AUE3761

Jan/Feb 2024
SUGGESTED SOLUTION

General comments:

- Remember that this memorandum is only a guideline. Read each answer provided
by the student carefully.
- If the student described it in a different manner, but it relates to a point provided in
the memorandum, please award the marks.

PART 1:
Question 1: Discuss, based only on the information included in the above stated information, the
matters of concern that ABC Incorporated should have considered before it accepted the audit
engagement with SADA for the financial year ended 30 November 2023. Recommend
improvements to be put in place for each concern.

19 MARKS

Matters of concern Improvements to be put in place

References: Tutorial letter 102; Lesson 3.3; ISA 315 (Revised 2019), TL 102 AND 105:
Companies Act
1. Establish whether pre-conditions for an audit are present.
1.1 SADA’s expectations that ABC Inc assist with If any of the preconditions of the audit are not
the preparation of accounting information/ present, the auditor should discuss the
setting the audit deadline is concerning (1). matter with management and decline the
audit engagement (1).

1.2 This is an indication that the management of The auditor should obtain an agreement
SADA do not fully accept responsibility for the from management where management
preparation of financial statements (1) as they clearly acknowledges and understands
required the prior auditor to assist in preparing their responsibility especially in terms of
financial statements that are free from material preparation of the financial statements
misstatement and fired them when this was not (this is usually stated in the engagement
done. letter as well) (1).
2. Investigate prospective client
2.1 ABC Inc did not investigate the prospective ABC Inc should have performed an
client (1) such as considering the integrity of the investigation into SADA and consider
client (1) and reasons for changing auditors (1). reasons for the sudden proposed
appointment and non-renewal of the
engagement with the previous firm (1).

1
Question 1: Discuss, based only on the information included in the above stated information, the
matters of concern that ABC Incorporated should have considered before it accepted the audit
engagement with SADA for the financial year ended 30 November 2023. Recommend
improvements to be put in place for each concern.

19 MARKS

Matters of concern Improvements to be put in place

2.2 ABC Inc did not contact the previous auditors ABC Inc should obtain permission from the
to investigate the reason for qualifications client to contact the previous auditors to
issued/disagreements with management (1). investigate the reason for the issues
experienced (1).
3. Determine skills, competence, and resources
3.1 There is a self-interest threat (1) to ABC Incorporated should increase the
professional competence and due care (1) as number of personnel on the audit team at
the audit firm might not have enough personnel SADA to counter the limited timeframe OR
(resources) on the audit to finalise the audit
within the limited/given timeframe. (1) extend, with SADA’s consent the timeframe
MAX (1)

3.2 The client is highly computerised and the audit ABC Inc should consider including
firm did not consider the competence of staff to experienced team members in auditing
address the computerised environment (1). computerised audit systems or hire an audit
expert (1).

4. Consider statutory and ethical requirements

4.1 There is a self-interest threat (1) to ABC Inc may not be involved in
professional behaviour (1) and objectivity (1) accounting or operational functions
as the technical audit manager is required to including ensuring the financial statements of
compile accounting information for the SADA are free of material misstatement-;and
financial statements of SADA in the should therefore not accept SADA as an
preparation of financial statements to ensure audit client OR
free from material misstatement/unqualified (1)
and to offer strategic guidance in terms of ABC Incorporated should consider obtaining
operations (1). This is also a contravention of legal advice. OR
section 90 of the Companies Act. (1)
SADA should consider to appoint someone
else to compile financial statements.

MAX (1)
4.2 ABC Inc should have considered if the
ABC Inc should discuss with management
appointment followed the necessary
the non-compliance with section 91(3) of the
channels/compliance processes for
Companies Act, resign or obtain ratification
appointment, i.e. Section 91(3) of the Companies

2
Question 1: Discuss, based only on the information included in the above stated information, the
matters of concern that ABC Incorporated should have considered before it accepted the audit
engagement with SADA for the financial year ended 30 November 2023. Recommend
improvements to be put in place for each concern.

