Auditing

Background information 35 MARKS You are a first-year trainee auditor at Cooper, Lang and Diale Auditors (CLD), a medium-sized auditing firm founded in 2005. You have been assigned to the audit of a newly acquired client, Joyce Clothing Ltd (JC) for the year ended 31 March 2023. JC has been listed on the Johannesburg Stock Exchange (JSE) for 20 years and its main business is the designing and production of clothes for women. CLD was appointed by the financial director as the auditors of JC after the financial year-end following the resignation of the previous auditors. The previous auditors filed a notice of their resignation on 15 January 2023. The financial director did not discuss the appointment of the new auditors with the rest of the board of JC. CLD was the only registered auditor being considered to replace the previous auditors. Identifying and assessing the risk of material misstatement In terms of International Standard on Auditing (ISA) 315, the auditor is required to conduct risk assessment procedures to gather information about the client so that the identification and assessment of risks of material misstatement at the financial statement and assertion level can take place. As part of your preliminary engagement activities, you identified the following risk indicators at JC: a) The Covid-19 pandemic led to a decrease in the demand for women's clothes compared to previous years due to many people working from home. b) A textile tax was implemented, and this resulted in complex accounting for purchases of material from other countries, which the current accounting system did not take into account and the accounting records had to be corrected with a journal entry. c) The audit committee of JC requested that the audit report be finalised within two months from the date of appointment. d) JC implemented a new accounting system during the financial year and therefore not all the internal controls were operating effectively during the financial year. Assertions, audit procedures and audit evidence In terms of ISA 330 , the auditor shall design and implement overall responses to assessed risks of material misstatement at the financial statement level and should design and perform further audit procedures to respond to assessed risks relating to the assertions. The provisional working paper for revenue: 2.2 Based on the identified risks (a) to (d), the inherent risk for the engagement was classified as high. Explain what you anticipate the control risk for the engagement should be classified as based on the information provided relating to the internal controls. Q3. With reference to the information under "assertions, audit procedures and audit evidence": (3) 3.1 Evaluate with reasons if the assertions relating to inventory, documented in the working paper (1 to 3 ), are correct or not. (71/2) Q4. With reference to the "SAICA Code of Professional Conduct", information pertaining to other CLD clients in matters 1 and 2: 4.1 Identify one type of threat (there could be more than one) for each of the matters 1 and 2 . (3) 4.2 Explain why it is a threat in terms of the Code of Conduct. 4.3 Identify the fundamental principles affected in terms of the Code of Conduct for each of the matters 1 and 2 . 2.2 Based on the identified risks (a) to (d), the inherent risk for the engagement was classified as high. Explain what you anticipate the control risk for the engagement should be classified as based on the information provided relating to the internal controls. Q3. With reference to the information under "assertions, audit procedures and audit evidence": (3) 3.1 Evaluate with reasons if the assertions relating to inventory, documented in the working paper (1 to 3 ), are correct or not. (721) Q4. With reference to the "SAICA Code of Professional Conduct", information pertaining to other CLD clients in matters 1 and 2 : 4.1 Identify one type of threat (there could be more than one) for each of the matters 1 and 2 . (3) 4.2 Explain why it is a threat in terms of the Code of Conduct. 4.3 Identify the fundamental principles affected in terms of the Code of Conduct (3) for each of the matters 1 and 2 . Matters pertaining to other CLD clients SAICA Code of Professional Conduct The following separate matters pertaining to other clients of CLD were brought to the attention of the respective engagement partners of CLD: Matter 1 ABC Stores, an audit client of CLD, has not paid its audit fees for the past three years. Matter 2 Tshidi Sibiya is a newly appointed partner at CLD. His wife, Danielle Sibiya, owns 60% of Riddle (Pty) Ltd. Riddle (Pty) Ltd owns 75% of the shares in Joker (Pty) Ltd and Joker (Pty) Ltd is one of Riddle (Pty) Ltd's major investments. Joker (Pty) Ltd is an audit client of CLD. REQUIRED MARKS Q1. With reference to the "background" information: 1.1 State whether the appointment of CLD as auditors of JC complies with Section 91 of the Companies Act. Describe in your answer the procedures that should have been followed to ensure compliance with the Companies Act. (5) (121) (121) 1.2 Explain why JC needs to have their financial statements audited. Q2. With reference to the information under "identifying and assessing the risk of material misstatement": 2.1 Provide a reason why each identified risk indicator in (a) to (d) can be regarded to increase the risk of material misstatement. (6) Matters pertaining to other CLD clients SAICA Code of Professional Conduct The following separate matters pertaining to other clients of CLD were brought to the attention of the respective engagement partners of CLD: Matter 1 ABC Stores, an audit client of CLD, has not paid its audit fees for the past three years. Matter 2 Tshidi Sibiya is a newly appointed partner at CLD. His wife, Danielle Sibiya, owns 60% of Riddle (Pty) Ltd. Riddle (Pty) Ltd owns 75\% of the shares in Joker (Pty) Ltd and Joker (Pty) Ltd is one of Riddle (Pty) Ltd's major investments. Joker (Pty) Ltd is an audit client of CLD. REQUIRED MARKS Q1. With reference to the "background" information: 1.1 State whether the appointment of CLD as auditors of JC complies with Section 91 of the Companies Act. Describe in your answer the procedures that should have been followed to ensure compliance with the Companies (5) Act. 1.2 Explain why JC needs to have their financial statements audited. (121/2) Q2. With reference to the information under "identifying and assessing the risk of material misstatement": 2.1 Provide a reason why each identified risk indicator in (a) to (d) can be regarded to increase the risk of material misstatement. (6 