AUE302Q/101/3/2012

Tutorial Letter 101/3/2012

Legal aspects concerning audit practice

AUE302Q Semesters 1 and 2

Department of Auditing
This tutorial letter contains important information about your module.

Bar code

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CONTENTS
1 2 3 3.1 3.2 3.3 4 4.1 4.2 5 6 7 8 8.1 8.2 8.2.1 8.2.2 8.3 8.4 8.4.1 8.4.2 8.4.3 8.4.4 9 10 11 INTRODUCTION AND WELCOME ................................................................................................ 3 PURPOSE OF AND OUTCOMES FOR THE MODULE ................................................................ 4 LECTURER AND CONTACT DETAILS......................................................................................... 4 Lecturers ......................................................................................................................................... 4 Department ..................................................................................................................................... 5 University ........................................................................................................................................ 5 MODULE RELATED RESOURCES............................................................................................... 6 Prescribed books ............................................................................................................................ 6 Recommended books ..................................................................................................................... 6 STUDENT SUPPORT SERVICES FOR THE MODULE ................................................................ 7 MODULE SPECIFIC STUDY PLAN ............................................................................................... 7 MODULE PRACTICAL WORK AND WORK INTEGRATED LEARNING ..................................... 8 ASSESSMENT ............................................................................................................................... 8 Assessment plan ............................................................................................................................ 8 General assignment numbers ......................................................................................................... 9 Unique assignment numbers .......................................................................................................... 9 Due dates of assignments .............................................................................................................. 9 Submission of assignments ............................................................................................................ 9 Assignments ................................................................................................................................. 11 Semester 1: Compulsory assignment 01 .................................................................................... 11 Semester 1: Compulsory assignment 02 .................................................................................... 19 Semester 2: Compulsory assignment 01 .................................................................................... 23 Semester 2: Compulsory assignment 02 .................................................................................... 31 EXAMINATIONS .......................................................................................................................... 35 ADDITIONAL ASSESSMENT ...................................................................................................... 36 FREQUENTLY ASKED QUESTIONS .......................................................................................... 40

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INTRODUCTION AND WELCOME

It gives us great pleasure to welcome you as an AUE302Q student in the Department of Auditing. We, as lecturers, are at your disposal and will gladly assist you in your studies. Be assured of our willingness to support you with advice during your study programme. You will receive a number of tutorial letters during the semester. A tutorial letter is one way of communicating with you about teaching, learning and assessment. Please read Tutorial Letter 301 in combination with this tutorial letter (Tutorial Letter 101) as it gives you an idea of generally important information when studying within our College. Right from the start we would like to point out that you must read all the tutorial letters you receive during the semester immediately and carefully, as they always contain important and, sometimes, urgent information. This tutorial letter contains important information that will assist you in your studies. Please read it carefully and keep it at hand when working through the study material, preparing the assignments, preparing for the examination and addressing questions to your lecturers. We trust that you will benefit from everything that this module has to offer. Study material You will be supplied with the following tutorial material for this module by the Despatch Department: Tutorial Letters Study guide

All tutorial material will be mailed to you upon registration. Tutorial matter that is not available when you register will be posted to you as soon as possible, but is also available on myUnisa. To contact the Department of Despatch regarding tutorial material that you have not received, use only the telephone numbers indicated in the booklet entitled my Studies @ Unisa (which you received with your tutorial material). If you have access to the Internet, you can access the tutorial letters for the modules for which you are registered on the Universitys online campus, myUnisa, at http://my.unisa.ac.za. You can also use myUnisa to confirm that you have received all the tutorial letters. Note: Some of this tutorial matter may not be available when you register. Tutorial matter that is not available when you register will be posted to you as soon as possible. When you register, you will also receive an inventory letter containing information about your tutorial matter. See also the booklet entitled: my Studies @ Unisa (which you received with your tutorial matter).

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PURPOSE OF AND OUTCOMES FOR THE MODULE

For the purpose and outcomes of this module we refer you to the study guide for this module. In Topic 1 you will find an overview of the module and we also explain our teaching strategy and how the study guide should be used to guide you through the study material. During the semester you should: work through your study material, make summaries and complete the do activities. answer the questions contained in Tutorial Letter 102 and compare your answers with the suggested solutions contained in Tutorial Letter 103. complete and submit assignment 01 (compulsory assignment for examination admission) and assignment 02 before the due dates and complete the self evaluation simulated examination paper. All the compulsory assignments and the self evaluation simulated examination paper will be included in this tutorial letter. prepare yourself for the examination (for examination preparation and technique refer to the my Studies @ Unisa brochure and Tutorial Letter 301).

All students will receive the solutions to the assignments, even if they do not submit their assignments.

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3.1

LECTURER AND CONTACT DETAILS

Lecturers Lecturers for AUE302Q The lecturer responsible for this module, and to whom you should direct your enquiries, is: Lecturer: Mr FN van Niekerk E-mail: aue302q@unisa.ac.za Course co-ordinator: Mr K Joubert E-mail: aue302q@unisa.ac.za PLEASE NOTE: Personal appointments should be arranged beforehand. Always have your student number and module code ready when you contact the university!!!

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3.2

Department Department of Auditing: If you wish to write to us, letters should be addressed to: The Module leader: AUE1601 Department of Auditing PO Box 392 UNISA 0003 Secretary: Tel: 012 429 4707/ +27 12 429 4707 Departmental Webpage: http://www.unisa.ac.za/Default.asp?Cmd=ViewContent&ContentID=194 The Department of Auditing is situated on the 2nd level of the AJH van der Walt building on the main campus in Pretoria and our telephone number is +27 12 429 4707. Professor JM van Staden is the chair of the department.

3.3

University If you need to contact Unisa about matters not related to the content of this module, please consult the brochure my Studies @ Unisa, which you should have received with your study material. In this document you will find the contact details of various administrative departments. If you did not receive this document and have access to the Internet, you can find it on myUnisa under the Resources option. Remember to always have your student number ready when making an enquiry. Please ensure that you contact the correct section or department for each enquiry as this will result in a speedy resolution of the enquiry. The contact details are: Short message service (SMS) number: Fax number (RSA only): Fax number (international): E-mail address: Other means of contacting the university are: Physical address: University of South Africa Preller Street Muckleneuk Pretoria City of Tshwane 32695 only for students in South Africa. 012 429 4150 +27 12 429 4150 study-info@unisa.ac.za

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Postal address:

University of South Africa PO Box 392 UNISA 0003 http://my.unisa.ac.za http://www.unisa.ac.za

Online address: Unisa website:

E-mail addresses: Assignments assign@unisa.ac.za Examinations exams@unisa.ac.za Aegrotat and special examinations: aegrotats@unisa.ac.za

MODULE RELATED RESOURCES

The resources at your disposal are classified into two categories.

4.1

Prescribed books The prescribed books for this module: Jackson, R.D.C. & Stent, W.J 2011. Auditing notes for South African Students (8th edition) Durban: LexisNexis South African Institute of Chartered Accountants (SAICA). SAICA Handbook 2011/2012. Durban: LexisNexis. * Also available on the IRBA website - http://www.irba.co.za The South African Institute of Chartered Accountants (SAICA). SAICA Legislation Handbook 2011/2012. Durban: LexisNexis OR The South African Institute of Chartered Accountants (SAICA). SAIGR Wetgewing Handboek 2011/2012. Durban: LexisNexis Gowar, H. & Jackson, R.D.C. Graded Questions on Auditing 2012. Durban: LexisNexis

Please consult the list of official booksellers and their addresses listed in the my Studies @ Unisa brochure. Prescribed books are available at the universitys official booksellers. If you have any difficulties in obtaining books from these bookshops, please contact the Prescribed Book Section as soon as possible at telephone number +27 12 429 4152 or e-mail address vospresc@unisa.ac.za. Information on the use of and the sources of information available in the Unisa Library are detailed in the my Studies @ Unisa brochure. 4.2 Recommended books There are no recommended books for this module.

