Summary
AUE3761 summary
- Course
- The Audit Process (AUE3761)
- Institution
- University Of South Africa (Unisa)
TEst of controls, Substantive procedures, Ethical considerations, Accepting an audit client
[Show more]
Content preview
Appointment of new engagement partner to meet statutoryrequirements. Section 90 of the companies Act
Not engagement partner for more than 5 years.
Not CFO for the preceding 5 years
Must be registered at IRBA (All partners should be registered)
Independent
Always suggest that another person should take on the audit as audit partner.
Inherent risk factors that arise at assertion level for each class of
transaction or account balance
1. VAT - There is Complexity in the calculation and recording of VAT as many different
systems are involved coupled with 100 - 800k daily transactions.
2. Fines and penalties - There is Complexity as Taxi is listed and might not comply with
CTSE listing requirements and disclosures.
3. Revenue - There is Complexity in the calculation and recording of revenue as many
different systems are involved, coupled with 100 - 800k daily transactions and
arrangements to share revenue with drivers.
4. Revenue - There is susceptibility to misstatement due to management bias or fraud
because Revenue is a presumed fraud risk as per ISA240.
5. Trade and other receivables - There is Complexity in the calculation and recording of
trade receivables as many different systems are involved coupled with 100 - 800k
daily transactions, and arrangements to share revenue with drivers.
6. Finance income - There is Complexity in the calculation and recording of finance
income as many different systems are involved coupled with 100 - 800k daily
transactions.
7. Allowances for credit losses - There is Complexity in the calculation and recording of
allowance for credit losses as many different systems are involved coupled with 100 -
800k daily transactions.
8. Provision for bad debts - There is Uncertainty in the calculation of the allowance for
debtors as this amount is an estimate.
9. Provision for bad debt - There is Subjectivity as the there is significant level of
judgement involved in calculating the allowance for credit losses.
10. Trade payables - There is Susceptibility to misstatement due to management bias or
fraud because of the fraud perpetrated in the purchases department.
11. There are Control deficiencies / a lack of adherence to controls/ controls were not
operating effectively during the year, based on the fraud perpetrated.
12. There is Change as a new payment system has been implemented in this business
process.
13. Operating - There is Complexity in the calculation and recording of associate
expenses as many different systems are involved coupled with 100 - 800k daily
transactions, and arrangements to share revenue with drivers.
,Inherent risk at material management at financial statements level.
Inherent risk factors
1. Complexity
2. Susceptibility to misstatement due to management bias of fraud.
3. Subjectivity
4. Uncertainty
5. Change
Complexity
Foreign trade
1. The AFS might be materially misstated due to error the company imports its products
and the way the foreign transactions are treated is complex.
Magnitude of misstatement is medium / high because there are products being imported, it
will still be material even if it is only 5%, the inventory balance is high.
Likelihood of misstatement is medium/high the foreign transactions is complex, and the
transactions might be accounted for incorrectly.
The risk can be placed on the medium/high end if spectrum of inherent risk.
JSE – IF Holding company
Complexity
2. The annual financial statements (AFS) might be materially misstated due to error as
the company might not comply with the additional JSE regulations and disclosures.
Susceptibility to misstatement due to management bias or fraud
3. The AFS may be materially misstated due to fraud as management may manipulate
financial information to comply with the JSE listing requirements.
4. The AFS might be materially misstated due to error, as the company might not
comply with additional JSE reporting requirements and disclosures as the holding
company is listed on the JSE, these disclosures and requirements can be complex.
Magnitude of misstatement is medium high as AFS should comply with JSE reporting
requirements and the consequences is significant if the company does not comply
with the requirements.
Likelihood of misstatement is medium/high as the requirements is complex and
chances for error is likely to happened.
The risk can be placed on the medium/high end of the spectrum of inherent risk.
Consolidated financial statements – Holding company.
Complexity
1. The AFS may be materially misstated due to error as consolidation of financial
statements might be complex.
2. The AFS may be materially misstated due to error as intergroup balances may not be
eliminated.
, 3. The AFS may be materially misstated due to error if the accounting policies are not
applied consistently by all the companies in the group.
Related party transactions
Complexity and susceptibility to misstatement due to managements bias of fraud
1.1 The AFS may be materially misstated due to error or manipulation as the disclosure of
related party relationships and transactions might be incorrect/incomplete in the financial
statements or might not be at arm’s length.
