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AUDI6211Ea C19
AUDI6211Ea C19
18; 19:20 2020
MODULE NAME: MODULE CODE:
Auditing 2A AUDI6211
ASSESSMENT TYPE: EXAMINATION (PAPER ONLY)
TOTAL MARK ALLOCATION: 180 MARKS
TOTAL HOURS: 3 HOURS (+15 minutes reading time)
INSTRUCTIONS:
1. Please adhere to all instructions in the assessment booklet.
2. Independent work is required.
3. Five minutes per hour of the assessment to a maximum of 15 minutes is dedicated to
reading time before the start of the assessment. You may make notes on your question
paper, but not in your answer sheet. Calculators may not be used during reading time.
4. You may not leave the assessment venue during reading time, or during the first hour or
during the last 15 minutes of the assessment.
5. Ensure that your name is on all pieces of paper or books that you will be submitting. Submit
all the pages of this assessment’s question paper as well as your answer script.
6. Answer all the questions on the answer sheets or in answer booklets provided. The phrase
‘END OF PAPER’ will appear after the final set question of this assessment.
7. Remember to work at a steady pace so that you are able to complete the assessment within
the allocated time. Use the mark allocation as a guideline as to how much time to spend on
each section.
Additional instructions:
1. This is a CLOSED BOOK assessment.
2. Non‐programmable calculators are allowed.
3. Answer All Questions.
© The Independent Institute of Education (Pty) Ltd 2020
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Question 1 (Marks:60)
CoalDigger Ltd (CD) is a coal mining company based in South Africa that recently listed on the
Johannesburg Stock Exchange (JSE). CD discovered oil reserves in South Africa, estimated at about
1 billion barrels of oil and located in deep waters approximately 175 kilometres from South
Africa’s coastline. Therefore, CD decided to acquire shares in Africa Oil, an oil mining company
listed on the JSE. This was a strategic move to ensure that CD has a stake in the various mining
sectors of South Africa.
Board of Directors
Violet Mguni (VM) – Chairperson
William Small (WS) – Director
Bob Cope (BC) – Director
Boy Newton CA(SA) (BN) – Chief Financial Director
The board of directors meet quarterly. During the most recent meeting, the following points were
discussed:
Introduction of the Chief Financial Director
Boy Newton CA(SA) recently qualified as a Chartered Accountant. He specialised in auditing the
automotive industry during his three years of articles. Boy was instructed by the board of
directors to ensure that the profits are high at the end of the financial year as his bonus and
future in the company depends on the profit made.
Approval of financial statements for audit
The board of directors reviewed the financial statements for the period ended 28 February 2020.
VM indicated concerns over the Property, Plant and Equipment (PPE) line item. A new machinery
to the value of R10 500 000 was purchased during the current financial year but there appears to
be no movement in the line item from the 2019 financial year. VM indicated that he is not sure
that the rights and existence assertion of the PPE line item is satisfied. He then requested that BN
looks at the PPE line item again and ensures the error is corrected.
WS indicated that VM should not be concerned about the smaller line items as the auditors will
look at the financial statements on a higher level and not at the individual line items as they are
only giving reasonable assurance. BN should only ensure that the financial statements follow the
© The Independent Institute of Education (Pty) Ltd 2020
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format given in IAS 1. Assertions are not important, and the auditors rarely consider them.
Assertions are just important for management when drafting the financial statements.
The board of directors agreed that the financial statements are ready to be submitted for audit
and BN needs to sign the financial statements as they are.
Appointment of Auditors for the financial statements
RiverAuditors Incorporated (RA) will be appointed as the auditors for the 2020 financial year‐end
audit. RA has been in charge of the audit for the previous nine years and is a registered auditor. H
Forever CA(SA) (HF) has been the designated auditor and has developed a good relationship with
the client.
HF was encouraged to only focus on the machinery included in the machinery fixed assed register.
Doing this will ensure that the relationship continues with CD.
HF was invited to CD’s investor meeting as a guest speaker. CD requested HF to specifically talk
about what a good audit client CD has been and how they are optimistic about a favourable audit
opinion for the 2020 financial year.
Required:
Q.1.1 With regards to the information contained under the heading Approval of (10)
financial statements for audit, discuss the comments made by VM and WS
regarding the audit of the financial statements.
Q.1.2 With regards to the information contained under the heading Appointment of (10)
Auditors for the financial statements, discuss whether the engagement is an
assurance or non‐assurance engagement.
Q.1.3 ISQC1 is a standard that deals with the firm’s responsibilities for its system of (6)
quality control for audits, reviews and other assurance engagements. Identify the
elements of the system of quality control that should be implemented by RA to
comply with ISQC 1.
© The Independent Institute of Education (Pty) Ltd 2020
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Q.1.5 With regards to the information contained under the heading Appointment of (6)
Auditors for the financial statements, discuss the long association that HF has
with CD.
Ensure that your answer addresses the following:
‐ Explanation of the threat to the fundamental principle;
‐ Provide possible safeguards that could be implemented to mitigate these
threats to an acceptable level.
Q.1.6 HF recently attended a SAICA ethics conference and is worried about the investor (7)
conference that CD has invited him to as a guest speaker.
Advise HF on the matter using principles from the SAICA Code of Professional
Conduct.
