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Unit 2.2 Question Bank- Pre- engagement
Auditing 300 (University of Johannesburg)
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FACULTY/COLLEGE
College of Business and Economics
SCHOOL
School of Accounting
DEPARTMENT
Department of Accountancy
MODULE NAME
Auditing 300 / Intermediate Auditing
MODULE CODE
AUD 300 / S3BCTQ1
QUESTION BANK
UNIT 2.2
PRE-ENGAGEMENT
INSTRUCTIONS:
1. The Question Bank is for you to master the topic to a standard of what we expect from you in
assessments.
2. Remember that “practice makes perfect”.
3. You should ONLY do the questions in the Question Bank, once you have diligently worked
through the teaching material.
4. You should attempt each question under strict assessment circumstances i.e. calculate the
time per question, read through the case study, do the question and then mark your attempt
against the suggested solution provided.
5. The learning takes place when you analyse your attempt to the question against the
suggested solution.
This Question Bank contains the following questions:
Question
Source
Topic
Marks
1
Rug-A-Luscious
2020 Final
Pre-Engagement & CPC
25
2
2020 Vision
2021 AO1
Pre-Engagement & CPC
25
3
Beauty Supply
2021 RA04
Pre-Engagement & CPC
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QUESTION 1
25 MARKS
CASE STUDY
Mpho Ledwaba started Ledwaba Auditors Incorporated (hereafter Ledwaba Auditors) in 2010,
after she had completed her SAICA training contract at a large audit firm in Johannesburg. She
sees herself as an individual with high ethical and moral values, which she applies within the
business of her audit firm. Ledwaba Auditors have 8 engagement partners, 20 engagement
managers and approximately 60 SAICA audit trainees.
Ledwaba Auditors has been the auditors of Rug-A-Luscious (Pty) Ltd (hereafter RAL), a privately
owned and management company, since inception of the business of RAL in 2011. RAL provides
carpet cleaning services throughout the country to individual and corporate customers. Mpho and
the Chief Executive Officer of RAL, Thandi Mokoena have known each other since childhood. As
such, Mpho knows the business of RAL inside out, and she indicated that there is no need to
perform a client investigation before accepting the 2020 year-end engagement service.
Because RAL is using the financial statements to apply for a bank loan, Thandi indicated that the
audit must be completed as soon as possible in order to submit the loan application on
18 November 2020. In order to save some time and because this is a continuous audit
acceptance, Mpho and Thandi verbally agreed on the engagement and will at a later stage
complete the formal engagement letter. Mpho also indicated that Ledwaba Auditors is extremely
busy at this time of year, but she will get together a small audit team as soon as possible. RAL
has a 31 October year-end and is registered for Value Added Tax (VAT). In order to apply for the
bank loan, RAL must compile its financial statement in terms of International Financial Reporting
Standards (IFRS).
As Mpho and her team are conducting the audit, Thandi asked her to compile the financial
statements as well, which Mpho agreed to. Mpho indicated that she knows exactly what the bank
is looking for when assessing financial statements to grant financial assistance to corporate
clients. Based on her experience, she will advocate RAL’s financial statements in order for the
bank to grant the loan. The current accounting department of RAL has limited experience in the
application of IFRS to compile the financial statements.
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The shareholding and governing body (Board of Directors) of RAL are as follows:
Name
and Shareholding Director Description
Surname
Thandi
51%
Yes
Founder of RAL and the Chief Executive Officer
Mokoena
(CEO). The Board of Directors elected Thandi
as the Chair of the Board of Directors in 2019.
Sophia Dube
10%
Yes
Sophia is Thandi’s sister. She does not work at
RAL and is considered to be an independent
and non-executive director.
Magda
De
15%
No
Magda provided Thandi with a portion of the
Lange
capital to start RAL in 2011.
Lungile Latsi
12%
No
Lungile provided Thandi with a portion of the
capital to start RAL in 2011.
Albert Kotze
12%
Yes
Albert is an independent and non-executive
director. He does not work at RAL.
Dirk Nkomo
Yes
Dirk is the Chief Operations Officer (COO) of
RAL.
Sarah Naidoo
Yes
Sarah has a bachelor’s degree in Human
Resources (HR) and is responsible for HR
related matter of RAL.
