Office Use Only
Semester One 2017
Exam Memorandum
Faculty of Business and Economics
EXAM CODES:
ACS3770
TITLE OF PAPER:
Auditing B
TEST DURATION:
3 hours writing time
READING TIME:
30 minutes
THIS PAPER IS FOR STUDENTS STUDYING AT: (tick where applicable)
 Berwick
 Clayton
 Malaysia
 Off Campus Learning
 Open Learning
 Caulfield
 Gippsland
 Peninsula
 Monash Extension
 Sth Africa
 Parkville
 Other (specify)
During a test, you must not have in your possession any item/material that has not been authorised for your
test. This includes books, notes, paper, electronic device/s, mobile phone, smart watch/device, calculator,
pencil case, or writing on any part of your body. Any authorised items are listed below. Items/materials on
your desk, chair, in your clothing or otherwise on your person will be deemed to be in your possession.
No test materials are to be removed from the room. This includes retaining, copying, memorising or noting
down content of test material for personal use or to share with any other person by any means following
your test.
Failure to comply with the above instructions, or attempting to cheat or cheating in a test is a discipline
offence under Part 7 of the Monash University (Council) Regulations.
AUTHORISED MATERIALS
OPEN BOOK
 YES
 NO
CALCULATORS
 YES
 NO
SPECIFICALLY PERMITTED ITEMS
 YES
 NO
if yes, items permitted are:
SAICA handbooks containing the Companies Act, CC Act, Auditing Professions Act, ISA’s and King Lv
Report are allowed, EXCEPT for Monash University library books. The SAICA examination policy for
open books applies to all tests and the examination in this unit.
INSTRUCTIONS TO CANDIDATES
1. The exam is worth 50% of the overall assessment.
2. This exam is marked out of 120.
3. There are a total of 3 questions of which you must answer all questions.
Candidates must complete this section if required to write answers within this paper
STUDENT ID:
__ __ __ __ __ __ __ __
DESK NUMBER:
__ __ __ __ __
1
QUESTION 1
(75 marks)
Part A (19 marks)
Describe the substantive audit procedures required to obtain sufficient and appropriate
audit evidence that the invoice from Yankee Gas Inc. and any related costs have been
appropriately recognised and measured. (19 marks)
Note to marker: award the mark, even if the procedure is not under the correct assertion.
General
Obtain a signed management representation letter that specifically deals with the
appropriate recognition of all capital expenditures and repairs and maintenance in
accordance with accounting standards. (1)
Request a schedule summarising the computation of the amount capitalised in
respect of the new natural gas extraction chamber, (1) and re-perform the casting
thereof. (1)
Scrutinise the schedule for any abnormal or unusual items. (1)
Inspect the accounting policy for capitalization of assets and ensure the treatment
is in line with company policy (and IFRS). (1) Also establish whether the company
is using the cost or revaluation model in terms of IAS 16. (1)
Inspect the minutes of management meetings for any matters relating to the
replacement of the main natural gas extraction chamber of the plant (1)
Compare the invoice amount in dollars to the 2015 invoice and follow up on any
significant variance (1).