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STUDENT SUPPORT SERVICES FOR THE MODULE

For student support services you are referred to the my Studies @ Unisa brochure. UNISA LIBRARY LOGIN You will be required to provide your login details, i.e. your student number and your myUnisa password, in order to access the librarys online resources and services. This will enable you to view or print your electronic course material request library material view and renew your library material use the librarys e-resources

Requesting books from the library Students are expected to purchase their own copies of prescribed books listed in Tutorial Letter 101. A limited number of copies are housed in the Unisa Libraries, subject to each branch librarys lending regulations. Problems experienced in obtaining copies from booksellers should be directed to the Prescribed Book Section at e-mail vospresc@unisa.ac.za or telephone +27 12 429-4152. Electronic requests The preferred way of requesting recommended or additional books is online via the librarys catalogue. Go to http://oasis.unisa.ac.za, or via myUnisa, go to http://my.unisa.ac.za > Login > Library > Library catalogue, or for mobile access (AirPAC), go to http://oasis.unisa.ac.za/airpac. Telephonic book requests This can be done on +27 (0)12 429-3133. Please supply the reservation order number (RON).

MODULE SPECIFIC STUDY PLAN

We provide you in the study guide with a table indicating the minimum time required to master the various topics of this module. Plan your studies accordingly to spread your studies evenly throughout the semester. Also use the my Studies @ Unisa brochure for general time management and planning.

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MODULE PRACTICAL WORK AND WORK INTEGRATED LEARNING

There is no practical work for this module.

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8.1

ASSESSMENT
Assessment plan Assignments Assignments are seen as part of the learning material for this module. As you do the assignments, study the reading texts, consult other resources, discuss the work with fellow students or tutors or do research, you are actively engaged in learning. You are required to submit the compulsory assignment 01 before the due date to obtain admission to the examination. Admission will be obtained by submitting compulsory assignment 01 and not by the marks you obtain for it. The marks you obtain for assignment 01 and assignment 02 will contribute towards your year mark. Commentaries and feedback on assignments The solution to assignment 01 will be provided to you in Tutorial Letter 201 which will only be distributed after the due date of assignment 01. The solutions to assignment 02 will be provided to you in Tutorial Letter 202 which will only be distributed after the due date of assignment 02. As soon as you have received the commentaries, please check your answers. The assignments and the commentaries on these assignments constitute an important part of your learning and should help you to be better prepared for the next assignment and the examination. The solution and commentary on the self evaluation examination paper will be included in Tutorial Letter 104 which will enable you to mark your assignment. Year mark The marks that you obtained for assignment 01 and assignment 02 will contribute towards your year mark for the module. Your year mark contributes 10% towards your final examination mark. A student requires a final mark of 50% to pass a module. The final mark is calculated as follows: 5% x mark obtained for compulsory assignment 01 plus 5% x mark obtained for compulsory assignment 02 plus 90% x mark obtained in the examination (sub-minimum of 40%)

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The sub-minimum of 40% implies that if you obtain a mark of less than 40% in the examination, your year mark will not be taken into account. Please ensure that your assignment 01 and assignment 02 reach the University before the due date late submission of these assignments will result in you not receiving marks that count towards your year mark. THUS: TO GET ADMISSION TO THE EXAMINATION, YOU MUST SUBMIT ASSIGNMENT 01 BEFORE OR ON THE DUE DATE YOUR MARKS FOR BOTH ASSIGNMENTS 01 AND 02 WILL BE USED TO DETERMINE YOUR YEAR MARK 8.2 General assignment numbers Assignments are numbered consecutively per module, starting from 01. numerals are used, for example: Assignments 01, 02, 03, and so on. 8.2.1 Unique assignment numbers In addition to the general assignment number (eg 05), each assignment has its own unique assignment number (eg 102717). This number must be written on the mark reading sheet or assignment cover page in the designated area. 8.2.2 Due dates of assignments Assignment FIRST SEMESTER Due date if you are registered for the first semester 8 March 2012 Unique number: 803348 4 April 2012 Unique number: 671438 SECOND SEMESTER Due date if you are registered for the second semester 30 August 2012 Unique number: 236432 27 September 2012 Unique number: 823233 Only Arabic

01 (Compulsory) 02 (Compulsory)

8.3

Submission of assignments You may submit written assignments and assignments done on mark reading sheets either by post or electronically via myUnisa. Assignments may not be submitted by fax or e-mail. For detailed information and requirements as far as assignments are concerned, see the brochure, my Studies @ Unisa, that you received with your study material.

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To submit an assignment via myUnisa: Go to myUnisa. Log in with your student number and password. Select the module from the orange bar. Click on assignments in the left-hand menu. Click on the assignment number you want to submit. Follow the instructions on the screen.

Please ensure that your assignment 01 reaches the University before the due date late submission of assignment 01 will result in you not being admitted to the examination. NB: You must submit assignment 01 in order to be admitted to the examination while both assignments 01 and 02 must be submitted for purposes of determining your year mark. No extension of the due dates can be given by the lecturers for these assignments. General remarks For enquiries about assignments (eg whether or not the University has received your assignment or the date on which an assignment was returned to you) please refer to the contact information in 3.1 of this tutorial letter. You may also find this information on myUnisa. To go to the myUnisa website, start at the main Unisa website, http://www.unisa.ac.za, and then click on the login to myUnisa link under the myUnisa heading on the screen. This should take you to the myUnisa website. You can also go there directly by typing in http://my.unisa.ac.za. Assignments should be addressed to: The Registrar PO Box 392 UNISA 0003 Completion of assignment cover NB: Make sure that you read the instructions on the assignment cover carefully before completing it. Make sure that you complete the cover correctly. Please make sure that the following information appears on the COVER of your assignment. Name. Address (and postal code). Student number. Subject code (e.g. AUE302Q). Correct assignment number. Correct unique assignment number (applicable only to assignments 01 and 02). Label with bar code.

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8.4

Assignments

8.4.1 Semester 1: Compulsory assignment 01 Instructions: (1) (2) (3) (4) Write the correct unique assignment number in the six blocks provided on the mark reading sheet. Write the ordinary assignment number (01) in the two blocks provided on the mark reading sheet. Consult my Studies @ Unisa for an example of how a computer mark-reading sheet should be filled in. If you do not follow these instructions, the computer will reject your answer sheet and it will be returned to you unmarked. Also consult: my Studies @ Unisa when you answer multiple-choice assignments.

Special instruction regarding the answering of this assignment (1) (2) This assignment consists of 20 multiple choice questions. This assignment covers topics 1-8 of the study guide and topics 9-11 included in Tutorial letter 104/3/2012.

ASSIGNMENT 01: MULTIPLE-CHOICE QUESTIONS (compulsory)

UNIQUE ASSIGNMENT NUMBER FOR THE FIRST SEMESTER: 803348 DATE OF SUBMISSION First semester: 8 March 2012

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QUESTION 1 REQUIRED

30 marks

Select for each question only ONE alternative that you consider to be the most correct and then mark on myUnisa or on the mark reading sheet the digit that corresponds to the digit of the alternative which you have selected as your answer. Answer the sub-sections of this question in numerical sequence, for example, as follow: 1. 2. 1 3

(1 marks per question) 1. Which one of the following statements is not a risk factor relating to misstatements arising from fraudulent financial reporting in terms of ISA 240? (Topic 3) 1 2 3 4 Financial stability or profitability is threatened by entity operating conditions, such as new accounting, statutory, or regulatory requirements. Pressure on management to meet the expectations of third parties due to adverse effects of reporting poor financial results on significant pending transactions. The practice by management of not committing to analysts, creditors and other third parties to achieve aggressive forecasts. Internal control components are deficient as a result of accounting and information systems that are not effective, including situations involving significant deficiencies in internal control.

