 hours.
Enquire management on cases where one has more than 10 hours and procedure followed.
-inspect the clock card of an employee who clocks out after 16:00 and note if overtime hours
are correctly recorded.
Inspect the signature f the foreman as authorisation of the weekly clock cards.
-Observe as Mr Grobbler accesses the payroll software
-Inspect if she enters a unique username and password.
Try accessing the payroll software by entering a random and username.
Try entering an employer number with less/more than 6 numbers and observe if a name is
retrieved.
Test data by entering overtime hours in excess of 10 hours and note if an error message
appears.

6a) Reasons that the auditor is interested in fraud that is committed at Pills 4U.
-Revenue is a high risk factor
As this fraud is perpetuated by the executive directors, this makes it a very serious issue.
-this gives the auditors reason to believe that material misstatements exist in a majority of
accounts.
-this fraud might be hiding a going concern problem

b) Fraudulent Financial Reporting

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Involves intentional misstatements including omissions of amounts or disclosures in financial

statements to deceive financial statement users.

Misappropriation of Assets
-Involves the theft of an entity’s assets and is often perpetuated by employees in relatively
small immaterial amounts

c) Fraudulent Financial Reporti

AUE 3701 May/June 2014

1. Factors that the partner in charge should have considered before accepting the audit.
Independence of the auditor.
Mr Douglas was a close school friend of Combat TB CEO.
This places a threat to his Independence as an Auditor
Threat to independence which arises are:
Familiarity threat.
Self interest threat.
As Douglas has a significant influence in the company, he has a self interest and affects
his objectivity and independence.
Self interest threat and intimidation threat arises.
Partner in charge should apply appropriate safeguards by removing Douglas from the
client.

Integrity of Management

Integrity of Management is questionable because of the following reasons:

I. Disagreement concerning Treatment of Revenue.
II. Manufacturer and supply of medicine without proper approval.
III. Declining of Permission to contact previous auditors
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The partner in charge should make a decision whether the firm is prepared to deal with
a company as Combat where integrity of management is questionable.

Previous Auditors

As Permissions to contact was denied, XYZ should seek legal advice on this subject
matter.
Auditors should have the right to contact previous auditors with permission of the
client.
XYZ should decide whether it still wants to associate itself with the client.

Resources.
Does XYZ have the necessary knowledge of the Pharmaceutical industry
Is S staff sufficient for the audit.

Audit Fee.
As severe penalties could threaten its ability t continue operations, will it be able to pay
the audit fee.

Conclusion
This audit should have not been accepted.
2. Sources of information to utilities to obtain understanding of the entity.
Employees – They have information about the working conditions and operations within
the entity.
Customers- information about services provided and reliability and quality of services.
General Nature and Characteristics of internal control.
- Reliability of the entity’s financial reporting.
- Effectiveness and efficiency of its operation.
- Its compliance with applicable laws and regulations.
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Industry Regulatory Factors.

- Consider regulatory factors in the Pharmaceutical industry about:
- Market and competition.
- Cyclical or seasonal activity.
- Product technology relating to the medicines of Combat TB.
- Energy supply and cost.
Regulatory Factors.
- Accounting Principles
- Regulatory framework – JSE regulations.
- Legislation and regulation that significantly affect its operation.
- Inquire about the pharmaceutical Industry Regulations.
- Taxation - Engage SARS about Combat TB payment of Tax.
- Government policies currently affecting the conduct of the entity.
- Environmental requirements affecting the Industry and the entity Business.
Nature of the Entity – Business Operation
- Nature of revenue Sources, Products – Selling of Medicines.
- Conduct of operations.
- Outsourcing Activities.
- Geographic Dispersion.
- Location of Production facilities and offices.
- Key customers and important supplies of medicines.
- Research and development activities.

Investments.
- Planned or recently executed acquisitions.
- Capital Investment activities.
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Financing and Financing Activities.

- Debt Structure and Related Terms.

Risk Indicators Description of Audit Risks

1. Hospitals throughout SA and -The A.F.S maybe materially misstated as entity

other countries might not comply properly with the relevant
laws and regulations.

2. Pending Litigation
(Supplying Medicines without Approval)
-A.F.S maybe materially misstated as the going
concern assumption might not be properly
accounted.
- A.F.S maybe materially misstated because of the
entity engaging in fraudulent financial reporting to
hide a going concern threat.

3. New Client. -A.F.S maybe materially misstated as material

Misstatement and errors could go undetected as
we are not familiar with the client.
- A.F.S maybe fraudulently materially misstated by
management because of the new auditors have
limited knowledge of the entity.
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4. Management’s Integrity -A.F.S maybe materially misstated as the control

Questionable. environment might be compromised by
management who lack integrity.