Occurrence and completeness
Inspect the invoice from Yankee Gas Inc to determine that it is made out to
Puregas. (1)
Match the invoice to the purchase agreement signed by management. (1)
Agree the detail on the invoice and the purchase agreement with the details on the
delivery documentation signed by Ms Sibanda (or other relevant personnel who
took delivery of the chamber) as evidence of proof of receipt of the chamber. (1)
Physically inspect the replaced (new) main gas extraction chamber and agree the
asset number (001) according to the fixed asset register to the actual number on the
main gas extraction chamber as engraved by Ms Sibanda to confirm that it was
replaced. (1)
Discuss with management and use professional judgement to determine the correct
treatment of the various costs, other than the extraction chamber, reflected on the
schedule as being associated with the replacement of the chamber. (1)
Inspect invoices for details of such costs to determine the nature thereof: Possible
examples include shipping and freight expenses to move the chamber from the
factory in the US to the port, shipping the chamber over the sea to a South African
2
port, moving the chamber overland to the plant, dismantling cost of the old
chamber; costs to install the new chamber and to test its effective functioning;
insurance cost during transportation of the chamber; import duties, import taxes;
etc. (max 2)
Audit these expense items for occurrence, accuracy and completeness in a similar
way as the main invoice from Yankee Gas Inc. (1)
Inspect payment records to confirm that payment was made for the invoice (1)
and/or confirm the payment made directly with the bank. (1)
Classification
Evaluate if capitalisation of the chamber and all related expenditures are
appropriate in accordance with IAS 16.7 (1) and based on an assessment of the
accuracy and reasonableness of management’s projections (probable that future
economic benefits associated with the item will flow to the entity, and the cost can
be measured reliably). (1)
Accuracy and cut-off
Inspect the invoice/import documentation and



verify that the amount (purchase price) is stipulated as $1 000 000; (1)
verify the percentage of the trade discount agreed upon as 10%; (1) and
recalculate the net purchase price ($1 000 000 less $100 000 = $900 000)
(1)
Inspect the shipping documents (bill of lading) and the contract to determine that
the FOB date is 1 March 2017 (IAS 21.22). (1)
Obtain the foreign exchange rate (spot rate) for 1 March 2017 from the Bank. (1)
Recalculate the conversion from $ to ZAR using the confirmed spot rate and the
invoice amount after the trade discount (1) and compare the ZAR price of the
changer to the figure included in the schedule summarising the costs capitalised. (1)
Calculate the difference and add this amount to the schedule of unadjusted
differences. (1)
Inspect the fixed asset register and confirm that the new main gas extraction
chamber was recognised in it at the correct amount, i.e. the total of the schedule
summarising the costs capitalised. (1)
Recalculate the computation of the depreciation amount on the basis consistent
with the accounting policy (1) and compare to the figure in the fixed asset register.
(1) Calculate the difference and add this amount to the schedule of unadjusted
differences. (1)
Consider whether or not the useful life, depreciation rate and residual value used
is reasonable compared to industry, past experience etc. (1)
Presentation
Inspect the financial statements to confirm that
 the disclosures are consistent with the evidence gathered (1)
3




the new natural gas extraction chamber has been included in additions (1)
the note reflects any restrictions on title (security). (1)
The note reflects the accounting policy adopted (1)
All required disclosures have been made. (1)
Other
Discuss with management and inspect the asset register to identify what amount of
cost relating to the old natural gas extraction chamber should be derecognised.
(1)
Query with management why the item was only capitalized on 30 March 2017 and
also why the incorrect exchange rate (at that date), instead of on 1 March 2017,
when the risks & rewards passed, was used. (1)
Inspect the correcting journal entries (if made by management) and agree:
 the amount to the differences calculated above. (1)
 that the correct accounts have been used (1)
4
Part B (10 marks)
Describe the tests of control that could be performed to obtain sufficient and appropriate
audit evidence regarding the operating effectiveness of the key controls described. (10
marks)
Credit management
For a sample of debtor accounts added during the financial year, request the customer’s
credit application forms from management and: (1)
Inspect the sample of credit application forms for evidence of a credit limit having
been allocated to the debtor and for the form being signed by the credit controller (Jessica
Makua). (1)
Inspect any supporting documentation to the application form that provides evidence
of the credit check having taken place (e.g. a credit checklist having been completed by
the credit controller) (1)
Observe the credit controller performing a credit background check for a new credit
customer to assess the credit controller’s level of understanding of the control being
performed (1)
Enquire from the financial manager whether the control is, in management’s view,
sufficient to ensure the recoverability of debt granted to credit applicants and
corroborate their opinion with prior and current audit knowledge of the amounts of bad
debts written off. (1)
Reperform the credit background check for the sample of credit customers selected. (1)
Despatch and delivery of goods to customers
Observe the security guards at the gate checking the goods in the trucks leaving the
premises. (1)
Enquire from management whether the security checks have taken place throughout
the period being audited. (1) Enquire from the security guards what controls they
perform and what happens if the goods and delivery note are not in agreement. (1)
Reperform the security check by comparing the delivery notes to the goods for a sample
of trucks leaving the premises. (1)
Creating and recording of invoice
For a sample of reports showing unmatched delivery notes relating to the financial year
under audit, (1) inspect the reports for the signature of Ishe Mashiri evidencing the
completeness of sales review he performed. (1)
Reperform the review control by tracing the unmatched delivery notes on the sample of
reports to sales invoices subsequently recorded in the accounting records. (1)
Inspect the first report for the 2018 financial year showing all unmatched delivery notes
for which no invoice has yet been generated and confirm that none applies to the 2017
financial year under audit. (1)
5
Enquire from management whether the review control has taken place throughout the
period being audited. (1)
Observe the senior bookkeeper performing the review control to assess the senior
bookkeeper’s level of understanding of the control being performed (1)
Part C (12 marks)
C1 With specific reference to the board and committee structures of Puregas, discuss
your concerns about the company’s application of the recommended practices contained
in the King IV Code on Corporate Governance. (10 marks)
In terms of the King IV Code on Corporate Governance (“the King Code”), the board
should comprise a majority of non-executive directors, (1) most of whom should be
independent of the company. (1)
 Whilst there is a majority of non-executive directors on the board (four non-execs
vs. three execs), (1) only two of them are independent – i.e. Ms Barnard and Ms Pitt.
