COLLEGE OF BUSINESS AND ECONOMICS

DEPARTMENT COMMERCIAL ACCOUNTING

Subject: Auditing and Internal Control

Subject Code: AIC22A2
Test: Test 1

Test date: 14 March 2019

Marks: 50 Marks
Duration: 1.5 Hour
Pages 4 (four) pages (including cover sheet)
No of questions 3 (three)

Examiner: B Kuzwayo; M Mia; M Nevhutanda and L Nzama

Internal moderator: B Schutte

Information to students:

1. You are allowed to use a calculator.

2. An answer sheet/book will be supplied to you, in which you must write your answers in. If you
need another book/sheet, please ask the invigilator for another.
3. By writing this test and affixing your name and student number to the answer sheet/book, you
confirm that you are conversant with the test regulations of the University.
4. Use only a blue or a black pen to answer your questions. Answers given in pencil will not be
marked.
5. Make sure your handwriting is neat and easy to read. Set out your answer in a clear logical
manner.
6. Use the same numbers for your answers as those used for the questions in the test/examination
paper.
7. Hand your answer book to the invigilator at the end of the test/examination.
AIC22A2 – Test 1 - 2019

QUESTION 1 [BLUE BOOK] [15]

Auditing is defined as the process of inspecting or checking financial statements to ensure they are free
from material misstatement

REQUIRED:
1.1 Explain the various concepts that exist that form the fundamental beliefs for auditing. (6)
1.2 Can an auditor provide assurance and non-assurance services to the same client? You are required
to motivate your answer. (2)
1.3 Discuss whether a registered external auditor can give absolute assurance regarding financial
statements. You are required to give reasons in your discussion. (5)
1.4 Give the definition of an assertion. (2)

QUESTION 2 [GREEN BOOK] [15]

In lectures you learnt that public interest is the interest the public have in companies, because such
businesses operate within the society and among other things use resources belonging to the society such
as roads, natural resources, employees and derive their profits out of the society. Therefore the
public/society has an interest in businesses to see how things are done, how such businesses are run, how
resources are used etc.

REQUIRED:
2.1 What is the purpose of a public interest score? (1)

2.2 Clothes-For-All (Pty) Ltd is a company that sells clothing with a financial year end of December.
The entity anticipates to increase revenue by 10% in the 2019 financial year from R50,000,000 in
the 2018 financial year to R55,000,000. The total number of employees on 31 December 2018 was
65. During 2018, 5 employees resigned and 10 employees were hired.

The company’s shareholder is as follows:

 36% of the shares are owned by Mrs PEP
 42% of the shares are owned by Mrs Sneakers
 10% of the shares are owned by Mr Price (Pty) Ltd
 2% of the shares are owned by Socks (Pty) Ltd
Mr Price (Pty) Ltd and Socks (Pty) Ltd each have 5 and 3 shareholders, respectively, all of whom
are natural persons.

[Please turn over the page]

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AIC22A2 – Test 1 - 2019

QUESTION 2 [CONTINUED] [15]

Below are the liabilities of the entity:

Description Amount
Trade payables (to non-related companies) at the beginning of the 2018 R3,000,000
financial year
Trade payables (to non-related companies) at the end of the 2018 financial R4,000,000
year
Loan owing to Mr Cavella (Chief Executive Officer of Clothes-For-All R2,000,000
(Pty) Ltd)
Loan owing to Standard Bank R1,000,000
Loan owing to Mrs Sneakers R5,000,000

The financial statements were compiled by Book-Keep-It (Pty) Ltd. This company is owned by the
former Chief Financial Officer of Clothes-For-Me (Pty) Ltd who resigned in the 2013 financial
year to start his company.

You are required to calculate the public interest score for Clothes-For-Me (Pty) Ltd at 31 December
2018. (12)

2.3 Based on the public interest score calculated above, identify what type of assurance is required for
this entity and justify your answer (2)

QUESTION 3 [YELLOW BOOK] [20]

The IFAC’s code of professional conduct requires professional accountants to identify threats that could
negatively impact on fundamental principles. Such threats should then be addressed by putting
safeguards in place. The IFAC’s code of professional conduct categorises possible threats into five broad
categories.

REQUIRED:

3.1 List the five fundamental principles found in the Code of Professional Conduct. (5)
3.2 Identify what the Committee for Auditing Standards needs to assist the Independent Regulatory
Board of Auditors with. (3)
3.3 Which individuals does the Code of Professional Conduct apply to? Provide a definition for each
individual. (4)
3.4 Identify three (3) safeguards that exist in the work environment. (3)

[Please turn over the page]

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AIC22A2 – Test 1 - 2019

QUESTION 3 [CONTINUED] [20]

3.5 For each of the following scenarios, identify (where applicable) the type of threat the scenario
represents and suggest a possible safeguard to either reduce the threat to an acceptable level or to
eliminate it completely.
3.5.1 Agrizzzz (Pty) Ltd has asked Bo-Saas, its audit firm, to allow three of its trainee accountants
to assist with some finance duties in the accounting department for two months. (2)
3.5.2 Vroom Vroom is a trainee accountant for the audit of Nitbank. Vroom Vroom applied for
a loan at Nitbank to finance the purchase of his home. The loan granted to Vroom Vroom
by Nitbank is based on normal terms and conditions. (1)
3.5.3 PMC is an audit firm. Nelly Khumalo, a partner at PMC, has been the partner who signs
the audit report of Forever Check (Pty) Ltd for eight years (2)

[The end]

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AIC22A2 – Test 1 - 2019

MEMORANDUM

QUESTION 1.1 – Solution (Maximum 6 marks)

Notes for markers:

 The question has 8 possible marks but the maximum is 6 marks.