Garry
Yes
Garry is Thandi’s father in-law and a Chartered
Mokoena
Accountant (SA). He holds the position as an
independent and non-executive director
because he is not involved in the day-to-day
activities of RAL. He does however provide
advice to the Board of Directors regarding
strategic matters on a regular basis due to his
in-depth industry knowledge.
The company does not have any established committees to assist the Board of Directors in
executing their duties. The board is aware that compliance with the KING IV Report on Corporate
Governance is not compulsory, because the company is a privately owned company and has a
Public Interest Score below the prerequisite that is required for the company to comply. Hence,
the board is not really adamant to comply, as they view voluntary compliance as a waste of
valuable resources.
On 1 September 2020, Thandi awarded a five-year contract to Sophia Dube, her sister. Sophia
owns Extreme-Cleaning Suppliers (Pty) Ltd (hereafter ECS), a company that imports high quality
cleaning detergents used in the business of RAL. Thandi holds 15% of the share capital in ECS
and is a non-executive director on the Board of ECS. Sophia guaranteed that RAL will have first
preference in the supply chain of ECS. Hence, there is no risk that RAL will not have cleaning
detergent on time to deliver their services. Because of this guarantee, RAL pays ECS
approximately 25% above the market price when compared to other suppliers delivering the same
service. Thandi and Sophia voted to award the contract to ECS in the Board meeting. When she
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was confronted by one of the directors about this after the meeting, her response was: “I started
RAL and will do as I please. In any case, if we left the meeting there would not have been a
quorum to approve the contract”.
The following is an extract of the management accounts prepared by management on 31 October:
Description
2020
2019
ZAR
ZAR
‘000
‘000
Income (Note 1)
10 120
13 500
Expenses (Note 2)
5 060
6 075
Bank and Cash (Note 3)
(500)
200
Inventory (Note 4)
150
80
Property, Plant and Equipment (Note 5)
1 100
1 800
Trade Receivables (Note 6)
800
500
Notes:
1 Income mostly decreased because of the restraint on trade imposed in the beginning of
2020 due to COVID-19 and the national lockdown. If sales increase by at least 20% before
year-end, management will receive performance bonuses.
2 The raw materials used to deliver the services of RAL increased due to the exchange rate
differences. Most cleaning materials are imported from the European Union (EU).
3 Bank decreased because RAL continued to pay all their staff full salaries during the national
lockdown period. In doing this, the Board of Directors view the company to be a good
corporate citizen.
4 Inventory increased due to consumable items (consumables) not being used during the
national lockdown in South Africa. These items have a fairly short shelve life.
5 RAL disposed of some of its equipment in order to improve its cash flow position. Most
equipment items are now leased because of the cost vs. benefit associated with owning
equipment items and leasing it.
6 The financial strain placed on the corporate customers of RAL led to the outstanding
debtors’ days for trade receivables deteriorating (i.e. debtor’s days increased when
compared to prior years).
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REQUIRED
Use only the information under the heading “CASE STUDY” (excluding the
information provided in the Workpapers), to discuss any concerns you have
regarding the acceptance of Rug-A-Luscious (Pty) Ltd, as a continuous audit client
of Ledwaba Auditors Incorporated.
(20)
Please Note:
•
If relevant, your response should include any breach of the South African
Institute of Chartered Accountants (SAICA) Code of Professional Conduct,
applicable to Mpho Ledwaba as a registered Chartered Accountant with the
SAICA.
•
As part of your response, you should include possible action(s) that the auditor
could take in order to address any of your concerns relevant to possible breach
of the SAICA Code of Professional Conduct i.e. possible safeguards that the
auditor could implement.
•
You should conclude on whether the audit should have been accepted or not.
STEP 1: CLIENT INVESTIGATION
It appears that a proper client investigation was not performed.
A client investigation should have been performed irrespective of it being a
continuous audit client.
Independence of the auditor:
The following are concerns applicable to the SAICA Code of Professional
Conduct applicable to Mpho and some of the actions underpinning the
engagement:
Long terms relationship with the audit client:
• The fact that Ledwaba Auditors has been the external engagement service
provider of RAL since inception (for a very long time i.e. 10 years), could
result in a familiarity threat.
• The fact that Mpho and Thandi are good friends (or their relationship) could
also result in a familiarity threat.
