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.
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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 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.
QUESTION 4
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
Following errors may be identified from audit report presented:
- Title of report is erroneous. Title should be " Independent Auditor's report" as against " Independent Report".
- Report should be evaluated for correctness & fairness & not merely fairness.
- As against the writing that management is responsible for financial statements, drafting should be that " management is responsible for views expressed in financial statements".
- Auditor's responsibility is not only to detect fraud but also to express a view on financial statements. This statement is missing from drafted audit report.
-The Instead of being blunt about management dismissing guility persons, wording no action was taken would be more appropriate.
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