namib I A UnIVERSITY OF SCIEnCE AnD TECHnOLOGY

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1 namib I A UnIVERSITY OF SCIEnCE AnD TECHnOLOGY Faculty of Management Sciences Department of Accounting, Economics and Finance QUALIFICATION: BACHELOR OF ACCOUNTING QUALIFICATION CODE: 07BACC LEVEL: LEVEL 7 COURSE: AUDITING 310 SESSION: JUNE 2016 COURSE CODE: GAU711S PAPER: THEORY DURATION: 3 HOURS MARKS: 100 SUPPLEMENTARY EXAMINATION QUESTION PAPER EXAMINER(S) MODERATOR: M DIKUUA A KETJINGANDA JVAN WYK E BEUKES INSTRUCTIONS 1. Answer ALL the questions. 2. Write clearly and neatly. 3. Number the answers clearly. PERMISSIBLE MATERIALS 1. Examination paper. 2. Examination script. THIS QUESTION PAPER CONSISTS OF 6 PAGES (Excluding this front page)

2 QUESTION 1 (15 marks) The following four (4) situations have arisen at different audit clients: i. A trainee was conducting audit procedures on cheques (selected by cheque number) using statistical sampling. A cheque that had been selected by random sample was missing. The trainee failed to realise it was missing and simply chose the next cheque in the sequence for his sample. An investigation into the missing cheque would have revealed material fraud. (2 marks) ii. iii. iv. When designing audit procedures to be implemented in the revenue cycle, the trainee omitted a procedure which required the tracing of invoices to the sales journal. As a result a substantial number of unrecorded sales remained undetected by the auditor. (2 marks) Using a statistical sampling method, a trainee selected a sample from the inventory Masterfile of a large wholesaler of consumer goods. The sample was used for testing of inventory for existence by physical count. The trainee carried out the sampling exercise correctly and efficiently enabling him to satisfy himself that the inventory balance did not contain material misstatement arising from the inclusion of non-existent inventory. However, a few days later the company's internal audit department unexpectedly picked up a major fraud in the warehousing section which led to the discovery of non-existent inventory in the inventory masterfile. (2 marks) The audit senior planned to obtain his assurance in respect of the client's allowance for doubtful debts in part from tests of controls over credit control and in part from analytical review procedures on doubtful debts applied at year end. The auditor failed to detect that the allowance was materially understated. An enquiry into the procedures employed by the trainee revealed that the trainee had set his tolerable rate of deviation too high when conducting his tests of controls. Breakdowns (deviations) in key controls over the granting of credit were not detected. (3 marks) a) Explain sampling risk and non-sampling risk (do not simply give definitions). (6marks) b) Indicate, with reasons, whether the situations described above (i - iv) should be categorized as sampling risk or non-sampling risk. (9 marks) Take note: Allocation of the 9 marks between the different situations are indicated above.

3 QUESTION 2 14 Marks A friend of yours, John Legend, recently purchased all the stores in Grammys (Pty) Ltd, a wholesaling company which sells all kinds of music equipment for the needs of vocal artists. The company sells only on credit. Debtors pay only by cheque or EFT. The previous owners, Sam Smith and Ed Sheeran, spent most of their time on their vocal pursuits rather than looking after the business, choosing to leave the running of the business in the hands of various "managers" and other employees. The goods which the company sells are popular, so the business has survived this ownership neglect, and your friend (an entrepreneur) sees potential in the company. He has asked you to have a look at the accounting system and internal controls which you did, only to find that, despite the design, and the documentation of the system being basically sound, the control awareness and proper operation of control activities by employees was poor. The cycle has been broken down into the usual function for a revenue and receipts cycle and all functions are adequately staffed. On reporting to John Legend, his response was "OK, as I am the sole director and will not be involved much in the business, I want you to explain two things to me. Firstly, If we assume the staff are honest but careless or as you say, not very control aware, what could go wrong in the revenue and receipts cycle, and secondly, if some of the staff are dishonest, including the managers, how could they be stealing from or defrauding the company. Respond to John Legend explaining what could go wrong in the revenue and receipts cycle, assuming the staff are honest and not very control aware. (14 Marks) Note: You should structure your answer to cover possible weaknesses in the following areas: Order department Warehouse Despatch Receipts and recording of receipts from debtors Goods returned by customers Credit management General

