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QUESTION3 (30 MARKS)

The following audit report was drafted by a trainee on the audit ofGolf (Pty) Ltd (“Golf”), a company which manufactures golf clubs.The trainee was asked to draft the report at the conclusion of theaudit for the financial year end 31 March 2017 as part ofon-the-job training and you have to evaluate his report. Theshareholders of Golf included a clause in the company’s Memorandumof Incorporation which requires that the company’s annual financialstatements are extremely audited.

Independent Report To the board of directors. We have evaluated theaccompanying financial statements of Golf for fairness based on ourannual audit carried out in terms of the Memorandum ofIncorporation of the company.

Management is responsible for the preparation of the financialstatements and for the prevention of fraud.

The auditor’s responsibility is to perform the audit and in doingdo, to detect any fraud which may have material effect on thefinancial statements not having been prevented by thedirectors.

We report on the following aspects of the audit: 1. With regard tothe detection of fraud, we detected a small wage fraud relating tounauthorized overtime. We reported this to management whosubsequently dismissed the guilty persons.

2. An expert was engaged by our firm to assist in the valuation ofthe work-in-progress. Due to the complexity of the some of thecompany’s golf clubs, the risk of misstatements in thework-in-progress warranted this.

3. The company is currently being sued by a former employee whosuffered personal injury at work whilst testing certain golf clubsduring quality control procedures.


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In our opinion, except for the matters raised in 1 to 3 above,there are no outstanding issues arising from the audit which wasconducted in terms of the International Standards on Auditing andthe International Financial Reporting Standards.
Emphasis of matter There are no matters which requireemphasis.

ABD Audit Kings 31 March 2017 Windhoek Namibia

YOU ARE REQUIRED TO:

Detail the errors / deficiencies in the audit report presented toyou for evaluation (give explanations where necessary). You are NOTrequired to redraft the report.

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The following audit report was drafted by a trainee on the audit of Golf (Pty) Ltd (“Golf”), a company which manufactures golf clubs. The trainee was asked to draft the report at the conclusion of the audit for the financial year end 31 March 2017 as part of on-the-job training and you have to evaluate his report. The shareholders of Golf included a clause in the company’s Memorandum of Incorporation which requires that the company’s annual financial statements are extremely audited.

Independent Report

To the board of directors.

We have evaluated the accompanying financial statements of Golf for fairness based on our annual audit carried out in terms of the Memorandum of Incorporation of the company.

Management is responsible for the preparation of the financial statements and for the prevention of fraud.

The auditor’s responsibility is to perform the audit and in doing do, to detect any fraud which may have material effect on the financial statements not having been prevented by the directors.

We report on the following aspects of the audit:

1. With regard to the detection of fraud, we detected a small wage fraud relating to unauthorized overtime. We reported this to management who subsequently dismissed the guilty persons.

2. An expert was engaged by our firm to assist in the valuation of the work-in-progress. Due to the complexity of the some of the company’s golf clubs, the risk of misstatements in the work-in-progress warranted this.

3. The company is currently being sued by a former employee who suffered personal injury at work whilst testing certain golf clubs during quality control procedures. In our opinion, except for the matters raised in 1 to 3 above, there are no outstanding issues arising from the audit which was conducted in terms of the International Standards on Auditing and the International Financial Reporting Standards.

Emphasis of matter

There are no matters which require emphasis.

ABD Audit Kings

31 March 2017

Windhoek Namibia

YOU ARE REQUIRED TO: Detail the errors / deficiencies in the audit report presented to you for evaluation (give explanations where necessary). You are NOT required to redraft the report. (30 marks)

The following audit report was drafted by a trainee on the audit of Golf (Pty) Ltd (“Golf”), a company which manufactures golf clubs. The trainee was asked to draft the report at the conclusion of the audit for the financial year end 31 March 2017 as part of on-the-job training and you have to evaluate his report. The shareholders of Golf included a clause in the company’s Memorandum of Incorporation which requires that the company’s annual financial statements are extremely audited.

Independent Report To the board of directors. We have evaluated the accompanying financial statements of Golf for fairness based on our annual audit carried out in terms of the Memorandum of Incorporation of the company.

Management is responsible for the preparation of the financial statements and for the prevention of fraud.

The auditor’s responsibility is to perform the audit and in doing do, to detect any fraud which may have material effect on the financial statements not having been prevented by the directors.

We report on the following aspects of the audit: 1. With regard to the detection of fraud, we detected a small wage fraud relating to unauthorized overtime. We reported this to management who subsequently dismissed the guilty persons.

