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AUE3701 GRADED QUESTIONS STUDY NOTES 2022

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AUE3701 GRADED QUESTIONS STUDY NOTES

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  • February 3, 2022
  • 67
  • 2021/2022
  • Exam (elaborations)
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AUE3701 GRADED QUESTIONS

STUDY UNIT 2.1 – PRELIMINARY ENGAGEMENT STAGE QUESTION 1 (54 marks)

Do question 5.8 in Graded Questions on Auditing 2014 by Gowar and Jackson.

You are a member of the Quality Control Committee of a large audit firm; Art Andersunn and Co.
Part of the committee’s responsibility is to determine whether prospective clients are acceptable
and whether existing clients should be retained. Being a large practice, numerous potential clients
are brought to the committee for consideration and the following list includes a number of recent
such cases where the audit appointment is available.

1. Trigger Happy Ltd, a company which hires out mercenaries to foreign governments involved
in conflict and anyone else who is interested. The company is not listed on any stock
exchange.
2. Bossman Ltd, a listed company (with a substantial audit fee), whose chairman is an
outspoken critic of the King III Report on Corporate Governance. His stance is that business
is tough and that all the transparency, disclosure and fairness simply weakens the company
as it gives competitors insights they shouldn’t have and that business is not supposed to be
fair!
3. Nicotar (Pty) Ltd, a company which manufactures cigarettes.
4. Bluevex Ltd, a public company which owes its current auditors R754,000 in audit fees. The
company’s audit committee claims that the current auditors have overcharged.
5. King Couriers Ltd, a company which has on two previous occasions sued its auditors and on
both occasions the auditors (different firms) have admitted negligence and settled out of
court.
6. Skweeze (Pty) Ltd, a chain of retail shops which sells pornographic materials and runs escort
agencies. The company is a subsidiary of a listed company in the entertainment sector. The
holding company auditors have declined the audit.
7. La Paint (Pty) Ltd, an interior decorating business which is owned by the wife of Art
Andersunn and Co’s partner in charge of the Taxation department. The company’s public
interest score requires that the company be externally audited.
8. Interworld (Ltd), prestigious, International Corporation with operations world wide and its
head office in Johannesburg.




1

, AUE3701 GRADED QUESTIONS

YOU ARE REQUIRED TO:

a) Discuss what an audit firm sets out to achieve by implementing policies and procedures
relating to the acceptance of new clients as required by ISQC1. (4)

QUESTION 1 (a) (54 marks)
1. In terms of ISQC1, such policies and procedures are carried out to provide the firm with reasonable
assurance that it will only undertake an engagement where the firm …
 Is competent to perform the engagement and has the capabilities, including time and resources
to do so.
 Can comply with relevant ethical requirements.
 Has considered the integrity of the client, and does not have information that the client lacks
integrity.
2. From a practical perspective, an audit firm carries out these procedures so as not to make a bad
business decision e.g. taking on a client which will not pay its fees or which will negatively affect the
reputation of the audit client. (4 x 1½ = 6)

b) Comment on how information about a prospective client can be obtained. (4)

QUESTION 1 (b)
Information about a prospective client can be obtained in various ways:
1. Communicating with the previous auditor, or in the case of a group, other auditors involved in the
audit of group companies.
2. Discussion with the client’s audit committee, senior financial personnel.
3. Enquiry of the firm’s bankers, legal counsel, etc.
4. Searches of various databases, e.g. on the internet.
5. Review of documentation, public, or made available by the client, e.g. group reports.
6. Enquiry and analysis of the firm’s partners and employees as to any relationships with the
perspective client. (6 x 1 = 6)

c) Comment on the matters to which your committee should give consideration in deciding on
whether to accept the above audit appointments.

QUESTION 1 (c)
1. Trigger Happy Ltd.
1.1 The activities of a company such as this may as a result of an Act of Parliament, are illegal.
1.2 One of the major practical reasons for conducting preliminary engagement activities is to determine
whether there will be any negative consequences for the firm taking on a particular client. The practice
of hiring out mercenaries and being involved in war activities is morally questionable and is probably
not something which …
 the staff of the firm or other
 Clients of the firm would be particularly keen for Art Andersunn & Co to be associated with.
It is therefore, an unwise business decision.
1.3 Another aspect to consider would be whether we would be able to actually render our professional
service. In a business like this, there is likely to be shady (secretive) dealing between parties,
undisclosed movements of funds etc. Limitations on our scope would be inevitable and it would be a
breach of professional behaviour to take on work which we know we won’t be able to do properly.
1.4 It may also be argued that the integrity of the directors of this type of business is questionable.




