AUE3701 ASSIGNMENT 2 (ECP) – SEMESTER 1
OF 2021
1.
Threats Safeguards
1. Intimidation threat Remove the audit partner from the audit
2. Detection threat Assign more staff to the audit
3. Self-review threat The three staff members should not be included in the
audit team that will be auditing Zo-Jo
4. Self-review threat Another partner independent of the audit should prepare
the tax returns and take responsibility for them
2.
(a) Risk indicators (b) Description of the risk of material
misstatement at the financial statement
level.
Zo-Jo is a listed company The annual financial statements (AFS) might
be materially misstated, as the company
might not comply with JSE regulations.
Number of stores increased from 20 to 40 The AFS may be materially misstated as the
control environment could be compromised
due to the rapid growth
Stores are all over South Africa The AFS may be materially misstated due to
error as the internal control in the various
stores might not be operating effectively.
The company has to comply with numerous The AFS may be materially misstated due to
acts including the Consumer Protection Act error/fraud, as the entity might
68 of 2009 and the Competition Act 89 of unintentionally/intentionally not comply with
1998. the specific rules and regulations in the
industry within which it operates
Tight audit deadline The AFS may be materially misstated due to
error as the financial results prepared by the
client might be incomplete due to time
pressure
New and inexperienced personnel in finance The AFS may be materially misstated as there
department might be errors occurring in the preparation
of financial records due to a lack of
experienced personnel with appropriate
, accounting and financial reporting skills to
record complex accounting transactions
Shareholders’ dividends based on achieving
60% gross profit margin The AFS may be materially misstated due to
manipulation as management might engage
in fraudulent financial reporting by inflating
the performance and position (eg
overstatement of revenue) of the entity or by
reflecting a poor performance and position
(eg overstatement of expenses) of the entity
to meet the gross profit margin in order to
pay dividends.
Question 3
The following will affect the scope of the audit strategy:
Zo-Jo Ltd is a listed company
• Will be an audit based upon information prepared in terms of International Financial
Reporting Standards and conducted in terms of the ISAs.
• Procedures on compliance with JSE regulations and • corporate governance
requirements (e.g. King IV), will be conducted.
Multiple locations
• May result in the use of other auditors in the major cities, for simultaneous inventory
counts.
• May also result in more extensive use of internal audit (but see 4 below) for inventory
counts etc.
The following information will affect the timing of the audit strategy:
Size of client
• As the company is large and geographically spread out, the audit cannot be left until the
“last minute”. It must commence as soon as possible with careful planning.
Audit deadline
• The audit deadline reinforces that we will have to get on with the audit as soon as
possible.
• This will also put pressure on the engagement team and emphasize the importance of
prompt communication with other parties, and within the audit team.
Question 4
OF 2021
1.
Threats Safeguards
1. Intimidation threat Remove the audit partner from the audit
2. Detection threat Assign more staff to the audit
3. Self-review threat The three staff members should not be included in the
audit team that will be auditing Zo-Jo
4. Self-review threat Another partner independent of the audit should prepare
the tax returns and take responsibility for them
2.
(a) Risk indicators (b) Description of the risk of material
misstatement at the financial statement
level.
Zo-Jo is a listed company The annual financial statements (AFS) might
be materially misstated, as the company
might not comply with JSE regulations.
Number of stores increased from 20 to 40 The AFS may be materially misstated as the
control environment could be compromised
due to the rapid growth
Stores are all over South Africa The AFS may be materially misstated due to
error as the internal control in the various
stores might not be operating effectively.
The company has to comply with numerous The AFS may be materially misstated due to
acts including the Consumer Protection Act error/fraud, as the entity might
68 of 2009 and the Competition Act 89 of unintentionally/intentionally not comply with
1998. the specific rules and regulations in the
industry within which it operates
Tight audit deadline The AFS may be materially misstated due to
error as the financial results prepared by the
client might be incomplete due to time
pressure
New and inexperienced personnel in finance The AFS may be materially misstated as there
department might be errors occurring in the preparation
of financial records due to a lack of
experienced personnel with appropriate
, accounting and financial reporting skills to
record complex accounting transactions
Shareholders’ dividends based on achieving
60% gross profit margin The AFS may be materially misstated due to
manipulation as management might engage
in fraudulent financial reporting by inflating
the performance and position (eg
overstatement of revenue) of the entity or by
reflecting a poor performance and position
(eg overstatement of expenses) of the entity
to meet the gross profit margin in order to
pay dividends.
Question 3
The following will affect the scope of the audit strategy:
Zo-Jo Ltd is a listed company
• Will be an audit based upon information prepared in terms of International Financial
Reporting Standards and conducted in terms of the ISAs.
• Procedures on compliance with JSE regulations and • corporate governance
requirements (e.g. King IV), will be conducted.
Multiple locations
• May result in the use of other auditors in the major cities, for simultaneous inventory
counts.
• May also result in more extensive use of internal audit (but see 4 below) for inventory
counts etc.
The following information will affect the timing of the audit strategy:
Size of client
• As the company is large and geographically spread out, the audit cannot be left until the
“last minute”. It must commence as soon as possible with careful planning.
Audit deadline
• The audit deadline reinforces that we will have to get on with the audit as soon as
possible.
• This will also put pressure on the engagement team and emphasize the importance of
prompt communication with other parties, and within the audit team.
Question 4
