AUE3761 Test 1 Solution

April 2023

AUE3761 Test 1
April 2023
SUGGESTED SOLUTION

Dear Student,

Carefully study the feedback we give you in the solution to Test 1.

Required 1: Statutory concerns relating to the appointment of the engagement MARKS

partner
References: Lesson 1.2; APA and Companies Act

1. Mr Marole may not be appointed as the engagement partner on the audit of BR Retail
as he would have been the engagement partner for more than five consecutive ^
years. (1½) (Section 92 of the Companies Act)

2. Mrs Martin, as a previous CFO of BR Retail, is disqualified to take over as the

engagement partner as she is not yet eligible to do so before another year has
passed (five years should lapse and she is only in year four) (1½) (Section 90 of ^
the Companies Act)

3. Although both Mr Marole and Mrs Martin:

• are registered with IRBA (they are partners at a registered firm of auditors) (1½)
^
(Section 90 of the Companies Act and Section 37 of APA),
• except for the issues identified in points 1 and 2 above no other independence ^
issues are identified (Section 90 of the Companies Act) (1½),

neither of them qualifies to be appointed as the engagement partner on BR Retail’s

audit. (1½) (If only one person is mentioned as not complying, award 1 mark only.) ^

4. It is therefore suggested that another partner in the audit firm takes on this
responsibility. (1½) ^

Available (6 x 1½ = 9) 9
Maximum 6

Comments

Take note of the following comments for the solution of Required 1:

• It was not clear whether or not students understood the term “statutory
requirements” as some students did not address the required in terms of the requirements
prescribed in the relevant Acts. To answer this required, students had to identify which
Acts should be complied with when appointing an engagement partner of an engagement.
1

Open Rubric
 AUE3761 Test 1 Solution
April 2023

From your studies, you should have identified that the APA definitely applies as well certain
sections in the Companies Act.
• A lot of students provided us with a theoretical answer which was incorrect. As you
may know by now, for this module you should know the theory but more importantly be
able to apply it to a practical scenario. This means you had to look at the case study
and identify what information indicates whether they comply or not with statutory
requirements (the Acts).
• Some students only focused on Mrs Martin and not on Mr Marole as well.
• It is also evident that students do not understand that you also have to be registered with
IRBA to be appointed as an engagement partner.
• Also note that all partners of a partnership (as in the case with SBG Incorporated) should
be registered at IRBA (this is required by law). Therefore, if we indicate that SBG
Incorporated is a registered firm of auditors, it means that all partners are indeed registered
with IRBA. You should be able to deduct this from the information provided.
• Note that it was not necessary for you to provide the Acts and section numbers in
your answer. It was only given in this solution for reference purposes.

Required 2: Identification, description and assessment of inherent risks of

MARKS
material misstatement at the financial statement level due to complexity and
change
References: ISA 315 (Revised 2019); Lesson 3.3
(a) (b)
Description of inherent risks of Assessment of each inherent risk,
material misstatement, which arise citing reasons for your
because of complexity and change assessment, according to its
• Magnitude (1½ marks)
(1½ marks each) • Likelihood (1½ marks) and
• placement on the spectrum
of inherent risk (1½ marks)

DUE TO COMPLEXITY
1. The AFS may be materially misstated 1.
due to error as BR Retail imports Magnitude of misstatement is
products and the accounting medium/high as there are a few products ^
treatment of forex transactions is being imported (even though it is only 5%, ^
complex. (1½) it is still material (qualitatively but possibly ^
also quantitively if you consider the ^
yearend balance of inventory)). (1½)

Likelihood of misstatement is
medium/high as these types of
transactions are complex and might be
measured incorrectly (also considering the
under declaring of import taxes which
makes it more complex). (1½)

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 AUE3761 Test 1 Solution
April 2023

Required 2: Identification, description and assessment of inherent risks of

MARKS
material misstatement at the financial statement level due to complexity and
change
The risk can be placed on the
medium/high end of the spectrum of
inherent risk. (1½)