5. Management Deceive Bonuses - A.F.S maybe materially misstated as Directors

driven by Profile. Might engage in fraudulent financial reporting
i.e Overstatement of revenue to maximise bonuses.

Indicator Description
6. Tight Deadline - A.F.S maybe materially misstated as management
might not have sufficient time to properly account and
disclose post- balance sheet event.

-Risk that the auditor might not have sufficient time to obtain
the audit evidence

7. Listed on the JSE. -AFS might be materially misstated as the company might
Not Comply with JSE regulations resulting in the delisting of the
company and affecting the Going Concern of the company.

4. Risk of material misstated at Assertion level of Motor Vehicles.

Description of Risk Assertion.

-Risk that Logistics Company Vehicles are included -Existence
As part of Combat TB’s own vehicles
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-Risk that Leased Vehicles are included as part - Rights

of owned vehicles.

-Risk that the carrying amounts is incorrect due to -Valuation

Incorrectly calculated depreciation and
Amortisation values

-Risk that the expert is not appropriately - Valuation

Qualified and carrying amounts are wrong

Criticism Reasons/ Recommendation

-Revenue, Gross Income and - all indicators should be taken into account
Total Equity were not considered. Because both the balance sheet and income
Indicators matter.

-A percentage range should be -The percentage range per each indicator should
Used be used to determine whether lower or upper
Should be used.

Test of Controls.
- to submit an order request with incomplete fields to ensure the error message,
appears.
- Perform sequence testing of all internal sales order.
- Attempt to enter incorrect user code at the printer to ensure only Mrs Piper’s is
allowed.
- Inspect evidence and sequence check by Ms Piper inspects the signature.
- Enquire the process to initiate the order from Ms Piper.
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- Read the minutes of the weekly debtors meeting

- ensure all new clients are identified
- Read the terms of the credit.
- Inspect documents for credit investigation and obtain satisfaction.
- Inspect the approval memo signatures approving.
- Inspect the report reviewed by the financial officer for signature.
Enquire t process of reviewing the existing customers from rs Kruger.
- Inspect for Ms Vuagn signature to authorise further processing of the order.
- Observe process to test availability of TB medicine.
- Attempt to test availability using incorrect username and password.
- Enter inventory code with 6 or 4 digits to see whether inventory file appears.
- ensure medicine picked corresponds to picking skip by observation
- Inspect the referencing on the delivery note to picking slip and 150.
- Inspect Slooner’s matching the label to TB medicine
- Inspect for Zwane’s signature to ensure acknowledgement.
- Inspect numerical filing.

Shortcoming on draft report

- The draft identifies a matter that does not qualify to be a deficiency of internal control.
- Only a description was given no potential effects of the deficiency were discussed.
- Auditors have no responsibility to express opinion on internal controls.
- It is concerning that they said he deficiency identified is the only deficiency yet there
were deficiencies in the revenue cycle which are significant.
- Management may use this communication with third parties if required by law or
regulation.
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OCT/NOV2015

1 Aspects that the Auditor will consider when developing the Audit Plan.

Nature
-The nature of audit procedures means a selection between test of controls, substantive
or a combined approach.
- These depend on the risk of material misstatement in the audit client.
- The following aspects will be considered:
* Most of company’s systems are automated. – This gives a reason to test the operating
Effectiveness of controls, thereby using Test of Controls.
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Well established Internal Audit department– This might mean that the control
system is operating well and therefore giving a lesser need to test controls.
Disagreement on the accounting treatment of leases. – This gives a need to test the
numbers in detail using substantive procedure..
Based on this a combined approach will be chosen.

Timing

This relates to when Basedthe preferred.

The following aspects will be considered.

Tight Audit Deadline – Auditors will need to perform other procedures before year
end to meet the deadline.
Wide range of services – Auditors will need sufficient time to perform procedures
concerning all these wide range of services.
Based on this, some procedures will have to be performed before year end.

Extent

Extent refers to how detailed the procedures would be.

-A high risk client will require greater extent.

-The following factors will determine the extent.

* Company’s systems are automated.

* Audit firm mainly renders services in the construction industry so they will need to
23 | P a g e

Obtain much evidence to give an opinion

Financial statements are needed to apply license – there is high risk of

misstatement.
Disagreement of lease treatment – Integrity of management questionable -need to
test may balance.
Bonuses based on profits.

Based on the above, the audits need a greater extent to test.

RISK INDICATORS DESCRIPTION OF AUDIT RISK

1.Listed -The AFS might be materially misstated as the company might not
comply with JSE regulations, resulting in the delisting of the
company and affecting the going concern of the company.

2.Industry regulated by local - The AFS might be materially misstated as the entity might not
aviation laws and regulations comply with Laws and regulations, possibly resulting in material
misstatements for unrecorded liabilities expense.