19 MARKS

Matters of concern Improvements to be put in place

Act (1). There is a self interest (1) threat to by the board after commendation from the
professional behaviour (1) as appointment is not audit committee (1).
in terms of the Co Act.
or
ABC Inc was not proposed by the board to the
audit committee for approval, in this case the
board has unanimously approved the
appointment without the recommendation
from the audit committee. (1).
4.3 There is a familiarity threat (1) to objectivity The audit partner (Ms Sandy Mahlangu)
(1) as the CFO and the engagement audit partner should not be involved in the audit; and
in charge of the audit are friends. The audit partner another audit partner at the firm should be
is therefore not independent from the audit client. allocated to the audit, if possible. If this is not
(1) possible, the audit should not have been
accepted. (1)

5. Establish terms of the engagement

5.1 SADA’s expectations of ABC Inc regarding the SADA should not dictate the conditions of the
setting the audit deadline is concerning (1) audit and therefore no audit deadline should
be included in the engagement letter. (1)
Available (32 x 1 ) 32
Maximum marks 18
Communication skills – Clarity of expression 1
Total part 1 19

3
Required 2: Formulate the automated tests of controls to test the internal controls over
the invoicing of paid advertising clients at SADA for the year ended 30 November
MARKS
2023. Your tests of controls may include using CAATs. Limit your answer to invalid
test data.

References: Tutorial letter 103 TOC 12

1. Attempt to gain access to the invoicing application by entering a fictitious username 
and password. (1)
2. Use CAATs to scan the masterfile and transactional file for ‘’error conditions’’ and
extract an exception report: (1) 
3. for instances where the invoicing process does not run from the first date to last

date of the month for both PPL and PPC clients. (1)
4. where the PPL or PPC report do not contain all required client fields/missing 
client fields (1)
5. where clients are not charged interest on overdue accounts/ disputes are accepted 
after the 30 day period (1)
6. where there are duplicated masterfile information such client numbers, email 
addresses ect (1)
7. invoice numbers that are in duplicate (1) 

8. reports without a valid digital signature (1) 
9. interest charged rates/tariffs/employee rates not in accordance with masterfile tariffs
(1)
10. Invoices not in sequential order (1) 
11. Where the invoice differs to the information captured in the transactional file (1) 

12. Obtain a log of access to inspect that only authorised users have access to specific
functions/ unauthorised users are blocked from accessing specific functions (least-
privilege function (user profile functions)

OR Attempt to perform other functions such as edit/approve/make changes as a user
without access to perform those specific functions. (1)
13. Using CAATs extract a report of paid advertising clients (PPL and PPC) the billing 
system (1) and:
14. Attempt to change the monthly fixed fee/payment terms (including interest rate)
for (PPL or PPC) or the client contract type or the automatic generation of monthly 
reports on the first of each month by overriding the automatic generation of the
correct tariff for a unit/contract type on the customer billing information. (1)
15. Reprocess a number of client information and note if the tariff does not automatically

appear or agree to the tariff list according to the masterfile (1).
16. Use CAATs to recalculate the invoice to confirm the accuracy (1). 

Available (16 x 1) 16
Maximum 12

4
Required 3.1: Discuss considerations to be applied by ABC Inc in assessing whether, in
which areas, and to what extent the work done by the internal auditors on WP IA MARKS
B-100 used in line with ISA610 (revised)

References: Tutorial letter 104, ISA 610 (revised) 9

1. The work performed by the internal auditors of SADA represent additional audit 
evidence on matters that impact the control environment and amounts disclosed
in the financial statements pertaining to employee costs. (1)
2. The work prepared by the internal audit function should be assessed by the external 
auditors ABC Incorporated to determine the extent of reliance (1)

3. As this is a new audit engagement, ABC Inc may utilise internal audit working papers, 
to identify risk of material misstatement and possibly reduce the extent of
substantive work by placing reliance on the work done by the internal audit function.
(1)

4. ABC Inc should consider the objectivity (1 ), competence (1 ), experience (1 ), of 

the internal audit function and whether the internal audit function applies a
systematic and disciplined approach including quality control (1) in the completion 
of WP IAB-100.