(1)
 This is as both Mr Small and Ms de Villiers are executive management of a related
organisation (i.e. the holding company), and as such cannot be considered to be
independent. (1)
 The board members are mostly white (not racially representative). (1)
 It does not seem as if a Lead Independent Director has been appointed. (1)
Puregas does not have a remuneration committee, the establishment of which is
recommended (by the King Code) and to be considered by the governing body. (1)
 In the absence of a remuneration committee, the board will therefore have to devote
more time to exercise oversight of remuneration – to ensure that principle 14 of the
King Code is applied. (1)
 Also, as the governing body also includes executive directors, there is a risk that
executive directors may influence the remuneration policy of the company, (1) which
gives rise to a conflict of interest and potential abuse of power. (1)
Nor does the company have a risk governance committee, the establishment of which is
recommended (by the King Code) and to be considered by the governing body. (1)
 The absence of a dedicated risk governance committee may jeopardise the board’s
ability to apply principle 11 of the King Code – in that insufficient time and attention
may be given to considering the company’s risk management policy and plan and
monitoring the risk management process (1)
There is also no social and ethics committee (1)
 The failure to appoint this committee may mean that not sufficient attention is given
to social and economic development, good corporate citizenship, the environment,
health and public safety, consumer relations and labour / employment. (max 2 for
referring to any of these)
In terms of the King Code all the members of the audit committee should be
independent non-executive directors – (1) however, the audit committee of the client
only comprises of one such member, Ms Pitt (of the three members). (1). It is questionable
whether the marketing director has the skills required to serve on this committee. (1)
The nomination committee should have at least 3 members (1).
6
C2 Briefly discuss whether you believe the board of directors have applied the
recommended practices relating to the company secretary’s professional Corporate
Governance Services to the board? (2 marks)
In terms of the King Code, the governing body should oversee that the company secretary
has the necessary competence, gravitas and objectivity (1) to provide independent
guidance and support to the board. (1)
Based on the examples of the non-application of a number of recommended practices
from the King Code, which may undermine the achievement of the King Code principles,
(1) brings into question whether the company secretary at Puregas satisfies these
attributes. (1) Hence the board of directors have not applied the recommended practices
(1).
Part D (32 marks)
D1 Discuss Dr A Strydom’s compliance with the requirements of the Companies Act 2008
with regards to the contract awarded to Delicious Designs and comment on the validity of
the contract, in terms of the Act. (12 marks)
This is a contract in which Dr A Strydom has a personal financial interest by virtue of
the fact that he is “related” (by definition) to the party, Delicious Designs, with whom
Puregas has contracted on the strength of a directors’ resolution. (1) The owners of
Delicious Designs are his wife and daughter. (1)
Dr A strydom should therefore have
 Formed part of the quorum (1)
 disclosed the interest and its general nature to the meeting before the contract was
discussed (1)
 disclosed any material information he had about the contract (1)
 disclosed any observations/insights he had about the contract if requested to by the
directors (1)
 left the meeting (1) and
 not taken part in the deliberations on the proposal to award the contract (1)
 He did take part, actually convincing the other directors on which one to vote for (1).