2

, AUE3701 GRADED QUESTIONS

Comment on the matters to which your committee should give consideration in deciding on
whether to accept the above audit appointments. (CONTINUES)

2. Bossman Ltd
2.1 Whilst there may be some selective truths in the opinion of the chairman, he has a very narrow
view of King III and corporate governance. Corporate governance is indeed about transparency,
fairness in business etc, but it is also about leadership, sustainability and corporate citizenship.
2.2 The chairman does not appear to provide the type of leadership envisaged by King III and his
attitude may well filter down to the board (who would have elected him to the position of chairman).
2.3 In addition, for listed companies, adherence to the requirements of corporate governance, including
making certain disclosures such as the integrated (sustainability) report in the annual report, is a JSE
requirement.
2.4 It is therefore unlikely that we would take this audit (despite the fact that it is a listed company with
a substantial fee) as we might
* place ourselves at risk by taking on a client who does not embrace the qualities of sound corporate
governance, and may be quite comfortable manipulating the financial statements.
* have great difficulty in reporting on those disclosures which must be contained in the annual report
relating to corporate governance. It is inevitable that there will be conflict.

3. Nicotar (Pty) Ltd
3.1 The consideration here is whether the firm wishes to be associated with an industry which
manufactures (and promotes) a product which causes disease and which is becoming more and more
socially unacceptable.
3.2 Again, the attitude to social responsibility which the partners have, will determine this as the
association which the firm has (audit), is in itself unlikely (at this stage) to have business implications
UNLESS Art Andersunn and Co have large clients who adopt a strong anti-smoking stance, e.g.
medical supply companies.

4. Bluevex Ltd
4.1 This, on the face of it, amounts to a straight business decision. We do not want to get involved with
this client, investing time and money, only to find that they refuse to pay the fee!
4.2 It is possible that they have been overcharged - this should be investigated with the existing auditor
(with Bluevex Ltd’s permission) and the Bluevex Ltd audit committee.

5. King Couriers Ltd
5.1 This company is obviously aware of what auditors should be doing, as it has successfully sued its
previous auditors twice.
5.2 This should not cast the company in a bad light, indeed they may well be the type of efficiently run,
successful company which we would like to work with.
5.3 We should be satisfied that our quality controls are of the standard which will prevent negligent
performance and the threat of litigation should not be the overriding consideration. This would be a
negative approach but may have some business risk implications!
5.4 We must be satisfied that the client’s actions with regard to the previous auditors do not reflect a
lack of integrity, and that we understand the business sufficiently to be certain that we can satisfy the
technical, resource, and time requirements.
5.5 It will be of utmost importance that we can service the client properly with regard to the
competence of our engagement team, our time and resources.
5.6 Another consideration might well be whether we need to run the risk of being sued at all! If the
client is predisposed to suing the auditors, is there any sense in taking the audit? Even if we were sued
but won the case, there would be negative publicity and cost implications.




3

, AUE3701 GRADED QUESTIONS

Comment on the matters to which your committee should give consideration in deciding on
whether to accept the above audit appointments. (CONTINUES)

6. Skweeze (Pty) Ltd
6.1 It is unlikely that our firm would want to be associated in any way with this company.
6.2 Firstly, pornographic materials are generally not socially acceptable and any association with them
is undesirable and discreditable to the profession and its members.
6.3 Of even more significance is the fact that the company is involved in activities (escort agencies)
which may be illegal (prostitution) and which in no way would we wish to be involved or associated.
6.4 The fact that the holding company auditors have declined the audit should strengthen our resolve
not to take on this audit.

7. La Paint (Pty) Ltd
7.1 The difficulties with this engagement are the lack of independence of our firm and the majority
shareholder of the company.
7.2 Whilst it may be argued that the partner who is "creating" the lack of independence is not an audit
partner and that because we are a large firm, need not have anything to do with the audit of his wife’s
company, we must still be seen to be independent, which, if we take the appointment, we will not.

8. Interworld Ltd
8.1 The question to be asked here is whether we are large enough to service this international client.
8.2 Although we are a large firm, do we have
 sufficient manpower
 sufficient resources
 International affiliations (even if we do have, we must still be large enough in our own right to
justify holding the position of principal auditor).
8.3 We will also need to consider whether we have the necessary expertise and competence to
conduct the audit e.g. international law, tax practice etc (affiliated offices may be able to provide this).
8.4 On the positive side, the prestige of having a client of this nature would enhance the image and
profile of our firm. (28 x 1½ = 42)




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