Case Study

PROGRAMME Postgraduate Diploma in Risk Management

MODULE Auditing for Risk
YEAR One (1)
INTAKE January 2025
TOTAL MARKS 100
 FORMATIVE ASSESSMENT 1 [100 MARKS]

Question 1 (25 Marks)

Horizon Tech (Pty) Ltd is a medium-sized technology company operating in South Africa. It is not listed but has seen
significant growth over the past five years, making it one of the largest privately-owned companies in its sector.
Board Composition and Related Details
The board of Horizon Tech comprises the following individuals:
1. Richard Mason (CEO, Executive Director, Chairperson of the Board)
2. Katherine Hill (CFO, Executive Director)
3. Michael Andrews (COO, Executive Director)
4. Sarah Jacobs (Non-Executive Director, owns 10% of the shares in Horizon Tech)
5. Ethan Greene (Independent Non-Executive Director, Chairperson of the Audit Committee)
6. Linda Khoza (Non-Executive Director, owner of a major supply company to Horizon Tech)
7. James Mathis (Non-Executive Director, Chairperson of the Remuneration Committee, consultant who previously
worked with Horizon Tech’s primary customer)
8. Carla Naidoo (Non-Executive Director, Chairperson of the Social and Ethics Committee)
Key Facts
· Chairperson of the Board: Richard Mason, the CEO, also holds the role of Chairperson of the Board. He is involved in
the company’s day-to-day operations.
· Audit Committee Composition: The audit committee is composed of Ethan Greene, Linda Khoza, and Richard Mason.
· Qualifications: None of the board members have formal qualifications in governance or finance, except for Ethan
Greene, who has experience in the financial services sector.
· Succession Planning: The board has not developed a formal succession plan for key leadership positions, including
the Chairperson and the CEO. Richard Mason has been in the role of Chairperson for the past 12 years.
Recent Developments
The board recently approved a proposal to acquire a new software company. During the approval process, Linda Khoza’s
supply company was chosen as a primary vendor for the software integration, but no conflict of interest was declared.
Richard Mason, acting as both Chairperson and CEO, heavily influenced this decision.
The audit committee has met twice in the last year but has not provided detailed reports on its assessments. Ethan Greene,
the Chairperson of the audit committee, has raised concerns over the lack of financial reporting structures but was
overruled by Richard Mason.
You are required to:

Based on the scenario above, evaluate the compliance of Horizon Tech (Pty) Ltd with the King IV Code of (25)
Corporate Governance. Identify and discuss both areas of contravention and compliance with the code.
 Question 2 (25 Marks)
Julia is a Chartered Accountant (CA(SA)) who works as the Chief Financial Officer (CFO) for TrendSpree, a fast-growing
fast-fashion company. The company has enjoyed exponential growth due to its ability to produce clothing at a very low cost
and quickly respond to changing fashion trends.
As TrendSpree expanded, Julia found herself under increasing pressure from the CEO and board members to maintain the
company's high profitability and growth targets. The CEO has proposed opening new stores in international markets, but
there are concerns that some of the target countries have high labor costs, which could affect TrendSpree's pricing model.
Julia is asked to prepare financial forecasts for these new markets, but the CEO pressures her to provide optimistic
numbers to ensure investor confidence, even though she believes that the labor costs in those countries are too high to
maintain the company’s current margins. Additionally, the CEO suggests that they manipulate the forecasts to account for
expected cost reductions through "new supplier arrangements," though no such arrangements have been finalized.
Further complicating matters, Julia’s younger sister, Zara, is currently working in TrendSpree's marketing department.
Recently, Zara has been working closely with one of the company’s major suppliers, BloomTex, which offers premium fabric
at discounted prices for bulk purchases. BloomTex's CEO, with whom Zara has developed a friendly relationship, has
offered Zara an expensive gift for her "hard work" in maintaining the relationship between the companies. Zara excitedly
tells Julia about the gift, which Julia finds inappropriate.
TrendSpree is also under scrutiny from environmental activists due to allegations of poor labor conditions in its foreign
supply chain. The company is considering expanding a partnership with a supplier in another country with more lenient
environmental and labor laws. Julia is asked to sign off on a report that downplays the concerns raised by the activists,
despite the fact that TrendSpree has not made any significant changes to address these issues.
As the company prepares to issue its financial statements, the external auditors request that Julia provide supporting
documentation for certain transactions, particularly around inventory valuations. Julia knows that the valuation method used
by the company inflates the value of the inventory, which is significant for TrendSpree’s financial position. The CEO
instructs her not to provide any additional documentation to the auditors and to simply "manage" the situation, hinting that a
negative audit report could damage investor confidence at a crucial time when they are seeking additional funding.

