AUE2601/202/2/2022
Tutorial Letter 202/2/2022
AUDITING THEORY AND PRACTICE
AUE2601
Semester 2
Department of Auditing
This tutorial letter contains the suggested answers to, and comments on,
Assignment 02.
1
, AUE2601/202/2/2022
Q1.
1.1 Describe the preconditions for an audit that must be met, before an audit client can be
accepted.
References:
International Standard on Auditing (ISA) - ISA 210 (2009: par 6)
Auditing notes for South African students (2021): 6/10
The auditor should ensure that:
• The financial reporting framework/criteria to be applied in the preparation of the financial
statements to be audited, is/are acceptable.
• Management acknowledges and understands its responsibilities:
o For the preparation and fair presentation of the financial statements, in accordance
with IFRS or IFRS for SMEs, whichever is appropriate for the company.
o For such internal control as management determines is necessary, to enable the
preparation of financial statements that are free from material misstatement, whether
due to fraud or error.
o To provide the auditor with access to all information of which management is aware,
that is relevant to the preparation of the financial statements, such as records,
documentation and other matters.
o Additional information that the auditor may request from management, and unrestricted
access to persons within the entity from who the auditors deem it necessary to obtain
audit evidence.
(6 x 1)
Max 4
1.2 Describe the procedures ZPK could have followed to acquire preliminary information about
whether or not to accept AST as a client.
References:
International Standard on Quality Management (ISQM1) ISQM1(2020: par A69)
Auditing notes for South African students (2021): 6/12
ZPK could have adhered to the following procedures:
• Communicated with the previous auditors or other professional accountants providing
services to AST.
• Held discussions with those charged with governance, such as the directors, senior
management and audit committee.
• Inquired from AST’s external parties, such as bankers, legal counsel and industry peers.
• Performed background searches of relevant databases, such as the internet, financial
press, social media, etc.
• Reviewed AST’s internal documentation that was made available.
• Inquired from firm employees, to assess the independence status of ZPK in relation to
AST.
Award half marks if student merely listed some words. ^
(6 x 1)
Max 4
2
, AUE2601/202/2/2022
1.3 Explain why performance materiality must always be set lower than the materiality of the
financial statements as a whole.
References:
International Standard on Auditing (ISA) 320 par A13
Auditing notes for South African students (2021): 7/24–7/25
• Performance materiality is always set lower than materiality for the financial statements as
a whole, to reduce to an appropriately low level the probability that the aggregate of
undetected and uncorrected misstatements in the financial statements exceeds materiality
for the financial statements as a whole.
Max 2
Q2.
2.1 Identify five (5) risk indicators that will increase the risk of material misstatement at the
overall financial statement level or at assertion level.
2.2 Give a reason for each of the risk indicators identified in 2.1.
2.3 Indicate, for each of the risk indicators identified in 2.1, whether the risk pertains to a risk
of material misstatement at financial statement level or a risk of material misstatement at
assertion level.
2.4 Indicate, for each of the risks of material misstatement at assertion level identified in 2.1,
the relevant financial statement account and management assertion affected. You should
indicate “Not Applicable” for risks of material misstatements at financial statement level.
References:
International Standards on Auditing (ISA) 315 par 3-8 and International Standards on Auditing
(ISA) 200 par 13(c) and (n)
Auditing notes for South African students (2021): 7/6 and 7/2–7/5
2.1 Risk indicator 2.2 Reason 2.3 Risk at 2.4 Applicable
financial financial
statement or statement
assertion level account and
management
assertion
The directors receive a There is a risk that the Assertion level Completeness ^
bonus based on cost directors may materially ^ of expenses ^
reduction achieved understate expenses, in
order to boost their own
bonuses ^
AST intends to list on There is a risk that the Financial N/A
the JSE within a year financial statements may be statement level
materially misstated, in order ^
to meet the stringent JSE
listing requirements ^
3
, AUE2601/202/2/2022
AST’s information There is a risk that the Financial N/A
system was hacked financial statements may be statement level
during the year, materially misstated due to ^
resulting in data loss the compromised data
security and loss ^
AST faced a high level There is a risk that revenue Assertion level Occurrence ^ of
of competition towards may be materially ^ revenue ^
the end of the year, overstated, in order to hide
adversely impacting the full impact of the
revenue competition and thereby
present a favourable position
to the users^
There is a risk that some of Assertion Accuracy,
AST’s inventory may be level^ valuation &
unsaleable (obsolete), allocation ^ of
resulting in the Inventory^
overstatement of inventory
^
There is a risk of going
concern due to a high level Financial
of competition and an statement
adverse impact on sales ^ level^ N/A
AST had to estimate There is a risk that the Assertion level
Accuracy,
the provision for the provision (liability) and ^ valuation &
pending legal claims related expense may be allocation ^ of
materially misstated, due to provisions ^
errors in judgement ^ OR
Accuracy ^ of
expenses ^
(5 x 1) (7 x 1½) (7 x 1½) (8 x 1½)
Max 5 Max 7½ Max 7½ Max 9
Format, and for communication, logical reasoning and structure. (1½)
Q3.
3.1 Identify the components of internal control applicable to each of the four factors outlined.
References:
International Standards on Auditing (ISA) 315, par 12(m), 21–26
Auditing notes for South African Students (2021): 7/13–7/18
a. The entity’s process to monitor the system of internal control ^
4
Tutorial Letter 202/2/2022
AUDITING THEORY AND PRACTICE
AUE2601
Semester 2
Department of Auditing
This tutorial letter contains the suggested answers to, and comments on,
Assignment 02.