 not executed any document on behalf of the board on the matter (unless requested
by the board) (1)
As it stands, this contract is invalid as it was approved without disclosure (1) and Ms A
Pitt is as a director, entitled (if not obliged in terms of Section 76) to communicate this
information to the board. (1)
Dr A Strydom would then have the option of
4.1
having the contract ratified by an ordinary resolution of the shareholders
after making full disclosure, (1) or (presumably)
4.2
reconvening a directors meeting disclosing his interest and having the
directors vote again on the contract. (1)
A court may also declare this transaction valid, despite the failure of Dr A Strydom to
disclose his interest. (1)
As it stands, Dr A Strydom appears to be in breach of Sec 76 which deals with the
standard applicable to directors’ conduct. (1)
7
Dr A Strydom has contravened this section in that
 he has used his position as a director to gain an advantage for himself by having a
lucrative contract awarded to his family (1)
 he did not communicate information to the board which he should have disclosed –
financial interest (1)
 he has not exercised his powers and functions as a director
 in good faith and for a proper purpose (1)
 in the best interests of the company. (1)
It appears that he has made a “small profit” at the expense of the company by getting
the directors to accept a more expensive contract from which he will benefit. (1)
Dr A Strydom can be held personally liable in terms of section 77 (1).
D2 Discuss the legality of the loan to be made to Mr V Greedy. (15 marks)
Sec 45 makes it perfectly clear that a company can make a loan to the director of a
related company (1) (Up-in-Flames Ltd is the holding company of Puregas and
therefore is related by definition (1)) provided all of the following conditions are met.





any conditions or restrictions in respect of making the loan contained in the
MOI, are adhered to, (1) and
the board is satisfied that
immediately after providing the loan (financial assistance), the company would
satisfy the solvency and liquidity test (1)– no consideration seems to have
been given to this (1)
o Assets (fairly valued) =/> Liabilities (fairly valued) (1)
o Company will be able to pay its debts as they become due in ordinary
course of business for period of 12 months of the date on which test is
considered or 12 months after a distribution was made (1)
the terms under which the loan is proposed, are fair and reasonable (1) (a
R500k interest-free loan is not fair and reasonable), (1) and
a special resolution is obtained. (1)
The special resolution could be one which had been passed within the last two years
(1), giving authority for a loan to a specific recipient (obviously not the case here) (1), or
it could be one giving general authority to a category of potential recipients, e.g. directors
(1)
 however, it appears that no such authority exists. (1) The authority for this
loan is the “personal authorisation by Dr A Strydom in his capacity as
CEO”. (1)
 in terms of the Companies Act there is no such thing as the “personal
authority of the CEO”. (1)
Puregas must provide written notice of the resolution to all shareholders and to any trade
union representing the company’s employees (1):
o within 10 business days after adoption of the resolution if the loan exceeds 0.1% of
the net worth of Puregas (1)
o else the notice must be given within 30 business days after the end of the company’s
financial year. (1)
The above requirement are applicable, as none of the following applies:
 Ordinary course of business (not a money lender) ,because the company
provides gas) (1)
8



Advance for purpose of meeting legal expenses (used to purchase sports car)
(1)
Advance for anticipated company expenses (used to purchase sports car) (1)
Advance to defray person’s expenses associated with removal (relocation) at
company request. (used to purchase sports car) (1)
As it stands, this loan is void (1) and in terms of Sec 77, the directors who voted in favour
of the loan, may be jointly and severally liable for any loss, damage or costs arising as
a direct or indirect consequence of approving the loan, e.g. it is not repaid in full. (1)
Dr A Strydom’s actions appear to be in serious contravention of Sec 76 (Standards of
Conduct) again (1).