• Specific to Mpho’s independence, objectivity, integrity and professional
competence and due care of Mpho.
• This is because she might be inclined to “overlook” misstatements due to
her long term friendship with Thandi / friendship (too sympathetic toward
the business of RAL).
• A possible safeguard could be to rather appoint another engagement
partner to conduct the audit of RAL.
Compiling the Financial Statements:
• The fact that Mpho agreed to compile the financial statements could result
in a self-review threat.
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•
Specific to her independence, objectivity, integrity and professional
competence and due care.
• This is because the auditor will in essence audit her own work.
• A possible safeguard could be to rather request RAL to compile their own
financial statements.
• Providing these services is also in breach with the Companies Act.
Advocating the grant of the loan to RAL:
• The fact that Mpho will advocate to the bank, to grant the loan to RAL
represent an advocacy threat.
• Specific to her independence, objectivity, integrity and professional
competence and due care.
• This is because she will advocate the financial information of RAL to such
an extent that her objectivity might be compromised.
• It could also result in her not acting with the necessary level of professional
behaviour.
• That could discredit the CA profession.
• A possible safeguard could be for the auditor to not submit the financial
statements to the bank and not liaise with the bank in this regard at all
(facilitate the loan application) / she should note do this.
Integrity of the client:
The following factors should be considered with regards to the integrity of the
client:
• Non-compliance with the KING IV Report of Corporate Governance
regarding the composition of the governing body, although it is not required
from RAL to comply.
• Management’s attitude that complying with the KING IV is a waste of
valuable resources.
• No established committees to assist the Board of Directors in executing
their duties.
• Non-compliance with the Companies Act when granting the contract to
Thandi’s sister (non-compliance with Section 75 of the Companies Act).
• Thandi appears to have an attitude of “she will do as she pleases because
it is her business” / autocratic management style as she does not want to
be questioned in her decision making.
• Inexperience of accounting staff (department) / weak control environment.
Existing client: Changes in the entity:
• There doesn’t seem to be significant changes to the existing client.
Financial responsibility of the client:
Based on the financial information provided below, it seems that RAL could
have cash flow issues:
• RAL is applying for a bank loan.
• Income has decreased.
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• Expenses have increased (raw materials).
• Gross Profit percentage has decreased.
• Cash and cash equivalents have decreased.
• Outstanding debtor’s days have increased / deteriorated.
• Audit fees might not be paid by the client.
• Disposal of assets.
• Impact of COVID-19 (national lockdown).
Legal procedures:
• Not applicable / relevant as Ledwaba Auditors have been the auditors since
incorporation and there doesn’t seem to be a vacancy.
STEP 2:
DETERMINE THE SKILLS, COMPETENCE AND RESOURCE
REQUIREMENT FOR THE ENGAGEMENT:
Skills and competence requirements:
Ledwaba Incorporated has been the auditors since incorporation and should
have the applicable industry knowledge.
Resource requirements:
Mpho seems to have not considered the resource requirements as she will get
together a small audit team
Ledwaba Incorporated is extremely busy at this time of the year could indicate
that they don’t have the resources to appropriately complete the audit.
Using the work of an expert – not applicable
Realistic timeframe for completion of the engagement:
The audit deadline appears to be very tight / completed as soon as possible.
STEP 3: ESTABLISH THE TERMS OF THE ENGAGEMENT:
Mpho and Thandi verbally agreed on the engagement and will at a later stage
complete the formal engagement letter.
The engagement letter cannot be completed and signed at a later stage / there
must be an engagement letter / it cannot be verbal.
It must be completed and signed before the engagement commences.
This is because, it sets out the terms of the engagement.
As well as the roles and responsibilities of both the auditor and the
management of the client.
CONCLUSION:
Based on the concerns raised above, I would not have accepted / not accepted
the client.