Auditing Postulates
1. No necessary conflict of interest exists between the auditor and management / employees of the
enterprise under audit (both the client and the auditor have the same objective with regard to
fair presentation) 
2. An auditor must act exclusively as auditor in order to be able to offer an independent and
objective opinion on the fair presentation of financial information 
3. The professional status of the independent auditor imposes commensurate professional
obligations 
4. Financial data and information are verifiable 
5. Internal controls reduce the probability of errors and irregularities 
6. Application of generally accepted accounting practice results in fair presentation 
7. That which held true in the past will hold true in the future (in the absence of any contrary
evidence) 
8. The financial statements submitted to the auditor for verification are free of collusive and other
unusual irregularities 

QUESTION 1.2 – Solution (Maximum 2 marks)

 An auditor can provide assurance and non-assurance work only if the non-assurance services
are deemed to be insignificant relative to the assurance work 
 This is linked to the postulate that states an auditor needs to act exclusively in the capacity of an
auditor in order to be able to offer an independent and objective opinion on the fair presentation
of financial information as well as to remain independent in appearance and mind at all times.
 The audit committee is required to approve any non-audit work which the auditor of the
company is engaged to perform.  This can be seen to be an attempt to focus the auditor’s
attention on performing the audit, not on providing other services. 
 The audit committee must be satisfied that the auditor is independent and must state whether
they are satisfied with the audit of the annual financial statements. 

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AIC22A2 – Test 1 - 2019
QUESTION 1.3 – Solution (Maximum 5 marks)

An auditor cannot issue absolute assurance  because of the following limitations that exist in an audit
:
 The nature of financial reporting.  In the preparation of financial statements, management
must apply judgement in applying the relevant reporting framework, and financial statements
contain many account balances which are subjective
 The nature of audit procedures.  There are practical and legal limitations on the auditor’s
ability to obtain audit evidence. There is always the possibility that management may not
provide complete information that is relevant to the preparation of the financial statements, and
accordingly the auditor cannot be certain that all relevant information has been received.  Audit
procedures are not designed specifically to detect fraud, and by collusion or falsification of
documentation, and other means of circumventing controls carried out by management,
fraudulent transactions may go undetected and the auditor may believe that evidence is valid
when it is not. 
 Audit evidence is usually persuasive rather than conclusive.  For example, an auditor is
“persuaded” that an event or transaction took place by the presence of documents or information
provided by management, rather than by actually witnessing the event. The documentation could
be false, and the information provided by management untrue. It is obviously impossible for
the auditor to “witness” every transaction 
 The use of testing.  On a similar note the auditor cannot examine every single transaction which
has taken place in the business due to financial and time constraints,  therefore it is necessary
to “test” check i.e. perform procedures on only a sample of transactions and balances. Once the
auditor “test checks”, he cannot state that everything is 100% correct, only a reasoned opinion
based on the sample on which procedures were undertaken, can be given. 
 The inherent limitations of accounting and internal control systems.  The auditor is obliged
to place reliance on the systems which the client has put in place to provide financial information;
 these systems have inherent limitations which may result in the failure to detect errors or fraud
and hence the information on which the auditor forms an opinion, may be flawed. 
 Timeliness of financial reporting and the balance between benefit and cost. To be of any
value the audit opinion must be reported within a reasonable time after the financial year-end,
and the benefit derived from the audit must exceed the cost.  To meet these practical
requirements will generally lead to some compromise in the audit, but it is compromise which
users understand and accept 
 Other matters that affect the inherent limitations of an audit. There are frequently aspects of
the audit or assertions in the financial statements which are inherently difficult for the auditor to
gather sufficient appropriate evidence and which compound the limitations of the audit. 

QUESTION 1.4 – Solution (Maximum 2 marks)

Claims/representations made by management/directors  about the company’s assets equity, liabilities,

transactions and events, and disclosures or financial statements 

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AIC22A2 – Test 1 - 2019

QUESTION 2.1 – Solution (Maximum 1 marks)

A public interest score is used to determine whether an entity is required to have their annual financial
statements audited or not  or

A public interest score is used to determine whether the level of assurance that is required for an entity


QUESTION 2.2 – Solution (Maximum 12 marks)

Public interest Max

Calculation Justification
score component marks
Employment Average number of employees: (60 + 65) / 2 = 3
63 (62.5 rounded up to 63 employees) marks
63 
Employees at the beginning of the year: 65 –
10 + 5 = 60 
Employees at the end of the year: 65 
Third party Third party debt relates to creditors of the 3
liability company. It is money owing to persons or marks
companies external to the company.

