QUESTION 1

1.1 ISA 300 Planning an Audit of Financial Statements provides guidance to assist auditors in planning an audit. (10) Required:

Explain the benefits of audit planning. (10 marks)

1.2 Evaluate 4 stages in the Audit process

1.3 Describe contents of an engagement letter

Question 2

You are the senior partner in an audit firm. Your audit firm has recently been appointed as the auditors of Free Style SA Limited Free Style SA, a recently listed company on the JSE Securities Exchange. The year-end of Free Style SA is 31 January 2011. Upon discussions with management, you discover that the previous auditor resigned as a result of a disagreement with management.

The company specialises in organising diving excursions to popular dive sites off the coast of South Africa as well as Mozambique. The company caters for both South African and overseas customers. Free Style SA accepts foreign currency from overseas customers, and although it is not widely publicised, prefers to receive cash, rather than credit card payments or electronic transfers. The head office of the company is situated in Durban, and it has branches situated in Sodwana, East London and Hermanus.

The company is doing extremely well, and has recently shown a steady increase in turnover. Due to the recent growth in the company, the previous manual accounting system became inadequate for the company, and it was decided during the year ended 31 January 2011, to change over to a computerised system. The computerised accounting package is an off the shelf package. None of the staff were familiar with the package, so it was decided to employ an IT manager to oversee the processing of the accounting records, as well as monitoring the integrity of the system. The newly appointed IT managers previous job, was as a skipper of a ferry that was used to transport tourists to and from Robben Island.

The growth in turnover in previous years is mainly due to the fact that the company has implemented a new bonus system for the management staff of the company. The bonus system states that if turnover exceeds budgeted turnover by more than 10%, a percentage of the excess turnover will be paid out to management. Management is extremely excited about this incentive.

Free Style SA suffered a substantial loss in the previous year as a result of a legal claim against the company. One of the activities of the company up until last year, was extreme shark-cage diving. The skippers of the boats were enticing sharks to venture closer to the boats, by chumming the water (throwing fish scraps into the water). The sharks began to lose their fear of boats, and began harassing other vessels, specifically the smaller vessels that took foreign tourists to view the local penguin and seal populations. After a number of attempts by the local police to put a stop to these practices, the company was eventually taken to court where they lost their case and were forced to pay damages.

The date the audit report is required is set for the 7 March 2011 REQUIRED:

a) Describe the factors you as auditor should have considered and the procedures you should have performed prior to acceptance as auditor of Free Style SA Ltd. (10)

b) A good system of internal control consists of 5 main components. List the 5 components and briefly describe each of the components. (15)

c) Audit risk consists of 3 types of risks, detection risk being one of them. Name and define the other 2 risks, and discuss their effect on detection risk. (5)

d) Differentiate between the audit strategy and the audit plan and their components. (13)

e) State whether the risk of material misstatement at financial statement level should be assessed as low, medium or high. Give reasons for your decision.

QUESTION 3 (40 MARKS)

You have recently accepted the engagement to audit the financial statements of Game (Pty) Ltd, after the retirement of the companys previous auditor from the auditing profession. The following information is of relevance:

The company has been established for many years, specializing in gaming equipment. The past few years audit reports have been unmodified and their financial performance has been excellent. It has a very good reputation in its industry and has received numerous ISO quality awards and certifications, pertaining to products as well as to business processes and management achievements.

The company runs a virtual record keeping system, in which all accounting and system documents are electronically generated, processed, stored and signed through the use of various passwords, finger print identification and cornea recognition technology for highly secure transactions.

The companys accounting, production and payroll software are interfaced with each other. In addition, their accounting and production software interfaces with their customers production systems, enabling on-line transfer of order, purchase and billing data.

Game (Pty) Ltd has a limited, international and lucrative client base. The company imports its materials and manufactures the gaming equipment locally. However, the company has various warehouses in London, New York, Tokyo and Sydney, with a staff complement at each, which it uses to store finished goods intended for its international customers, until such time as the parts are physically ordered by these clients. The company retains ownership of the finished goods until such time as they are delivered to the clients.

Because of the need to import its raw materials, the company has entered into a number of FEC contracts with its bank in order to hedge against foreign exchange losses.

During the year under review, the companys Tokyo warehouse was destroyed in a fire that was started at a nearby restaurant. The intense heat of the fire rendered the machined parts unusable. As a result, the client for whom these parts were intended suffered production losses due to supply delays, and has instituted legal action against the company to recover such damages.

The companys credit policy requires payment within 60 days. The banking accounts are operated in South Africa. Customers are quoted in Euro, US Dollar, Australian Dollars and Yen, and invoices are issued accordingly. When invoices are recorded, they are converted at the ruling spot rate on the date of the transaction. Receipts are captured at the amount that appears on the bank statement on date of receipt. The foreign currency balances owing by the customers are computed manually. The customers are all very co-operative; balances are few and are very material to the financial statements.

Auditing 3B Page 5 of 7 2023 Individual Assignment

The reporting requirements of the company are strict, with the audit deadline being 6 weeks after year end.

REQUIRED:

a) Discuss the 3 stages of pre-engagement activities and one consideration in each of these areas. (6)

b) List the factors extracted from the above information which would have an impact on your audit strategy, i.e. Scope, Direction and Timing. (14)

c) List 4 different types of specialized audit evidence which need to be obtained based on the information provided above. Give a brief explanation of each. (10)

d) List and explain the assertions applicable to transactions and events. [30]