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QUESTION 2
25 MARKS
CASE STUDY
Seleka Incorporated (hereafter Seleka Inc.) is a medium size audit firm with offices in
Johannesburg, Cape Town, Durban and Gqeberha. Seleka Inc. was formed by David Seleka in
the early 2000’s, after completing his articles at a large audit firm. David is a registered Chartered
Accountant and Auditor with both the South African Institute of Chartered Accountants (SAICA)
and the Independent Regulatory Board for Auditors (IRBA). Seleka Inc. has since grown and
consists of approximately 15 engagement partners, 35 engagement managers and 90 audit
trainees. Seleka Inc. is currently preparing its proposal for the audit of 2020 Vision (Pty) Ltd
(hereafter 2020 Vision), a chain of 12 Optometry stores across South Africa. Optometry is the
practice and profession of testing eyes for defects and deterioration in vision and the consequent
prescription of corrective optical lenses (i.e. glasses). Each store has a manager and an in-house
optometrist. The store manager is responsible for ordering the goods from the 2020 Vision main
warehouse in Pretoria. The company has a 31 December year-end. 2020 Vision has two main
income streams:
1.
2.
Rendering services (eye tests); and
Sale of goods (sale of glasses, contact lenses, etc.).
Nicole Hlope is the Chief Executive Officer (CEO) of 2020 Vision. She contacted David Seleka
and requested him to tender for the audit of 2020 Vision, after she dismissed the previous auditor.
She did not elaborate on why she dismissed the previous auditor, but indicated that David Seleka
is not allowed to contact them.
Since the age of three, Nicole and David have been friends. They also studied together at the
University of Johannesburg and completed their audit articles together at the same audit firm. In
addition to the audit services required, Nicole requested David to provide her with a quote for the
audit team to compile the year-end financial statements. This could place less strain on the
Financial Accountant of 2020 Vision. Seleka Inc. is auditing the financial statements and as such,
Nicole is of opinion that there is no harm in the audit team compiling these.
Vision 2020 is planning to convert their current accounting system (Bookkeeping 101) to a more
robust system i.e. “Xero”. Nicole also requested that the audit team consider to deal with the
system conversion, as they know exactly what controls should be in place and how the new
system will impact financial data contained in the financial statements.
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The current Governing Body (Board of Directors) of 2020 Vision are as follows:
Name and Surname
Director Description
Nicole Hlope
Yes
CEO. She is also the Chairperson of the Governing Body.
Sydney Nyeko
Yes
Chief Information Officer (CIO). He has a vast amount of
industry knowledge.
Braam Van Der Merwe
Yes
Braam is a Chartered Accountant. He is the Chief
Financial Officer (CFO) of the company.
Mervin Hlope
Yes
Mervin is Nicole’s husband. He is regarded as an
independent non-executive director. He also owns 15% of
the ordinary share capital in 2020 Vision.
Clara Landman
Yes
Clara was the previous CEO of 2020 Vision. She retired in
2019. Due to her in-depth industry knowledge, she took on
the role as an independent non-executive director on
1 January 2020.
The company does not have any established committees to assist the Governing Body in
executing their duties. The Board of Directors is aware that compliance with the KING IV Report
on Corporate Governance is not compulsory, because the company is privately owned and has
a Public Interest Score below the prerequisite that is required for the company to comply. As such,
the Governing Body is not convinced that compliance will add any value. They view voluntary
compliance as a waste of valuable resources.
The following documents are available:
Document
D1
Description of Document
Email regarding Research for Proposal
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Document D1
Email regarding Research for Proposal
To:
From:
Sent:
Subject:
Lindi Coetzee (Lindi.coetzee@seleka.co.za)
Lizette Joubert (Lizette.joubert@seleka.co.za)
Wednesday, 3 March 2021, 16:05
Re: Questions regarding Audit Proposal for 2020 Vision (Pty) Ltd
Hi Lindi
Please refer to my answers below in Italics:
1. Who will be the proposed team? As 2020 Vision has a complex IT system, will we
include an IT specialist?
>>
Engagement Partner
David Seleka
Engagement Manager
Lizette Joubert
rd
3 year trainee
Lindi Coetzee
nd
2 year trainee
Malibongwe Dayimani
st
1 year trainee
Jason Felix
Although David is included as the engagement partner, he will be on leave and
away with his family because this is our “quiet” time at the firm. I will therefore act
on his behalf.
No, we do not have budget to include an Information Technology (IT) specialist.
You can add one of the IT specialists in our firm on the list, but we will definitely
not include him / her in the audit team.
<<
2. For question 2 in the proposal, we have to state what other clients we have that is in a
similar business industry. What clients should I list there?
>>
We have various clients in the service and retail industry… but I can’t think of any
other Optometry clients. Just Google some practice names and add it – it will look
impressive!
