AUE3701 GRADED QUESTIONS

AUE3701 GRADED QUESTIONS 1 STUDY UNIT 2.1 – PRELIMINARY ENGAGEMENT STAGE QUESTION 1 (54 marks) Do question 5.8 in Graded Questions on Auditing 2014 by Gowar and Jackson. You are a member of the Quality Control Committee of a large audit firm; Art Andersunn and Co. Part of the committee’s responsibility is to determine whether prospective clients are acceptable and whether existing clients should be retained. Being a large practice, numerous potential clients are brought to the committee for consideration and the following list includes a number of recent such cases where the audit appointment is available. 1. Trigger Happy Ltd, a company which hires out mercenaries to foreign governments involved in conflict and anyone else who is interested. The company is not listed on any stock exchange. 2. Bossman Ltd, a listed company (with a substantial audit fee), whose chairman is an outspoken critic of the King III Report on Corporate Governance. His stance is that business is tough and that all the transparency, disclosure and fairness simply weakens the company as it gives competitors insights they shouldn’t have and that business is not supposed to be fair! 3. Nicotar (Pty) Ltd, a company which manufactures cigarettes. 4. Bluevex Ltd, a public company which owes its current auditors R754,000 in audit fees. The company’s audit committee claims that the current auditors have overcharged. 5. King Couriers Ltd, a company which has on two previous occasions sued its auditors and on both occasions the auditors (different firms) have admitted negligence and settled out of court. 6. Skweeze (Pty) Ltd, a chain of retail shops which sells pornographic materials and runs escort agencies. The company is a subsidiary of a listed company in the entertainment sector. The holding company auditors have declined the audit. 7. La Paint (Pty) Ltd, an interior decorating business which is owned by the wife of Art Andersunn and Co’s partner in charge of the Taxation department. The company’s public interest score requires that the company be externally audited. 8. Interworld (Ltd), prestigious, International Corporation with operations world wide and its head office in Johannesburg. AUE3701 GRADED QUESTIONS 2 YOU ARE REQUIRED TO: a) Discuss what an audit firm sets out to achieve by implementing policies and procedures relating to the acceptance of new clients as required by ISQC1. (4) QUESTION 1 (a) (54 marks) 1. In terms of ISQC1, such policies and procedures are carried out to provide the firm with reasonable assurance that it will only undertake an engagement where the firm …  Is competent to perform the engagement and has the capabilities, including time and resources to do so.  Can comply with relevant ethical requirements.  Has considered the integrity of the client, and does not have information that the client lacks integrity. 2. From a practical perspective, an audit firm carries out these procedures so as not to make a bad business decision e.g. taking on a client which will not pay its fees or which will negatively affect the reputation of the audit client. (4 x 1½ = 6) b) Comment on how information about a prospective client can be obtained. (4) QUESTION 1 (b) Information about a prospective client can be obtained in various ways: 1. Communicating with the previous auditor, or in the case of a group, other auditors involved in the audit of group companies. 2. Discussion with the client’s audit committee, senior financial personne