Q.1.7 Assume BN discovered that CD has been contravening the Companies Act; list the (6)
six steps that BN should take to address the non‐compliance with laws and
regulations.
© The Independent Institute of Education (Pty) Ltd 2020
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Question 2 (Marks: 45)
South Africans on Board Ltd (SAB) flies to over 20 destinations across the globe. SAB is a state‐
owned company; they have been surviving on government bailouts and guarantees for many
years and have been put on business rescue since 15 December 2019. The business rescue
committee decided that it would be wise to cancel all international flights to help the business
recover.
SAB is also under investigation for improper conduct due to the Chief Financial Officer awarding
tenders to his wife’s sister without following the tender process. It was also alleged that
management has been overstating profits to ensure that they get their performance bonuses as
their bonus is based on profits of the company.
One of SAB’s planes was in the newspaper as it was discovered it had not been serviced for over
10 years, this led to the plane almost crashing due to system failure. This has had a major
impact on the reputation and flight sales of the company. The Civil Aviation Act 2009 requires
that aircrafts be serviced at least every five years.
You are an audit partner at a medium audit firm called AuditRight Incorporated (AR) and you
have been approached to perform the audit for the 2020 financial year of SAB. The Chief
Financial Director is a close varsity friend of yours who was glad to offer you the business. The
directors of SAB requested that the audit be completed within a week after submitting the
financial statements for audit, as they require the auditor's report to impress one of their major
potential shareholders. SAB is also willing to offer you a loan to the amount of R500 000 to pay
off the outstanding mortgage loan amount on your house. No interest will be charged on this
loan and you can repay the amount at any time.
You also discovered, whilst performing risk assessment procedures, that management was
aware of the fact that one of their planes had not been serviced for 10 years and decided it is
best to keep it operating as it was one of their biggest international flights.
Required:
Q.2.1 Draft an email to your managing partner, Mrs Nkosana discussing the factors that (25)
AR should consider before accepting the audit of SAB.
Ignore risks of material misstatement.
Q.2.2 Discuss whether continuing to fly a plane not serviced for 10 years would (10)
constitute a reportable irregularity as defined in the Auditing Profession Act, 2005.
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Q.3.3 Recommend internal controls that Mr Pete can implement to address the loss of (3)
inventory.
Question 4 (Marks: 55)
You are the auditor of ForSure Products Only (Pty) Ltd (ForSure), that owns departmental stores at
various malls in South Africa. The company has a February year‐end.
ForSure sells a wide range of electronics, office furniture, stationery and household appliances.
Each product line of the store (e.g. electronics) has a designated line manager. When an employee
identifies that the area of the store in which he works is running low on a particular item of
inventory, he proceeds to the storage area to ask Mr Nolan, the store manager, if the company
has any inventory on hand. Mr Nolan logs onto the inventory system to determine if inventory is
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in stock as requested by the employee. If Mr Nolan identifies that the company does have
inventory on hand, he instructs one of the storage employees to collect the inventory and transfer
it to the main floor as needed. Mr Nolan will then update the system with the transfer.
If Mr Nolan is not available, the employee who requires the inventory logs onto Mr Nolan’s
computer and checks the system for the inventory needed. If he identifies that the company does
indeed have inventory on hand, he proceeds to collect the inventory and moves it to the main
floor. If it is determined that there is no inventory on hand by either Mr Nolan or the employee,
the employee informs the designated line manager who calls the closest supplier and places an
order for more inventory. The quantity ordered by the manager generally fluctuates as it is
normally based on the line manager’s instinct.
When the goods are delivered to the store, Mr Nolan or one of his storage employees allows the
driver of the delivery truck to pull into the collection area. The goods are offloaded and packed
wherever they find space for the inventory in the storeroom. Mr Nolan uses the delivery note of
the truck driver to update his inventory records. Where no delivery note is provided by the
supplier, Mr Nolan asks the driver how many products he is delivering and writes it on his
inventory notepad. A copy of the delivery notes or notes in the notepad are made and sent to the
accounting office.
Once the invoice is received from the supplier, the creditors clerk captures the transaction into
the system by comparing the invoice with the delivery note. Where differences arise between the
invoice and the delivery note, the creditors clerk uses the invoice as the basis for recording the
transaction. The creditors clerk inspects all the invoices received during the month and
determines whether 30 days have passed since the date of the invoice, as it is the company’s
policy to settle invoices only after 30 days. If 30 days have passed, the credit clerk includes the
invoice in the batch of suppliers to be paid and then compiles a spreadsheet listing all suppliers to
be paid and the amounts to be paid. The spreadsheet with the amounts to be paid is attached to
the invoices supporting the amounts, which are then given to the accountant.
The accountant does a spot check on the spreadsheet and invoices and then signs the
spreadsheet as authorisation to be paid. Suppliers are paid via electronic funds transfer, the
accountant logs onto the company’s bank account, makes the payment from the schedule and
returns the invoices to the credit clerk.
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Required:
Q.4.1 Identify the internal control weaknesses from the scenario above. For each (50)
weakness identified, make recommendations for improvement.
Present your answer in a table format.
Q.4.2 List five inherent limitations for the internal controls recommended in Q.4.1. (5)
END OF PAPER
© The Independent Institute of Education (Pty) Ltd 2020
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