2. Even though BR Retail is not indicated 2. ^

as listed, the holding company is listed Magnitude of misstatement is ^
and therefore BR Retail’s AFS may be medium/high as the AFS should comply ^
materially misstated due to error as with JSE reporting requirements and ^
they might not comply with disclosures as a whole or if not complied
additional JSE reporting with have serious consequences. (1½)
requirements and disclosures as
they need to report to BRH. (1½) Likelihood of misstatement is
medium/high as the requirements can be
(Note: It is important that this answer somewhat complex and chances for error
should not relate to fraud (manipulation is likely. (1½)
of AFS to ensure that they comply with
JSE disclosures and requirements). The risk can be placed on the
Only risks related to inherent risks due to medium/high end of the spectrum of
complexity and change were required inherent risk. (1½)
and not risks due to susceptibility to
misstatement due to management bias
or fraud or significant risks.)

DUE TO CHANGE
3. The AFS may may be materially 3.
misstated due to error Magnitude is high as it affects the ^
• as the company has a huge business operations as a whole or in the ^
expense related to loadshedding case of not adhering to laws and ^
and it is expected to get worse (½) regulations it will attract a penalty which ^
or affects the whole business. (1½)
• customer spending might decline
due to the economic outlook (½) Likelihood is (this answer depends on the
or risk that was listed in column a)
• the company made a huge capital • medium to high as the company is
investment when opening new aware of loadshedding issues and
stores (expanding) and if they were expense and plans to invest in solar
to fail, they will still need to pay off energy in the future to minimise this
the debt (½) expense. It can also be argued that the
or likelihood is high as the expense is
• the company might be liable for material or
penalties if not adhering to • low to medium as momentum of sales
international laws and regulations growth still in line with projections or
when importing goods (½)

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 AUE3761 Test 1 Solution
April 2023

Required 2: Identification, description and assessment of inherent risks of

MARKS
material misstatement at the financial statement level due to complexity and
change
the AFS may be incorrectly disclosed • low to medium as the company seems
based on the going concern to be profitable and has experience with
assumption. (1) opening of new stores or
• medium to high as countries have
different regulations and it seems as if
certain laws and regulations related to
import of products have already been
transgressed. (1½)

This risk can therefore be placed on the

medium/high end of the spectrum of
inherent risk. (1½)

Available (12 x 1½ = 19½) 18

Maximum 10
Communication mark – layout 1
Maximum 11

Comments

Take note of the following comments for the solution of Required 2:

• The impact that the risk has on the AFS should be clear (otherwise it is seen as a
business risk).
• Students did not address all the components in the assessment (magnitude, likelihood
and spectrum of inherent risk) and sometimes also did not explain the assessment. For
example, if you only wrote down that likelihood may be assessed as high without explaining
it, no marks were awarded.
• Students had to focus on specific inherent risk factors, namely complexity and
change. Answers dealing with other inherent risk factors where not accepted. For
example,
o RoMM related to fraud for related party transactions (susceptibility to misstatement
due to management bias or fraud)
– RoMM related to fraud to overstate income and assets to look good for investors as
part of JSE listing (susceptibility to misstatement due to management bias or fraud)
– RoMM related to fraud to manipulate the AFS as there are a few going concern
indicators present (susceptibility to misstatement due to management bias or fraud)
• Students also had to focus on BR Retail and not on BRH. This means that answers
related to consolidations were not accepted as consolidation is only accounted for in the
holding company.
• Some students mentioned that due to the expansion, BR Retail is moving in unknown
territory, but this is incorrect as BR Retail has been in business for many years and
have experience in expansion.