TECnO Background information 35 MARKS You are a first-year trainee auditor at Cooper, Lang and Diale Auditors (CLD), a medium-sized auditing firm founded in 2005. You have been assigned to the audit of a newly acquired client, Joyce Clothing Ltd (JC) for the year ended 31 March 2023. JC has been listed on the Johannesburg Stock Exchange (JSE) for 20 years and its main business is the designing and production of clothes for women. CLD was appointed by the financial director as the auditors of JC after the financial year-end following the resignation of the previous auditors. The previous auditors filed a notice of their resignation on 15 January 2023. The financial director did not discuss the appointment of the new auditors with the rest of the board of JC. CLD was the only registered auditor being considered to replace the previous auditors. Identifying and assessing the risk of material misstatement In terms of International Standard on Auditing (ISA) 315, the auditor is required to conduct risk assessment procedures to gather information about the client so that the identification and assessment of risks of material misstatement at the financial statement and assertion level can take place. As part of your preliminary engagement activities, you identified the following risk indicators at JC: a) The Covid-19 pandemic led to a decrease in the demand for women's clothes compared to previous years due to many people working from home. b) A textile tax was implemented, and this resulted in complex accounting for purchases of material from other countries, which the current accounting system did not take into account and the accounting records had to be corrected with a journal entry. c) The audit committee of JC requested that the audit report be finalised within two months from the date of appointment. d) JC implemented a new accounting system during the financial year and therefore not all the internal controls were operating effectively during the financial year. Assertions, audit procedures and audit evidence In terms of ISA 330 , the auditor shall design and implement overall responses to assessed risks of material misstatement at the financial statement level and should design and perform further audit procedures to respond to assessed risks relating to the assertions. The provisional working paper for revenue: 2.2 Based on the identified risks (a) to (d), the inherent risk for the engagement was classified as high. Explain what you anticipate the control risk for the engagement should be classified as based on the information provided relating to the internal controls. Q3. With reference to the information under "assertions, audit procedures and audit evidence": (3) 3.1 Evaluate with reasons if the assertions relating to inventory, documented in the working paper (1 to 3 ), are correct or not. (71/2) Q4. With reference to the "SAICA Code of Professional Conduct", information pertaining to other CLD clients in matters 1 and 2: 4.1 Identify one type of threat (there could be more than one) for each of the matters 1 and 2 . (3) 4.2 Explain why it is a threat in terms of the Code of Conduct. 4.3 Identify the fundamental principles affected in terms of the Code of Conduct for each of the matters 1 and 2 . 2.2 Based on the identified risks (a) to (d), the inherent risk for the engagement was classified as high. Explain what you anticipate the control risk for the engagement should be classified as based on the information provided relating to the internal controls. Q3. With reference to the information under "assertions, audit procedures and audit evidence": (3) 3.1 Evaluate with reasons if the assertions relating to inventory, documented in the working paper (1 to 3 ), are correct or not. (721) Q4. With reference to the "SAICA Code of Professional Conduct", information pertaining to other CLD clients in matters 1 and 2 : 4.1 Identify one type of threat (there could be more than one) for each of the matters 1 and 2 . (3) 4.2 Explain why it is a threat in terms of the Code of Conduct. 4.3 Identify the fundamental principles affected in terms of the Code of Conduct (3) for each of the matters 1 and 2 . Matters pertaining to other CLD clients SAICA Code of Professional Conduct The following separate matters pertaining to other clients of CLD were brought to the attention of the respective engagement partners of CLD: Matter 1 ABC Stores, an audit client of CLD, has not paid its audit fees for the past three years. Matter 2 Tshidi Sibiya is a newly appointed partner at CLD. His wife, Danielle Sibiya, owns 60% of Riddle (Pty) Ltd. Riddle (Pty) Ltd owns 75% of the shares in Joker (Pty) Ltd and Joker (Pty) Ltd is one of Riddle (Pty) Ltd's major investments. Joker (Pty) Ltd is an audit client of CLD. REQUIRED MARKS Q1. With reference to the "background" information: 1.1 State whether the appointment of CLD as auditors of JC complies with Section 91 of the Companies Act. Describe in your answer the procedures that should have been followed to ensure compliance with the Companies Act. (5) (121) (121) 1.2 Explain why JC needs to have their financial statements audited. Q2. With reference to the information under "identifying and assessing the risk of material misstatement": 2.1 Provide a reason why each identified risk indicator in (a) to (d) can be regarded to increase the risk of material misstatement. (6) Matters pertaining to other CLD clients SAICA Code of Professional Conduct The following separate matters pertaining to other clients of CLD were brought to the attention of the respective engagement partners of CLD: Matter 1 ABC Stores, an audit client of CLD, has not paid its audit fees for the past three years. Matter 2 Tshidi Sibiya is a newly appointed partner at CLD. His wife, Danielle Sibiya, owns 60% of Riddle (Pty) Ltd. Riddle (Pty) Ltd owns 75\% of the shares in Joker (Pty) Ltd and Joker (Pty) Ltd is one of Riddle (Pty) Ltd's major investments. Joker (Pty) Ltd is an audit client of CLD. REQUIRED MARKS Q1. With reference to the "background" information: 1.1 State whether the appointment of CLD as auditors of JC complies with Section 91 of the Companies Act. Describe in your answer the procedures that should have been followed to ensure compliance with the Companies (5) Act. 1.2 Explain why JC needs to have their financial statements audited. (121/2) Q2. With reference to the information under "identifying and assessing the risk of material misstatement": 2.1 Provide a reason why each identified risk indicator in (a) to (d) can be regarded to increase the risk of material misstatement. (6 TECnO