AUE2601 - GRADED QUESTIONS ON
AUDITING.
,Topic 1: Introduction to auditing
Study unit 1.1: The auditor
1. Q1.1 (20 marks 24 minutes)
In your auditing studies and in the practice of auditing, you will frequently come across the following terms:
Auditee
Audit independence
Professional scepticism
Professional competence
Assurance engagement
Internal auditor
External auditor
Audit committee
Postulates of auditing
Audit evidence
YOU ARE REQUIRED TO briefly explain each of the above terms.
Ans: References: - Jackson & Stent (2016: 1/2 -1.6, 1/21 – 1/24)
- Study guide (Study unit 1.1)
1. Auditee: The auditee is the entity which is subject to audit. In the case of external audit it may be
the client company, and in the case of internal audit, it may be a branch, division or department within the company itself. √
2. Audit independence: The characteristic of auditing which makes it unique and without which the audit function has little value, ie, the
auditor must be independent of the auditee. √
3. Professional scepticism: An attitude which an auditor must adopt and the auditor must not believe everything he or she is told in a
naive manner. √ Auditors must keep in mind that auditees may attempt to deceive them.√ An auditor should remain unconvinced of the
truth of a particular fact until suitable evidence to support the fact is provided. √
4. Professional competence: This is one of the fundamental ethical principles which auditors must achieve and
maintain. √ They must maintain professional knowledge and skill at the required level and have the necessary technical ability to perform
their function in accordance with applicable technical and professional standards. √
5. Assurance engagement: An assurance engagement is an engagement in which the professional accountant (e.g.
an auditor) expresses a conclusion (e.g. opinion) designed to enhance the degree of confidence of the users (e.g. shareholders) of some
form of information (e.g. AFS) in that information. √
6. Internal auditor: A person who is employed (staff member) by a company to perform independent audits and related assignments
within the company on behalf of the board frequently to provide the board with a level of assurance.√ Whilst the internal auditor is not
independent of the company, he must be independent of whatever is being audited.√ Internal audits commonly relate to the efficiency and
effectiveness of the company’s systems and the company’s ability to identify and respond to risk. It also forms part of the company’s
combined assurance mechanisms.√
7. External auditor: A firm (or individual) which is appointed by a company to perform an external audit.√ This may be an audit required
by the Companies Act 2008 (e.g. public company) or by virtue of the entity’s public interest score or an audit required voluntarily by a
company (e.g. in terms of a private company’s Memorandum of Incorporation). √
8. Audit committee: A grouping of directors independent of the company’s day to day functions, constituted to act as an independent link
between the board of directors and the external auditors, and to oversee internal audit and the integrity of the company’s financial
reporting.√ The audit committee is an important part of corporate governance. √
9. Postulates of auditing: The “foundation stones” or basic assumptions on which the discipline of auditing is built. √
10. Audit evidence: The auditor is required to gather information which is sufficient and appropriate to support the opinion he is required
to provide on the fair presentation of the financial statements.√ The information which the auditor gathers is termed as audit evidence. √
2. Q1.12 (22 marks 26 minutes)
You are chatting to a close friend of yours, Vincent Nzimande an engineer, after a game of squash one evening and he tells you that he is
purchasing the majority (75%) holding in a private company. In addition he will be the managing director but will retain the services of the
two existing directors in the company, neither of whom are shareholders. (There are four other shareholders.)
