Auditing Fundamentals in A South African Context Graded Question

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Contents in brief
PART A: e context within which the external auditor operates
Chapter 1 Introduction
Chapter 2 Ethics
Chapter 3 Legal responsibilities of the auditor
PART B: e auditee’s responsibility for nancial information
Chapter 4 Basic concepts of governance and internal control

Chapter 5 Introduction to risks and internal controls in a
computerised environment
Chapter 6 Revenue and receipts cycle
Chapter 7 Purchases and payments cycle
Chapter 8 Inventory and production cycle
Chapter 9 Human resources cycle
Chapter 10 Investment and nancing cycle
PART C: e external audit process
Chapter 11 Overview of the audit process

Chapter 12 Pre-engagement and planning activities
Chapter 13 Audit procedures: Essential concepts
Chapter 14 Audit procedures: Speci c considerations
Chapter 15 Completion of the audit
Chapter 16 e independent review
Chapter 17 Additional questions
List of references
Contents
Contents in brief
Preface
Additional resources
About the editors
List of contributors
PART A: e context within which the external auditor operates
Chapter 1 Introduction
Questions
Question 1 Background to auditing [24 marks] LEVEL 1
Chapter 2 Ethics
Introduction
Example question SAICA Code of Professional Conduct: CA in
practice [12 marks]
Guidance
Suggested solution
Questions
Question 1 SAICA Code of Professional Conduct: Fundamentals
and CA in practice [27 marks] LEVEL 1/2
Question 2 SAICA Code of Professional Conduct: CA in practice
[10 marks] LEVEL 2
[13 marks] LEVEL 2
[15 marks] LEVEL 2
Question 5 SAICA Code of Professional Conduct: CA in practice [6
marks] LEVEL 2
Suggested solution to question 5
Question 6 SAICA Code of Professional Conduct: CA in practice [8
marks] LEVEL 2
Question 7 SAICA Code of Professional Conduct: CA in business [9
marks] LEVEL 2
[10 marks] LEVEL 2
[10 marks] LEVEL 2
[10 marks] LEVEL 2
[18 marks] LEVEL 2
marks] LEVEL 2
marks] LEVEL 2
Question 14 SAICA Code of Professional Conduct: CA in business
[12 marks] LEVEL 2
SAICA Code of Professional Conduct: CA in business
Question 15 [17 marks] LEVEL 2
Question 16 SAICA Code of Professional Conduct: CA in business
[22 marks] LEVEL 2
Question 17 SAICA Code of Professional Conduct: CAs in practice
and in business [10 marks] LEVEL 2
Question 18 SAICA Code of Professional Conduct and general
auditing theory [21 marks] LEVEL 3
Chapter 3 Legal responsibilities of the auditor

Introduction
Example question Auditing Profession Act 26 of 2005: Reportable
irregularity [17 marks]
Guidance
Suggested solution
Questions
Question 1 Auditing Profession Act 26 of 2005: Reportable
irregularity [8 marks] LEVEL 1
Question 3 Auditing Profession Act 26 of 2005: Registration as
auditor, duties of auditor [14 marks] LEVEL 1/2
Question 6 Auditing Profession Act 26 of 2005: Legal liability [9
marks] LEVEL 2
Question 7 King IV™ report [13 marks] LEVEL 1
Question 8 King IV™ code [10 marks] LEVEL 2
Question 12 King IV™ report and Companies Act 71 of 2008 [18
marks] LEVEL 1
Question 13 Companies Act 71 of 2008 [10 marks] LEVEL 2
Question 14 Companies Act 71 of 2008 [10 marks] LEVEL 2
Question 15 Companies Act 71 of 2008 and King IV™ report [16
marks] LEVEL 2/3
Question 16 Companies Act 71 of 2008 and Auditing Profession Act
26 of 2005: Reportable irregularity [24 marks] LEVEL
2/3
Question 17 Companies Act 71 of 2008 and King IV™ report [28
marks] LEVEL 2/3
PART B: e auditee’s responsibility for nancial information
Chapter 4 Basic concepts of governance and internal

control
Introduction
Questions
Question 2 Internal control: Fundamentals [19 marks] LEVEL 1
Question 3 Internal control: Fundamentals [15 marks] LEVEL 1
Question 4 Internal control: Control objectives [11 marks] LEVEL 1
Question 5 Internal control: Components [10 marks] LEVEL 1
Chapter 5 Introduction to risks and internal controls in

a computerised environment
Introduction
Questions
Question 1 Multiple choice questions addressing multiple
concepts [10 marks] LEVEL 2
Question 2 Physical access controls [18 marks] LEVEL 2
Question 3 Access controls [16 marks] LEVEL 3
Question 4 Application controls [12 marks] LEVEL 2
Question 5 Business continuity [10 marks] LEVEL 2
Question 6 System development [10 marks] LEVEL 2
Question 7 General controls [16 marks] LEVEL 3
Question 10 Weaknesses in an IT environment [30 marks] LEVEL 2
Question 11 Governance in an IT environment [30 marks] LEVEL 2
Question 12 Application controls and back-ups [22 marks] LEVEL 2
Question 13 Application controls (input controls) [15 marks] LEVEL
3
Question 14 Processing and master le controls [24 marks] LEVEL 2
Question 15 Controls regarding changes to master le data [18
marks] LEVEL 2
Question 16 Application controls (master le) [22 marks] LEVEL 3
Chapter 6 Revenue and receipts cycle
Introduction
Example Question 1 Internal control weaknesses [8 marks]
Guidance
Suggested solution
Example Question 2 Internal control weaknesses, risks, control
objectives and assertions [32 marks]
Guidance
Suggested solution
Questions
Question 1 Control objectives [8 marks] LEVEL 2
Question 2 Functional areas and control objectives [18 marks]
LEVEL 2
Question 3 Assertions [9 marks] LEVEL 2
Question 4 Purpose of controls, control objectives and assertions
[23 marks] LEVEL 2
Question 5 Weaknesses [13 marks] LEVEL 2
Question 6 Risks [25 marks] LEVEL 2
Question 8 Weaknesses and recommendations [32 marks] LEVEL 2
Question 9 Weaknesses, risks and recommendations [20 marks]
LEVEL 2
LEVEL 2
Question 11 Weaknesses, risks, decrease in gross pro t and
recommendations [40 marks] LEVEL 3
Question 12 Weaknesses, recommendations, internal controls, role
players and documents [41 marks] LEVEL 2
Question 13 Recommendations [14 marks] LEVEL 2
Question 15 Key controls [8 marks] LEVEL 2
Question 16 Key controls and control objectives [10 marks] LEVEL 2
Question 17 Key controls and tests of controls [10 marks] LEVEL 3
Question 18 Tests of controls [30 marks] LEVEL 3
Chapter 7 Purchases and payments cycle

Introduction
Questions
Question 2 Assertions [4 marks] LEVEL 2
Question 7 Risks and assertions [20 marks] LEVEL 2
LEVEL 2
Question 11 Key controls and assertions [6 marks] LEVEL 2
Question 12 Key controls and control objectives [16 marks] LEVEL 2
Question 15 Test of controls and control objectives [13 marks]
LEVEL 2
Chapter 8 Inventory and production cycle

Introduction
Questions
Question 1 Purpose and control objectives [11 marks] LEVEL 1
Question 3 Functional areas [10 marks] LEVEL 2
Question 6 Weaknesses and risks [8 marks] LEVEL 2
Question 10 Key controls [4 marks] LEVEL 2
Question 11 Purpose and tests of controls [25 marks] LEVEL 3
Question 13 Control objectives, key controls and tests of controls
[24 marks] LEVEL 3
Chapter 9 Human resources cycle

Introduction
Questions
Question 3 Risk of material misstatement at assertion level [12
marks] LEVEL 2
Question 12 Assertions, key controls and tests of controls [20 marks]
LEVEL 3
Question 13 Audit procedures [10 marks] LEVEL 3
Question 14 Risks, internal controls and substantive procedures [25
marks] LEVEL 3
Chapter 10 Investment and nancing cycle

Introduction
Questions
Question 2 Segregation of duties, fraud and error [9 marks] LEVEL
2
Question 4 Risks: Companies Act 71 of 2008 [12 marks] LEVEL 3
Question 11 Key controls and assertions [11 marks] LEVEL 2
Question 12 Internal control vs test of control, control objectives [9
marks] LEVEL 3
Question 13 Test of control vs substantive procedure, objective of
audit procedure [13 marks] LEVEL 3
Question 14 Tests of controls vs substantive procedures [16 marks]
LEVEL 3
PART C: e external audit process
Chapter 11 Overview of the audit process

Introduction
Questions
Question 1 Stages and steps [13 marks] LEVEL 1
Question 2 Audit evidence [7 marks] LEVEL 1
Question 3 Audit evidence [7 marks] LEVEL 1
Question 4 Impact of computerised environment on audit
procedures [7 marks] LEVEL 2
Question 5 Audit opinion: Modi ed and unmodi ed [4 marks]
LEVEL 1
Chapter 12 Pre-engagement and planning activities

Introduction
Example Question 1 Pre-engagement [10 marks]
Guidance
Suggested solution
Example Question 2 Strategy [4 marks]
Guidance
Suggested solution
Example Question 3 Materiality [10 marks]
Guidance
Suggested solution
Example Question 4 Risk at nancial statement level [6 marks]
Guidance
Suggested solution
Example Question 5 Risk at assertion level [4 marks]
Guidance
Suggested solution
Questions
Question 1 Planning materiality [7 marks] LEVEL 2
Question 6 Pre-engagement [20 marks] LEVEL 2
Question 7 Pre-engagement activities [12 marks] LEVEL 2
Question 10 Client acceptance decision [26 marks] LEVEL 3
Question 11 Pre-engagement [12 marks] LEVEL 2
Question 12 Risk at assertion level [9 marks] LEVEL 2
Question 13 Risk at nancial statement level [12 marks] LEVEL 2
Question 14 Risk at assertion level, the audit approach and the risk
thereto [22 marks] LEVEL 2
Question 15 Risk at assertion level and the response thereto [20
marks] LEVEL 3
Question 17 Risk at nancial statement level [16 marks] LEVEL 2
Question 19 Audit risk overall level [19 marks] LEVEL 3
Question 21 Risk and response at assertion level [17 marks] LEVEL 3
Question 22 Detection risk [22 marks] LEVEL 3
Question 23 Audit strategy [6 marks] LEVEL 2
Question 24 Planning strategy [9 marks] LEVEL 2
Chapter 13 Audit procedures: Essential concepts

Introduction
Example Question 1 Balances [17 marks]
Guidance
Suggested solution
Example Question 2 Transactions [15 marks]
Guidance
Suggested solution
Questions
Question 1 Revenue applying IFRS 15 [14 marks] LEVEL 3
Question 2 Revenue [15 marks] LEVEL 2
Question 7 Commission paid [15 marks] LEVEL 2
Question 8 Purchases and payments balances [18 marks] LEVEL 3
Question 9 Purchases [14 marks] LEVEL 2
Question 10 Substantive procedures: Expenses [20 marks] LEVEL 3
Question 11 Prepaid expenses [8 marks] LEVEL 3
Question 12 Prepayments [16 marks] LEVEL 3
Question 13 Wages {25 marks] LEVEL 2
Question 14 Salaries [15 marks] LEVEL 2
Question 15 Lifetime expected credit losses [21 marks] LEVEL 3
Question 16 Accounts receivable [18 marks] LEVEL 2
Question 17 Provision for future expected credit losses [14 marks]
LEVEL 2
Question 19 Positive con rmation and provision for future expected
credit losses [26 marks] LEVEL 2
Question 20 Creditors statement reconciliation [15 marks] LEVEL 2
Question 21 Trade payables [12 marks] LEVEL 2
Question 22 Trade and other payables [25 marks] LEVEL 3
Question 23 Trade and other payables balance [23 marks] LEVEL 3
Question 24 Inventory [18 marks] LEVEL 2
Question 25 Inventory and roll forward procedures [25 marks]
LEVEL 2
Suggested solution for question 27
Question 29 Property, plant and equipment [20 marks] LEVEL 2
Question 30 Investment property [14 marks] LEVEL 3
Question 32 Intangible asset [10 marks] LEVEL 3
Question 34 Goodwill [22 marks] LEVEL 3
Question 35 Loans [10 marks] LEVEL 3
Question 36 Long-term borrowings [20 marks] LEVEL 3
Question 37 Loans [22 marks] LEVEL 3
Question 38 Interest paid/debentures [25 marks] LEVEL 3
Question 39 Warranty provision [14 marks] LEVEL 3
Question 40 Provision for bonuses [18 marks] LEVEL 3
Question 41 Provision created for environmental rehabilitation
costs [15 marks] LEVEL 3
Question 42 Provision for leave pay [14 marks] LEVEL 3
Question 43 Provision for leave pay/share option scheme [31 marks]
LEVEL 3
Question 44 Provision for bonuses [14 marks] LEVEL 3
Question 45 Provision for rehabilitation of land [20 marks] LEVEL 3
Question 46 Provision for chemical spill [25 marks] LEVEL 3
Question 47 Provision for defective work [13 marks] LEVEL 3
Question 48 Issue of shares: Equity [15 marks] LEVEL 3
Question 49 Equity [21 marks] LEVEL 2
Question 50 Other reserves [14 marks] LEVEL 3
Question 51 Bank reconciliation [7 marks] LEVEL 2
Question 52 Bank con rmation letters [10 marks] LEVEL 2
Question 53 Deferred taxation [16 marks] LEVEL 3
Question 54 Taxation payable [22 marks] LEVEL 3
Question 55 Audit of unlisted investment/accruals [24 marks]
LEVEL 3
Question 56 Directors emoluments [26 marks] LEVEL 3
Question 57 Audit procedures regarding legal matters [14 marks]
LEVEL 3
Chapter 14 Audit procedures: Speci c considerations

Introduction
Questions
Question 2 Opening balances [16 marks] LEVEL 2
Chapter 15 Completion of the audit

Questions
Question 1 Series ISA 560 Phase 1–3 (6 scenarios) [66 marks]
LEVEL 3
Scenario 1: Subsequent events [10 marks]
Question 2 Subsequent events [15 marks] LEVEL 3
Question 7 Going concern [12 marks] LEVEL 3
Question 12 Materiality [14 marks] LEVEL 2
Question 13 Final materiality [13 marks] LEVEL 3
Question 14 Audit differences [10 marks] LEVEL 2
Question 17 Evaluation of misstatements [15 marks] LEVEL 2
Question 18 Audit conclusion [12 marks] LEVEL 3
Question 19 Reporting [10 marks] LEVEL 1
Chapter 16 The independent review

Questions
Question 1 Audit and review engagements [10 marks] LEVEL 1
Question 2 Audit and review engagements [16 marks] LEVEL 2
Question 3 Independent review [14 marks] LEVEL 2
Question 4 Report [14 marks] LEVEL 2
Chapter 17 Additional questions

Questions
Question 1 Internal controls: Various cycles [10 marks] LEVEL 1
Question 2 Internal controls [24 marks] LEVEL 1/2
Question 3 Key controls, control objectives, tests of controls:
Receipts [25 marks] LEVEL 2
Question 4 Key controls, control objectives and tests of controls [30
marks] LEVEL 2
Question 5 Control objectives and tests of controls [20 marks]
LEVEL 2
Question 6 Control objectives and purpose: Computerised systems
[18 marks] LEVEL 2
Question 7 Control objectives and purpose: Computerised systems
[20 marks] LEVEL 2
Question 8 Risks and substantive procedures [24 marks] LEVEL 2
Question 10 Integrated question [30 marks] LEVEL 2
List of references
Preface
e purpose of this book is to provide undergraduate students with the

experience they will need to answer audit questions successfully in tests
and exams. e text does not attempt to provide the theoretical
background to auditing, as such theory is covered in our companion
textbook, Auditing Fundamentals in a South African Context. e
chapters in this work correspond to those in the complementary
textbook, except for chapter 17 which contains additional questions
addressing multiple topics. is question book should be used for the
revision and reinforcement of concepts encountered and mastered in
Auditing Fundamentals in a South African Context, and for the
identi cation of areas requiring additional study.
e questions in the text are graded according to levels which

correspond with and support the framework of SAICA pro ciency
levels. e text is structured in such a way that the question at the
lowest level of difficulty is positioned at the beginning of each chapter.
ereafter, the questions are graded to ensure that the most difficult
question will be the last question in each chapter. It follows, therefore,
that second-year students will work through those questions at the
beginning of each chapter, while third-year students will probably work
through those questions in the latter part of the chapters. Since this
book is directed at undergraduate, rather than postgraduate, students,
one or two integrated questions have been included for each topic and
chapter.
Each chapter addresses a different section of the syllabus. e student

should rst study the relevant theory in the Auditing Fundamentals
textbook before working through the example questions in this book.
Example questions and guidance are included in the majority of
chapters in order to support students’ development and understanding
of how to approach and answer speci c questions. Following
engagement with the example questions and the guidance, students
should apply these techniques in the questions that follow, working
under exam conditions.
e Companies Act is not covered in the depth which its scope justi es
as this would merit a book on its own. Corporate governance is not
covered as a separate chapter, but rather addressed throughout the
textbook in the relevant context and sub-components. After careful
consideration, corporate governance questions were included in
chapter 3.
We should like to express our gratitude to the many contributors, from

various academic institutions, who have kindly contributed material to
this book. A key bene t of material which is authored by a large and
diverse group of contributors is that students are exposed to questions
which re ect a broad range of styles and approaches. is is valuable
preparation for the initial test of competence (ITC) and assessment of
professional competence (APC) exams.
Future editions of this book will be published at regular intervals in

order to ensure they remain relevant and that a continual supply of new
content is provided. As can be seen, many new questions have been
added to this third edition, and additional notes were also included for
the questions that have suggested solutions.
Prescribing lecturers can access additional, unseen questions through

the Oxford University Press Learning Zone website. At the same
website, students may access short, formative questions, which are
automatically marked, in order to test their understanding of key
concepts. Solutions that are not provided in the text are also available to
prescribing lecturers here. Please bear in mind that different
universities follow different structures and layouts for suggested
solutions. If you should experience any difficulties with either the
questions or suggested solutions, or should you wish to raise any
queries, please contact us at [email protected] or
[email protected]. We welcome your feedback, as it will assist with
future development of the book.
We should like to tender our apologies if any case should arise in which
an original source of any question concept in this book has unwittingly
not been acknowledged. We will be grateful for any information
enabling us to rectify this in future impressions.
We wish to thank Oxford University Press Southern Africa and its staff
who participated in the publication of this edition for their time and
patience in ensuring we met our deadlines and answered the many
queries which resulted during the revision process.
André P. Hamel
Rolien Kunz
Additional resources
All prescribing lecturers will be given access to the Oxford University

Press Learning Zone website. is opens the gate to a selection of
additional resources for this title.
For lecturers, the Learning Zone website provides:
A set of Online Questions

ese are additional, unseen questions which can be used for
assessment, consolidation or extension purposes. ey provide
further opportunities for students to apply their newly acquired
knowledge and skills across a range of different contexts.
A Solutions Manual
is comprehensive Solutions Manual provides the answers and/or
suggested solutions to both:
the questions in the textbook, and
the Online Questions mentioned above.
For students, the Learning Zone website provides:
A Question Bank
is Question Bank contains a range of short, formative questions
which are marked electronically as students complete them. ese
questions provide students with unlimited chances to self-assess
their grasp of the key concepts related to auditing.
About the editors
André P. Hamel (Editor) BCom Accounting (University of

Johannesburg), BCom Honours Accounting (University of
Johannesburg), CA(SA)
André P. Hamel is a Senior Lecturer, and the Subject Head of Auditing in

the Department of Accounting at the University of the Western Cape,
and a Chartered Accountant. André has extensive lecturing experience
at various education institutions in South Africa, and has co-authored
several auditing textbooks. He has served as academic representative
on the auditing standards committee of the South African Institute of
Chartered Accountants for three years and has set, and assisted in
setting, questions for the qualifying exams of both the South African
Institute of Chartered Accountants and the Independent Regulatory
Board for Auditors.
Rolien Kunz (Editor) BCompt (University of South Africa), BCompt

Honours (University of South Africa), Postgraduate Certi cate in Higher
Education (cum laude) (University of Pretoria) MCom Auditing
(University of Pretoria), CA(SA)
Rolien Kunz is a Senior Lecturer in the Department of Auditing at the

University of Pretoria, and a Chartered Accountant. Rolien has lectured
at various higher education institutions at undergraduate as well as
postgraduate level. She also acts as external examiner for a various
higher education institutions. Rolien is a co-author of the companion
text to this work, Auditing Fundamentals in a South African Context. Her
research interests are focused within accounting educationand for
many years, at various levels, she has actively participated in the
professional education activities of the South African Institute of
Chartered Accountants and the Independent Regulatory Board for
Auditors.
List of contributors
A broad panel of expert contributors, from various South African

academic institutions, have authored the questions and solutions which
are published in this book and/or on the Oxford University Press
Learning Zone website. e questions and solutions which have been
placed on Learning Zone complement this third edition as additional
supporting material and are available to prescribing lecturers of
Auditing Fundamentals in a South African Context: Graded Questions.
Barend Barnard BCom (Pretoria), BCompt Honours (South Africa),
MCom (Pretoria), CA(SA)
Senior Lecturer, College of Accounting Sciences, University of South
Africa; Marker, Assistant Umpire and Umpire for both the Initial Test of
Competence as well as the Assessment of Professional Competence of
the South African Institute of Chartered Accountants and the Public
Practice Examination of the Independent Regulatory Board for
Auditors.
Rika Butler BCom Honours (Accounting) (Pretoria), CTA (Pretoria),

MAcc (Computer Auditing) (Stellenbosch), CA(SA)
Associate Professor, School of Accountancy, Faculty of Economic
and Management Sciences, Stellenbosch University.
Cornelie Crous BCompt (Free State), BAcc Honours (Free State),

MCompt (cum laude) (Free State)
Senior Lecturer, Centre for Accounting, Faculty of Economic and
Management Sciences, University of the Free State.
Monique du Plessis BCom (North West), BCom Honours (North West),
MCom (North West), CA(SA)
Senior Lecturer, School of Accounting Sciences, North West
University (Vaal Campus).
Mandisa Gandela BCom Accounting (Cape Town), BCom Honours

Accounting and CTA (Natal), CA(SA)
Africa.
André P. Hamel BCom Accounting (Johannesburg), BCom Honours

Accounting (Johannesburg), CA(SA)
Senior Lecturer and Subject Head of Auditing, Department of
Accounting , University of the Western Cape; current Regional
Chairman of the Southern African Accounting Association (SAAA),
Western Cape.
Phindiwe Kamolane BCom Accounting (Johannesburg), BCom

Honours Accounting (Johannesburg), CA(SA)
Senior Lecturer, College of Accounting Sciences, Department of
Auditing, University of South Africa.
Rolien Kunz BCompt (South Africa), BCompt Honours (South Africa),

PGC in Higher Education (cum laude) (Pretoria), CA(SA)
Senior Lecturer, Department of Auditing, University of Pretoria.
Jana Lamprecht BCompt Honours (South Africa), MA Higher

Education Studies (Free State), CA(SA)
Senior Lecturer, Department of Auditing, University of the Free
State.
Ismail Mohamed BCom (Cape Town), BCom Honours (Natal), CA(SA)

Lecturer, Department of Accounting, University of the Western
Cape.
Anneke Moolman BCom Chartered Accountancy, BCom Honours
CTA, MCom Accountancy (North West), CA(SA)
Senior Lecturer, School of Accounting Sciences, North West
University.
Vincent Motholo BCom Accounting Sciences (Pretoria), BCom

Honours Accounting and CTA (Natal), CA(SA)
Previously: Senior Lecturer, College of Accounting Sciences,
University of South Africa
Currently: Audit Senior Manager, Sizwe Ntsaluba Gobodo.
Mari Patterson BAcc Honours (Stellenbosch), MComm (Computer

Auditing) (Stellenbosch), CA(SA)
Lecturer, School of Accountancy, Faculty of Economic and
Management Sciences, Stellenbosch University.
Gerrit Penning BAcc Honours, CTA (Free State), CA(SA), MCom (UP)
Senior Auditing Lecturer, University of Pretoria; serving member of
the question-setting team of the Public Practice Examination (PPE) of
the Independent Regulatory Board for Auditors.
Pranisha Rama BCom, BCom Honours, CTA (Johannesburg), CA(SA)

Senior Auditing Lecturer, Department of Accounting, University of
Johannesburg.
Riaan J Rudman BBus Sc Honours (Cape Town), PGDA (Cape Town),

MBus Sc (Cape Town), MAcc (cum laude) (Stellenbosch), CA(SA)
Senior Auditing and Information Systems Lecturer, uthuka Senior
Project Manager, School of Accountancy, Stellenbosch University.
Henriette Scholtz BCom Accounting (Rand Afrikaans University),

BCom Honours Accounting (Rand Afrikaans University), MCom
Financial Management (Rand Afrikaans University), Adv Cert Tax
(South Africa), CA(SA)
Senior Auditing Lecturer, School of Accounting, University of
Stellenbosch; Member of SAICA ethics committee.
Jacques Siebrits BCom (Stellenbosch), LLB (Stellenbosch), BCompt

Honours (South Africa), CA(SA)
Senior Lecturer, Department of Accounting, University of the
Western Cape.
Olive Stumke BCom (North West), BCom Honours (UNISA), MCom

(North West), Professional Accountant (SA)
Internal Auditing and Accounting Lecturer, School of Accounting
Sciences, North West University (Vaal Campus).
André (JJ) Swart BCom, Honours BCompt (South Africa), MCom

(North West), CA(SA), RA
Subject Chair for Ethics, External and Internal Auditing, Senior
External Auditing Lecturer, School of Accounting Sciences, North West
University (Vaal Campus).
Alet Terblanche BCom Accounting Sciences (Pretoria), BCom Honours

Accounting Sciences (Pretoria), MCompt Accounting Science (South
Africa), CA(SA)
Africa.
Judith Terblanche BAcc (Stellenbosch), BAcc Honours (South Africa),

MComm (Computer Auditing) (Stellenbosch), CA(SA), PGD eology
(Stellenbosch), Diploma in Sport Psychology (BSY(UK)), HED
(Stellenbosch)
Senior Lecturer, Department of Accounting, University of the
Western Cape.
Jolandi Volschenk BCom CA, BCom Honours CTA (North West),

CA(SA), RA
Senior Auditing and Advanced Auditing Lecturer, School of
Accounting Sciences, North West University (Vaal Campus).
Lyle Weber BCom Accounting (Western Cape), BCom Honours
Accounting (Western Cape), MCom Computer Auditing (Stellenbosch),
Diploma Itinerant Ministry (Rhema Bible Training College) (USA)
Previously: Senior Auditing Lecturer, Department of Accounting,
University of the Western Cape.
Currently: CEO of LBW Consulting, and traveling Minister.
CHAPTER 1 Introduction
CHAPTER 2 Ethics
CHAPTER 3 Legal responsibilities of the auditor

e topics contained in this chapter provide a background to those
included in the rest of the book. ese topics are normally not tested on
their own, but a thorough understanding of them will enhance your
application of them in the chapters to follow.
Question 1 LEVEL 1
Background to auditing
[24 marks]
As an audit partner at OLX Incorporated (OLX), you are responsible for

the recruitment of trainee accountants for the rm. You recently
attended an open day at one of the universities, during which a
confused second-year student approached you with the following
questions:
A. I found the following de nition in my auditing text book:

External audit is a systematic process of obtaining and
evaluating evidence and information objectively regarding
assertions about economic actions and events to determine the
degree of correlation between those assertions and prede ned
criteria and to communicate the results in writing to the users
of the nancial statements.
Could you please explain the de nition to me? (6)
B. What are the postulates of auditing, and where do they t into
the bigger picture of auditing? (9)
C. What is the difference between the South African Institute of
Chartered Accountants (SAICA) and the Independent Regulatory
Board for Auditors (IRBA), and which other professional bodies
related to the accounting profession are there in South Africa? (9)
REQUIRED
Answer the student’s questions.
[24]
INTRODUCTION
e following question formats are most often used when the SAICA
Code of Professional Conduct is examined:
Apply information in the question or scenario with reference to the
SAICA Code of Professional Conduct.
Discuss safeguards that could be implemented where problems have
been identi ed.
Discuss the theory that you had to study regarding the SAICA Code of
Professional Conduct.
Variations of the above.
A sound knowledge of the SAICA Code of Professional Conduct, as well

as the safeguards that could be implemented in order to address
identi ed problems, is necessary in order to answer questions in this
chapter. ese questions are not difficult if you have properly studied
the underlying theory and have worked through a number of them. All
the information you need to obtain a good mark is in the question. e
crucial thing is to identify the relevant information that you need to
apply to the principles set out in the code and to apply it properly.
EXAMPLE QUESTION
SAICA Code of Professional Conduct: CA in practice

[12 marks]
Carter & Cash Inc. (CC Inc), a small rm of registered auditors with a
single office in East London, is the auditor of the 20X1 nancial
statements of Monsterbond Ltd (Monsterbond). Incorporated in 20X0,
the company develops small shopping centres in medium-sized towns.
Until four years ago, it had been relatively small, and operating only in
the Eastern Cape. e company then appointed a new managing
director, Mr Garth Groenewald, under whose leadership the company
expanded its operations to other provinces, thereby attracting in excess
of R250 million in new investments from non-institutional investors.
Monsterbond is now CC Inc’s largest client by far.
Mr Carter, a CA(SA), has been the engagement partner on the
Monsterbond audit since the incorporation of the company. Since the
appointment of Mr Groenewald as MD, he has become increasingly
uncomfortable with developments within the company. First, Mr Carter
has found Mr Groenewald to be abrupt, uncooperative and sometimes
aggressive. Second, Mr Carter has experienced problems dealing with
Monsterbond’s new computerised accounting system, as he is not
comfortable with computer-assisted audit techniques (CAATs). In
response to these problems, Mr Carter has been delegating more of the
responsibility for the Monsterbond audit to Megan Meek, who is in the
third year of her training contract.
Megan Meek has been placed in charge of the eldwork for the
current year’s Monsterbond audit. Being a rather timid person, she is
also struggling to deal with the difficult Mr Groenewald, as well as other
senior managers at Monsterbond. When she builds the courage to tell
Mr Carter about this problem, he says, ‘Megan, stop moaning. You’re a
third-year student now, this is your client, and you must learn to handle
senior management.’
REQUIRED
Comment on the above scenario with reference to the SAICA’s Code of
Professional Conduct. Where relevant, your answer should include
references to appropriate safeguards that ought to have been
implemented.
[12]
GUIDANCE
Understand the question
Comment on the above scenario with reference to the SAICA Code of
Professional Conduct. Where relevant, your answer should include
references to appropriate safeguards that should have been
implemented.
Identify the theory applicable to the question, and thus the

issue
Identify which of the following threats are applicable to the auditor in
the scenario:
Self-interest
Self-review
Familiarity
Advocacy
Intimidation
Identify which of the following fundamental principles of the code are

threatened by the identi ed issue(s) in the scenario:
Objectivity
Professional behaviour
Professional competence and due care
Integrity
Con dentiality
Discuss whether the level of the threat(s) is signi cant or not and give
reasons why.
Identify appropriate safeguards for each of the threats identi ed.
Read the question

It is clear from the scenario that a small-sized audit rm is auditing a
client, namely Monsterbond, which has now appointed an aggressive
new managing director. Ethical issues have been identi ed during the
performance of this audit. ese and other similar ethical issues are
experienced on a daily basis by audit rms throughout the country.
Chartered accountants (CAs) and/or registered auditors (RAs) should
ensure that they comply with the SAICA and IRBA Codes of Professional
Conduct, and they should implement appropriate safeguards if any
threats to their professional conduct have been identi ed. e objective
of this type of question is to test your ability as a student to apply the
theory that you have studied to a practical scenario.
Exam technique
Scrutinise the scenario for possible indications of where there might be
threats to the CA or RA’s professional conduct. ese have been marked
in bold print below. You should also highlight, or underline, the words
indicating possible threats.
Carter & Cash Inc. (CC Inc), a small rm of registered auditors with a
single office in East London, is the auditor of the 20X1 nancial
statements of Monsterbond Ltd (Monsterbond). Incorporated in
20X0, the company develops small shopping centres in medium-
sized towns. Until four years ago, it had been relatively small,
operating only in the Eastern Cape. e company then appointed a
new managing director, Mr Garth Groenewald, under whose
leadership the company expanded its operations to other
provinces, thereby attracting in excess of R250 million in new
investments from non-institutional investors. Monsterbond is now
CC Inc’s largest client by far.
Mr Carter, a CA(SA), has been the engagement partner on the
Monsterbond audit since the incorporation of the company. Since
the appointment of Mr Groenewald as MD, he has become
increasingly uncomfortable with developments at the company.
First, Mr Carter has found Mr Groenewald to be abrupt,
uncooperative and sometimes aggressive. Secondly, Mr Carter has
experienced problems dealing with Monsterbond’s new
computerised accounting system, as he is not comfortable with
computer-assisted audit techniques (CAATs). In response to these
problems, Mr Carter has been delegating more of the responsibility
for the Monsterbond audit to Megan Meek, who is in the third year of
her training contract.
Megan Meek has been placed in charge of the eldwork for the
current year’s Monsterbond audit. Being a rather timid person, she
is also struggling to deal with the difficult Mr Groenewald, as well
as other senior managers at Monsterbond. When she builds the
courage to tell Mr Carter about this problem, he says, ‘Megan, stop
moaning. You’re a third-year student now, this is your client, and
you must learn to handle senior management.’
Discuss the threat(s) and possible safeguards for each of the

issues marked in bold print. Use the following framework for
your answer:
Start by explaining the type of threat(s) that might exist and the
fundamental principle(s) being threatened.
Next, state and motivate whether the level of the threat is signi cant
or not (certain lecturers, however, might not require this step).
Discuss the safeguards that could be implemented.
Use the above framework, which has been applied in the suggested
solution below, for each of the areas highlighted.
In addition, start your answer by indicating why the Code of
Professional Conduct will be applicable (refer to point 1 below).
SUGGESTED SOLUTION
1. Mr Carter is a CA(SA) and therefore needs to comply with the SAICA

Code of Professional Conduct. (1)
2. ere is a self-interest threat1 to independence because
Monsterbond is now CC Inc’s largest client by far which might
cause independence issues.2 (1)
a) is might cause an intimidation or self-interest threat to Mr
Carter’s objectivity as his professional judgement might be
compromised because of bias.3 (1)
b) is might also cause an intimidation or self-interest threat to
integrity as Mr Carter might not be honest when reporting on
Monsterbond’s nancial statements. (1)
c) e level of the threat is signi cant as Monsterbond is the rm’s
largest client by far and the newly appointed managing director is
described as aggressive.4 (1)
d) A possible safeguard5 would be to try actively to increase the rm’s
client base. (1)
3. Mr Carter has been the engagement partner since the company’s
incorporation, which is a contravention of both the SAICA Code of
Professional Conduct as well as the Companies Act, causing
independence issues. (1)
a) is might create a familiarity or self-interest threat6 to
objectivity as such a relationship can in uence Mr Carter’s
judgment (although one could argue that the threat is negated by
the fact that he does not seem to be getting along with the entity’s
senior managers). (1)
b) In addition, a self-interest threat to professional behaviour is
created as the engagement is in contravention with the
Companies Act requirements. (1)
c) e level of the threat might be regarded as signi cant as it has
been an exceptionally long relationship with no partner
rotation.7 (1)
d) A possible safeguard8 would be that Mr Carter be replaced as the
engagement partner. (1)
4. e client has implemented a new computer system and Mr Carter is
not comfortable with CAATs.9 (1)
a) is creates a further self-interest threat10 to professional
competence and due care as Mr Carter seems to be lacking the
necessary knowledge to provide the required services. (1)
b) e level of the threat is signi cant,11 because it is stated that the
engagement partner is uncomfortable using CAATs but continues
with the engagement irrespectively. (1)
c) Possible safeguards12 would be to:
i) assign a partner with the required skills to the audit, if
possible; or (1)
ii) seek outside assistance. (1)
Available marks [16]; maximum marks [12]
QUESTIONS
Question 1 LEVEL 1/2
SAICA Code of Professional Conduct: Fundamentals and CA in practice
[27 marks]
A. In the SAICA Code of Professional Conduct, a ‘conceptual
framework’ approach is used.
REQUIRED
1. Why is this approach used? (1)
2. List the steps that should be followed when applying the conceptual
framework approach. (2)
B. e SAICA Code of Professional Conduct consists of four parts: 1, 2, 3

and 4.
REQUIRED
1. State what is contained in each part of the code, and to whom it is
applicable. (7)
2. What, if any, is the relationship between the SAICA Code of
Professional Conduct and the IRBA Code of Conduct? (1)
C. Independence is not a fundamental principle in the SAICA Code of

Professional Conduct, but many examples are provided of how a
member should respond to a threat to his/her independence.
REQUIRED
1. What is the connection between independence and the fundamental
principle of objectivity? (1)
2. List, and brie y explain, the ve threats dealt with in the SAICA Code
of Professional Conduct. (8)
D. In an auditing test, Billy Blunder, an accounting student, is required

to apply the guidance contained in the SAICA Code of Professional
Conduct to the following scenario:
Mr Wild is a partner in Wild & Woes, a rm of registered auditors.
He has an advertisement placed in Daily Gossip, a low-quality
tabloid newspaper, of which the following is an extract:
e Big 4? Rather choose us. I did my traineeship with one

of those rms, and I saw what they are: lumbering
dinosaurs that overcharge their clients for impersonal
service. Smaller is better. Try Wild & Woes, where the
client is king.
e CEO of Cavalier (Pty) Ltd read the advertisement and, after
some discussion, the company appointed Wild & Woes as its
auditors.
Billy Blunder answered it as follows: is is a self-interest threat. I

think this sort of thing is dealt with in section 150 of the Code of
Professional Conduct. Safeguards: Cavalier should rather get some
other auditing rm to audit their nancial statements, because Mr
Wild seems to have poor judgement.
REQUIRED
Comment critically on Billy Blunder’s answer. (7)
[27]
Question 2 LEVEL 2
[10 marks]
Elkom (Pty) Ltd (Elkom) was founded in 20X1 in order to support
electricity production in the country. Elkom’s nancial manager, Mr
Power, approached one of your audit rm’s partners, Ms Spark, in order
to be the external auditors of the entity. Mr Power and Ms Spark are
good friends and therefore Mr Power sees this as a great opportunity to
spend some time together.
Your audit rm, AUD Inc. (AUD), was recently founded and
therefore the engagement was immediately accepted in order to grow
the client database. e audit fee that was contracted with Elkom is the
previous audit rm’s fee, increased in line with in ation. Mr Power
bought Ms Spark a Rolex watch in order to thank her for accepting the
engagement.
After the engagement was accepted, the planning phase started

immediately, and the preliminary engagement team has been arranged
as follows:
Ms Spark – the engagement partner
Mr Capacitor – the audit manager
Mr Volt – the senior audit trainee
Mr Cable – the second year audit trainee
Ms Bulb – the rst year audit trainee
Mr Capacitor was the information technology (IT) director at Elkom two

years ago, and therefore has in-depth knowledge of the client. During
Mr Capacitor’s directorship, he designed an IT system for Elkom’s
nancial reporting, and has since kept the shares that Elkom gave to
him as payment for the development of the system. Mr Power requested
AUD to issue an assurance report on the effective operation of the IT
system. As Mr Capacitor has close connections with the personnel in
Elkom, he is currently assisting Mr Volt to nd a job at Elkom once the
latter has nalised his articles.
REQUIRED
Discuss the professional conduct concerns that you may have based on
the information provided above. Categorise your concerns based on the
type of threat created by your concerns.
[10]
Question 3 LEVEL 2
[13 marks]
Mr Basil Blink is a director of Blink & Bowles Inc. (B&B), a small rm of

chartered accountants and registered auditors with an office in Century
City.
During the period of 10–14 August 20X1, the following occurs:

