AUE3761 – FULL DETAILED SUMMARIES
SUMMARIES BASED ON QUESTIONS FROM PREVIOUS PAPERS
ALL TYPES OF QUESTIONS THAT CAN BE ASKED ARE INCLUDED
QUESTION PAPERS NOT INCLUDED
THIS WHOLE PACK CONSISTS OF SUMMARIES FROM PREVIOUS
EXAM QUESTIONS
AUE3761 + (AUE3701 & AUE3702)
, HOW,WHAT AND WHY
AUE3701
RISK INDICATOR DESCRIPTION OF RISK OF MATERIAL
MISSTATMENT AT FINANCIAL STATEMENT
LEVEL
Group companies The AFS may be materially misstated as errors
might occur during consolidation, as it involves
an intricate process possibly resulting in
material misstatement, for example non-
elimination of intergroup balances etc.
Nature of business The mobile devices business has a high risk due
to technological advancement, stiff
competition, dependency on overseas
components, etc.
MAY/JUNE 2019
Risk indicator’s – Description of risk of material misstatment at financial statement level
Imports products from China The annual financial statements may be
materially misstated, as the entity might not
comply properly with the relevant laws and
regulations governing imports from China.
AFS may be materially misstated due to
incorrect translation of foreign currency
transactions. Recording imports involves
complex calculations and concepts. The
complexity of recording foreign exchange
transactions, costs of import agents and
clearing charges could easily lead to errors
being made.
Financial Statements need to be submitted for There is a risk that financial statements may be
license renewal and Cellular depends on the materially misstated due to manipulation by
renewal for them to maintain their turnover. management as the might engage in fraudulent
financial reporting, for example overstatement
of assets and revenue and understatement of
liabilities and expenses to ensure renewal of
the license.
Tight audit deadline The AFS may be materially misstated as
material misstatements could go undetected
because of the tight audit deadline.
Using the work of component auditor Protect It will be a new client to the
component auditor. The AFS may be materially
misstated as material misstatements could go
undetected because they are not familiar with
the client which in turn will affect the group
financial statements.
There is a risk that the work done by the
component auditor is not adequate and they
might not be objective, competent and
, appropriately qualified to perform the work
required to collect audit evidence.
The CEO is the owner of the entity The AFS may be materially misstated due to
manipulation, as management might engage in
fraudulent financial reporting by inflating the
performance and position (e.g. overstatement
of revenue) of the entity or by reflecting a poor
performance and position (e.g. overstatement
of expenses) of the entity to save on taxation
to be paid over to the South African Revenue
Services.
Going concern There is a risk that if the license is not
renewed, Cellular will lose 70% of its revenue
which may lead to uncertainty regarding the
going concern ability of the entity and
therefore financial
Identify & Describe
Aspects Auditor should consider
Developing an Audit Plan
Nature of audit procedures – of the audit plan
- Explain – what type of audit approach you would follow
- What type of audit procedures for – aspects identified
- An audit plan consists of the nature, timing and extent of audit procedures.
- The nature of evidence is determined by the purpose thereof: tests of control or substantive
procedures.
- Considerations need to be taken on the purpose of procedures in order to determine the most
suitable audit approach.
- A combined approach is one where both tests of controls and substantive procedures are performed.
This approach is followed when the auditor intends to rely on the operating effectiveness of internal
controls or when substantive procedures alone cannot provide sufficient appropriate audit evidence.
- A substantive approach is one where only substantive procedures are performed. This approach is
followed when the risk assessment procedures have not identified appropriate and sufficient controls
relevant to the audit or because testing controls would be inefficient.
- Consideration needs to be made on the volume of transactions, which may make it difficult to test
solely substantively
,- Substantive procedures alone may not provide enough evidence with regards to the computerised
systems therefore tests of controls would be more effective.
- Given the size of the client, a fully substantive approach would not be an efficient approach.
- Substantive procedures will need to be performed for each material class of transaction, account
balance or disclosure and where significant risks have been identified.
- Computer assisted audit techniques should be used to test the automated (computerised)
applications or controls.
- Assessing whether or not to test controls:
Necessity
o It would be necessary to test controls because the system is mostly automated. Therefore auditor
will need to test the system so they can rely on it.
Possibility
o Cellular is said to have a healthy internal control environment therefore controls may be relied
upon.
o Tests of controls may be performed since controls will be expected to operate effectively.
Desirability
o If controls are tested and are concluded to be reliable, it might reduce the amount of audit work to
be performed substantively.
o Tests of controls will reduce the substantive procedures we need to perform.
