Exam (elaborations)
Mancosa introduction to Auditing revision practice questions and answers
- Course
- Introduction to auditing
- Institution
- Management College Of Southern Africa (MANCOSA)
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Please note that this practice question pack is provided solely as supplementary learningmaterial, intended to assist students in practicing the application of theoretical concepts
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Unit 1: An Introduction to Auditing
Learning Outcomes
Explain what is auditing and the function of an auditor in an entity
Explain the difference between the various types of auditors that exist in the auditing
profession
Demonstrate an understanding of the importance of the auditors and why they are
necessary
Display an understanding of the assurance engagements that are performed by an
auditor
Demonstrate an understanding of the relevant Accounting bodies that exist for the
profession of auditing
Question 1 – Explain Auditing
Heavenly Glitter (Pty) Ltd is seeking a loan and is required to have their financial statements
audited.
, a) Describe the process an auditor would follow to provide reasonable assurance to Rights
Resource Bank that the financial statements are free of material misstatements.
b) Explain what is meant by 'reasonable assurance' in auditing.
c) How does an auditor's assurance in the Heavenly Glitter (Pty) Ltd case help Rights
Resource Bank mitigate the risk of loss?
Suggested Solution Discussion Question
a) Describe the process an auditor would follow to provide reasonable assurance to
Rights Resource Bank that the financial statements are free of material misstatements.
Suggested Solution:
The auditor would follow a structured audit process to provide reasonable assurance, which
typically includes the following steps:
Planning: The auditor would begin by understanding Heavenly Glitter (Pty) Ltd's business and
industry, including the economic environment, and identifying areas where material
misstatements are likely to arise.
Risk Assessment: The auditor would assess the risk of material misstatement in Heavenly
Glitter's financial statements, considering both errors and fraud. This involves evaluating the
company's internal control system and determining the nature, timing, and extent of audit
procedures.
Audit Evidence Gathering: The auditor would collect appropriate and sufficient evidence
through various means such as inspection, observation, inquiries, and confirmations to support
the financial statement assertions.
Testing: The auditor would perform tests of controls to assess their effectiveness and
substantive procedures to detect material misstatements at the assertion level. This includes
detailed transaction testing, analytical procedures, and balance verification.
Evaluation: The auditor would evaluate the evidence gathered to determine whether the
financial statements as a whole are free from material misstatement.
Reporting: Upon completion of the audit, the auditor would form an opinion on the financial
statements and issue an audit report. If the financial statements are found to be fairly presented,
the auditor would issue an unqualified opinion, providing reasonable assurance to Rights
Resource Bank.
b) Explain what is meant by 'reasonable assurance' in auditing.
,Suggested Solution:
Reasonable assurance in auditing refers to a high level of assurance that the financial
statements are free from material misstatement, whether due to fraud or error. It is not an
absolute level of assurance because there are inherent limitations in an audit that affect the
auditor's ability to detect all misstatements. These limitations include the use of sampling, the
nature of audit evidence, and the fact that most audit evidence is persuasive rather than
conclusive. Therefore, reasonable assurance represents the auditor's satisfactory completion of
the audit process and the belief that the financial statements are presented fairly in all material
respects.
c) How does an auditor's assurance in the Heavenly Glitter (Pty) Ltd case help Rights
Resource Bank mitigate the risk of loss?
Suggested Solution:
The auditor's assurance helps Rights Resource Bank mitigate the risk of loss in several ways:
Credibility: The auditor's opinion enhances the credibility of the financial statements prepared
by Heavenly Glitter (Pty) Ltd, reducing the bank's concern over the reliability of the financial
information.
Detection of Misstatements: The audit process is designed to detect material misstatements
that could affect the bank's lending decision. By identifying any such misstatements, the auditor
helps the bank avoid making a loan based on inaccurate information.
Risk Assessment: The auditor's work includes assessing the company's risk management and
internal controls, which can inform the bank about the company's ability to manage and repay
the loan.
Informed Decision-Making: With the assurance that the financial statements are free from
material misstatements, the bank can make a more informed decision regarding the loan
application, which in turn reduces the risk of financial loss from non-repayment.
In summary, the auditor's assurance provides the bank with a higher level of confidence in the
financial health and reporting integrity of Heavenly Glitter (Pty) Ltd, thereby aiding in the bank's
risk management and decision-making processes.
, Question 2 – Types of Auditors – Internal vs External Auditor
Case Study: Zenith Electronics
Zenith Electronics, a publicly traded company specializing in consumer electronics, has
experienced significant growth over the past five years. With this growth, the complexity of its
operations and the risks associated with its business activities have increased. To maintain
investor confidence and ensure compliance with financial regulations, Zenith Electronics
engages the services of both internal and external auditors.
Registered External Auditor
Zenith Electronics contracts with Apex Auditing Firm, a well-respected external auditing
company. Apex's role is to provide an annual independent audit of Zenith's financial statements.
Their work is crucial for Zenith's stakeholders, including shareholders, creditors, and market
regulators, who rely on the accuracy and fairness of the financial reports.
Internal Auditor
Zenith also has an in-house internal audit department led by Jane Doe, an experienced auditor
with a background in the electronics industry. The internal audit team's role is to continuously
assess the effectiveness of internal controls, risk management, and governance processes.
They work closely with management to identify areas for improvement and ensure that Zenith
operates efficiently and complies with laws and regulations.
Scenario
In the current fiscal year, Zenith Electronics decided to launch a new line of smart home
devices. This strategic move required substantial investment and introduced new operational
complexities and risks. The internal audit department was tasked with reviewing the project's
risk management processes and the effectiveness of controls over the supply chain and
intellectual property rights.
As the year-end approached, Apex Auditing Firm began its external audit process. They
focused on verifying the financial implications of the new product line, assessing the valuation of
inventory, and ensuring revenue recognition practices were in accordance with accounting
standards.
Required
a) Compare and contrast the roles and responsibilities of Apex Auditing Firm (external
auditor) and Zenith's internal audit department in the context of the new product line
launch.
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