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 AUE3761 Test 1 Solution
April 2023

Required 3: Risks of material misstatement at the assertion level

References: Lesson 3.3, ISA 315 (Revised 2019)
Inherent risks of material misstatement that arise at the assertion level, as related MARKS
to the possible overstatement of inventory, and state the assertions to which they
relate.
1. Imported inventory

1.1 There is a risk that inventory in transit (imported) might have been included in
the inventory balance before the risks and rewards have passed to BR Retail ^^^
(therefore overstatement). (1½) Existence (½) and Rights and Obligation (½)

1.2 There is a risk that imported inventory might not be correctly translated at the
correct exchange rates at the transaction date or at year-end OR there is a risk ^^
that imported inventory might not be correct due to the complexity of foreign
exchanges and as a result, inventory might contain errors (therefore overstatement
if incorrect rates are used). (1½) Accuracy, valuation and allocation (½)

1.3 There is a risk that inventory might be damaged when transported from overseas ^^
or between local stores and might therefore not be written off (therefore
overstatement). (1½) Accuracy, valuation and allocation (½)
(Note that you should not only indicate that inventory is damaged but also the effect
it has on the AFS. The effect is that inventory is included in the inventory balance ^^
and not written off.)

1.4 There is a risk that inventory might not be accounted for net of allowances and
rebates received when buying certain quantities (therefore overstatement). (1½) ^^
Accuracy, valuation and allocation (½)

2. Obsolete stock

There is a risk that stock might become obsolete and not be written off (still ^^
included in the balance and therefore overstatement). (1½) Accuracy, valuation and
allocation (½)

Available (5 x 1½ = 7½) + (6 x ½ = 3) 10½

Maximum 6
Communication marks: appropriate style 1
Total 7

Comments

Take note of the following comments for the solution of Required 3:

• Students referred to the assertion as accuracy or valuation but the full name of the
assertion for account balances is accuracy, valuation and allocation and therefore
students were penalised if they did not write the correct name.

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 AUE3761 Test 1 Solution
April 2023

• Students had to focus on overstatement of inventory. Therefore, risks related to

completeness did not apply. The following answers thus did not apply:
o There is a risk that imported inventory in transit for which rights of ownership might
have transferred may be omitted.
o There is a risk that when determining the cost of inventory, the import duties or
insurance might not be taken into account.
o Inventory may be omitted because of different locations.
• Students did not apply the information given in the scenario to their answers. For
example, answers related to the following were not accepted as nothing was mentioned in
the scenario:
o problems with the inventory accounting system
o overstatement of inventory to increase bonuses
o the accounting policy that BR Retail followed for inventory
o indication of weak internal controls leading to inventory being stolen and therefore
not written off
• Answers related to the following was also not accepted as it does not make sense in
general terms, “Inventory already sold to customers still being included in the inventory
balance”. The risk here is low as it is a supermarket and supermarkets do not hold inventory
on consignment. Think about buying something at Checkers for example. You walk in, pay
for it before taking it out of the store. You won’t pay for something at Checkers but leave
the store without it right?

MARKS
Required 4: Overall audit strategy - inventory
References: ISA 300; Lesson 3.7
1. Scope

1.1 BR Retail uses sophisticated inventory management software

Computer-assisted audit techniques will be used to audit inventory; therefore, ^

the auditor must be familiar with the use of CAATs or should appoint an expert to
assist them. (1½)

1.2 The holding company is listed

It is therefore likely that the BR Retail might have additional reporting obligations ^
related to inventory. (1½)

1.3 International laws and regulations

We as auditors need to make sure that BR Retail complied with the international laws
and regulations when importing products. (1½) ^

(Note: If the headings were only identified, for example international laws and
regulation applies, without explaining the effect, full marks were not awarded.)

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 AUE3761 Test 1 Solution
April 2023

MARKS
Required 4: Overall audit strategy - inventory
2. Timing

2.1 Inventory counts across multiple stores

Will result in the use of auditors from other branches of SBG, for simultaneous
^
inventory counts. (1½)

2.2 Audit deadline

Although there is no set deadline, it should be considered that BR Retail needs to

report to BRH which is a listed company and therefore needs to comply with ^
certain reporting deadlines / schedule timeous meetings with parties involved
in the group audit. (1½)

It is therefore necessary to conduct audit procedures related to inventory before year ^

end and roll forward at year end. (1½)