You are required to:

2. For each of the ethical issues identified in the scenario, answer the following: (25)
· Identify the category/ categories of ethical threat(s) present.
· Identify the fundamental principle(s) of the SAICA Code of Professional Conduct that are being
threatened.
· Recommend safeguards that could be applied to reduce the ethical threat(s) to an acceptable level.
Note: Your answer should clearly address each ethical issue separately.
 Question 3 (25 Marks)

You are a member of the audit team of MakeaBrake Ltd, a company that manufactures braking systems for trucks and cars.
The company has a staff of 400 hourly-paid employees who are spread over the ten cost centres which make up the entire
process of manufacture.
The number, grade and category of employees vary from cost centre to cost centre; some centres, such as quality control,
have as few as ten employees, the majority of whom are skilled, while other centres may have as many as 70 employees,
the vast majority of whom are unskilled.
Each cost centre is controlled by a foreman. Hours worked are recorded using clock cards and a conventional timing
device. The foremen authorise all overtime for their cost centres. Engagements, dismissals and grade wage rates (which
vary considerably from grade to grade) are handled by human resources in conjunction with the foremen and union officials,
where necessary.
Wage earners are only paid for hours clocked, that is to say, if an employee is ill for a period, he is not paid. (An
independent ‘sick leave’ system is in operation.) No wage payouts are conducted, wages are paid directly into employees’
bank accounts by electronic funds transfer.
The company’s computerised payroll contains the following information:
1. Employee number, name and surname
2. Cost centre
3. Grade and category (skilled/unskilled)
4. Normal and overtime hours worked
5. Gross earnings
6. PAYE deduction
7. UIF deduction
8. Metalworkers Union deductions (compulsory)
9. Net earnings
10. Bank account number
11. SARS tax reference number
12. Identity number.
Your firm’s audit plan for the audit of wages is to select a base wage period which is comprehensively audited and then to
perform analytical procedures for selected other wage periods comparing those periods to the base period. The base period
for the current year’s audit has been selected and you have been requested by your senior to select a sample from the
base wage period payroll for audit.
The sample will be used to:
1. assist in determining whether any fictitious workers appear on the payroll; and
2. determine whether the figures on the payroll for the wage period selected are valid and accurate.
He further informs you that he does not require you to select a statistical sample; a well-thought-through non-statistical
sample will be sufficient. You have general audit software which is compatible with the client’s system available to you.
(Source: Adapted from Graded Questions on Auditing 2024)

You are required to:

3.1 Distinguish between statistical and non-statistical sampling. (3)

3.2 Discuss the factors you would consider in deciding on the size of the sample you will select. (7)

3.3 Indicate whether the population from which you will select your sample, will be all wage earners on the (3)
payroll (master file) or only wage earners who actually worked during the wage period selected as the base
wage period, that is to say excluding employees who were absent from work. Justify your answer.

3.4 Suggest two appropriate stratifications which you may consider carrying out on this population. Justify each. (4)

3.5 To comply with your senior’s request, describe the audit procedures you will carry out on the employees
selected for testing in respect of:

3.5.1 whether they are fictitious; and (4)

3.5.2 normal and overtime hours worked. (4)

Question 4 (25 Marks)

At the conclusion of the audit team of 100 Ltd, a junior member was requested to make sure that the audit working papers
were all properly filed and finalised. What struck him was just how much information/ evidence had been gathered on the
audit. Having seen all of the evidence together, he really felt that the audit team was in a strong position to certify the
financial statements as correct, rather than just stating in the audit report that ‘in our opinion, the financial statements
present fairly in all material respects…’
He asked you, as his senior, why, having done all this work, the financial statements had not been certified as correct.
(Source: Adapted from Graded Questions on Auditing 2024)

You are required to:

Explain in detail to your junior, why the financial statements cannot be ‘certified as correct’. Include in your (25)
answer an explanation of the limitations of internal control, and the limitations of an audit.

END OF PAPER