AUE2601___Graded_QUESTIONS AND ANSWERS_2017

Topic 1: Introduction to Auditing Study Unit 1.1: The Auditor 1. Do question 1.1 part 1) and 2) in graded Questions on Auditing 2017 by Gowar and Jackson (35 marks) References: - Jackson & Stent (2014: 1/2 -1.5, 1/20); - Study guide (Study unit 1.1) Q1.1 Part1. Give three reasons (with brief explanations) as to why auditors are needed in society. (9) Ans: Reason: The split between ownership and management. √ Explanation: In many businesses, the owners (shareholders) do not actually run (manage) the business, they appoint directors to do this. The directors are then required to report to the shareholders on how the company has performed. To make sure that management reports fairly, the shareholders appoint independent auditors to audit the accounting records. (In the case of a public company, the company must, in terms of the companies Act 2008, appoint an auditor. In the case of a private company it is not a statutory requirement, but the shareholders or an external third party with an interest in the company may require it.) √ - Reason: Society needs confidence in financial information. √ Explanation: Society (the general public) is affected in many ways by financial information e.g. for paying taxes, making investments, receiving government services and if society is to run efficiently and effectively, the financial information on which government and individuals rely, must be credible and fair. Independent auditors, whether they be external or internal or government auditors, contribute significantly to the quality of this financial information. √√ -Reason: Society requires that those who have responsibility for financial matters must be accountable. √ Explanation: The government is accountable to the public for the manner in which it spends tax money, directors are accountable to their shareholders and the public for the manner in which they run their companies e.g. control pollution, train staff etc. Independent auditors (of any type) provide a mechanism to evaluate and report on whether those who should be financially accountable are acting and reporting appropriately. √√ Q 1.1 Part2. Explain the following terms (10) Ans: * Internal auditor - Auditors who perform independent assignments on behalf of senior management (the audit committee) of the company. The internal auditor is an employee of the company and can be seen in the wider sense, as part of the internal/risk response control of the company. √√ * Forensic auditor - A forensic auditor is an auditor who concentrates on investigating and gathering evidence where there have been allegations of financial mismanagement, theft or fraud. √√ * Postulates of auditing - The postulates are the foundation on which the discipline (subject) of auditing is built. They provide a starting point, or basis for thinking about what auditing actually is. √√ * Professional scepticism - This is an attitude or state of mind which all auditors must exercise. It means approaching the audit with a questioning mind, not naively accepting information provided by a client (of any kind) as the truth, or being “led around by the nose” by the client BUT at the same time not being rude or discourteous to the client. It also means that the auditor should be alert to conditions which may indicate material misstatement and should remain unconvinced of the truth of a particular fact until suitable evidence is provided. √√ * Applicable financial reporting framework - The financial reporting framework adopted by management in the preparation of the financial statements, that is acceptable in view of the nature of the entity and the acceptable in view of the nature of the entity and the objectivity of the financial statements (eg. IFRS). √√ 2. Do questions 1.6 in Graded questions on auditing 2017 by Gowar and Jackson. (10 marks) References: - Jackson & Stent (2014: 1/2 - 1/5); - Study guide (Study unit 1.1) Scenario 1.6 (10 marks 12 minutes) Appearing below is a list of different types of auditor and other individuals associated with the financial world. Also listed is a broad description of some of the activities carried out by the individuals. 1. Individuals 1.1 forensic auditor 1.2 A registered auditor 1.3 internal auditor 1.4 independent accounting professional 1.5 A financial director 1.6 government auditor 1.7 special purpose auditor 1.8 management accountant. 2. Activities 1.1 takes responsibility at board level for the adoption and implementation of the accounting policies adopted by a company 1.2 investigates and gathers evidence where there has been alleged financial mismanagement/fraud 1.3 analyses cost and variance reports 1.4 expresses an independent opinion on whether the financial statements of a company are fairly presented 1.5 expresses an opinion on whether the financial information presented by the Eastern Cape provincial health department to the government is fairly presented in terms of the government’s reporting guidelines