5. Several shortcomings on WPB-100 indicates that proper planning, performance,

supervision, review and documentation were not maintained as: (1) 
6. The directions to perform the task was controlled by the HR director and not by an

independent person; (1)
7. The performance of additional audit work performed to address each complaint was 
not sufficient or appropriate as only enquiries were made. (1)
8. The documentation of who prepared the working paper, the date and review was 
not complete. (1)
9. The record of work done/procedures performed is not in sufficient detail to allow for 
reperformance. (1)

10. The conclusions reached are not supported by sufficient appropriate audit evidence. 
(1)

11. Except for risk assessment purposes, none of the work done by the internal audit 
function can be used by the external auditor. (note this relates to a valid conclusion
on the extent of reliance)
Available (14 x 1 = 10 ) 14
Maximum 9

5
Required 3.2: Discuss whether the assistance of the audit senior at XYZ Inc.
(previous auditor) in relation to complaint 2 of WP IA B-100 contravenes section
MARKS
90(2) of the Companies Act 71 of 2008 “Appointment of auditor”. (Source: SAICA
Adapted)

References: Tutorial letter 102&105, Companies Act, 2008. (SAICA, adapted) 4

Section 90(2) of the Companies Act provides that an auditor cannot be the following:

An employee or consultant of the company who was or has been engaged for more than
one year in the maintenance of any of the company’s financial record or the preparation
of any of its financial statements, and

Any person who, alone or with a partner or employees, habitually or regularly performs
the duties of accountant or bookkeeper, or performs related secretarial work, for the
company.

The above was indicated in the scenario and no marks are awarded.
1. The previous audit senior assisted with the journal entries to account payroll related 
items for the month of June 2023 and hence has not been engaged for more than a
year in maintaining the company’s financial records and this is a once off event. (1)
2. The previous audit team is not providing journal entries on payroll on a regular or 
habitual basis. (1)
3. Thus, section 90(2) has not been contravened in this instance. (1) 

Available (3 x 1 = ) 3
Maximum 3
Communication mark: logical argument 1
Total marks 4

6
Required 3.3: Describe substantive audit procedures to obtain sufficient and
appropriate audit evidence to support bonuses paid to employees on the 31 July 2023
as documented as complaint 1.1 and 1.2 on working paper IA B-100 by XYZ Internal MARKS
Auditors (Pty) Ltd. Ensure your answer addresses the bonus payment of R1 650 000 and
R750 00. You can ignore any reliance on predecessor auditors.

References: Tutorial letter 104, ISA500 15

Procedures to address the R1 650 000 bonus payment to all employees:

1. Obtain the remuneration and bonus policy and inspect the designated the basis of 
bonus calculation (3%-5%) and timing of payments (July and December) (1)

2. Obtain a breakdown of the bonuses paid schedule/payroll list for July 2023 (1) and.
3. Agree the total bonus paid amount as R 1 650 000 and payment date as 31 July 2023 
(1).
4. Obtain the revenue earned for the 6 months ended May 2023 from the trail balance 
as at 30 May 2023 (1).
5. Recalculate the amount of bonuses paid to all employees and ensure the % of 2.5% 
(1).
6. Obtain the minutes of meeting in which the 2.5% was discussed and agreed 
upon/minutes in which the directors agreed to address the shortfall in December 2023
(1).
7. Agree the shortfall to payslips/bank statements processed in December 2023 and 
inspect the AFS to determine if an accrual was raised (1).
8. Trace the July 2023 bonus paid to a sample of employees to the employee 
payslips/bank statement (1) and to valid employee contracts /physical employee
identification to confirm they are valid employees (1):
9. Obtain the CTC and total CTC from the payroll (1½) and 

10. Recalculate the sample of individual bonus payments using the CTC and overall CTC

for all employees to verify the correct amount is allocated per employee (1).
11. Confirm the bonuses paid in July 2023 payroll to signed salary notifications in the 
employee’s personnel file (1).

