Question 2 Marks: 60 (a) Five main steps in the planning stage of an audit 1. Obtain an understanding of the entity, its environment and its internal controls (1) 2. Assess the audit risk (1) 3. Determine planning materiality (1) 4. Establish the overall audit strategy (1) 5. Develop the audit plan (1) 6. Any other valid structure and/or wording should be marked accordingly. e.g. Jackson & Stent: (1) · Establish the audit strategy · Consider materiality · Planning risk assessment procedures · Conduct risk assessment procedures · Planning further ns other audit procedures. Available (6) Maximum (5) (b) Advantages of analytical review procedures 1. Through the performance of analytical review procedures, I am able to gain a greater understanding of Massive Discounters' business and its environment (revenue and remuneration). (1) 2. The analytical review procedures may identify areas requiring further or more detailed examination. (1) 3. If I am able to place reliance on the results of analytical review procedures, I would be able to reduce the extent of my tests of detail. (1) 4. Analytical review procedures may provide me with indications of financial difficulties encountered by the client. (1) 5. Analytical review procedures may make me aware of matters to be reported to management as a value added service. (1) Available (5) Maximum (4) (c) Risks of material misstatement at the overall financial statements level 1. The company is aggressively seeking a listing on the JSE. (1) - The directors have indicated they are willing do anything to achieve the listing. They may attempt to manipulate the financial statements so as to appear favourable in relation to other companies listed in the same sector. (1) - The deadline set to attain the listing is said to be unreasonable. Staff may be under pressure and may end up making errors to meet the deadline. (1) 2. The company operates a number of stores (operating branches) in different countries. (1) - Management at stores may override controls. Allegations of fictitious employees at two stores. (1) - Information is collated at regions and may not be consistent. Supervision of stores may also not be consistent and effective. (1) 3. The high staff turnover increases the risk of accounting errors. (1) 4. Finance staff is overworked and underpaid. (1) - A lack of motivation and time to ensure the operation of laid down controls and accurate financial recording and reporting. (1) --
5. Other staff may be negatively affected by what is happening to the finance staff (turnover, overworked, underpaid). This could negatively impact the controls and operating effectiveness of processes of the company. (1) 6. Aggressive new executive management. This could result in control override. (1) - This team could end up overriding controls in order to achieve their objective of making things work. (1) - They also have a further specific motivation as a result of the healthy bonuses they have (1) been offered. Communication skills - clarity of expression, logical development of answer. (1) Available (14) Maximum (8)