2.

Which one of the following is not an example of possible audit procedures to address the assessed risks of material misstatements due to fraud resulting from both fraudulent financial reporting and misappropriation of assets in terms of the ISA 240? (Topic 3) 1 2 Observing inventory counts at certain locations on an unannounced basis or conducting inventory counts at all locations on the same date. Where revenue transactions are electronically initiated, processed and recorded, testing controls to determine whether they provide assurance that recorded revenue transactions occurred and are properly recorded. Counting cash or securities during the interim audit. Confirming directly with customers the account activity (including credit memo and sales return activity) for the period under audit.

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3.

Which one of the following is not an agreed term to be included in the engagement letter in terms with the International Standards on Auditing? (Topic 3) 1 2 3 4 The objective and scope of the audit of financial statements. That the auditor is not responsible for obtaining reasonable assurance that the financial statements taken as a whole are free from material misstatement. The responsibilities of management. Auditors are required in terms of section 44 of the Auditing Profession Act to obtain all information, vouchers and other documents which in the auditors opinion were necessary for the proper performance of the auditors duties.

4.

Which one of the following statements is not in line with the requirements of ISA 240? (Topic 3) 1 Where there is a misstatement in the financial statements resulting from fraud, and an auditor encounters exceptional circumstances that bring into question his ability to continue performing the audit, he shall, inter alia, consider whether it is appropriate to withdraw from the engagement where withdrawal is possible under applicable law or regulation. Where an auditor has assessed the risks of management override of controls, he need not design and perform audit procedures to test the appropriateness of journal entries recorded in the general ledger and other adjustments made in the preparation of the financial statements if the assessment indicated a low level of risk. Where an auditor has identified or suspects that fraud may exist at a client, he shall determine whether there is a responsibility to report the occurrence or suspicion to regulatory and enforcement authorities outside the entity. Where an auditor has identified that fraud may exist at a client, he shall communicate these matters on a timely basis to the appropriate level of management in order to inform those with primary responsibility for the prevention and detection of fraud of matters relevant to their responsibilities.

5.

Which one of the following objectives of the auditor relating to fraud in financial statements is inapplicable in terms of ISA 240? (Topic 3) 1 2 3 To identify and assess the risks of material misstatement of the financial statements due to fraud. To respond appropriately to fraud or suspected fraud identified during the audit. To prepare audit documentation on a timely basis.

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4 6.

To obtain sufficient appropriate audit evidence regarding the identified risks of material misstatement due to fraud, through designing and implementing appropriate responses.

Which one of the following statements regarding consideration of laws and regulations in an audit of financial statements is incorrect in terms of ISA 250? (Topic 3) 1 The auditor is responsible for obtaining reasonable assurance that the financial statements, taken as a whole, are free from material misstatement, whether caused by fraud or error. In conducting an audit of financial statements, the auditor takes into account the applicable legal and regulatory framework. The auditor is not responsible for preventing non-compliance with laws and regulations and cannot be expected to detect non-compliance with all laws and regulations. Ordinarily, the further removed non-compliance is from the events and transactions reflected in the financial statements, the less likely the auditor is to become aware of it or to recognise the non-compliance. The form and content of financial statements is not a factor when considering laws and regulations applicable to any client.

2 3

4 7.

Which one of the following audit procedures, where non-compliance with laws and regulations is identified or suspected, is inapplicable in terms of ISA 250? (Topic 3) 1 2 3 An auditor shall obtain an understanding of the nature of the act and the circumstances in which it has occurred. An auditor shall obtain further information to evaluate the possible effect on the financial statements. If an auditor suspects that non-compliance with laws and regulations has a material effect on the financial statements under audit, and that it has not been properly reflected in the financial statements, he shall, without further ado, qualify his opinion on those financial statements. If sufficient information about suspected non-compliance cannot be obtained, the auditor shall evaluate the effect of the lack of sufficient appropriate evidence on his opinion.

8.

Which one of the following statements is not in line with the requirements of SAICAs Code of Professional Conduct and its SAICAs by-laws? (Topic 5) 1 2 Only the members of an engagement assurance team who are Chartered Accountants (SA), have to comply with the SAICA Code of Professional Conduct. When a firm or a member of the assurance team accepts gifts or hospitality, unless the value is clearly insignificant, the threats to independence cannot be reduced to an acceptable level by the application of any safeguard.

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A contingent fee charged by a firm in respect of an assurance engagement creates selfinterest and advocacy threats that cannot be reduced to an acceptable level by the application of any safeguard. If other partners, including partners who do not perform assurance engagements, in the office in which the engagement partner of an audit client practices, hold a direct financial interest in that audit client, the self-interest threat created would be so significant no safeguard could reduce the threat to an acceptable level.

9.

Which one of the following statements relating to criteria that an auditor must be satisfied about before expressing an unqualified (unmodified) opinion, is not in line with the Auditing Profession Act? (Topic 7) 1 2 The existence of all assets and liabilities shown in the financial statements. Proper accounting records in at least one of the official languages of the Republic have been kept that reflect and explain all its transactions and record all its assets and liabilities correctly and adequately. The auditor has reported a reportable irregularity to the Independent Regulatory Board for Auditors in terms of his section 45 duties. The auditor has complied with all laws relating to the audit of that entity.

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10. Which one of the following statements is not applicable in terms of the Auditing Profession Act? (Topic 6) 1 2 A registered auditor in public practice shall, in respect of any opinion expressed incur a liability to a client or third party if it is proved that such opinion was made maliciously. When registered auditors who are engaged in public practice form a company to engage in public practice via its members, the company's Memorandum of Incorporation must, inter alia, stipulate that its directors and past directors shall be liable jointly and severally, together with the company, for its debts and liabilities contracted during their periods of office. In respect of a reportable irregularity, the registered auditor may not consider information which comes to his knowledge from providing services to another client. The Independent Regulatory Board for Auditors may decline to register an individual as an auditor who has been provisionally sequestrated.

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11. Which one of the following actions constitutes an offence/improper conduct in terms of the Auditing Profession Act? (Topic 6) 1 A registered auditor may, under certain circumstances, accept an appointment that comprises the maintaining of a set of books of a private company of which he is not the auditor.

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2 3 4

A registered auditor fails to report a reportable irregularity in accordance with section 45. A firm that is a registered auditor notifies the Independent Regulatory Board for Auditors of a change in its composition within 30 days after the change has taken place. When a person is suspended from public practice under any provision of this Act, that person may under certain circumstances still be employed by a registered auditor.

12. Which one of the regulations below is not a regulation of the Auditing Profession Act? (Topic 6) 1 2 The Auditor-General may not appoint a person registered as auditor, to carry out an audit (in terms of the Public Audit Act) on his behalf. As soon as a registered auditor reports to the Independent Regulatory Board for Auditors that a reportable irregularity is continuing (subsequent to a previous report) the Independent Regulatory Board for Auditors must notify any appropriate regulator of the particular irregularity. A registered auditor may not act as auditor of a trust set up and controlled by himself. A person not registered as auditor may describe himself as an internal auditor or accountant.

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13. Which one of the following statements is not in line with the requirements of the Auditing Profession Act? (Topic 5) 1 No person may accept an appointment as auditor and accounting officer of a close corporation, unless he is registered with the Independent Regulatory Board for Auditors as an auditor. The Auditor-General may only appoint a registered auditor or an auditing firm to carry out on his behalf the audit of a municipality. When a registered auditor requests the Independent Regulatory Board for Auditors in writing to remove his name from the register of registered auditors, the removal does not affect any liability incurred by the registered auditor prior to the date of the removal. Every firm that is a registered auditor must notify the Independent Regulatory Board for Auditors of any change in name or composition.

