UNIVERSITY OF LIMPOPO

MEMORANDUM

STANDARD EXAMINATION

MODULE: CAUA040/CAUD080/CAUE080 NOV/DEC

2021

(AUDITING)
 CAUA040/CAUD080/CAUE080 STANDARD EXAMINATION 2021

QUESTION ONE

a. With reference to the headings: Background information AND Client 16

acceptance, discuss any concerns that Grand Thompson Incorporated should
have considered before accepting Phezukwabo Gaming and Leisure (Pty) Ltd
as a client.

Please note: Exclude from your discussion, any risk of material

misstatement and Grand Thompson’s skills and competence.

Communication mark: Clarity of expression 1

Industry

PGL operates in the betting and gaming industry which contributes towards gambling 1
addiction in society. GT should have considered whether they are comfortable being
associated with an industry synonymous with ruining people’s livelihoods.

Financial responsibility

Given that the company is in a negative cash flow position due to the impact of Covid-19 1
there is a risk that PGL will not be able to pay the audit fees.

Ethical considerations

GT did not consider if they are independent from the client as evident from the following: 1

Thulani expressed excitement over getting PGL as a client as they were struggling 1
to get clients. s330

This creates a self-interest threat because they are dependent on the client for audit fees. 1

This creates a threat to objectivity as the audit team may compromise their judgement or 1
overlook issues in the audit in order to keep the client happy, to receive the fees.

The threat is not at an acceptable level because they are dependent on the fees from 1
PGL and are struggling to obtain new clients.

The appropriate safeguard would be to have an independent person to appropriately 1

perform quality review on work performed.

Audit partner instructed the audit team not to do anything that will make the client 1
angry.

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 CAUA040/CAUD080/CAUE080 STANDARD EXAMINATION 2021

This creates a self-interest as GT would like to keep earning fees from PGL. As well and 1
intimidation threat to:

An intimidation threat is also created as GT will not want to irritate PGL and will do 1
everything they can to keep them happy

Objectivity as the team may overlook issues in the audit with the intent of not making the 1
client angry.

Professional competence and due care will be affected as the audit team may be scared 1
to ask questions/raise issues in order to keep the client happy.

The threat is not at an acceptable level as the quality of the audit may be compromised 1
or poor.

The appropriate safeguard would be:

 To have an appropriate quality control reviewer 1

The partner instructed the senior trainee to take full authority of the audit. 1

This creates a self-interest threat for the senior trainee as s/he may benefit from 1
completing the audit to the satisfaction of the audit partner.

An intimidation threat exists for the senior trainee as s/he may scared to tell the audit 1
partner that s/he is not competent enough to perform the task.

Professional competence and due care is compromised as the senior trainee does not 1
have the necessary competence to take full authority of the audit.

Objectivity may be compromised as the senior trainee may overlook issues or 1

compromise his professional judgement in order to impress the audit partner.

The threats are not at an acceptable level as the quality of the audit may be 1
compromised.

The appropriate safeguard(s) would be:

 Get assistance from other firms (experienced partner) if GT does not have enough 1
partners.
 Allocate more experienced staff to the audit of PGL. 1

Max of one mark for safeguards

Furthermore the above issues creates a self-interest threat for the partner as he will gain 1
financially from the audit.

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 CAUA040/CAUD080/CAUE080 STANDARD EXAMINATION 2021

Professional competence and due care of the partner is questionable as it does not seem 1
like he knows the requirements of the ISAs in performing audits.

The threats are not at an acceptable level as the quality of the audit may be 1
compromised.

The safeguard would be to;

 ensure compliance with the ISAs. 1

 Not accept the audit if compliance with ISAs can’t be achieved.
1
Max of one mark for safeguards

Available 28

Communication mark: Clarity of expression 1

Maximum 17

b. With reference to the background information, describe the risk of material 13

misstatement at the consolidated financial statements level of Phezukwabo
Gaming and Leisure Ltd for the year ended 30 September 2021.

PGL operations are geographically wide-spread. 1

The risk that controls and processes at the different offices are not effectively managed 1
and controlled resulting in deficiencies and misstatements in the financial statements.