1. 10 August: Mr Blink sends his sister, Rebecca Rossouw, an email.
Rebecca is the chief nancial officer of Shoppies (Pty) Ltd (Shoppies),
a retail company with seven branches in Cape Town, and an audit
client of B&B. In the email he asks her to do her utmost to get
Shoppies to give additional work to B&B. e email reads as follows:
‘We will take on accounting work, tax work, consulting work,
whatever you have for us. We have two junior trainees who have been
idle for the last three weeks and we can’t afford that’.
2. 11 August: Mr Blink gets a call from a friend, Charles Coetzer, who
runs a cage diving business in Kleinbaai. Some time ago, Charles had
told Mr Blink that he could place a small advertisement on the
advertising pamphlets for his cage diving business. Mr Blink then
asked Doug du Toit, another friend of his who does marketing, to
come up with such an advertisement. On 11 August, Charles calls to
say that he got the text for the advertisement from Doug, and that he
is having new pamphlets printed that include the advertisement. Mr
Blink tells him to go ahead without having seen the text for the
advertisement, which reads as follows: ‘You want to see sharks today,
but you don’t want your accountant or auditor to be a shark (and
many of them are, unfortunately!). So, bring your business to Blink &
Bowles, and you won’t be swimming with the sharks’. is is followed
by a phone number for the rm.
3. 12 August: In July, a company called Rumble Ltd (Rumble) asked Mr
Blink to nd a suitable empowerment partner for the company to
whom they could sell a shareholding in the business to improve
Rumble’s empowerment status. Having since looked at Rumble’s
nancial statements, Mr Blink realises that taking a shareholding in
that company would be a very good investment, so he asks a friend,
Sipho Dube, to buy the shares on his behalf, but to pretend that he
(Sipho) is the buyer.
4. 13 August: Mr Blink calls ve experienced managers who are working
for other small rms in Cape Town, and offers each one a director
position at B&B on condition that he/she brings clients with a fee
income of at least R1.5 million per annum with him/her to B&B.
REQUIRED
For each of the above situations, identify the threats to Mr Blink’s
compliance with SAICA’s Code of Professional Conduct and explain the
fundamental principle(s) being threatened. Brie y explain your reason
for stating that each threat exists.
[13]
Note: Your answer does not have to deal with the following:
e level of signi cance of the threats.
Safeguards to mitigate the threats.
Question 4 LEVEL 2
[15 marks]
REQUIRED
1. List the type of threat(s) that would be created in terms of the SAICA
Code of Professional Conduct for each of the following situations. e
fundamental principle, the signi cance of the threat and the
safeguards that could be implemented in order to reduce the threat to
an acceptable level do not need to be addressed.
a) A rm has undue dependence on total fees from a client.
b) A rm is threatened with litigation by the client.
c) A rm has prepared the original data used to generate records that
are the subject matter of the assurance engagement.
d) A chartered accountant is informed by a partner of the rm that a
planned promotion will not occur unless the chartered accountant
agrees with an audit client’s inappropriate accounting treatment.
e) A rm enters into a contingent fee arrangement relating to an
assurance engagement.
f ) A member of the engagement team has a close or immediate
family member who is a director or an officer of the client.
g) A director or an officer of the client, or an employee in a position
to exert signi cant in uence over the subject matter of the
engagement, has recently served as the engagement partner.
h) A rm is threatened with dismissal from a client engagement.
i) A rm is concerned about the possibility of losing a signi cant
client.
j) e rm performs a service for an assurance client that directly
affects the subject matter information of the assurance
engagement. (10)
2. Benny Edge, a CA(SA) recently quali ed as a chartered accountant,
has opened his own auditing rm, U3 Inc. (U3). In an attempt to
attract clients, Benny has had high-quality lea ets printed, on which
the following information appears:
Benny Edge CA(SA): three year training contract done and

dusted.
e best newly quali ed chartered accountant in town.
Fee: Only R1 000 an hour.
With reference to the SAICA Code of Professional Conduct, discuss
Benny Edge’s ethical conduct in printing such information on the
lea ets. (5)
[15]
Question 5 LEVEL 2
[6 marks]
Frans van Zyl CA(SA), the audit manager on the audit of Mountain
Limited (Mountain) bought 1000 shares in Foothill Limited (Foothill)
on 30 April 20X1. Frans was involved in the due diligence review of
Foothill, conducted for Mountain, during April 20X1. Foothill was taken
over by Mountain on 1 June 20X1. e share price of Foothill before the
takeover was 10c per share. It is currently trading for R2,00 per share.
REQUIRED
Discuss Frans van Zyl’s behaviour with reference to the SAICA Code of
[6]
SUGGESTED SOLUTION TO QUESTION 5
1. Frans van Zyl is a CA(SA) and therefore has to comply with the SAICA
Code of Professional Conduct and its fundamental principles. (1)
2. Frans obtained con dential information during the due diligence
review which he used for his own bene t. (1)
3. is creates a self-interest threat to con dentiality as he used the
information acquired as a result of professional and business
relations for his personal advantage. (1)
4. It can also create a self-interest threat to the professional behaviour as
his actions might bring the profession into disrepute. (1)
5. Frans has to comply with relevant laws and by using the information
to purchase shares, knowing that the share price will probably rise as
a result of the takeover, will be transgressing the insider trading act,
creating a self-interest threat to professional behaviour. (1)
6. e threat is signi cant, as information obtained from a client was
used to purchase shares and the share price has increased because of
this. (1)
7. No safeguards can be implemented to reduce the threats to an
acceptable level. (1)
Notes:
e required does not exclude any points of the framework, thus the
signi cance of the threat(s) as well as safeguards need to be included.
When looking at the mark allocation, six marks in a Code of
Professional Conduct questions could serve as an indication that it
probably only deals with one issue.
e suggested solution is presented in terms of the framework
provided in the guidance question, for example it started with why
the Code of Professional Conduct will be applicable, followed by the
identi ed issue and the type of threats to the relevant fundamental
principles, with an explanation/application of the fundamental
principles, followed by the signi cance of the threat and a safeguard.
Question 6 LEVEL 2
[8 marks]
Hush Ltd (Hush) placed an advertisement in a newspaper, after the

resignation of its auditors, to call for prospective auditing rms to come
and do a presentation on the audit approach they would follow as well
as an estimation of their audit fees. Your auditing rm, Rush Inc. (Rush),
which is registered with both the South African Institute of Chartered
Accountants and the Independent Regulatory Board of Auditors, would
like to obtain the audit of Hush and is therefore planning to do a
presentation to Hush. You are a CA(SA) and RA, and your plan is to
present a fee lower than that charged to current clients.
REQUIRED
Discuss the above with reference to the SAICA Professional Code of
Conduct. Also advise regarding alternative actions and/or steps that
could or should have been implemented.
[8]
Question 7 LEVEL 2
[9 marks]
Mr Bonanza is a chartered accountant employed as the most senior

nancial accountant of a signi cant division of Medium Ltd (Medium),
a company listed on the JSE Limited. Among other incidents, the
following happened to Mr Bonanza in 20X9:
1. February 20X9: Mr Bonanza spends most of February compiling the
division’s nancial information, which will feed into Medium’s
nancial statements for the nancial year ended 28 February 20X9.
Medium’s management awarded Mr Bonanza 300 000 share options
in 20X1, which will vest on 30 April 20X9. In February, the share
options are ‘in the money’, as they were awarded when Medium’s
share price was R7,20 per share, and the share price is now over R11
per share. Mr Bonanza is glad about the amount of money that he is
likely to receive when the share options vest, because he was
divorced late in 20X3, and needs the money in order to maintain his
standard of living.
2. September 20X9 : In September, the chairperson of the board of
directors of Large Ltd (Large), a competitor of Medium, calls Mr
Bonanza and offers him the position of nancial director of Large. Mr
Bonanza views this as a once-in-a-lifetime opportunity. However,
there is a condition attached to the offer: he must supply Large with a
list of Medium’s clients, showing the amounts that Medium charged
each client for services over the last 12 months.
REQUIRED
Discuss each of the above situations in the light of the relevant guidance
in the SAICA Code of Professional Conduct.
Mark allocation
1. (5)
2. (4)
[9]
Question 8 LEVEL 2
[10 marks]
You are a CA(SA) and registered auditor and were appointed as an audit
partner of Frazer Inc. (Frazer), an established auditing rm. e
following represents clients and potential clients of Frazer:
Shop Ltd (Shop) is a popular grocer and one of the largest retailers in
the country, and is the largest client of Frazer. Shop’s audit fees
comprise 65% of the auditing fees of the auditing rm.
e auditor of Buy (Pty) Ltd (Buy), the holding company of Shop, is
retiring. You offered to pay the current auditor of Buy a gratitude fee
of 15% of the rst year’s audit fees if he persuades the board of Buy to
appoint Frazer as the new auditor of Buy.
REQUIRED
Discuss any ethical concerns with reference to the SAICA Professional
Code of Conduct.
[10]
Question 9 LEVEL 2
[10 marks]
GDH Inc. are the auditors responsible for the audit of XXR Ltd (XXR), a
manufacturer of luxury cars. John Burton CA(SA) is a registered auditor
and the engagement partner on the audit.
It is customary for John and Harry, the chairperson of the board of
XXR, to play a round of golf together on a Wednesday afternoon. During
the course of their last game, Harry made an offer: John could buy the
new XXR sports car at cost (the same rate as that offered to company
employees, arguing that the auditors are considered part of the
business).
REQUIRED
With reference to the SAICA Code of Professional Conduct, discuss any
ethical concerns evident from the above scenario. List any steps that
should be implemented in order to reduce the threats to an acceptable
level.
[10]
Question 10 LEVEL 2
[10 marks]
Smart Books (Pty) Ltd (Smart Books) is a distributor of textbooks to

most universities in southern Africa. e entity has only one office in
Pretoria, and all orders are placed online, whereafter Smart Books
delivers the books to the relevant university. Smart Books is currently
expanding into the rest of Africa.
e nancial director of Smart Books, Anne Smith CA(SA), has
requested your audit rm, Lead Audits Inc. (Lead Audits), to tender for
the external audit of the entity for its 30 September 20X1 nancial year-
end. As several of the audit rm’s trainee accountants are still studying
towards becoming chartered accountants, Anne Smith offered the audit
team members a 10% discount on all books ordered through Smart
Books. is offer was made during the tender meeting, to which Anne
Smith arrived late. At the meeting, the HR director also asked the audit
partner, Ben, if he could recommend some hardworking people that
Smart Books could employ in order to ll positions for the expansion.
Ben and the HR director play golf together every Friday, and therefore
the HR director trusts Ben’s opinion.
During the coffee break, Ben overheard Anne telling one of her
colleagues that she would actually prefer Lead Audits not to be awarded
the tender, as she was not at all fond of the way that they had presented
themselves at the tender meeting. Anne added that she would rather
have Zebra Audits Inc. (Zebra Audits) as external auditors for Smart
Books, as she is more comfortable with her brother, James, one of the
audit partners of Zebra Audits. James apparently also owns a 5% share
in Smart Books, and Anne is sure that he will therefore ‘look after the
company’.
REQUIRED
Discuss any concerns and considerations relating to the SAICA Code of
Professional Conduct you may have, based on the information provided.
Do not include signi cance and safeguards as part of your answer.
[10]
Question 11 LEVEL 2
[18 marks]
e four paragraphs below describe incidents that occurred during a

year in the working life of Mr Hentie Hopper, a CA(SA). Hentie started
the year as a director of Carradine & Hopper Inc. (CH), a rm of
chartered accountants and registered auditors:
1. January: Quicksand (Pty) Ltd (Quicksand), one of CH’s audit clients,
is experiencing serious cash- ow problems. Hentie Hopper, who is
the partner in charge of the Quicksand audit, recently inherited a
substantial amount of money and thus decides to make an interest-
free loan of R200 000 to Quicksand, because he is a close friend of Mr
Hussey, a major shareholder in the company.
2. 12 March: Mr Jackson, the controlling shareholder in a number of
private companies audited by CH, comes to CH’s offices with a
carrier bag containing approximately R800 in cash. Mr Jackson asks
Hentie Hopper to store the money for him for a few days and not to
keep any record of having received the money. Finally, Mr Jackson
asks Hentie Hopper to give the money to his (Mr Jackson’s) son
should ‘something unfortunate happen to me before I get to collect
the money’.
REQUIRED
With reference to the relevant guidance provided by the SAICA Code of
Professional Conduct, discuss any ethical concerns as well as how
Hentie Hopper and/or the rm of Carradine & Hopper should have
responded to each of the situations described above. Do not discuss the
signi cance of the level of threat(s) as part of your answer.
Mark allocation
1. (9)
2. (9)
[18]
Question 12 LEVEL 2
[3 marks]
You have recently been appointed as the head of ethics at a training rm

and your main function is to answer queries submitted by CA(SA)s who
need guidance regarding ethical issues. e following issue was
presented to you:
Johan Van Wyk, a CA(SA), was recently appointed as the nancial
manager at Rubco Ltd (Rubco), a company that manufactures rubber.
Johan’s duty is solely to prepare the nancial statements, while the
nancial director, Willem Malherbe, also a CA(SA), is responsible for
the review of the nancial statements. Willem, however, felt he needed a
holiday, and instructed Johan to take over the preparation and review of
the nancial statements. Johan was rather concerned about this, and
explained to Willem that he could not perform both functions as it
would be considered as a threat. Willem’s response was as follows, ‘I
disagree with you. ere is no such a thing. Do as I say or leave the job!’
REQUIRED
Comment on the issue with reference to the SAICA Code of Professional
Conduct. Do not include safeguards in your answer.
[3]
Question 13 LEVEL 2
[5 marks]
Eddie Noyons, registered with SAICA as a CA(SA) in business, has

recently been appointed as the nancial manager at Raindrops (Pty) Ltd
(Raindrops), an irrigation company. e company is a wholly owned
subsidiary of Hydro Ltd (Hydro), a listed company. One of his main
duties is to prepare nancial statements for submission to the holding
company.
ese nancial statements are used in the calculation of bonuses
which are paid to management of the subsidiary. Upon Eddie’s
presentation of the June 20X1 results to Pete Venter, nancial director of
Raindrops, Pete suggested to Eddie that he should in ate the pro t
gure in order to re ect a higher pro t. Pete whispered to Eddie: ‘Do
not forget that managements’ bonuses depend on the pro t, and I
strongly suggest you do as I say!’
On his way back to the office, Eddie discussed the matter with a
colleague, Ahmed Haji, also a CA(SA). Ahmed’s response was: ‘Just do
as you are told, or else Pete will re you. Besides, you are not in the
profession any longer. Oh, and on the brighter side, our bonuses will be
bigger, and it is not like you’re stealing! Lastly, the auditors are useless
so that should not even be a worry to you.’
REQUIRED
Discuss the situation that Eddie Noyons is currently in based on the
SAICA Code of Professional Conduct. Do not include the signi cance of
the threat and safeguards in your answer.
[5]
Question 14 LEVEL 2
[12 marks]
Jeffrey Wells, a second-year trainee accountant at MMM Inc., is the

audit senior on the audit of BGG Limited (BGG). During a visit to the
canteen, Jeffrey overhears William Woods, the nancial director, and
Matt Walker, the nancial manager, who are both CA(SA)s, discussing
their respective weekends. Matt tells his colleague that he had to bribe a
traffic officer in order to evade a speeding ne. William acknowledges
that he too has done so in the past. In addition, he informs Matt that the
editor of Finances magazine offered him R15 000 to tell him (the editor)
whether the nancial position of BGG had improved or declined over
the past year, which he accepted and so shared the information.
REQUIRED
With reference to the SAICA Code of Professional Conduct, discuss any
ethical concerns arising from the above scenario. Do not include
safeguards in your answer.
[12]
Notes
In answering the question, follow the layout explained in the
guidance to the example question.
When analysing the required, take note of the fact that safeguards are
excluded from the required.
When looking at the mark allocation, 12 marks in a Code of Professional

Conduct question could serve as an indication that it deals with more
than one issue (probably two to three), taking into account that
safeguards were excluded.
1. Both William and Matt are professional accountants in business

(CA(SA)s); therefore, Part 2 of the SAICA Code of Professional
Conduct is applicable to them. (1)
2. Matt made the payment of a bribe to a traffic officer and William
acknowledged that he had done the same in the past. (1)
a) Such an action could create a self-interest threat to integrity, as
they were dishonest in their dealings with their offences and the
traffic officers. (1)
b) Paying a bribe also causes a self-interest threat to professional
behaviour, as such an action is against the law and could discredit
the profession. (1)
c) e level of the threat is signi cant as in an attempt to protect
themselves, they were breaking the law. (1)
3. William has disclosed con dential information to the editor of a
magazine in return for R15 000. (1)
a) He should not have done so, since this creates a self-interest
threat to con dentiality – he disclosed con dential information
without the appropriate authorisation. (1)
b) In addition, this creates a self-interest threat to professional
behaviour, as his unauthorised disclosure will discredit the
profession if it becomes public. (1)
c) e level of the threat is signi cant as he nancially bene tted
from the disclosure. (1)
4. e R15 000 can be regarded as an inducement. In terms of section
R250.8, William shall not accept any inducement if a reasonably
informed third party would be likely to conclude that it was made
with the intent to in uence his behaviour improperly. William is
offered R15 000 if he discloses con dential information. A reasonably
informed third party would conclude that the R15 000 was offered to
in uence him to transgress the code by disclosing con dential
information. (2)
Accepting the inducement created a self-interest threat to
a) integrity, as he was not acting in a straightforward and honest
manner by accepting the money in return for the con dential
information. (1)
b) It also created a self-interest threat to his objectivity, as his
judgement was compromised when he accepted the money and
shared the information. (1)
c) In addition, this will create a self-interest threat to professional
behaviour, as the profession’s reputation will be discredited by his
actions. (1)
d) e level of the threat is signi cant as he acted in his own
interest and nancially bene tted from the disclosure. (1)
Question 15 LEVEL 2
[17 marks]
Mr Reserve is a chartered accountant and is employed as the nancial

manager at Dodd Ltd (Dodd). Dodd’s warehouse, in which nished
products are stored, was ooded in the last month of the nancial year.
Dodd was able to keep it out of the news. Mr Reserve is responsible for
preparing the draft annual nancial statements and liaising with the
external auditors. e chief nancial officer of Dodd instructed Mr
Reserve not to make any adjustments to the inventory balance and
advised him that no write-offs were allowed to the lowest of cost price
or net realisable value.
REQUIRED
Discuss the abovementioned with reference to the SAICA Code of
[17]
Note: You are not required to discuss the detail of a dispute resolution
process.
Question 16 LEVEL 2
[22 marks]
Nomvula Phosa CA(SA) was appointed the head of accounting at Kind

Hearts NPC on a six-month contractual basis. Kind Hearts NPC is a
national non-pro t company involved in the redistribution of unsold
food to people in need. e company was speci cally formed in the
wake of statistics showing that an immense volume of food that has
reached its sell-by date goes to waste, despite still being perfectly
suitable for human consumption. To counteract the waste, Kind Hearts
NPC will typically obtain the food either for free or at signi cantly
reduced prices from retail chains and distribute it to soup kitchens and
other charity organisations involved in providing food to the poor. Kind
Hearts NPC relies on subsidies from the national lottery, on private
donations and on donations from multinational corporations to fund its
operations.
When the end of Nomvula’s six-month contract was approaching,
the nance director of Kind Hearts NPC, Kenneth Wiggins, managed to
secure a further six-month contract for her after having gone through
immense trouble on her behalf. Soon after her contract was extended,
Nomvula came face-to-face with a major ethical dilemma. Upon
reviewing the accounting records, she came upon several suspicious
and material general journal entries, posted by a person with a
username of ‘guestuser001’. e entries were for donations received, but
instead of being debited to bank, the receipt was debited to a suspense
account. Upon closer investigation, she determined that payments were
subsequently made from the suspense account to an unidenti ed
personal bank account. Nomvula decided to ask Kenneth Wiggins
about the matter. Kenneth simply responded that Nomvula should keep
her nose out of journals she did not understand and reminded her that
he, Kenneth, was the reason her contract with Kind Hearts NPC was
extended.
Nomvula approached the chairman of the board, a non-executive
director, for guidance on the matter. However, the chairman seemed
fearful and told her that ‘some battles in life are too big for us ordinary
people to ght’ and recommended that she turn a blind eye to the
problem. Nomvula decided not to approach any other party in the
company out of fear that she might be made the scapegoat in the
matter, especially since she had no evidence to implicate Kenneth in the
fraudulent payments.
REQUIRED
Discuss the ethical issues, aspects to consider and further actions that
Nomvula Phosa could possibly take in terms of Part 2 of the SAICA Code
of Professional Conduct.
[22]
Question 17 LEVEL 2
SAICA Code of Professional Conduct: CAs in practice and in business
[10 marks]
1. Paddy Lambkin is a rst-year trainee accountant at Abel & Blom Inc.,

a rm of chartered accountants and registered auditors. Paddy is a
member of the audit team for the audit of the 20X1 nancial
statements of Really Big Bank Ltd (RBB), a listed retail bank. During
RBB’s 20X1 nancial year (but before the start of the audit testing),
Paddy went to an RBB branch and applied for a personal loan. He
was granted a R15 000 loan which he used to buy shares in RBB. e
RBB staff members who dealt with his loan application were unaware
of his involvement with the RBB audit.
2. Henry Pollock is a recently quali ed CA(SA) and works as a business
analyst in the group schemes department of Solid Ltd, a life
assurance company. He is instructed by a senior manager in the
department, Mr Grump, to take R250 000 in cash to the head office of
a trade union, and to hand it to the trade union’s general secretary.
When Henry musters the courage to ask Mr Grump the reason for the
payment, the latter answers as follows: ‘So, little Pollock is now asking
questions about things that don’t concern him. Shut up and do as you
are told, or you will soon be sitting on a street corner with a placard.
is is real-world business, which you don’t know anything about.’
REQUIRED
Discuss, with reference to relevant guidance in the SAICA Code of
Professional Conduct, threats to compliance with the fundamental
principles as outlined in the Code by:
1. Paddy Lambkin (5)
2. Henry Pollock (5)
Note: Your answers should include relevant safeguards that should have
been implemented to mitigate the relevant threats.
[10]
Question 18 LEVEL 3
SAICA Code of Professional Conduct and general auditing theory
[21 marks]
Sweetie Jacobs is the marketing manager at Pratt & Whitney (P&W), a

recently formed rm of registered auditors operating from offices in
Rondebosch, Cape Town. She recently drafted a letter that she intends
sending out to a large number of local businesses. e letter reads as
follows:
Pratt & Whitney

P.O. Box 420
Rondebosch
17 January 20X1
[Name and address of potential client]
Dear Sir/Madam
We are the new kids on the audit block, formed to serve the
southern suburbs of Cape Town (for now – we eventually intend to
conquer the world of auditing!). The purpose of this letter is to:
inform you of our range of top quality services; if you have dealt
with the so-called Big 4 before, we promise you vastly better
service than you received from those lumbering dinosaurs (in
fact, we think they are on the verge of extinction);
invite you to make us your business partner; and
guarantee our speedy acceptance of appointment (within 24
hours, as outlined below), should you do the sensible thing and
choose us as your auditors (and, hopefully, the provider of
further services).
All you have to do in order to appoint us as your business partner

is to complete the short section towards the end of this letter: no
mess, no fuss. But hurry, because we are only able to offer the
terms and conditions outlined below for a very limited period.
(Another reason not to delay, but to act today is that the rst 20
respondents will receive fantastic braai tongs, equipped with a
built-in LED light, so you always have a light handy to check the
wors.)
Some reasons to choose us:

As stated above, we are good. In fact, we are more than good:
we are (to borrow a line from Tina Turner) simply the best!
We are quali ed to perform audits of companies (large, small or
anywhere in between) as required by the Companies Act 71 of
2008. But here’s the really good part: our auditing methodology
is designed to minimise disruption to your business activities.
How do we do this? It’s very simple: being an up-to-date rm, we
do controls testing only, which is much more ef cient than the
substantive testing methodology used by other rms. Our
methodology also ensures the detection of fraud. And, should
our testing procedures cause you any degree of inconvenience,
we would be happy to modify them to better suit you: no
arguments. We are the exible rm, always willing to bend over
backwards for you.
We pass the savings of our ef cient controls testing
methodology on to you, so we will quote you an audit fee at
least 15% lower than what you paid for your last audit.
Our audit can be extended to include a range of other services,
as listed below. It would be sensible for you also to engage us
to provide all of these other services, as we reduce our audit fee
by 5% for each additional service that you ask us to perform. Do
the sums: if you tick all the ‘Yes’ boxes below, you can save a
further 20% on our already low audit fees! And there is nothing
untoward about this fantastic discount. We can offer it because,
if, for example, our tax staff does your tax compliance work, the
audit staff will know it’s spot-on, and can then cut back on the
related audit work.
If you have had a fall-out with your present auditor, partner with
us instead. We promise to assist you, not ght with you. After
all, you pay your auditor good money, and in return deserve the
best service. And don’t just take our word for this: have a look
at what one of our many satis ed clients has to say about us:
I can’t tell you how much I have enjoyed dealing with Pratt
& Whitney. Our previous auditors were expensive, and they
found fault with just about everything we did. Pratt &
Whitney is so much nicer to deal with: they’re much
cheaper, and they hardly bother us at all. And, most
importantly, they give us exactly what we want, a clean
audit report!
For you to complete
Indicate which of the following service(s) you require in addition to
an external audit (and remember: the more you tick, the more you
save!):
YES NO
Management consulting
Accounting
Internal auditing
Tax compliance
Your name:
Your email address:
We will email you a letter of client acceptance within 24 hours of

receipt of the above, and that will serve as a binding contract
between ourselves and your company. That’s how easy we make it
for you!
We look forward to doing business with you, and knocking your

socks off.
Regards,
Pratt & Whitney
REQUIRED
Guided by the SAICA’s Code of Professional Conduct and general
auditing theory, comment critically on the draft letter.
[21]
1 First point of framework.

2 Last section of text highlighted in paragraph 1.
4 Second point of framework.
5 Third point of framework.
9 Last section of text highlighted in paragraph 2.
INTRODUCTION
e legal responsibilities of, as well as the requirements to be met by, an auditor are
governed by, among other things, the Companies Act 71 of 2008, the Auditing Profession
Act 26 of 2005 (APA), and the King IV Report on Corporate Governance™ for South Africa
2016.1
e following types of application questions can typically be asked regarding compliance
with the Acts and the King IV™ report:
Discuss whether an incident constitutes a speci c event or would give rise to a speci c
liability in terms of an Act.
Discuss the non-compliance of an auditor, a company, a committee or the directors in
terms of an Act or the King IV™ report.
Evaluate the conduct of an auditor, a company, a committee or the directors in terms of
an Act or the King IV™ report.
EXAMPLE QUESTION
Auditing Profession Act 26 of 2005: Reportable irregularity

[17 marks]
You are a director at AuditCorp Inc., which has recently been appointed as auditors of
Distron (Pty) Ltd (Distron), a cold beverage wholesale supplier servicing the Gauteng area.
You were appointed as the designated auditor.
Distron buys its products directly from various beverage manufacturers, and then
resells them to independent shops and retail chains. Distron currently owns a eet of 12
delivery vehicles, with which it makes its deliveries to its customers.
During your review of the audit le, you could nd no substantive documentation for
an amount of R123 456 claimed as a deduction when the second provisional tax return was
completed by the nancial manager and signed off by the nancial director, Mrs Botha.
Further investigations revealed that this amount was the total of all traffic nes issued
during the nancial year to the company’s delivery vehicle drivers. Subsequently, you set
up a meeting with Mrs Botha and were stunned by her response: she was of the opinion
that traffic nes received by delivery vehicle drivers for speeding, illegal parking and so on
could be claimed as a deduction from taxable income. She reasoned that the nes had
been issued in the production of income. She argued that the faster the deliveries were
made, the more pro table the company would be. Mrs Botha insisted that these deductions
be made, as the South African Revenue Service would not pick them up.
REQUIRED
1. Discuss whether Mrs Botha’s treatment of the traffic nes constitutes a reportable
irregularity in terms of the Auditing Profession Act 26 of 2005. (11)
2. Describe the actions that you should take in terms of the Auditing Profession Act 26 of
2005, if you have concluded that Mrs Botha’s treatment of the traffic nes constitutes a
reportable irregularity. (6)
[17]
GUIDANCE
1. Discuss whether2 Mrs Botha’s treatment of the traffic nes constitutes a reportable
irregularity3 in terms of the Auditing Profession Act 26 of 2005.4 (11)
2. Describe the actions that you should take in terms of the Auditing Profession Act 26 of
5
2005,6 if you have concluded that Mrs Botha’s treatment of the traffic nes constitutes a
reportable irregularity. (6)
Identify the theory applicable to the question

In order to answer the above question, you need to be familiar with the Auditing Profession
Act 26 of 2005, or you will not be able to list the criteria against which Mrs Botha’s conduct
will have to be measured when deciding whether or not it is a reportable irregularity. You
will also not be able to describe the actions you should take as required in part B.
Read the question
You are a director at AuditCorp Inc., which has recently been appointed as auditors of
Distron (Pty) Ltd (Distron), a cold beverage wholesale supplier servicing the Gauteng
area. You were appointed as the designated auditor.7
Distron buys its products directly from various beverage manufacturers, and then
resells them to independent shops and retail chains. Distron currently owns a eet of 12
delivery vehicles, with which it makes its deliveries to its customers.
During your review of the audit le, you could nd no substantive documentation for
an amount of R123 456 claimed as a deduction when the second provisional tax return
was completed by the nancial manager and signed off by the nancial director, Mrs
Botha.8 Further investigations revealed that this amount was the total of all traffic nes
issued during the nancial year to the company’s delivery vehicle drivers. Subsequently,
you set up a meeting with Mrs Botha and were stunned by her response: she was of the
opinion that traffic nes received by delivery vehicle drivers for speeding, illegal
parking and so on could be claimed as a deduction from taxable income.9 She
reasoned that the nes had been issued in the production of income. She argued that
the faster the deliveries were made, the more pro table the company would be. Mrs
Botha insisted that these deductions be made,10 as the South African Revenue Service
would not pick them up.11
Exam technique
Remember: you need to follow a speci c approach if you are required to describe, or
comment on, requirements set out in:
Acts, such as the Auditing Profession Act 26 of 2005 and the Companies Act 71 of 2008
the King IV Report on Corporate Governance™ for South Africa 2016.
You need to:

identify the relevant issue in the Acts and/or the King IV™ code
state the relevant theory as stated in the Acts and/or the King IV™ code
apply the information in the scenario to the relevant stated theory.
If you are asked to comment on the non-compliance in terms of an Act or the King IV™
code, that is exactly what you will deal with: non-compliance. However, if you are asked to
evaluate or assess the information in terms of an Act or the King IV™ code, you must
include in your answer the instances of both compliance and non-compliance. Remember
also to conclude on the compliance and the non-compliance.
SUGGESTED SOLUTION
1. ere is an issue that relates to incorrect tax practices, which could possibly prove to be a
reportable irregularity.12
a) It must be in the capacity of the auditor of the company. (eory) (1)
You were appointed as the designated auditor of Distron. (Application) (1)
AND
b) An unlawful act or omission must have taken place. (eory) (1)
Provisional tax returns were unlawfully completed owing to the deduction of traffic nes from taxable income.
(Application) (1)
AND
c) e unlawful act or omission must be committed by a person responsible for the
management of the company. (eory) (1)
Mrs Botha was responsible for, and/or fully aware of, the deduction of the traffic nes from taxable income.
(Application) (1)
AND
d) e unlawful act or omission has caused, or is likely to cause, material nancial loss to
the entity or to a partner, member, shareholder, creditor or investor of the entity in
respect of his/her dealings with that entity. (eory) (1)
i) Fines and penalties can be imposed by the South African Revenue Service and
Distron will suffer nancial loss. (Application) (1)
ii) If returns go through the way they were completed, the South African Revenue
Service will suffer a loss, as Distron will pay less tax than that to which the South
African Revenue Service is entitled. (Application) (1)
OR
e) e unlawful act or omission is fraudulent or amounts to theft. (eory) (1)
e submission of these falsi ed tax returns might constitute fraud. (Application) (1)
OR
f ) e unlawful act or omission represents a material breach of any duciary duties.
(eory) (1)
e submission of falsi ed tax returns represents a material breach of the nancial
director’s duciary duty, as it is not in the best interests of the company. (Application)
erefore, based on the above, Mrs Botha’s treatment of the traffic nes constitutes (1)
a reportable irregularity in terms of the Auditing Profession Act 26 of 2005
(Decision/Conclusion). (1)
2. eory stated in the Auditing Profession Act 26 of 2005

a) As per section 45 of the Auditing Profession Act 26 of 2005, the existence of a
reportable irregularity must be reported to the IRBA without delay. (1)
b) Management of Distron must be noti ed (in writing) of the report to the IRBA within
three days of the auditor sending the rst report to the IRBA. (1)
c) e auditor must, as soon as reasonably possible, but no later than 30 days from the
date on which the rst report was sent to the IRBA: (1)
i) take all reasonable steps to discuss the report with the management of Distron;
ii) afford the members of the management board of Distron an opportunity to (1)
make representations in respect of the report; and (1)
iii) send a second report to the IRBA stating that:
no reportable irregularity has taken, or is taking, place; or (1)
the suspected reportable irregularity is no longer taking place, and that
adequate steps have been taken for the prevention or recovery of any loss as a
result thereof, if relevant; or (1)
the reportable irregularity is continuing. (1)
QUESTIONS
Question 1 LEVEL 1
[8 marks]
Section 45 of the Auditing Profession Act 26 of 2005 imposes an obligation on registered

auditors to report a reportable irregularity to the IRBA if certain requirements are met.
REQUIRED
List and brie y explain the elements that constitute a reportable irregularity.
[8]
Question 2 LEVEL 1
[6 marks]
REQUIRED
Brie y outline the process that a registered auditor should follow when he/she is under a
duty to report a reportable irregularity in terms of the Auditing Profession Act 26 of 2005.
[6]
Question 3 2 LEVEL 1/
Auditing Profession Act 26 of 2005: Registration as auditor, duties of auditor
[14 marks]
e three individuals below would like to register with the IRBA. ey are not sure what the
requirements are and have asked for your assistance:
Franc Massri is a quali ed CA(SA). He has been vigilant in keeping up with his
continuous professional development requirements as set out by SAICA. He received his
South African citizenship ve years ago and has been working at an auditing rm for the
past three years.
Jakky Chiang is a South African citizen. He was released from prison in 20X1, after having
been sentenced, without the option of a ne, to 25 years in prison for the forging of salary
cheques at his previous place of employment. While in jail, he realised his mistake and
decided to become an auditor in order to catch fraudsters. He was released on early
parole owing to good behaviour and began studying immediately after his release. He is
ready to write his professional exams and start his training at an audit rm.
Grant orn is a well-known and respected accountant in Johannesburg. He complies
with all the SAICA continuous professional development requirements as well as those
of the IRBA. He is still waiting for his South African citizenship to be approved, as he is
originally from the UK.
REQUIRED
1. Discuss each person’s eligibility to be registered as an auditor in terms of the Auditing
Profession Act 26 of 2005. Motivate your answer. (9)
2. List the criteria with which an appointed auditor of a company must be satis ed,
according to section 44 of the Auditing Profession Act 26 of 2005, before expressing an
unquali ed opinion on a company’s nancial statements. (5)
[14]
Question 4 LEVEL 2
[13 marks]
Mr Murray is the partner in charge of the 20X1 audit of Mega Ltd (Mega). During the course
of its 20X1 nancial year, Mega purchased a much smaller company, Micro (Pty) Ltd
(Micro).
One evening, while the Mega audit was in progress, three staff members of Micro came to
Mr Murray’s house. ey showed him convincing-looking documents that indicated that,
shortly after Mega took over Micro, an executive director of the former company, a Mr
Retief, instructed Micro’s accounts payable clerks to delete from Micro’s records a large
number of entries for deliveries received by the company before the takeover. He instructed
them to do so because:
he hoped that some of the suppliers concerned would not have any record of having
made the relevant deliveries to Micro; and
he wanted to create discrepancies between Micro’s records and the relevant suppliers’
statements in order to delay having to pay them.
REQUIRED
Given the above information, discuss whether Mr Murray has a reporting responsibility in
terms of the Auditing Profession Act 26 of 2005. Motivate your answer.
[13]
Question 5 LEVEL 2
[11 marks]
Kelly Auditors Inc. (Kelly) have been the external auditors of the Multicor group for the past
four years. Kelly is the external auditors of all the subsidiaries in the group and the audit
team is currently busy with the audit of Wonder Ltd (Wonder), one of Multicor’s
subsidiaries, for the nancial year ended 31 May 20X1.
During the inspection of the minutes of directors meetings, the following information
was obtained regarding the remuneration of Wonder’s board of directors and management.
e company has six executive directors and one independent non-executive director. e
directors had not been satis ed with their current remuneration, as due to the ever-
increasing cost of living in South Africa, they felt that it had become difficult to maintain
their lifestyles. ey had therefore taken it upon themselves to approve a new directors’
remuneration policy. is policy had been developed during the current nancial year by
the company’s chief nancial officer, who is also a director, but it had not been approved by
the shareholders.
e directors of Wonder do not wish to disclose any remuneration in the annual nancial
statements of either Wonder or the group. ey are willing to disclose only their basic
salary.
REQUIRED
Discuss whether the lack of approval and disclosure of the directors’ remuneration will
constitute a reportable irregularity in terms of the Auditing Profession Act 26 of 2005.
[11]
Question 6 LEVEL 2
Auditing Profession Act 26 of 2005: Legal liability
[9 marks]
Mr John Cowboy is a CA(SA) and a registered auditor. In his role as audit partner at John
Cowboy Inc., he issued an unmodi ed audit opinion on the nancial statements of Dicey
Rock (Pty) Ltd (Dicey) that re ected that the company had a positive nancial outlook, and
would be a going concern for the foreseeable future. e audit work performed, however,
did not support this statement. e unmodi ed report was issued, despite Mr Cowboy
being aware of the fact that Dicey was under severe nancial pressure at year-end.
Mr Cowboy was also aware that a nancial company, Capital Ltd (Capital), would rely
on the audit report in deciding whether or not to provide Dicey with nancial assistance in
the form of a loan. e granting of the loan by Capital was speci cally dependent on
Dicey’s latest audited nancial statements, providing assurance that Dicey would be able to
operate as a going concern for the foreseeable future. Mr Cowboy was aware that the
potential loan from Capital would bring some short-term cash ow relief to Dicey, but that
this would be insufficient to restore nancial stability.
Based on Mr Cowboy’s audit report, Capital granted the loan to Dicey, as Capital
expected the company to be more than capable of servicing the loan repayments.
A few months after the loan had been granted, Capital realised that Dicey was not in a
position to make the contractual loan repayments. Upon subsequent enquiry, they
discovered that Capital had used the loan money to pay administrative expenses, including
salaries.
REQUIRED
Discuss whether Mr John Cowboy will be held liable for the loss suffered by Capital in
terms of the Auditing Profession Act 26 of 2005.
[9]
Question 7 LEVEL 1
King IV™ report

[13 marks]
You have recently been appointed as an audit manager at the audit rm of General
Practitioners of Excellence Inc., which has entrusted you with the audit of Goodies Ltd, a
company that was incorporated by its chief executive officer, Mike Goods.
Goodies Ltd manufactures and sells ceramic teapots, and was listed on the JSE in 2000.
Mike Goods has heard about the importance of the King IV Report on Corporate
Governance™ for South Africa 2016 and the so-called ‘combined assurance model’. He feels,
however, that King IV™ is not applicable to Goodies Ltd, as the external auditor and the
internal audit department work independently with different agendas and goals.
REQUIRED
Write a letter to Mike Goods in which you explain the applicability of the King IV™ report to
the company and describe the concept of and responsibility for combined assurance.
[13]
Question 8 LEVEL 2
King IV™ code

[10 marks]
You are a rst-year audit trainee allocated to the statutory aspect of the audit of Kilimanjaro
Ltd (KLM).
Client: KLM Year-end: 30 June 20X1

Prepared by: A. Trainee Preparation date: 20 July 20X1
X1
Reviewed by: S. Supervisor Review date: 24 July 20X1
Subject: Statutory matters
e company secretary provided the following schedule to the board of directors and the
risk committee:
Board of directors
D. Masha – executive director and chairperson
A. Anker – chief executive officer (CEO)
S. Sighn – marketing director (an executive director)
M. Makas – human resources director (an executive director)
G. Jones – information technology (IT) director (an executive director)
E. Weinstein – risk director (an executive director)
W. Derksen CA(SA) – independent non-executive director
e position of nancial director has been vacant for nine months after the previous
director’s resignation. e CEO, A. Anker, is in the process of interviewing candidates and
he will, in due course, appoint the new nancial director. Even though there is only one
independent non-executive director in the board, the directors and shareholders are
satis ed that the number of directors per company is sufficient and they are not prepared
to appoint additional directors.
Risk committee
D. Masha (chairperson of the risk committee)
E. Weinstein
W. Derksen
e nomination committee has recently been dissolved as the CEO believes he and M.
Makas have the ability to handle the appointment process on their own.
REQUIRED
Brie y describe any concerns that you have regarding the composition and appointments
of the board of directors and risk committee. For each concern, provide a
recommendation(s) and/or requirement(s) of the King IV™ code and report.
Present your answer as follows:
Concerns (1 mark Recommendations and/or requirements of King IV™ code and

each) report (1 mark each)
Communication skills – logical argument, layout and structure (2) (8)

[10]
Question 9 LEVEL 2
King IV™ report

[21 marks]
e following information relating to the board of directors of Paino and Later Ltd (P&L)
has been presented to you during an audit. You have been assigned the responsibility of
investigating compliance with the King IV Report on Corporate Governance™ for South
Africa 2016 (King IV™). e company is listed on the JSE.
DIRECTOR TITLE/POSITION HELD IN COMPANY INVOLVEMENT

NAME IN THE AUDIT
COMMITTEE
Al Paccino Chairperson and CEO Audit committee
chairperson
Joe Tick Inc. Secretary and auditors
D. Preston Not in the employ of P&L. D. Preston was, Audit committee
however, the CEO up until one year ago, when Al member
Paccino was appointed as CEO.
Joe Risk director Audit committee
Marciano – member
PhD Maths
DIRECTOR TITLE/POSITION HELD IN COMPANY INVOLVEMENT
NAME IN THE AUDIT
COMMITTEE
R. Balboa Not in the employ of P&L. He owns 2% of P&L’s
shares. This is, however, immaterial to his
personal wealth.
J. Acker Financial director Audit committee
CA(SA) member
B. Acker Self-employed. B. Acker is one of P&L’s
signi cant suppliers.
J. Bolt – Production director
MSc
M. Advert Marketing director
REQUIRED
1. Classify the directors of Paino and Later Ltd as executive or non-executive in terms of the
King IV™ report. Also classify the non-executive directors as independent or not
independent in terms of the King IV™ report. Your answer should be presented in the
following tabular form: (12)
DIRECTOR TITLE/POSITION INVOLVEMENT EXECUTIVE/NON- INDEPENDENT/NON-

NAME HELD IN IN THE AUDIT EXECUTIVE INDEPENDENT, PLUS
COMPANY COMMITTEE MEMBER OF THE MOTIVATION
BOARD, PLUS
MOTIVATION
Al Paccino Chairperson and Audit committee
CEO chairperson
Joe Tick Inc. Secretary and
auditors
D. Preston Not in the employ of Audit committee
P&L member
Joe Marciano Risk director Audit committee
– PhD Maths member
R. Balboa Not in the employ of
P&L
J. Acker Financial director Audit committee
CA(SA) member
B. Acker Self-employed
J. Bolt – MSc Production director
M. Advert Marketing director
2. Discuss any instances of non-compliance with the King IV™ report, speci cally with
reference to the composition of the board of directors and the audit committee. e role
of the chairperson of the board as well as the CEO should be included in your answer.
(9)
[21]
Question 10 LEVEL 2
King IV™ report