<<
3. Just on an overall level, should we document our pre-engagement process, or can I
include our proposal to do the work and this email?
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>>
Remember, our proposal is a formal offer for the 2020 Vision audit. So all the
information is in here! Just add the proposal and this email to the file.
<<
Regards
Lizette Joubert
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REQUIRED:
Use only the information included under the heading “CASE STUDY” and
“DOCUMENT D1”, to discuss any concerns that David Seleka should have
considered, before accepting the 2020 Vision (Pty) Ltd year-end audit.
(25)
Please Note:
• Your response should include any considerations applicable to the South African
Institute of Chartered Accountants (SAICA) Code of Professional Conduct (CPC).
• As part of your response, you should include possible action(s) that the auditor could
take in order to address any of your concerns relevant to possible breach of the
SAICA Code of Professional Conduct i.e. possible safeguards that the auditor could
implement.
• You should conclude on whether the audit should have been accepted or not.
STEP 1: CLIENT INVESTIGATION
It appears that a proper client investigation was not performed.
Independence of the auditor:
The following are concerns applicable to the SAICA Code of Professional Conduct
applicable to David and some of the actions underpinning the engagement:
Self-interest / Familiarity Threat to Independence / Objectivity / Integrity:
• David and the engagement team might not be independent when performing
the audit.
• This is because David has a close relationship with the CEO of the company.
• He has been friends with Nicole since childhood, and they also studied together
and completed their training contracts at the same audit firm.
• The above could also affect David’s objectivity / independence / integrity when
conducting the audit.
• Due to a self-interest / familiarity threat.
• A possible safeguard could be that David should not be the engagement
partner on the audit.
Additional Services Requested:
• Nicole also requested the audit team to compile the financial statements.
• As well as to deal with the system conversion.
• This will give rise to a self-review threat.
• Specific to David and all other team member’s independence / integrity /
objectivity.
• This is because David and the engagement team will in essence audit their own
work.
• A possible safeguard could be that David should not agree to perform these
services.
Intimidation Threat:
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•
•
David’s independence / objectivity / integrity could also be impaired.
Because of his close relationship with Nicole as she could easily manipulate
him to provide audit outcomes that are favourable to the company.
• This creates an intimidation threat.
• A possible safeguard could be that David should not be engagement partner
on the audit.
Integrity of the client / management:
The following factors should be considered with regards to the integrity of the client:
• Nicole appears to have an autocratic management style as she makes
decisions without consultation.
• Dismissing the previous auditors without Seleka Inc. contacting the previous
auditor could be an indication of Nicole Hlope hiding something from the
auditor.
• Although not a requirement, non-compliance with the KING IV report of
Corporate Governance regarding the composition of the governing body.
• Management’s attitude that complying with the KING IV report of Corporate
Governance is “just a box to tick” and a waste of valuable resources
New client: Communication with the previous auditor:
• 2020 Vision did not allow Seleka Incorporated to contact the predecessor
auditors.
• The engagement should not be accepted unless the non-communication is
regarded as an exceptional circumstance.
• It does not seem that there are any exceptional circumstances as the change
in auditors are due to a dispute.
• This could also lead to a limitation of scope applicable to the audit.
• Furthermore, opening balances might not be verified.
Financial responsibility of the client:
• No indication that 2020 Vision will or will not be willing and able to pay the audit
fee.
Legal procedures:
• It seems that no vacancy exists in terms of the Companies Act no 71 of 2008.
• As the predecessor auditors were not removed at an AGM.
• It appears that the previous auditor was not notified of their removal.
• Auditors are appointed and removed at the AGM by the shareholders, and not
by the directors.
STEP 2:
DETERMINE THE SKILLS, COMPETENCE AND RESOURCE
REQUIREMENT FOR THE ENGAGEMENT:
Skills and Competence requirements:
Seleka Inc. does not have any other Optometry clients which could indicate that
the firm does not have the skills and competence to perform the audit of 2020
Vision.
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However, they have various clients in the service and retail industry which could
indicate they have the skills and competence requirements.
Resource requirements:
The audit will be conducted when it is Seleka Inc.’s “quiet time” so there should be
sufficient staff members available.