- Based on the above, a combined approach would be most appropriate.
INVENTORY
RISK OF MATERIAL MISSTATEMENT – ASSERTION LEVER
Inventory Balance – Statement of Financial Position
For each risk described – Identify applicable assertion
Description of the risks of material misstatement at the assertion level Assertion
relating to the inventory balance
There is a risk that the costs incurred to bringing the mobile devices to their saleable Valuation
condition such as shipping costs and are not accounted for correctly.
There is a risk that incorrect sot rates are applied in translating the foreign currency costs of Valuation
purchasing the mobile devices to ZAR.
, There is a risk that mobile devises that have been shipped and for Completeness, Rights
which risks and rewards have passed on to Cellular are not recorded in
the accounting records of Cellular (Ownership)
There is a risk of theft of the goods in transit from China that has been Existence, Rights
recorded as inventory in the books of Cellular
There is a risk that the NRV is not determined accordingly by Valuation
experienced and qualified individuals leading to the inventory of mobile
devices being recorded with an incorrect value.
There is a risk that stock that has been held for over a year and not Valuation
been claimed by customers may be obsolete, given the nature of the
business and how technological advancements affect it.
There is a risk of theft or damage of inventory items at the warehouse Existence
leading to inventory being recorded when it does not actually exist.
COMPUTING OF PLANNING MATERIALITY
STEPS TO FOLLOW – CALCULATING PLANNING MATERIALITY
SUBSTANTIATE MATHOLOGY – REASONS
Steps to be followed to calculate materiality
1) Determine which figures to use
Current year unaudited figures
Used as best representation of items being audited
Used only if information can be relied upon
Budgets
If achievable
Can incorporate with current year figures
Prior year audited
If current year figures cannot be relied upon
Adjust for significant changes from prior to current year
Based on the information available for Cellular, current year unaudited figures may not be
reliable given the fact that these figures are going to be used to apply for renewal of the
license. There is risk that these may not be reliable as they may be manipulated to increase
the chances of renewal of the license.
Also given the nature of the business, we cannot rely on the budgeted figures due to
uncertainties in the industry in terms of technological changes and their effect on the business,
as well as the fact that renewal of the license has not yet been finalised.
Therefore, prior year audited figures are most reliable.
SUMMARIES BASED ON QUESTIONS FROM PREVIOUS PAPERS
ALL TYPES OF QUESTIONS THAT CAN BE ASKED ARE INCLUDED
QUESTION PAPERS NOT INCLUDED
THIS WHOLE PACK CONSISTS OF SUMMARIES FROM PREVIOUS
EXAM QUESTIONS
AUE3761 + (AUE3701 & AUE3702)
, HOW,WHAT AND WHY
AUE3701
RISK INDICATOR DESCRIPTION OF RISK OF MATERIAL
MISSTATMENT AT FINANCIAL STATEMENT
LEVEL
Group companies The AFS may be materially misstated as errors
might occur during consolidation, as it involves
an intricate process possibly resulting in
material misstatement, for example non-
elimination of intergroup balances etc.
Nature of business The mobile devices business has a high risk due
to technological advancement, stiff
competition, dependency on overseas
components, etc.
MAY/JUNE 2019
Risk indicator’s – Description of risk of material misstatment at financial statement level
Imports products from China The annual financial statements may be
materially misstated, as the entity might not
comply properly with the relevant laws and
regulations governing imports from China.
AFS may be materially misstated due to
incorrect translation of foreign currency
transactions. Recording imports involves
complex calculations and concepts. The
complexity of recording foreign exchange
transactions, costs of import agents and
clearing charges could easily lead to errors
being made.
Financial Statements need to be submitted for There is a risk that financial statements may be
license renewal and Cellular depends on the materially misstated due to manipulation by
renewal for them to maintain their turnover. management as the might engage in fraudulent
financial reporting, for example overstatement
of assets and revenue and understatement of
liabilities and expenses to ensure renewal of
the license.
Tight audit deadline The AFS may be materially misstated as
material misstatements could go undetected
because of the tight audit deadline.
Using the work of component auditor Protect It will be a new client to the
component auditor. The AFS may be materially
misstated as material misstatements could go
undetected because they are not familiar with
the client which in turn will affect the group
financial statements.
There is a risk that the work done by the
component auditor is not adequate and they
might not be objective, competent and
, appropriately qualified to perform the work
required to collect audit evidence.