Group financial statements will have to be prepared. 1

There is a risk that the consolidation requirements of IFRS 10 and IFRS 3 have not been 1
correctly applied.
There is a risk that material misstatements may arise as a result of the failure to correctly 1
eliminate the intercompany balances.
There is a risk that related party transactions are not identified and/or are not at arm’s length 1
in the separate financial statements
If not at arm’s length, possible non-compliance with IAS 24. 1

Going concern problems owing to:

The company is negatively affected by the current economic downturn due to Covid-19. 1

The company experienced cash flow issues. 1

Risk that the going concern assumption is not appropriate regarding the preparation of the 1
financial statements.

Risk that management will be inclined to materially misstate the financial statements to 1
present a better financial position.

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 CAUA040/CAUD080/CAUE080 STANDARD EXAMINATION 2021

There’s a tight audit deadline as the audit has to be finalised in 30 days. i.e. 31 October 1
2021.
Material misstatements in the financial statements due to management being under 1
pressure to prepare the financial statements in time.
Events after balance sheet date and contingencies will not be properly / timely identified 1
and accounted for by management.

Amtail intergrates into PGL’s accounting system 1

Risk of unauthorised changes to software / data which result in invalid standing or 1
transaction data thereby undermining the integrity of the company’s financial information.
Risk of errors arising from incorrect input and processing of data thereby potentially 1
corrupting many account balances.
Risk of business continuity and loss of data should a problem exist in the Amtail application. 1

PGL is a new engagement client. 1

Risk that opening balances are materially misstated due to fraud or errors. 1
Risk that accounting policies are not consistently applied. 1
Risk that the management may intentionally misstate the financial statements as they are 1
aware that GT is not familiar with PGL.

Available 22
Maximum 13

c. With reference to working paper A1, identify key controls and describe the related
test of control you will perform to test the operating effectiveness of the control. 20

Key Controls Test of control

 Appointment for new employees
is initiated through a pre-
numbered requisition form.(1)
 Requisition for appointment is
approved by the Head of HR
and the financial manager.(1)
 Employment contracts are
signed by the head of HR as
confirmation of approval.(1)
 Obtain a sample of requisitions and inspect
if the requisitions are pre-numbered. (1)
 Obtain a sample of requisition form and
inspect for the signature of the head of HR
and the financial manager to confirm that
the requisition was approved. (1)
 Obtain a sample of employment contract
and inspect for the signature of the head of
HR to confirm is the contract was
approved. (1)

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 CAUA040/CAUD080/CAUE080 STANDARD EXAMINATION 2021
 Employment contract are stored
in a safe location, access to the
store room is restricted through
use of biometric system.(1)
 Access to the payroll system is
restricted to the employee in the
HR department. (1)
 Attempt to gain access by using the details
 Employee log into the system
using unique username and
password. (1)
 The system block the employee
account should the employee
insert an incorrect password for
more than 3 times. (1)
 Employees are assigned unique
employee numbers. (1)
 Super user rights are assigned
to the HR manager only. (1)
 Changes to employee details is
initiated through a pre-
numbered amendment form. (1)
 The amendments are approved
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 Attempt to gain access to store room by
using my own fingerprint, and confirm that
the system will deny access. (1)
 Obtain a list of users from the system:
- And select a sample of users
appearing on the list and enquire
about their position. (1)
- Obtain the employment contract of
the user and confirm their role and
position. (1)
of a non-HR staff member to confirm that
access will not be granted. (1)
 Observe one of the employees within the
HR department logging into the system
using their unique username and
password. (1)
 Obtain the list of the users from the system
and confirm if there are no users with the
same username. (1)
 Attempt to log in using one employee
username and insert an incorrect password
more than 3 times, and confirm that system
does block that employee. (1)1
 Obtain employee listing and use CAAT to
identify any duplicate employee numbers,
follow up on any exception noted. (1)
 Obtain the user rights report and confirm
that the HR manager is the only user with
“super user rights”. (1)
 Obtain a sample of the amendment forms
and inspect if they are pre-numbered. (1)
 Obtain a sample of the amendment form
and inspect for the signature of the HR
 CAUA040/CAUD080/CAUE080 STANDARD EXAMINATION 2021

by the line manager and the HR manager / assistant HR manage to confirm

manager/assistant HR the approval of the changes. (1)
manager. (1)

 Obtain the list stating the salary increases

 Salary increases are approved
by the CEO and the CFO at the
begining of each financial year.
(1)
 The HR manager review and
approve the new rates captured
by the administrators on the
payroll system.(1)
and inspect the list for the signature of the
CEO and CFO confirming the approval of
such increases. (1)
 For a sample of employees who received
salary increases in the current year:
- Obtain a transaction history for the
first month of the year and inspect
the details of the capturer and the
approver. (1)

Available 29
Maximum 20

d. With reference to the email conversation, describe the audit procedures to be 15

performed to obtain sufficient and appropriate audit evidence regarding existence
of debtors.