[20 marks]
You are the audit manager at the audit rm Go ProAudits Inc. (Go ProAudits). Your rm
was recently appointed as the external auditors of Pen ’n Pencil Ltd (Pen ’n Pencil) based
on the recommendation of the board of directors. Management was very helpful during the
planning stage of the audit and assisted in providing the following background information
to the senior trainee accountant on the audit team:
Background of the entity’s management

Pen ’n Pencil is a wholesaler of stationary with 30 branches throughout southern Africa.
e entity listed on the JSE in 2010 and has been pro table since its incorporation in 1980.
e board declares full compliance with King IV™ in its annual reports.
e board consists of the following individuals with their different roles:

Ms Danielle Copper – chairperson of the board
Mr abo Mofokeng – serves on the audit committee
Ms Fatima Naidoo – chief nancial officer (CFO)
Ms Marie Swanepoel – serves on the audit committee
Mr Siphiwe Makuma – chief executive officer
Mr Yusuf Wascowitz – managing director
Ms Danielle Copper and Mr Siphiwe Makuma were the founders of Pen ’n Pencil. Both of
them separately owned 50% of the entity’s shareholding at inception, but their
shareholding has decreased – since the date of listing, they have owned only 7.5% each. Ms
Copper is seen as the best candidate to oversee matters in the company due to her
involvement in the incorporation. Mr Makuma was appointed as chief executive officer for
the same reason. e shareholders at the time therefore elected both of them to their
respective positions on the board of directors in 2010.
Mr abo Mofokeng is an independent director of Pen ’n Pencil with an extensive
background in retail stores. Pen ’n Pencil therefore appreciates his willingness to assist in
the day-to-day operation of the entity.
Ms Fatima Naidoo has a background in psychology, but is currently studying towards
becoming a chartered accountant. She has been in a managerial position at Pen ’n Pencil
for the past ve years, and was promoted to CFO after the resignation of the previous CFO.
As Pen ’n Pencil aims to maintain a high level of quali cation, Ms Naidoo was requested to
further her studies in accounting.
Ms Marie Swanepoel is a stay-at-home mom, and also the sister-in-law of Ms Copper.
Ms Copper requested Ms Swanepoel to assist on the board in order for them to increase the
board’s independence.
e compensation of the directors is determined by Ms Copper and is as follows:

Executive fees: R1 million per annum
Non-executive fees: R500 000 per annum
e directors’ fees are appropriately disclosed in the nancial statements by the accounting
function, which is responsible for the preparation of the nancial statements.
REQUIRED
Discuss the corporate governance concerns based on the King IV™ report.
Notes:
e required asks for concerns based on the King IV™ report. erefore you will only deal
with instances of non-compliance in your answer and you will not include a conclusion
in your answer.
You need to state the relevant King IV™ requirements (theory) in your answer and have
to apply the information in the case study to the stated King IV™ requirements
(application).
Your answer must clearly link the theory to the application. One way of presenting this
type of answer is to do it in tabular format, with the theory in the rst column and the
application in the second column.
When looking at the mark allocation, 20 marks constitutes 10 relevant King IV™
requirements marks and 10 properly applied application marks.
1. The chairperson of the board is not a non-executive director who is

independent, as required by the King IV™ report. (1)
Ms Danielle Copper owns a 7.5% share in Pen ’n Pencil, which is material to
her personal wealth, and will not be seen as independent. (1)
2. The company should appoint a lead independent member to strengthen the
independence of the board. (1)
There is no indication of a lead independent board member. (1)
3. The chairperson of the board as well as the CEO should be appointed by the
board of directors. (1)
It is a concern that the chairperson of the board was elected by the
shareholders and not by the board of directors in terms of the King IV™
report. (1)
The CEO was also appointed by the shareholders and not by the board of
directors, as required by the King IV™ report. (1)
4. The majority of the board members are not non-executive directors. (1)
Mr Mofokeng assists with the day-to-day activities of Pen ’n Pencil, and
therefore cannot be seen as non-executive. (1)
Four of Pen ’n Pencil’s six directors are executive directors (only Ms Copper
and Ms Swanepoel are non-executive), and therefore the entity does not
adhere to this principle. (1)
5. The majority of these non-executive directors are not independent, as
required by the King IV™ report. (1)
Neither Ms Copper nor Ms Swanepoel is independent.
Ms Swanepoel is remunerated based on the performance of the company

and therefore cannot be seen as independent.
(Refer to point 1 for the discussion of Ms Copper’s independence.) (1)

6. There should be an effective and independent audit committee. All the (1)
members of the committee should be independent and it should be chaired
by an independent, non-executive director. The committee should comprise
at least three independent, non-executive directors.
Only Mr Mofokeng and Ms Swanepoel serve on the audit committee (only
two directors). (1)
Mr Mofokeng is involved in the day-to-day operations of Pen ’n Pencil, which
means he is an executive director (mark awarded in point 4). (1)
Ms Swanepoel is remunerated based on the performance of the company
and therefore cannot be seen as independent (mark awarded in point 5).
She serves on the audit committee. (1)
7. The members of the audit committee as a whole should have the necessary
nancial literacy, skills and experience to execute their duties effectively. (1)
Ms Swanepoel is a stay-at-home mom and there is no indication that she
has nancial literacy, skills and experience. There is also no indication
whether Mr Mofokeng has the relevant nancial literacy, skills and
experience. (1)
8. Pen ’n Pencil does not have the following required minimum committees
according to the King IV™ report:
Risk committee (1)
Nomination committee (1)
Remuneration committee (1)
Social and ethics committee (1)
9. The number of breaches of the governance principles in King IV™ detailed
above indicates the following:
The company either does not have a company secretary or the incumbent is
ineffectual. (1)
The board does not meet their responsibility for compliance governance as (1)
required by King IV™. (1)
Question 11 LEVEL 2
King IV™ report

[25 marks]
Bookings-R-Us Ltd (BRU) is a travel agent in the South African tourism industry. BRU is
listed on the JSE. e board of directors is well aware of the fact that good governance in
terms of King IV™ is compulsory for companies listed on the JSE and, as such, has requested
your review of the information provided below.
e audit committee (sub-committee of the board of directors)

e audit committee met on 5 March 20X1 for their annual meeting. e audit committee
consists of four members and therefore exceeds the requirement set by King IV™ to have a
minimum of three members. e members of the committee are as follows:
Mrs Gold – chairman of the board, chairman of the audit committee, chief executive
officer (CEO)
Mr Black – marketing director (executive director)
Mr Green – human resources director (executive director)
Mr Red – CA(SA) (independent non-executive director)
Mr Red quali ed as a chartered accountant after he nished his training contract seven
years ago. However, he then decided to follow his passion of becoming a professional
singer. He never kept up to date with the latest changes in the auditing/accounting
profession while pursuing his passion as he was not planning on returning to the
profession.
e following memorandum was presented and discussed at the meeting on the 5 March
20X1:
Memorandum
To: The audit committee members

From: Mrs Gold (on behalf of the board of directors)
RE: Functions of the audit committee
Dear Member
Please take note of the following additional functions required from the audit
committee in assisting the board of directors to be effective and ef cient:
1. Assisting the nominations committee in future with the appointment of a company secretary
2. Appointing or renewing the appointment of the external auditors
3. Investigating suspected instances of fraud during the weekly wage pay-out to the workforce
4. Conducting the audit of the interim nancial results
REQUIRED
Highlight all instances of non-compliance with King IV™ and make recommendations as to
how BRU can become compliant with the requirements.
[25]
Question 12 LEVEL 1
King IV™ report and Companies Act 71 of 2008

[18 marks]
Per the King IV Report on Corporate Governance™ for South Africa 2016 (King IV™), a
company’s audit committee is supposed to, inter alia, oversee both its external and internal
auditors.
REQUIRED
1. Answer yes or no. In terms of the Companies Act 71 of 2008, it is compulsory for the
following companies to have an audit committee:
a) Public companies (1)
b) State-owned companies (1)
c) Private companies, in the case where the memorandum of incorporation indicates
that the company should have an audit committee (1)
2. What are the duties of the audit committee in terms of the Companies Act 71 of 2008?
(15)
[18]
Question 13 LEVEL 2
Companies Act 71 of 2008
[10 marks]
As the senior manager in the technical department of the audit rm of Matthews &
Mbowene Inc. with expertise in aspects of the Companies Act 71 of 2008, you have received
a query from one of your colleagues and an email from another. You need to respond to
these queries separately.
1. During the course of a conversation with Meisie Smith, one of the audit seniors at the
audit rm, regarding a prospective client, Trophy (Pty) Ltd, a company that performs all
types of engraving, especially that of trophies, she told you the following:
I have a potential client, Trophy (Pty) Ltd, who approached us to serve as the company secretary. I obtained
Trophy (Pty) Ltd’s memorandum of incorporation (MOI), and there is something that is bothering me. e
company’s MOI only indicates that the company is prohibited from offering its securities to the public. Am I
correct in saying that the company will be seen to be incorporated as a private company in terms of the
Companies Act 71 of 2008?
2. You have received the following email from a colleague:
From: [email protected]
To: [email protected]
Date: 20X1/07/08 8:15am
Subject: Companies Act Query
Good morning, Colleague,
I have a potential audit client, Seals (Pty) Ltd, who is the sole provider of printed
degree certi cates in South Africa. Even though they are registered as a private
company, they need to know whether or not they need to be audited according to the
new Companies Act. They have provided me with the following information for the
nancial year ended 30 June 20X1:
Number of certi cates printed during the year under review 40 million
Cost price per certi cate R5
Sales price per certi cate R7
Average number of employees 40
Total creditors R20 million
Number of shareholders 20
Do they need to be audited according to the new Companies Act?
Gift Sisulu CA(SA)
REQUIRED
Address each of your colleague’s queries separately.
Mark allocation
1. (4)
2. (6)
[10]
Question 14 LEVEL 2
[10 marks]
As a member of the audit team of Cheesy Ltd (Cheesy), which manufactures and sells dairy
products, you have been assigned to the audit of statutory matters and, as part of your
procedures, have extracted some information pertinent to your audit.
Group structure
Cheesy Ltd owns 80% of the shares in Boxes Ltd, a company responsible for marketing the
products of Cheesy Ltd. e other 20% of shares are held by independent shareholders.
Directors of Cheesy Ltd

Fi Frame
Shervani Govender
Apple Cruise CA(SA)
Directors of Boxes Ltd

Fi Frame
Apple Cruise CA(SA)
Joe Slow
Boxes Ltd (Boxes) had to appoint a new auditor during the last annual general meeting, but
the shareholders could not come to an agreement as to who the new auditor should be.
erefore, they gave the directors authorisation to make an appointment. Listed below are
the candidates they are currently considering:
Giddy Fellows (Pty) Ltd, a new dynamic rm in the city whose shareholders are Franc
Giddy CA(SA), Mary McTree CA(SA) and abo Mzini (BCom)
Apple Cruise CA(SA)
Badrep, a rm of registered auditors involved since its inception in the supply of
secretarial services to the company
Brainwaves Inc., a large international rm of registered auditors
REQUIRED
Discuss the eligibility of the four entities or individuals listed above for the appointment as
the auditor of Boxes Ltd in terms of the Companies Act 71 of 2008.
[10]
Companies Act 71 of 2008 and King IV™ report
[16 marks]
Wellworthit Ltd (WWI) is one of the top 100 companies listed on the JSE. Its business
involves retailing of clothing, food products, groceries and home products to upper- and
middle-income customers, and it has operations in South Africa, Namibia, Botswana,
Australia and New Zealand. WWI also has an interest in Wellworthit Financial Services
(Pty) Ltd, which provides nancial services such as personal loans.
At WWI’s nancial year-end (30 September 20X1), WWI’s board consisted of:
Mr Archibald – chairperson of the board; non-executive director
Mr Brooks – independent non-executive director
Ms Calvin – independent non-executive director
Mr Du Toit – non-executive director
Mr Els – non-executive director
Mr Franken – executive director; chief executive officer
Mr Goodes – executive director; chief operating officer
Ms Hamilton – executive director; head of corporate affairs
At 30 September 20X1, the company had the following board committees:
Audit, risk and compliance committee members

Mr Brooks – committee chairperson
Ms Calvin
Mr Franken
is committee met once during the 20X1 nancial year.
Nominations committee members

Mr Archibald – committee chairperson
Mr Brooks
Ms Calvin
e nominations committee did not meet during the 20X1 nancial year. Per WWI’s annual
report, this committee ‘meets when required, and it was decided that it was unnecessary to
have a meeting during the reporting period’.
Remuneration committee members

Mr Archibald – committee chairperson
Mr Isner – WWI’s chief nancial officer
Ms Jordan – an executive remuneration consultant who is not a full-time employee of
WWI
e remuneration committee decides on the remuneration of executive directors. All non-

executive directors are remunerated with a meeting attendance fee of R20 000 per board
meeting and R15 000 per committee meeting.
e company also has a social and ethics committee, which it is required to have in terms
of the regulations to the Companies Act of 2008.
e social and ethics committee members at year-end:

Mr Goodes
Ms Hamilton
Mr Keyser – WWI’s head of compliance management
During the year, two independent, non-executive directors resigned from the board. e
rst was Mr Langeveld, who did so after it became known that he had been listed in the
Companies and Intellectual Properties Commission’s (CIPC’s) register of delinquent
directors before he was appointed. WWI’s annual report stated that Mr Langeveld resigned
during the reporting period, but did not provide a reason for his resignation. e other
director who resigned was Mr Mlambo. WWI made a statement that the reason for his
resignation was ‘to free up time to pursue other interests’. is statement was repeated in
the annual report. e Black Management Forum issued a statement that accused WWI’s
board, and the chairperson of the board in particular, of having been disrespectful towards
Mr Mlambo, and called for a boycott of WWI. e company did not respond to the Black
Management Forum’s statement. Both Mr Langeveld and Mr Mlambo served on WWI’s
audit committee before they resigned as board members.
REQUIRED
Discuss the governance practices at Wellworthit that you regard as being
problematic/unacceptable, given relevant guidance in the King IV™ report and the
Companies Act 71 of 2008.
[16]
Companies Act 71 of 2008 and Auditing Profession Act 26 of 2005: Reportable irregularity
[24 marks]
Colorz Ltd (Colorz) manufactures ink cartridges for laser jet printers. Colorz has a 28
February 20X1 nancial year-end. e company has been in operation for 20 years, and has
been pro table up until the current nancial year when a major global nancial recession
hit. e recession, along with the fact that an increasing number of individuals and
companies are ‘going green’, has caused a massive decline in pro tability. Mrs Pink, the
nancial director and a nancial accountant, provided you with the following extract from
the statement of nancial position as at year-end:
ACCOUNTS 29 FEB 20X1 (R’000)

Inventory R59 157
Debtors R45 178
Non-current assets R125 689
Overdraft R55 431
Creditors R45 682
Non-current liabilities R85 479
During the 20X1 nancial year, Mrs Pink approved a loan to the executive director, Mr
Green, to enable him to partake in a new business venture. Mrs Pink approved the loan on
15 April 20X10 without consultation with Ms Yellow (chief risk officer) or Mr Blue (human
resources director) as, in Mrs Pink’s opinion, ‘they have limited nancial knowledge’. e
loan amounted to R6 million, and is repayable at the end of March 20X1, as this is the
month when directors are awarded bonuses. e loan does not carry interest. e loan was
funded out of the bank overdraft and Mrs Pink posted the following journal entry in order
to record the transaction on 15 April 20X0:
Dr Debtors R6 000 000

Cr Non-current liabilities R6 000 000
General journal entry in order to record loan to debtor
REQUIRED
Note: Ignore any taxation implications.
1. Discuss whether Mrs Pink acted in compliance with section 45 of the Companies Act 71
of 2008. (7)
2. Discuss the effect of your ndings in (1) in terms of section 45 of the Auditing Profession
Act 26 of 2005. (17)
[24]
Companies Act 71 of 2008 and King IV™ report
[28 marks]
Diversi ed Ltd (Diversi ed), a large logistics company, was listed on the JSE in 1983. e
company has expanded into a number of sub-Saharan countries: rst, into the countries
neighbouring South Africa, and then into West and East Africa. Generally speaking, the
expansion process has been a success.
Board composition
On its 20X1 nancial year-end date, the board of directors of Diversi ed consisted of:
Mr Appleton – chairperson and joint chief executive officer (he was the board
chairperson before being made joint CEO)
Mr Brundyn – joint chief executive officer (he was an executive director, tasked with
stakeholder engagement, before being made joint CEO)
Ms Carter – chief nancial officer
Mr Dube – non-executive director
Mr Engels – non-executive director
Mr Franks – non-executive director
Mr Gordon – independent, non-executive director
Ms Hadebe – independent, non-executive director
Mr Irish – independent, non-executive director
Half-way through the 20X1 nancial year, Mr James, Diversi ed’s CEO at the time,
unexpectedly resigned from the position to which he had been appointed two years ago.
Later, it became apparent that Mr James had pushed for the board to remove the
company’s chief nancial officer, Ms Carter, and then resigned when the board refused to
do so. Mr Appleton, a former chairperson of Diversi ed, has been the joint CEO, with Mr
Brundyn, since that time. It is not clear how long this joint CEO arrangement will last.
Shortly after Mr James’s resignation, Mr Klein, the chief operating officer at the time and
an executive director, also resigned. He reportedly left because he had not been appointed
chief executive officer. Apparently, the company does not intend appointing a new chief
operating officer. Diversi ed’s share price dropped considerably after the above-mentioned
events.
Committees
At the nancial year-end date, Diversi ed had an audit committee and three board
committees, which were constituted as follows:
Audit committee:
Mr Appleton – chairperson
Ms Ludd – chief audit executive
Mr Gordon
Mr Irish
Executive committee:
Mr Brundyn
Ms Carter
Four additional senior managers
Nomination committee:
Mr Engels
Ms Hadebe
Mr Langa – head of human resources
Remuneration committee:
Mr Franks – chairperson
Mr Irish
Mr Langa – head of human resources
During the nancial year, the board decided to do away with both the risk committee and
the social and ethics committee. e functions of the risk committee were transferred to
the audit committee, while the functions of the social and ethics committee were
transferred to the executive committee.
Loans to board members

After the departure of Messrs James and Klein, the company made loans totalling R100
million to Mr Appleton, Mr Brundyn and Ms Carter in order for them to purchase shares in
the company. e minutes of a board meeting held on 1 December 20X1 indicated that
these loans were approved by Mr Gordon and Mr Hadebe. e minutes of this meeting did
not include anything else relating to the approval of these loans. No notice of this meeting
was sent out to the directors. All of the directors were present at the board meeting.
REQUIRED
Discuss any instances of non-compliance with the King IV™ report and the Companies Act
71 of 2008 with reference to the information provided relating to Diversi ed Ltd. You may
assume that the Companies Act requirements relating to quorums of meetings have been
met. You are not required to address the issuing of shares in your answer.
[28]
1 Copyright and trademarks are owned by the Institute of Directors in Southern Africa NPC and all of its rights are
reserved.
2 Requires a decision from you = conclusion.
3 Deals specifically with a reportable irregularity.
4 Criteria stated in the Auditing Profession Act.
5 Actions = what you will do.
6 Stated in the APA = theory.
7 First requirement is met: you are the auditor.
8 Financial director = management is aware.
9 Not in terms of the Income Tax Act = unlawful.
10 Not in the company’s best interest.
11 SARS will lose money.
12 This is the issue, but in this case will not earn a mark as it has been given to you in the required.
CHAPTER 4 Basic concepts of governance and internal
control
CHAPTER 5 Introduction to risks and internal controls in a

computerised environment
CHAPTER 6 Revenue and receipts cycle
CHAPTER 7 Purchases and payments cycle
CHAPTER 8 Inventory and production cycle

CHAPTER 9 Human resources cycle
CHAPTER 10 Investment and nancing cycle

INTRODUCTION
e basic concepts of internal control provide a background to the

topics included in the rest of the book. Although these concepts are not
usually tested on their own, a thorough understanding of them will
enhance your ability to apply them in later chapters.
For guidance on the answering of those questions on governance
requiring the application of theory, refer to Chapter 3.
QUESTIONS
Question 1 LEVEL 1
King IV™ report

[16 marks]
Your audit rm, Excellent Service, appointed as the auditors of
Corporate (Pty) Ltd, has received the following document from their
new director with regard to uncertainties or questions in terms of the
King IV Report on Corporate Governance™ for South Africa 2016 (King
IV™ report).
Date 4 February 20X1
Attention: Excellent Service audit team
Subject: King IV™ report requirements
According to the King IV™ report, corporate governance is de ned

as the exercise of ethical and effective leadership by the governing
body towards the achievement of the following governance
outcomes: ethical culture, good performance, effective control and
legitimacy.
Based on the above statement, I have the following queries with

regard to governance and internal control in terms of the King IV™
report:
Query 1
Risks are an integral part of any business striving to achieve its
objective.
What is the de nition of risk according to the King IV™ report?
Query 2
The governing body should exercise ongoing oversight of risk
management and ensure that particular objectives are achieved.
What are the objectives that should be met in terms of the King
IV™ report?
Query 3
After the process of risk identi cation and risk evaluation, the
entity should decide on an appropriate risk response for each of
the risks identi ed.
What are the different risk responses available to us as an entity?
I look forward to your response.
Mr A. Hopeful
(Director)
REQUIRED
Assist the director of Corporate (Pty) Ltd with his queries.
Mark allocation
Query 1 (5)
Query 2 (5)
Query 3 (6)
[16]
Question 2 LEVEL 1
Internal control: Fundamentals
[19 marks]
e International Standard on Auditing (ISA) 315 (Revised), which

identi es and assesses the risks of material misstatement through an
understanding of the entity and its environment, requires an auditor to
understand an entity’s internal control. ISA 315 (Revised) de nes
internal control and deals with the different components thereof.
REQUIRED
1. De ne internal control. (5)
2. List the components of an entity’s internal control, and give a brief
explanation of each component. (14)
(Adapted from ACCA Question 2a, 8 December 2011)

[19]
Question 3 LEVEL 1
Internal control: Fundamentals
[15 marks]
You were recently appointed as a partner at the audit rm of Tom, Dick

and Harry Inc. One of your duties includes a monthly training session
with the trainee accountants in order to resolve their uncertainties
regarding, among other things, aspects of internal control.
In order to identify problem areas, you distributed a questionnaire
among the trainee accountants, the results of which revealed that there
are reservations about the bene ts to be derived from the
implementation of a computerised system, the type of control activities
and the inherent limitations of internal control.
REQUIRED
Prepare a guideline that could be used as a reference tool during the
training session, in which you:
1. describe ve potential bene ts identi ed by ISA 315 (Revised) to be
derived from the implementation of a computerised system (5)
2. list the different type of control activities (5)
3. list ve inherent limitations on internal control. (5)
[15]
Question 4 LEVEL 1
Internal control: Control objectives
[11 marks]
You have recently been employed as the audit manager responsible for
resolving technical issues and overseeing trainee accountants
completing their studies part-time through Various University. One of
your tasks is to assist the trainee accountants in preparing for their
upcoming examinations.
One of the areas of concern is their understanding of internal
control and, more speci cally, the control objectives relating to internal
control. You have been tasked with the preparation of a presentation on
control objectives in order to answer the following unrelated questions
raised by the trainee accountants.
REQUIRED
1. List and de ne the generic control objectives that need to be present
in all accounting systems. Bearing in mind that the objectives
referred to are those of management, and should not be confused
with the assertions that management implies in the nancial
statements, answer using this tabular format:
CONTROL OBJECTIVE GENERIC DEFINITION OR MEANING

Notes:
Listing the generic control objectives requires the provision of one
word only – the control objective.
In de ning the listed items, provide a description of each – the
generic description for each of the listed control objectives.
Whenever (as in this case) you are required to provide an answer in
a certain format, use the format throughout your answer. (9)
2. Explain the rst step (one step only) in the design of a system of
internal control and the difference between risks and control
objectives. (2)
[11]
1.
CONTROL GENERIC DEFINITION OR MEANING

OBJECTIVE
Validity (1) All transactions and events executed:
are properly authorised in accordance with management policy;
did actually occur during the period; and (1) (1)
are supported by sufficient documentation and evidence. (1)
Completeness All transactions that actually occurred during the period are
(1) recorded in a timely manner. (1)
No transactions are omitted. (1)
Accuracy (1) All transactions are:

recorded at the correct amounts (quantity, prices and
calculations); (1)
correctly classi ed in terms of the entity’s chart of accounts; and
correctly summarised and posted to the entity’s accounting (1)
records. (1)
2. When designing a system of internal control, the rst step is to

formulate control objectives (what the entity wants the system to
achieve or ensure) for each class of transaction, or part of the
accounting system. (1)
Risks are things that could go wrong. (1)
Control objectives relate to what management wants the
system to achieve. (1)
Note: An understanding of the generic meaning of the three control

objectives is of utmost importance, as they are the foundation on which
entities, business cycles and the accompanying accounting systems are
built.
Question 5 LEVEL 1
Internal control: Components
[10 marks]
REQUIRED
List and describe brie y the ve components of internal control
according to ISA 315 Revised that should be present in every entity’s
internal control system.
[10]
INTRODUCTION
e questions in this chapter deal with information technology.
QUESTIONS
Question 1 LEVEL 2
Multiple choice questions addressing multiple concepts
[10 marks]
REQUIRED
Answer the following multiple choice questions by selecting the
appropriate option:
1. Which of the following statements about the control environment is
false?
Management’s attitude towards internal control and ethical
a) behaviour has little impact on employee beliefs or actions.
b) An overly complex or unclear organisational structure could be
indicative of more serious problems.
c) A written policy and procedures manual is an important tool for
assigning authority and responsibility in many organisations.
d) Supervision is important in organisations that cannot afford
elaborate responsibility reporting, or are too small to have an
adequate segregation of duties. (1)
2. All things being equal,
a) detective controls are superior to preventive controls
b) corrective controls are superior to preventive controls
c) preventive controls are equally as important as detective controls
d) preventive controls are superior to detective controls. (1)
3. In order to achieve an effective segregation of duties, certain
functions should be separated. Which of the following is the correct
listing of accounting-related functions that should be separated?
a) Control, recording and monitoring
b) Authorisation, recording and custody
c) Control, custody and authorisation
d) Monitoring, recording and planning (1)
4. Which of the following is a control procedure relating to both the
design and the use of documents and records?
a) Locking blank cheques in a drawer
b) Reconciling the bank account
c) Sequentially pre-numbering sales invoices
d) Comparing actual physical quantities to recorded amounts (1)
5. Which of the following is the correct order of action to be taken when
one undertakes a risk assessment, in order to implement an effective
system of internal control?
Identify threats, estimate risk and exposure, identify controls,
a) estimate costs and bene ts.
Identify controls, estimate risk and exposure, identify threats,
b)
estimate costs and bene ts.
c) Estimate risk and exposure, identify controls, identify threats,
estimate costs and bene ts.
d) Estimate costs and bene ts, identify threats, identify controls,
estimate risk and exposure. (1)
6. Controls designed to ensure that an organisation’s computer-based
control environment is stable and well managed are called
a) general controls
b) applications controls
c) detective controls
d) preventive controls. (1)
7. All of the following are effective control procedures in order to ensure
that operators do not make unauthorised changes to programs and
les except for
a) rotating duties
b) having multiple operators in the computer room during
processing
c) requiring formal written authorisation and documentation of any
program changes
d) maintaining and reviewing a log/register of all operator activity
and interventions. (1)
8. Password effectiveness is enhanced by all of the following, except
a) frequent changes
b) user selection of passwords
c) not displaying the password on the screen
d) automatic disconnection after several unsuccessful attempts. (1)
9. Controls designed to prevent, detect or correct errors in transactions
as they ow through the various stages of a speci c data-processing
program are referred to as
a) general controls
b) application controls
c) administrative controls
d) data-processing controls. (1)
10. e edit check in order to detect the entry of a customer number that
does not exist is called
a) a check digit
b) a limit check
c) a sequence check
d) a validity check. (1)
[10]
Question 2 LEVEL 2
Physical access controls
[18 marks]
You were recently appointed as chief information systems officer (CIO)

of Some Nights Ltd (Some Nights), responsible for the information
system controls. Some Nights, a subsidiary of the notorious Black Water
Group of mercenaries, is used to raise money with which to fund the
clandestine activities of the Black Water Group in countries such as
Afghanistan and Syria. e company manufactures historic war
memorial gurines (the best-selling ones relate to the American Civil
War), and has a modern warfare series. e company’s logo is ‘Listen,
boy; this is war!’
Some Nights operates from its head office just outside Langley in
Virginia, USA. e building also houses the Black Water Group’s offsite
back-up facility. Some Nights employees are not aware that a back-up
facility is on their premises; they have simply been informed that they
are not allowed into Block B, the research and development section of
the company. Similarly, the company does not allow wireless
technology or internet connections on its premises. e company has a
strict ‘no cellphone or tablet’ policy.
Each employee in the computer department has a mini computer
connected in real time to the mainframe computer located in a room at
head office. Computers are connected via a local area network. e
computer room contains an applications server, database and a
mainframe computer. is network connects with the back-up service
contained in Block B. Users can, by logging on to the network, gain
access to various application software programs, as well as data les
stored on the computer hardware located in the computer room. A
general procedure used by Some Nights in order to verify access to the
information system is by means of a password linked to a username.
e data administrator is responsible for the maintenance of the
computerised information collected during investigations.
During the year, the company’s head office came under siege when
the computer room was attacked by a gang of ve well-armed men.
ey breached the building with military precision in under 15 minutes.
Unbeknown to the other staff employed by the company, there was also
a break-in at Block B. According to the police, another group of thieves
(which is suspected to have included company employees) broke into
the building and stole one of the servers and a few back-up hard drives.
On the way out, they exchanged re with the police.
e company has excellent physical access controls for both blocks
A and B, as well as logical access controls to the computer information
system. All these controls were designed by the company in
collaboration with an external computer specialist. You are, therefore,
satis ed that they appear sufficient and effective. is was con rmed by
one of the thieves wounded in the gun ght with the police before being
arrested. He confessed that, before stealing the hardware, they had
hacked the system and removed and changed some of the information
in order to make it difficult for the Black Water Group to determine
which information had been stolen.
REQUIRED
1. Describe the physical access controls (over and above those already
mentioned in the scenario) that should have been implemented in
order to prevent the break-in and to ensure that the back-ups stored
in Block B of Some Nights’ premises could be used for authorised
purposes only. Your answer must not address logical access controls.
2. Explain how ‘authorisation matrixes’ could have been used in (13)
order to ensure that only valid and authorised changes could be
made to the information on the computer system, which could have
prevented the thieves from removing and changing information
stored on the system. (5)
[18]
1. a) ere must be a formal, documented security policy, distributed to

all users, that determines that only authorised staff may have
access to and utilise the mainframe computer; and that action will
be taken in the event of unauthorised use or access. is policy
should be communicated to all staff members. (2)
e following physical access controls should be in place in Block
B and the back-up store: (1)
i) Access to the room must be restricted through keys, magnetic
card readers or a security guard with a register. (1)
ii) A security guard must be present at the entrance in order to
accompany visitors through the building. (1)
iii) Doors to the venue must always be locked if the computer is
not in use as well as when staff leave the computer room. (1)
iv) Only authorised users may have access to keys for the room
and/or should have proper control over the registration of
magnetic cards. (1)
v) Additional security gates must be installed at the entrance to
the back-up storeroom. (1)
vi) An alarm with motion sensors must be installed. (1)
vii) e hardware must be locked when it is not in use (e.g. in a
server case). (1)
viii) ere must be no place for the insertion of such media
devices as memory sticks or DVDs. (1)
b) e terminal should be located in a highly visible area where it

cannot be hidden, so that unauthorised people approaching the
servers are visible. (1)
c) All staff should have uniforms and identi cation cards in order to
be clearly identi able when entering non-public areas, such as the
server room. (1)
d) Staff should be allowed to use the computer during operating

hours only and have to sign in before entering the computer room;
otherwise, the area must be locked. Alternatively, a daily work
schedule must be prepared. (1)
e) Every computer must have a terminal code. (1)
f ) Access outside business hours must be managed by the use of:

i) alarms
ii) security cameras, and/or
iii) security guards who supervise the use of computers, and
iv) previously received consent. (ma 2)
2. An access control matrix (programmed authorisation scheme or

CRUD matrix) can contribute in the following ways in order to ensure
that only valid changes to the information in the system are made:
a) By means of a terminal code, only a speci c terminal would (1)
be permitted access to the program’s module that makes
information changes possible, thereby restricting such changes to
a speci c terminal; (1)
b) e employment of a log-in system involving user ID
authenticated by a password would restrict: (1)
i) the access rights each user has to change information on the
system (for example, display and write), and (1)
ii) the possibility that an unauthorised staff member could make
changes to the information on any of the computers, because
he/she would then not have the necessary access rights in
order to implement such changes. (1)
c) Changes in accordance with the allocated authorisation level
should only be allowed to be made on a predetermined day of the
month. (1)
d) Ad hoc changes should require at least two authorising passwords.
(1)
Question 3 LEVEL 3
Access controls
[16 marks]
You were recently appointed as the computer audit specialist at Marki

Ltd (Marki). Marki is known for selling speciality dog food from its store
and storeroom located in Canal Walk shopping centre. As part of your
rst job, you formulated a strict policy around dismissals and
resignations of employees, as well as a security policy. e policy
requires that staff’s access to the store be revoked on date of dismissal
or resignation. It also includes other disciplinary consequences.
In order to obtain a better understanding of how the company operates,

you documented the following system description:
Dog food is displayed in large containers on shelves in the store.
Customers can ll 5 kg bags with dog food from these containers. e
5 kg bags are then taken to a till located at the exit of the store, where
a cashier weighs the dog food. Marki also has a self-help express
counter at the back of the store where customers can pay exclusively
by credit card. Customers can use one of four touch screen
computers to place orders for pre-priced vacuum-packed 5 kg, 10 kg,
20 kg and 50 kg packets of speciality dog food. Customers can browse
through pictures and descriptions of the available dog food on the
touch screen and make selections. e touch screen computers are
easy to use and have visual prompt navigation and a help function,
and therefore training is not required. Customers who want to use
the service must rst register on the touch screen as presented
below:
Email Email serves as username.

address:
Create a Strong passwords contain 7–16 characters.

password: Do not include common words or names.
Retype
Combine upper and lowercase letters,
password:
numbers and symbols. Do not disclose your
Alternative password to anyone.
email
address:
Security
question:
Answer to Password changes every three months.

security
question:
First
name:
Last
name: An sms will be sent to your phone con rming
your password, with a one-time pin.
Address:
Province: Recon rmed password must match.

Postal
code:
Telephone
number:
Enter 45dg7$7
characters
you see:
Create Click to go to next page.
account:
As part of the registration process, customers must capture their

credit card information (screenshot not provided), which the system
automatically veri es with the bank. ereafter, customers receive a
unique username and can select their own unique password.
In order to purchase dog food, the customer can click on the
relevant product displayed on the screen. e dog food is added to
the customer’s electronic basket. is is updated to the mainframe
computer and server via the local area network. One of three trained
shop assistants receives a picking slip printed in the storeroom and
brings the ordered dog food to the customer.
In addition to the shop assistants, a shift manager is always on duty.

e shift manager reviews and investigates all the available logs
(including input logs, error reports and access registers) from the
touch screen system. ese are reviewed by the shift manager and he
investigates and obtains reasons for unusual access. He is speci cally
interested in the following:
Activity log that records who logged on, when and for how long
Exception reports of all unsuccessful or failed attempts to use a
username
REQUIRED
Identify the access controls you would expect to be in place over the
touch screen system as a whole.
[16]
Question 4 LEVEL 2
Application controls
[12 marks]
Your rm, Du Toit & Mayane Inc., has been the auditors of JBC Ltd, a
company retailing earth-moving equipment, for the past four years.
Salaries are a material expense at JBC Ltd, representing 35% of the total
expenses of the entity. Management has therefore implemented
stringent controls in order to prevent any fraud or error in the payroll
system. Currently, the payroll system works as follows:
1. All employees are paid by electronic funds transfer (EFT) via the
secure bank software application. Julia Ntembe, one of the payroll
clerks, is solely responsible for the EFTs to employees.
2. Fatima Naidoo, another payroll clerk, reconciles these payments by
downloading and printing the company’s bank statement via the
secure bank software application and reconciling this to the payroll
register.
3. e nancial manager, Tim Lake, oversees the payroll process.
REQUIRED
Describe the application controls that you would expect to nd in place
in order to prevent and detect unauthorised access to the company’s
secure bank software application as well as the printed bank
statements.
[12]
Question 5 LEVEL 2
Business continuity
[10 marks]
You were recently appointed internal auditor of 221B Baker Street Ltd
(221B Baker Street) founded by Mr Sholmes and Dr Watsup. e
company is fairly new and the rst of its kind. Mr Sholmes and Dr
Watsup operate a detective service and mostly perform background and
credit checks on individuals. ey consider themselves to be
‘consultative detectives’. e company prides itself on being the
company that the police call when they cannot crack a case. Mr
Sholmes is the brains of the operation, while Dr Watsup is considered to
be the muscle. Unfortunately, it has been involved in only two cases.
Companies who want to make use of 221B Baker Street’s services can
contact them via the company’s website.
221B Baker Street operates from its head office in London. It uses a
mini-computer system that is connected in real time to the mainframe
computer located in a separate room. Computers are connected via a
local area network. e computer room contains various servers and a
mainframe computer on which all information is stored.
During the year, an attempt was made on Mr Sholmes’ life by Dr
James Mortuary, renowned thief and criminal mastermind. In addition,
an arsonist was hired to burn down the company’s head office. e re
was extinguished by the re brigade two days later, after which the
power supply to the building was restored. is resulted in signi cant
losses for the company.
REQUIRED
Brie y describe the business continuity controls that 221B Baker Street
could have implemented in order to limit the losses experienced as a
result of the re.
[10]
Question 6 LEVEL 2
System development
[10 marks]
You are an audit manager at Will.I.Am Inc., located in Cape Town, a

company appointed as the external auditor of Agent J & K (Pty) Ltd
(Agent J & K) after the previous audit partner passed away
unexpectedly.
Agent J & K retails a famous brand of black suits. It also sells black
accessories, such as sunglasses and shoes, as well as white shirts. Agent
J & K’s accounting system is fully computerised. It uses a fully integrated
system that consists of various components that perform specialist
functions, such as purchases, sales, payroll and so on. ese integrate to
maintain one general ledger and produce the nancial statements.
Although the company has internet access, Agent J & K does not
currently have its own website, although it is considering creating one
that will be used as a marketing tool for services and to promote any
special offers.
A couple of years ago, Agent J & K purchased a biometric timesheet
recording module that allows employees to record their working hours
on a biometric reader using their thumbs. According to the agreement
with the vendor who developed the module, the vendor must email a
software patch to Agent J & K’s IT administrator when bugs are detected
in the software or when the software requires an upgrade. e IT
administrator then loads the patch onto the server and updates the
software.
During the course of the year, a couple of virus scanner updates
were not uploaded by the vendor, which resulted in the biometric
system being infected by a virus. In the light of other problems
experienced during the uploading of similar patches for some of the
company’s other software modules, it was suggested that the company
implement the necessary internal controls in order to address these
risks.
A decision was taken to update the company’s IT procedure manual
with these controls. e IT administrator tasked with this responsibility
has requested your assistance in formulating the controls. e IT
procedure manual already contains sufficient internal controls relating
to appropriate user training, and the complete and timely uploading of
patches.
REQUIRED
Describe the additional controls that should be documented in the IT
procedure manual in order to address appropriately the risks relating to
the uploading of software patches.
[10]
Question 7 LEVEL 3
General controls
[16 marks]
You were recently hired as a consultant to I[phone] Ltd (I[Phone]).

I[phone] was formed by two entrepreneurs from Technopark, the
silicon valley of South Africa, and retails I-phones and other cellular
technologies.
e company records all its transactions in Excel. is was adequate

until the company started to grow and expand. e company has made
signi cant investment in its infrastructure to keep up with the growth
and is considering implementing alternative record-keeping methods.
e following two options are being considered:
e company uses a new app from a local bank which prepares a
company’s accounting records based on the company’s bank
statements and cash transactions.
e company purchases a new accounting package developed
speci cally for the South African small- and medium-enterprise
market. e company could purchase this standard package from
Pastel Blue™, a software supplier.
e company is making a signi cant investment in all its systems.

