APPENDIX A: ASSIGNMENT COVER SHEET

ASSIGNMENT COVER SHEET

Surname Abrahams
First Name/s Zakariya
Student Number 158761
Subject Auditing 3T – AUD3T
Assignment Number 2
Tutor’s Name Mr. Ismail Sader
Examination Venue N/A
Date Submitted 27 April 2022
Submission (√) First Submission Yes Resubmission
11 Denneboom Street
Bosmont
Postal Address
Johannesburg
Gauteng
South Africa 2093
E-Mail zakabrahoo1@gmail.com
(Work)
Contact Numbers (Home) 011 474 3648
(Cell) 067 319 3607

Course/Intake B-Comm in Information and Technology Management – Y3 /S1/ 2022

Declaration: I hereby declare that the assignment submitted is an original piece of work produced by myself.

Signature: Mr.Z.Abrahams Date: 27 April 2022

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Question 1
For each situation below identify and explain the threat and one fundamental principle
that is comprised. (15 Marks)

1. Self-interest threat - This arises when the auditor has a financial interest in the client's
business.
2. Self-review threat - Arise when actual work performed is audited/checked by the
person who has actually performed such work or by his relatives or friend.
3. Advocacy threat - Arise when an auditor promotes a client’s position or representation
in deals on behalf of clients.
4. Familiarity threat - Arise when a person auditing the financials of his relative or
friend.
5. Intimidation threat - Arise when pressure is created on the auditor not to perform his
functions including attempts to exercise undue influence over the account.

Situation Threat Fundamental principle

An auditor has shares in a Self-interest threat In this case, the auditor holding
company that is an audit shares in the company or holds
client of theirs. a financial interest in the client,
independence will compromise.

An accountant has Self-review threat An accountant audited financial

compiled the financial statements complied by him,
statements for a client and In this case, work is audited by
was requested to also audit the person who actually
the statements. performed such work, integrity
will be compromised.

The financial director of Intimidation threat In this situation, pressure is

Baboo Ltd is very created on the auditor to not
aggressive and dismissive perform his functions hence,
of the audit function and objectivity will compromise.
the audit team.

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 A chartered accountant
values a client’s shares and
then leads the negotiations
on the sale of the client’s
company
Advocacy threat The chartered accountant
value’s a company's share and
negotiates on behalf of the
client, objectivity will be
compromised.

The chartered accountant Familiarity threat The chartered accountant fails

fails to report the fraud of to report fraud related to his
a client because the friend’s business subsequently
perpetrator is a close the auditor has not reported
friend and he is fraud in relation to his friend’s
sympathetic to the interest business, thus independence
of his friend. will be compromised.

Question 2
2.1 The risk of the auditor “getting it wrong” or giving opinions that are not 100%
accurate will always be present and this is referred to as audit risk. Audit risk is better
understood when the components of the risks are understood. Identify and explain the
three components of audit risk. (9 Marks)

An audit is a process of examining and authenticating the validity and accuracy of books of
account. Audit risk is associated with errors or misstatements that can originate in books of
account of the business.

Components of audit risk are: Inherent Risk, Control Risk, and Detection Risk
Inherent Risk: Risk that can be found in business transactions.
Control Risk: Risk that material misstatement will not be prevented or detected.
Detection Risk: Risk that shows the probability that audit procedures will not be able to
detect the existence of error or fraud in the business.

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2.2 The concept of materiality is fundamental when conducting an audit. An auditor
makes an opinionated expression on the fair representation of financial statements with
regard to all things material. Explain 3 items that best describe the nature of
materiality. (6 Marks)

1. Overall Materiality
The level of "overall materiality" in a company's financial statements is determined by the
auditor appointed by the company as a whole and can influence the decision-making process
for the users of the financial statement.

2. Overall Performance Materiality

"Overall Performance materiality" is reduced from "overall materiality level" to consider the
risk of several smaller errors or omissions that the auditor was unable to find. It can be less
than the overall level of materiality or a combination of these factors.

3. Specific Materiality
Specific materiality refers to the level at which the materiality is likely to be substantiated.
These may exist in different areas in the company, for certain classes of transactions, for the
account balances that may affect the economic decisions of the users of the financial
statement of the company.

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References:

Arens, A.A., Elder, R.J. and Beasley, M.S. (2017). Auditing and assurance services : an
integrated approach. Harlow, Essex: Pearson Education Limited.

Marx (2018). Dynamic Auditing - A Student Edition. Lexisnexis Sa.

A Adams, T Diale and Richard, G. (2019). Auditing notes for South African students.
Durban: Lexisnexis.

Coetzee, G.P., R Du Bruyn, H Fourie and K Plant (2017). Internal auditing : an introduction.
Durban, South Africa: LexisNexis.