Procedures to address R750 000 paid to PPL employees only

12. Enquire with management as to the basis used to pay out PPL employees’ additional 
bonus of R750 000/obtain minutes to confirm approval of PPL Bonus (1).
13. Obtain the list of PPL incentive bonus paid (1) and

14. Ensure there are 25 payments/employees ( 1 ) and 
15. Agree the amount of R750 000 and the date as 31 July 2023 (1) 
16. Obtain a list of all the PPL employees (from the Masterfile extract all PPL employees) 
(1).
17. Discuss with PPL manager to ensure that all employees who received the PPL 
incentive, are in fact PPL employees or with confirmation from payroll file
description/appointment letters/ work description for employee (1).
18. Trace any additional amounts paid to the PPL contracted employees to the employee 
payslips/bank statement (R30 000 before tax) (1):
– inspect the source documentation for a valid authorising signature, for example, the 
CFO approving the payment of an incentive bonus (1)

7
Required 3.3: Describe substantive audit procedures to obtain sufficient and
appropriate audit evidence to support bonuses paid to employees on the 31 July 2023
as documented as complaint 1.1 and 1.2 on working paper IA B-100 by XYZ Internal MARKS
Auditors (Pty) Ltd. Ensure your answer addresses the bonus payment of R1 650 000 and
R750 00. You can ignore any reliance on predecessor auditors.

– re-perform any calculations (R30 000 X 25) (1), and 

– confirm by enquiry and inspection, that the payment is valid in terms of company
policy/memorandum or minutes approving the additional amount/PPL employee contract 
(1).

Procedures to address both payments:

19. Obtain a written representation regarding bonuses paid for the year ended 
30November 2023 addressing all assertions (1).
20. Confirm the PAYE has been appropriately calculated and paid over to 
authorities/employees are paid an amount net of PAYE (1).
21. Trace amounts posted from the selected payroll for both bonus payments to the 
relevant accounts in the general ledger (1).

Note: General regarding the payment of the R1 650 000 bonus- The answer cannot be
awarded marks by discussing the difference between the 2,5 % and what could/should
be provided (possible accrual/contingent liability) as the question requires tests on the
actual payment of the bonus.
Available 24
Maximum 15

8
Required 3.4: Discuss whether or not a material misstatement exists and what steps
should be taken by the auditor in relation to the incentive bonus paid to PPL
employees (complaint 1.2) in terms of ISA 450. You can assume your procedures in MARKS
3.3 confirmed the validity of the complaint and you assume there are no other issues
identified affecting the audit report.

References: Tutorial letter 105 7

1. The issue on the incentive bonus to PPL employees is not disclosed / recorded in 
accordance IAS 1 (IAS 1.104 requires that the employee benefits expense be
separately disclosed (1), and it was included as part of sundry expenses.
2. As a result this is a misstatement because it is a difference between the amount, 
classification, presentation, or disclosure of a reported financial statement item and
the amount, classification, presentation, or disclosure that is required for the item to
be in accordance with the applicable financial reporting framework (IAS 1) (1).
In terms of materiality:
3. The matter is quantitively material (1) as the aggregated misstatement does exceed 
final materiality, R750 000 understatement of employee costs is greater than

R700 000 materiality threshold. (1)
4. The matter is also qualitatively material (1) as its the misclassification in the AFS 
might influence the users decisions and the matter constitutes directors breaching
their fiduciary duty due to a contravention of company policy that may result in
litigation against the company and non-compliance to IAS 1 (1). 
5. Thus, in terms of materiality, this misstatement should be communicated to 
management in good time (1).
6. Management should be convinced to adjust the financial statements and action any 
non-compliance to company policy with appropriate response (1).
7. The misstatement is not pervasive as it only affects/confined to limited elements of 
the financial statements, (employee costs, sundry expenses) (1).
8. If after all steps are followed and management refuse to make the adjustment, the 
audit report will be modified. (1)
Available marks (10 x 1 ) 10
Maximum for question 3.4 7