3.3 Timeous meetings/arrangements specifically related to inventory

Necessary meetings should be arranged between the involved engagement teams ^

involved in inventory / data and information should be made available timeously by
the audit client when using CAATs to audit inventory etc. (1½)

3. Direction

3.1 Specific focus should be given to imported inventory

• To confirm that inventory is accounted for at the correct spot rate (1½) ^
• That the costs allocated to inventory such as import taxes are ^
calculated/allocated correctly (1½)

3.2 Specific focus should be given to overstatement of inventory

The inventory balance is material and due to the increase in inventory possible
overstatement of inventory specifically related to (1½): ^

• Seeing that the BRH is listed, and BR Retail will report to them, inventory might
be overstated to make the AFS look good. (1½) The necessary attention should
^^
therefore be given to the existence of inventory. (½)

• BR Retail expand their storage capacity and therefore inventory might become
obsolete and still not being written off. (1½) The necessary attention should be
given to accuracy, valuation and allocation of inventory. (½) ^^

3.3 BR Retail has large quantities of inventory and therefore sufficient and appropriate
audit procedures should be performed to ensure inventory is not materially misstated. ^
(1½)
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 AUE3761 Test 1 Solution
April 2023

MARKS
Required 4: Overall audit strategy - inventory

Available (13 x 1½ = 19½) + (2 x ½ = 1) 20½

Maximum 9
Communication marks: logical argument 1
Total 10

Comments

Take note of the following comments for the solution of Required 4:

• Students did not present their answers separately under the three components namely
scope, timing and direction and therefore missed out on the communication mark.
• Students did not focus on inventory only.

MARKS
Required 5: Ethical considerations related to the CFO
References: Lesson 1.2
Ethical concerns related to SAICA Code of Professional Conduct (CPC)

1. Mr Wilson is a CA(SA) and therefore bound to comply with the SAICA (CPC). (1½) ^

2. Although Mr Wilson was not involved in the illegal import of products, he is required
to respond in terms of the requirements of Section 260 once he becomes aware of
non-compliance with laws and regulations. (1½) (not necessary to name the ^
section to earn marks)

3. This matter should be dealt with further in terms of non-compliance with laws and ^
regulations (NOCLAR) by the CFO who is a senior professional accountant in
business. (1½)

4. By not disclosing this transgression, creates a self-interest threat (½) to integrity ^^^
(½) and professional behaviour (½).

Ethical concerns related to the core concepts of ethics and the evaluation of good
for self and good for others principle

5. The CFO is not acting in a straightforward and honest manner (integrity) when not
disclosing the under declaration of import taxes (hiding the non-compliance) and is ^
therefore: (1½)
5.1 Only good for self by acting in his own self-interest while trying to be “good to ^
others (community – low prices)” and not in the best interest of the company
because he did not perform his duties with the necessary care, skills and

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 AUE3761 Test 1 Solution
April 2023

MARKS
Required 5: Ethical considerations related to the CFO
diligence and experience expected from directors (professional
behaviour). (1½) (Companies Act Section 76)

6. The CFO is also not acting in the best interest of other stakeholders because:
^
6.1 Not good for other stakeholders as
• Hiding the issue is not in the best interest of the company and could lead
to fines and penalties/ employees of the company have acted unlawfully and ^
have not been held accountable for their actions (which could also result in
reoccurrence). (1½)
• SARS (external stakeholder) has lost out on import taxes. (1½)
Available (3 x ½ = 1½) (7 x 1½ = 10½) 12
Maximum 6

Comments

Take note of the following comments for the solution of Required 5:

• Students did not do well in this question as they did not address all the components, for
example, ethics in terms of the SAICA Code of Conduct as well as according to
principles of good for self and good for other (you had to ignore King IV). There was a
whole discussion class on this where a question was discussed. Make sure that you are
familiar with these concepts.
• Students focused on Mr Pillay instead of the CFO Mr Wilson.
• Students also did not read properly and answered the question in terms of Mrs Martin who
was the previous CFO of BR Retail (four years ago!).

UNISA 2023