D3 Discuss fully the concerns you have with Dr A Strydoms’s behaviour in Matter 1 in
terms of the SAICA Code of Professional Conduct. (5 marks)
In terms of Section 310, a chartered accountant in business shall not allow a conflict of
interest to compromise his professional or business judgement (1)
A conflict of interest may arise when the interests of the chartered accountant with
respect to a particular matter and the interests of a party (in this case his employer,
Puregas), are in conflict. (1)
In Matter 1, it would be in the best interest of his family to win the refurbishment contract
(1). It may, however, not be in the best interest of Puregas to award the contract to
Delicious Designs, as it appears that their tender is more expensive than the other
tenders received. (1)
Primarily a conflict of interest creates a self-interest threat (1/2) to objectivity (1/2), but
may also create a threat to other fundamental principles for example integrity (1).
Dr A Strydom’s behaviour towards Ms A Pitt could also be considered as unprofessional
(1).
Based on the above, the threat is clearly significant. (1)
To counter the threats arising from this conflict of interest situation, the following
safeguards should be in place (1):
 Disclosing the conflict of interest to all parties involved (1) and
 Withdrawing from the decision making and authorising processes relating to
Matter 1 (1)
 The above are required by sec 75 of the Companies Act (1)
Communication skills for Question 1 (structure and layout) (2)
9
QUESTION 2
(15 marks)
The audit report is not appropriate for the following reasons :
In the first paragraph under the heading “Opinion” the following information is
omitted (all requirements of ISA 700.24 (as Revised)): (1)
 The title of each statement comprising the financial statements; (1)
 Reference to the notes, including the summary of significant accounting
policies; and (1)
 Clearly specifying the date of, and period covered, by each financial statement
comprising the financial statements. (1)
The audit opinion is expressed using International Financial Reporting Standards
(IFRS) as the financial reporting framework. (1) In terms of this framework, the
preparer is obliged to prepare the cash flow statement and accompanying notes.
(1)
 The management’s stated basis for non-compliance with IAS 7 is “the
complexity involved”. This does not seem likely. (1)
 Moreover, IAS 7 offers no exemption on these (or any other) grounds. (1)
 The “fair presentation” override catered for in IAS 1 para 19 and 20 is also not
applicable here as management has not indicated that compliance with a
requirement in IAS 7 would be so misleading that it would conflict with the
objective of financial statements set out in the Framework. (1)
The fact that the client has failed to adhere to IFRS requirements would constitute
a factual misstatement. (1)
The omission by the client of all information pertaining to its cash flows for the year
will undermine the users’ ability to evaluate the company’s financial situation
appropriately and hence is qualitatively material. (1)
The failure to prepare the cash flow statement is, however, unlikely to be
fundamental to the users’ understanding of the financial statements OR the failure
to disclose is pervasive due to the disclosures being “fundamental to users’
understanding of the financial statements”. (1)
Accordingly, the auditor should have expressed a qualified or adverse audit
opinion, and not an unmodified opinion as was the case here. (1P)
When drafting the “basis for qualified opinion” section the auditor should clearly
state that there is non-compliance with IAS 7. (1) For example, the following
wording should have been used: “As explained in note … the financial statements
do not contain a cash flow statement as required by International Accounting
Standard 7 on Cash Flow Statements”. (1)
Also, the auditors should not be expressing the opinions of Paw Patrol (Pty) Ltd’s
management in their report. (1) Management’s “justification” should be set out in
a note to the financial statements (e.g. in the accounting policies section). (1)
10
As the departure from IAS 7 is also likely to constitute a contravention of the
Companies Act 29 (2), (1) in that the financial statements are incomplete in a
material manner, a reportable irregularity may have arisen. (1)
 As such this will have to be dealt with under the heading “report on other
legal and regulatory requirements” in accordance with the recommendation
in the IRBA Guide on Reportable Irregularities. (1)
Communication skills (structure and layout) (1)
11
QUESTION 3
(30 marks)
A. Using the information, calculate the planning materiality for the audit of Mockia Ltd.
(10 marks)
Calculation of planning materiality.
(1) Which figures to use?
The best figures to use for the calculation of materiality are prior year audited
figures (1) as these figures are more reliable (1) compared to the provisional
figures of the current year prepared by management.
Unaudited current year figures are unreliable as the company has going
concern problems (1) and management might manipulate the figures in order to
present a better “picture” (1).