9
 PART 2

Required 4.1: Complete items 1.1-1.13 on WPA100 that the previous audit manager
Mr J Smith left incomplete. Your answer will address incomplete items in all the headings MARKS
below and should be addressed as 1.1, 1.2, 1.3 etc in accordance with the numbering in
the scenario. The mark allocation per heading is indicated below. (SAIGA, adapted).
10

References: Tutorial letter 102, 104

1.1 Inaccurate or incomplete financial statements/opening balances may not carry 

forward correctly or not in accordance with the GRAP reporting framework.(Financial
statements might contain errors due to non-compliance with accounting framework).
Note: There answer does not have to indicate GRAP specifically but allude to inaccurate
or incomplete financial statements/opening balances.

1.2 All assertions may be affected. 

1.3 All transactions, account balances and disclosures may be affected. 

1.4 There is a risk that the laptops might not be valued at the correct amount/assets may 
be overstated(depreciation understated). As the laptops/assets are not in working
condition, they should be written off.
Note: The answer should explain why the assets may be overstated to be awarded full
marks.
1.5 Accuracy, valuation and allocation. 
1.6 Fixed assets/PPE and loss on disposal of asset. 

1.7 There is a risk that intangible assets might not be valued correctly due to difficulties 
in establishing the date the risks and rewards are transferred and the appropriate
spot rate to be used.
1.8 Intangible assets, amortisation, gains/losses on forex.  
1.9 The appointment of a new finance manager during January 2024 (3 months prior to 
year-end) and with no sufficient experience as a finance manager/financial role.
1.10 The financial statements as at 31 March 2024 may be inaccurate or incomplete (may 
contain errors) and not in accordance with the GRAP reporting framework due to a
lack of experience of Mr J Smith in the role as a financial manager within public sector.
1.11 Financial statement level. 
1.12 All assertions. 
1.13 All transactions, account balances and disclosures. 
Available marks 14
Maximum for question 4.1 9
Layout and structure (point form) 1
Total question 4.1 10

10
Required 4.2: Describe the substantive audit procedures that you will perform on: (i)
agency fees- digital management for the period ended 30 November 2023. Limit
you answer only to procedures that will be performed with the assistance of data-
MARKS
orientated CAATs and (ii) and additional substantive procedures to obtain sufficient
appropriate audit evidence on the possible interest of Ms Mhlangu in the contract with
Sizwe & Adams (Pty) and related disclosure in the financial statements.

References: Tutorial letters 104

24
(i) Substantive procedures using CAATs on agency fees for digital
management as at 30 November 2023.
1. Use CAATs to cast and cross cast the schedule, GL, TB, AFS (1). 
2. Use CAATs to select a sample or extract information related to agency 
contracts/transactions in the GL for further tests of detail (1).

3. Use CAATs to recalculate agency fees paid and agree to the AFS/TB/GL (1).

4. Use CAATs compare information:

• Compare the agency fees- digital management expense amount of this year 
adjusted to 12 months with the same expense of the prior year. (1)
• Compare the current year agency fees- digital management expense adjusted 
to 12 months with budgeted agency fees- digital management expense for
FY2024. (1)

• Compare the adjusted agency fees- digital management expense amount in the
financial statements/trial balance/GL of the current year (1) and compare to
the expenditure total in financial statements of other enterprises in the same
operating sector/similar clientele/best practices range. (1)
• Compare the increase or decrease in adjusted agency fees- digital 
management expense with the increase or decrease in agency digital
management creditors. (1)
• Compare the agency fees- digital management expense monthly to the 
monthly budgeted prediction of agency- digital management expenditure. (1)

5. Use CAATs to perform analytical review procedures :

• Calculate agency fees- digital management as a percentage of total expenses 
and (1)
• Compare the above percentage calculated to the percentages to prior periods 
(adjusted). (1)