Although Seleka Inc. seems to have the relevant IT knowledge to perform the audit,
it appears that the services of an IT specialist will not be used.
Using the work of an expert – not applicable
Realistic timeframe for completion of the engagement – not applicable
STEP 3: ESTABLISH THE TERMS OF THE ENGAGEMENT:
The proposal (or the award of the proposal) doesn’t replace an engagement letter.
There must by an engagement letter completed and signed.
It must be completed and signed before the engagement commences.
This is because, it sets out the terms of the engagement.
As well as the roles and responsibilities of both the auditor and the management of
the client.
CONCLUSION:
The above factors are a strong indication that the audit should not be accepted.
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QUESTION 3
30 MARKS
CASE STUDY
Naidoo and Partners Incorporated (hereafter N & P) was established in 2015 by Seresh Naidoo.
Seresh is passionate about auditing and wishes to add value to all his clients by not only providing
excellent assurance services, but also non-audit engagements. N & P has two engagement
partners, three engagement managers and approximately 10 SAICA audit trainees. The office of
the company is in Midrand, Johannesburg. N & P’s clients are mainly family owned businesses.
Beauty Supply Warehouse (Pty) Ltd (hereafter BSW) is a beauty supply shop that was established
in Auckland Park, Johannesburg and has since experienced exponential growth.
The business was started by the current Chief Executive Officer (CEO), Erik Mouton. Erik owns
75% of the entity. The remainder of the ordinary share capital is held by his father who supplied
the capital to start BSW. To date the company has 60 shops in South Africa, five shops in Namibia,
three shops in Zambia and three shops in Swaziland. BSW has a 31 July year end.
BSW does not take out forward cover on exchange rate differences for the purchases of imported
inventory. Historically, BSW only sold beauty products at their physical shop premises. However,
sales decreased drastically during lockdown. As such, the company commenced in online trading
and delivering inventory directly to individual customers. This resulted in an increase in sales
again. The move to online sales was a crucial strategic decision as management’s bonuses are
dependent on sales. BSW is registered for Value Added Tax (VAT) and their financial statements
are compiled in terms of International Financial Reporting Standards (IFRS).
BSW uses a fully computerized ordering system, Key Account. Key Account is integrated and has
various functions. For example, Key Account Order is used when creating an order for a sales
transaction. BSW’s is highly dependent on their Information Technology (IT) infrastructure, as all
orders are captured online and interfaces with the inventory management application at the
company warehouse in Johannesburg. Commencing with online sales to individual customers,
substantially increased the company’s dependency on IT.
BSW dismissed the previous auditors telephonically, after a dispute applicable to tax returns. N
& P was appointed as the auditors of BSW on 14 July 2021. BSW did not allow N & P to contact
the previous auditor. The previous auditor refused to continue to prepare the company’s tax
returns on a contingent fee, as the previous auditor viewed that it was a threat to the auditor’s
independence. Erik Mouton, indicated that: “I am the boss – no one will tell me what they can and
can’t do!”
The preparation of the tax returns involved assisting BSW with drafting and compiling information
that is required to be submitted to the South African Revenue Service (SARS). BSW feels that
their accounting team is not sufficiently experienced. Hence, the company does not want
“surprises” during the audit. As such, BSW require its auditors to prepare the tax returns on their
behalf. Seresh believes in adding value to his clients, and therefore accepted the audit of BSW.
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He will also prepare the company’s tax returns based on a contingent fee structure. For every R1
000 that BSW can claim back from SARS, N & P will earn 1% as a service fee.
BSW is applying for a bank loan to improve cash flow and therefore requires that the Auditor’s
Report be signed by 31 July 2021. Although this represents a tight audit deadline and July is
N & P’s busiest time of the year, Seresh indicated that “BSW will constitute 45% of our audit fees”.
As such, “we will just have to make it work”. Due to the time pressure, the engagement letter will
be signed at the end of the audit to ensure there is no unnecessary administration that could
hinder the audit.
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REQUIRED:
With reference to only the information under the heading “CASE STUDY”, list and
explain what you would have expected Seresh Naidoo, to have considered prior to
accepting the appointment as the auditor of Beauty Supply Warehouse (Pty) Ltd.
Where applicable, your answer should include possible safeguards that should have
been implemented to ensure that Beauty Supply Warehouse (Pty) Ltd can be accepted
as an audit client.