He also informs you that the company has, besides himself, 27 employees and that the expected turnover for the year is R36 million and
that the only liabilities which the company has are current creditors of just less than R1 million and long-term loans of R4.8 million. Vincent
has just been told by his lawyer, who is responsible for the formalities related to the purchase of the company, that at the next annual
general meeting of the company, an auditor will have to be appointed. Vincent is concerned about this and, knowing that you are in the
auditing profession, he asks you the following questions:
YOU ARE REQUIRED TO respond to Vincent Nzimande's questions
1. Must the company have an auditor and if so, is it an external or internal auditor the company must have? (10)
Ans: References: - Jackson & Stent (2016: 1/2 -1.6, 1-13/1-14)
- Study guide (Study unit 1.1 and 1.2)
,1. 1.1 With regard to whether the company must appoint an external auditor, you will first have to calculate your company’s public interest
score. √ Without going into too much detail this is the sum of points which are allocated to 4 attributes of your
company as follows:
* One point is allocated for the average number of employees (28 points) √^
* One point for every R1m (or portion thereof) of turnover (36 points) √^
* One point for every R1m (or portion thereof) of liability to 3rd parties (6 points) √^
* One point for every individual who has a direct or indirect interest in the shares of the company (5 points) √^
1.2 If your company’s public interest score is below 100 there is no requirement that your AFS be audited. √ Your PIS will be around 70
points. However with this PIS it will be necessary for your company to appoint a registered auditor (or a person who qualifies to act as an
Accounting Officer of a close corporation) to independently review your financial statements. √
1.3 It is also possible that the company’s Memorandum of Incorporation has a clause which requires that the company appoint an external
auditor but this would be a requirement created by the shareholders. √ If this clause exists, your company would have to comply, but as
you will own 75% of the shares you could remove this clause if you wanted to. √
1.4 With regards to an internal auditor, there is no requirement which makes it obligatory for a private company to appoint one. √
1.5 Appointing an internal auditor will not be a substitute for having an independent review and the internal auditor may not carry out the
independent review because he is not independent of the company. √
2. Even if we aren't required to appoint an auditor, can we still appoint one? Could I appoint you as the auditor? (4)
Ans: 2. 2.1 You are certainly entitled to appoint an auditor and if the company already has
one, you may retain the existing auditor, provided the existing auditor is available for re-appointment. √
2.2 Whilst there is nothing in the Companies Act which prevents you from appointing me as your auditor, I would not be in a position to
accept such an appointment. √
2.3 For any audit opinion to be worthwhile (reliable) it must be given by someone who is independent of the company about which the
opinion is being expressed. √
2.4 As you and I are close friends, I would not be, or be seen to be independent, and would therefore be in breach of the requirement
explained in 2.3 as well as my profession’s Code of Professional Conduct. √
2.5 If you end up only having to be independently reviewed (not audited) you could appoint the existing auditor to conduct the review, but
for the same reason as above, I could not perform the review. Note, that the review engagement is, like
an audit/assurance engagement. √
3. Whose responsibility would it be to appoint the auditor and must there be agreement amongst the directors as to who the
auditor should be ? (2)
Ans: 3. 3.1 The shareholders would appoint the auditor by general resolution. As the other directors are not shareholders they have no
say in the appointment. √
3.2 As you hold 75% of the shares, it will be your decision. The MOI (if this is relevant) may lay down some additional requirements for
appointment of the auditor. √
4. What benefit would there be from an audit for the company and for me, bearing in mind that I am the majority shareholder and
managing director? (6)
Ans: 4. Benefits: Overall having your financial statements audited adds to the credibility of your
company in its business dealings. √
4.1 For the company
* It is essential that the other shareholders know how the company is performing and audited annual financial statements are an important
mechanism for reporting to them. √
* Whoever prepares the company's statements may make errors (or even hide frauds) which the audit may detect. Thus the auditor's
opinion on the fair presentation of the annual financial statements gives management greater assurance on the validity of the company's
results. √
* Having the accounting records audited acts as a deterrent to employees attempting to defraud the company. √
* The company will also benefit in as much as lenders of money e.g. your bank, will be far more inclined to extend credit. √ They will
almost certainly require audited financial information from you when considering your financial needs.