6. Use CAATs to scan the supplier masterfile for error conditions (max 3):
• such as, blank fields, missing supplier code, duplicate transactions, contracts 
where the annual escalation rate not linked to prime interest rate or had no annual
escalation and debit balances/payments to suppliers not in the masterfile. (1)
• Extract a sample of agency fees- digital management expense, above a certain 
amount or nil balances. (1)

11
Required 4.2: Describe the substantive audit procedures that you will perform on: (i)
agency fees- digital management for the period ended 30 November 2023. Limit
you answer only to procedures that will be performed with the assistance of data-
MARKS
orientated CAATs and (ii) and additional substantive procedures to obtain sufficient
appropriate audit evidence on the possible interest of Ms Mhlangu in the contract with
Sizwe & Adams (Pty) and related disclosure in the financial statements.

7. Follow up unusual fluctuations with management (all CAATs procedures). (1) 

Available marks (13 x 1 ) 13

Maximum part i 9

(ii) Possible interest of Ms Mhlangu in the contract with Sizwe & Adams (Pty)
Ltd
Directors’ interest in contract
1. Inspect the register of directors’ interests in contracts for Ms Mhlangu’s declaration for 
FY2024. (1)
2. Inspect evidence from the supply chain processes (tender committee minutes) (1) to 
determine if Ms Mhlangu was present at the awarding of the tender to Sizwe & Adams
or if her interest was declared to MSA for the FY2024 prior to awarding the
contract/tender or inspect that Ms Mhlangu has declared her interest in the standard 
bid documentation (1)
3. Inspect the documentation that Ms Mhlangu did not vote on the decision to award the

contract to Sizwe & Adams (1).

Related parties’ substantive procedures

4. Obtain and inspect the supplier contract with Sizwe & Adams and confirm signing 
parties, dates, terms and conditions ect (1).
5. For the contracting parties, inspect supporting documentation specifically for any 
evidence of Ms Mhlangu being a party to it as a non-executive director; (1)
6. Inspect the supplier contract with Sizwe & Adams and other documentation (best
practices guideline) to see whether the contract has business rationale (logic) (arm’s 
length or is it designed to conceal misappropriation etc); and (1)
7. Inspect the supplier contract with Sizwe & Adams and other documentation to see

whether the deal has been appropriately accounted for in the accounting records. (1)
8. Review the entity’s procedures for identification of related parties. (1) 
9. Obtain confirmation from the Companies and Intellectual Property Commission (CIPC)
regarding the directors and shareholders of Sizwe & Adams (Pty) Ltd and compare
the information with that of MSA to identify possible related parties. (1) 
10. Request management to identify all transactions with Sizwe & Adams (Pty) Ltd or with
Ms Mhlangu. (1) 
11. Obtain a written representation from management regarding all assertions relating to

the supplier contract with Sizwe & Adams (Pty) Ltd. (1)

12
Required 4.2: Describe the substantive audit procedures that you will perform on: (i)
agency fees- digital management for the period ended 30 November 2023. Limit
you answer only to procedures that will be performed with the assistance of data-
MARKS
orientated CAATs and (ii) and additional substantive procedures to obtain sufficient
appropriate audit evidence on the possible interest of Ms Mhlangu in the contract with
Sizwe & Adams (Pty) and related disclosure in the financial statements.

12. Evaluate if above procedures reveal possible undisclosed related parties or significant
related party transactions (1) and perform additional identification procedures through 
enquiries with management/inspection of additional supporting documentation as
necessary to ensure all related party transactions and disclosures are included in the

financial statements. (1)
13. Inspect the financial statements for the disclosure of the related party relationship as 
well as the transactions. (1)
Available (15 x 1) 15
Maximum part ii 14
Maximum part i and ii 9+14=23
Communication marks:
Appropriate style (formal language used, appropriate statements) 1

Total question 4.2 24

13