Your audit firm has been appointed to audit the financial statements of Pills (Pty) Ltd (Pills) for the financial reporting period ended 31
March 2020. Pills is a producer and distributor of pharmaceutical products. While performing risk assessment procedures, you
identified the following risk:
Pills uses highly specialised machinery in the manufacture of its products. The company also owns several patents over the
manufacture of its products. The accounting for both the specialised machinery and patents is quite complex; however, management
is quite experienced in accounting for these assets.
Which one of the following options would be the most appropriate response to the risk identified in terms of International Audit
Standards?
Select one:
a. Allocate more experienced personnel to audit machinery and patents.
b. Conduct more extensive tests of controls to reduce substantive testing.
c. Reduce substantive testing by relying on management’s expertise in accounting for the specialised machinery and patents.
d. Select audit samples in a way that is less predictable.
Clear my choice
Question 2
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Which one of the following statements regarding a system of internal controls is correct in terms of International Audit Standards?
Select one:
a. Internal controls are designed, implemented, and maintained by management to promote the reliability of financial reporting,
the effectiveness and efficiency of operations and compliance with applicable laws and regulations.
b. Effective internal controls provide an entity with absolute assurance about achieving the entity’s financial reporting objectives.
c. The components of a system of internal control consist of the control environment, the entity’s information system and
communication, the auditor’s risk assessment process, control activities and the process to monitor the system of internal
control.
d. The auditor is required to obtain an understanding of all the internal controls of the audit client.
The auditor is required to perform risk assessment procedures in order to identify risks of material misstatements at both financial
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statement/and
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courses /level.
AUE2601-24-S1 / Welcome Message / Assessment 6
The following are possible risk assessment procedures specified in the International Standards on Auditing (ISAs):
1. enquiries with management, internal audit function and others within the entity
2. performing substantive tests of detail
3. attending the year-end stock count
4. performing analytical procedures
5. discussions among the engagement team
Choose the option that correctly indicates risk assessment procedures in terms of the ISAs.
Langley Consultants (Pty) Ltd is a firm of engineers based in Pretoria. For the year under review, the firm had 38 staff members,
including five executive directors. The company earned revenue of R136.8 million and net profit after tax of R39.2 million.
The directors acquired equipment at a cost of R 25 million two weeks before year end, which was financed with an 80% loan from VW
Bank Ltd; the balance was financed from cash reserves. The loan from VW Bank is the only third-party liability of Langley Consultants
(Pty) Ltd at year end.
There are 8 shareholders and the chief executive officer is the only director who owns shares in Langley Consultants (Pty) Ltd.
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