2 3

14. Which one of the following statements is incorrect in terms of the Auditing Profession Act? (Topic 6) 1 A registered auditor who has reason to believe that a reportable irregularity is taking place at his client must, without delay, send a written report to the Independent Regulatory Board for Auditors.

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The only requirements for registration as auditor in public practice are: - the passing of the prescribed board examinations, - resident within the Republic, and - completion of the prescribed training contract. In order to practice as registered auditor, a registered auditor must have paid all prescribed yearly fees to the Independent Regulatory Board for Auditors. A registered auditor, who assists his client with the consolidation and preparation of its annual financial statements, need not indicate in his report that he was partly responsible for the preparation of his client's annual financial statements.

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15. Which one of the following actions by a registered auditor in public practice constitutes improper conduct in terms of, or infringes upon the provisions of, the Auditing Profession Act? (Topic 6) 1 Immediately after a registered firm of auditors is appointed by an entity to perform an audit, the firm took a decision as to the person in the firm that will be responsible for the audit. Assisting with adjusting entries and the drafting of his client's annual financial statements without specifically referring to these activities in his audit report on those annual financial statements. Reporting in writing, in terms of Section 45 of the Auditing Profession Act, to the Independent Regulatory Board for Auditors and to client As management as regards a reportable irregularity that took place at client A, but which came to his attention during the audit of client B. Appointing an attorney as director of an incorporated company engaged in public auditors practice, as the attorney will be of great value to the particular practice.

16. Which one of the following statements is incorrect in terms of the Auditing Profession Act? (Topic 6) 1 2 3 4 The registration of a registered auditor that is a company, automatically lapses if unregistered persons act as directors thereof. The registration of a registered auditor that is a partnership automatically lapses if one of the partners is not a registered auditor. Voting rights on meetings of incorporated companies registered as auditors are limited to members. A person registered as an auditor may not act as auditor, for remuneration, for a club of which he is a member.

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17. Which one of the following situations does not place the independence of a registered auditor in question? (Topic 8) 1 Company A owns 30% of the shares in company B. The board of directors of company A requests its auditors to value the investment at balance sheet date in order to include a reasonable value in the annual financial statements. The valuation involves a significant degree of subjectivity. A firm of auditors lends a staff member to a statutory audit client in order to assist the accounting department. Subsequently the staff member was given an audit responsibility in respect of the function he performed during the period he was loaned. The holding of an investment in a private company of which he is the auditor and which investment he acquired by way of inheritance. The acceptance by a member of the assurance team of a loan under normal lending procedures, terms and requirements from an assurance client which is a bank.

3 4

18. Select the most correct alternative, in terms of the SAICA Code of Professional Conduct, to complete the following paragraph: (Topic 8) You have recently been appointed as auditor of a business utilising a large computer installation. You consider approaching the previous auditor in order to examine his audit working papers. This action ... 1 2 3 4 is acceptable if the client consents thereto. is acceptable, only if you refer in your audit report to your reliance on the previous auditor's work. is unacceptable, as you must maintain an independent attitude towards the new audit appointment. is unacceptable, as it is prohibited by the Auditing Profession Act.

19. Which one of the following statements is false in terms of the Companies Act? (Topic 10) 1 2 3 4 If there is more than one class of shares, the Memorandum of Incorporation must provide that all classes must have voting rights in respect of all voting matters. A voting right, only under certain conditions, may be limited, but not excluded. Every share has associated with it one general voting right, subject to the provisions of the Act and the Memorandum of Incorporation. If there is only one class of shares, those shares must have voting rights in respect of all voting matters.

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20. Which one of the following statements is false in terms of the Companies Act? (Topic 9) 1 2 The incorporators of a company must inform the Commission of the incorporation of that company through filing a Notice of Incorporation. The Memorandum of Incorporation sets out rights, duties and responsibilities of shareholders, directors and others within and in relation to a company, and other matters required in the Act. The term financial statement includes interim or preliminary reports. Distribution does not include the consideration for the acquisition by a company of any of its shares. ---x--8.4.2 Semester 1: Compulsory assignment 02 Instructions: (1) Consult my Studies @ Unisa for instructions on how to submit written assignments.

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Special instruction regarding the answering of this assignment (1) This assignment covers the whole syllabus.

ASSIGNMENT 02: ESSAY TYPE QUESTIONS

UNIQUE ASSIGNMENT NUMBER FOR THE FIRST SEMESTER: 236432 DATE OF SUBMISSION First semester: 4 April 2012

QUESTION 1

15 marks

Excel Spares Limited recently appointed your audit firm, Auditors Inc, as their new auditor. You are assigned to be the partner in charge of this new audit in Pretoria. After an initial meeting with the financial director of the company, you sent an engagement letter to the company. You received a letter from Mr Miller, the chief executive officer (CEO) of the company, and the following are extracts from that letter:

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Marks 1.1 Our company has been audited for many years and this is the first time we have ever been required to sign an "engagement letter". Why are we now required to sign such a letter? From your engagement letter it would appear that you do not accept any responsibility for the detection or reporting of fraudulent activity in my company. If you conduct your audit properly all fraudulent activity should be identified and reported to us. In the engagement letter it is indicated that you require written confirmations of oral representations made by ourselves during the course of the audit. Is our "word" not sufficient for you?

(4)

1.2

(6)

1.3

(4)

REQUIRED Write a letter to the CEO, in terms of ISA 210, responding to the three matters above. QUESTION 2 20 marks

You are the auditor in charge of the year-end audit of Ceres Proprietary Limited, a fruit canning factory. Although Ceres Proprietary Limited is a private company, and therefore not required to be externally audited, the terms and conditions of its major long-term finance agreement require that the companys annual financial statements be audited by a registered auditor. During the course of the audit you discover that the financial director and managing director (the two executive directors on the board), both of whom own shares in the company, have been falsifying the monthly value added tax (VAT) returns by claiming considerable amounts of VAT on salaries and wages to which the company is not entitled. You are satisfied that a reportable irregularity (RI), in terms of the Auditing Profession Act, has taken place and reported it to the Independent Regulatory Board for Auditors (IRBA). After playing a round of golf recently, you could not resist telling your friend about the problems you encountered at Ceres Proprietary Limited, since he is a shareholder of the company. You are also the auditor of Tzaneen Fruit Canners Limited, a company in the same industry as Ceres Proprietary Limited. REQUIRED 2.1 Use the definition of a reportable irregularity (RI) and the information in the question to evaluate whether a RI took place or not. Marks (6)

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2.2

State and substantiate whether you would still have to report the RI to the IRBA if 2.2.1 the financial director and managing director realised, before you made your report to the IRBA, that you suspected what was going on, and offered to notify the South African Revenue Services and pay all VAT and penalties owed. 2.2.2 you had discovered the RI whilst conducting other work (not audit work) for Ceres Proprietary Limited.

(2) (2) (2)

2.3 2.4

Explain how you would respond to the argument that as this is not an audit required by the Companies Act, you have no duty to report the RI. Taking into account the information in the question, explain your concerns regarding compliance with the Code of Professional Conduct of the South African Institute of Chartered Accountants (SAICA). You are not to discuss the threats to the fundamental principles.