The CEO is the owner of the entity The AFS may be materially misstated due to
manipulation, as management might engage in
fraudulent financial reporting by inflating the
performance and position (e.g. overstatement
of revenue) of the entity or by reflecting a poor
performance and position (e.g. overstatement
of expenses) of the entity to save on taxation
to be paid over to the South African Revenue
Services.
Going concern There is a risk that if the license is not
renewed, Cellular will lose 70% of its revenue
which may lead to uncertainty regarding the
going concern ability of the entity and
therefore financial
Identify & Describe
Aspects Auditor should consider
Developing an Audit Plan
Nature of audit procedures – of the audit plan
- Explain – what type of audit approach you would follow
- What type of audit procedures for – aspects identified
- An audit plan consists of the nature, timing and extent of audit procedures.
- The nature of evidence is determined by the purpose thereof: tests of control or substantive
procedures.
- Considerations need to be taken on the purpose of procedures in order to determine the most
suitable audit approach.
- A combined approach is one where both tests of controls and substantive procedures are performed.
This approach is followed when the auditor intends to rely on the operating effectiveness of internal
controls or when substantive procedures alone cannot provide sufficient appropriate audit evidence.
- A substantive approach is one where only substantive procedures are performed. This approach is
followed when the risk assessment procedures have not identified appropriate and sufficient controls
relevant to the audit or because testing controls would be inefficient.
- Consideration needs to be made on the volume of transactions, which may make it difficult to test
solely substantively
,- Substantive procedures alone may not provide enough evidence with regards to the computerised
systems therefore tests of controls would be more effective.
- Given the size of the client, a fully substantive approach would not be an efficient approach.
- Substantive procedures will need to be performed for each material class of transaction, account
balance or disclosure and where significant risks have been identified.
- Computer assisted audit techniques should be used to test the automated (computerised)
applications or controls.
- Assessing whether or not to test controls:
Necessity
o It would be necessary to test controls because the system is mostly automated. Therefore auditor
will need to test the system so they can rely on it.
Possibility
o Cellular is said to have a healthy internal control environment therefore controls may be relied
upon.
o Tests of controls may be performed since controls will be expected to operate effectively.
Desirability
o If controls are tested and are concluded to be reliable, it might reduce the amount of audit work to
be performed substantively.
o Tests of controls will reduce the substantive procedures we need to perform.
- Based on the above, a combined approach would be most appropriate.
INVENTORY
RISK OF MATERIAL MISSTATEMENT – ASSERTION LEVER
Inventory Balance – Statement of Financial Position
For each risk described – Identify applicable assertion
Description of the risks of material misstatement at the assertion level Assertion
relating to the inventory balance
There is a risk that the costs incurred to bringing the mobile devices to their saleable Valuation
condition such as shipping costs and are not accounted for correctly.
There is a risk that incorrect sot rates are applied in translating the foreign currency costs of Valuation
purchasing the mobile devices to ZAR.
, There is a risk that mobile devises that have been shipped and for Completeness, Rights
which risks and rewards have passed on to Cellular are not recorded in
the accounting records of Cellular (Ownership)
There is a risk of theft of the goods in transit from China that has been Existence, Rights
recorded as inventory in the books of Cellular
There is a risk that the NRV is not determined accordingly by Valuation
experienced and qualified individuals leading to the inventory of mobile
devices being recorded with an incorrect value.
There is a risk that stock that has been held for over a year and not Valuation
been claimed by customers may be obsolete, given the nature of the
business and how technological advancements affect it.
There is a risk of theft or damage of inventory items at the warehouse Existence
leading to inventory being recorded when it does not actually exist.
COMPUTING OF PLANNING MATERIALITY
STEPS TO FOLLOW – CALCULATING PLANNING MATERIALITY
SUBSTANTIATE MATHOLOGY – REASONS
Steps to be followed to calculate materiality
1) Determine which figures to use
Current year unaudited figures
Used as best representation of items being audited
Used only if information can be relied upon
Budgets
If achievable
Can incorporate with current year figures
Prior year audited
If current year figures cannot be relied upon
Adjust for significant changes from prior to current year
Based on the information available for Cellular, current year unaudited figures may not be
reliable given the fact that these figures are going to be used to apply for renewal of the
license. There is risk that these may not be reliable as they may be manipulated to increase
the chances of renewal of the license.
Also given the nature of the business, we cannot rely on the budgeted figures due to
uncertainties in the industry in terms of technological changes and their effect on the business,
as well as the fact that renewal of the license has not yet been finalised.
Therefore, prior year audited figures are most reliable.