The loans to Mr Carvella (CEO) and Mrs

Sneakers (shareholder) are not loans to third
parties

The trade payables at the beginning of the year

are irrelevant because the public interest score
5
relates to third party liabilities at the end of the
year

The only third party liabilities are trade

payables at the end of the financial year of
R4,000,000 and loan to Standard Bank of
R1,000,000

Therefore the total score for this component is

4+1=5
Turnover 1 point for every R1,000,000 of turnover 1 mark
50 
Turnover for 2018 financial year is

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AIC22A2 – Test 1 - 2019
Public interest Max
Calculation Justification
score component marks
R50,000,000. The R55,000,000 is irrelevant in
this question because it relates to the 2019
financial year and the public interest score
calculation is for the 2018 financial year
Shareholders 1 point is awarded for every individual who 4
has a direct or indirect beneficial interest in the marks
company’s shares.

Direct interest: Mrs PEP and Mr Sneakers = 2

points 
Indirect interest: Mr Price (Pty) Ltd and
Socks (Pty) Ltd each have a direct interest but
are not individuals. The shareholders of these
10 
two companies have an indirect interest in
Clothes-For-Me (Pty) Ltd because of their
company’s interest in Clothes-For-Me (Pty)
Ltd. Mr Price (Pty) Ltd has 5 shareholders 
and Socks (Pty) Ltd has 3 shareholders. 

Therefore the total score for this component is

2 + 5 + 3 = 10

Total 128  1 mark

QUESTION 2.3 – Solution (Maximum 2 marks)

Limited/Review assurance 
This is because the public interest score is 128 points and the financial statements were compiled by an
external or third party being Book-Keep-It (Pty) Ltd . The fact that the Book-Keep-It (Pty) Ltd is
owned by the former CFO is irrelevant

NOTE: If the student’s answer for 2.2 is:

 Between 0 and 100:
o You can give a mark if a student says it’s a limited/review assurance 
o Reason: the public interest score is between 0 and 100
 Is greater 350:
o You can give a mark if a student says it’s a reasonable assurance 
o Reason: the public interest score is greater than 350

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AIC22A2 – Test 1 - 2019
QUESTION 3.1 – Solution (Maximum 5 marks)

 Integrity 
 Objectivity 
 Confidentiality 
 Professional Behavior 
 Professional competence and due care 

QUESTION 3.2 – Solution (Maximum 3 marks)

 To develop, maintain, adopt, issue or prescribe auditing pronouncements ;

 To consider relevant international changes by monitoring developments by other auditing standard-
setting bodies and sharing information where requested ; and
 To promote and ensure the relevance of auditing pronouncements  by –
o considering the needs of users of audit reports; 
o liaising with other committees of the Regulatory Board on Standards to be maintained by
registered auditors and by receiving feedback from such committees on areas where auditing
pronouncements are needed; 
o ensuring the greatest possible consistency between auditing pronouncements and accepted
international pronouncements;  and
o consulting with professional bodies on the direction and appropriateness of auditing
pronouncements. 

QUESTION 3.3 – Solution (Maximum 4 marks)

 Professional accountant in business : a professional accountant employed or engaged in such

areas as commerce, industry, the public sector, education etc.  For example an accountant
working for Eskom.
 Professional account in public practice:  a professional accountant in a firm that provides
professional accounting services  (auditing, taxation etc). For example an auditor working at
PwC.

QUESTION 3.4 – Solution (Maximum 3 marks)

 Leadership of the firm that stresses the importance of compliance with the fundamental principles

 Policies and procedures to implement and monitor quality control on engagements 
 Documentary evidence that “ethical” threats were identified, evaluated and responded to in respect
of an engagement 
 Policies and procedures designed to identify interests or relationships between the client and

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AIC22A2 – Test 1 - 2019
members of the engagement team, e.g. questionnaires to be completed by team members 
 A disciplinary mechanism to promote compliance and deal with transgressions of the fundamental
principles 
 Having the engagement teams work subjected to independent review by say, a partner not
otherwise involved with the engagement 
 Rotating senior assurance team personnel 
 A company has sound procedures which protect an employee (a chartered accountant in business)
from intimidatory threats from the employee’s manager. 

QUESTION 3.5 – Solution

3.5.1 (Maximum 2 marks)

 Threat: Self-review  and potential familiarity  threat as trainees become friendly with client
accounting staff.
 Safeguards:
o Trainees should not make any “management” decisions. 
o Trainees should not exercise discretionary authority to commit the client, e.g. sign a
purchase order or write off a bad debt. 
o Trainees should not be assigned to the audit. This will be particularly effective in
addressing any familiarity threat. 

3.5.2 (Maximum 1 mark)

 Threat: No threat exists  because the loan is granted under normal terms and conditions.

3.5.3 (Maximum 2 marks)

 Threat: Familiarity 
 Safeguards: Rotate the signing partner with a new one 

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