√
* The company will benefit from the advice on such matters as systems and tax that the auditor can offer. This kind of advice becomes a
positive by-product of the audit. √
4.2 For you
* Even though you are the majority shareholder and managing director it is still possible for your fellow directors or employees to "pull the
wool over your eyes", particularly as, being an engineer, you know little about financial
matters. √
* The audit will give some assurance that this is not happening as it provides you with an independent “view” of the state of your company,
and you will receive reports on weaknesses in your company’s controls from the auditor. √
4.3 A review engagement which is like a “watered down” audit does not provide the same level of independent assurance that an audit
does. √ This will be explained in the review report given by the registered auditor carrying out the review so users of your financial
statements may not be as confident about them as they would have been with an audited set of financial statements. √
Study unit 1.2: Assurance and non - assurance engagements
13.10 (30 marks 36 minutes)
, 1. What is a public interest score? (3)
Ans: 1. 1.1 A public interest score is the sum of the points allocated to certain attributes of a company or close corporation e.g. one point
is allocated to every one million rand or part thereof, of turnover. The Companies Act 2008 requires that each company (and close
corporation) calculate its public interest score annually. √
1.2 The public interest score is used as a gauge of the interest the public at large (society) has in the company or close corporation. √
1.3 In terms of the Companies Act 2008 (and Companies Regulations 2011), the entity’s public interest score is one of the factors which
determines whether the entity must have its annual financial statements audited or independently reviewed, e.g. all companies and close
corporations with a PIS of 350 and above must be externally audited whilst a private company with a PIS of less than 100 need only
undergo an independent review. √
2. State three matters which will be affected by company's public interest score. (2)
Ans: 2. 2.1 Whether the company is audited or reviewed and who must carry out the independent review. √
2.2 Which financial reporting standard the company must use to prepare its annual financial statements. √
2.3 The level of financial rescue practitioner who would be engaged, if the company needed financial rescue. √
2.4 Whether a private company must appoint a Social and Ethics Committee (Reg 43). √
3. Which of the following do not affect a company's public interest score:
3.1 location of the company
3.2 number of non-executive directors
3.3 number of directors
3.4 turnover
3.5 assets held in trust by the company
3.6 number of years in operation? (2)
Ans: 3. Location, the number of directors (executive and non-executive), and number of years in operation do not affect the public interest
score. √
4. Public companies, both listed and unlisted as well as private companies and close corporations, must calculate their public
interest score. True or false? (1)
Ans: 4. True√. All companies and close corporations must calculate their public interest score. √
5. The Memorandum of Incorporation can stipulate other criteria to be used when calculating the public interest score. True or
false? (1)
Ans: 5. False. √ Public interest score criteria are set in Regulations 26 of the Companies Act and are not alterable. √
6. Calculate the public interest scores for the following companies, Tech (Pty) Ltd and Master (Pty) Ltd:
Tech (Pty) Ltd Master (Pty) Ltd
6.1 Turnover R7.25m R135.75m
6.2 Directors 4 11
6.3 Average employees for the year 62 201
6.4 Amounts owed to third parties R1.6m R19.2m
6.5 Individuals with direct or indirect interest in each company's shares 9 22
6.6 Charitable donations R0.2m R1.5m
Ans: 6. Tech (Pty) Ltd Master (Pty) Ltd
6.1 8√ 136√
6.2 N/A N/A
6.3 62√ 201√
6.4 2√ 20√
6.5 9√ 22√
Total81 points√^ 379 points√^
7. What are the various thresholds (categories) set by the Companies Regulations 2011 for public interest scores? (2)
Ans: 7. Equal to or above 350 points^
Equal to 100 or above, but less than 350 points^
Below 100 points. ^
8. Once a public interest score has been calculated, it remains in effect for five years after which it must be re-calculated. True
or False? (1)
Ans: 8. False√. Public interest score must be calculated annually. √
13.21 (18 marks 22 minutes)
References: - Jackson & Stent (2016: 1/13-1/14, 3/6 – 3/9))
- Study guide (Study unit 1.2 and 2.2)
1. All close corporations must calculate a public interest score. True or false? (1)
Ans: 1. True. (As required by the Companies Act regulations).