Considering that the company’s accounting records will be available
electronically only, management is worried about the impact of
loadshedding on its business activities and the associated risk of loss of
information.
REQUIRED
1. Describe the additional bene ts to a company buying and
implementing a new accounting package developed speci cally for
the South African small- and medium-enterprise market. (9)
2. Describe the additional continuity controls that I[phone] must
implement in order to sufficiently protect the company against the
impact of loadshedding on the business. (7)
[16]
Question 8 LEVEL 2
General controls
[11 marks]
Staff Force (Pty) Ltd (Staff Force) is a labour hire entity and connects
employers with employees. e entity is the largest of its kind in South
Africa and has an annual turnover exceeding R1 billion. Approximately
250 transactions ow through the accounting records of the company
on a daily basis. e board of directors states compliance with King IV™
in its annual report, and has therefore focused intensively on
eliminating any fraud or error in its nancial statements.
In order to meet the increasing demands of the accounting division of

Staff Force, the board of directors is considering purchasing a new
accounting package, Numberz. A sales representative from Numberz
highlighted the following details of the Numberz accounting package:
It is suitable for all entities, excluding manufacturing entities.
It is competitively priced, especially in light of the fact that it can be
customised if required by the entity. Numberz has functionalities to
address all accounting needs of entities, from recording of
transactions to the preparation of nancial statements.
Accounting personnel may phone the support line 0760 784 1249, 24
hours a day, 7 days a week, if any assistance with Numberz is
required. e support is provided free for ve years after purchase.
is is an attempt from Numberz to remain the leading accounting
package in the country.
Due to the high quality of Numberz, the program needs 40 gigabytes
of computer memory per computer, in order to install and run
properly.
e accounting personnel at Staff Force previously worked on a simple

accounting package that was much smaller than the Numberz package.
REQUIRED
Discuss the issues the board of directors should consider before buying
the Numberz accounting package.
[11]
Question 9 LEVEL 2
General controls
[19 marks]
You are the computer consultant on the internal audit team of Marry
Me, Darling Ltd (Marry Me). e company operates a wedding-
planning business in Stellenbosch. e company was started when the
owner, Ms Elza Johnson, realised that there was a need for
sophisticated, low-cost wedding planners. She noted, however, that cost
was not the only driver of market demand: there was also a demand for
weddings that could be arranged at short notice. erefore, if she
expanded her company, she would have to place greater reliance on the
company’s information system. In addition, she realised that the
existing mainframe on which her accounting systems operated would
not be sufficient and would require frequent program changes.
In order to react proactively to the growth of the company, Ms Johnson

had two options:
1. Develop a new system.
2. Make regular changes to the existing system.
e nancial director responsible for determining the computerisation

needs of the company implemented the following process regarding
changes to the application software:
STEPS IN THE PROCESS

Requirements Program change requirements must be
communicated to the information systems
(IS) manager via email.
The IS manager prepares the needs
assessment.
The IS manager engages all affected users.
The IS manager determines the cost relating
to the program change. Cost is the main
consideration in approving a request. If the
cost is more than R10 000, approval is
needed from the nancial director.
Plan The IS manager prepares a project plan
incorporating a cost and time budget. This is
prepared based on the PRINCE 2 program
change standards.
Standards The approved request for the program
changes, together with the needs
assessment, are handed to the
programmers. The programmers also have to
rely on the PRINCE 2 program change
standards when they make program
changes.
Librarian A librarian supervises and keeps records of

controls the issuing and the coping capacity of
programs.
The programmer works on a copy of the
relevant program and not the live system.
Since the programmers require access to all
programs and les, they use the
administrative password.
The copy of the relevant program is kept in
source code in the development area of the
library.
Testing The IS manager reviews the programmers’
work and monitors the compliance of the
documentation relating to the program
change to the PRINCE 2 program change
standards. Once the program change has
been completed, both the programmer and
IS manager test the coding and the system
logic.
Approval Only the upgraded program version control
list and program description are retained in
the library.
After a discussion with the internal auditors,
users and IS manager, the nancial director
approves the testing results.
Since there is no need to retain the test
results, they are thrown away.
Implementation Once approval is obtained, the use of the
previous version of the program is
immediately stopped and the program
change is implemented.
Training Training is provided to all staff.
REQUIRED
1. Identify the weaknesses in the controls over changes made to the
application software. (13)
2. List the most signi cant risks that should be considered when a new
system is developed. (6)
[19]
Question 10 LEVEL 2
Weaknesses in an IT environment
[30 marks]
Da Rock Ltd imports exotic cars from Spain for resale in Johannesburg.
As Spanish cars have become a fashion item and are gaining in
popularity, the company has opened several retail outlets across South
Africa, its 20th store being the one that recently opened in Upington.
e company does all its distribution from its head office and
storage facility in Rosebank, Johannesburg, where its IT department is
located.
Because of Da Rock’s nationwide expansion, its computer infrastructure

has come under pressure. e areas that have been affected are:
staffing
infrastructure
processing.
Increased pressure in these areas has resulted in errors occurring.
Management doubts that the current system addresses properly all the
relevant risks that exist in the computerised information system
environment. In order for it to do so, the company approaches you, as a
computer consultant, to provide them with advice. e IT programming
department, which has been placed at your disposal, has capable
personnel with sufficient knowledge and experience in order to develop
their own software. Management has stated that, in order to process the
transactions, update records, amend the system and so on, staff should
be available to work overtime. It is standard practice at Da Rock that, if
necessary, management approves overtime, as they prefer to reimburse
staff for overtime rather than have them take additional leave. us,
staff work overtime if and when available, or when requested to do so by
management.
e IT department has the following organisational structure:
BOARD OF DIRECTORS
IT MANAGER: MR T. PITT
Programmers: Data control clerks:
Mr Johnson Ms van Rhyn
Ms Nye Mr Matshoba
Ms Makanga Operating personnel:
Mr Williams Mr Naidoo
Ms Erica
Ms Parker
Systems analysts:
Mr Muhamad
Mr Mpondo
e IT manager is responsible for the department as a whole, and

reports to the board of directors. e current system has been in use for
the past 10 years, as a result of which most staff are familiar with the
system. Many of them have been performing the same type of work ever
since they started working at Da Rock Ltd.
When a user identi es problems in the system, or requires a new
functionality, he/she can contact a programmer telephonically and
request that the error be xed, or the new functionality be added to the
system. In terms of the service level agreement with the IT department,
all requests should be resolved quickly and the necessary changes
made to the software. e agreement also requires that users obtain
immediate access to the system. After a period of four hours of
inactivity, the IT department must reimburse the user department for
the loss of income. is allows users to continue with their work on the
system without unnecessary delays.
REQUIRED
Identify the weaknesses in internal controls of Da Rock Ltd’s
computerised information system, and recommend internal controls in
order to address these weaknesses. Present your answer in tabular form.
[30]
Question 11 LEVEL 2
Governance in an IT environment
[30 marks]
e sustainability of any company, particularly one that is listed, could

be threatened by any number of risks. In an information environment,
IT risks are becoming more signi cant. In terms of the King IV™ report,
the board of a listed company is responsible for responding to these
risks in an appropriate manner. It has an overall responsibility for
implementing IT governance, and for formulating an IT-governance
framework that cannot be generic and should be customised to a
particular industry or organisation. Responsibility for the
implementation of the IT framework may be delegated to IT
management.
REQUIRED
1. Identify what IT management of a listed company should be able to
demonstrate with regard to responding to the risks arising from the
information system detailed above. (4)
2. Identify three high-level information security principles that the IT
management system should include. (3)
3. Explain why the implementation of these principles is important for
the sustainability of a listed private hospital. (8)
4. Explain the responsibility of the board of directors in terms of IT
governance, as well as the responsibilities of the risk and audit
committees. (15)
[30]
Question 12 LEVEL 2
Application controls and back-ups
[22 marks]
You are a business consultant employed at Dan-o Ltd. e company,

which was set up approximately a year ago, sells copyrighted pictures at
a xed price to magazine publishers, who can use them in either hard
copy or online publications. Dan-o Ltd owns various licences for
pictures ranging from cats and dogs to designer artworks.
You were approached by staff in the IT department to assist with the
design of internal controls for a cloud-based enterprise resource
planning system used to manage the company’s sales. ey are
currently working on the ordering module of the software. e company
prides itself on its state-of-the-art, cloud-based technologies that use
the latest assurance logos, rewalls, encryption and virus protection
protocols. e network on which the cloud service operates is located in
the basement of the company’s premises. e network consists of
personal computers linked to a server, which contains the
programming of the cloud-based service and an integrated accounting
package.
Cloud-based service
Publishers can install an ordering application (app) from the company’s
website onto their system. e app communicates directly with the
company’s network and is then used to process orders and to perform
various other tasks, such as making payments. Publishers can register
for the company’s free cloud service app by submitting their company
details, including their name, registration number and delivery address.
Publishers must also enter their banking details onto the app. An
account is then created. On registration, the system automatically
generates a username for the publisher; the username consists of the
rst six letters of the company’s name combined with three random
numbers. e company can choose its own password. e username
must be recorded on the app when orders are placed and electronic
payments made.
Publishers can search Dan-o Ltd’s website in order to view the
available pictures. ey can also view them using the app. Once a
publisher has identi ed a picture that it would like to use, it can place
an order on the app by selecting the serial number of the picture from a
list of available pictures (by means of drop-down boxes, where
applicable). is list is automatically updated on a daily basis as new
pictures are loaded. When orders are received, a member of staff writes
the pictures to a DVD and places it in a bubble-wrapped package for
distribution. e DVD is delivered to the publisher by a courier
company as soon as the payment of R100 per le has been made
electronically. e system then automatically emails an electronic
invoice to the publisher’s accounting department. is invoice also
serves as a pre-numbered receipt.
Virus infection
e system was recently infected with a virus that corrupted a large
portion of the information on the server, because the company had not
loaded the latest antivirus patches. e information lost could not be
recovered, as effective back-up procedures had not been put in place.
All important information is supposed to be backed up onto a CD at
least once a week, but, during busy times, back-ups are not always
made, or are lost, and are sometimes not stored safely.
REQUIRED
1. Describe the application controls that must be present on the cloud
service app in order to ensure that all pictures ordered by publishers
are processed accurately and are valid and complete. You must
discuss input, processing and output controls. (12)
2. Describe the controls that should be implemented relating to back-
up procedures and controls in order to prevent back-up CDs from
being lost or falling into the hands of unauthorised persons. (10)
[22]
Question 13 LEVEL 3
Application controls (input controls)
[15 marks]
You are employed as the IT governance specialist at Super Shirts Ltd

(Super Shirts). Since your staff is aware that you are very busy and do
not always have time to read everything, they have provided you with
the following: a high-level system description and a detailed
description of the system.
High-level system description

Super Shirts operates a self-service kiosk in a large mall in Cape Town.
e kiosk has three touch screens on which customers can order and
pay for a men’s shirt. e customers’ selection is based solely on the
images on the touchscreen. e company’s slogan is: ‘Like shopping on
the internet, but not. We provide the human touch’. Once the shirt has
been ordered on the touch screen, the kiosk assistant collects the shirt
from the storeroom behind the booth and presents it to the customer.
Customers do not have access to the shirts and the kiosk assistants do
not handle cash.
Detailed description of the system

Customers must rst register for the service. As part of the registration
process, customers must capture their credit card information, which is
automatically veri ed with the bank. Customers receive a unique
username and can select a unique password.
Customers can use one of three touch screen computers to place
orders for men’s shirts depending on their size, style and
measurements. Customers can browse through pictures and
descriptions of the available shirts on the touch screen and make
selections. e touch screens are easy to use and have visual prompt
navigation and a help function, and therefore training is not required. In
order to purchase a product, customers click on the relevant product
displayed on the screen from the inventory master le. e product will
be added to customers’ electronic baskets. After a customer completes a
transaction, the system allocates a sequential number to the
transaction. is order number is displayed on the touch screen and a
pre-numbered receipt is printed for the customer. e system
automatically creates a picking slip in the storeroom behind the kiosk
for each order captured. One of the kiosk assistants brings the ordered
shirt to the customer and con rms the order details and number on the
receipt held by the customer.
A shift manager is always on duty, monitoring the kiosk assistants.
e shift manager reviews and investigates all the available input logs
(including error logs related to inputs) from the touch screen system.
REQUIRED
Describe the additional input controls which must be present at Super
Shirts in order to ensure the completeness and accuracy of sales
transactions captured into the touch screen.
[15]
Question 14 LEVEL 2
Processing and master le controls
[24 marks]
Two years ago, you were appointed chief operating officer at Honolulu
5.0 Ltd (Honolulu 5.0), after you had resigned from a position as an
audit manager in a large auditing rm. Honolulu 5.0 is a chain store
group that retails plastic guns, police badges and other such items to
the public. e head office of the company, which has shops on the
various islands of Hawaii, is located on the main island of Hawaii, in
Pearl Harbour.
As part of your responsibilities as chief operating officer, you are
responsible for the human resources function. You have been able to
centralise the salaries and related processes only partially, because of
the distances between the shops located on the various islands. As a
result, the computer information system used by the group consists of
mini-computer systems at the various shops, systems that are linked to
the mainframe at head office via a virtual private network. Each shop is
responsible for its own staff appointments and for maintaining hard-
copy records. Head office also keeps hard copies and electronic staff
records for the whole company and is responsible for calculating and
paying out the monthly payroll. You are responsible for overseeing this
function.
e payroll system includes a payroll master le and monthly
transaction les. During the month, each shop manager and the
departmental manager at head office forwards to you via email all the
relevant documentation – such as appointments, resignations,
dismissals, retirements, changes to existing employee information and
transactional information – relating to staff matters, all of which is
captured by one of your employees. Master le changes are immediately
recorded on input forms and entered into and processed on the payroll
master le. Where possible, payroll information already available on the
system is extracted from the master le. Information that requires
approval is placed in a computerised suspense le for your approval.
e system has an effective report-writing function. Exception
reports will, for example, be printed for any error identi ed by the
programmed matching and reasonableness tests performed on the
input eld. All exception reports generated by the system are reviewed
by a manager on a monthly basis, and any unusual items investigated.
Reports regarding access violations are also checked. Various other
reports, too, are generated, reviewed and investigated. During last
month’s review, you were distressed by the errors highlighted in one of
the reports relating to salaries and wages.
Processing errors occurred during the monthly payroll production
run, when the payroll master le was updated with the transaction les.
e controls to detect omissions by the calculation of various control
totals, among other things, are sufficient, but the internal controls to
detect other types of errors are not.
Unauthorised staff obtained access to payroll information.
You decide to look into the matter further in order to identify the
related risks. You would also like to make recommendations with regard
to addressing the identi ed problems. To this end, a business
consultant has been appointed to investigate any unauthorised
activities.
REQUIRED
1. List the risks arising when attention is not given to the errors that
occur during the updating process of the payroll master le. (7)
2. Recommend internal controls in order to detect weaknesses caused
by process errors occurring during the updating of the payroll
master le. (5)
3. Describe the additional logical internal controls that should be
implemented in order to prevent the unauthorised use of the payroll
master le. (12)
Note: In all cases, ignore risks, controls and weaknesses relating to the
virtual private network.
[24]
Question 15 LEVEL 2
Controls regarding changes to master le data
[18 marks]
You are the auditor of Jacobs Ltd, a coffee shop in a well-known Cape
Town mall. Jacobs Ltd sells brews made from both locally sourced and
imported beans. It also delivers take-away coffee in special heated
containers. A couple of months ago, the business implemented a
computer system in order to manage orders, suppliers, prices and take-
away delivery drivers. e program integrates with a point-of-sale
module linked to an electronic cash register.
Clients can order coffee either telephonically or over the counter.
Deliveries are made by casual staff. e menu with prices is displayed
above the cash register and is also available on the internet. Both the
menus and the prices are revised every two months by the shop
manager.
Most business is conducted by means of cash or credit card
payments. However, over the past couple of months, the shop has
opened corporate accounts on credit to some local businesses, whose
details are recorded on the master le of the computer system before
they are allowed to purchase on credit.
Before speci c stock levels of coffee run too low, the computer
system generates a suggested order, and identi es the most appropriate
supplier, the quantity of coffee required and the appropriate price. is
information is extracted from the supplier and the product master le.
e system relies on a complicated, but accurate, economic order-
quantity program.
REQUIRED
Describe the controls that should be present within the computer
system relating to changes to the supplier and product master le
information.
[18]
Question 16 LEVEL 3
Application controls (master le)
[22 marks]
Lemon Tree Ltd (Lemon Tree) was founded by P.G. Marais and
Martinette Marais in Moorreesburg. e business was started after their
dog Marki developed a habit of digging holes in their garden, which P.G.
lled by planting lemon trees.
Over the past few years, the business has grown so much that they
now own a small shop in the main street of the town. Lemon Tree uses
the lemons to make creams, preserves and jams.
e purchases cycle operates as follows:

In order to ensure that their stock is fresh, Lemon Tree relies on a
computer accounting package which is linked electronically to all its
suppliers.
At the end of every week, the storeroom assistant extracts a report of
all varieties of lemons (i.e. stock items) that have reached their
minimum stock levels.
e chief storeroom assistant uses the stock codes from these reports
to enter orders into the accounting package to be sent to the
approved suppliers.
Management reviews the approved list of suppliers quarterly.
e chief storeroom assistant selects the most appropriate approved
suppliers’ codes from a drop-down box when he inputs the order.
After the order has been electronically approved and released by the
chief storeroom assistant, it is automatically sent to the relevant
supplier electronically.
A schedule of amounts payable to creditors is prepared on Excel. e
schedule indicates each creditor’s supplier code, name and the
amount payable.
Creditors are paid by making use of an independent internet banking
service.
Creditors must have been loaded as bene ciaries on the company’s
internet banking service facility before payment can be made.
Monthly bank reconciliations are prepared and properly reviewed.
REQUIRED
1. Describe the additional controls which must be in place at Lemon
Tree in order to ensure that only valid amendments are made to the
inventory master le. (10)
2. Describe the additional controls which must be in operation over the
internet banking service at Lemon Tree in order to ensure that only
valid payments are made to creditors.
Note: You are not required to discuss the process for the creation of
and any changes to bene ciaries. (12)
[22]
INTRODUCTION
e following types of application questions can typically be asked on the business cycles:
Describe weaknesses in the control system and recommend improvements by describing
the required internal controls. is type of question can also be combined with control
objectives and/or account or assertions affected.
Identify and describe risks in the cycle. is type of question can also be combined with
control objectives and/or account or assertions affected.
Design a system of internal controls, both manual and computerised, that will achieve the
cycle’s control objectives.
Weaknesses in the cycle will always be the starting point for all of the above types of questions.
Risks are consequences of identi ed weaknesses and could affect business operations and
nancial statements (business risks), or only the nancial statements (risks of material
misstatement at the assertion level). By answering the example questions, you will be guided
through weaknesses (example question 1) to the risks, the control objectives not being achieved
and the account or assertions affected (example question 2).
EXAMPLE QUESTION 1
Internal control weaknesses

[8 marks]
As a trainee accountant at A2Z Inc., a registered audit rm, you were appointed to the audit of
Blitz Ltd (Blitz), a wholesale company that sells electrical goods, such as kettles, toasters, stoves,
television sets and MP3 players. All sales to customers are made on credit and Blitz is
responsible for delivering the goods to its customers.
One of the other trainee accountants has already dealt with the following parts of the revenue
and receipts cycle:
Credit management
Receipt of orders from customers
Authorisation of sales orders
Picking of goods from the warehouse
Receipt of cash from customers
Recording of receipts in the accounting records
Processing and recording of returns and other sales adjustments
e audit senior has requested that you assist with the remaining parts of the cycle and provided
you with the following abstract of the company’s revenue and receipts cycle description:
Dispatch and delivery of goods to customers

Upon receipt of the picking slip and the packed goods from the warehouse, the dispatch clerk
compares the contents of the goods to be delivered with the picking slip, whereupon he/she
signs the slip as evidence of having received all goods from the warehouse. He/she then
prepares a sequentially numbered, multi-copied delivery note for the goods to be delivered.
After the goods have been loaded onto the delivery vehicle, the driver proceeds to the exit gate,
where security guards perform a check on the number of boxes in the truck, following which the
goods are delivered to the customer. Upon their delivery, the customer is requested to sign all
three copies of the delivery note as acknowledgement of receipt of the goods. e rst copy is
retained by the customer; the second is returned to the warehouse, where the status of the
delivery is updated to ‘delivered’ (this enables the sales order staff to follow up on long-
outstanding orders), and the third copy is submitted directly to the invoicing clerk for the
purpose of invoicing the customer.
Invoicing
Upon receipt of a customer-signed delivery note from the driver, the invoicing clerk les it
sequentially in a ‘pending invoice le’. First thing every morning, he/she takes the delivery notes
from this le and prepares sequentially numbered invoices for each of them. e invoices are
cross-referenced and attached to the original internal sales order and delivery note.
Recording of sale in the accounting records

Posting the sales transactions to the sales journal takes place once the invoicing clerk has
generated the invoices. After preparing them from the delivery notes as described above, he/she
records them in the sales journal. He/she also posts the transactions to the debtors ledger and
the general ledger.
Towards the end of each month, the bookkeeper: accounts receivable performs a debtors
reconciliation between the grand total of outstanding debtors balances in the debtor’s ledger
(computerised debtor’s listing) and the balance of the trade debtors control account in the
general ledger. Any reconciling items are followed up and resolved. After the invoicing clerk has
successfully performed the debtors reconciliations, he/she generates debtors statements for
each debtor, showing:
the outstanding balance (if any) of the debtor brought forward
all transactions with the debtor over the past month (including invoices, receipts and
adjustments)
the outstanding balance, with ageing of the balance, payable by the debtor at statement date.
He/she then emails each debtor statement to the applicable debtor.
REQUIRED
Describe the weaknesses in the above system.
[8]
GUIDANCE
Describe the internal control weaknesses1 in the above system description. [8]2

In order to answer application questions, you need to know the theory relevant to the cycle. You
need to:
understand the nature and the purpose of the cycle
identify the major general ledger accounts affected by the cycle
understand the accounting treatment required for the recording of revenue
identify the cycle’s functional areas
identify the documents and records, both manual and computerised, utilised in the cycle, and
describe the purpose of each
understand the ow of transactions in the cycle through the information system, including its
relation to source documents and accounting records and its relation to classes of
transactions and events, and balances
understand how internal controls may assist in achieving the control objectives in the cycle,
and how these control objectives relate to the management assertions in the nancial
statements.
us, you need to know what the ideal revenue and receipts cycle should look like (your
framework), and you will have to measure the system provided in the question against that
framework. Internal controls applied incorrectly, as well as internal controls not mentioned in
the question, are weaknesses.
Read the question
Blitz Ltd (Blitz), a wholesale company that sells electrical goods, such as kettles, toasters,
stoves, television sets, and MP3 players.3 All sales to customers are made on credit4 and
Blitz is responsible for delivering the goods to its customers.5
and receipt cycle:
Credit management
Processing and the recording of returns and other sales adjustments6
e audit senior has requested that you assist with the remaining parts7 of the cycle, and
provided you with the following abstract of the company’s revenue and receipts cycle
description:
Dispatch and delivery of goods to customers8

Upon receipt of the picking slip and the packed goods from the warehouse, the dispatch
clerk compares the contents of the goods to be delivered with the picking slip,9
whereupon he/she signs the slip as evidence of having received all goods from the
warehouse. He/she then prepares a sequentially numbered, multi-copied delivery note
for the goods to be delivered.10 After the goods have been loaded onto the delivery vehicle,
the driver proceeds to the exit gate, where security guards perform a check on the number
of boxes in the truck,11 following which the goods are delivered to the customer. Upon their
delivery, the customer is requested to sign all three copies of the delivery note as
acknowledgement of receipt of the goods.12 e rst copy is retained by the customer; the
second copy is returned to the warehouse, where the status of the delivery is updated to
‘delivered’ (this enables the sales order staff to follow up on long-outstanding orders), and the
third copy is submitted directly to the invoicing clerk for the purpose of invoicing the
customer.
Invoicing13
Upon receipt of a customer-signed delivery note from the delivery truck driver, the invoicing
clerk les it sequentially in a ‘pending invoice le’.14 First thing every morning, he/she takes
the delivery notes from this le and prepares sequentially numbered invoices15 for each of
them. e invoices are cross-referenced and attached to the original internal sales order
and delivery note.16
Recording of sale in the accounting records17

e posting of sales transactions to the sales journal takes place once the invoicing clerk has
generated the invoices. After preparing them from the delivery notes as described above,
he/she records them in the sales journal. He/she also posts the transactions to the debtors
ledger and the general ledger.
Towards the end of each month, the bookkeeper: accounts receivable performs a debtors
reconciliation18 between the grand total of outstanding debtors balances in the debtors
ledger (computerised debtors listing) and the balance of the trade debtors control account in
the general ledger. Any reconciling items are followed up and resolved. After the invoicing
clerk has successfully performed the debtors reconciliations, he/she generates debtors
statements for each debtor, showing:
adjustments)
the outstanding balance, with ageing of the balance, payable by the debtor at statement
date.
He/she then emails each debtor statement to the applicable debtor.19
SUGGESTED SOLUTION
Remember: a weakness is a control that is incorrectly performed or not performed at all.
erefore, it will always be phrased as not being there with nobody performing it or as being
performed incorrectly. In this scenario, the following controls are missing:
Security guards do not perform spot checks on the contents of the truck by agreeing the goods
on the delivery truck back to the delivery note. (1)
A senior personnel member does not ensure that invoices have been prepared for all returned
delivery notes. (1)
A senior personnel member does not ensure that the date on the invoices corresponds with
the nancial period in which the deliveries were made (as per the date on the delivery notes).
Missing delivery notes (gaps in sequence) are not identi ed and followed up with the (1)
dispatch area by a senior personnel member as to why the delivery has not yet taken place.
A senior personnel member does not compare (review) the quantities and prices on the (1)
prepared invoices to the delivery notes and quoted prices respectively. (1)
A second clerk or senior personnel member does not recalculate the costs and calculations on
the invoices. (1)
A second clerk or senior personnel member does not check the recorded invoices in the sales
journal by agreeing the entries to supporting invoices. (1)
A second clerk or senior personnel member does not agree the invoice amounts being posted
from the invoices to the sales journal and the debtors ledger. (1)
A second clerk or senior personnel member does not inspect the numerical sequence of the
entries being posted from the invoices to the sales journal and the debtors ledger. (1)
e debtors reconciliation is not reviewed by a senior personnel member before monthly
statements are prepared for mailing to debtors. (1)
EXAMPLE QUESTION 2
Internal control weaknesses, risks, control objectives and assertions

[32 marks]
Blitz Ltd (Blitz), a wholesale company that sells electrical goods, such as kettles, toasters, stoves,
television sets and MP3 players. All sales to customers are made on credit and Blitz is
responsible for delivering the goods to its customers.
and receipts cycle:
Credit management
Processing and recording of returns and other sales adjustments
e audit senior has requested that you assist with the remaining parts of the cycle, and
provided you with the following abstract of the company’s revenue and receipts cycle
description:

Upon receipt of the picking slip and the packed goods from the warehouse, the dispatch clerk
compares the contents of the goods to be delivered with the picking slip, whereupon he/she
signs the slip as evidence of having received all goods from the warehouse. He/she then
prepares a sequentially numbered, multi-copied delivery note for the goods to be delivered.
After the goods have been loaded onto the delivery vehicle, the driver proceeds to the exit gate,
where security guards perform a check on the number of boxes in the truck, following which the
goods are delivered to the customer. Upon their delivery, the customer is requested to sign all
three copies of the delivery note as acknowledgement of receipt of the goods. e rst copy is
retained by the customer; the second is returned to the warehouse, where the status of the
delivery is updated to ‘delivered’ (this enables the sales order staff to follow up on long-
outstanding orders), and the third copy is submitted directly to the invoicing clerk for the
purpose of invoicing the customer.
Invoicing
Upon receipt of a customer-signed delivery note from the driver, the invoicing clerk les it
sequentially in a ‘pending invoice le’. First thing every morning, he/she takes the delivery notes
from this le and prepares sequentially numbered invoices for each of them. e invoices are
cross-referenced and attached to the original internal sales order and delivery note.
Recording of sale in the accounting records

Posting the sales transactions to the sales journal takes place once the invoicing clerk has
generated the invoices. After preparing them from the delivery notes as described above, he/she
records them in the sales journal. He/she also posts the transactions to the debtors ledger and
the general ledger.
Towards the end of each month, the bookkeeper: accounts receivable performs a ‘debtors
reconciliation’ between the grand total of outstanding debtors balances in the debtor’s ledger
(computerised debtor’s listing) and the balance of the trade debtors control account in the
general ledger. Any reconciling items are followed up and resolved. After the invoicing clerk has
successfully performed the debtors reconciliations, he/she generates debtors statements for
each debtor, showing:
adjustments)
the outstanding balance, with ageing of the balance, payable by the debtor at statement date.
He/she then emails each debtor statement to the applicable debtor.
REQUIRED
Describe the internal control weaknesses. For each of the identi ed weaknesses, describe the
associated risk as well as the control objective not being achieved and the revenue assertion
affected in the above system description of the revenue cycle of Blitz.
[32]
GUIDANCE
Describe the internal control weaknesses.20 For each of the identi ed weaknesses,21 describe the
associated risk,22 as well as the control objective not being achieved23 and the revenue assertion
affected24 in the above system description of the revenue cycle of Blitz.[32]25
Identify the theory applicable to the question26

In order to be able to answer application questions, you need to know the theory relevant to the
cycle. You need to:
understand the nature and the purpose of the cycle
identify the major general ledger accounts affected by the cycle
understand the accounting treatment required for the recording of revenue
identify the cycle’s functional areas
identify the documents and records, both manual and computerised, utilised in the cycle, and
describe the purpose of each
understand the ow of transactions in the cycle through the information system, including its
relation to source documents and accounting records, as well as its relation to classes of
transactions and events, and balances
understand how internal controls may assist in achieving the control objectives in the cycle,
and how these control objectives27 relate to the management assertions28 in the nancial
statements.
us, you need to know what the ideal revenue and receipts cycle should look like (your
framework) and you will have to measure the system provided in the question against this
framework. Internal controls applied incorrectly, as well as internal controls not mentioned in
the question, are weaknesses. You must now also write down what the consequences of the
weaknesses (the risks) will be.
Read the question
Refer to example question 1.
SUGGESTED SOLUTION
Always remember to make it as easy as possible for the marker to understand what you have
done and thus allocate marks. One of the best ways of presenting a weakness29 and its
associated risk,30 control objective and assertion question is by presenting it in tabular form.
Remember that the control objective needs to relate to one of the three listed above and the
assertion to one of the ve revenue assertions listed above.
WEAKNESS RISK CONTROL ASSERTION

OBJECTIVE AFFECTED
NOT
ACHIEVED
The security guard does not The goods leaving the Completeness: None:
perform spot checks on the premises might not all all goods completeness
contents of the truck by have been recorded on picked by the assertion is
agreeing the goods on the delivery notes, leaving storemen are only affected
delivery truck back to the insuf cient records of recorded on a once the
delivery note. (1) the sales that have delivery note. customer has
taken place. (1) (1) accepted the
delivered
goods. (1)
A senior personnel member The goods leaving the Completeness: Completeness
does not ensure that invoices premises might not all all goods of revenue (1)
have been prepared for all have been invoiced, delivered have
delivery notes returned from leaving insuf cient been invoiced.
customers. (1) records of the sales (1)
that have taken place.
(1)
A senior personnel member Deliveries might not be Validity: sales Cut-off of
does not ensure that the invoiced timeously, are recorded revenue (1)
date on the invoices resulting in sales in the period
corresponds with the possibly being to which the
nancial period in which the recorded in an transaction
deliveries were made (as per incorrect accounting relates. (1)
the date on the delivery period. (1)
notes). (1)
OBJECTIVE AFFECTED
NOT
ACHIEVED
Missing delivery notes (gaps The goods leaving the Completeness: Completeness
in sequence) are not premises might not all all goods of revenue (1)
identi ed and followed up have been invoiced, delivered have
with the dispatch area by a leaving insuf cient been invoiced.
senior personnel member as records of the sales (1)
to why delivery has not yet that have taken place.
taken place. (1) (1)
A senior personnel member Invoices might be Accuracy: all Accuracy of
does not compare (review) prepared on incorrect invoices are revenue (1)
the quantities and prices on quantities and/or prepared with
the prepared invoices to the prices, which will lead accurate
delivery notes and quoted to the under- or quantities and
prices respectively. (1) overcharging of prices. (1)
customers. (1)
A second clerk or senior The costs and the Accuracy: all Accuracy of
personnel member does not calculations on the invoices are revenue (1)
recalculate the costs and the invoices might be prepared with
calculations on the invoices. inaccurate, which will accurate
(1) lead to the under- or quantities and
overcharging of prices. (1)
customers. (1)
A second clerk or senior Postings to the sales Validity: only Occurrence of
personnel member does not journal may be invalid, valid sales are revenue (1)
check the recorded invoices leading to the posted from
in the sales journal by overstatement of the invoices to
agreeing the entries to sales. (1) the sales
supporting invoices. (1) journal. (1)
A second clerk or senior Postings to the sales Accuracy: Accuracy of
personnel member does not journal may be sales are revenue (1)
agree the invoice amounts inaccurate, leading to correctly
being posted from the the under- or posted from
invoices to the sales journal overstatement of the invoice to
and the debtors ledger. (1) sales. (1) the sales
journal and
the debtors
ledger. (1)
OBJECTIVE AFFECTED
NOT
ACHIEVED
A second clerk or senior Postings to the sales Completeness: Completeness
personnel member does not journal may be all sales are of revenue (1)
inspect the numerical incomplete, leading to posted from
sequence of the entries the understatement of the invoice to
being posted from the sales. (1) the sales
invoices to the sales journal journal and
and the debtors ledger. (1) the debtors
ledger. (1)
The debtors reconciliation is Postings to the Validity: only Occurrence of
not reviewed by a senior debtors ledger and valid sales are revenue OR
personnel member before control account in the posted from Accuracy of
monthly statements are general ledger may be the invoices to revenue
prepared for mailing to incomplete, inaccurate the sales OR
debtors. (1) or invalid. (1) journal. Completeness
OR of revenue (1)
Accuracy:
sales are
correctly
posted from
the invoice to
the sales
journal and
the debtors
ledger.
OR
Completeness:
all sales are
posted from
the invoice to
the sales
journal and
the debtors
ledger. (1)
QUESTIONS
Question 1 LEVEL 2
Control objectives
[8 marks]
Coffee Bean Ltd (Coffee Bean) is the rst roaster of certi ed fair trade coffee and strives to make
a sustainable difference in the lives of African coffee producers by personally sourcing quality
coffee through direct fair trade. Coffee Bean is a wholesaler of coffee beans and sells on credit to
coffee shops. e following internal controls were implemented by Coffee Bean in the revenue
and receipts cycle:
1. When a new customer wants to purchase coffee beans on credit, the customer needs to
complete a credit application form with trade references. e credit controller performs a
background check and con rms the credit status. e credit controller then sets a credit limit
for the customer.
2. Sales orders are placed telephonically. e order clerk only accepts orders from customers
who are able to provide an account number and who are on the approved customer list. e
order clerk asks the customer to con rm certain pertinent details (such as ID number and
address).
3. e sales orders are then sent to the warehouse. e warehouse prepares pre-printed and pre-
numbered picking slips and cross-references these to the sales order.
4. e dispatch clerk completes a pre-numbered and pre-printed delivery note for all the coffee
beans dispatched. e driver checks coffee beans against the delivery note and signs the
delivery note if it agrees.
5. e customer receives two copies of the delivery note and signs one as proof of acceptance of
the coffee beans.
6. e customer-signed delivery note is handed to the invoicing clerk. e invoicing clerk
prepares a pre-numbered, pre-printed invoice for each delivery note received.
7. Prices and quantities are included on the invoice with reference to the sales order, delivery
note and approved price lists. e second invoicing clerk checks the prices and calculations
on the invoice and signs if satis ed.
8. e bookkeeping clerk posts the invoices to the sales journal. A second bookkeeping clerk
checks the recorded invoices in the sales journal by agreeing the entries to the supporting
invoices.
9. e second bookkeeping clerk also checks the amounts of the invoices posted and checks the
numerical sequence of the invoices posted.
REQUIRED
Formulate the control objective(s) for each of the internal controls listed above in the revenue
and receipts cycle of Coffee Bean.
[8]
Question 2 LEVEL 2
Functional areas and control objectives
[18 marks]
Business cycles are divided into ‘functional areas’, each of which represents a phase in the cycle
through which transactions ow. In order to ensure the achievement of an entity’s control
objectives (the validity, the accuracy and the completeness of nancial information), internal
controls are implemented in each functional area.
e functional areas in the revenue and receipts cycle for Homestyles (Pty) Ltd (Homestyles), a
wholesale company selling home appliances and furniture to its retail customers on credit, are:
a) managing of credit
b) receipt of orders from customers
c) authorisation of sales
d) picking of goods from the warehouse
e) dispatch and delivery of goods to customers
f ) invoicing and recording of sales
g) posting of sales to the accounting records
h) receipt of cash from customers
i) recording and posting of receipts in the accounting records
j) granting of credit on sales returns and the provision of discounts to customers.
Consider the following control activities that have taken place in Homestyles’s revenue and
receipts cycle:
1. e driver of the company’s delivery truck requested that a customer sign a copy of the
delivery note indicating the quantities and descriptions of goods delivered to the customer.
2. e computer system prevented the sales clerk from processing a sales order received from a
customer, because the customer would have exceeded his credit limit.
3. A sign on the cashier’s counter requests that customers insist on a printed receipt when
settling their account with cash.
4. e debtors clerk prepared a debtors reconciliation, agreeing the total of the debtors ledger
with the balance of the debtors control account in the general ledger.
5. e sales manager approved a credit note requested by a customer who returned faulty goods
to the company.
6. e cashbook clerk prepared a monthly bank reconciliation, comparing the cashbook total
with the bank balance as per the bank statement.
7. e credit controller assigned a limit to a new customer’s credit account.
8. A shipment of goods leaving the warehouse was recorded on a delivery note by the storeman,
which in turn was provided to the dispatch clerk who performed a check in order to ensure
that all goods dispatched had indeed been recorded on the delivery note.
9. e computer system requested the invoicing clerk in the accounting department to key in an
internal sales order number before the computer allowed her to generate an invoice.
10. e sales clerk requested an account number from a customer who wanted to place an order
for goods over the telephone, before proceeding with the order.
REQUIRED
For each of the 10 control activities referred to in the above scenario, identify the functional area
in which the control activity would typically take place and state the control objective(s)
achieved by each.
[18]
Question 3 LEVEL 2
Assertions
[9 marks]
You are an accountant in public practice, specialising in the provision of accounting and
business consulting services to start-up companies. A new client of yours, Woodworks (Pty) Ltd
(Woodworks), has recently completed the statutory registration of the company in anticipation
of its future manufacturing activities. Its chief executive officer, Patrick Japhta, has requested
your advice on the nancial reporting risks the company may face in terms of its recorded sales
transactions.
REQUIRED
List and explain the assertions applicable to the revenue gure in the nancial statements of
Woodworks. Categorise the assertions in terms of ‘overstatement of revenue’ and
‘understatement of revenue’. Ignore misstatement risks pertaining to sales returns, and the
presentation and disclosure assertions.
[9]
Question 4 LEVEL 2
Purpose of controls, control objectives and assertions
[23 marks]
Wooltons (Pty) Ltd (Wooltons) is a producer of wool yarn. e company, which buys wool in
large quantities from sheep farmers, produces the yarn before selling it in bulk to clothing
manufacturers and haberdashers. Woolton makes deliveries to customers using its own staff and
delivery vehicles.
Before the start of the nancial year subject to the current audit, Wooltons implemented several
new, improved internal controls in its revenue and receipts cycle:
INTERNAL CONTROL
1. Wooltons has contracted the services of a credit bureau that runs background checks on the credit status of potential
customers wishing to open an account with Wooltons. Based on the results of the checks, the bureau might suggest
a credit limit for a particular customer.
INTERNAL CONTROL
2. On a monthly basis, referring to a list of debtors identi ed as being at risk of defaulting on their outstanding debts,
the nancial manager carefully determines whether long-outstanding debtor balances (or part of a balance) should be
included in the allowance for credit losses.
3. The accounting application on Woolton’s computer system does not allow the sales clerk to process a sale to a
customer’s account if the account has been agged by the nancial manager (by means of the accounting software
application) as at risk of default.
4. Woolton’s senior bookkeeper reviews the le of delivery notes issued to customers upon delivery in order to ensure
that the sequence of delivery notes is intact and that for each delivery note a corresponding invoice has been
generated on the computerised accounting application.
5. The accounting software application automatically calculates item prices and invoice amounts when customer invoices
are generated on the computer by the accounts receivable clerk. This is achieved by referring to the product code
entered and the price stored in the price list master le (that is, the clerk does not have to enter product prices
manually).
6. The sales manager is required to authorise all sales returns by referring to a goods returned voucher and a copy of
the invoice on which the details of the returned goods appear.
REQUIRED
Describe the purpose of each internal control listed above. In addition, for each control:
explain the control objective(s) that management attempts to achieve
state the assertion and the account affected by the control.
Present your answer in tabular format.

