AUE2601 ASSIGNMENT 2 GROUP A
1.1 State whether the appointment of FGN as auditors of EL complies with Section 91 of the
Companies Act. Describe in your answer the procedures that should have been followed to ensure
compliance with the Companies Act.
The appointment of the New auditors of Evergreen did not comply with Section 91 of the
Companies Act due following reasons:
-The new auditors, Fisher, Gani and Nkosi Auditors (FGN) was not appointed within 40 business days
of the vacancy arising [Sec 91(2)]
-financial director of Evergreen Lawn Ltd (EL) took it upon himself to appoint the firm.
-The board did not propose the name of at least one registered auditor to the audit committee
within 15 days S e c 91(3a)].
Section 91 of the Companies Act that covers the resignation of auditors and vacancies, the
procedures that should have been followed to ensure compliance with the Companies
Act include the following:
-The new auditor must be appointed within 40 business days of the vacancy arising [Sec 91(2)]
-Within 15 days the board must propose the name of at least one registered auditor to the audit
committee [Sec 91(3a)].
-The audit committee has five business days after a proposal has been delivered to reject in writing,
or else the board may make the appointment S e c 91(3)(b)]
1.2 Explain why EL needs to have their financial statements audited.
-EL is a public company according to the designation of its name (Ltd) and the Companies Act makes
it compulsory for all public companies to be audited.
Q2. With reference to the information under "identifying and assessing the risk of material
misstatement"
2.1 Provide a reason why each identified risk indicator in (a) to (d) can be regarded to increase the
risk of material misstatement
, A- There is inherent risk that AFS may be materially misstated due to error, as the internal controls in
the various locations might not be operating effectively.
B-There is inherent risk that AFS may be materially misstated due to fraud as the control
environment might be compromised by management who lack integrity, which could lead to errors
and misstatement due to fraud
C-There is an inherent risk that AFS may be materially misstated due to manipulation or fraud, as
directors might engage in fraudulent financial reporting, for example overstating assets and revenue
and understating liabilities and expenses to ensure that financing will be obtained.
D-There is an inherent risk that AFS may be materially misstated due to error as material
misstatement can penetrate the accounting system of the entity without being detected and
prevented by the system of internal control.
2.2
Control risk would be high due to the following reasons:
-It is stated that internal controls relating to EL's accounting system were not operating effectively
during the financial year.
-EL aspires to expand the business and start with exports to Europe soon and therefore the internal
controls in the various locations might not be operating effectively.
Q3.
With reference to the information under "assertions, audit procedures and audit evidence":
3.1
Evaluate with reasons fi the assertions relating to inventory, documented
in the working paper (1 to 3), are correct or not
1-Completeness is incorrect since it does not mention anything about related disclosure because
completeness means all payroll expenses that should have been recorded, have been recorded and
all related disclosures which should have been included in the financial statements, have been
included.
2-Cut off is a correct assertion because cut-off means that only expenses incurred during the
reporting period have been accounted for in that accounting period
3-Existence is incorrect because payroll expenses are a transaction or event, and existence is an
assertion for account balances.
Matter1
4.1 Self-interest threat and Familiarity threat
1.1 State whether the appointment of FGN as auditors of EL complies with Section 91 of the
Companies Act. Describe in your answer the procedures that should have been followed to ensure
compliance with the Companies Act.
The appointment of the New auditors of Evergreen did not comply with Section 91 of the
Companies Act due following reasons:
-The new auditors, Fisher, Gani and Nkosi Auditors (FGN) was not appointed within 40 business days
of the vacancy arising [Sec 91(2)]
-financial director of Evergreen Lawn Ltd (EL) took it upon himself to appoint the firm.
-The board did not propose the name of at least one registered auditor to the audit committee
within 15 days S e c 91(3a)].
Section 91 of the Companies Act that covers the resignation of auditors and vacancies, the
procedures that should have been followed to ensure compliance with the Companies
Act include the following:
-The new auditor must be appointed within 40 business days of the vacancy arising [Sec 91(2)]
-Within 15 days the board must propose the name of at least one registered auditor to the audit
committee [Sec 91(3a)].
-The audit committee has five business days after a proposal has been delivered to reject in writing,
or else the board may make the appointment S e c 91(3)(b)]
1.2 Explain why EL needs to have their financial statements audited.
-EL is a public company according to the designation of its name (Ltd) and the Companies Act makes
it compulsory for all public companies to be audited.
Q2. With reference to the information under "identifying and assessing the risk of material
misstatement"
2.1 Provide a reason why each identified risk indicator in (a) to (d) can be regarded to increase the
risk of material misstatement
, A- There is inherent risk that AFS may be materially misstated due to error, as the internal controls in
the various locations might not be operating effectively.
B-There is inherent risk that AFS may be materially misstated due to fraud as the control
environment might be compromised by management who lack integrity, which could lead to errors
and misstatement due to fraud
C-There is an inherent risk that AFS may be materially misstated due to manipulation or fraud, as
directors might engage in fraudulent financial reporting, for example overstating assets and revenue
and understating liabilities and expenses to ensure that financing will be obtained.
D-There is an inherent risk that AFS may be materially misstated due to error as material
misstatement can penetrate the accounting system of the entity without being detected and
prevented by the system of internal control.
2.2
Control risk would be high due to the following reasons:
-It is stated that internal controls relating to EL's accounting system were not operating effectively
during the financial year.
-EL aspires to expand the business and start with exports to Europe soon and therefore the internal
controls in the various locations might not be operating effectively.
Q3.
With reference to the information under "assertions, audit procedures and audit evidence":
3.1
Evaluate with reasons fi the assertions relating to inventory, documented
in the working paper (1 to 3), are correct or not
1-Completeness is incorrect since it does not mention anything about related disclosure because
completeness means all payroll expenses that should have been recorded, have been recorded and
all related disclosures which should have been included in the financial statements, have been
included.
2-Cut off is a correct assertion because cut-off means that only expenses incurred during the
reporting period have been accounted for in that accounting period
3-Existence is incorrect because payroll expenses are a transaction or event, and existence is an
assertion for account balances.
Matter1
4.1 Self-interest threat and Familiarity threat