(30)
Please Note:
• Where relevant, your response should include any breach of the South African
Institute of Chartered Accountants (SAICA) Code of Professional Conduct,
applicable to Seresh Naidoo as a registered Chartered Accountant (South Africa).
STEP 1: CLIENT INVESTIGATION
It appears that a proper client investigation was not performed.
Independence of the auditor
The following are concerns applicable to the SAICA Code of Professional Conduct
applicable to Seresh in some of the actions underpinning the engagement:
Preparing tax returns based on a contingent fee:
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The fact that Seresh agreed to complete the tax return does not create an
independence threat (section 604).
•
This is due to the fact that tax return preparation services are usually based
on historical information.
•
Furthermore, tax returns are subject to a review and approval process by
SARS.
•
The fact that the fee earned for the preparation of the tax return is based on
the outcome of the tax return.
•
That is regarded as a threat to the auditor’s independence (section 905).
•
This will result in a self-interest threat.
•
Specific to Seresh’s independence and objectivity
•
A possible safeguard can include to agree on a fixed fee for preparing the tax
return.
Relative size of the audit fee (section 905):
•
The fact that the audit fees for BSW will constitute a large portion of the total
fees (45% of the audit firm’s income) could result in a self-interest or
intimidation threat
•
Specific to Seresh’s independence, integrity, objectivity, professional
competence and due care, as well as professional behaviour
•
This is because the auditor might overlook issues in order to “keep” the
engagement.
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•
A possible safeguard could be to appoint an external independent
Engagement Quality Control Partner to review the file.
•
However, this should be discussed with the client as it will have an impact on
the audit fee.
Integrity of the client:
The following factors should have been considered with regards to the integrity of
the client:
•
Possible lack of integrity of management of BSW as they dismissed the
previous auditors due to a disagreement.
•
The CEO (Erik Mouton) has an autocratic management style as seen in the
dismissing the previous auditor.
New client: Communication with the previous auditor:
•
•
Management of BSW refuses communication with previous auditors.
The engagement should not be accepted unless the non-communication is
regarded as an exceptional circumstance.
•
It does not seem that there are any exceptional circumstances as the change
in auditors are due to a dispute.
•
This could also lead to a limitation of scope applicable to the audit.
•
Furthermore, opening balances might not be verified.
Financial responsibility of the client:
Based on the financial information provided below, it seems that BSW could have
cash flow issues and might not be able to pay the audit fee:
•
Income has decreased due to COVID-19.
•
BSW does not take out forward cover against foreign exchange exposures
for the import of inventory items.
•
BSW is applying for a bank loan.
Legal procedures:
•
It seems that no vacancy exists in terms of the Companies Act no 71 of 2008.
•
As the predecessor auditors were not removed at an AGM.
•
The company needs to give written notice of their intend to appoint another
auditor, and not telephonically.
•
Auditors are appointed and removed at the AGM by the shareholders, and
not by the directors.
•
Even though it appears that the previous auditor is aware of the removal, still
no vacancy exist
STEP 2: DETERMINE THE SKILLS, COMPETENCE AND RESOURCE
REQUIREMENT FOR THE ENGAGEMENT:
Skills and Competence requirements:
•
N & P’s clients are mainly family owned businesses and they could possibly
not have the necessary skills and competence to audit such a large entity (i.e.
BSW).
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•
BSW is regarded as fairly large because of the number of stores which the
company owns.
Resource requirements:
• BSW is a large client with stores throughout South Africa. N & P only has two
engagement partners and could potentially not have the resources to travel
throughout the country to conduct the audit.
• Specifically if stock counts have to be conducted to verify inventory held at
various stores.
Using the work of an expert – not applicable
Realistic timeframe for completion of the engagement:
• July is BSW’s busiest time of the year and they could potentially not have
sufficient resources to complete the audit by 31 July 2021.
STEP 3: ESTABLISH THE TERMS OF THE ENGAGEMENT:
The engagement letter will be signed at the end of the audit.
The engagement letter cannot be completed and signed at a later stage.
It must be completed and signed before the engagement commences.
This is because it sets out the terms of the engagement.
As well as the roles and responsibilities of both the auditor and the management of
the client.
CONCLUSION:
The above factors are a strong indication that the audit should not be accepted.
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