[23]
Question 5 LEVEL 2
Weaknesses
[13 marks]
You have recently been appointed as the manager of Queen Fridge Cakes (Pty) Ltd, a cake
company that specialises in extended-freshness fridge cakes, which can be stored in fridges for
up to six months. You have prepared the following notes to describe extracts of the company’s
system of sales:
Orders
e order clerk receives orders via the telephone from customers. e order clerk records
telephone orders on sticky notes which are colour coded. e order clerk only accepts orders
from customers who are able to provide an account number and who are on the authorised
customer list. If a customer is not on the customer list, the customer is referred to the credit
controller to commence the credit application process. You can assume that the credit
control department has efficient internal controls in place. As Queen Fridge Cakes (Pty) Ltd
has a free delivery policy, most orders will be for cakes being delivered to existing customers.
e order clerk will therefore always con rm the delivery address from the customer, con rm
the price according to the authorised price list and only then sign the sticky notes as approval
of the nal order. e orders are always written down on two different sticky notes: the green
sticky note is led in the order department and the pink sticky note is sent to the warehouse
department.
Warehouse and dispatch

e picker in the warehouse uses the pink sticky note to draw up a picking slip. All the cakes
are then picked from the fridges as recorded on the picking slip, checked by the picker for
expiry dates and signed off on the picking slip. If the storeman cannot nd some of the cakes,
he/she highlights it on the picking slips. Once the picking is done, the picker will sign the
picking slip to acknowledge the procedures performed. e cakes, together with the picking
slip, are then carried to the dispatch bay that is connected to the warehouse area. e
dispatch clerk will then sign the picking slip as proof of having taken custody of the cakes that
were picked and create numerically sequenced, two-part delivery notes for all cakes being
dispatched. e driver and the gate security guard have to observe that the speci ed cakes are
loaded onto the delivery truck. e driver will compare the cakes loaded onto the truck with
the delivery notes. After the gate security guard has supervised the loading of the truck, he
will quickly proceed to open the gate for the delivery truck to exit the premises. e driver will
provide the customer with the delivery note and cakes upon delivery. If the customer is
satis ed with the delivery, he/she will normally tip the driver as a token of appreciation.
REQUIRED
1. Brie y describe the weaknesses in the ‘orders’ function, which forms part of the sales system
of Queen Fridge Cakes (Pty) Ltd. Limit your answer to manual controls. (5)
2. Brie y describe the weaknesses in the ‘warehouse and dispatch’ function, which forms part of
the sales system of Queen Fridge Cakes (Pty) Ltd. Limit your answer to manual controls. (8)
[13]
Question 6 LEVEL 2
Risks
[25 marks]
An entity may have business risks relevant to the various transactions in the business cycles or
processes. Management is responsible for the risk management of the company and should
implement internal control in order to reduce these risks. ey may appoint internal auditors to
perform the risk management process internally.
Each risk may have a consequence for, or impact on, the nancial statements and/or
operations of the business. e auditor is concerned with the risks that might impact directly on
the company’s nancial statements and indirectly on the company’s business processes and
operations.
e following information is relevant to the company for which you have to supervise the trainee
accountants performing the auditing of the sales cycle:
Type of company: Manufacturer and retailer with high volumes and low gross
pro t margins
Gross turnover: R532 936 000
Cash sales: R137 946 258
Credit sales: R394 989 742
Number of outlets or 152
branches:
Gross pro t percentage: 12.5%
e company operates on a manual system and batches are sent to head office for processing
onto the computerised system.
In terms of the system:

orders are placed telephonically, whereupon an email is sent to the production line for them
to produce the products
the products are sent either to the retail outlet or directly to the customer, who signs the
invoice as proof of delivery, either paying COD or taking the products on credit
the credit controller follows up the outstanding amounts after only 60 days
the company does not reconcile the invoices issued to the dispatches completed.
Owing to the large volumes of sales transactions, the audit partner has instructed the auditor to
identify the risks and list the consequences next to each risk, in tabular form.
REQUIRED
Identify and discuss the risks, relevant to the information given above, that could occur in the
sales cycle and list the consequence(s) next to each risk in tabular form.
[25]
Question 7 LEVEL 2
Risks
[15 marks]
You are the internal auditor of Fruity Juice (Pty) Ltd (Fruity Juice), a company that manufactures
a wide range of fruit juices from its factory located in Elgin. e company has a December year-
end. e following is an extract of information that you have obtained from the sales and
marketing director of the company:
Extract: Revenue and receipts cycle – credit sales
Up until April of the current year, all sales were conducted on a cash basis only. The
directors approved a resolution at the March board meeting to start selling products to
customers on credit from April. The decision was made because the company was losing
customers to competitors who sold similar products on credit.
Customers are required to submit the following documents to a sales representative of

the company via email or post in order to qualify to purchase goods on credit:
A completed application form
A certi ed copy of their identity document
A utility bill indicating where they reside
An income and expenditure estimation to determine how much credit the individual should be granted
The sales representative is required to review the documentation submitted and grant the
customer a credit limit. The customer receives a noti cation of their credit limit via an
email and an of cial letter from the company. Credit limits that are granted to customers
are capped at a maximum of R100 000.
Customers wishing to have their credit limits increased at a later date are required to
submit a written request for the increase to the credit manager who reviews the request
and, if he is satis ed, increases the limit on the system. He uses his unique user ID and
password to gain access to the debtor’s master le to initiate the increase. If the credit
manager is away from the of ce, he leaves his unique user ID and password with one of
the members of his credit team who is permitted to use the log-in details in order to
amend a client’s credit limit by a maximum of R10 000 after reviewing the written request.
Credit orders
Customers are only able to place orders over the telephone. When an order is received,
customers are asked to provide their company’s customer number. If unable to do this,
they are asked to provide their company’s name and address in order to identify that they
are an existing customer. The order is captured on an internal sales order on the sales
system by a sales representative. A noti cation is sent through to the warehouse
manager, the dispatch manager and the creditors clerk responsible for handling the
customer’s account, informing them that there is a new order. The warehouse manager
prints the internal sales order form and hands it to the head picker who is responsible for
collecting the bottles of juice to ll the order. Once the bottles of juice have been
prepared, the goods are moved to the dispatch department where the bottles are stored
until the juice is loaded onto the truck and delivered to the customer. The dispatch
manager prepares a delivery note based on the internal sales and hands it to the driver of
the delivery truck. At delivery, the driver of the delivery truck hands a duplicate copy of the
delivery note to the customer. The customer is given one copy of the delivery note and the
driver retains one copy. The driver and the client both sign the delivery to indicate that the
driver was at the client’s premises.
Recording of the sale
Once the driver returns to the premises, he gives the delivery note to the creditors clerk,
who prepares the invoice and recognises the sales and corresponding debtor in the
accounting records by using the information located on the internal sales order document.
The detail located on the delivery note is not reviewed but is simply used to identify that
the driver delivered the juice to the client.
Collection of payment from customers
Customers are able to settle their outstanding amounts by making an electronic funds
transfer and using their customer number as their reference. Customers who prefer paying
by cash or cheque are able to deposit the money into the company’s bank account and
use their customer number as their reference. The bank details are provided to the
customer by the creditors clerk over the telephone.
Credit allowances at year-end
The amount recognised as an allowance for credit losses for the company at year-end was
5% of the amount due to the company. While the assumption that 5% of the debtors will
not be able to repay the company may not be entirely accurate, the company does not
have enough historic data of credit sales to make a more realistic allowance.
The company grants customers 30 days to settle their outstanding balances. If clients fail
to do so, the company contacts them to determine the reason they have not settled their
outstanding balances. If clients are unable to make their payment, the company starts
charging late payment penalties and interest on the amount outstanding. If customers
have not settled their account within 90 days, the company recognises 5% of the balance
receivable as an allowance for credit losses and contacts a debt collecting agency to
assist in the recovery of the amount due to the company.
REQUIRED
Describe the business risks affecting the revenue and receipts cycle at Fruity Juice (Pty) Ltd.
[15]
Question 8 LEVEL 2
Weaknesses and recommendations
[32 marks]
You are the auditor of Family Mag (Pty) Ltd, a company that publishes a monthly magazine
aimed at families in South Africa. e following has been brought to your attention about the
revenue received by the company in lieu of advertisements:
New advertisers
A prospective customer contacts the company’s corporate office and indicates that he/she
would like an advertisement to be published in the company’s magazine. e prospective
customer is then transferred to the marketing department. An employee in the marketing
department obtains more details about the advertisement and then emails the prospective
customer an application form that needs to be returned in order to register as a customer of the
company.
In addition to the application, the email also includes:

a request for the copy of the advertisement
a request that the customer select a username which will be used to identify his/her payments
the costs involved to publish the advertisement (mini ads run up to as much as R4 000 and full
ads up to R16 000)
the details of the company’s bank account, into which the customer is required to make a
payment.
Once the application has been emailed back to the marketing employee, he/she prints the
application form and submits it to the marketing manager for approval. e marketing manager
scans the contents of the advertisement as well as the application to register as a customer of the
company. If she approves of the new customer, she informs the marketing employee via a
telephone call to load the new customer’s details, including his/her username, on the sales
system and the amount that she feels that the customer quali es for as his/her initial credit
limit. e marketing employee logs on to the sales system by using the general nance
department user ID and password to load the new customer on the system.
Customers are always granted 30 days to settle their accounts, but the marketing manager
has the discretion to issue credit limits up to R10 000.
Customers can request to have their credit limits increased. e request should be made via
email and directed to the marketing manager at [email protected]. She makes a
decision based on whether or not the customer has placed regular advertisements with the
company, in which case she increases the credit limit to R10 000 on her computer by using the
general nance department user ID and password to gain access to the system. e credit
manager has indicated that he is not pleased with the current system as many of the customers
whose credit limits are being increased are actually the ones defaulting on their accounts.
For all advertisement requests made by existing customers, the customers email their
advertisements through to the marketing manager, who approves the publication after scanning
the contents.
Recording of the sale

At the end of each month, the marketing manager emails a report to the nancial accountant
informing him of the advertisements that were published during the month, the username of
the customer to whom the advertisement relates and the amount to be charged.
e accountant logs onto the revenue system and records the sale by processing a journal
entry for the amount noted in the email received from the marketing manager.
Collection of cash
Customers are permitted to pay their accounts via electronic funds transfer or by direct deposit
into the company’s bank account.
e nancial accountant logs into the company’s bank account and identi es all payments
received with customer usernames, allocates the payments to the customers’ accounts and
emails the customers an acknowledgement of receipt.
Where the nancial accountant is unable to nd customer usernames on the system, he
records the income in a miscellaneous account until the customer contacts the company.
If a customer does not contact the company within 90 days of depositing the money for an
invoice or an acknowledgement of receipt, the money is moved to a staff party fund.
Debtors who have not settled their accounts within 90 days are handed over to the
company’s collection agency. Some debtors have contacted the company informing them that
they have indeed settled their accounts as agreed via direct bank deposit, but have lost their
proof of payment.
REQUIRED
Identify and discuss the weaknesses in the revenue and receipts cycle above and make
suggestions to address them.
[32]
Question 9 LEVEL 2
Weaknesses, risks and recommendations
[20 marks]
You are a trainee accountant on the audit of Doorbell (Pty) Ltd (Doorbell) for its nancial year
ended 30 September 20X1. Doorbell is a wholesaler of kitchenware, table-top and home décor
products. You have been tasked with auditing certain aspects of the company’s revenue cycle.
All sales to customers are on credit, and very little computerisation is used in the company’s
business processes. From enquiries with client staff and from the observation of cycle activities,
you have noted the following:
Credit management
Retail customers wishing to open a credit account with the company must phone Doorbell’s
credit controller and provide their business details. e credit controller then enters the
customer’s details on the computer system, and also sets a credit limit for the customer’s
account based on the customer’s credit needs.
You have determined that sound controls are in place regarding the identi cation of long-
outstanding and uncollectable debt.
Sales orders and approval

Customers place sales orders with Doorbell by telephone. Any one of two sales order clerks
writes down the order on a blank notepad after requesting the customer’s account number. e
sales clerk ensures that the account exists by referring to an official list of customers (prepared
on a daily basis from the debtors ledger by the credit controller) and that the customer is still
within his/her credit limit.
After writing the order quantities and inventory codes of products ordered, the order clerk
signs and dates the order as evidence of approval.
You have not identi ed any concerns regarding the picking of goods.
REQUIRED
Describe the internal control weaknesses and the associated risks in the above system
description of the revenue cycle at Doorbell (Pty) Ltd. Also describe the recommended
control(s) that should be put in place in order to prevent the consequences associated with each
risk for each identi ed weakness. Present your answer in tabular form.
[20]
CREDIT 1. a) Weakness
MANAGEMENT i) No credit background checks are performed on the

creditworthiness of an applicant. (1)
ii) Credit limits are based on the customer’s needs rather than
on his/her credit history and/or business references. (1)
b) Risk
Doorbell (Pty) Ltd risks selling goods on credit to customers who
cannot settle their debts, which could lead to possible debt write-
offs and consequent nancial losses. (1)
c) Recommendations
i) Each potential new credit customer should complete a pre-
printed credit application form and submit trade references.
ii) The credit controller should perform a background check (1)
on a potential new customer’s trade references and credit
status with credit bureaux. (1)
iii) Based on the results of the credit check, the credit controller
should set an informed credit limit on the amount of debt a
particular customer might incur and record it on the credit
application form. (1)
iv) The debtors ledger should be reviewed by the nancial
manager on a regular basis for new debtors added; in
addition, he/she should agree the additions to a supporting
approved credit application form. (1)
SALES 1. a) Weakness
A pre-printed, sequentially numbered order form is not used to
ORDERS AND record sales orders from customers. (1)
APPROVAL b) Risks
i) Sales orders could go missing if there are no means of
identifying them owing to their not being numbered
sequentially. (1)
ii) The potential for errors and missing order information is
increased when an order is made out on a blank sheet of
paper, as there are then no form details with which to guide
the order clerk as to what information is needed (e.g. the
account number, the customer’s name and the quantities
ordered). (1)
iii) It will make it more dif cult to cross-reference other
documentation (such as the invoices) to sales orders, thereby
increasing the risk of un lled sales orders. (1)
c) Recommendation
A multicopy, pre-printed, sequentially numbered internal sales order
should be completed for each order, with one copy being led in a
pending sales order le for follow-ups. (1)
2. a) Weakness
No additional validity check besides the request for an account
number is performed by the sales order clerk on the customer
placing the order. (1)
b) Risk
Despite providing an account number, the person phoning might
not be the genuine customer, which could result in a credit sale
that the account holder cannot, or legally will not, settle. (1)
c) Recommendation
The sales order clerk should request that the customer provide
pertinent details (ID number, address, contact details etc.) that
should be compared to the information on the of cial list of
customers in order to con rm that the customer is genuine. (1)
3. a) Weakness
No inventory availability check is performed before the sales order
is accepted. (1)
b) Risk
i) There might be insuf cient inventory and, if the order is
processed, there will be short-deliveries leading to possible
cancelled sales and/or customer dissatisfaction. (1)
ii) A back-order system cannot be maintained effectively if
customers are not informed of inventory shortages before an
order is accepted, as these shortages might be identi ed too
late (owing to the delay, customers might cancel ordered
items that are not in stock). (1)
c) Recommendation
i) In order to con rm inventory availability, the sales order clerks
should have access to an up-to-date of cial inventory list that
they should consult while taking down an order. (1)
ii) Any inventory shortages should be referred to a back-order
system, if the customer agrees. (1)
SALES 4. a) Weakness
ORDERS AND There is an insuf cient segregation of duties between the initiation
and the approval of sales orders, as the order clerks who initiate
APPROVAL the orders are also allowed to approve them. (1)
b) Risk
The sales order clerks might make out sales orders to
unauthorised parties (customers not on the debtors ledger) or
customers who have exceeded their credit limits, which could lead
to possible non-payment by such parties. (1)
c) Recommendation
All sales orders should be submitted to the credit controller for
approval before any further processing takes place. (1)

Notes:
When looking at the suggested solution you will note that only weaknesses, risks and
recommendations relating to credit management and sales orders and approvals were
included in the solution. is is because these were the only functions for which information
was provided in the case study. You cannot include functions for which there is no
information in the case study.
Another important aspect to take note of is the fact that one weakness can have more than
one risk and more than one recommendation.
Question 10 LEVEL 2
[23 marks]
Leonard Langley was recently appointed as the assistant nancial manager of Trucker Tools
(Pty) Ltd (Trucker Tools), a wholesale distributor of vehicle parts serving the trucking and
courier industries. One of Leonard’s rst tasks was to solve internal control problems in the
revenue cycle. All sales made by the company to its customers are on credit, and the company
performs local deliveries using its own staff and delivery vehicles. Computerisation in the
company is minimal. Trucker Tools’s revenue cycle, from warehousing to recording of sales,
takes the following form:
Warehouse, dispatch and delivery

e warehouse receives a copy of the picking slip from the sales order department soon after a
sales order has been approved.
e slip indicates the items to be picked from the warehouse shelves, in addition to the
customer’s details and the delivery address.
e picking of goods is the responsibility of Henry Crause, the storeman. He also creates a
delivery note in duplicate for all the goods picked. After picking, the slip is signed by Henry and
led directly in the warehouse manager’s office.
e goods are then transferred by trolley from the warehouse to the dispatch area, together
with the delivery note. As they enter dispatch, the dispatch clerk, Victor Msimane, immediately
starts to pack the goods into boxes.
e security guards at the exit gate report to the dispatch area and assist Victor to load the
packaged items onto the delivery vehicle, thus saving a considerable amount of time and
enabling the security guards to experience the operations of the business rst-hand.
Upon delivery of the items to the customer, the driver responsible for deliveries, James
Mann, requests him/her to sign the top copy of the delivery note (which carbon-copies the one
beneath) and hands the top copy to the customer. e second copy is returned to Trucker Tools.
Invoicing
Upon returning to the company premises, James Mann hands the second copy of the delivery
note – signed by the customer – in at the invoicing office.
e invoicing clerk, Bonani Fumba, prepares a pre-printed, sequentially numbered invoice
in triplicate for each delivery, cross-referenced to the corresponding internal sales order.
In order to expedite the process of debt collection, Bonani sends the original of the invoice to
the customer (by postal mail) as soon as possible after invoice preparation. e second copy of
the invoice is presented to the bookkeeping office for recording in the nancial records, while
the third copy is led in the pending invoice le. On a regular basis, the senior bookkeeper
checks the invoices in the pending invoice le for sequential numbering (in order to ensure that
there are no missing invoices) and for matching to the delivery note brought back by James
Mann after it has been signed by the customer (in order to ensure that an invoice has been
created for each delivery note).
Recording of sales
e accounts receivable clerk, Helen Troy, is responsible for recording sales in the sales journal.
After recording invoices for the day, the senior bookkeeper reviews the accuracy, completeness
and proper cut-off of the recorded sales in the sales journal by agreeing each entry in the journal
with the supporting invoice and delivery note. She also ensures that an entry in the journal exists
for each invoice.
At the end of the month, Helen prepares debtor statements from the debtors ledger for
mailing to customers.
Leonard did not nd any particular weaknesses in the credit management and sales returns
areas of the revenue cycle.
REQUIRED
Describe the weaknesses and the associated risks in the above system description of the revenue
cycle at Trucker Tools. In addition, for each weakness identi ed, describe the recommended
control(s) that should be put in place in order to prevent the risks associated with the weakness.
Present your answer in tabular form.
[23]
Question 11 LEVEL 3
Weaknesses, risks, decrease in gross pro t and recommendations
[40 marks]
You are an internal audit manager employed at WTK Inc. (WTK), a rm of registered auditors
and accountants. One of the rm’s clients is Autonovation (Pty) Ltd (Autonovation), a company
that sells vehicle products to the public, operating from large retail stores situated across the
country. Each store is responsible for keeping its own set of accounting records, although some
reconciliations are performed at head office. e following matters have come to your attention:
Extract from the system description of sales function at the Kimberley store
Sales to customers can either be on credit (for pre-authorised account holders) or for
cash. After selecting products, customers proceed to the sales clerk counters. In order to
ring up a sale, a sales clerk logs onto the nancial application on the computer system
using a common username and password (the username is saLescLerk123).
Credit customers must show a store card on which an account number appears. The clerk
keys in the number in order to display the customer’s account details on the screen. New
credit applicants are referred to the sales manager’s of ce before being able to buy
products on credit. Cash customers do not have to provide any form of identi cation.
Products are scanned with a barcode scanner. Should the customer’s credit limit have
been reached, the clerk enters an override code if the clerk deems the customer’s reason
for exceeding the credit limit to be reasonable. Credit customers receive a printed,
sequentially numbered sales invoice. Cash customers receive a printed sales quote. Sales
clerks can enter a discount percentage for cash sales by using their discretion, even
though (according to sales clerks) this function is never used. (Note: the sales clerks’
commission is based on net sales.) Goods are packed into shopping bags at this stage.
Cash customers proceed with their products to a cashier at the exit, hand the sales quote
to the cashier and pay the amount due. A sequentially numbered cash invoice is printed by
the cashier and handed to the customer after it has been stamped ‘Paid’. The customer
then exits the store. Credit customers leave the store directly after receiving their sales
invoice from the sales clerk.
Extract from the internal audit report on the system of cash receipts at the George
store
The gross pro t percentage of the George store fell from 30% in quarters one to three to
25% in quarter four (the year-end inventory count has already taken place). A replacement
cashier was appointed at the beginning of the fourth quarter, which coincided with a
signi cant increase in the issuing of written cash receipts instead of printed cash invoices.
Management of the store had not yet detected the decrease in the gross pro t
percentage, and showed surprise when asked about the matter. The store manager
con rmed that, although head of ce does not generally approve of this, the issuing of
manual cash receipts is allowed in emergency cases. As no formal policy document could
be provided by the store manager on the regulations applying to the use of manual cash
receipts, this query was referred to head of ce.
According to the cashier, frequent network failure between his terminal and that of the
sales clerks compelled him to write out manual cash receipts, as his terminal is
dependent on the sales quote created on the system by the sales clerks. The computer
system does not allow him to create a cash invoice if a sales quote has not previously
been generated by a sales clerk. (The cashier keys in the sales quote number in order to
call up the quote details on the screen.) According to the store manager, she is aware of
the network problem.
When a computerised cash invoice is created, sales are automatically recorded in a

pending sales le. Hand-written cash receipts, however, must be manually recorded in the
le, which is posted to the general ledger the next day when the sales amount in the le is
reconciled with the cash deposit slip. The cashier is responsible for performing this
reconciliation, recording manual receipts to the pending sales le and posting the le to
the general ledger. He is also responsible for issuing stationery to company staff.
Request by Autonovation to assist with the implementation of the sales returns

function
e accounting department at the head office of Autonovation has requested your rm to

advise the company on the internal controls that should be implemented over its sales
returns function. To date, the company has followed an informal approach to sales returns,
owing to the limited number of such returns. However, increased sales have necessitated the
formalisation of controls for roll-out across all stores. Management is prepared to establish
sales returns counters at each store, staffed by a sales returns clerk. e nancial application
currently enables the creation of both goods return vouchers and credit notes. Returns are
made in person by customers.
REQUIRED
1. With reference to the information contained in the extract, describe the de ciencies in the
sales function at the Kimberley store. Explain also the risks associated with the de ciencies
and describe the recommended controls that should be put in place in order to minimise the
risks. (16)
2. With reference to the information provided, discuss what might have led to the decrease in the
gross pro t percentage of the George store and the delay in the detection thereof. (Refer to the
George scenario, but allow the information in the Kimberley scenario to inform your answer.)
3. Describe the controls that Autonovation should implement in the sales returns function (15)
of each store in order to ensure that the control objectives of validity of sales returns recorded
in the nancial records are achieved. (Refer to the information provided in the request, but
allow the Kimberley and George scenarios to inform your answer. Do not include controls for
previously stored transaction and master le data.) (9)
[40]
Question 12 LEVEL 2
Weaknesses, recommendations, internal controls, role players and documents
[41 marks]
You are the internal auditor employed by South Peninsula Cleaning Services (Pty) Ltd (SP
Cleaning), a provider of cleaning services to office blocks in an around the South Peninsula area.
e business has been in existence for the last ve years and has grown 10-fold over that period
of time. e administrative function is performed and takes place from the home of the owner
and now chief executive officer, Mrs Radcliff. When the business started up, Mrs Radcliff could
perform the administrative function because she had only one client. Today, Mrs Radcliff
employs the following employees to perform the administrative function of the business:
Mrs Bray – administrative clerk
Mr Adams – sales and marketing manager
Ms Britton – operational staff co-ordinator
Mr Jikijela – nancial manager.
At the previous nancial year-end, the external auditors were concerned about the revenue and
receivables process and requested SP Cleaning to map the process for their review for the
following year’s statutory audit (i.e. the current audit).
All new and existing business is handled by Mr Adams. In his position as sales and marketing
manager, he is authorised to enter into contractual agreements with customers to provide
cleaning services to them. Customers can only make use of SP Cleaning if they have a signed
contractual agreement with the company.
On the rst working day of each month, Mrs Bray creates a manual sales order based on the
agreement between the customers and SP Cleaning for cleaning services. e sales order is
authorised by Mr Adams after he inspects the agreements to con rm the number of working
days. e original sales order is kept in a book and the carbon copy is sent to Ms Britton so that
she can co-ordinate the cleaning staff for the month ahead.
Upon receipt of the sales order, Ms Britton plans the roster for the cleaning staff. e SP
Cleaning model is based on two shifts – an early morning and a late afternoon shift. As only
office blocks are serviced, the business model is designed to provide cleaning services in the
administrative offices before the customer’s staff arrive for work as well as after the customer’s
staff leave work.
Ms Britton visits the office block locations on a regular basis to make sure that supervisors
and cleaning staff are doing their work and also to handle queries from customers. All customer
queries are logged in a query book used by Ms Britton to assess cleaning staff performance and
also in cases where disputes arise with the Department of Labour.
At the end of each month, all cleaning staff and supervisors complete their monthly time sheets
and this is reviewed by Ms Britton. She then uses this information to complete a service delivery
form. e service delivery form re ects the following:
Sales order number
Month of service
Cleaning staff and supervisor on duty for the speci c office block
Number of hours worked by each staff member based on the authorised time sheets
e service delivery form is reviewed and signed off by Mrs Radcliff, who is responsible for all
senior staff, including Ms Britton. e service delivery form is then sent to Mrs Bray for
processing.
At month-end, Mrs Bray creates the sales invoices for customers based on the following
documents:
Original sales order in the order book
Service delivery form sent to her from Mrs Radcliff
e sales invoice is made out in duplicate in an invoice book. e carbon copy sales invoice is
kept in the invoice book and the original sales invoice is sent to the customer for payment.
e general customer payment terms are one calendar month from statement date. e
debtor’s statement is created and sent out with the original sales invoice on the last of every
month.
ere are no unpaid invoices from the previous months as all customers comply with their
contractual agreement with SP Cleaning. ere is only a current balance on the debtor’s age
analysis as a result of this.
Note: All documents are pre-printed and pre-numbered.

REQUIRED
1. Identify the internal control weaknesses based on the scenario above. For each weakness
identi ed, explain the consequence(s) and make recommendation(s) for improvement.
[11]
2. a) Identify the internal controls in the revenue and receivables process of SP Cleaning, as
outlined in the scenario, for the following activities:
i) Receiving and processing customer orders
ii) Granting credit to customers
iii) Delivering the service
b) For each internal control identi ed, indicate who the role players are and what documents are used in the internal control.
Present your answer in the following format:
INTERNAL CONTROL ROLE PLAYERS DOCUMENTS

(1 mark for each internal (1 mark for each relevant role (1 mark for each relevant
control) player) document)
[30]
Question 13 LEVEL 2
Recommendations
[14 marks]
You are a rst-year trainee accountant employed by an audit rm to work in its internal audit
department. One of your rm’s internal audit clients is GameZone (Pty) Ltd (GameZone), a
company that operates in the family entertainment industry.
GameZone’s operations include an indoor laser games compound, where people can
simulate a battle using laser-beam guns. Each participant receives a laser gun connected to a
battery-operated body harness that can detect light beams, upon which the harness registers a
shot received from another player. Up to four teams of ve people each can participate in a
round lasting 30 minutes and costing R50 per person. During the game, the gameplay computer
collects all game data (e.g. those players shot and by whom, how many times a person was hit
and the ring accuracy of each person). During busy periods, up to R12 000 a day is collected
from the laser games compound.
Mr Mark Costa, owner of GameZone, has con ded to you that he believes cash is being
misappropriated in the laser games operation. You have obtained the following information:
Participating players must pay the required fee before a game commences. Receipts are
printed by the compound’s cashier from a stand-alone point-of-sale computer connected to a
cash register. Players pay either with cash or with a bank card using a card-swipe machine.
Cheques are not accepted. e point-of-sale computer is connected neither to the gameplay
computer nor to the computer used by Ms Betty Colt, the bookkeeper. A duty manager
oversees the smooth working of all GameZone’s operations, while Mr Costa’s wife, Mrs
Arcadia Costa, assists with nances and accounting in general.
Ms Colt has told you that she occasionally ful ls the duty of cashier at the laser games
compound in the evenings when casual staff members do not show up for work and to
‘supplement my meagre income’.
Daily cash takings for all the operations at GameZone are stored in Ms Colt’s office inside a
reproof safe, together with the cash receipt report printed out from the point-of-sale
computer. Either one of the two keys kept by Mr Costa and Ms Colt respectively can open the
safe.
Ms Colt is responsible for preparing a deposit slip for each day’s total cash takings. Banking is
done weekly, and when the bank-stamped copy of the deposit slip is returned after banking by
the company’s messenger, Ms Colt records the deposits in the cash receipts journal. A bank
reconciliation is prepared on a quarterly basis by Ms Colt.
You have not been able to nd any indication that the past year’s bank reconciliations have been
reviewed.
REQUIRED
Recommend the controls that you would suggest be implemented at GameZone (Pty) Ltd in
order to reduce the possibility of the misappropriation of cash in the company’s laser games
operation. Ignore the effect of any computerised access or input controls.
[14]
Question 14 LEVEL 3
Recommendations
[22 marks]
Handyman Wholesalers (Pty) Ltd (Handyman) distributes a wide range of hardware and paint
products to retailers across South Africa. e audit rm by whom you are employed as a senior
auditor has been requested to audit the company’s nancial statements for its nancial year
ended 30 September 20X1. A trainee accountant on the audit has obtained the following system
description of the company’s revenue cycle:
Credit management
All sales to customers are on credit. e company’s credit management office is staffed by Ms
Ellie Amber, the credit controller, who is responsible for:
performing creditworthiness checks on credit applicants
allocating credit limits to customers’ accounts on the debtors master le
ensuring that each new customer receives a unique, computer-generated account number
agging accounts on the system of those customers who are behind with payments or have
other pending queries against their accounts.
Receiving orders from customers

e sales order department is staffed by two sales order clerks who report to the department’s
supervisor, Mr Loyiso Mkwevu. All orders from customers are received telephonically by
either one of the sales clerks on duty.
A customer, after reference to a product catalogue, is required to read his/her order to the
sales clerk by quoting the product code and quantity, after which the clerk enters the details
on an on-screen internal sales order (ISO) on the sales order module of the company’s
computerised nancial system. is module is linked to the debtors master le and the
inventory master le. A back-order system is not in use.

When an ISO has been generated by the system, the storeman, Mr Jimby Zin, receives a
message on his computer that there is a pending sales order awaiting processing. He prints a
copy of the ISO and picks the ordered goods from the warehouse shelves, whereupon he
clicks on the ‘picked’ button on the on-screen ISO and the system automatically prints a
multi-copied, sequentially numbered delivery note.

Goods are transferred to the dispatch area by Jimby Zin and dispatched via delivery vans,
which pass through security checks at the exit gate of the company’s premises. Customers are
required to sign the delivery note and retain a copy for their own records. When customer-
signed delivery notes have been returned to the warehouse, Jimby Zin accesses the computer
system and clicks on the ‘ lled’ button on the on-screen delivery note in order to indicate that
delivery has taken place.
Invoicing and recording of sales

A copy of the customer-signed delivery note is submitted to Ms Renée Plait, the invoicing
clerk in the nance department, who on a daily basis accesses the invoicing module on the
computerised nancial system and selects the ‘Create invoice’ option. A list of all delivery
notes in sequential order appears, with those that have been agged as ‘ lled’ by Jimby Zin
clearly indicated as such. Next to each lled delivery note, Ms Plait clicks on a button that
creates an invoice.
At the same time as the invoice is accepted by Ms Plait on the system, the sales journal
and debtors ledger are updated with the sale. e nancial manager to whom Ms Plait reports
is Mr Suyesh Khare.
REQUIRED
1. Describe the computerised access and input application controls required in order to achieve
the control objectives of the validity, accuracy and completeness of internal sales orders
captured onto the nancial system by the sales order clerk. (12)
2. Describe the computerised input and processing application controls required in order to
achieve the control objectives of validity, accuracy and completeness of invoices recorded in
the nancial records of Handyman. (10)
In both of the above questions, ignore controls relating to screen aids and any controls
applicable to amendments to master le data.
[22]
Question 15 LEVEL 2
Key controls
[8 marks]
In October, you received the latest copy of the accounting and auditing circular from your rm.
e main focus of the circular was key controls. e following extract intrigued you:
Extract from accounting and auditing circular
Key controls are those internal controls that provide reasonable assurance that material
misstatement in the nancial statements (whether owing to fraud or error) will be
prevented, or detected and corrected, before the nalisation of the entity’s nancial
statements. It follows from this de nition that key controls are those that respond to risks
that could result in misstatements in the nancial statements that are considered
material. This means that, if a key control fails, there is a reasonable likelihood that
material misstatement (error or fraud) may be present in the nancial statements.
After you had read the extract, you decided to look at this list of controls as practised by your
current client, Hot and Cold (Pty) Ltd (Hot and Cold):
1. Customers should be requested to provide orders by fax, email or physical delivery.
2. All written orders should be completed in blue pen.
3. All products obtained should be compared to the order form received from the sales
department before they are moved to the dispatch department.
4. All order forms should be grouped in batches of 10 and bound by an elastic band.
5. Discounts should be authorised by a speci ed personnel member and granted in accordance
with the organisation’s policy.
6. e organisation’s discounts policy should be displayed on the back of the sales department
door.
7. Customers should always sign the delivery note as proof of having received the goods.
8. Customers may sign anywhere on the delivery note.
9. All delivery notes must be pre-numbered and kept in a locked drawer.
10. e sales department should have a scheduled tea break at 10h00 every morning.
REQUIRED
Indicate which of the controls listed above are key controls.
[8]
Question 16 LEVEL 2
Key controls and control objectives
[10 marks]
During the interim audit of Trust-Us (Pty) Ltd (Trust-Us), you requested system descriptions of
all the different business cycles within the company in order to design the appropriate test of
controls. An extract of the revenue and receipts cycle is presented below. e extract only deals
with the revenue generated through the selling of tickets for speci c fundraising events
undertaken by the staff of Trust-Us.
Extract: Ticket sales
The campaign manager determines the quantity of tickets needed to be sold for the
purpose intended. Based on this, the campaign manager orders the appropriate number
of booklets. For example, 1 000 pre-numbered booklets for the wheelchair fundraising
project (each booklet containing 10 pre-printed and pre-numbered tickets) were ordered
from the local printing company. On receipt of the booklets, the printer’s delivery man, as
well as two administrative staff members of Trust-Us, count the number of booklets (and,
on a sample basis, con rm that each booklet contain 10 tickets). All three applicable
persons sign the delivery document of the printing company after the booklets are
counted. The secretary of the nance team compiles a booklet register, containing the 1
000 booklets in numeric order. The booklet register is locked in the secretary’s ling
cabinet to prohibit unauthorised access. The booklet register contains the following
details: booklet number, details of the staff member who receives the booklet, a place for
the signature of the staff member who receives the booklet, and lastly a place where the
secretary and staff member sign (together with the number of unsold tickets in booklet)
when the staff member returns a booklet (with unsold tickets in it).
Staff members have ve weeks to sell the tickets and the staff member who sells the
most tickets receives a cash incentive. When a staff member has sold all 10 tickets in the
booklet, he/she brings the cash to the cash clerk, who records the cash received and
issues a receipt (pre-printed and pre-numbered in quadruplicate) for the staff member. One
copy of the receipt stays with the cash clerk, one copy is sent to the secretary to ensure
that a staff member does not receive a second booklet before he/she has paid the cash
of the rst booklet, and one copy is sent to the accountant for independent review
purposes. At the end of the ve-week term, all staff members must return the booklets in
their possession – the booklet to the secretary and the cash for sold tickets to the cash
clerk (process as described above).
The accountant performs a reconciliation at the end of the period between the tickets sold
according to the secretary’s booklet register and the total cash received (and banked) by
the receipts and deposit slips of the cash clerk. The accountant performs a reconciliation
between the total tickets sold, total unsold tickets and total tickets available for sale. The
accountant investigates any discrepancies found and records his ndings on the
reconciliations. The accountant signs the reconciliations and submits it to the nance
manager when a fundraising project is nalised.
REQUIRED
Identify the key controls from the above extract of the revenue and receipts systems description.
For each key control identi ed also state the main control objective achieved by the key control.
[10]
Question 17 LEVEL 3
Key controls and tests of controls
[10 marks]
You are a member of the internal audit department of Quality Supplies (Pty) Ltd (Quality
Supplies), a company that sells a range of household furniture and electronic appliances from its
store located in a prominent mall in Durban. e company has a December year-end.
e accounting system, which includes a point-of-sales system module, is located on a fully
integrated system run on a local area network at the store.
Extract: Sales process at company
For existing customers

At the start of each shift, the salesperson logs onto the point-of-sales system using
his/her unique user ID and password, thereby gaining write access to the sales le and
read-only access to the inventory and debtor master les. The system shuts down after
three failed attempts at entering an unauthorised password.
The salesperson asks the client to provide his/her Quality Supplies customer card. When
the salesperson scans the barcode on the card, the following details appear on the
screen:
Name Address Identity/passport Outstanding Available Credit

and number balance balance limit
surname
In cases where customers have left their Quality Supplies card at home, they are
requested to produce their identity document, passport or South African driver’s licence.
The ID/passport number appearing on the presented document is captured into the
system and the same information appears on the screen as if the barcode on the
customer’s card had been scanned. The system has logic tests built into it that recognise
whether or not a valid ID or passport number has been entered.
If the total purchase price does not cause the outstanding balance to exceed the credit
limit, the sale will be approved and the customer will take immediate delivery of the goods
purchased, unless he/she requires the goods to be delivered, in which case the goods
will be delivered within three business days of the date of purchase.
When the value of the goods purchased causes the outstanding balance to exceed the
credit limit, the sale is loaded onto the system and stored in a sales pending le. At the
same time, a noti cation is sent to the email address of Mr Jenkinson, the credit
manager. The customer will not be permitted any more sales until his/her credit limit has
been increased. The turnaround time for doing so is normally two working days.
Mr Jenkinson logs onto the system using his unique user ID and password in order to gain
access to the sales module. He reviews all such cases and applies his discretion when
increasing the credit limit, subject to certain requirements. Mr Jenkinson documents his
reason on the system for increasing the credit limit (e.g. regular payments received to
date). In some instances, the customer may be required to provide three months’ bank
statements in order to prove his/her increased disposable income. A log is created of all
instances where Mr Jenkinson authorises an increase in the credit limit. It is then printed
and reviewed by Ms Ballinger, the chief nancial of cer, at the end of each month and all
exceptions (such as where there is no valid reason for the increase) are followed up with
Mr Jenkinson. Ms Ballinger signs the log in order to indicate that she has reviewed it.
Once Mr Jenkinson has documented the reason for the increase and authorised it, a
sequentially numbered noti cation is sent to Mr Ndlovu, whose duty it is to capture and
update the debtor’s master le. The noti cation received by Mr Ndlovu informs him that he
needs to increase the client’s credit limit. Mr Ndlovu has write access to the debtors
master le, and uses the authorising email as a debtors master le amendment form. Mr
Ndlovu then les the noti cation.
The customer is informed via SMS the day after the order has been placed in order to:
inform him/her whether the order was successful or not
advise him/her if his/her limit has been increased
give him/her the date on which he/she will be able to take delivery of the goods.
REQUIRED
Identify the key internal controls in the sales system as described above and describe a test of
control which the internal auditor could perform for each. Present your answer in tabular form.
[10]
KEY INTERNAL CONTROLS TEST OF CONTROL BY INTERNAL

AUDITOR
The salesperson and Mr Jenkinson log Attempt to gain access to the system by
onto the system using their unique user using an incorrect user ID and password and
IDs and passwords. (1) observe that it shuts down after three
unsuccessful attempts. (1)
The salesperson scans the barcode Observe the sales clerk scanning the
located on the customer’s Quality Supplies barcode on the customer’s Quality Supplies
card in order to gain access to his/her card to gain access to the customer’s
details. (1) details. (1)
Alternatively the customer’s ID number or Attempt to input an incorrect ID or passport
passport number is used to call up their number into the system in order to call up a
details on the sales system. (1) customer’s details and observe that the
system does call up any customer details.
(1)
The system performs credit checks before Attempt to process an order for a customer
orders are processed. (1) which exceeds his/her credit limit and
observe that the order is not automatically
approved. (1)
A log of all instances where Mr Jenkinson Inspect the log for Ms Ballinger’s signature.
has authorised amendments to the credit (1)
limit of existing customers is reviewed by
Ms Ballinger and all exceptions are
followed up. (1)
Mr Ndlovu uses the sequentially numbered Extract a report indicating all customers
noti cation received from the system as whose credit limits have been increased
debtors master le amendment form. (1) during the course of the year and agree them
to the corresponding sequentially numbered
noti cations. (1)
Notes:
e rst important aspect to take note of is that the required asked you to identify key
controls, thus controls that will help to ensure that the information in the accounting records
and, in the end, the nancial statements are accurate, valid and complete.
Another important aspect to take note of is the fact that the required asked for a test of control,
therefore you should only have formulated one test of control.
Question 18 LEVEL 3
Tests of controls
[30 marks]
You are the senior auditor on the audit of Quality Clothing (Pty) Ltd (Quality Clothing), a
company that sells clothing to the public from its 15 stores located around South Africa and has
its corporate head office located in Roodeport.
e following is an extract of information that was obtained during the planning phase of the
audit:
Extract: Revenue and receipts cycle – credit purchases
General
Customers who purchase goods on credit are required to open an account with Quality
Clothing.
Authorisation of credit purchases

The prospective customer needs to complete a credit application in order to purchase
clothes on credit from one of the stores.
The credit application may be completed in the store or on the company’s website.
The following documentation is required in order to approve an individual as a new credit

customer and to determine the customer credit limit:
A completed new customer application form
A certi ed copy of the customer’s identity document
Proof of residential address
Three most recent payslips or three most recent bank statements
If an individual is unable to provide the documentation required above, the individual will
not be permitted to open a customer account.
For new customer applications submitted in the store, the documentation is scanned into
the system and stored in a new customer pending le.
For new customer applications submitted via the company’s website, the application,
along with the documents that the prospective customer has loaded onto the system, is
stored in a new customer pending le.
Once a prospective customer applies to open an account, it takes four to ve business

days to process the application.
The company has several credit managers who log onto the system using their unique
user IDs and passwords. They have read-only access to the information loaded onto the
system by the prospective customer.
If the credit manager inputs his/her user ID or password incorrectly more than three
times, the computer automatically logs off.
The credit manager performs the following checks:

Con rms that the new customer application form has been completed correctly
Inspects the supporting documentation
Performs a credit check on prospective customer
Once the credit manager is satis ed that the application and supporting documentation
meet the company’s requirements, the credit manager approves the application by digitally
authorising the application.
An employee in the credit department who is responsible for loading the credit limits onto
the customer’s account logs onto the system by using his/her unique user ID and
password. The employee loads the new customer’s credit limit based on the disposable
income noted on the application form as well as recommendations made by the credit
manager. The new customer’s account is then moved from the pending le to an approved
new customer le. The employee digitally signs off the activation as proof that he/she
loaded the new customer’s credit limit in terms of the company’s policy.
The new customer is mailed a customer card which takes two to three business days to
arrive at the customer’s mailing address and is activated instore with the approved credit
limit. The customer is required to come into a store, provide proof of identi cation and
swipe his/her customer card in order to activate it. The system logs the date on which the
card was activated in the store for the rst time.
The system creates a log of all cards that have been issued as well as those cards that
have not been activated in the store within 21 days, so that the approved customers can
be contacted to determine whether they have received the cards or whether they are still
interested in making purchases on credit. The reason why the approved customer has not
activated the card is noted on the system.
The card and offer to purchase on credit for the rst time expire 90 days after the card
was mailed to the individual if the individual has not come into a store to activate the
card. Once the 90 days has lapsed the individual is required to reapply.
Increasing of credit limit

Customers are permitted to request that their credit limits be increased. They are required
to submit:
motivation for the increase
three most recent payslips or the three most recent bank statements.
The credit manager reviews the documentation and determines whether or not the
approval is warranted. If the credit manager is satis ed that the credit limit increase is
valid, he/she completes a credit limit amendment form which is sent to an independent
employee in the credit department to load onto the system. The credit manager signs the
credit limit amendment form to indicate that he/she has reviewed and approved the
increase in credit limit in terms of the company’s policy.
An employee in the credit department logs onto the client’s account using his/her unique
user ID and password. The employee changes the credit limit by using the information
located on the credit limit amendment form. The employee signs the credit limit
amendment form and digitally signs the change in credit limit as proof that he/she has
made the change. A log of all changes to the credit limit is recorded. The log is reviewed
by the nancial manager on a monthly basis and exceptions are followed up. The nancial
manager signs the log as proof that he/she has reviewed the log and followed up on any
exceptions.
Orders
Orders are taken in the following manner:
By telephone
In person
When someone calls to place an order, the employee receiving the order follows the
following process:
Asks the customer for the customer number
Repeats the order back to the customer
Con rms that it is the customer by asking a series of predetermined security questions
(e.g. what was your nickname in high school)
Completes the order on an internal sales order form
All calls are recorded for legal purposes.
Where an order is placed by a customer in person, the customer is required to provide

his/her customer card when placing the order, as well as proof of identi cation.
Prior to approving the sale, the payment history of the customer is reviewed by the sales
representative on the system, and where the customer’s account is in arrears for more
than three months, the system will not permit the sale to proceed unless a manager
overrides it. The system creates a log of all sales where managers have overridden it, and
this log is followed up by the nancial manager on a monthly basis. The nancial manager
signs the log as proof that he/she has reviewed the log.
Where the purchase results in the customer’s credit limit being exceeded, the system will
not process the order. The customer is informed that the order has exceeded his/her
credit limit and the customer is requested to pay the balance that exceeds the credit limit.
Should the customer not be able to pay for the balance above the credit limit, he/she will
be required to reduce the value of the order by removing some products.
REQUIRED
Identify the key controls as described in the above scenario, and for each key control identi ed,
describe the test of control that you would perform to determine if the control was working
effectively.
[30]
Question 19 LEVEL 3
Tests of controls
[15 marks]
You are the auditor of Juicy M. is business sells a range of juice bottles to both the general
public and wholesalers.
Credit sales, which make up the majority of the company’s total sales gure, are made as follows:
DEPARTMENT PERSON OPERATIONS

Order Sales The sales clerk receives orders telephonically, by mail or
clerk directly from walk-in customers. These are recorded on
the company’s pre-numbered order forms. The company
uses two copies: one is sent to the credit department,
the other retained in the order department and led in
sequential order.
Credit Credit Credit limits are determined for all new debtors based on
manager their credit references. The credit manager records this
and limit in a debtors le. After each transaction, price lists
debtors are used in order to calculate the value of the transaction.
clerk This total value is used in order to verify whether the
customer has exceeded his/her credit limit.
If the limit has not been exceeded, the order form is

signed by the debtors clerk and sent to the inventory
warehouse. If the credit limit has been exceeded, the
form is returned to the sales department. The debtor
concerned is contacted.
Each debtor receives a statement on a monthly basis.