1
, AUE2601/202/2/2022
Q1.
1.1 Describe the preconditions for an audit that must be met, before an audit client can be
accepted.
References:
International Standard on Auditing (ISA) - ISA 210 (2009: par 6)
Auditing notes for South African students (2021): 6/10
The auditor should ensure that:
• The financial reporting framework/criteria to be applied in the preparation of the financial
statements to be audited, is/are acceptable.
• Management acknowledges and understands its responsibilities:
o For the preparation and fair presentation of the financial statements, in accordance
with IFRS or IFRS for SMEs, whichever is appropriate for the company.
o For such internal control as management determines is necessary, to enable the
preparation of financial statements that are free from material misstatement, whether
due to fraud or error.
o To provide the auditor with access to all information of which management is aware,
that is relevant to the preparation of the financial statements, such as records,
documentation and other matters.
o Additional information that the auditor may request from management, and unrestricted
access to persons within the entity from who the auditors deem it necessary to obtain
audit evidence.
(6 x 1)
Max 4
1.2 Describe the procedures ZPK could have followed to acquire preliminary information about
whether or not to accept AST as a client.
References:
International Standard on Quality Management (ISQM1) ISQM1(2020: par A69)
Auditing notes for South African students (2021): 6/12
ZPK could have adhered to the following procedures:
• Communicated with the previous auditors or other professional accountants providing
services to AST.
• Held discussions with those charged with governance, such as the directors, senior
management and audit committee.
• Inquired from AST’s external parties, such as bankers, legal counsel and industry peers.
• Performed background searches of relevant databases, such as the internet, financial
press, social media, etc.
• Reviewed AST’s internal documentation that was made available.
• Inquired from firm employees, to assess the independence status of ZPK in relation to
AST.
Award half marks if student merely listed some words. ^
(6 x 1)
Max 4
2
, AUE2601/202/2/2022
1.3 Explain why performance materiality must always be set lower than the materiality of the
financial statements as a whole.
References:
International Standard on Auditing (ISA) 320 par A13
Auditing notes for South African students (2021): 7/24–7/25
• Performance materiality is always set lower than materiality for the financial statements as
a whole, to reduce to an appropriately low level the probability that the aggregate of
undetected and uncorrected misstatements in the financial statements exceeds materiality
for the financial statements as a whole.
Max 2
Q2.
2.1 Identify five (5) risk indicators that will increase the risk of material misstatement at the
overall financial statement level or at assertion level.
2.2 Give a reason for each of the risk indicators identified in 2.1.
2.3 Indicate, for each of the risk indicators identified in 2.1, whether the risk pertains to a risk
of material misstatement at financial statement level or a risk of material misstatement at
assertion level.
2.4 Indicate, for each of the risks of material misstatement at assertion level identified in 2.1,
the relevant financial statement account and management assertion affected. You should
indicate “Not Applicable” for risks of material misstatements at financial statement level.
References:
International Standards on Auditing (ISA) 315 par 3-8 and International Standards on Auditing
(ISA) 200 par 13(c) and (n)
Auditing notes for South African students (2021): 7/6 and 7/2–7/5
2.1 Risk indicator 2.2 Reason 2.3 Risk at 2.4 Applicable
financial financial
statement or statement
assertion level account and
management
assertion
The directors receive a There is a risk that the Assertion level Completeness ^
bonus based on cost directors may materially ^ of expenses ^
reduction achieved understate expenses, in
order to boost their own
bonuses ^
AST intends to list on There is a risk that the Financial N/A
the JSE within a year financial statements may be statement level
materially misstated, in order ^
to meet the stringent JSE
listing requirements ^
3
, AUE2601/202/2/2022
AST’s information There is a risk that the Financial N/A
system was hacked financial statements may be statement level
during the year, materially misstated due to ^
resulting in data loss the compromised data
security and loss ^
AST faced a high level There is a risk that revenue Assertion level Occurrence ^ of
of competition towards may be materially ^ revenue ^
the end of the year, overstated, in order to hide
adversely impacting the full impact of the
revenue competition and thereby
present a favourable position
to the users^
There is a risk that some of Assertion Accuracy,
AST’s inventory may be level^ valuation &
unsaleable (obsolete), allocation ^ of
resulting in the Inventory^
overstatement of inventory
^
There is a risk of going
concern due to a high level Financial
of competition and an statement
adverse impact on sales ^ level^ N/A
AST had to estimate There is a risk that the Assertion level
Accuracy,
the provision for the provision (liability) and ^ valuation &
pending legal claims related expense may be allocation ^ of
materially misstated, due to provisions ^
errors in judgement ^ OR
Accuracy ^ of
expenses ^
(5 x 1) (7 x 1½) (7 x 1½) (8 x 1½)
Max 5 Max 7½ Max 7½ Max 9
Format, and for communication, logical reasoning and structure. (1½)
Q3.
3.1 Identify the components of internal control applicable to each of the four factors outlined.
References:
International Standards on Auditing (ISA) 315, par 12(m), 21–26
Auditing notes for South African Students (2021): 7/13–7/18
a. The entity’s process to monitor the system of internal control ^
4
