I'IFIITIIBIFI UI'IIVERSITY

OF SCIENCE Fll'ID TECHNOLOGY

MANAGEMENT SCIENCES

ACCOUNTING DEPARTMENT

QUALIFICATION : BACHELOR OF ACCOUNTING AND FINANCE

QUALIFICATION CODE: 23BACF LEVEL: 7

COURSE: AUDITING 3A COURSE CODE: AUD 3115

DATE: NOVEMBER 2017 SESSION: NOVEMBER 2017

DURATION: 3HRS MARKS: 100

FIRST OPPORTUNITY EXAMINATION QUESTION PAPER

EXAMINER(S) ANDREW SIMASIKU

MODERATOR:ISE DORGELOH

THIS QUESTION PAPER CONSISTS OF _3_ PAGES

(Excluding this front page)

INSTRUCTIONS

1. Answer ALL the questions and in blue or black ink

2. Start each question on a new page in your answer booklet & show all your workings-3. Questions relating to this examination may be raised in the initial 30 minutes after the start of the

paper. Thereafter, candidates must use their initiative to deal with any perceived error or ambiguities &

any assumption made by the candidate should be clearly stated

PERMISSIBLE MATERIALS

1. Examination paper. No study materials are allowed in the examination

room

2. Examination script. The examination script should be handed to the

invigilator at the end of the examination session

1

Question One (30 marks)

External auditors are required to obtain understanding ofan audit client as part ofclient screening

and assessment of risk of material misstatements.

Required:

a) Briefly explain why it is necessary for an auditor to have an understanding of an entity

and its environment. (2 marks)

b) ISA 210. Agreeing the terms ofaudit engagements lists a series ofmatters which may be

referred to in an engagement letter.

Required:

Discuss at least 12 (Twelve) matters that could be covered in an engagement letter (25 marks)

c) Outline the procedures to be followed by the new auditor before accepting an audit

engagement (3 marks)

Question Two (20 marks)

(a)Explain the concept of objectivity, with reference to

i. External auditors

ii. Internal auditors who are also members of SAICA (8 marks)

(b) Scenario 1.

Shoprite Checkers is an audit client ofPWC, a firm ofChartered Accountants. The firm has had

the audit of Shoprite Checkers Ltd for 17 years and the fee represents 7% of the firm’s income.

Shoprite is considering a major new project and has asked the firm if it would be happy to

undertake some one—off consultancy work for the firm. It is possible that the fee income for this

contract would represent 10% of that year’s income for PWC. The new business services partner,

2

who heads up a new division of the firm, is keen to take on the work, as this would represent his

best contract yet.

Scenario 2

Peter works in the purchasing department of Katima Manufacturing Company. He has been

instrumental in setting up control systems in the purchasing department as part of the recent risk

management exercise. He has a poor relationship with his immediate supervisor, the purchasing

director.

Katima manufacturing has just advertised the position of trainee internal auditor. Peter is

interested in the work that internal audit do, having liaised substantially with the department

during the recent control exercise. No formal accountancy qualifications are required for the post

because the successful candidate will be put through accountancy training. Peter has had a chat

with the head of internal audit concerning the position and is seriously considering making an

application.

Required:

Discuss the threats and safeguards to objectivity that could be implemented in the two situations

given above (12 marks)

b)

Question Three (25 marks)

(a) In order for auditors to operate effectively and to provide an opinion on an entity’s financial

statements, they are given certain rights.

Required:State FIVE rights of an auditor, excluding those related to resignation and removal (5 marks)

(b) ISA 315 Identifying and Assessing the Risks of Material Misstatement through

Understanding the Entity and Its Environment requires auditors to obtain an understanding of

control activities relevant to the audit.

Control activities are the policies and procedures that help ensure that management directives are

carried out; and which are designed to prevent and detect fraud and error occurring. An exampleof a control activity is the maintenance of a control account.

Required:

(c) Apart from maintenance of a control account, explain SIX control activities a company may

undertake to prevent and detect fraud and error. (6 marks)

((1) Describe SIX limitations of external audits. (6 marks)

(e) Contrast the role of internal and External auditors (8 marks)

Question Four (25 marks)

In terms of ISA 315 - Identifi/ing and assessing the risk of material misstatements through

understanding the entity and its environment, internal control has five components, one ofwhich

is the entity’s risk assessment process. The suggestion here is that, to adequately control the

business, the directors (management) should assess the risks which the business faces, from

minor risks to major risks, and respond to the risks by putting internal control procedures/mechanisms/ activities in place. In this manner the entire internal control system will be

developed.

You are required to:

a) Define business process (3 marks)

b) Briefly explain the term “control environment” (3 marks)

c) List the other THREE components of internal control (other than control activities and

the control environment) (3 marks)

d) List and briefly explain the FOUR elements of control activities (9 marks)

e) Identify, with brief explanations, SIX inherent limitations of internal control

(7 marks)

End of Paper4