Should he/she have any queries about the statement,
these are referred to the credit manager, who resolves
them in conjunction with the debtors clerk.
Warehouse Storeman Once the signed order form arrives at the warehouse from
the credit department, the storeman checks that the
items requested are available.
If they are, he/she signs the order form and forwards it to

the accounting department. If the items are not available,
it is returned to the sales department and the debtor
concerned is contacted.
Accounting Accounting Once the approved order form has been received, the
clerk and accounting department prepares a pre-numbered invoice
accountant in triplicate. The accounting clerk uses the price list in
order to calculate the total amount due.
One copy of the invoice is sent to the warehouse, where

the goods are packed and distributed. The customer
signs this copy as evidence of receipt of the goods and
returns it to the accounting department.
Once the signed copy of the invoice has been returned,

the accounting department sends the original invoice to
the customer. The signed invoice, which is led
sequentially, is entered by the accounting clerk into the
sales journal, where it is also led sequentially. The third
copy of the invoice is sent to the debtors clerk, who
updates the debtors ledger.
At the end of each nancial year, the accountant performs

a reconciliation between the debtors ledger and the
debtors control account in the general ledger.
REQUIRED
Formulate the audit procedures relating to the internal control objectives of validity and
accuracy that you would perform on the internal controls as contained in the credit sales system
described above.
[15]
Question 20 LEVEL 3
Tests of controls
[18 marks]
You are the external auditor employed at Furniture Protectors Ltd (FP). You are assigned to audit
the sales cycle of FP.
FP designs protectors that can be placed on furniture to protect furniture against damage and
dirt from young children and animals. It produces and sells a wide variety of protectors for all
types and shapes of furniture. e following information relating to the sales system is available:
1. Mr Nieuwoudt, the customer relationship manager, is responsible for dealing with

customers who want to make purchases of furniture protectors on credit.
Mr Nieuwoudt requires proof of physical address and income as well as a customer

identity document before a customer can make purchases on credit. Customers are
also required to bring three copies of each of these documents with them, when they
present the originals. This is done to reduce FP’s printing costs.
The credit bureau is also contacted by Mr Nieuwoudt before setting the credit limit for
a customer.
A credit form is used, which contains the customer’s information and credit limit.
The customer is requested to check and sign the form, which is led in a customer
le with copies of the necessary documents listed above.
The customer is given the latest price list and a number of pre-numbered order forms.
Customers can complete the details of their purchase on the order form.
2. If the customers want to order furniture protectors, they contact the call centre
telephonically, reading the number of the order form (which is in their possession) to
the call centre agent.
The call centre agent then prepares a pre-numbered sales order based on the
information received.
The call centre agent records the order form’s number as communicated to him/her
by the customer on the sales order.
Mr Nieuwoudt checks that the customers’ credit limit is not exceeded and authorises
the sales order.
A copy of the order is sent to the head storeman and to Mrs Marais, the accounting
clerk. A copy remains in the call centre.
Mr Nieuwoudt frequently performs a sequence check on the sales orders and
investigates any missing numbers as well as any long-outstanding sales orders whose
delivery notes have not been received.
3. The orders are packed by the storeman and a pre-numbered delivery note is made
out.
The guard at the gate checks that the goods agree to the sales order and delivery
note before the goods leave the premises. The guard signs the delivery note as proof
that he has performed the check.
A copy of the delivery note is returned to the call centre, two copies are sent to the
customer and one remains in the warehouse.
4. The delivery clerk, who is also the driver of the delivery vehicle, compares the delivery
note with the original order form as prepared by the customer to ensure that the order
is complete.
In the event that the goods being delivered differ from the original order form,
changes are made to the order form and the customer is required to sign next to the
changes.
The customer signs the delivery note on receipt of the goods.
The delivery clerk signs the original order form and returns the form and a signed copy
of the delivery note to the head of ce. These forms are handed over to Mrs Marais.
5. Mrs Marais compares the original order form, delivery note and sales order with one
another and investigates any differences.
Mrs Marais then makes out a pre-numbered invoice.
Mr Benadie checks the calculations on the invoice and that the latest prices were
used.
Mr Benadie signs the invoice.
Invoices are printed and sent to customers.
Monthly statements are sent to debtors via email.

6. Mrs Marais posts the invoices to the sales journal and debtor ledger at the end of
each week.
Mr Swartz, the assistant accountant, posts the sales journal to the general ledger on
a monthly basis.
Mr Patterson, the accountant, checks the postings on a sample basis.
Debtor reconciliations are performed by Mr Patterson, and checked and signed

monthly by Mrs Morris.
REQUIRED
Describe the test(s) of control you would perform to test the operation of each control identi ed
above.
[18]
1 Deal with incorrect controls and/or controls that are not there, and are stated as such by means of the words ‘no’ or ‘not’.
2 8 marks = 8 weaknesses.
3 Take note of the goods being sold; they might affect the answer, as not all of the goods might be packed in boxes.
4 Start thinking about credit management controls.
5 Thus, dispatch function.
6 These functions can thus not be included in the answer.
7 Identify which are the remaining parts from your framework, as well as the internal controls in those remaining parts.
8 The first part of the cycle that you need to think about deals with controls that should be there: the inspection of goods
against the picking slip by the dispatch clerk; numerically sequenced delivery notes based on goods being dispatched; the
two functions performed by the security guard; and the customer’s signature on receiving the goods.
9 Well done: control is in place.
10 Another control is in place.
11 The security guard performs only one duty; the other one is thus the first weakness.
12 Control is in place.
13 The second part of the cycle that you need to think about deals with controls that should be there: the signed delivery
note filed in a pending file; sequentially numbered invoices prepared; confirmation that invoices have been prepared for all
returned signed delivery notes; checking that invoice dates are correct, missing delivery notes are followed up, invoices are
cross-referenced to internal sales orders and delivery notes, and quantities and prices on prepared invoices are reviewed,
as well as casting and calculations on invoices.
17 The third part of the cycle that you need to think about deals with controls that should be there: the recorded invoices
checked by a second employee – agreeing entries to supporting invoices and agreeing invoice amounts to amounts in
sales journal; the numerical sequence is inspected; and debtors reconciliation is prepared and reviewed by a senior
personnel member.
19 Nothing else is mentioned for this function; the remaining controls, which you expected to find in this function but are not
mentioned, are thus weaknesses.
20 Refer to example question 1.
21 Thus each weakness has to be addressed with the information that follows.
23 Linked to the weakness.
24 Linked to the weakness, and specifically referring to revenue.
25 Thirty-two marks divided by four (weakness, control objective, revenue assertion = 8 weaknesses).
27 Validity, completeness, accuracy.
28 Revenue assertions = accuracy, completeness, classification, cut-off and occurrence.
INTRODUCTION
Refer to the guidance and the example questions contained in Chapter

6, as the principles and the approach remain the same.
QUESTIONS
Question 1 LEVEL 1
Control objectives
[6 marks]
Validity, accuracy and completeness of nancial information are the

control objectives that management seeks to achieve in order to address
the major risks relating to all the cycles.
It is the responsibility of the audit manager on the engagement to
ensure that the audit team knows which control objectives relate to the
speci c cycle being audited, as well as the consequence for the entity’s
nancial statements if these control objectives are not achieved.
REQUIRED
Using the table below, provide a description of the control objectives
and the related risks of misstatement for the purchases transactions.
CONTROL CONSEQUENCE FOR ENTITY’S FINANCIAL

OBJECTIVE STATEMENTS IF CONTROL OBJECTIVE IS
NOT ACHIEVED
Validity
Accuracy
Completeness
[6]
CONTROL CONSEQUENCE FOR ENTITY’S FINANCIAL

OBJECTIVE STATEMENTS IF CONTROL OBJECTIVE IS
NOT ACHIEVED
Purchases
Validity Invalid purchases:
Overstatement of expenditure and accounts payable owing to
ctitious recorded purchases (1)
Overstatement of expenditure and accounts payable owing to
unauthorised recorded purchases (1)
Over- or understatement of expenditure and accounts payable if
transactions are not recorded in the year to which they pertain
Overstatement of expenditure and accounts payable if (1)
recorded transactions are not supported by suf cient
documentation (1)
Accuracy Inaccurate purchases:

Over- or understatement of expenditure and accounts payable if
transactions are recorded at inappropriate amounts (e.g.
calculation errors, incorrect price, incorrect quantity) (1)
Under- or overstatement of expenditure and accounts payable
due to incorrect classi cation of recorded transactions (1)
Under- or overstatement of expenditure and accounts payable as
a result of transactions being recorded in the incorrect accounts
(1)
Completeness Incomplete purchases: Understatement of

expenditure and accounts payable due to
unrecorded purchases (1)
Notes:
Six marks for three control objectives equals approximately two per
control objective, but you should know that accuracy and validity
have more aspects than completeness.
e risk of misstatement is the consequence to the nancial
statements. When looking at the suggested solution take note of the
way in which it was formulated, for example overstatement and
understatement.
Question 2 LEVEL 2
Assertions
[4 marks]
e following scenarios indicate the relevant risk indicators applicable
to the payments cycle:
1. Amounts prepared for payment are incorrectly determined.
2. Suppliers that are not on the payment schedule are paid.
3. Fictitious payments that never took place are recorded.
4. Not all payments made are recorded in the nancial records.
5. Fictitious/duplicated invoices are used for payment.
REQUIRED
For each of the scenarios mentioned above, indicate which assertion(s)
will be affected. Provide your solution using the following tabular
format:
NUMBER ASSERTION(S) AFFECTED

[4]
Question 3 LEVEL 2
Weaknesses
[7 marks]
You have recently been appointed as the internal auditor of Minor (Pty)
Ltd (Minor). During preliminary discussions with management, it was
decided that you would focus on determining the need for goods as well
as the ordering and the receiving of goods within the purchases and
payments cycle.
e following extract relates to a purchase transaction you observed:

STAFF JOB DESCRIPTION
Mr Radebe Procurement clerk
Mr Tobias Warehouse clerk
Mr Kromhout Warehouse supervisor
Determining the need for goods

Solly, the sales representative, wanted to make several photocopies of
the recent price lists with a view to distributing them to prospective
clients. However, he discovered that there was no more paper left for the
machine. He asked Mr Radebe, the procurement clerk, to order 50
boxes of paper in order to be sure that the company did not experience
further shortages.
Ordering of goods
When Mr Radebe received the request from Solly, he assured him that
the paper would be ordered. He then proceeded to phone the rst
supplier for whom he could nd a number in the Yellow Pages and
asked them to deliver the 50 boxes of paper as soon as possible. He did
not think it was necessary to complete any documentation.
Receiving of goods
When the supplier arrived at the warehouse with the boxes of paper, the
warehouse clerk, Mr Tobias, realised that the supplier’s delivery man
was a childhood friend whom he had not seen in years. He was so
delighted to see him that he received the delivery without signing the
delivery note.
Mr Kromhout, the warehouse supervisor, prepared the goods received

note based on the supplier delivery note in duplicate, after which he
sent a copy to the accounting department.
REQUIRED
Identify the weaknesses in the abovementioned system.
[7]
1. Determining the need for goods

a) e company does not have a system in place to determine a need
for stationery (e.g. regular checks to determine low levels). (1)
b) No pre-numbered, multi-copy requisitions are completed and
authorised. (1)
2. Ordering of goods
a) e company does not have an approved supplier list – the rst
available supplier was selected from the Yellow Pages. (1)
b) No quotation was requested from the supplier and the availability
was not con rmed either. (1)
c) No purchase order was prepared. (1)
3. Receiving of goods
a) Goods were not received in a designated receiving area. (1)
b) Goods were not received by dedicated goods receiving staff. (1)
c) e goods received note was not prepared based on the received
goods but on the quantities as per the supplier delivery note. (1)
d) Goods received were not checked for quantity, quality and
description as contained on the delivery note. (1)
Notes:
Weaknesses equal functions/duties not performed.
You need to have a thorough understanding of the cycles to be able to
identify weaknesses, as you have to match your knowledge
(framework) to the information provided in the case study.
e case study only dealt with the following aspects of the purchases
cycle: ‘Determining the need for goods’, ‘Ordering of goods’ and
‘Receiving of goods’, therefore your weaknesses can only include
weaknesses in these three functions.
Question 4 LEVEL 1
Risks
[3 marks]
ere are various categories of risks of misstatement relating to the

nancial information produced in the purchases and payments cycle.
Should a misstatement be material and not be corrected, the nancial
statements will not be fairly presented.
REQUIRED
List the various categories of risks of misstatement, whether owing to
fraud or error, that apply to the purchases and payments cycle.
[3]
Question 5 LEVEL 2
Risks
[17 marks]
You are the auditor of High Heels Ltd (High Heels), a shoe
manufacturer. You identi ed the following weaknesses in the purchases
and payments cycle during the audit of High Heels:
1. ere is not a process in place to determine which inventory is
required for the production process before orders are placed. Rush
orders are sometimes placed at additional cost.
2. Not all orders are placed using a written order form.
3. Not all orders placed are authorised.
4. Orders are placed with only one supplier.
5. A pre-numbered goods received note is not completed upon receipt
of the goods by the receiving department.
6. ere is insufficient segregation of duties, as the departmental
manager places orders, receives goods and makes payments to
suppliers.
7. Goods delivered are not reviewed, nor is a comparison made
between what was ordered and what was received.
8. Invoices received from suppliers are not compared with what was
ordered and what was received.
9. Creditors’ reconciliations are not performed between monthly
statements received from creditors and the creditor control account.
10. e cheque is submitted to the accountant and managing director for
signing without any supporting documentation accompanying the
payment.
REQUIRED
For each of the 10 weaknesses, identify the resulting risk(s) on the
nancial statements.
Note: Number each risk clearly.

[17]
Question 6 LEVEL 2
Risks
[19 marks]
You are the internal auditor on the audit of Protector (Pty) Ltd
(Protector), a company that manufactures a wide range of protective
cases and screens for mobile devices. Protector sells the cases and
screens to a number of wholesalers and retailers around the country.
e company has a February year-end.
e following is an extract of the key points obtained during a

discussion held with Mr Sijeke, the inventory controller; Mr Jordan, the
chief buyer; and Ms Carter, the nancial accountant in September of
the current year:
Extract
The company is considering implementing a new inventory system

as it has not always been able to meet the demands of its
customers. It attributes this primarily to the company’s running out
of inventory on a regular basis, which results in it not being able to
process additional orders.
When an employee working on the production line notices that it is

running out of a particular item of inventory, the employee calls Mr
Jordan and informs him of the need for the inventory. Mr Jordan
identi es three suppliers on the approved supplier list that are
located closest to the factory and calls them to establish how
quickly they would be able to deliver the inventory required. An
order is placed with the supplier that is able to deliver the
inventory the fastest. If the supplier requires a purchase order, Mr
Jordan completes one and faxes or emails it to the sales
representative at the supplier.
There have been times when the production of certain products

has been stopped temporarily while the company waited for the
inventory to arrive at the factory.
For orders where the production has stopped as a result

of running out of inventory
The inventory is received in the west wing of the warehouse by Mr
Sijeke. The inventory is of oaded from the delivery vehicle and Mr
Sijeke performs a quick inspection of the inventory to make sure
that it is not damaged. The employee who informed Mr Jordan of
the inventory needed is contacted and told to collect the inventory
immediately so that production can continue.
For normal orders

The inventory is received in the west wing of the warehouse by Mr
Sijeke. The inventory is of oaded from the delivery vehicle and Mr
Sijeke performs a thorough check to see if the inventory is not
damaged. The inventory is stored in speci c locations in the
warehouse until a request for the inventory is received. The
employee who identi es the need for the inventory contacts Mr
Sijeke, who in turn has the inventory picked up and delivered to
the section of the factory where the employee who contacted Mr
Sijeke is located.
Recording
The creditors clerk records the credit purchase in the accounting
records using the information noted on the invoice that is received
from the supplier. Where a purchase order was used, the creditors
clerk compares the information on the purchase order to the
information on the invoice. If a difference is noted, the creditors
clerk contacts the supplier to identify the cause for the
discrepancy. If a discrepancy is still noted after the call, the
creditors clerk records the credit purchase in the accounting
records using the information located on the purchase order.
Payment of creditors
The creditors clerk performs a creditor’s reconciliation on a
monthly basis and uses the reconciliation as the basis to
determine the amount to be paid to the supplier. The creditor’s
reconciliation as well as supporting documentation is presented to
Ms Carter for review. If Ms Carter is satis ed that the creditor’s
reconciliation has been performed properly and if she agrees with
the amount to be paid to the supplier, she signs the creditor’s
reconciliation and a cheque made out to the supplier. The
supporting documentation and the creditor’s reconciliation are
returned to the creditors clerk who is responsible for cancelling
the supporting documentation and posting the cheque to the
supplier.
The company intends moving away from cheque payments to

electronic funds transfers in the next nancial year.
REQUIRED
Describe the business risks affecting the purchases and payments cycle
at Protector (Pty) Ltd.
[19]
Question 7 LEVEL 2
Risks and assertions
[20 marks]
Sky Paints (Pty) Ltd (Sky Paints) manufactures a range of household

paints, for which raw materials in the form of resin, pigment, solvent
chemicals and additives are sourced from various local suppliers and
stored after receipt in the factory stores until needed in the production
process. A procurement department is responsible for submitting
purchase orders to suppliers, while an accounting department records
all purchases and related liabilities. Controls in place in Sky Paints’
purchases and payments cycle include the following:
On a weekly basis, the factory manager, together with the cost
accountant, determines what the expected need for raw materials in
the production process will be for the week ahead. is production
budget is reviewed and authorised by the senior production manager.
For orders placed with suppliers of raw materials, the purchase order
must rst be approved by the procurement manager, who requires a
cross-referenced purchase requisition before he signs the order as
evidence of his approval.
e procurement manager regularly checks whether the sequence of
purchase orders is intact, at the same time matching each purchase
order to a goods received note. He also investigates missing purchase
orders, or where an order does not have a corresponding goods
received note.
Buyers in the procurement department are required to obtain at least
three quotations from the company’s list of authorised suppliers
before submitting the purchase order for approval by the
procurement manager.
When raw materials are delivered by suppliers and received at the
factory stores, a receiving clerk scans a barcode attached to the
outside of the packaging. As the materials are being scanned, the
computer system automatically allocates the items to a materials
received note containing the item code, a description and the
quantity received.
As part of year-end procedures, a senior staff member in the
accounting department matches the date of recorded purchases as
per the accounting records, with the date manually written by the
receiving clerk on each purchase’s corresponding materials received
note. (Note: e control is necessary, as Sky Paints’s purchases are
not recorded concurrently with the generating of materials received
notes.)
Item prices are pre-arranged with suppliers and stored in an item
price master le. It is not possible for accounting staff to change prices
in the master le and a strict control system over item price
amendments is in place.
e accounts payable clerk in the accounting department performs
monthly supplier statement reconciliations. e nancial manager
reviews the reconciliations before payments to suppliers are made.
REQUIRED
Describe the risks that each of the above internal controls seeks to
mitigate, and state the nancial statement assertion(s) affected by each
risk. Where no assertion is affected, indicate whether or not the risk is
operational in nature.
[20]
Question 8 LEVEL 2
[23 marks]
You are one of the internal auditors of Africa Flight Delight Ltd (AFD), a
company distributing food to airlines throughout South Africa. e
company is fully computerised. One of the directors, Mr T. Mofokeng,
approached you to evaluate their purchase cycle (excluding recording
of payments). He informed you that, despite the overall effective
internal controls that are in place, the company is still facing difficulties
concerning its purchasing system, which has resulted in substantial
nancial losses to the company.
On request of a detailed system description on the purchases cycle of

AFD, you received the following working paper:
PREPARED BY: D.J. MOLEFE (AUDIT SENIOR)

REVIEWED BY: A. DU PLESSIS (AUDIT MANAGER)
COMPANY: AFRICA FLIGHT DELIGHT LTD
SUBJECT: SYSTEM DESCRIPTION ON PURCHASES
Purchase requisition
Mr Naidoo (storeman) is responsible for preparing the purchase
requisitions every month. Previously, he would telephonically
request from the three airlines to which food is distributed the
number of food packages required. Mr Naidoo has now simpli ed
the process by using budgets based on market research. As a
result, he completes the purchase requisition based on these
budget gures, les the original requisition in a pending le and
sends the other copy to the procurement department. Owing to Mr
Naidoo’s workload, he sometimes allows junior warehouse staff
members to ll in the purchase requisitions and send them to the
procurement department on his behalf.
Mr Naidoo commented that, although the process has been

simpli ed, AFD still overestimates the quantity of food required,
which results in an excess number of food packages being
prepared, not sold and eventually exceeding their sell-by date.
Ordering goods from suppliers
Ms Stumke (buying clerk) electronically processes a purchase
order based on the requisition received from Mr Naidoo or the
junior staff member. All calculations on the purchase order are
automatically performed by the computer, which also performs edit
checks on the input of data and automatically addresses the
purchase order to the correct suppliers based on the list of pre-
approved suppliers stored in the supplier master le. The computer
also assigns sequential numbers to all system purchase orders
thus created by Ms Stumke, who then les the purchase order
sequentially so as to allow a senior staff member to follow up on
any missing purchase orders on a regular basis. The other copies
of the purchase order are then distributed as follows:
Copy 1 is sent to the supplier.
Copy 2 is sent to the receiving bay of the warehouse.
Copy 3 is led as mentioned above.
Copy 4 is sent to the accounting department.
Copy 5 is sent to the requisition department.
Receiving goods from suppliers

Mr Swart (goods receiving clerk) is authorised to receive goods at
the receiving bay of AFD, which is a separate, fenced-off area
manned by a security guard at the main entrance who inspects
every delivery vehicle that enters or exits. Accompanied by the
delivery personnel, he also inspects supporting documentation.
Recently, security cameras were installed to mitigate the theft of
goods.
Once they have delivered the goods, the supplier’s delivery

personnel hand the delivery note to Mr Swart. He scrutinises the
note for the reference number of the purchase order, which he
enters into the computer. Once the computer has generated an on-
screen goods received note (GRN) with standing data of the order,
Mr Swart scans all the boxes received from the supplier,
whereupon the computer automatically indicates any outstanding
items, which are indicated as ‘not received’ on the electronic
purchase order. Mr Swart also writes ‘not received’ next to the
relevant items on the supplier’s delivery note. If any items scanned
do not match the purchase order, the computer raises a warning
and Mr Swart does not accept these items. As an additional
check, Ms Stumke assists Mr Swart in checking a sample of the
boxes scanned in order to perform a quality check and to ensure
agreement between the description on the box and its contents.
Ms Stumke also has access to the inventory system and can
generate a GRN if necessary (e.g. if Mr Swart were off sick).
Mr Swart is also responsible for distributing goods received notes

to the relevant departments:
Copy 1 is sent to the receiving bay.
Copy 2 accompanies the goods during transfer to the warehouse.
Copy 3 is sent to the accounting department.
Copy 4 is sent to the procurement department.
Recording of purchase
Mr Louw is responsible for reviewing the recording process of
purchases in the purchases journal after it has been generated
electronically by the computer. The computer application
implements the recording of a purchase based on the purchase
order and goods received note generated electronically once Mr
Swart and Ms Stumke have scanned in the goods received.
The computer application automatically uses quantities on the

system-stored GRN and the price per unit entered by Mr Louw
(obtained from supplier-approved price lists) in order to record nal
prices in the purchase journal. Nobody checks the values entered
by Mr Louw, as they feel he is intelligent and would notice any
error.
Mr Louw reviews the electronic recording of the purchase and the

corresponding liability (creditor), and ensures that the computer
system matches the following documents:
The purchase order
The delivery note from the supplier, which has been scanned in
The goods received note
An invoice from the supplier, which has been scanned in
Payment preparation
Mr Vosi, the accounts payable clerk responsible for payment
preparation, les all statements received from suppliers in a
pending le, which task he leaves until the end of the month, if
possible, or otherwise until he nds himself with time on his
hands. Mr Vosi then performs a creditors reconciliation on-screen,
where he enters the balance outstanding, as per the supplier’s
statement, into the computerised system, where it is compared to
the supplier’s balance as per the computerised master le. Mr Vosi
follows up manually on reconciling the items.
He is aware that most of the time AFD forfeits the discount that
they would have received had they paid within 30 days, but has
explained that he is struggling with the work overload, and believes
the problem will be resolved in the future.
Mr Vosi then accesses the supplier payment module on the

computer in order to create the payment. He manually types in the
name of the supplier that needs to be paid, based on the creditors
statements received. The computer subtracts this amount from the
creditors reconciliation saved in the master le, whereupon it
automatically creates a remittance advice for each supplier
needing to be paid.
Ms Barnard (senior bookkeeper), who obtains all the relevant

documentation received from Mr Vosi, performs the necessary
checks. She then accesses the suppliers payment module on the
computer system with her own password and indicates that the
supplier is ready for payment.
Mr Vosi then prints the payment schedule, attaches the supplier’s

statements and reconciliation, as well as the relevant goods
received note, the supplier invoice, the supplier delivery note and
the purchase order for each purchase, making up the balance
represented for payment.
Paying the supplier
Mrs Botha ( nancial manager) receives the relevant documentation
from Ms Barnard once the latter has created the ready-for-payment
notice. Mrs Botha then reviews the relevant documentation of the
payment that needs to be made. If she agrees with it, she logs
onto AFD’s bank account using her username and password and
creates an ad hoc payment. She then manually types in the details
of the supplier, the supplier’s bank account details and the amount
that needs to be transferred, and clicks on ‘pay’.
REQUIRED
Identify and explain the weaknesses in the above purchases system. For
each weakness identi ed, you should also recommend improvements
to be implemented by Africa Flight Delight. Your report should address
computerised controls only. Provide your solution using the following
tabular format:
NUMBER IDENTIFY AND RECOMMENDATION
EXPLAIN WEAKNESS

[23]
Question 9 LEVEL 2
[23 marks]
Mystic Falls Beverages (Pty) Ltd (Mystic Falls) is a distributor of a

popular beverage, ‘O’ Positive. It purchases its beverages from a
supplier called Pure Inc. and various other local manufacturers, and
thereafter distributes the beverages throughout South Africa. It is the
only supplier in South Africa of ‘O’ Positive.
Mystic Falls has an office and warehouse in Saldanha, Western
Cape. e beverages are shipped by sea and delivered in South Africa at
the port of Saldanha. e beverages are then brought to the warehouse
by Cape Winelands Transport where they are stored until they are sold
to customers in South Africa. Mystic Falls is a cash-only business and
does not provide any credit.
Mystic Falls has been in existence for the last three years servicing
its numerous customers, but has had no formal control processes in
place and has therefore been avoiding the external auditors. e chief
executive officer, Damian Salvatore, has decided to legitimise the
business and get control processes in place before the external auditors
arrive at year-end, 31 March 20X1. Because Mystic Falls does not have
any control processes in place, you were approached to provide
consulting services.
As you were required to assess all the control processes in Mystic
Falls, you decided to start off with the purchases and the inventory
management processes.
You had a meeting with the chief operating officer, Steve Salvatore, the
brother of the CEO, and jotted down the following notes of the
purchases process:
Owing to the long lead times to receive inventory, Bonita Bennett, the
administration clerk, places an order via telephone to Pure Inc. to
purchase the inventory. is is based on the amount of inventory
Mystic Falls will require to service its customers for at least six
months.
e quantity that Bonita Bennett orders is based on her instruction
from the Salvatore brothers.
Once the beverages arrive and are delivered to the warehouse, the
goods are counted by Jim Gilbert, the warehouse clerk, and stored in
the warehouse until they are sold.
After Jim Gilbert stores the beverages, he takes the documents he
receives to Marc Donovan to update the inventory management
spreadsheet that he created in Excel to manage the entire inventory.
Customers place orders for beverages with Carol Forbes. After
receiving an order, she calls Jim Gilbert and instructs him to send
Mystic Falls’s driver to deliver the beverages to the customer.
As soon as the driver leaves the warehouse to deliver the beverages,
Jim Gilbert calls Marc Donovan to update the inventory management
spreadsheet with the quantity of beverages that has left the
warehouse.
After your meeting, you went to your temporary office in Saldanha and
analysed the situation. You are aware that the company’s only assets are
the inventory and cash in the safe, as the Salvatore brothers do not have
con dence in the South African banking system. All premises in
Saldanha are leased and Pure Inc. is not a creditor as debt is settled to a
trust, the Original Family Trust, once inventory arrives at the Mystic
Falls premises.
REQUIRED
1. Identify the weaknesses in the purchases process based on the
scenario above. (8)
2. For each weakness identi ed, recommend an improvement(s) to
address the identi ed weakness. (15)
[23]
Question 10 LEVEL 2
Recommendations
[12 marks]
Your audit client, Universal Ltd (Universal), deals mainly in the retailing
of electronic equipment sourced from various local and international
suppliers. e company owns a central warehouse in Gauteng, from
which it distributes its products to its stores around South Africa.
e company follows a set procedure when receiving goods:

e goods receiving department receives a copy of an order
con rmation from the ordering department.
e goods receiving department of the central warehouse has a
number of goods receiving clerks working in the warehouse.
Upon arrival of the supplier’s delivery vehicle, goods are offloaded
into the goods receiving area.
Any available goods receiving clerk then obtains the delivery note
(two copies) from the supplier’s truck driver and checks that the
quantity of the received goods corresponds with the supplier’s
delivery note.
e goods are then transferred from the goods receiving department
to the warehouse.
REQUIRED
Recommend improvements to the current receiving of goods function
of Universal at its central warehouse.
[12]
Question 11 LEVEL 2
Key controls and assertions
[6 marks]
Dexford Ltd (Dexford), a paper-manufacturing client based in the

Western Cape, has established a division publishing magazines and
textbooks. One of the current projects on which it is embarking is the
publication of an educational magazine on auditing. Because your audit
rm has been engaged in Dexford’s audit for the past three years, the
editor in the publishing division has requested assistance in evaluating
a case scenario based on the system implemented in his division. You
may assume that there is no independence issue that might arise from
your participation.
A reputable academic in the eld of auditing has supplied the editor
with the following de nition of key internal controls: they provide
reasonable assurance that material misstatements in the nancial
statements will be prevented, or detected and corrected, and respond to
risks that could result in misstatements in the nancial statements that
are considered material.
Case study
Management style
The division’s management is of the opinion that its recruitment
process is of such a high standard that the staff it employs are
responsible, which ensures that the company does not have to
supervise and police them. The purchases and inventory system is
open for all staff to access; as a result, all staff can add and
delete master le and transaction data.
Requisitioning and ordering of goods and services

When inventory is needed, an email is sent to the buyer, who
creates an order and emails it to the supplier of his choice. The
order is printed and led sequentially. Management does not
believe that the system should include an order number, as it
might take up more space on the database. The procurement
manager is responsible for the manufacturing divisions’ orders; he
only follows up on inventory not delivered before year-end.
Receiving of goods and services, and recording of

purchases
The delivery note is signed by the receiving clerk after he has
checked the quality and agreed the quantity and description of the
received inventory to the details on the supplier’s delivery note. A
sequentially numbered goods received note (GRN) is prepared and
printed for all inventory received based on the actual quantity
received before the goods are transferred to the warehouse. The
warehouse clerk is responsible for receiving the inventory items in
the warehouse, when they are being transferred from receiving. He
compares details of the items transferred to the details as per the
GRN and signs the GRN after the comparison has been
completed.
On a weekly basis, the buyer prints a report that lists deliveries

and ordered goods, and follows up on any long-outstanding orders.
The accounts payable clerk keeps a le containing all the GRNs

received from the warehouse, in numerical order. Upon receipt of
the supplier invoices, the invoices are matched to the
corresponding GRN and recorded in the purchases journal,
whereafter they are automatically recorded in the creditors ledger,
the inventory system and respective general ledger accounts by
the system. The senior accountant regularly reviews the GRN le
for overdue GRNs for which invoices have not been received and
follows up on them.
REQUIRED
Identify and discuss the key internal controls, taking into account the
information above, which the auditor can rely on in order to meet the
assertions. Ignore those internal controls that are important for
management only. Your answer should be presented in such a manner
that the key internal controls are discussed per purchase assertion.
[6]
ASSERTION: KEY INTERNAL CONTROL

1. Only genuine purchases are recorded. (Occurrence) (1)
Goods received notes are prepared based on actual inventory
delivered. (1)
2. Purchases are recorded at the correct amounts. (Accuracy) (1)
The warehouse clerk compares the details of the items
transferred from receiving to the warehouse to the details as
per the GRN. (1)
3. Purchases have been correctly classi ed, summarised and posted by the accounting
system. (Accuracy) (1)
Purchase transactions are automatically recorded in the
creditors ledger, the inventory system and respective general
ledger accounts by the system. (1)
ASSERTION: KEY INTERNAL CONTROL
4. All purchases transactions are recorded and none has been omitted. (Completeness)
(1)
The senior accountant regularly reviews the GRN le for
overdue GRNs for which invoices have not been received and
follows up on them. (1)
Notes:
e rst thing you had to determine was the assertions relating to the
purchases, thus the transaction assertions.
In addition, you had to deal only with key internal controls, and a hint
was given in the required stating that you had to ignore those internal
controls that are important for management only.
If the required asks you to present your answer in a speci c format,
present your answer accordingly. In this instance, you had to present
your answer according to the assertions.
Question 12 LEVEL 2
Key controls and control objectives
[16 marks]
e following is a description of the purchase system in use at Funky

Toys (Pty) Ltd:
REFERENCE INTERNAL CONTROLS

NUMBER
NUMBER
1 Funky Toys purchases only from approved
suppliers. The production manager and senior
buyer will review all new supplier applications,
based on the suitability of their prices and quality
of their products. If suppliers are considered
suitable, both the production manager and senior
buyer will authorise the new supplier by signing
off the new supplier application form.
2 All approved suppliers are stored on the
company’s computer system based on an
authorised new supplier application form. Only
the nancial manager and production manager
are allowed to capture any new approved
suppliers on the computer system. Both
managers have unique usernames and
passwords assigned to them in order to conduct
this procedure.
3 The senior accountant in the accounts
department will print out the list of approved
suppliers after being informed by the managers
of any changes to the list.
4 The senior accountant distributes the list to all
the purchase clerks on the oor.
5 The new suppliers normally send Funky Toys
some documents on interesting special offers
provided, as well as their of cial price list and
terms and conditions on deliveries.
NUMBER
6 All purchases made by Funky Toys are based on
an authorised requisition. The system requires
the number of an authorised internal requisition
before allowing buyers to initiate the purchase
order. The system is also programmed to select
the appropriate supplier from the pre-approved
suppliers stored on the entity’s computer system.
7 The computer automatically assigns sequential
numbers to all system purchase orders created
by Funky Toys.
8 The buyers of Funky Toys will complete the on-
screen purchase orders by lling in the minimum
information not already sourced from the
requisition.
9 Once the buyers have completed the on-screen
purchase order, the computer will automatically
check all calculations on the purchase order. The
computer will also conduct edit checks on input
data.
10 The senior buyer will print a log of all purchase
orders that are without a corresponding goods
receiving note (GRN) number to follow up on
un lled orders.
11 The receiving area is a clearly designated area
which is safely secured.
NUMBER
12 Once goods are delivered by the relevant
supplier, the goods receiving clerk will obtain the
purchase order reference number from the
supplier delivery note. The goods receiving clerk
will then key in the purchase order number on
his/her tablet that will link it to the purchase
order. The computer will also automatically
populate an on-screen GRN.
13 The receiving clerk will then inspect the quality
and the quantity of goods received against the
supplier delivery note and purchase order. If the
goods receiving clerk is satis ed with the
delivery, he/she will tick off the items on the
GRN as being received.
14 The computer automatically creates sequentially
numbered GRNs upon the capture of details of
goods received by authorised goods receiving
staff.
15 Goods received are then sent to the warehouse,
where the warehouse clerk will check the goods
received against the GRN.
REQUIRED
Prepare a report, addressed to the audit manager, with reference to the
above description of Funky Toys, in which you report on the following
matters: (1)
1. Identify, by stating the appropriate reference number, the key
controls you want to rely on to obtain audit evidence about the
validity, accuracy and completeness of purchases; and (7)
2. State the control objective being addressed by each key control. (7)
Present your answer in table format, as follows: (1)
Reference number (e.g. 1) Control objective
[16]
Question 13 LEVEL 3
[30 marks]
You are the auditor of Plumb Supplies (Pty) Ltd, a company that
manufactures a wide range of plumbing supplies for household and
commercial purposes. e manufacturing plant is located in Epping
and has a December year-end.
e following extract from the purchases and payments cycle was

obtained through discussions held with the inventory controller, chief
buyer and chief nancial officer:
Extract
Ordering of goods
When an employee identi es that the inventory used by his/her
team is running low, he/she completes a requisition on the
company’s intranet from the computer located in the breakroom.
The requisition is stored on a requisition pending le. An email
noti cation of the requisition is sent to the employee’s manager.
The manager logs onto the inventory system by using his unique
user ID and password and identi es whether or not the inventory
levels are low. He has read-only access to the inventory le. He
inspects the existing process costing schedules to identify if the
company requires the item of inventory being requisitioned in order
to ful l orders for the next three months. If he identi es that a
need does exist, he digitally authorises the requisition and it is
moved to an approved requisition le.
A noti cation of the approved requisition is sent to a buyer in the

buying department who logs onto the system and inspects the
approved requisition. The buyer contacts three suppliers on the
approved supplier list for quotes and requests them to email the
quotes to [email protected]. Once the three quotes are
emailed to the buyer, he scans them and loads them onto the
buyers system. He inspects the quotes and determines the one
which best meets the company’s need. He completes an electronic
purchase order on the buying system which is sent to the chief
buyer for approval. The chief buyer logs onto the system and
inspects the purchase order. He compares it with the three
scanned quotes and approved electronic requisition, and once he
is satis ed, he digitally authorises the purchase. The buyer
receives an email noti cation that the chief buyer has approved
the purchase order and that the order can be placed by the buyer
with the supplier via email.
Receiving of goods
The goods are delivered to the goods receiving area of the
warehouse. On arrival of the goods at the warehouse, the goods
receiving clerk asks the driver for the company name and
purchase order number. He logs onto the system with his mobile
tablet computer by using his unique user ID and password. He has
read-only access to the purchase order. He pulls the purchase
order up on the mobile tablet computer and proceeds to receive
the goods being delivered.
Once the goods are of oaded, the goods receiving clerk counts
the goods and inspects them to see if they are damaged and if
they agree with the purchase order.
The goods receiving clerk prepares a delivery note on his mobile
tablet computer and both he and the driver sign it. Once the
delivery note is signed, a noti cation is sent to the credit clerk
stating that the goods have been delivered. The email address to
which the buyer sent the purchase order is immediately emailed
with a copy of the goods receiving note.
The goods are moved from the receiving area to the storage
section of the warehouse. A transfer request is signed by the
goods receiving clerk and the warehouse clerk on the goods
receiving clerk’s tablet after they have both counted the items
being transferred.
Once the goods are stored in the warehouse, the manager who
requested the inventory is informed by the warehouse clerk that
the inventory is available and can be collected. The goods are
transferred to production after the manager requesting the goods
and the warehouse clerk count the goods and sign the transfer
request on the warehouse clerk’s mobile tablet device.
Recording of creditors
Once the creditors clerk receives an email noti cation that the
goods have been received, he/she logs onto the system to view
the goods received note. He/she has read-only access to the
inventory system.
He/she compares the goods received note, the approved

purchase order, the approved requisition and the invoice for any
inconsistencies and signs the invoice as proof that he/she has
compared the documents. The creditors clerk re-performs the
calculation on the invoice and initials the invoice prior to recording
the purchase on the system.
Where the detail on the invoice is different to the detail recorded

on the goods received note, the client is contacted via email to
nd out why the difference arose. If the client is adamant that the
invoice is correct, the difference is placed on the creditor
reconciliation as a reconciling difference.
The purchase is recorded on the system by the creditors clerk and

reviewed by the nancial accountant, who digitally authorises the
process.
Payment of creditors
The creditors clerk performs a monthly creditors reconciliation.
The creditors reconciliation and the invoices to be paid are handed

to the accountant for review. The accountant inspects the invoices
and re-performs the logic of the reconciliation and signs the
reconciliation as proof of the checks that he performed.
The company has a policy of only making payments to suppliers

via electronic funds transfer.
The nancial accountant loads all suppliers that the company has
had dealings with for more than three months as approved
bene ciaries on the company’s bank account. The chief nancial
of cer reviews the bank details of all bene ciaries that the
nancial accountant has loaded onto the company’s electronic
funds transfer (EFT) account by inspecting the documentation (e.g.
original bank letter) used by the nancial accountant.
Once she approves of the details, they are stored on the

company’s EFT account. She les a report on a weekly basis,
which she signs, indicating all new bene ciaries.
The nancial accountant loads all of the payments on the

company’s bank account. The chief nancial of cer reviews and
approves the payment after she checks a sample of the
documentation (e.g. creditor’s reconciliation and invoices). She
signs off the documentation she has reviewed.
She hands all of the supporting documents back to the creditors
clerk for ling purposes.
REQUIRED
Identify the key internal controls for the purchases and payments cycle
included in the above system description and design the appropriate
audit tests to determine whether or not the control is functioning as
indicated by management.
[30]
Question 14 LEVEL 2
Tests of controls
[17 marks]
You have been the external auditor of Olympus (Pty) Ltd (Olympus),
manufacturers of Greek statues, since the incorporation of the company
ve years ago. e company’s year-end is 30 September. e company’s
purchases and payments system operates as follows:

Production area; Production Once he has determined what
purchases foreman; raw materials (or products) are
department purchases needed, the production foreman
clerk; prepares a pre-numbered
purchases purchase requisition. When
manager approved, the requisition is sent
to the purchases department,
where a purchases clerk prepares
a pre-numbered purchase order in
triplicate. The purchases
manager sequence checks the
order before signing it. The top
copy is sent to the receiving
department, while the third copy
is led with the requisition.
The purchases clerk, who is
responsible for checking the
invoices, agrees the prices and
terms to the original order, and
con rms the quantities against
the GRN. He checks the
calculations and additions on the
invoice, whereupon he initials the
invoice, which is sent to the
payments department.
Receiving Receiving Once the raw materials have
department clerk been received, the receiving clerk
checks the purchase order and
the quality of the goods
delivered, and compares the
details of the order against the
physical inventory. Thereafter, he
prepares a pre-numbered GRN in
duplicate. He also signs the GRN,
one copy of which is sent with the
goods to the storeman, while the
other is returned to the
purchases department.
Mail room Clerk On receipt of the invoice, the mail
room clerk sends it directly to the
purchases clerk in the purchases
department.
Payments Purchases The invoice is recorded by the
department clerk; clerk in the purchases journal
accountant; and led according to the due
nancial date, at which time the
director accountant issues a number of
pre-numbered blank cheques, as
required, to the payments
department.
When the cheques have been

made out, the related invoices
are stamped as having been paid
and are handed, together with the
cheques, to the accountant, who
checks the sequence of the
cheques as well as whether all
invoices have been marked
‘paid’. A cheque-signing machine
then signs the cheques in the
presence of the nancial director.
Accounting Clerk The cheques are handed to the
department accounting department, where
the clerk records them in the
payments journal. Thereafter, they
are sent back to the payments
department, where the payment
date and the cheque number are
recorded in the purchases journal
next to the entry of the relevant
invoice.
REQUIRED
Formulate the tests of controls that you will perform relating to the
purchases and payments system for raw materials and/or goods.
[17]
Question 15 LEVEL 2
Test of controls and control objectives
[13 marks]
Pinefresh (Pty) Ltd (Pinefresh) is a large wholesaler of commercial and

household cleaning products. e company is audited by GPT Inc.,
which is currently planning the audit of Pinefresh’s 20X1 nancial year.
Below is an extract from a system description prepared and updated
by a GPT Inc. staff member. It pertains to the purchases cycle at
Pinefresh. All key controls are in bold.
Extract
When goods are received from suppliers at Pinefresh’s central

warehouse, the receiving clerk on duty prepares a goods received
note (GRN) regarding the quantity, description and quality of items
received. The GRN is made out sequentially and in multiple
copies, one of which is sent to the accounting department
together with a copy of the supplier’s delivery note.
On a regular basis, a bookkeeper in the accounting department

records purchases in the purchases journal from the details
contained on the GRN. On a weekly basis, the assistant accounting
manager (AAM) reviews the purchases journal to:
check the sequence of the GRNs and to follow up on missing
numbers
ensure a purchase order exists for the purchase entry
perform a check on a sample of purchase entries by comparing
the recorded details to the supporting GRN and supplier delivery
note.
Upon nalisation of the above review, the AAM signs the

purchases journal below the last purchase entry reviewed.
At the end of each month, the bookkeeper posts the totals in the
purchases journal to the general ledger account for creditors and
purchases. The bookkeeper also performs a reconciliation
between the total balances as per the creditors ledger and the
creditors control account in the general ledger. The AAM reviews
the reconciliation and signs it as evidence of the review having
taken place. According to the AAM, he signed only 10 of the 12
reconciliations during the 20X1 nancial year, even though he
reviewed them all.
For each supplier in the creditors ledger, a second bookkeeper

performs a supplier statement reconciliation between the
statement from the supplier and the balance owing as per the
creditors ledger. Each reconciliation is then signed by the AAM as
evidence of his having agreed the respective balances to the
statement and creditors ledger and having scrutinised the
statement for any unusual items.
REQUIRED
For each key control in the scenario (bold), formulate the audit
procedure the auditor should perform to test the control. For each test
of control, also state the control objective(s) being addressed by the
procedure.
[13]
INTRODUCTION
Refer to the guidance and the example questions contained in Chapter

6, as the principles and the approach remain the same.
QUESTIONS
Question 1 LEVEL 1
Purpose and control objectives
[11 marks]
Bicyclycy (Pty) Ltd (Bicyclycy), a company that manufactures mountain

bikes, stores parts (chains, wheels, etc.) ordered from different suppliers
in the raw material warehouse. e assembly factory requests parts
from the raw material warehouse as and when needed. Assembled
mountain bikes are transferred in batches of 20 from the factory to the
nished goods warehouse.
REQUIRED
1. Discuss the purpose of the inventory and production cycle. (2)
2. List and discuss the control objectives of Bicyclycy’s inventory and
production cycle. (9)
[11]
Question 2 LEVEL 2
Control objectives
[8 marks]
Below is a list of controls that could be implemented by the

management of various businesses to design a system of internal
control in the production and inventory cycle:
1. Counters should have clear instructions to keep obsolete, damaged
or slow-moving inventory separately.
2. Branch managers must place an order at the central inventory
warehouse by making use of a pre-printed standard order form.
3. With dispatch, the security guard must compare the items being sent
with the information according to the delivery note and should not
allow any items that do not appear on the documentation to leave the
premises.
4. e staff’s personal belongings must be examined when they leave
the premises.
5. Logs are kept for all changes to the inventory master le.
6. e warehouse reviewer and the branch managers, respectively, must
review the number sequence of order and delivery documents and
follow up on missing numbers.
7. Suppliers should be informed that an inventory count is taking place
on that speci c day and, where possible, goods should not be
delivered that day.
8. When the branch manager receives the goods, he/she must compare
the quality and quantity of the items with the delivery note and order
form, and initial/sign as proof of duty performed.
9. e storeroom must only have one entrance. Any doors or windows
on the outside must have security gates/be closed with iron bars.
10. A price master le should be created on which the current sales price
of each inventory item is stored (per inventory code).
REQUIRED
For each of the internal controls stated above, list the main control
objective achieved by each.
[8]
Question 3 LEVEL 2
Functional areas
[10 marks]
Maiza (Pty) Ltd (Maiza), a South African company that buys maize from
farmers, stores the cereal in silos before it is transferred to the mill. Mr
Grain is responsible for determining how much maize needs to be
bought from farmers, as well as when maize has to be milled and the
quantities involved in each operation. Once the maize has been
processed, the meal is poured into bags, which are then transferred to
the warehouse, where they are stored awaiting transportation to Maiza’s
customers.
REQUIRED
1. List the six functional areas of Maiza’s inventory and production
cycle. (5)
2. For each functional area listed, describe how it is applied at Maiza.
(5)
Note: Answer the questions in a tabular format.
[10]
Question 4 LEVEL 2
Weaknesses
[13 marks]
Candlelight (Pty) Ltd (Candlelight), which has a 30 June year-end, asked

you, as an external consultant, to review the company’s year-end
inventory count procedures.
During the count, you noted the following:

Candlelight has a large warehouse and an inventory value in terms of
quantities. As a result, only the high-value items, which constitute
80% of the total inventory balance, have been selected to be counted.
During the month of May, the company’s inventory management
team had a planning meeting for the year-end inventory count. At
this meeting, they discussed:
– the date of the count
– the staff who would be performing the count
– who the inventory count controller, the supervisor and the
counters would be
– the stationery required for the day of the count.
All this information was printed and prepared prior to the count.
During the inventory count, which took place on 1 July:
– inventory was despatched for delivery to customers and deliveries
were accepted by suppliers
– the inventory count controller issued the three count teams
(made up of two members each) with pre-numbered count sheets
for the selected inventory to be counted
– each team counted the selected inventory items twice
– one team member physically counted the inventory, while the
other recorded in pen the quantity counted
– for the second count, they exchanged tasks
– in order to enhance the controlling of the two counts, the count
sheets were designed to allow for both counts to be entered onto
the same sheet
– all goods were tagged as evidence of their having been counted.
After the count had been completed, the inventory count controller
sent the count sheets to the inventory administration clerk for
capturing and comparison with the inventory system. If variances
were found, the teams were noti ed and sent back to recount the
relevant inventory item(s).
REQUIRED
Identify the weaknesses in internal controls of the inventory count
evident from the notes that you made.
[13]
Question 5 LEVEL 2
Risks
[10 marks]
Stallion (Pty) Ltd (Stallion), a company manufacturing catalytic

convertors for an international motor vehicle company, has its factory
in Cape Town. Once the convertors have been manufactured, they are
shipped free-on-board from Cape Town to the US.
e two key components of the cost of the convertors are:
1. the steel, the price of which uctuates weekly
2. labour (there has been labour unrest in the motor manufacturing
sector over the last few years, which has put pressure on the
industry).
Inventory is held until a shipping container has been lled, which is

done under the terms of Stallion’s agreement with its American
customer in order to keep their transportation costs down. However, the
customer charges warehouse rental for the storage and security of the
goods up until the convertors are loaded onto the ship.
REQUIRED
With reference to the information provided:
1. list all possible risks that Stallion could face with regard to the
manufacture and sale of convertors to its foreign customer (7)
2. list all possible risks that the foreign customer could face with regard
to the purchase of convertors from Stallion. (3)
[10]
Question 6 LEVEL 2
Weaknesses and risks
[8 marks]
Flower Power (Pty) Ltd (Flower Power), a wholesale company based in

Cape Town that sells arti cial owers and arrangements to companies,
buys its raw materials in bulk. Owing to staff shortages, the company’s
procurement process currently has a backlog of three months. Orders
are placed without supporting documents when the procurement clerk
contacts suppliers telephonically for orders below R100 000. In terms of
Flower Power’s procurement policy, the procurement clerk is allowed to
contact a single supplier.
Goods are delivered to Flower Power’s central warehouse, which has
a secure receiving area. Once they have been offloaded, they are left in a
demarcated area until a purchase order has been loaded by the
procurement clerk. is allows the goods to be loaded onto the
inventory management system by the warehouse manager.
Flower Power has increased its standing in the market as a result of
the competitive prices it pays to suppliers, which allow them to sell their
manufactured goods at attractive prices. As the company aims to be the
leader in the market, it would like to tighten up all its internal controls.
REQUIRED
1. Identify the internal control weaknesses evident from the information
provided above. (6)
2. With reference to the weaknesses identi ed, describe the risk of
material misstatement for the accuracy, valuation and allocation
assertion of inventory. (2)
[8]
Question 7 LEVEL 2
[15 marks]
You are the auditor of Renewable Energy (Pty) Ltd (RE). RE is a

manufacturer of renewable energy products such as solar products and
heat pumps. Management has asked you to review the system of
internal control. While doing walk-through testing, you compiled the
following system description:
1. e sales director informs the production manager on a Friday
afternoon of which products sold well during the previous week.
Based on this, the production manager allocates responsibilities to
the production department.
2. e raw materials used to produce the products are kept in the raw
materials warehouse. e raw materials warehouse has a head
storeman and two other storemen working there. Whenever raw
materials are needed for production, the production foreman
requests the items with verbal or written authorisation.
3. No perpetual inventory records are kept, but monthly inventory
counts are done. You attended one of the inventory counts and were
satis ed with the controls surrounding the inventory count.
4. A re-order level has been set for each product. e head storeman of
the raw materials warehouse compares the inventory count sheets
with the re-order levels. If the inventory according to the count is less
than the re-order levels, then a pre-numbered purchase requisition is
prepared by one of the storemen and signed by the head storeman
and then sent to the purchases department.
REQUIRED
List the shortcomings in the system of internal control and make
recommendations to improve the purchase, receipt, storage and issue
of raw materials.
Weaknesses Recommendations
[15]
Question 8 LEVEL 2
[13 marks]
Candlelight (Pty) Ltd (Candlelight) will be conducting a year-end
inventory count for the rst time. e company has brought you in as an
external consultant to review its year-end inventory count procedures.
Candlelight has a 28 February year-end.
Planning meeting
During the month of February, before year-end, Candlelight’s inventory
management team had a planning meeting for the year-end inventory
count. e following is discussed during the planning meeting:
When the count will take place
e staff that will be performing the counts
Who will be the inventory controller
e stationery required for the day of the count
Candlelight has a large warehouse in terms of oor space, and it has a

large quantity of inventory. As a result, only the high value items are
selected to be counted, which constitute 80% of the total inventory
balance.
Inventory count
e inventory count takes place on 1 March. On the day, inventory is
still being dispatched out for deliveries to customers and deliveries are
being accepted from suppliers.
e inventory count controller issues the three count teams (made
up of two members each) with count sheets on the selected inventory to
be counted. Each team counts the selected inventory twice. Each team
member gets a chance to count the inventory while the other team
member does the recording.
e count sheets are designed to allow for both counts to be
counted on the same sheet so that the count can be better controlled.
All inventories are tagged as evidence of their having been counted by
the count teams. After the count is completed by the team, the
inventory count controller sends the count sheets to the inventory
administration clerk to capture and compare to the inventory system. If
variances are found, the team is noti ed of the variances and is sent
back to recount the inventory items.
REQUIRED
1. Identify the weaknesses in the internal controls for the inventory
count. (4)
2. Recommend improvements to the internal controls for the inventory
count procedures. (9)
[13]
Question 9 LEVEL 2
Recommendations
[21 marks]
Glister Ltd (Glister), a company manufacturing gold and diamond

jewellery for retail stores, has a standard catalogue from which such
stores can order jewellery. Appointed as the internal auditor of Glister,
you have been assigned the responsibility of reviewing the company’s
internal controls over the order, receipt, storage and issue of gold and
diamonds (raw materials only). You have received the following notes
on the current system:
Glister has three vaults:

Vault One (referred to hereafter as ‘the store’) is used for the
storage of raw materials. e store’s staff, all of whom are trained
in the handling and the safekeeping of gold and diamonds,
consists of one supervisor and four assistants. Raw materials are
removed from the store only upon the verbal authority of one of
the production foremen.
Vault Two is used for the storage of work in progress, when the
jewellers are not working on a speci c piece.
Vault ree is used for the storage of nished goods until they are
dispatched to retail stores.
Because inventory levels are low, no perpetual inventory records are

kept, and the staff do not keep records of gold and diamonds
received or issued. A monthly physical inventory count is carried out
in order to compensate for this. Procedures for this count are
effective and reliable.
After the physical count, the store supervisor compares quantities
counted against a predetermined order level. If the count for a given
item is below that level, the supervisor enters the inventory code on a
pre-numbered requisition list, which he then sends to the accounts
payable clerk, who prepares a purchase order for a pre-determined
order quantity for each item before emailing the purchase order to
the supplier from whom the item was last acquired.
When gold and diamonds ordered are delivered, they are
received at the store by any available staff member. ey then count
the gold and diamonds and agree the quantity to the supplier’s
delivery note, which is initialled, dated and led in the store in case
of a dispute.
REQUIRED
Make recommendations in order to mitigate the weaknesses in the
ordering, receiving, storage and issuing of gold and diamonds (raw
material only). Do not list the weaknesses.
[21]
1. Ordering
a) e pre-determined order levels should be reviewed regularly by a
senior staff member so that no under- or overordering takes place.
b) Prior to requisitions being made, store or production staff (1)
should con rm that the inventory (gold or diamonds) is
really needed. (1)
c) A buying function should be established in order to ensure that
inventory of the highest quality, and at the best prices, is ordered.
d) e company should have an approved suppliers list to (1)
which the buyer should refer when ordering. (1)
e) Even when ordering from an approved supplier, the buyer should
contact the supplier in order to con rm availability and delivery
dates. (1)
f ) All requisition lists and purchase orders should be authorised by a
senior staff member. (1)
g) Before the order is placed, a supervisor or senior buyer should:
i) compare the order to the requisition list for accuracy and
authorisation (1)
ii) review the order for suitability of supplier, reasonableness of
price, quantity and the nature of the goods on order. (1)
h) e ordering department should le the requisition lists
sequentially and review frequently the les for requisitions that
have not been cross-referenced to an order. (1)
i) A copy of the order should be led sequentially, checked and
frequently cross-referenced to goods received notes in order to
con rm that either:
i) goods ordered have not yet been received; or
ii) the pending le of orders in the receiving area have been
reviewed for long-outstanding orders. (1)
2. Receiving
a) One of the stores staff (receiving clerk) should be given the task of:
i) con rming inventory received. (1)
ii) preparing a goods received note based on the actual goods
received as indicated on the delivery note. (1)
He/she should not be involved in any recording functions. (1)
e receiving of goods should be designated to a goods receiving
b) section that should be physically secure and have proper access
controls. (1)
c) A copy of the purchase order should be sent to the goods receiving
section so that it can con rm that goods received have in fact been
ordered before receiving the goods. (1)
d) When receiving goods, the receiving clerk should inspect their
quality and compare the quantity and the description of the goods
to the delivery note. (1)
e) Suppliers’ delivery notes and GRNs should be forwarded to the
creditors clerk as evidence that inventory being paid for has been
received. (1)
f ) On the transference of the goods to the store, the stores clerk
should compare the physical goods to the goods received note,
acknowledging receipt by signing the GRN. (1)
3. Storage
a) Perpetual inventory records should be maintained so that physical
counts can be compared to the theoretical records. (1)
b) Receipts and issues of inventory should be entered into these
inventory records. (1)
c) Inventory counts should be carried out frequently by the stores
staff, together with an independent person; shortages and
surpluses should be reported to, and investigated by,
management. Inventory cards should then be adjusted
accordingly. (1)
d) One of the stores staff (or an independent staff member) should be
given the task of maintaining the perpetual inventory, and should
have no responsibility for either the receiving or the counting of
inventory. (1)
4. Issues
a) No issues should be made without a written issue note authorised
by one of the production foremen. (1)
b) A copy of each issue note should be forwarded to the costing or
accounting department for production records. (1)
5. General
a) Purchase orders and issue notes should be pre-numbered. (1)
b) e sequence of all purchase orders and issue notes should be
accounted for. (1)
Notes:
e starting point for answering a recommendation question, in
which the weaknesses are not required, is rst to identify the
weaknesses (but you do not have to include them in your answer)
and then to formulate recommendations to address the identi ed
weaknesses.
An important aspect is the way in which a recommendation is
formulated. You will see that each of the recommendations listed
above contain the word ‘should’.
Question 10 LEVEL 2
Key controls
[4 marks]
You are the audit senior on the audit of Canfruta Ltd (Canfruta), a
company that cans fresh fruit bought directly from farmers. e
company distributes the cans to numerous retail shops across South
Africa.
A rst-year articles clerk has summarised the controls over inventory at

Canfruta, but is unsure which controls are key and which are not. Below
is an extract from the summarised controls:
Extract
CONTROL
1 All access to the computerised inventory system is controlled
with unique user ID codes and passwords.
2 All inventory documents (manual or computerised) are pre-
numbered.
3 Canfruta has a 24-hour call centre, which handles queries
relating only to when orders can be expected to be delivered,
available to its customers.
4 All inventory items are counted monthly and the actual quantity
at hand is compared to the quantity per the perpetual inventory
records. Any discrepancies are followed up and corrected, if
necessary.
5 All amendments resulting from the inventory count (refer to
control 4) are lled out on an inventory amendment form
authorised by the warehouse manager before being captured
by an independent administrative clerk. All amendments to the
inventory le are followed up by the inventory warehouse
manager.
6 Canfruta’s delivery system determines the most cost-effective
route for each delivery.
7 When information is captured onto the inventory system,
appropriate edit checks are performed on the data being
captured.
REQUIRED
Identify ve key controls from the summarised list provided above.
[4]
Question 11 LEVEL 3
Purpose and tests of controls
[25 marks]
You are the senior auditor on the audit of Utensils (Pty) Ltd, a mining
company that manufactures a wide range of eating utensils. e
company is located in Durban and has a December nancial year-end.
During the planning phase of the audit, the following internal control
questionnaire was used to gain a better understanding of the internal
controls in place at the client:
Internal control questionnaire
NUMBER QUESTION PERSON RESPONSE

TO WHOM
THE
QUESTION
WAS
POSED
1 How do you Mr Rabotli We perform random
ensure that (factory searches on
employees manager) employees on a daily
will not steal basis.
inventory?
TO WHOM
THE
QUESTION
WAS
POSED
2 How does the Mr Rabotli Both Mr Meyer, the
company (factory storage manager,
ensure that manager) and I inspect the raw
the correct materials to be
raw material transferred and sign
requested by the raw materials
the transfer document
production as proof that we
manager is agree with the
transferred amount transferred.
from raw
material
storage to
the
production
facility?
TO WHOM
THE
QUESTION
WAS
POSED
3 How do you Mr Johnson Ms Brittany, the
ensure that ( nancial inventory clerk,
the perpetual accountant) processes a journal
inventory entry after each
records are transfer of inventory,
accurate and which updates the
kept up to perpetual inventory
date? records. I compare
the journal entry with
the transfer
documentation, after
which I sign off the
journal entry as
proof that I have
reviewed the journal
entry processed.
TO WHOM
THE
QUESTION
WAS
POSED
4 How does the Mr Johnson Ms Coetzee, the
company ( nancial cost accountant,
ensure that accountant) performs a
the cost of calculation of the
the utensils raw material, labour
accounted for and overheads to be
in the allocated to the
accounting inventory at the end
records is of each month. I
accurate? review the
calculation by
checking it to the
supporting
documents and the
assumptions used,
and sign the
calculation off as
evidence that I have
inspected the
accuracy thereof.
TO WHOM
THE
QUESTION
WAS
POSED
5 How do you Mr Johnson Ms Coetzee
ensure that ( nancial prepares a journal
the journal accountant) entry based on her
entries calculation and I
processed to compare the actual
update the costs to budgeted
inventory costs and follow up
account are on material
accurate and differences, after
reasonable? which I sign off the
journal entry as
proof that I agree
with the accuracy
and reasonableness
of the journal entry
processed.
Mr Samson We conduct monthly
(count and year-end
controller) inventory counts.
Mr Samson We give the team an
(count instruction list and
controller) have a brie ng
session indicating
what to do during
the inventory count.
TO WHOM
THE
QUESTION
WAS
POSED
Mr Samson Counters are
(count required to sign the
controller) count sheet register
when they receive
the count sheet and
when they return it.
All count sheets are

numerically
sequenced and I
check the numerical
sequence of all
count sheets at the
end of each count.
TO WHOM
THE
QUESTION
WAS
POSED
Mr Samson Each inventory item
(count is counted by two
controller) counters.
Each counter
records the amount
that he/she has
counted on the
count sheet and the
two counters both
sign the count sheet
as proof that they
agree with the
amount recorded on
the count sheet.
Inventory count
supervisors perform
spot checks on a
sample of inventory
items and follow up
on differences
noted.
TO WHOM
THE
QUESTION
WAS
POSED
10 Mr Samson Mr Abrahams, the
(count nancial manager,
controller) reviews the reasons
for the adjustments
and signs off the
adjustment sheet as
proof that he agrees
with the adjustment
to be processed.
REQUIRED
For each internal control documented above, list the purpose of the
control (mentioned in the response column) and describe the test of
control that you would perform to determine if the control is working as
intended by management.
[25]
Question 12 LEVEL 3
Tests of controls
[20 marks]
You are the audit manager responsible for the audit of Dreamwedding
Ltd (Dreamwedding), a company founded by wedding co-ordinator,
Jane Love, when she realised that South Africa did not have a one-stop
shop to assist brides and grooms in planning and organising their
dream weddings.
One of the audit team members has prepared the following list of
controls that the company has implemented:
Working Paper P2
LIST OF KEY CONTROLS

1 All inventory orders must be authorised by the manager of the
department requesting the order, using his/her user ID code
and password, before it can be processed. Any order
exceeding R20 000 must be authorised online by the senior
buyer.
2 When goods are received, both the quality and the quantity
have to be checked. A hand-held scanner is used to scan the
barcodes on all the items in order to generate a goods
received note for the items accepted.
3 A goods received note can be generated by the system only if
the inventory received can be linked to an authorised order
(using the order number as reference).
4 As soon as the goods received note has been captured, the
system automatically posts a journal entry for the liability
against the creditor’s account in the creditors ledger as well
as one for the asset in the inventory ledger.
LIST OF KEY CONTROLS
5 All manual journals (not system generated) required (such as
for corrections, write-offs, etc.) must be accounted for on an
of cial pre-numbered journal requisition, and supporting
documentation must accompany the requisition which,
together with the supporting evidence, must be inspected and
signed by a manager as proof of authorisation. The journal
requisition and supporting evidence are led sequentially
according to the journal requisition number.
6 All access to the system is regulated by speci c user ID codes
and passwords. Not all users have the same access rights to
the system.
7 All inventory items are counted at least once a month
a) following counting procedures as set out in the entity’s
inventory count manual. Inventory count sheets are signed off
by the counting team once they have been completed and are
then read into the inventory system before being led
according to date.
7 The system then generates an exception report of differences
b) between the actual inventory counted and the quantity
recorded on the system. Management follows up on all
differences and corrects quantities where necessary. All steps
taken are documented on the exception report, which is led
according to date.
REQUIRED
Describe a maximum of two tests of control you would perform in order
to test the operating effectiveness of each of the controls identi ed in
Working Paper P2.
[20]
Question 13 LEVEL 3
Control objectives, key controls and tests of controls
[24 marks]
You are an audit manager assigned the responsibility of evaluating the

inventory system of MasterCake (Pty) Ltd (MC), a company that bakes
and distributes biscuits in the Gauteng region. You have received the
following document from the company’s internal audit department
listing some of its inventory controls:
CONTROL
1 Fixed re-order levels are set for all inventory. The warehouse
manager reviews these levels regularly.
2 Before the ordering department places any orders, it con rms
that they are goods ( our, eggs, etc.) generally used by MC.
3 The buying department obtains two quotations from authorised
suppliers before any order is placed.
4 The ordering department les requisitions sequentially and
frequently reviews the le for requisitions that have not been
cross-referenced to an order.
5 Computerised perpetual inventory records are maintained.
6 No issuing of inventory from the warehouse to the bakery takes
place without an authorised issue note, all of which are led
numerically in the warehouse.
7 All documents utilised in the inventory system (such as
purchase orders and issue notes) are pre-numbered. The
computerised system generates a weekly report of any missing
or duplicate numbers. This report is followed up by the head
accountant on a weekly basis, signed as proof of his having
performed the control and led according to date.
CONTROL
8 Whenever an employee performs a control procedure on a
document (e.g. compares quantities on the delivery note to the
actual quantity), the employee responsible for the control signs
the relevant document.
REQUIRED
1. For each control mentioned above, list and explain the control
objectives MC’s management is attempting to achieve. (15)
2. Indicate for each of the controls listed above whether it is a key
control. Provide an explanation for each of your answers. (6)
3. Describe two tests of controls that the audit team could perform on
each of the key controls identi ed above. (3)
[24]
INTRODUCTION
Refer to the guidance and example questions contained in Chapter 6, as

the principles and the approach remain the same.
QUESTIONS
Question 1 LEVEL 1
Risks
[15 marks]
After months of deliberation, you have decided to start an auditing

practice with two friends with whom you studied at university, after
which each of you completed your training contracts at different audit
rms in South Africa. All of you are chartered accountants who have
recently registered as auditors with the Independent Regulatory Board
of Auditors. Your new rm’s rst assignment involves assisting a non-
audit client with the design of an internal control system for their
human resources cycle. You have decided the best approach is to
identify the risks in this cycle and thereafter to develop internal controls
in order to mitigate these risks.
REQUIRED
Identify the risks involved in the human resources cycle.
[15]
1. Dishonest, lazy or incompetent workers could be employed, resulting

in fraud, errors and inefficient operations which could lead to
nancial losses. (1)
2. Family members could be employed, thereby disadvantaging more
quali ed (and/or more suitable) candidates, resulting in inefficient
operations and in effect less pro t. (1)
3. Fictitious workers could be added to the payroll, resulting in the
salaries account being misstated. (1)
4. Incorrect dismissal procedures might be followed, resulting in law
suits which could lead to nes and penalties as well as reputational
damage. (1)
5. e company could contravene labour legislation, resulting in law
suits which could lead to nes and penalties as well as reputational
damage. (1)
6. Unauthorised amendments such as salary adjustments could be
made to employee records, resulting in the salaries account being
misstated. (1)
7. Details in employee records (e.g. the amount of leave taken) might be
inaccurate or incomplete, resulting in labour disputes which could
cause reputational damage. (1)
8. Wage or salary payrolls might not be reconciled from the previous
pay-out to the next, resulting in unauthorised people being paid and
the salaries account being misstated. (1)
9. Invalid hours might be recorded on the clock-card system and paid
out, resulting in the salaries account being misstated. (1)
10. e hours registered on the clock cards might have been inaccurately
calculated and captured, resulting in the salaries account being
misstated. (1)
11. e calculation of the payroll might be incorrect (if, for example, the
incorrect salary or rate per hour is employed), resulting in the salaries
account being misstated. (1)
12. Security might be lacking when cash is drawn or paid out, resulting in
theft and nancial losses. (1)
13. Cash could be stolen as a result of a poor segregation of duties,
leading to nancial losses. (1)
14. Unclaimed wages could be misappropriated, resulting in nancial
losses. (1)
15. Deductions from salaries might be incorrectly made, or deductions
payments not made promptly, resulting in nes and penalties and
reputational damage. (1)
16. e company might not have all its employees’ permissions on le for
all the non-standard deductions to be made, resulting in labour
unrest and reputational damage. (1)
17. e payroll printout might not be properly approved before payments
are made, resulting in payments to ctitious employees and
subsequent misstatement of the salaries account. (1)
18. Security surrounding payroll records, which contain sensitive
information, could be lacking, leading to sensitive information being
disclosed and resulting in labour unrest and reputational damage.
(1)
Note:
e risks included above are generic risks, as no case study was
provided. If a case study is provided, the risk will relate to the
weaknesses identi ed in the case study. In addition, each of the risks
contains a consequence (leading to …, resulting in …).
Question 2 LEVEL 2
Risks
[23 marks]
You are the auditor of Lbw Engineers (Pty) Ltd (Lbw Engineers), a civil
engineering company whose head office is located in Cape Town. Lbw
Engineers employs 1000 employees in various capacities. e following
information was obtained during a walk-through, which you
conducted, of the payroll cycle:
Appointments and employee bene ts

When managers identify that they need additional workers for a project,
they appoint individuals who they feel are suitably quali ed for the task
at hand. For the most part, appointments of this nature are done on a
project-by-project basis, but managers are delegated the power to
appoint employees on a full-time basis too. Once the appointment has
been made, the manager informs a human resources officer to prepare
a contract for the new employee using the terms agreed upon between
the manager and the new employee. All employees are placed on a
three-month probation period, irrespective of whether they have been
hired on a permanent basis or for a speci c project, unless the project
period is less than three months.
e employee is required to provide the human resources officer with

the following information:
A signed copy of the contract
A letter from his/her bank with bank account details
A certi ed copy of his/her identity document
Proof of address.
Once the employee has provided the documentation to the human

resources officer, the human resources officer then logs onto the payroll
system using his/her unique user ID and password. e human
resources officer proceeds to upload the new employee’s details on the
employee le.
All employees are expected to work a minimum of 40 hours per
week. Employees (with the exception of management) are permitted to
work up to 10 hours of overtime per week at their own discretion.
Employees have the option either to have the overtime paid out at the
end of the nancial year or to have it converted into paid days off. Each
employee accumulates leave at 1.25 days per month and is entitled to 3
days compassionate leave. e employee’s leave is carried over for a
maximum of one calendar year, after which the employee will lose the
days not taken.
e company pays 50% of the employees’ medical aid contributions
as well as 50% of their pension fund contributions. Management and
executives at the company qualify for a car allowance and an annual
performance-based bonus. All other employees are entitled to a 13th
cheque, which is paid in December. e employees can either have the
full 13th cheque taxed in December or they can opt to have the tax
deferred over the course of the 12 months. Employees are required to
sign a letter at the start of the year indicating how they want the tax to
be treated on their 13th cheque. Most employees opt to have the full
amount taxed at the end of the year as they feel that deferring the tax
implications over 12 months affects what they are able to do in their
personal lives on a monthly basis.
All changes made to employee les are made by the human
resources officer. e changes made are based on an instruction
received from the nancial manager via email in the case of salary
increases and special bonuses, and the returned letter from the
employees indicating how they would like the tax on their bonuses to be
treated.
Dismissal of employees
If a manager is not happy with the performance of an employee the
process followed depends on how long the employee has worked at the
company for:
If he/she has worked for three or fewer months, the manager has the
power to dismiss the employee with immediate effect.
If he/she has worked for four or more months, but not exceeding one
year, one weeks’ notice is required.
If he/she has worked for more than one year, two to four weeks’
notice is required, depending on the circumstances of the dismissal.
Once the employee has been noti ed of the dismissal, the manager
informs the human resources officer, whose duty it is to remove the
employee from the payroll register.
e human resources officer logs into the employees le and
changes the employee’s status from ‘active’ to ‘terminated’ and
identi es the employee’s last day of employment.
Calculation of gross amount to be paid

When an employee intends taking leave (e.g. annual leave, maternity or
paternity leave, or unpaid leave) during the month, the employee is
required to submit a request to take the leave on the leave system. e
employee’s manager receives a noti cation of the request and is
required to approve the leave prior to the employee taking the leave. In
the case of compassionate and sick leave, employees are required to
record the days that they were out of work on the system within two
days of being back at the office.
e system calculates the days worked for the month by deducting
the approved leave recorded on the system from the total number of
days that the employee was expected to work in the month. e system
then determines the amount to be paid by dividing the gross
remuneration that would have been paid if the employee worked for the
full month by the total number of normal days expected to be worked in
a normal working month, and then multiplying the answer by the actual
days worked as calculated by the system.
When employees work overtime

When employees work overtime, they are required to record their hours
on the payroll system by using their unique user ID and password. e
system automatically calculates the overtime to be paid to them for the
month by multiplying the overtime hours by 1.5, unless the hours were
worked on a Sunday or a public holiday, in which case the overtime
hours are multiplied by 2.
Amount to be paid to employees for the month

e system automatically identi es the deductions for each employee
from the employee’s personnel le and then reduces the gross
remuneration by the related deduction.
e senior human resources officer logs onto the system using
his/her unique user ID and password, and performs a spot check on a
sample of employees to determine if the gross remuneration and
deductions used in the determination of the amount to be paid is
correct. If the senior human resources officer agrees with the amount
calculated, he/she digitally authorises the payment, which results in an
electronic funds transfer being made to pay the employees.
Deductions to be paid over

e medical aid and pension fund contribution determined by the
company, which is checked by the senior human resources officer, is
paid over to the medical aid and pension fund on the same day that the
electronic funds transfer is made to pay the employees.
Pay-as-you-earn (PAYE), unemployment insurance fund and skills
development levy payments are made before the 7th day of the
following month. e human resources officer logs onto the company’s
e- ling pro le by using the company’s log-in name and password,
submits the EMP 201 tax return and immediately processes the
payment.
Pay slips are generated by the system and granted to employees on
the request.
REQUIRED
Describe the business risks affecting the payroll cycle at Lbw Engineers
(Pty) Ltd.
[23]
Question 3 LEVEL 2
Risk of material misstatement at assertion level
[12 marks]
You are the supervisor in charge of the audit of Victoria Falls (Pty) Ltd
(Victoria Falls) for the year ended 31 December. Victoria Falls
outsources its payroll services to LetsPay (Pty) Ltd (LetsPay). LetsPay is
a company that offers HR solutions to small and medium-sized
companies.
LetsPay was established by two university graduate students, Bob
and Rob. Both Bob and Rob are the directors of LetsPay and are
studying to become chartered accountants.
LetsPay was established and commenced with its primary mission
of offering payroll services just over a year ago. It is therefore still
establishing itself in the market. e company provides a range of
payroll services, including preparation of monthly payslips, payment of
salaries and duties related to the South African Revenue Service (SARS),
such as completion of taxation returns and payment of pay-as-you-earn
(PAYE), standard income tax on employees (SITE) and unemployment
insurance fund (UIF) amounts.
As part of a job creation campaign, Bob and Rob decided to appoint
mostly staff members who are part-time accounting or marketing
students still in the process of obtaining their degrees.
During your discussions with some of the staff at Victoria Falls, it
became apparent that:
Victoria Falls had to pay penalties on late payments of PAYE, SITE and
UIF to SARS as LetsPay did not meet the SARS deadline payment
dates
at the end of December, the staff members of Victoria Falls received a
bonus pay-out, but they complained that the taxation payable on the
bonuses was calculated incorrectly
one of the members at a well-known newspaper got hold of the
salaries and bonus amounts of the directors of Victoria Falls and
published these in a story on the front page
REQUIRED
1. Describe the risks of material misstatement at the assertion level
relating to the salaries balance in the statement of pro t or loss and
other comprehensive income for the year ended. (6)
2. For each risk described, identify the applicable assertion. (6)
A. B.
DESCRIPTION OF THE ASSERTIONS
RISKS OF MATERIAL
MISSTATEMENT AT THE
ASSERTION LEVEL
(1 MARK EACH)
RELATING TO THE
SALARIES BALANCE
(1 MARK EACH)
1.……………………………..…… .………………………….………
[12]
Question 4 LEVEL 2
[30 marks]
You are the senior auditor for a new client, Galv-Tanks (Pty) Ltd (Galv-
Tanks), a company specialising in the installation of galvanised storage
tanks built at the company’s warehouse in Blackheath. On completion,
the tanks are transported for installation by company personnel. Galv-
Tanks has a December nancial year-end.
e following extract of the systems description, compiled by the
second-year audit trainee and based on information obtained from Mr
Tank, the owner of Galv-Tanks (who is also the chief executive officer),
relates to the payroll function of the company:
Extract: System description – Human resources cycle
Employment of permanent employees

All permanent employees have contracts indicating the terms of
their employment with Galv-Tanks. The contracts are stored in a
drawer by Ms Steel, the person responsible for hiring
administration employees and for all remuneration-related tasks
(e.g. salaries and wages, and the Unemployment Insurance Fund
(UIF) and SARS calculations and payments) for both the salaried
and the wage workers at the company. Ms Steel matriculated two
years ago and is engaged to Mr Tank’s youngest son, who also
works for the company.
Mr Tank Snr has delegated the hiring of individuals to the following

people:
Ms Steel in the HR of ce
Mr Cooper in the warehouse
Increases
Mr Tank Snr and Mr Cooper determine the amount of each
employee’s bonus, which is paid in December, as well as the
amount of the annual increase to be awarded in the rst month of
each new nancial year.
The increased rate of pay and the annual bonuses to be paid are
emailed to Ms Steel by Mr Tank Snr, whereupon Ms Steel prints
the email and uses it in order to compile a document in which she
notes the new rate of pay for each individual. She uses this
document as the basis for calculating the amount to be paid twice
a month to wage employees. She prints the email and stores it in
the top drawer of her desk in order to allow for easy access.
Employees are informed of their rate increases in letters drafted

by Ms Steel and signed by Mr Tank Snr. Ms Steel places copies of
these letters into her desk drawer in case an enquiry should arise.
Although she sometimes misplaces signed contracts and rate

increase letters, she does have soft copies on her computer that
she can print out if an employee approaches her for one. Once she
has inserted Mr Tank Snr’s signature digitally, she has the
employee sign the copy of the contract.
The top drawer to Ms Steel’s desk does not have a lock.
Employment of temporary employees