4 QUESTION 3 (35 Marks) Part A (15 Marks) Fraser Wolfe, CA (Nam), is the auditor of Sheen's Shipbuilding (Pty) Ltd. During the course of his first audit of the company, Wolfe discovers that the record of substantial amounts of contract expenses are kept by the company's financial director in a contracts expense journal to which Wolfe is denied access on the grounds that these expenses are of a confidential nature. Wolfe argues that unless he can examine the journal (which he considers necessary for the purpose of his audit), a limitation on the scope of his examination will have been imposed and he will have to qualify his audit report accordingly. a) State whether you agree with Wolfe's argument. (1 mark) b) Discuss other points Wolfe could have raised with the financial director. (2 marks) c) Prepare the appropriate modifications for inclusion in the audit report (assuming that Wolfe has not had access to the said confidential contracts expense journal) suitable for issue by Wolfe, to the shareholders of Sheen's Shipbuilding (Pty) Ltd. Include only your opinion paragraph, the basis for any qualification and the auditor's signature. (12 marks) Part B (1 0 marks) A qualified audit opinion arises where the auditor has been unable to obtain sufficient appropriate evidence (restricted in his/her scope) or where the auditor believes that some aspect of the financial statements are misstated to the extent that fair presentation is affected. The concept of materiality is applied by the auditor, among others, when forming an opinion on the appropriate audit report to be given. Part of this assessment will be considering any uncorrected misstatements in relation to predetermined materiality limit (level) generally termed the final materiality limit (level). i) Comment on whether misstatements should be considered both quantitatively and qualitatively for reporting purposes. ii) Explain briefly the reasons that the directors may refuse to correct a material misstatement to avoid a qualification of the audit opinion. (7 Marks)

5 Part C (10 Marks) Once all the audit evidence has been gathered, ISA 700- forming an opinion and reporting of the financial statements, requires the auditor evaluates the audit evidence to form an opinion on whether the financial statements are prepared in all material respects in accordance with the applicable financial reporting framework. 1. Which member of the audit team is most likely to carry out this evaluation? (1 mark) 2. In evaluating whether the financial statements are presented in accordance with the applicable financial reporting framework, kindly indicate what, besides accounting policies, will the auditor consider? 3. When evaluating the accounting policies, what does the auditor consider? 4. Besides the specific evaluations in (2) and (3) above, what else must the auditor consider before concluding on whether the financial statements have been prepared in accordance with the applicable reporting framework?

6 QUESTION 4 (18 Marks) You have just completed the "identifying and assessing the risks of material misstatements" stage of the planning of a new client, Heart Limited. You have established the following: 1. The financial accountant and the financial director are not at all co-operative with the auditors % of the company's operating equipment is in remote, isolated areas of Namibia and its neighboring countries. 3. The company is involved in long-term construction contracts which can last up to 5 years. 4. Some of the operating equipment used on the contracts is leased from foreign companies. 5. Numerous complex journal entries were put through prior to the year end. Supporting documentation is minimal, but the entries were all authorized by the financial director. a) Assess the risk of material misstatement at the financial statement level. Give reasons. (8 Marks) b) Assess the risk of material misstatement at the assertion level. Indicate which assertions are affected. (1 0 Marks)

7 .. QUESTION 5 (18 Marks) ISA 315 (Revised) - Identifying and assessing the risks of material misstatement through understanding the entity and its environment, states that the auditor should obtain an understanding of the entity and its environment. It is an important statement in the planning of the audit. 1. What is the auditor's overall objective of gaining an understanding of the entity and its environment? (2 Marks) 2. Audit procedures to obtain an understanding of the entity are referred to as the "risk assessment procedures". Identify the three categories of risk assessment procedures and give two examples of each category. (6 Marks) 3. ISA 315 (revised) requires that "the members of the engagement team should discuss the susceptibility of the entity's financial statements to material misstatement." Explain the reasons behind getting the members of the audit team collectively involved in this discussion. 4. The auditor's understanding of the entity and its environment consists of an understanding of five aspects. The first being "the industry, the regulatory framework and other external factors." Name the other four? (2 Marks) 5. In terms of ISA 315 (revised) a company's internal control process consists of five components. Describe each component in not more than 20 words. (5 Marks) END OF EXAMINATION PAPER

PWF! I'IFIITIIBIFI UNIVERSITY EXAMINER(S) perceived error or ambiguities & any assumption made by the candidate should be clearly stated.

PWF! I'IFIITIIBIFI UNIVERSITY EXAMINER(S) perceived error or ambiguities & any assumption made by the candidate should be clearly stated. I I'IFIITIIBIFI UNIVERSITY OF SCIETICE FIFID TECHNOLOGY FACULTY OF MANAGEMENT SCIENCES DEPARTMENT OF ACCOUNTING, ECONOMICS AND FINANCE QUALIFICATION: BACHELOR OF ACCOUNTING QUALIFICATION CODE: 07BACC LEVEL: