AUI2601/203/2/2020

Tutorial Letter 203/2/2020

Internal Auditing: Theory and Principles

AUI2601

Semester 2

Department of Auditing

IMPORTANT INFORMATION:

SUGGESTED SOLUTION TO ASSIGNMENT 03 0F 2020 FOR THE SECOND

SEMESTER.

BARCODE
 1 GENERAL

In Tutorial Letter 101 we mentioned that only a sample or sections of a question would
be marked. You must use the suggested solution to mark all the questions for self-
assessment purposes.
2 PLANNING AND LAYOUT OF ANSWERS

Please note the following important principles before you work through the answers to
the various questions:

• You should have received your submitted Assignment 03 back

from Unisa.

• Pay attention to the mistakes you have made and to the

questions you have omitted.

• When working through the suggested solutions and the

discussions that follow below, try to understand why those
solutions are appropriate. You will then be able to apply the
principles addressed in those questions to other questions.

• At the end of each learning unit make notes on the mistakes you
have made and identify the topics you need to pay more attention
to.

3 SUGGESTED SOLUTION TO ASSIGNMENTS 03 OF 2020 FOR THE SECOND

SEMESTER

Question 1 22 marks

1.1 Practical illustration of the elements of an audit finding and developing a

recommendation

Reference: Learning Unit 14

Criteria Signed and accepted official purchase order by

the company and the customer should be in
place prior to the order being processed. (1)
Condition: Purchase orders are accepted from prospective
customers on the basis of a simple e-mail
confirmation to Zintle Pty (Ltd). (1)
Cause: Official purchase order have not yet been
approved by management and implemented. (1)
Effect: In the past year Zintle Pty (Ltd) experienced a
loss of R1.5 million as a consequence of goods
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being delivered against fraudulent orders placed

with the company (1)
Recommendation: Zintle Pty (Ltd) should ensure that a purchase
order is approved and implemented. Customers
should be required to forward to Zintle Pty (Ltd) a
an authorised purchase order either
electronically or by delivery to Zintle Pty (Ltd)’s
premises (1). As an additional control, checking
and authorisation by the sales manager should
be done prior to order being acceptance. (1)

(Marks as indicated, maximum 5 marks)

1.2 Benefits of compiling audit working papers

Reference: Learning Unit 15.4

• Working papers that document the engagement should be prepared by the internal
auditor and reviewed by the management of the internal audit activity. (1) The
working papers should record the information obtained and the analyses made (1),
and should support the bases for the observations and recommendations to be
reported. (1)

Engagement working papers generally:

• aid in the planning, performance and review of engagements. (1)
• provide the principal support for the engagement results. (1)
• document whether the engagement objectives were achieved. (1)
• support the accuracy and completeness of the work performed. (1)
• provide a basis for evaluating the internal audit activity's quality assurance and
improvement program. (1)
• Facilitate third-party reviews. (1)
• Source of reference/ record keeping for future use. (1)

(Marks as indicated, maximum 5 marks)

1.3 Purpose of sampling

Reference: Learning Unit 15

Sampling, or testing is applied for the purposes of:

• arriving at an audit opinion rapidly and without delay
• arriving at conclusions on whether the population should be accepted or rejected
• assuring that the conclusions regarding the financial and/or other records are reliable
and accurate
• on the strength of the theory of probability, using the sampling conclusions as the
basis for the reasonableness of the audit opinion.

(Marks as indicated, maximum 3 marks)

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1.4 Factors that determine the nature and scope of audit sampling

Reference: Learning Unit 15

The following factors directly determine the nature and scope of audit sampling or testing:

• the effectiveness of the system of internal control the more effective, the smaller the
sample (1)
• materiality of the transactions – the more material, the larger the sample (1)
• volume of transactions (population size) does not affect the size of the sample (1)
• method of record keeping (1)
• relative risk associated with the transactions (1)
• nature of the evidence (1)
• suggestion of irregularities (1)
• unusual items in the population (1)

(Marks as indicated, maximum 3 marks)

1.5 Quality of communication

Reference: Learning Unit 14

1.5.1 Clear communication – communications easily understood and logical, avoiding

unnecessary technical language and providing all significant and relevant
information. (1½)
1.5.2 Accurate communication – communications are free from errors and distortions
and are faithful to the underlying facts. (1½)
1.5.3 Concise communication – communications are to the point and avoid unnecessary
elaboration, superfluous detail, redundancy, and wordiness. (1½)
1.5.4 Constructive communication - communications are helpful to the engagement
client and the organisation and lead to improvements where needed. (1½)

(Marks as indicated, maximum 6 marks)