2. An expert was engaged by our firm to assist in the valuation of the work-in-progress. Due to the complexity of the some of the company’s golf clubs, the risk of misstatements in the work-in-progress warranted this.

3. The company is currently being sued by a former employee who suffered personal injury at work whilst testing certain golf clubs during quality control procedures.


Page 12 of 17

In our opinion, except for the matters raised in 1 to 3 above, there are no outstanding issues arising from the audit which was conducted in terms of the International Standards on Auditing and the International Financial Reporting Standards.
Emphasis of matter There are no matters which require emphasis.

ABD Audit Kings 31 March 2017 Windhoek Namibia

YOU ARE REQUIRED TO:

Detail the errors / deficiencies in the audit report presented to you for evaluation (give explanations where necessary). You are NOT required to redraft the report. (30 marks)


QUESTION 4 (16 marks) According to ISA 240R- The auditors responsibility to consider fraud in an audit of financial statements, the auditor is required to recognize situations which may result in misstatements arising out of the misappropriation of assets. Consider the following. 1. A client company which holds large quantities of inventory does not keep the perpetual inventory records. 2. A company makes all its payments (e.g. wages, salaries, creditors) by electronic funds transfer. 10 employees are provided with the facilities on their computers to effect electronic transfers for their various sections. 3. The company reconciles its creditors ledger with creditors statements only at year – end. 4. The company pays salaries well below the industry norm and adopts the attitude that “if staff don’t like it if they can leave”. 5. Employees caught stealing from the company or making unauthorized use of company assets are dismissed immediately and prosecuted. 6. The company makes a significant number of cash sales. 7. Management and other employees constantly complain about the company (many of the complaints being unfounded). Company morale is low.


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8. There is inadequate authorization of expenditure incurred by management and employees on behalf of the company e.g. salesmen’s expense claims, management travel claims.

ISA 240R classifies the factors which could lead to the risk of misstatement arising from misappropriation as follows:

Classification a – incentive/pressures to misappropriate assets Classification b – opportunities to misappropriate assets Classification c – attitudes/rationalization which suggest the misappropriation may take place.

YOU ARE REQUIRED TO indicate into which classification each of the above risk factors (1 to 8) falls, and give a brief explanation as to why each of the factors increases the risk of misappropriation

The following auditor’s report was drafted by a staff accountantof Nathan and Mat-
thew, CPAs, at the completion of the audit of the comparativefinancial statements

of Monterey Partnership for the years ended December 31, 2015and 2014. Mon-
terey is a privately held company that prepares its financialstatements on the income

tax basis of accounting. The report was submitted to theengagement partner, who

reviewed matters thoroughly and properly concluded that anunmodified opinion

should be expressed. The draft of the report prepared by aninexperienced staff audi-
tor is as follows:

Auditor’s Report

We have audited the accompanying financial statements ofMonterey Partnership,

which comprise the statements of assets, liabilities, andcapital–income tax basis as

of December 31, 2015, and the related statements of revenue andexpenses–income

tax basis and of changes in partners’ capital accounts–incometax basis for the year

then ended, and the related notes to the financialstatements.

Final PDF to printer

Auditor’s Responsibility

We conducted our audit in accordance with standards establishedby the AICPA.

Those standards require that we plan and perform the audit toobtain reasonable assur-
ance about whether the financial statements are free from materialmisstatement.

An audit involves performing procedures to obtain audit evidenceabout the

amounts and disclosures in the financial statements. Theprocedures selected depend

on the auditor’s judgment, including the assessment of the risksof material mis-
statement of the financial statements, whether due to fraud orerror. An audit also

includes evaluating the appropriateness of accounting policiesused as well as evalu-
ating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained issufficient and appropriate

to provide a basis for our audit opinion.

Opinion

In our opinion, the financial statements referred to abovepresent fairly, in all

material respects, the assets, liabilities, and capital ofMonterey Partnership as of

December 31, 2015, and its revenue and expenses and changes inpartners’ capital

accounts for the year then ended in conformity with generallyaccepted accounting

principles applied on a consistent basis.

Basis of Accounting

We draw attention to Note 2 of the financial statements, whichdescribes the basis

of accounting. The financial statements are prepared on thebasis of accounting the

Partnership uses for income tax purposes. Accordingly, thesefinancial statements

are not designed for those who do not have access to thePartnership’s tax returns.

Our opinion is not modified with respect to this matter.

Nathan and Matthew, CPAs

April 3, 2016

Required:

Identify the errors and omissions in the auditor’s report asdrafted by the staff audi-
tor. Group the errors and omissions by paragraph, where applicable.Do not redraft

the report.

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