Question

The following audit report was drafted by a trainee on the audit of Golf (Pty) Ltd...

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.


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.


Page 13 of 17

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

Homework Answers

Answer #1

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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