Question 2 14 marks

2.1 Audit procedures

Reference: Learning Unit 14

• Inspection (1): Inspection involves examinations of records or documents, whether
internal or external, in paper form, electronic form or in the form of other media, or a
physical examination of an asset. (1)
• External confirmation (1): Obtaining external confirmation entails receiving a direct
written response from a third party to a request from the auditor to that third party. (1)
• Reperformance (1): The auditor independently executes procedures or controls that
were originally performed as part of the entity's internal control (e.g. reperformance of
bank reconciliation). (1)
• Analytical procedures (1): Analytic procedures consist of evaluating financial
information through analysis of plausible relationships among financial and non-
financial information. (1)
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• Inquiry (1): Inquiry entails seeking information, both financial and non-financial from
knowledgeable persons within or outside the entity. This can be done by
questioning and interviewing the relevant people. (1)
• Tracing (1): This involves the selection of documents for tracing to the relevant
entries recorded in the accounting records. The direction of testing allows for the
detection of entries omitted and, therefore, provides assurance related to the
completeness assertion. (1)
• Observation (1): This consists of looking at a process or procedure being performed
by others. It implies taking a careful and knowledgeable look at people's activities
and actions in order to obtain information that the internal auditor requires to
perform his or her task. Observing is a valuable procedure, which is used in virtually
every assignment and which requires a high degree of skill. Observations are
sometimes carried out subtly and inconspicuously. Information obtained when the
auditee is unaware that he or she is under observation, and so does not carry out
procedures purely to satisfy the internal auditor, is very valuable (1)
• Recalculation (1): Recalculation consists of checking the mathematical accuracy of
documents and records manually or electronically.
• Routine checking/transaction audit (1) Basically, the routine work in an internal
audit (original record examination) comprises those steps (checks) designed to
satisfy the internal auditor that the double-entry functions have been fully and
correctly performed
• Verification/ audit of balances (1): Verification consists of checking, examining
and/or obtaining satisfactory evidence (i.e. to prove that something exists or is
accurate) that all assets and liabilities of the undertaking that are (or should be)
shown on the balance sheet
1. do exist; (1)
2. are in fact the property, or liability, of the undertaking; (1)
3. are shown at a fair valuation; (1)
4.are all disclosed in conformity with generally accepted accounting principles and/or
specific legal requirements; and(1)
5. that the auditor has satisfied himself of the preceding facts in respect of every item
separately, and of the balance sheet as a whole. (1)
• Computer-Assisted Audit Techniques (CAATs) (1): When the entity's accounting
records are maintained on electronic media, CAATs may be used to perform many
audit procedures. The use of CAATs may provide effective tests of controls and
substantive procedures where there are no input documents or a visible audit trail,
where population and sample sizes are very large or where it may not be possible to
perform the procedures manually. (1)

(Marks as indicated, maximum 8 marks)

2. 2 Classification of controls

Reference: Learning Unit 13

I. Preventive (1)
II. Detective (1)
III. Detective (1)
IV. Preventive (1)
V. Preventive (1)
VI. Preventive (1)

(Marks as indicated, maximum 6 marks)

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Question 3 14 marks

3.1 Considerations when planning an audit engagement

Reference: Learning Unit 14

In planning the engagement, internal auditors must consider:

• The objectives of the activity being reviewed and the means by which the activity
controls its performance; (1)
• The significant risks to the activity, its objectives, resources, and operations and the
means by which the potential impact of risk is kept to an acceptable level; (1)
• The adequacy and effectiveness of the activity’s risk management and control
processes compared to a relevant control framework or model; (1) and
• The opportunities for making significant improvements to the activity’s risk
management and control processes. (1)
(Marks as indicated, maximum 4 marks)

3.2 Audit procedures and (b) kind of audit evidence used

Reference: Learning Unit 14

Control number Audit procedure Audit evidence

1 Observe the opening of mail that it Physical evidence (1)

is opened by two people (1), and
the recording of payment received
in the remittance register. (1)

Enquire from the relevant people Oral evidence (1) /

responsible for opening the mail Documentary evidence (1)
regarding the process. (1) Obtain
signed confirmation of the process
from the abovementioned people
as evidence. (1)

2 Obtain the copies of the Documentary evidence (1)

reconciliations (1) and inspect that
they are signed off by the reviewer.
(1)

3 Observe that the employees Physical evidence (1)

provide positive proof of
identification during the payout of
wages (1) and that they sign the
wages register as proof of
acknowledgement of receipt (1).

Inspect and compare the Documentary evidence (1)

employee’s signature in the payroll
register (1) to the signature in the
employment contract or personnel
file. (1)

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Control number Audit procedure Audit evidence

4 For a period of a few consecutive Documentary evidence (1)

months, obtain copies of exception
reports and inspect that they have
been signed by the financial
director (1). Obtain a payment roll
and check that no payment was
effected before the date the
exception report was signed off. (1)

5 Select a sample of payments (1) Documentary evidence (1)

and inspect that all supporting
documentation have been
cancelled (stamped “paid” or
crossed out). (1)

(Marks as indicated, maximum 10 marks)

Conclusion

It is important to review the feedback contained in this tutorial letter and compare it with your
own answers.

You are welcome to contact us should you have any queries.

We wish you every success in your studies.