Note to marker: Be open to other logical reasoning.
(2) Consideration of benchmarks.
The most appropriate benchmark to use is Revenue, as the company’s primary
business is the selling of cell phones to retailers.(1)
Users would primarily be interested in these figures. (1)
Another appropriate benchmark to use is total assets as Mockia Ltd is a
company that manufactures and keeps inventory. (1)
Profit after tax is not an appropriate benchmark to use (1) as it is a loss figure
(negative). (1)
(3) Actual calculation of planning materiality.
Indicator
R’000
Percentage
Revenue
10 000
0.5%-1%
Assets
16 000
1%-2%
Range
(lower)
50 000
(1/2P)
160 000
(1/2P)
Range
(upper)
100 000
(1/2P)
320 000
(1/2P)
P=Principle marks should be awarded if students used the 2017 figures instead, so
as to not penalise them more than once.
(4) Justification of the materiality.
As the company is a new client and the audit firm is not familiar (1) with the
environment, and it is listed (1) the materiality should be set at a more
conservative (lower) level (1)
12
(5) Conclusion.
Around R100 000 using the average of the figures below. (1P)
Planning materiality answer
Benchmark
Materiality figure
Revenue
50 000 (1P)
Assets
160 000 (1P)
B. Compare the unadjusted differences to the final materiality figure and discuss
whether any adjustments need to be made to the 2017 Annual Financial
Statements. (19 Marks)
Note 1:
This is a factual misstatement (1)
The misstatement of R1 000 000 is material in amount (quantitatively) (1) as it
exceeds the final materiality figure of R100 000. (1)
Request management to adjust the inventory by writing down the stolen stock.
(1)
Dr: Inventory write down (P/L)
Cr:
Inventory (F/P) (1)
The misstatement could affect the user’s understanding of the financial
statements thus the financial statements are not currently fairly presented. (1)
If management does not adjust, consider the effect on the Audit Opinion. (1)
Note 2:
This is a factual (i.t.o. the recognition) and judgemental (i.t.o. the amount)
misstatement (1)
In terms of IAS 37, a provision should have been raised as this is a present
obligation of the entity, arising from past events, of which the settlement will result
in an outflow of future economic benefits. (1)
The law suit is a present obligation and the lawyer stated that there is high
probability that the company will be required to settle the fee. (1) Therefore at
year end the company should have recognised a provision in their financial
statements.(1)
The misstatement is material quantitatively (R1 200 000 as compared to the final
materiality of R100 000). (1)
13
The misstatement is also material in nature (qualitative) (1) as management of
Mockia Ltd are refusing to comply with IFRS. (1)
The misstatement could affect the user’s understanding of the financial
statements thus the financial statements are not currently fairly presented. (1)
Request management of Mockia Ltd to raise a provision in the financial
statements, as liabilities of Mockia are currently materially understated. (1)
Dr: Law suit (P/L)
Cr:
Provision (F/P) (1)
If management do not adjust consider the effect on the audit opinion. (1)
Note 3:
This is a factual misstatement (1)
The misstatement is not quantitatively material (R60 000) in isolation as the
director’s package is below the final materiality figure. (1)
The company is however contravening sec 30 of the Companies Act that requires
director’s emoluments to be disclosed (1).
Hence the misstatement may be material in nature (i.e. qualitatively) (1)
Conclusion.
The aggregate financial effect of all the individually immaterial misstatements
need to be considered. (1)
As the individually immaterial misstatements, when aggregated (only R60 000)
do not exceed the final materiality figure, it is not necessary to adjust for the
immaterial misstatement. (1) The material differences referred to under Notes 1
& 2 will cause the financial statements to be materially misstated, (1) unless they
are both processed by the client. (1)
The matters dealt with in Notes 1 & 2 will individually and in the aggregate also
result in the company becoming factually insolvent as well (1) (based on the
provisional figures the company was only commercially insolvent). (1) Hence the
auditors need to reconsider the appropriateness of preparing the financial
statements on the going concern basis (1) as preparing them on the liquidation
basis may materially affect various amounts (1)
Communication skills (structure and layout) (1)
14