COLLEGE OF BUSINESS AND ECONOMICS

DEPARTMENT COMMERCIAL ACCOUNTING

Subject: Auditing and Internal Control

Subject Code: AIC22A2
Test: Test 1

Test date: 15 March 2024

Marks: 50 Marks
Duration: 90 Minutes
Pages 5 (Five) pages (including cover sheet)
No of questions 2 (Two)

Examiner: M Dube; M Nevhutanda and L Nzama-Sithole

Internal moderator: B Kuzwayo

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.
Question 1
Part A (8 marks: 14 mins)

You are required to indicate whether each of the following statements is true or false.

1. One of the duties of an auditor is to head the audit committee of an audit client.
2. Auditing the systems of a client should only be considered if fraud is suspected.
3. Shareholders and other users can assume that the amounts reflected in a company’s
financial statements are 100% correct only if they have been properly audited.
4. The postulates of auditing form the philosophical foundation of the discipline of
auditing.
5. A professional accountant is permitted to be a member of more than one firm of
registered auditors.
6. The professional accountant’s responsibility is to exclusively satisfy the needs of an
individual client or his employer.
7. Inducement with no intent to improperly influence behaviour can still create threats of
the fundamental principles.
8. Contingent fees are fees calculated on a predetermined basis relating to the outcome of
the work performed or as a result of a transaction that arises from the service.

Part B (7 marks: 13mins)

Select the most correct answer for each of the following e.g 1= C
1. Which of the following is not a type of auditor?
A. Internal auditor
B. External auditor
C. Fundamental auditor
D. Forensic auditor
E. Special purpose auditor
2. In which type of engagement does a professional accountant express a conclusion
designed to enhance the degree of confidence of the intended user of the AFS?
A. Assurance engagement
B. Review engagement.
C. Limited engagement
D. Non-assurance engagement
E. None of the above
3. Which of following is not a limitation of an audit?
A. The nature of the financial reporting
B. The use of testing
C. The nature of audit procedures
D. Accountability
E. None of the above
 4. Which of the following is not an assertion?
A. Occurrence
B. Preparation
C. Completeness
D. Accuracy
E. Presentation
5. In the SAICA Professional Code of Conduct Part 2 which section deals with conflicts
of interest
A. Section 210
B. Section 220
C. Section 230
D. Section 240
E. None of the above
6. Which of the following is performed before taking custody of the client’s assets:
A. Keeping clients’ assets separate from personal or firms’ assets
B. Using the assets only for the purpose of which they were intended
C. Being prepared to account for the assets at all times
D. All of the above
E. None of the above
7. Which of the following is incorrect: To be able to apply the conceptual approach, the
professional accountant must understand the:
A. Fundamental principles
B. Types of threats which may arise
C. Misleading statements
D. Safeguards that may be applied
E. All of the above

Part C (10 marks: 18 mins)

Identify the possible threat(s) (it could be more than one threat in a situation) to which each
of the following relates:

1.1. A professional accountant in public practice has a close business relationship with the
majority shareholder of an assurance client.
1.2. A professional accountant in public practice has prepared the annual financial
statements for a client and provide an audit opinion on the financial statements.
1.3. A professional accountant in public practice accepted an oversees holiday paid for by
an audit client and is now being threatened that the senior partner of the audit firm
will be notified of the trip.
1.4. A professional accountant in public practice who does not form part of the engagement
team performing assurance services is engaged to mediate in a dispute between the
audit client and the third party.
1.5. A professional accountant in public practice agrees not to give a qualified opinion on
a set of financial statements (for which a qualified opinion is appropriate) to secure
his firm’s appointment as an auditor for the following year.
1.6. A professional accountant in public practice, whose son has recently been appointed
as the financial accountant at a client, performs the annual independent review of that
client’s annual financial statements.
Question 2

Part A (5 marks: 9 mins)

2.1.1 Give three reasons as to why auditors are needed in society. (3)
2.1.2 Name two roles that are performed by the directors of a company. (2)

Part B (8 marks:14 mins)

King (Pty) Ltd is a company that manufactures and sells mattresses. The company employs on
average 150 factory workers, 15 administrative employees (excluding five employees in its
accounting department) and 10 cleaners. The company’s turnover has decreased from R220
million for the 2021 Financial year, to R180 million for the 2022 financial year. The company’s
debtors’ book value is R52 million, while its third-party liabilities amount to R12 million. The
only known beneficial interest holders of the company are its seven shareholders.
King (Pty) Ltd.’s financial statements are compiled independently.

Required

2.2.1 Calculate the public interest score for King (Pty) Ltd for the 2022 Financial year.
You are required to show your calculations. (6)
2.2.2 Evaluate, based on your calculation above, the type of assurance King (Pty) Ltd
will be subjected to and give reason for your answer. (2)
Part C (12 marks: 22 mins)

Pete Williams, registered with SAICA as a chartered accountant in business, and was recently
appointed as a financial accountant at Thanda Manzi (Pty) Ltd, a water purification and
irrigation company. The company is a wholly owned subsidiary of H2O Ltd, a company listed
on the JSE. One of his duties is to prepare the annual financial statements for submission to the
holding company.
The annual financial statements are used to calculate bonuses paid to management, including
executive directors at the subsidiary. On presenting the March 2023 figures to Timmy Lewis,
the financial director of Thanda Manzi (Pty) Ltd, Timmy Lewis suggested to Pete Williams
that he amends the figures to reflect a far better profit for the year, reminding him that
management bonuses depended on the profit reflected. On protesting that he could not
manipulate the figures, Timmy Lewis replied, ‘I suggest you do as I say.’
On his way back to his office, Pete Williams decided to discuss the matter with Andrew Ken,
a chartered accountant employed by Thanda Manzi (Pty) Ltd. His response was, ‘Pete, just do
it; you are no longer in the profession. Lewis will fire you if you do not do what he says – just
look on the bright side, our bonuses will also be bigger. Besides it is not as though you are
stealing! In any event, who will ever know – the auditors they send here are always pretty
inexperienced and you can tell them anything you like!’

Required
Discuss the situation in which Pete Williams finds himself in, in relation to the SAICA Code
of Professional Conduct. (12)