(8) 20 marks

QUESTION 3

Holding Limited is an unlisted public company with an authorised and issued share capital of 50 million ordinary shares. The stated capital reflected in the previous years annual financial statements amounted to R100 million. The directors plan to buy back all shares from shareholders that individually own less than ten thousand shares in order to decrease the administrative burden. This will involve 5 million shares in total. The directors are willing to pay a price per share that will be more than acceptable to every shareholder involved in the buy back, and therefore do not expect any opposition to the offer from any shareholders. Holding Limited is the holding company in a group of companies. The directors, after consultation with the auditors, decided that it will be in the best interest of the group that all companies be audited in future, in spite of any possible exemption from the audit requirement. Holding Limiteds memorandum of incorporation does not have any different requirements with respect to amendments to its memorandum of incorporation than the requirements prescribed by the Companies Act. REQUIRED 3.1 List the requirements that Holding Limited must meet in terms of the Companies Act in order to buy back the five (5) million shares. In your answer indicate the amount by which the stated capital must be reduced and show your calculations. Taking into account the specific circumstances above, explain under which circumstances all the companies in the group will be obliged to be audited. Marks

(13) (2)

3.2

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3.3

Explain under which circumstances a company would be exempted from both the audit requirement and the requirement to have an independent review performed. What three appointments must be made by Holding Limited in order to comply with the enhanced accountability and transparency requirements in terms of the Companies Act?

(2)

3.4

(3) 25 marks

QUESTION 4

A friend of yours, Maria Bueno, a staff member of GPS Limited, has recently been appointed by the shareholders as a director of GPS Limited, an electronics company which specialises in the development and manufacturing of global positioning systems (GPSs) for vehicles and motorcycles. The company is not listed. Maria is considered to be an important individual with regard to the future of the company, particularly its research and development programmes. However, Maria has not filled the role of a company director before, and whilst excited about her promotion, is concerned about her responsibilities as a director, particularly those arising from the Companies Act. She tells you that she has heard that the Companies Act has sections dealing with standards of directors conduct and that if she doesnt perform, she can be removed from the board and dismissed from the company. She also tells you that she has heard that she can be placed on probation as a director by the chairman of the board or declared delinquent. Marias husband has a financial interest in Electronic Importers Limited, a company that, from time to time, tenders for large contracts to supply GPS Limited with certain electronic parts that the latter requires in order to manufacture GPSs. Electronic Importers Limited is one of four companies that put in tenders to be considered at the upcoming board meeting. The following actions have already taken place at the time Maria asked your advice: Before a recent board meeting, Maria requested various GPS sales figures from the sales manager, since she had to report to the board thereon. Maria spoke to various persons in the company about matters on the agenda in order to be able to intelligently take part in discussions at the meeting. Maria informed her husband about new projects that are being pursued and certain confidential information about tenders that will be put out in the coming month. Maria was silent about her husbands financial interest when the tenders were voted on at the board meeting. Her husband informed her that an American company is on the verge of taking over GPS Limiteds largest competitor in order to make inroads into the South African market. Maria immediately informed the chief executive officer of GPS Limited of this after it came to her attention. Maria signed a contract on behalf of GPS Limited after her appointment as director of GPS Limited and subsequently indicated to the other party to the contract that she acted without authority at the time of signing the contract. Maria was under the impression that she had the necessary authority. She is now being sued for damages by the other party. GPS Limiteds memorandum of incorporation is silent on the indemnification of its directors in respect of any liability.

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Marks She has put the following questions to you: 4.1 Can I be removed from the board and dismissed from the company if I do not perform as a director, and if so, what requirements must be met in terms of the Companies Act? Considering my actions above, explain the standards of conduct for directors, (limited to four) provided for by the Companies Act, and whether or not I have complied with the standards described? Your answer should be in the following format: Standard of conduct (1 mark each) 4.3 4.4 Whether or not the standard has been complied with (1 marks each)

(9)

4.2

(10) (3) (3)

Can I be placed on probation by the chairman or any other party; and what requirements must be met in this regard in terms of the Companies Act? Discuss whether or not GPS Limited may indemnify me as director in respect of the liability flowing from the signed contract?

REQUIRED Respond to each of Maria Buenos questions and substantiate your answers, where applicable. ---x--8.4.3 Semester 2: Compulsory assignment 01 Instructions: (1) (2) (3) (4) Write the correct unique assignment number in the six blocks provided on the mark reading sheet. Write the ordinary assignment number (01) in the two blocks provided on the mark reading sheet. Consult my Studies @ Unisa for an example of how a computer mark-reading sheet should be filled in. If you do not follow these instructions, the computer will reject your answer sheet and it will be returned to you unmarked. Also consult: my Studies @ Unisa when you answer multiple-choice assignments.

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Special instruction regarding the answering of this assignment (1) (2) This assignment consists of 20 multiple choice questions. This assignment covers topics 1-8 of the study guide and topics 9-11 included in Tutorial letter 104/3/2012.

ASSIGNMENT 01: MULTIPLE-CHOICE QUESTIONS (compulsory)

UNIQUE ASSIGNMENT NUMBER FOR THE SECOND SEMESTER: 671438 DATE OF SUBMISSION Second semester: QUESTION 1 REQUIRED Select for each question only ONE alternative that you consider to be the most correct and then mark on myUnisa or on the mark reading sheet the digit that corresponds to the digit of the alternative which you have selected as your answer. Answer the sub-sections of this question in numerical sequence, for example, as follow: 1. 2. 1 3 30 August 2012 15 marks

(1 marks per question) 1. Which one of the following statements is false in terms of the International Standards on Auditing and/or the Auditing Profession Act? (Topics 3 & 6) 1 2 An example of compliance with laws by an audit client will include the issue of shares by a company after the issue has been authorised in all instances by the directors only. When the auditor becomes aware of a possible instance of non-compliance with laws and regulations, he should, inter alia, obtain an understanding of the nature of the act and the circumstances in which it has occurred. If an auditor concludes that non-compliance with laws and regulations has a material effect on the financial statements under audit, and that it has not been properly reflected in the financial statements, he has a duty to modify his opinion on those financial statements.

24

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An auditor should, as soon as possible, either communicate with those charged with governance of an auditee, or obtain audit evidence that they are appropriately informed, regarding non-compliance with laws and regulations that came to the auditors attention.

2.

Which one of the following statements is not an example of a risk factor of misstatements arising from fraudulent financial reporting in terms of ISA 240? (Topic 3) 1 2 3 4 High vulnerability to rapid changes, such as changes in technology or interest rates. New accounting, statutory or regulatory requirements. Low turnover of junior management, legal counsel, or those charged with governance. Accounting and information systems that are not effective, including situations involving significant deficiencies in internal control.

3.

In terms of ISA 210, which one of the following items does not have to be included in the audit engagement letter? (Topic 3) 1 2 3 4 The auditors responsibility in respect of determining the accounting policy and the protection of assets. An indication that the auditor will bring to managements attention significant weaknesses in the internal control structure. The format of any reports or other communication of the results of the audit activities. The objective of the audit.

4.

Which one of the following acts does not constitute fraud as defined by ISA 240? (Topic 3) 1 2 3 4 The intentional omission of a material amount from a set of financial statements. The intentional non-disclosure of relevant financial information. An incorrect accounting estimate resulting from a negligent and incorrect assumption. Financial reporting undertaken to render financial information misleading.

5.

Which one of the following audit findings will not, in terms of ISA 240, result in the auditor considering whether or not material misstatements exist? (Topic 3) 1 2 3 Reconciliations are performed between the number of completed goods and the goods received by the packaging department. Unwillingness to extend or to alter disclosure in the financial statements to make it more complete or understandable. Transactions selected for testing are not supported by proper documentation or are not appropriately authorised.
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4 6.

Unwillingness to timeously address identified weaknesses in internal control.

Which one of the following procedures in terms of ISA 240, need not merely be followed by an auditor when he becomes aware of a possible material misstatement due to fraud? (Topic 3) 1 2 He shall evaluate the implications of the misstatement in relation to other aspects of the audit, recognising that an instance of fraud is unlikely to be an isolated occurrence. He must modify his auditors report if he becomes aware of a possible material misstatement due to fraud; clearly state the reason for the modification, including the disclosure of the misstatement. He shall design and perform further audit procedures to respond to the assessed risk of material misstatement due to fraud at the assertion level. He shall obtain written representations from management and, where appropriate, those charged with governance that they have, inter alia, disclosed to the auditor their knowledge of fraud or suspected fraud.

