JANUARY 2022 SUPPLEMENTARY/AEGROTAT EXAMINATION

TAKE HOME ASSESSMENT QUESTION PAPER

PROGRAMME Bachelor of Commerce in Accounting

MODULE Auditing 2

INSTRUCTIONS TO CANDIDATES:
1. This is an official assessment of REGENT BUSINESS SCHOOL, and all assessment rules apply.

2. Students are required to carefully read and fully understand the questions before answering

them.

3. Students must answer the questions fully but concisely and as directly as possible using

sufficient research and application.

4. Students should follow all specific instructions for individual questions (e.g., “list”, “in point form”,

“show all workings”).

5. The mark allocation is there to show you the weighting and length of each question.

6. Students are required to answer questions as instructed to.

DATE: 05 January 2022 TIME: 13h00 - 18h15

DURATION: 5.15 MARKS: 100

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QUESTION ONE [40]
You are a trainee accountant at a small audit firm. Your firm was recently appointed as auditors of
Fashion (Pty) Ltd, a company which sells fashionwear. The previous auditors had resigned after a
dispute with the company’s directors about the audit fee. The company has been operating for the
last five years and has a number of branches across South Africa.
The company sells for cash or on account, no cheques or credit cards are accepted. Accounts must
be opened in the name of a person over the age of 21 years. On average thirty percent of annual
sales are made for cash. Most of the company’s inventory is imported. There is a large warehouse in
Cape Town from which inventory is dispatched to the company’s branches where it is either
displayed on the shop floor or kept in a small storeroom.
Although sales have generally been good in previous years, sales for the financial year end 31
March 2019 have shown a decline. The directors of the company attribute this to two things,
negative fluctuations in foreign exchange rates which have resulted in increased costs for the
company’s imports, and increased competition in the market place. In an attempt to increase sales
the directors decided to relax the granting of credit by extending the credit limits and terms for all
existing and new account holders. The company has a small overdraft on its bank account but which
is within the facility granted by the bank.
When the company was formed five years ago, it was financed by 12 private investors who provided
long-term loans. None of these 12 long-term loans is secured, but in terms of the loan agreement the
investors are entitled to call up their loans immediately if the company does not achieve a pre-
determined net profit before tax. The loan agreement requires that an annual audit of the company
be carried out. The directors are very anxious that the stipulated (pre-determined) net profit before
tax is achieved.
Required
1.1. Discuss the factors which your firm would have considered prior to accepting the
appointment of auditor of Fashion (Pty) Ltd, based on the information above. (10)
1.2. Define audit risk. (4)
1.3. Evaluate the risk of material misstatement relating to the following account balances or
classes of transaction at 31 March 2019 based on the information given above for the
following:
- Inventory (13)
- Sales (6)
- Accounts receivable (7)
You are advised to consider the risk relating to each assertion applicable to each of the
above account balances or classes of transactions.

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QUESTION TWO [25]
Your audit firm was recently appointed as auditors of Anivet (Pty) Ltd, a large chemical company
which manufactures veterinary products for the domestic and agricultural markets. The following
information was gathered during the preliminary engagement phase.
• The financial year end of the company is 31 March.
• The company is a subsidiary of Multivet International which has its head office in New York.
All subsidiaries of Multivet International must have their annual financial statements audited.
• Anivet (Pty) Ltd has depots in a number of African countries in which it stores its products for
distribution into Africa.
• The company also holds veterinary products on a consignment basis for a French veterinary
company.
• The company has a very complex computerized inventory system which interfaces with both
the acquisitions and revenue and which facilitates the tracking of inventory moving between
the head office warehouse and the depots in Africa.
• The previous auditors of Anivet (Pty) Ltd were a local firm Petra Jordan and Co.
• Multivet International send the groups internal auditors to its subsidiaries from time to time to
evaluate aspects of the business.
After a successful meeting with Anivet (Pty) Ltd, Tarique Kerak, the engagement partner,
conveyed this information to you and requested that you draft an appropriate engagement letter.
Required:
Discuss the matters which you will include in the engagement letter to be issued to Anivet (Pty) Ltd
in respect of the first audit of the company. You are not required to draft a letter.

QUESTION THREE [25]

You have recently joined an established, medium sized firm of auditors as a junior partner.
Because of your knowledge of the relevant pronouncements, Sam Sandman, the senior partner,
discussed the following situations with you:
1. Your firm acts as auditors to Small Ltd and as financial advisers to Ben Big one of its
directors. Ben Big has instituted a legal action against the company for breach of contract
and has sought your firm’s advice relating to certain financial aspects relating to Small Ltd.
2. The chief accountant of Cruz Ltd, a public, but unlisted company, audited by your firm, left
unexpectedly. The company has asked your firm to maintain its accounting records for the
remaining three months of its financial year until they can appoint a suitable accountant.
3. Your firm acts as auditors to Rex (Pty) Ltd, a company required by its Memorandum of
Incorporation to be audited. Rex (Pty) Ltd has lent R5 million to Blax (Pty) Ltd, a company of
which Sam Sandman is the non-executive chairman.

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Required:
Discuss each of the situations 1 – 3 above in terms of the Code of Professional Conduct. Include in
your answer the threats, fundamental principles and safe guards.

QUESTION FOUR [10]

Television shows seem to like having an auditor on the show! “Strictly come Dancing” is a show in
which contestants (a pair) are eliminated week by week until a winner is left. Contestants are
eliminated on the strength of votes cast by the judges and the general public with the pair obtaining
the lowest combined vote leave the show. The show presenter makes a point of referring to the fact
that “the vote has been verified by our auditors”, at the end of the show.

Required:
4.1 Explain why shows like “Strictly come Dancing” make use of the auditing profession in this
manner. (6)
4.2. Comment whether this kind of exposure is good for the auditing profession. (4)

END OF QUESTION PAPER

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