The existence of debtors was assessed to be a high risk and therefore Positive debtors’ 1
circularization/Confirmation will be appropriate audit procedure to perform.

Positive debtors’ circularization procedures:-

 Obtain permission from debtors’ clerk/management to perform a debtors’ 1

circularization/confirmation.

 Obtain a listing of debtors and their outstanding balances. 1

 Agree the total of this debtors listing to the debtors’ control account in the general 1
ledger.

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 CAUA040/CAUD080/CAUE080 STANDARD EXAMINATION 2021

 Select a sample of debtors from the debtors listing created: 1

- The sample should include those debtors whose accounts are 1
long overdue or whose outstanding balance is significant.

- The sample should also include any unusual accounts.

1

 Arrange control of all copies of confirmations to be sent to debtors. 1

 Draft a letter (on client letterhead) requesting the debtor to confirm directly with the 1
auditors whether or not the enclosed invoices correctly represent amounts owed by
them.
Confirmation through Post

 Enclose the letter, a stamped envelope addressed to the auditor and the invoice 1
copies in an envelope for mailing to the debtor.

 Confirm that the debtors with a Post Office Box address are not fictitious by looking 1
up the address in the telephone directory or confirming the address telephonically.

 Personally mail or supervise the mailing of all the envelopes/letter. 1

Alternative: Email Confirmation 1

 Obtain the debtor’s email address from the client, and personally send an email to 1
the debtor with the external confirmation letter attached.
 Instruct the debtors to respond directly to the auditors with a signed confirmation 1
letter.

 Instruct the debtor to reply directly to you 1

 Prepare a working paper detailing all accounts circularized, for monitoring of 1

replies.

 Agree the amount per the debtor’s listings to the amount on the signed external 1
confirmation.

 Follow up disagreements by inspecting the relevant source documents and making 1

enquiries of the parties concerned.

 Send out second confirmation requests to all those debtors who have failed to 1
reply or whose envelopes/emails were returned “addressee unknown” (after
correcting the address).

 If debtor’ fail to respond to the second request perform the following alternative 1
procedures:
o Telephone the debtor (and then follow up with written confirmation later) – 1
with permission from the client.

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 CAUA040/CAUD080/CAUE080 STANDARD EXAMINATION 2021

 Inspect subsequent receipts from debtors in cash books. 1

Obtain a signed management representation letter with regard to the Existence assertion 1
for Debtors.

Available 23

Maximum 15

e. You were instructed by the audit manager to review the audit work performed by a 8
junior audit trainee, testing the existence of fixed assets. Critically evaluate the audit
working paper A2.

Please note: Exclude from your discussion any additional procedures to be

performed.

Communication mark: Logical argument 1

The trainee has not done well in the following aspects:
1. The Working paper stated an incorrect year end (i.e. 31 December 2021) and 1
preparer date (i.e. 2020). The year end of PGL Ltd is 30 September 2021.
2. The working paper does not have the preparer’s details such as name or initials. 1
3. The objective stated is incorrect, The working paper was designed to test the 1
existence of fixed assets, however the objective stated confirms the completeness
of the fixed asset.
4. Procedure 1 – The test documented is performed to ensure that all the assets 1
purchased are recorded in the fixed asset register and therefore does not confirm
the existence of assets. The direction of testing is incorrect as it is testing
completeness and not existence.

5. Procedure 3- The procedure performed confirms the accuracy of the profit on sales 1
of an asset and not the existence of the fixed asset.
- Accuracy is an assertion for classes of transaction ( Statement of 1
profit or loss items) not for account balance ( Statement of
financial position).
6. Procedure 5 – The procedure does not confirm the existence of fixed asset but 1
rather the presentation and disclosure of the fixed asset.
7. The conclusion documented is incorrect due to the following reasons: 1
 There were two assets that were recorded in the fixed asset register 1
before the risk and rewards were transferred to PGL, and therefore
we cannot conclude that the assets do exist.
 There are no procedures performed in terms of disposal of assets , 1
the procedures documented only covers additions and the opening
balances)
The trainee has done well in the following aspects:

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 CAUA040/CAUD080/CAUE080 STANDARD EXAMINATION 2021

1. Procedure 2 and Procedure 4 are correct testing for confirming the existence of 1
fixed assets.

Conclusion 1
Overall the substantive tests performed do not give sufficient and appropriate audit
evidence regarding the existence of fixed assets.

Furthermore the testing did not cover the disposals and the conclusion documented is 1
therefore incorrect .
Available 13
Communication mark: Logical argument 1
Maximum 9

f. With reference to working paper A3, MISSATEMENTS 1 – 5 only, prepare a schedule

of audit differences with regard to the uncorrected misstatements identified. 14

Communication mark: Layout 1

Use the following format for your answer

Assets Liabilities Equity P/L
Uncorrected
Description Dr/(Cr) Dr/(Cr) Dr/(Cr) Dr/(Cr)
misstatement
R R R R

N Description Assets Liabilities Equity Profit/Loss

r DR/(CR) DR/(CR) DR/(CR DR/(CR)
)
1 Misallocation (250 000) (0.5)
error between ACCOUNTS
directors’ RECEIVABLE (0.5)
loans and
Accounts 250 000 (0.5)
receivable. LOANS TO
(0.5) DIRECTORS (0.5)

2 Misallocation (379 000) 379 000 (0.5)

error between (0.5) REVENUE (0.5)
Revenue and BETTING
Payables. PAYABLE
(0.5) (0.5)
3 Understateme Amount is below trivial Threshold. (1)
nt of interest
received (0.5)
4 Overstatement (495 000) (0.5) 495 000 (0.5)
of intangible INTANGIBLE ASSET OTHER EXPENSES (0.5)
assets and (0.5)

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 CAUA040/CAUD080/CAUE080 STANDARD EXAMINATION 2021

amortisation.
(0.5) 24 750 (0.5) (24 750) (0.5)
ACCUMULATED AMORTISATION (0.5)
Calculation: AMORTISATION (0.5)
(495 000* 5%
= 24 750) (1)
5. Understateme (123 551) 123 551 (0.5)
nt of payables (0.5) STATIONERY (0.5)
and stationery. TRADE
(0.5) PAYABLES
(0.5)
Aggregated (470 250) (502 551) (0) (972 801)
Misstatements (0.5) (0.5) (0.5) (0.5)
(Principle marks)

Available 16.5
Communication mark: Layout 1
Maximum 15

g. With reference to the working paper A3, MISTATEMENT 6, discuss the 11

Grand Thompson Incorporated considerations in terms of the Auditing
Professions Act.

GT has to consider if a reportable irregularity has taken place. 1

A reportable irregularity is :

An unlawful act or omission. 0.5

Not declaring revenue made to SARS is unlawful in terms of the Income Tax Act. 1

Not declaring all revenue will also affect the fair presentation of the financial statements 1
which will result in non-compliance with s29 of the companies act.

Committed by any person responsible for management of the company. 0.5

The CEO who is responsible for management of the company is the one that instructed the 1
bookkeeper to not declare the revenue.

Which has caused or likely to cause material financial loss to the company or to any 0.5
member, shareholder, creditor or investor or

Non-compliance with SARS laws may result in penalties being incurred by the company. 1

Is fraudulent or amounts to theft or 0.5

No declaring all revenue made amounts to fraud as this is tax evasion and constitutes fraud. 1

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 CAUA040/CAUD080/CAUE080 STANDARD EXAMINATION 2021

Represents a material financial breach of any fiduciary duty owed by that person to the 0.5
entity.

The CEO has breached his duty of acting in the best interest of the company by instructing 1
that revenue be misstated.

Therefore, a reportable irregularity has taken place. 1

GT as the registered auditors of PGL must without delay, send a written report to the 1
Regulatory Board.

Within three days of sending the report to the Board, notify the members of management 1
of the company in writing of the sending of the report.

As soon as reasonably possible but no later than 30days from the date which the report
was sent to the Board, GT must:
1
Take all reasonable measures to discuss the report with management;

Afford members of management an opportunity to make representations in respect of the 1

report and

Send another report to the Regulatory Board which must include 1

-a statement that the GT is of the opinion that no reportable irregularity is taking place or
has taken place or is continuing.

Available 15.5

Maximum 11

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