3 4

7.

Which one of the following statements is not in line with the requirements of the Auditing Profession Act or the Codes of Professional Conduct? (Topics 5 & 6) 1 2 A registered auditor may in special circumstances delegate his signing powers in respect of an audit report to his partner. A registered auditor may not sign any statement or report which purports to represent work performed by him, where such work was performed under the personal supervision of one or more of his partners. A registered auditor may sign an audit report in the name of the firm in which he practises. A registered auditor may not express an opinion to the effect that the financial statements of a client are a true and fair reflection if all transactions are correctly reflected in the financial records, but in German.

3 4

8.

Which one of the following statements is not applicable in terms of the Auditing Profession Act? (Topic 6) 1 A registered auditor in public practice may incur liability to a third party even if that third party proves only that a particular report given by the auditor in the normal performance of his duties was certified maliciously. When registered auditors who are engaged in public practice form a company to engage in public practice via its members, the company's Memorandum of Incorporation must, inter alia, stipulate that its directors and past directors shall be liable jointly and severally, together with the company, for its debts and liabilities contracted during their periods of office.

26

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The Independent Regulatory Board for Auditors shall merely cancel the registration of an auditor, who subsequent to his registration has been convicted of an offence involving dishonesty. The Auditing Profession Act provides that no person who is registered as an auditor under the Act, shall sign a report relating to work performed by him, unless such work was performed by himself or under his or one or more of his partners' personal supervision or direction. Despite this fact, a practitioner may request another practitioner, registered as such, to perform an inventory count and trade receivables circularisation on his behalf at his client.

9.

Which one of the following actions constitutes an offence/improper conduct in terms of the Auditing Profession Act? (Topic 6) 1 2 3 4 A registered auditor accepts an appointment that comprises the maintaining of a set of books of a private company of which he is not the auditor. A registered auditor engages in public practice whilst a complaint of improper conduct against him is being investigated by the Independent Regulatory Board for Auditors. When a person is suspended from public practice under any provision of this Act, that person may under certain circumstances still be employed by a registered auditor. A registered auditor fails to report a reportable irregularity in accordance with section 45.

10. Which one of the following statements is incorrect in terms of the Auditing Profession Act? (Topic 6) 1 2 3 4 The registration of a registered auditor that is a company automatically lapses if unregistered persons act as directors thereof. A person registered as an auditor may not act as auditor, for remuneration, for a club of which he is a member. Voting rights on meetings of incorporated companies registered as auditors are limited to members. The registration of a registered auditor that is a partnership automatically lapses if one of the partners is not a registered auditor.

11. Which one of the following statements is incorrect in terms of the Auditing Profession Act? (Topic 6) 1 2 In order to practice as registered auditor, a registered auditor must have paid all prescribed yearly fees to the Independent Regulatory Board for Auditors. A registered auditor who has reason to believe that a reportable irregularity is taking place at his client must, without delay, send a written report to the Independent Regulatory Board for Auditors.

27

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A registered auditor who assists his client with the consolidation and preparation of its annual financial statements, need not indicate in his report that he was partly responsible for the preparation of his client's annual financial statements. The only requirements for registration as auditor in public practice are: - the passing of the prescribed board examinations, - resident within the Republic, and - completion of the prescribed training contract.

12. Which one of the regulations below is not a regulation of the Auditing Profession Act? (Topic 6) 1 2 The Auditor-General may not appoint a person registered as auditor, to carry out an audit on his behalf. As soon as a registered auditor reports to the Independent Regulatory Board for Auditors that a reportable irregularity is continuing (subsequent to a previous report), the Independent Regulatory Board for Auditors must notify any appropriate regulator in writing of the particular irregularity. A registered auditor may not act as auditor of a trust set up and controlled by him. A person not registered as auditor may describe himself as a financial advisor or as an accountant.

3 4

13. Which one of the following actions by a registered auditor in public practice constitutes improper conduct in terms of, or infringes upon the provisions of, the Auditing Profession Act? (Topic 6) 1 Immediately after a registered firm of auditors is appointed by an entity to perform an audit, the firm took a decision as to the person in the firm that will be responsible for the audit. Appointing an attorney as director of an incorporated company engaged in public auditors practice, as the attorney will be of great value to the particular practice. Reporting in writing, in terms of Section 45 of the Auditing Profession Act, to the Independent Regulatory Board for Auditors and to client As management as regards a reportable irregularity that took place at client A, but which came to his attention during the audit of client B. Assisting with adjusting entries and the drafting of his client's annual financial statements without specifically referring to these activities in his audit report on those annual financial statements.

2 3

14. Which one of the following statements is not in line with the requirements of the Auditing Profession Act? (Topic 5)

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No person may accept an appointment as auditor and accounting officer of a close corporation, unless he is registered with the Independent Regulatory Board for Auditors as an auditor. When a registered auditor requests the Independent Regulatory Board for Auditors in writing to remove his name from the register of registered auditors, the removal does not affect any liability incurred by the registered auditor prior to the date of the removal. The Auditor-General may only appoint a registered auditor or an auditing firm to carry out on his behalf the audit of a municipality. Every firm that is a registered auditor must notify the Independent Regulatory Board for Auditors of any change in name or composition.

3 4

15. Which one of the following instances will in all probability not constitute a reportable irregularity in terms of the Audit Profession Act, taking into account that management are involved in or aware of these instances? (Topic 7) 1 2 Filling of key posts in a company with friends and relations of management. If a company continues to carry on business and to incur debts when the directors are aware that there is no reasonable prospect of the creditors ever receiving payment for those debts. Contravening the provisions of the Income Tax Act regarding PAYE. Falsely declaring income on a tax return.

3 4

16. Which one of the following situations does not place the independence of a registered auditor in question? (Topic 8) 1 Company A owns 30% of the shares in company B. The board of directors of company A requests the auditors to value the investment at balance sheet date in order to include a reasonable value in the annual financial statements. A firm of auditors lends a staff member to a statutory audit client in order to assist their accounting department. Subsequently the staff member was given an audit responsibility in respect of the function he performed during the period he was loaned. A registered auditor holds an investment in a private company of which he is the auditor and which investment was acquired by way of inheritance. The acceptance by a member of the assurance team of a loan under normal lending procedures, terms and requirements from an assurance client which is a bank.

3 4

17. Select the most correct alternative, in terms of the SAICA Code of Professional Conduct, to complete the following paragraph: (Topic 8)

29

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You have recently been appointed as auditor of a business utilising a large computer installation. You consider approaching the previous auditor in order to examine his audit working papers. This action ... 1 2 3 4 is unacceptable, as you must maintain an independent attitude towards the new audit appointment. is acceptable if the client consents thereto. is acceptable only if you refer in your audit report to your reliance on the previous auditor's work. is unacceptable, as it is prohibited by the Auditing Profession Act.

18. Which one of the following actions of the respective registered auditors in public practice is not deemed improper conduct in terms of the Codes of Professional Conduct? (Topic 8) 1 Mr Strydom advised one of his clients not to register with the Department of Labour in respect of the Compensation Fund. He assured the client that nobody would ever discover that he is not so registered. Due to his very busy schedule, Mr Weber issues an unmodified audit opinion before properly reviewing the working papers. After effecting a proper examination, Mr van Staden certifies a royalty payment as correct. It was subsequently ascertained that the royalty payment had been incorrectly calculated by an immaterial percentage. Mr Kruger deposits all trust monies he holds on behalf of his clients in his bank account in order to receive a higher interest rate on his and his clients' behalf. He keeps proper record of the different monies received.

2 3

19. Which one of the following statements is false in terms of the Companies Act? (Topics 10 and 11) 1 2 3 4 A Memorandum of Incorporation and a record of its directors form part of the company records that must be maintained by every company. A private company need not be audited at all. The annual financial statements of a public company must be audited. A public company must appoint a company secretary who must, inter alia, be a permanent resident of the Republic of South Africa, and must remain so while serving in that capacity.