1.2 Magnitude is high as there are various companies in the group trading with each other
which also increases the potential fraud risk.
1.3 Likelihood is high as it may be very likely that transactions are not disclosed properly due
to the high number of companies in the group which also increases the potential fraud
risk.
1.4 The risk can be placed on the upper end of the spectrum of inherent risk as it can be
classified as a significant risk Ito ISA 315.
Time pressure
Complexity and or subjectivity and / or uncertainty
1. The AFS may be materially misstated due to error as the financial results prepared
by the client might be incomplete due to time pressure or they may not have
sufficient time to identify, account for and disclose subsequent events.
Going concern
Change
The AFS may be materially misstated due to error as the going concern assumption might
not be properly accounted for and/or disclosed.
- increased costs associated with recoveries/replace damaged equipment/state of the
economy/affecting profitability.
- As penalties or closure of business for not adhering to international laws and
regulations may be claimed.
The AFS may be materially misstated as the entity might be liable for legal damages
resulting in negative publicity and loss of revenue for the entity. This might lead to the going
concern assumption not being properly accounted for and/or disclosed.
2.1 The AFS may be materially misstated due to error, as the company experienced a
challenging year due to reduced demand, forced closure of facilities, reduced ability to
deliver products, decline in revenue and increase in costs, non-adherence to laws and
regulations that might lead to penalties, write off of many debtors (½) (mention any one
listed) leading to the going concern assumption not being properly accounted for and/or
disclosed
2.2 Due to the overwhelming evidence of identified going concern inherent risk factors, the
AFS may be materially misstated due to fraud to disclose a better financial position as
the company is currently experiencing a lot of going concern issues (overstatement of
assets and income and understatement of liabilities and expenses) or the company
might manipulate the financial statements to not add too much to their payable tax.
2.3 Magnitude is high as it affects the business operations as a whole or there are numerous
transactions locally and internationally and/or there is also a potential risk for fraud.
, 2.4 Likelihood is high as there are many contributing going concern factors identified and/or
management might be motivated to commit fraud to reflect a healthy financial position.
2.5 This risk can therefore be placed on the higher/upper end of the spectrum of inherent
risk.
Receive higher performance bonuses.
Susceptibility to misstatement due to management bias or fraud
The AFS may be materially misstated due to fraud as management might engage in
fraudulent financial reporting, for example overstatement of revenue and understatement of
expenses to receive higher performance bonuses.
The AFS may be materially misstated due to fraud as management might manipulate
figures, for example overstatement of revenue/assets and understatement of
expenses/liabilities to maximise bonuses.
Not complying with laws and regulations
Susceptibility to misstatement due to management bias or fraud
The AFS may be materially misstated due to manipulation as management lacks integrity as
they did not comply with section 45 of the Companies Act and do not deem it necessary to
comply with all regulations.
Change
1. The AFS may be materially misstated due to error because the company has a huge
expense relating to loadshedding and this is just getting worse, or the customer
spending might decline due to the future of the economy.
2. The AFS may be materially misstated due to error as the company made a huge
capital investment when opening new stores and if they were to fail, they still need to
pay the debt. And might be liable for penalties if not adhering to international laws
and regulations,
Magnitude is high as it effects the business operations as a whole or in the case of
not adhering to laws and regulations will attract a penalty which affects the whole
business.
Likelihood is medium to high as the company is aware of loadshedding issues and
expense and plans to invest in solar energy in the future to minimise this expense.
Low to medium as momentum of sales growth still in line with projections or the
company seems to be profitable and has experience with opening of new stores.
Medium to high as countries have different regulations and it seems as if certain laws
and regulations related to imports of products have already been transgressed.
The risk can be placed on the medium/high end of the spectrum of inherent risk.
New auditor
1.1 The AFS might be materially misstated due to fraud as management know that ABC Inc
is new auditors and not familiar with TV and therefore might make use of the opportunity to
manipulate the AFS as the auditor might not be able to detect the misstatements.
1.2 Susceptibility to misstatement due to management bias or fraud and or change
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through EFT, credit card or Stuvia-credit for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying this summary from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller MUnknownD. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy this summary for R100,00. You're not tied to anything after your purchase.
Can Stuvia be trusted?
4.6 stars on Google & Trustpilot (+1000 reviews)
67474 documents were sold in the last 30 days
Founded in 2010, the go-to place to buy summaries for 14 years now