3.Expanding its operations - The AFS might be materially misstated as the control
environment in other location might not be operating effectively
resulting in fraudulent activities.

4.Tight Deadlines - The AFS might be materially misstated as management might

not have sufficient time to properly account and disclose post-
balance sheet events.

-Risk that the auditor might not have sufficient time to obtain the
audit evidence resulting in material misstatement going
undetected.
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5.Financials to be used to assist - The AFS might be materially misstated as directors might engage
with the Application of license in fraudulent financial reporting i.e overstatement of assets and
profits and understatement of liabilities and expenses to ensure
license will be obtained

6. Mr Ngubane’s wife has a - The AFS might be materially misstated as directors might engage
significant shareholding / owner of in fraudulent financial reporting to present the performance and
entity. position of the entity in a more favorable light.

7.Disagreement with previous - The AFS might be materially misstated as the control
auditors/ management integrity is environment might be compromised by management who lack
questionable integrity.

8. Directors bonuses based on Directors might engage in fraudulent financial reporting by

Profits. overstatement of revenue.

3. Fleet of Aircraft

a) Description of the Risk at Assertion level Assertion

-Risk that operating leased aircraft are included as part of RCA own craft Rights

-Risk that foreign exchange losses and gains are included as part of cost of Valuation
aircraft.

-Risk that cost of aircraft is translated at incorrect spot rates on acquisition Valuation
dates
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-Risk that depreciation and impairment is incorrectly calculated. Valuation

-Risk that depreciation is insufficiently provided and accumulated depreciation Valuation

is wrong.

-Risk that the expert is not properly qualified to value. Valuation

4. Computation of planning matenality

Steps to be followed

Firstly asses the risk of maternal misstatement in the annual financial statements.
Consider the amount of misstatements (qualitative), namely individual or in
aggregate.
The nature of accounts and possible misstatements (qualitative).
If the risk is high then use the low range of figures and if it is low, use the high range
of figures.
As the risk is assessed as high. Use the low range.
As the company is capital intensive use, total assets as the basis of calculation.
This is because its value lies in assets.

5 Preliminary Audit Engagement letter -= Weaknesses.

References that Red Crane MO1 requires an audit, - This is wrong as Red Crane is a
public company, the law requires it to be audited not its MO1.
The form of the letter is incorrect as they put it in point form instead of specific
paragraphs.
No objectives and scope was provided in the report.
Wrong reason of conducting the audit was provided – They gave it as certify the
statement.
The actual objective is to express an opinion on the financials.
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Performance of the audit is in accordance with GAAP.

They didn’t confirm their acceptance of the audit.
It didn’t outline the responsibilities of the auditor in detail.
No mention was made that inherent limitations exists and that there is an
unavoidable risk.
No mention was made that they consider the internal control relevant to the
entity’s preparation of the statement.
It only stated internal controls as one responsibility of management.
Another responsibility is the preparation and fair presentation of the financials.
No mention was made of the request of written confirmation concerning
representatives.
No date of signing the report was provided.
No mention of the auditor’s responsibility of reporting reportable irregularities.
The responsibility of the auditor was not outlined in detail.

6. Test of Controls to test the Placing of orders.

Observe the placing of orders and confirm that it is affected by the buying clerks by
inspecting their ids.
Generate a list from the system of all placed orders and inspect that the order forms are
sequenced and prenumbered.
Obtain a list of all approved supplies and inspect that the buying clerks places the orders
with only those on the list.
Observe the placing of orders by clerks and confirm that a drop down appears to choose
a supplier.
Try placing an order and leave out some other fields and confirm if an error message
appears.
Generate a list of approved prices and inspect an order that was placed and agree to
prices that used.
Observe if the acquisitions manager approves all purchases orders by entering a unique
password.
Inspect if the password consists of at least 8 characters with a variation of alphabetic,
numeric and symbols.
Observe if a designated receiving section exists.
Enquire from management the follow up of orders on the exception report.
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Inspect and observe that 2 junior accountants are responsible for capturing and 2
seniors for approving.
Test data by entering a password that does not consist of eight characters (i.e less) and
observe if the EFT is authorized.
Observe the set up of terminals and confirm that they are limited to the accountants in
the accounting department.
Try accessing the terminals and observe if they switch off after 3 unsuccessful attempts.
Obtain a list of unsuccessful attempts for the past 3 weeks and confirm that it is
reviewed weekly by the CFO.
For payments above R 150 000, inspect for the signature of the CFO as proof of
authorization.
Inspect a list of monthly reconciliations and confirm by inspecting the signatures of the
CFO as proof of authorization.
Inspecting the signature that the senior accountants prepared them.
Inspect for the signature of the CFO as proof of authorization.