30

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20. Which one of the following statements regarding voting and shareholders' meetings is false in terms of the Companies Act? (Topic 10) 1 A shareholder of a company may only appoint an individual that is a shareholder of that company as a proxy to participate in, speak and vote at a shareholders' meeting on behalf of the shareholder. Voting on any matter at a shareholders' meeting may be conducted by polling the persons present and entitled to exercise voting rights on that matter. On a poll, any member (including his proxy) must be entitled to exercise all the voting rights attached to the shares held or represented by that person. On a show of hands, a person will only have one vote, irrespective of the number of shares he holds or represents. ---x--8.4.4 Semester 2: Compulsory assignment 02 Instructions: (1) Consult my Studies @ Unisa for instructions on how to submit written assignments.

2 3 4

Special instruction regarding the answering of this assignment (1) This assignment covers the whole syllabus.

ASSIGNMENT 02: ESSAY TYPE QUESTIONS

UNIQUE ASSIGNMENT NUMBER FOR THE SECOND SEMESTER: 823233 DATE OF SUBMISSION Second semester: QUESTION 1 27 September 2012 52 marks

You are an accountant in South Africa and an expert on the Companies Act 71 of 2008, as amended.

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Marvel Entertainment Limited is a renowned retailer of comic books and toys. You have recently been approached by Mr Wolverine, the financial director, of Marvel Entertainment Limited to seek advice on the legality of several proposed matters in terms of the Companies Act 71 of 2008, as amended. The following extract is from the companys annual financial statements at 30 June 2012: 2012 R EQUITY Authorised share capital 150 000 Ordinary shares Issued share capital 130 000 Ordinary shares Mr. Wolverine presented the following matters to you for your evaluation: 1.1 The audit committee is going to approve a decision to issue 30 000 shares at the annual audit committee meeting. The board has determined that the shares will be issued at the current market value of the shares. 10 000 of these shares are going to be issued equally to the five directors of Marvel Entertainment Limited. REQUIRED Discuss the requirements of the Companies Act 71 of 2008, as amended, for the issue of 30 000 shares, only in terms of the following points: The authority to issue shares Authorised shares available for issue Consideration for the shares Share issue to the directors Voting requirements regarding a special resolution to be approved by shareholders. (Do not discuss any requirements regarding giving notice or quorums). (1) (9) (3) (3) (1) Marks 75 000 65 000

1.2

An extract of the minutes of the meeting of the board of directors of Marvel Entertainment Limited held on 25 June 2012: Present: Mr Parker, chairman, independent non-executive director Mr Wayne, independent non-executive director Mr Stark, marketing director Mr Xavier, managing director Mr Wolverine, financial director

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Matters for discussion: Expansion of operations Suggestions on how to expand the companys operations most effectively were discussed. Mr Stark suggested the investment of the acquired funds from the share issue in shares of the top 40 listed companies. Mr Xavier suggested the investment and acquisition of the controlling interest in DreamWorks Limited, a competitor in the comic industry. The directors agreed with Mr Xaviers suggestion. Mr Xavier informed the meeting that his wife is the chief executive officer of DreamWorks Limited. No further information was required by the meeting and the voting process proceeded. The five directors voted and all the votes were in favour of the decision to invest and acquire the controlling interest in Dream Works Limited. REQUIRED Evaluate if Mr Xavier has a personal financial interest in the investment and acquisition of the controlling interest in DreamWorks Limited. Evaluate and conclude on the legality of the adopted resolution in terms of the requirements of the Companies Act 71 of 2008, as amended. 1.3 Marks

(16)

Mr Wolverine is not fully informed about all the duties of the audit committee. He explained to you that he believes that the duties of the audit committee are to ensure that the appointment of the auditor complies with the provisions of the Companies Act 71 of 2008, as amended, and any other legislation relating to the appointment of auditors; to perform other functions determined by the board, including the development and implementation of a policy and plan for a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes within the company; to pre-approve any proposed agreement with the auditor for the provision of non-audit services to the company. Marks (11)

REQUIRED List the remaining duties of the audit committee which Mr Wolverine is not aware of in accordance with the Companies Act 71 of 2008, as amended. QUESTION 2

34 marks

Distillique Limited, a leading producer and distributor of fine wines, spirits and ciders, has a significant equity interest of 85% in Aqua Vitae Proprietary Limited. The following extract is from Distillique Limiteds annual financial statements at 30 June 2012:

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2012 R ASSETS Total Non-Current Assets Total Current Assets EQUITY AND LIABILITIES Total Non-Current Assets Liabilities Total Current Liabilities 4 000 000 2 000 000 6 000 000 6 000 000 5 000 000 11 000 000

Mr Barcardi, the chief executive director, approached you for advice regarding the following transactions: 2.1 Distillique Limited wants to sell certain fixed assets with a book value of R3,5 million at a profit of R1 million to an independent third party. REQUIRED Discuss the requirements of the Companies Act 71 of 2008, as amended, in respect of the above transaction, assuming that no shareholders opposed this particular transaction and that the figures shown above are fair values. Do not discuss any requirements regarding quorums or voting. 2.2 Marks

(7)

Distillique Limited is experiencing severe cash flow problems. The company decided to attempt a strategy to attract investors and to increase the satisfaction of current shareholders and to discourage any disinvesting. Mr Barcardi proposed to declare a dividend at the end of the financial year to successfully accomplish the companys goal. The board of directors approved the decision with no director opposing the decision. REQUIRED Evaluate the requirements of the Companies Act 71 of 2008, as amended, in respect of the above transaction. Marks (9)

2.3

During the financial year, the board of directors approved the granting of a loan to Aqua Vitae Proprietary Limited to acquire shares in Distillique Limited. The board of directors approved the decision with no director opposing the decision. REQUIRED Evaluate and conclude on the legality of providing financial assistance for the acquisition of shares in Distillique Limited in terms of the requirements of the Companies Act 71 of 2008, as amended. Marks

(12)

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2.4

REQUIRED With reference to the extract from Distillique Limiteds annual financial statements at 30 June 2012, evaluate and conclude if Distillique Limited is trading recklessly in terms of the requirements of the Companies Act 71 of 2008, as amended. ---x---

Marks

(6)

EXAMINATIONS
Requirements for admission to the examination Submission of the compulsory assignment 01 by its due date will give a student admission to the examination in this module. Admission will be obtained by submitting this assignment in time and not by the marks you obtain for it. Please ensure that this assignment reaches the University before or on the due date. Late submission of the assignment will result in you not being admitted to the examination. No extension will be given for the late submission of assignments 01 and 02. The Examination Period This module is offered in both semesters. This means that if you are registered for the first semester, you will write the examination in May/June 2012 and the supplementary examination will be written in October/November 2012. If you are registered for the second semester you will write the examination in October/November 2012 and the supplementary examination will be written in May/June 2013. During the semester, the examination section will provide you with information regarding the examination in general, examination venues, examination dates and examination times. The Examination Paper Note that your self evaluation examination paper is an example of an examination paper. It will be included in this tutorial letter under point 10. Please refer to this assessment opportunity for the format of the examination paper and type of questions you can expect in the examination. Previous Examination Papers Previous examination papers are available to students on myUnisa. Suggested solutions are not provided. You may, however, accept that the type of questions that will be asked in the examination will be similar to those found in your study material. Use the my Studies @ Unisa brochure for general guidance for the examination as well as for your preparation for the examination.

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10

ADDITIONAL ASSESSMENT
An examination paper which serves as a self evaluation assessment is included hereafter. Special instructions and remarks regarding the answering of this assessment opportunity It is advised that you complete this assessment opportunity under examination conditions within two hours without consulting your study material. After having completed this, you should compare your answers with the key in Tutorial Letter 104. This assessment opportunity must not be sent to the University. Tutorial material for this assessment opportunity This assessment opportunity deals with the entire content of this module. Purpose of this assessment opportunity The purpose of this assessment opportunity is to serve as a revision of the study material as a whole and at the same time is an indication of the standard which can be expected in the examination.

This paper consists of the following questions and main topics: QUESTION 1.1 1.2 MAIN TOPIC The Companies Act: Share issue and financing the issue International Standard on Auditing: Fraud risk factors and the auditors responsibilities relating to fraud in an audit of financial statements SAICA Code of Professional Conduct: Various ethical matters The Auditing Profession Act: Reportable irregularity and liability of the auditor MARKS 30

25 25 20 100

1.3 1.4

NOTE: The main objective of the examination is to test a candidate's knowledge and ability to apply the study material, although the examiners will also take into account the candidates ability to organise and present that knowledge in writing and according to an acceptable standard.

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In this paper, references to the Companies Act, the Auditing Profession Act and regulations apply to the Companies Act 71 of 2008, as amended, the Auditing Profession Act 26 of 2005, as amended and the Companies Act Regulations, 2011, respectively of the Republic of South Africa. QUESTION 1 BACKGROUND INFORMATION Flix on Stix Limited (hereafter referred to as Flix on Stix) is a company providing a service whereby consumers may rent films by copying it to a memory stick. It can then be downloaded to a computer or media appliance at the consumers residence. After a few days the film is automatically deleted from the memory stick and rendered inaccessible on the clients computer. The service is provided via kiosks that are put up in all major centres. The company planned to extend their services by also providing the same type of service regarding games to be played on Xbox video games consoles and similar appliances. The major research and development costs associated with the new service, made it necessary to obtain additional equity financing. The directors decided to issue one hundred thousand new shares of a new and different class at a price of R100 each in order to finance the new project on the basis that it is a non-renounceable offer made to existing shareholders. The issue of the shares, including receiving the subscription monies will be dealt with by the companys secretary, Share Consult Inc. The issue was fully subscribed. Finance was made available to the members and directors (subscribers to the shares) in this regard and did not exceed one tenth of 1 percent of the companys net worth at the time of the resolution. The memorandum of incorporation provides that voting at shareholder meetings must take place on a poll. Flix on Stix year-end is 30 September 2012. The annual financial statements are prepared in accordance with IFRS. Sithole Inc are the auditors of Flix on Stix. THE FOLLOWING WERE OBSERVED AND NOTED DURING THE AUDIT OF FLIX ON STIX: The new project necessitated that significant dealings be conducted with North Korean suppliers, where different business environments and cultures exist. It is well known that eradication of fraud and corruption are not high priorities for the North Korean government. The company, unfortunately, does not have any alternative viable suppliers since the North Koreans are at the forefront of this cutting edge technology. Flix on Stixs financial profitability is currently threatened by a high vulnerability to rapid changes in technology and business failures in the overall economy. The CEO indicated that the shareholders expressed their satisfaction with the new venture and has promised top management substantial bonuses should the financial statements reflect more than a 35% increase in net profit. The Director of Operations mentioned that he received threats from some shareholders that management will be sued if future financial statements reflect that the new venture has failed.
37

100 marks

AUE302Q/101

The relationship between management and the auditors is strained because of restrictions placed on the auditors that inappropriately limit access to staff, information and effective communication with those charged with governance.

ETHICAL MATTERS: 1. The designated auditor, Mr Sithole, became the brother-in-law of the financial director when the latter married Mr Sitholes sister. 2. Mr Sithole, other registered auditors (RAs) and other staff members of Sithole Inc involved in audit practice have to follow a strict schedule of continuing professional development training courses and seminars during the year. 3. Through contact with his brother in law, Mr Sithole is aware of the exciting new project that Flix on Stix is undertaking. He plans to purchase a substantial number of shares based on the information and possible increase in the value of the shares. 4. Mr Sitholes brother-in-law requested him to associate himself with a report regarding the financial position of Flix on Stix that omitted information and where such omission was misleading to the readers. 1. Sithole Inc has a regular advertisement to market and promote their services in a magazine for the engineering profession. It indicates that Sithole Inc is the best choice as auditors and that they offer superior services. 6. Sithole Inc are also the auditors of Blue Ray Proprietary Limited that also provides similar services as Flix on Stix. The audit of Blue Ray Proprietary Limited is done by a designated auditor other than Mr Sithole. 7. Mr Naidoo, who served as an assistant to the financial director of Flix on Stix before recently being appointed as senior audit manager in Sithole Inc, is part of the assurance team. Sithole Inc is unaware of this situation since the partner involved in Human Resources and appointments never picked up this fact. INFORMATION RELATING TO THE AUDITING PROFESSION ACT: Flix on Stix had a fire at their headquarters during June, resulting in damage to the companys accounting records and vouchers. Management is of the opinion that Sithole Inc can go ahead and finalise the audit without the vouchers or the accounting records. Some expensive fixed assets were also damaged in the process and since the fixed asset register was also destroyed, Sithole Inc had a problem verifying the assets. Sithole Inc prepared a report for use by Big Bank regarding the financial position after the fire damage, without taking into account the real effect of the damage due to the records being damaged. Sithole Inc have complied with all laws relating the audit of Flix on Stix and are unaware of a reportable irregularity.

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REQUIRED 1.1 Using the BACKGROUND INFORMATION ... formulate the audit procedures that you as auditor will perform regarding the issue of shares and financing of the subscribers to the shares. (Consider only the assertions of occurrence (25) as well as presentation and disclosure (4).) 1.2 Using the BACKGROUND INFORMATION AND OBSERVATIONS NOTED DURING THE AUDIT ... 1.2.1 identify the fraud risk factors present at Flix on Stix and describe how each factor identified could impact on the risk of material misstatement. Your answer must be presented in the following tabular format: Fraud risk factor identified 1 marks each Impact on the risk of material misstatement 1 marks each

Marks

(30)

(10)

1.2.2 describe the reaction of Mr Sithole in his conduct of the audit, should the evaluation of the risk factors identified in 1.2.1 indicate that material misstatements due to fraud exist. 1.3 Using the information relating to ETHICAL MATTERS ... for each ethical matter, indicate the number of the ethical matter from the question, name the fundamental principle affected by the ethical matter, name and describe the threat and the safeguards (where applicable) in terms of the SAICA Code of Professional Conduct (CPC). You must take into account that Sithole Inc wants to retain the audit when considering the safeguards. Your answer must be presented in the following tabular format: Number of ethical matter from question, (i.e. : 1) Fundamental principle affected by the ethical matter 1 mark each Name and description of threat 1 marks each Description of safeguards (where applicable 1 marks each

(15)

(25)

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AUE302Q/101

1.4

1.4.1 Using the OBSERVATIONS NOTED DURING THE AUDIT AND INFORMATION RELATING TO THE AUDITING PROFESSION ACT ... indicate the individual criteria with which Mr Sithole must be satisfied regarding his duties in terms of section 44(3) of the Auditing Profession Act, before expressing an unqualified (unmodified) opinion and conclude, whether or not the criteria have been met. Your answer must be presented in the following tabular format: Criteria evaluated 1 marks each Whether or not the criteria has been met 1 marks each

(9)

conclude, based on your evaluation, whether Mr Sithole can express an unqualified (unmodified) opinion on Flix on Stixs financial statements. RELATING TO THE AUDITING

(1)

1.4.2 Using the INFORMATION PROFESSION ACT ...

evaluate and conclude, in terms of section 46 of the Auditing Profession Act whether or not Mr Sithole or his firm Sithole Inc may be liable to Big Bank under the given circumstances. ---x---

(10)

11

FREQUENTLY ASKED QUESTIONS

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