At those times of the year when business picks up, the company
employs additional workers, if it is deemed necessary, in order to
ll increased orders. These employees are identi ed and
appointed by Mr Cooper, who at the start informs them verbally of
the length of their respective employment periods and their hourly
rates of pay. A large amount of overtime (as determined by Mr
Cooper) is normally worked during these busy periods.
On Mr Cooper’s request, these temporary employees provide him

with a copy of their ID documents, or their passports if they not
South Africans, all of which Mr Cooper stores in his desk drawer.
Normally he does not have time to draft their contracts until the
conclusion of their employment periods. They are not expected to
provide utility bills in order to prove where they live, as payments
are not deposited into their bank accounts, but made in cash
directly to the employees themselves.
Dismissal of employees
If an employee transgresses, it is documented in his/her
employee le. If the transgression is deemed not severe enough to
warrant immediate dismissal, he/she is given a written warning.
The company’s policy of issuing three written warnings within a
speci c time period before the termination of employment results
in the worker being red by either:
Mr Tank Snr in the case of permanent employees, or
Mr Cooper in the case of temporary employees.
A transgression is deemed to be anything that displeases Mr Tank

Snr or Mr Cooper.
Time-keeping: Warehouse employees

All employees are expected to work from 08h00 to 16h30. The
company’s clock-card machine ceased operating in June, since
when it has not been replaced. Mr Cooper considers the
employees so trustworthy that he is content to have them record
their times of arrival and departure manually on their clock cards
themselves.
In the event that a deadline needs to be met, employees are

expected to work overtime, which Mr Cooper is responsible for
authorising.
The clock cards for all employees, including Mr Cooper himself,
are placed at the entrance to the warehouse by Mr Cooper and
collected by him every Wednesday evening. He uses these cards in
order to perform the calculations of the total hours worked. He
puts out the new clock cards every Thursday morning.
Other information
The company has 35 permanent employees, eight salaried
individuals and 27 workers who receive their wages twice a month.
REQUIRED
Identify the weaknesses, as well as the consequences of each weakness,
in the human resources cycle described above.
[30]
Question 5 LEVEL 2
[38 marks]
You have been the partner in charge of the audit of Fishy Fisheries Ltd
(Fishy) for the last four years. e company has a substantial eet of
shing trawlers and processes sh in its factories on the West Coast. You
are currently engaged in the March 20X1 year-end audit of Fishy, and
have been presented with the following system description, prepared by
your audit team.
System description of Fishy

New workers are employed by the human resources department only
after interviews and background checks have been performed in order
to establish whether or not they are competent.
e shermen and factory workers receive their wages every Friday
afternoon. e captain of the trawler or the production foreman at the
factory pays out the cash wages of the workers working under his
supervision. e captains and the various foremen are paid a xed
weekly wage by way of EFTs from the company’s main bank account
using one of the terminals situated in the accounting department. Every
week, R5 is deducted from each worker’s wage for the end-of-year staff
party.
Each Monday, it being the start of the working week, the foreman or
captain hands blank clock cards to each of the workers under his
supervision. ese workers write their names and employee numbers
on the cards and use them for that working week. e clocking devices
are situated at the entrance to the factory. e shermen on the
trawlers, who receive the same kind of clock cards, clock in at the
harbour near where their clothing lockers are situated. Workers clock in
and out by inserting their clock cards into the clocking machine, which
then records times on the card.
e following Monday morning, the foreman or captain hands the
completed clock cards to the wages clerks, each of whom is responsible
for the wages of all the workers at the factory or on the trawlers
allocated to him/her. e wages clerks add up the total number of hours
worked per clock card and write the total on the relevant clock card, all
of which are then sent to head office where the clock card hours are
entered into the payroll le on the computer by one of the clerks in the
human resources section. In order to ensure completeness of
processing, clock cards are batched in groups of 25 during the capturing
process. e computer calculates each worker’s gross pay, his/her
deductions and net pay by using the latest wage rates and deductions
according to the information in the master le. A weekly wages report is
printed and led sequentially in the human resources department at
head office.
After the human resources manager has reconciled differences
between the current and the previous week’s wages reports, and
initialled the report, he prepares a cash cheque for the exact amount of
the week’s net wages. e cheque is then cashed by one of the
employees in the human resources department. e computer prints
pay envelopes (each bearing a worker’s name and employee number)
for all those being paid. Clerks in the human resources department ll
the pay envelopes with the cash due to each employee as per the wages
report. If there is money unaccounted for at the end, the pay envelopes
are double-checked by the clerks and corrections made. e pay
envelopes are then sealed.
On ursdays, the pay envelopes are collected by the production
manager, who then drops them off at the various factories and at the
harbour. On Friday afternoons, the pay envelopes are handed to the
relevant foreman or captain for the weekly pay-out. Each foreman or
captain then hands out the wages to the workers under his supervision.
Generally speaking, the foreman or captain calls the workers together
and reads out the names one by one. As soon as each employee has
received his/her wages, he/she promptly heads for the factory gate.
During the course of the year, a power failure occurred at head
office, which resulted in wages being paid three days late, on the
Monday instead of on the Friday. Since the workers were very unhappy
about the late payment, the accountant, Mrs Arendse, authorised an
additional R10 per hour payment to each worker for that week only. In
order to do this, the assistant accountant changed the pay rate per hour
by adding R10 for all workers onto the payroll master le. After the
payroll for that week had been nalised, the assistant accountant
changed the rate back to the normal rate per hour.
REQUIRED
Identify the weaknesses in the wages system as described and provide
an explanation for each weakness. Ignore unclaimed wages. Use the
following format for your answer:
WEAKNESS EXPLANATION

[38]
Question 6 LEVEL 2
[16 marks]
Payroll-Exact (Pty) Ltd (the company) is an IT company that specialises

in payroll outsourcing services. It is responsible for processing
electronic payments of wages and salary payrolls, including electronic
payments of employee taxes, medical aids and retirement bene ts
contributions to the respective third parties.
Interested clients provide the company with a password protected
csv le consisting of the client’s monthly payroll information such as
personnel details (name, surname, personnel numbers and bank
account details), monthly gross income and deductions. e company
charges 10% of the total gross income as its processing fee.
Upon receipt of the csv le, the customer relationship manager
(CRM) is responsible for unprotecting the le with a unique password
obtained from the shared drive. e csv le is then saved on the shared
drive. e CRM checks whether total gross income per the csv le plus
the 10% processing fee has been paid to the company’s bank account.
Once completed, he prepares a schedule of the lump sum payments to
be made to third parties for employee taxes, medical aids and
retirement bene ts contributions. is schedule along with the csv le
are sent to the nance manager.
e nance manager agrees the lump sum payments per the
schedule to the totals noted on the client’s csv le and makes EFT
payments to the respective parties. In addition, he uploads the csv le
onto their payroll software to load and pay net income to the client’s
employees. is payment run normally occurs at midnight.
e company has experienced two irregularities in the current year:

1. In preparing the monthly bank reconciliation, it was noted that the
amount per the bank statement was much less than the amount per
the bank account in the general ledger. On further investigation, it
was discovered that the client deposited an insufficient amount that
did not equate to the total amount paid by the company to the client’s
employees and third parties. e contract with this customer had
expired before the payments were made. e company’s efforts to
recover the shortfall from the client have been unsuccessful.
2. e company received an email from another client who complained
that ve of its personnel were not paid. A consultant was hired to
investigate this matter and discovered that the creditors clerk had
replaced the bank account details on the csv le with her own bank
account number. Unfortunately, the software does not check whether
duplicate payments are made to one bank account.
REQUIRED
Identify the weakness in controls implemented by management that
caused the company to experience the irregularities and recommend
how management can improve its controls.
[16]
Question 7 LEVEL 2
[32 marks]
You are the auditor on the audit of Framing Supplies (Pty) Ltd, a
company that manufactures a wide range of photo and painting frames
at their factory in Epping. e company has a December nancial year-
end.
Mrs Moodley, the chief executive officer, has requested that you
review internal controls that are in place over the payroll system, and to
make recommendations where the company can improve.
e following has been noted during a walk-through that you
performed at the company:
Time keeping and supervision

Employees gain access to the factory through two entry and exit points.
A foreman is present at each entry point from 7:15 am to 7:40 am in the
morning and at the exit point from 4:00 pm to 4:20 pm. e foremen are
required to attend a compulsory meeting from 7:45 am to 8:15 am each
morning and normally try to leave the premises by 4:30 pm to avoid
peak hour traffic.
Employees are required to complete an eight-hour working day,
unless they have decided to work overtime on a particular day.
Employees have the option of starting at either 7:00 am and working
until 4:00 pm, or 7:30 am and working until 4:30 pm.
Blank clock cards are placed in the employee clock card holder on a
Monday morning by Mrs Claasen, a payroll administrator. Employees
are required to ll in their unique employee number on the clock card
with a pen, which is located by the employee clock card holder. Mrs
Claasen makes sure that there are sufficient pens available for the 190
employees on a Monday morning.
Employees collect their cards and clock in at work on entry to the
factory, and they also clock out of work when leaving the factory in the
afternoon. Employees are not permitted to take their clock cards home
with them.
On days where an employee decides that he/she wants to work
overtime, he/she is required to leave the premises via the exit on the
north side of the factory. He/she is also required to clock out at that exit
point.
Mrs Claasen collects the clock cards at the end of each week and
hands them to Mr Jacobus in the payroll department.
Payroll preparation
Mr Jacobus logs onto the payroll administration system with his unique
user ID and password. He captures each clock card into the system
using the employee number located on the clock card. Where duplicate
employee numbers are identi ed, Mr Jacobus identi es an individual
for whom no clock card has been submitted and allocates one of the
clock cards to the individual who he believes wrote down the incorrect
employee number.
e system automatically calculates the gross remuneration of the
employee by using the hours captured (by Mr Jacobus) × rate tariff
(located on the employee’s le).
e system also automatically identi es the deductions to be made
from the employee’s gross remuneration and determines the amount to
be paid to the employee via electronic funds transfer at the end of each
fortnight.
Once the system has determined the amount to be paid to each
employee, a noti cation is sent to Ms Arendse, the nancial manager,
notifying her that the payroll is ready to be paid. Ms Arendse proceeds
to log onto the payroll system using her unique user ID and password,
and authorises the electronic funds transfer.
Changes to personnel master les

Examples of changes made to employee les include, but are not
limited to:
changes made to the employee’s rate tariff
changes made to the deductions affecting the employee
change made to the employee’s bank details
changes made to the employee’s physical address.
Changes can be made to personnel master les by using the general

payroll user ID and password. In the past, Mr Jonas was the only one
who was able to make these changes, using his unique user ID and
password. Owing to his retirement, it was felt that relying on one person
to make these changes was inefficient. If the person was away from the
company for a week or two while on vacation, for instance, no changes
could be made to the personnel master le during this period.
e general payroll user ID and password only work on computers
located in the payroll department.
Changes to personnel master les should only be made on the basis
that a payroll master le amendment form has been authorised.
e process involved in making changes is as follows:

e payroll master le amendment form is approved by management.
e approved payroll master le amendment form is handed to Mrs
Claasen.
Mrs Claasen logs onto the personnel master le using the general
payroll user ID and password, and processes the changes from her
computer or another computer in the payroll department if her
computer is not available (e.g. if her computer is with the IT
department for maintenance).
Once Mrs Claasen has processed the changes to the personnel
master le, she les the payroll master le amendment form in her
personal ling cabinet in sequential order. She is not required to le
the form in terms of the company’s policy, but does so in case
someone wants to check up on the work that she performs. To date,
no checks have been made on any of the personnel amendment
changes that she has processed.
REQUIRED
Discuss the weaknesses identi ed during the walk-through and make
recommendations to address the weaknesses.
[32]
Question 8 LEVEL 2
Recommendations
[9 marks]
Glad Ltd (Glad), a manufacturer of high-end domestic appliances, was
recently incorporated and will start manufacturing appliances at the
beginning of next month. e following controls have already been
implemented:
1. e manufacturing division is divided into ve sections and a
foreman has been appointed for each section; 120 wage employees
have been appointed. e foreman reports to the factory manager.
2. A clock card system has been purchased and administrative clerks
will issue clock cards.
3. e administrative clerk will collect all the clock cards. He will
perform the calculations on the clock cards and hours will be
approved by the foreman. e clock cards are then handed over to
the wage clerks who will prepare the wage journal. e wage journal
will be authorised by the accountant. e wage cheque will be
authorised by the accountant and the managing director.
4. e wage packets and pay slips will be prepared by the wage clerks.
Glad has not implemented controls surrounding the wage pay-out

process and has contacted you to assist with this.
REQUIRED
Design a system of internal control for the wage pay-out at Glad.
[9]
Question 9 LEVEL 3
[32 marks]
You are the auditor of BBQ Delight (Pty) Ltd, a restaurant that
specialises in selling slow-cooked BBQ meals. e company has 10
restaurants which are located in shopping malls around the country.
e company has a December year-end.
e human resources function is centralised at the company’s head
office, which is located in Johannesburg.
Appointment of employees
e manager at each restaurant is responsible for the appointment of
servers (waiters and waitresses) and cooks at the restaurant. Managers
and assistant managers are appointed by head office.
e process followed when appointing a new server or cook is as

follows:
All prospective employees are advised to contact their local BBQ
Delight restaurant to inquire if any vacancies exist.
If a vacancy does exist, the prospective candidate is requested to
compile a two-page long curriculum vitae (CV).
e prospective employee is asked to submit his/her CV in person at
the BBQ Delight restaurant or to email the CV to the manager of the
restaurant.
e manager reviews all CVs and contacts the prospective employee
within two weeks of submission of the CV for an interview.
e interview is conducted between the manager and the prospective
employee, and the individual is informed within ve working days
whether or not his/her application has been successful.
All successful applicants are instructed to come to the restaurant and
to sign a contract of employment.
All successful candidates are required to submit the following

information to the manager on their rst day at the restaurant:
A copy of the contract
A certi ed copy of their identity document
A utility bill proving where they reside. If the candidate lives with
his/her parents or is unable to provide a utility bill, a sworn affidavit
is required.
An original bank letter stating the person’s bank account details
Every manager at a restaurant has a sequentially numbered checklist
which he/she goes through to ensure that all of the information is
submitted by the employee. e manager signs and dates the checklist
to indicate that he/she has received all the information.
e documentation is scanned and emailed to the human resources
officer at head office who is responsible for loading the information on
the employee personnel system.
e checklist, along with the supporting documentation, is led in
sequential order in a pending hardcopy le in the manager’s office. e
restaurant manager inspects the le on a weekly basis and follows up
with the human resources officer to determine how far along in the
process they are with loading the new employee on the system.
e human resources officer emails the manager to acknowledge
receipt of the documentation and the manager les acknowledgment
along with the other pending documents.
e human resources officer logs onto the payroll system using
his/her unique user ID and password and creates the new employee on
the system using the information sent through by the manager.
e computer system logs out after three incorrect user IDs or
passwords have been captured.
Prior to the information of the new employee being nalised on the
payroll system, the human resources manager, who has read-only
access to the new employee le, logs onto the system by using his/her
unique user ID and password. e human resources manager reviews
the information loaded on the system with the detail sent through from
the manager to the human resources officer and digitally authorises the
loading of the new employee on the payroll system. Once the human
resources manager has authorised the loading of the new employee on
the payroll system, an automatic noti cation is sent to the restaurant
manager indicating that the employee was successfully loaded on the
system.
e restaurant manager removes the documents from the pending
le and les all the documents as well as the noti cation received in a
hardcopy ‘approved employee’ le.
All of the restaurants pay their servers the same basic salary. e rest
of the servers’ salaries are based on tips that they make during the
month.
Managers, assistant managers and cooks earn a xed monthly
salary.
e directors of the company meet at the end of November and
decide on the percentage by which all employees’ salaries are to be
increased in the next nancial year. e percentage increase in salary is
communicated to the human resources manager via email. e human
resources manager instructs a human resources officer to calculate the
increase for each employee of the company in a spreadsheet and to
draft increase letters for each employee.
e spreadsheet and increase letters are reviewed by the human
resources manager and the letters are signed as proof that the human
resources manager agrees that the correct amounts have been
transferred to the increase letters that have to be sent to the employees.
Each employee receives a letter indicating what his/her increase in
salary will be in the next nancial year.
e employees are required to sign the letter and to submit it to their
respective managers by 10 December. e letters are scanned and
emailed to the human resources department. e restaurant managers
le the signed letters in their respective offices.
Once all of signed letters are returned, a human resources officer
completes a salary increase master le amendment form in the second
week of January, which the human resources manager authorises by
signing the salary increase amendment form.
e human resources officer logs on to the payroll system by using
his/her unique user ID and password and loads the changes, which are
effective at the end of January. e changes are reviewed by the human
resources manager, who logs onto the system using his/her unique user
ID and password. e human resources manager has read-only access
to the system.
e human resources manager prints a copy of the changes that
have been made and les it along with the authorisation letter from the
directors and the salary increase amendment form, after signing the
documents as proof that the review has taken place.
e chief nancial officer reviews all changes which have been
recorded on a log of changes and compares it to the documents that
have been led by the human resources manager, and follows up on
exceptions.
Determination of amount to be paid

Managers and cooks and servers – basic salary
As they receive a standard salary, the system automatically calculates
the amount to be paid by using the information on their employee le.
e human resources officer compares the gross amount and
deduction rates used by the payroll system to the information in the
employee’s le to determine if the correct information has been used.
e human resources officer re-performs the calculation performed
by the system and any exceptions noted are logged by the payroll
system and recti ed immediately.
e log is printed by the human resources manager and signed as
proof that the human resources manager has reviewed the changes
made in terms of the company’s policy.
Servers – tips that have been received via credit card

e company is unable to account for cash tips received by the servers,
but accounts for credit card tips as follows:
ey are recorded on the system for each person at payment.
e system automatically calculates the amount to be paid over to the
employee based on the tip captured at the point of payment.
e assistant managers at the restaurants perform a sample check on a

selection of receipts which are led sequentially to determine if the
correct tip was recorded on the system at the point of payment. ey
sign the receipts as an indication of the check performed.
Where the assistant manager identi es a difference, he recti es it
and documents the reason for the change on the system. All changes of
this nature are logged by the system and followed up by the chief
nancial officer, who requests a copy of the receipt to be scanned and
emailed to him at head office for inspection. He compares the receipt to
the amount recorded on the system by the assistant manager and signs
the log as proof that he has checked the changes made and approves of
them.
Where the assistant manager is satis ed with the tip recorded on the
system, he/she logs onto the system using his/her unique user ID and
password and approves of the tips recorded, at which point a
noti cation is sent through to the restaurant manager. e restaurant
manager then checks a sample of tips in the same manner as the
assistant manager, and if he/she is satis ed, he/she digitally authorises
the tips on the system. e tips, once authorised, are automatically
included in payroll along with the employee’s basic salary.
Payment
Salary payments take place on the 25th day of the month. e payroll
period runs from the 21st of the current month to the 22nd of the
following month.
e chief nancial officer logs onto the payroll system by using his
unique user ID and password. He has read-only access to the system.
He selects a random sample of three employees from each restaurant
and reviews the documentation (e.g. receipts for tips and signed
increase letters) and re-performs the calculations processed by the
payroll system. He signs a control sheet indicating that he has
performed the review and agrees with the amount to be paid, and loads
the payroll payment onto the company’s bank account by using the
company’s con dential bank account login details.
REQUIRED
Identify the key controls provided in the information above and, for
each key control identi ed, describe the tests of controls that you would
perform to determine if the control is working as intended by
management.
[32]
Question 10 LEVEL 3
[28 marks]
You are a rst-year audit trainee on the audit of Fresh-Smell (Pty) Ltd
(Fresh-Smell), a company that imports body and skin care products
from around the world for marketing to retailers in South Africa, where
it is one the largest distributors.
Allocated the responsibility of auditing the client’s payroll system,
you have identi ed the following while in discussion with Mr Kingston,
the head of human resources:
General
Fresh-Smell has 150 permanent employees on its payroll, all of whom
receive a salary via EFTs on the 25th day of every month, or on the
Friday if the 25th falls on a weekend. All employees are entitled to an
annual bonus equal to one month’s salary. e bonus may be taken in
full in the month of the employee’s birthday or he/she may opt to take
part of the bonus each month of the year.
Each employee has an employee le that is stored in a re-proof
safe. Access to the safe is limited to authorised individuals only, as
con dential information is stored there. In order to gain access to the
safe, an authorised individual has to sign the log book and indicate
his/her reason for wanting access. Once the log book has been lled
out, the chief executive officer’s secretary gives the individual the key to
the safe and, on receiving the key back, notes the time at which it was
returned. e log book is reviewed on a regular basis by a senior
employee of the company, who investigates any unusual activity. He
signs the log book at the end of each review, indicating whether or not
he is satis ed with the reasons for any such unusual activity.
Updating of employee les

All changes made to an employee’s pro le are approved at a human
resources department meeting. e changes noted are recorded in the
signed minutes of the meeting, a copy of which is given to Ms Clarke,
who is responsible for completing the triplicate payroll amendment
forms. e supervisor, Mrs Kimberly, reviews the information captured
in the payroll amendment book and compares it to the authorised
minutes. Once she is satis ed that they agree, she signs the payroll
amendment forms located in the payroll amendment form book.
ese forms are sequentially numbered and the sequences of the
forms are inspected on a monthly basis by Ms Clarke’s supervisor for
any missing forms. If any are noted, they are investigated and reported
to Mr Kingston in a missing payroll amendment form report. One copy
of this form stays in the payroll amendment form book, while one each
is sent to the master le clerks, Mr Combrink and Ms Clarke.
Changes to the employee master le are made by Mr Combrink and
Ms Klink. ese changes can be made from their workstations only and
require that they log onto the payroll application using their unique
user ID. All such changes are logged and reviewed by Mr Kingston on a
monthly basis. He compares the changes logged to the copy of the
payroll amendment form located in the payroll amendment form book.
If he is satis ed with the changes made, he signs the log; if not, he
requests from Mr Combrink and Ms Klink reasons for validating the
changes.
Ms Klink is responsible for loading the changes, which Mr Combrink
authorises. e procedure is as follows:
Step 1
Mr Kingston sends Ms Klink a sequentially numbered payroll
amendment form and a document signed by the employee as to how
he/she wishes to receive his/her bonus. e payroll amendment form
indicates the new salary or any additional remuneration to be paid to
the employee, the date on which the new salary or additional
remuneration is to be paid and the appropriate deductions.
Step 2
Ms Klink inspects the payroll amendment form to determine whether it
has been signed and authorised by Mr Kingston and the head of the
department in which the employee works.
Step 3
Ms Klink logs onto the payroll system and accesses the payroll
master le, to which application she has write access, using her unique
user ID. If she inputs her user ID incorrectly three times, the application
closes, and she needs to log a request with IT support in order for them
to unlock the application.
e master le amendment screen is designed to look like the
payroll amendment form in order to reduce input errors.
Salary changes
Ms Klink enters the employee’s employee number into the system in
order to access all his/her details. She then inputs the amount to which
the salary is to be increased.
Both these elds (employee number and the amount to which the
salary is to be increased) have inbuilt alphanumeric protection in order
to ensure that only numbers are captured. In addition, a logic test
ensures that the amount to which the salary is to be increased is not
above the set threshold.
Ms Klink then makes use of the drop-down date eld in order to
select the day on which the change is to be effected. Once she has done
so, she clicks on the tab indicating the reason for the change (salary
increase or additional remuneration). If additional remuneration is
involved, she captures the reason noted on the payroll amendment
form.
Bonus payment period
Ms Klink agrees the payroll amendment form to the document received
from the employee with regard to the period over which the bonus is to
be paid, and signs the payroll amendment form as an indication that
the two agree. She then clicks the bonus drop-down eld, which allows
her to select the tab either for payment to be made in the employee’s
birthday month or to pro-rata the bonus over a period of 12 months.
Once she has processed the increase and the bonus instruction, she
clicks ‘enter’, upon which the system prompts her to con rm whether or
not she is sure she wants to process the information. If she is, she clicks
‘enter’, but if she is not, she clicks ‘cancel’. Once she clicks ‘enter’ the
second time, the information posts to a pending le and Mr Combrink
receives an email noti cation of the pending changes.
Ms Klink les the copy of the payroll amendment forms
sequentially. e sequence is inspected by a colleague of Ms Klink’s on
a monthly basis. Any missing forms noted are investigated and reported
to Mr Kingston in a missing payroll amendment form report.
Step 4
Mr Combrink logs onto the payroll system and accesses the payroll
master le using his unique user ID. If he inputs this number incorrectly
three times, the application closes and he needs to log a request with IT
support in order for them to unlock it. Mr Combrink has read-only
access in this le.
He compares the changes loaded onto the system to the payroll
amendment form. If he is satis ed that the changes are accurate, he
clicks ‘accept’ and, following the computer’s prompting, ‘yes’, which
updates the employee’s pro le; if he is not satis ed with the changes
made, he has the option of rejecting them by indicating his reason(s) in
a text box for the relevant employee.
After receiving noti cation to correct it, Ms Klink does so. Steps 3
and 4 are repeated until Mr Combrink is satis ed with the changes
made.
A log of all rejections is recorded and a report prepared by Mr
Combrink for Mr Kingston’s perusal. e latter reviews the log, which
he signs if he is satis ed with the reasons given. Mr Combrink then les
the copy of the payroll amendment forms sequentially. e sequence is
inspected by a colleague of Mr Combrink’s on a monthly basis. Any
missing forms noted are investigated and reported to Mr Kingston in a
missing payroll amendment form report.
REQUIRED
Identify the key controls in the payroll system mentioned above. For
each control identi ed, describe how you would test it.
[28]
Question 11 LEVEL 3
Tests of controls
[9 marks]
Happy Chappies (Pty) Ltd (Happy Chappies) is a small entity located

near rural areas and was founded in 20X1 in order to reduce local
unemployment. Happy Chappies manufactures bubble gum, which is
sold internationally. e entity mainly employs people from the rural
areas for the production process and suitably quali ed personnel for
the nance and management function. e current nancial year-end
of Happy Chappies is 31 October.
Your audit rm, Tick Away Inc., has been the auditors of Happy
Chappies since its incorporation. Happy Chappies’s personnel have
always been very helpful during the external audit process. e Happy
Chappies audit has been allocated to your audit portfolio in the current
year. e previous partner always followed a combined approach and
after the planning stage of the audit, you, the new audit partner,
concluded that you will also incorporate tests of controls during the
audit.
e rst-year trainee accountant on your audit team has identi ed the

following controls which are relevant to the wage cycle of Happy
Chappies for the 31 October year-end:
1. All employees have a signed employment contract, which is
authorised by the human resources (HR) manager.
2. All employees are provided with a personnel card, which is used to
gain access to the workplace.
3. ere is only one entrance to Happy Chappies, and employees must
swipe their personnel card to gain access. A card can only be swiped
once. A security guard supervises the entrance at all times.
4. Happy Chappies’s computerised system calculates the hours worked
by personnel and prints a report which each division’s head should
review.
5. e division heads review all reports for any unusual entries and
approve any overtime.
6. After the head has reviewed the hours report and authorised
overtime by way of a signature, the report is sent to the nance
department for recording.
7. After the payroll clerk has recorded the hours into the accounting
records, a reconciliation is prepared which is reviewed by the
nancial manager. e nancial manager also re-performs the
payroll calculations by comparing them to the authorised hours
report. e nancial manager approves the payroll and reconciliation
by way of a signature.
8. All payroll payments are authorised by two cheque signatories, who
have to:
scrutinise the payroll records and reconciliation for unusual items
sign the payroll and reconciliation as proof of duty performed.
REQUIRED
Describe the tests of controls that you will perform in order to ensure
that the controls identi ed by the rst-year trainee accountant are
operating effectively.
[9]
Question 12 LEVEL 3
Assertions, key controls and tests of controls
[20 marks]
You are the audit partner in charge of Best Wares (Pty) Ltd (Best), a
company manufacturing hardware products sold to retailers and
wholesalers throughout South Africa. e company employs over 200
workers at its factory at Wadeville in Gauteng.
e following control activities have been documented by one of your

audit trainees regarding timekeeping and payroll preparation:
Wages, paid every Friday afternoon, are based on the hours captured
on the employees’ clock cards.
All clock cards are prepared by the human resources department.
A senior employee in the department agrees the number of clock
cards per division to the latest list of authorised employees in that
division.
e human resources officer then enters this number in the clock
card register, which he also signs as evidence of a control performed.
Afterwards, he takes the clock cards, together with this register, to the
foremen of the various divisions, who must then check whether they
agree with the number of clock cards given to them and sign the clock
card register in order to indicate receipt of the cards.
e foremen then place the clock cards on racks at the entry points to
their divisions.
e workers take their cards at both the beginning and the end of the
daily shift and insert them into the clock card machine. Clocking in
and out is protected by a turnstile, and is strictly monitored by
security personnel.
At the end of the week, a staff member from the wages department
collects all the clock cards and agrees the number of cards per
division to the clock card register and signs the register indicating
that the totals have been agreed.
e wages clerk then takes these clock cards to the foremen, who
scrutinise them for anything out of the ordinary. ey then sign the
clock cards as evidence that the cards have been scrutinised, and that
overtime has been approved by them.
e wages clerk then returns to the wages office, where the payroll for
that week is prepared. A supervisor at the wages office will agree the
hours worked on the payroll back to the clock cards. After this, he/she
veri es any amendments to the payroll back to the approved
master le amendment forms. He/she then signs the payroll report as
evidence of duties performed.
e payroll report is then sent to the human resources department,
where a senior official reviews the payroll and performs a week-to-
week reconciliation. After testing a sample of changes to approved
master le forms, he/she signs the payroll as evidence that payments
may now proceed.
e cheque for wages is prepared in the accounting office. Attached
to the cheque requisition is the approved payroll and the week-to-
week reconciliation. Two approved signatories then sign the cheques
as well as both the approved payroll and the weekly reconciliation in
order to indicate that the cheque amounts agree with those on the
payroll printout.
REQUIRED
By linking them to one of the assertions, discuss the controls
implemented by management that the auditor can rely on in the system
as described above. In addition, describe the test(s) of control(s) that
the auditor can perform for each discussed control.
[20]
Question 13 LEVEL 3
Audit procedures
[10 marks]
Audit procedure instructions issued by external auditors:

Inspect the signature of the foreman on a sample of clock cards
displaying his approval of overtime hours worked.
Inquire from the human resources manager what procedures the
company has implemented in order to identify employees with
criminal records.
Inspect a sample of payroll master le changes and agree the log of
changes made to approved master le amendment forms.
Perform an analytical review of salaries, and compare them to the
corresponding period the previous year in order to identify any
unusual variances that need to be investigated.
Ascertain that the director’s remuneration is properly disclosed in the
nancial statements and that such disclosure complies with section
30 of the Companies Act 71 of 2008.
Inspect the signature of the factory manager on the payroll printout
in order to indicate that he/she veri ed the accuracy of the clock card
hours captured, and that the correct rates were employed.
Inquire from the wages clerk about procedures followed regarding
leave records.
Attend a wage pay-out and check that unclaimed pay packets are
locked away immediately at the conclusion thereof.
Scrutinise the wages control account at year-end for any unusual
journals posted and investigate these journals together with
supporting documentation.
Enquire from the human resources manager what procedures he/she
follows in order to ensure that the company complies with labour
legislation.
REQUIRED
Classify the audit procedure instructions in the above scenario as a test
of control and/or a substantive procedure and/or a risk assessment
procedure.
[10]
Question 14 LEVEL 3
Risks, internal controls and substantive procedures
[25 marks]
ree Digital (Pty) Ltd (ree Digital) is a highly technological company

working on technological products and market research in its eld.
Tangible products, such as 3D printers, satellite components, etc., make
up 20% of its business, and 80% is from market research in the eld of
new advancements in technologies.
All operations take place on its premises in Tokai, south of Cape
Town. e premises are split into three oors. e top oor is used for
administration and management, and the oor below is for researchers
to conduct their research. e ground oor is split between a
warehouse, where raw materials and nished goods are stored, and the
manufacturing area, where the goods are produced.
Access to the premises and the various areas around the building is
controlled with staff cards that should be displayed on employees at all
times. ese cards are scanned to allow employees access to particular
areas.
ree Digital uses its website to input data, which is then interfaced
with its accounting systems. Access to the website requires a username
and password.
You read through the policy document and make the following notes to
assist you with future internal audits:
Manufacturing process
Once a sales order is created, an internal job card is created in the
manufacturing department. Raw materials are issued against the job
card.
e hours worked against the sales order are also captured in the
online time sheet application. Each staff member logs onto the ree
Digital website and allocates his/her time based on a job card
number. is is also used to track productivity.
e time sheet is then approved by the supervisors for whom the
work was performed.
Standard costing is used in the process of manufacture. For labour
costs, this is based on the job description of each employee as each
job description has its own rates. e labour rates are based on actual
payments to employees. For overheads, it is based on the at rate per
hour determined annually.
Once the goods are completed, an internal purchase order is created
against the job card and sent to the warehouse in order for the staff
there to anticipate the goods to be received.
Obtaining components from the warehouse

Components are requested on a weekly basis from the manufacturing
department via an internal sales order. is is an internal online
document between the two departments. It can only be created if the
manufacturing department has a valid sales order number.
e picker will then pick the goods, based on the electronic picking
slip.
After he/she picks the components, a noti cation is sent to the
warehouse supervisor who then checks whether the picker has
picked the correct goods and quantity. After the supervisor’s
inspection, he/she approves it.
e warehouse assistant creates an internal delivery note, which gets
approved by the warehouse manager. A noti cation is then sent to
the manufacturing department to collect the goods.
When the components are collected, the manufacturing business
representative inserts his/her user ID, which serves as acceptance of
goods.
Additional information
All goods are sold at a 100% mark-up. e price is determined based on
what the market is willing to pay versus the costs to the manufacturer.
REQUIRED
1. Describe the risks to the payroll preparation phase of the payroll
process. For each described risk, recommend internal controls to
mitigate that risk. [14]
2. ere has been speculation that the wages payments received by the
manufacturing department are inaccurate as a result of fraud.
Describe the substantive audit procedures you would perform on this
engagement to satisfy yourself regarding the following assertions:
a) Occurrence of wages
b) Accuracy of wages[11]
[25]
INTRODUCTION
Refer to the guidance and example questions contained in Chapter 6, as

the principles and the approach remain the same.
QUESTIONS
Question 1 LEVEL 2
Control objectives
[11 marks]
You are general manager at a local charity, Help-Mekaar. You are

responsible for organising a raffle in order to raise funds for the charity.
You were able to arrange donations from a local auditing rm as prizes:
tablets with wi and 3G connections, Woolworths vouchers and
hampers of homemade dolls. You adapted a system description you
found on the internet to suit your needs as follows:
Price and proceeds

e raffle tickets will be sold from the administration office for R10
each. Tickets are only sold for cash. Bene ciaries of the charity and their
families receive a 10% discount on each raffle ticket bought. is was
approved by the board of trustees of the charity. e price and discount
are advertised along with the terms and conditions on the tickets as well
as on all posters.
Tickets
e secretary who sells the tickets has a set of pre-designed, pre-
numbered tickets, printed speci cally for the raffle in a book format.
e tickets contain the ticket holder’s name, identity number, and
contact and residential details. Each ticket has a carbon copy attached
to it which will be used for the draw.
Safeguarding of cash box

e proceeds of the sale will be kept in a cash box, which is kept in a
safe. At the end of each day, the secretary clears out her cash box and
hands the cash and ticket book to you, the manager.
Deposit of cash
You are required to record the receipts in the cash book daily. is
updates the income system. e cash is then handed to a security guard
who deposits the cash.
REQUIRED
Formulate the internal control objectives for cash receipts from the sale
of raffle tickets.
[11]
Question 2 LEVEL 2
Segregation of duties, fraud and error
[9 marks]
You are a third-year audit trainee at the audit rm of EWC Inc. (EWC),
which has recently been appointed the auditors of Electro-Tricks (Pty)
Ltd (Electro-Tricks).
Since its inception in 2006, Electro-Tricks has established itself as a
leading provider of electrical equipment such as radios, irons, fridges,
ovens, cordless telephones and television sets, which the company
provides to both the general public and corporate clients. Electro-
Tricks, which operates through 12 retail stores across South Africa, aims
to offer the most competitive prices for quality equipment. e
company owns several delivery vehicles for transporting the larger
appliances (e.g. fridges and ovens) to its clients. e accounting
department operates from the company’s head office in Pretoria.
Every so often, Electro-Tricks purchases property, plant and
equipment (PPE) items, which include delivery vehicles, desktop
computers, laptops, printers, and so on. A PPE acquisition form needs
to be completed and approved before any such items may be
purchased. A clerk in the accounting department is responsible for
updating and maintaining the PPE asset register. On a quarterly basis, a
physical inventory of PPE items is taken by a clerk in that same
department in order to identify any stolen or broken items, and to
reconcile the PPE asset register with the physical items.
e manager in charge of the audit assigned you to review the
controls that Electro-Tricks currently has in place regarding their PPE,
speci cally those relating to the segregation of duties. During the initial
audit planning meeting, the manager requested that you explain brie y
to the team a few of the principles of the segregation of duties in terms
of controls over PPE, as well as the possible errors or fraud that could
result if these controls were not in place.
REQUIRED
List brie y the segregation of duties in respect of controls over property,
plant and equipment that you would expect to see at Electro-Tricks
(Pty) Ltd. In addition, discuss the possible errors or fraud that could
result in the event of each of these duties not being segregated.
Answer using the following tabular format:
SEGREGATI POSSIBLE ERORS OR FRAUD RESULTING

ON OF FROM DUTIES NOT BEING SEGREGATED
DUTIES

[9]
Question 3 LEVEL 2
[12 marks]
BaAgi (Pty) Ltd (BaAgi), a construction company whose main business

is the development of townhouses in newly established residential
areas, is based in Boksburg. e company, which has grown over the
years, now employs 320 staff members, including ve directors.
e four brothers who founded BaAgi in 1994 are not involved in the
day-to-day management of the company.
As a member of the audit team responsible for the audit of BaAgi, you
were presented with the following information:
AMOUNT (R) NOTES

Loans to directors 900 000 1
Long-term loans (3 200 000) 2
Machinery 1 200 000 3
Notes:
1. Loans to directors were authorised at a directors’ meeting. No loan
agreement was signed by the directors and the company in
connection with these loans, however, as the directors believed it to
be unnecessary since those awarded the loans are still in the employ
of BaAgi.
2. In order to expand into other cities, the directors obtained a ve-year
term loan attracting interest at prime plus 2% per annum. No other
nancing options were considered.
3. Certain machinery was acquired during the nancial year under
review, after a director who is the head of the operations department
made a request for their purchase. Purchases of capital expenditure
at BaAgi are decided when the head of a department determines the
need to acquire additional assets. No budgets are prepared. e
machinery was purchased from a company owned by the wife of the
director in the operations department (said director did not mention
this fact at the meeting). All directors, including the director in the
construction department, voted in favour of this acquisition.
REQUIRED
Identify the weaknesses in BaAgi’s internal control process of the
nance and investment cycle. In addition, explain the consequence(s)
of the identi ed weaknesses.
Present your answer using the following tabular format:
WEAKNESES EXPLANATI ON OF WEAKNESES

[12]
Question 4 LEVEL 3
Risks: Companies Act 71 of 2008
[12 marks]
As a rst-year trainee accountant at Deno & Partner Inc. (Deno), a

medium-sized audit rm, you are a member of the audit team that is
responsible for the audit of Techno Ltd (Techno), a company that sells
technological products, such as television sets, music systems and
tablets. Techno has a 30 June year-end.
You are assigned to audit the share capital account.
Share capital
Authorised shares 500 000

Issued shares as at 30 June 20X1 480 000
AMOUNT (R) NOTES

Opening balance at 1 July 20X1 960 000 1
Additions: see note 2 27 000 2
Closing balance at 30 June 20X2 987 000
Notes:
1. e opening balance represents 480 000 shares at R2 per share.
2. During the year under review, the board passed a resolution to assist
two new non-executive directors in acquiring 30 000 shares in
Techno. e two directors insisted that the shares be sold to them at
99 cents per share, each of which at that stage was trading at R2.50. A
loan of R13 500 per director, payable in 24 monthly instalments
earning 1% interest, was approved by the board. e share register
was not updated with this share issue.
REQUIRED
Identify the risks relating to non-compliance of the Companies Act 71 of
2008 as discussed in note 2 above. For each of the risks identi ed,
discuss the procedure/steps that should have been implemented in
order to eliminate the risks of non-compliance with the Act.
Answer using the following tabular format:
RISK PROCEDURES/STEPS

[12]
Question 5 LEVEL 2
[11 marks]
You are the second-year trainee on the audit of the Yest WEG Group
(Yest). Yest is the leading supplier of low-, medium- and high-voltage
electric motors, variable speed drives, softstarters, switchgear,
transformers, containerised substations, diesel generator sets and co-
generation and energy solutions as well as electrical and
instrumentation engineering and project management services in
Africa.
e following document received from the managing director sets out
some of the controls implemented to reduce the risk associated with
capital expenditure for the year.
Summary of internal controls implemented by Yest to

reduce business risks associated with capital
expenditure
Yest has a capital expenditure committee. The CFO makes
recommendations to the board of directors on all capital
expenditure. All capital expenditure is approved by the CFO prior to
board meetings. The decisions are presented only for noting at
Yest’s board meetings. It is a long-standing agreement in the
company that any director has the authority to enter into any
capital expenditure contract on behalf of Yest without necessarily
obtaining the approval of the board. All capital expenditure
recommendations are based on the CFO’s best estimate of the
expected cost. There is no requirement for detailed budgets and
cash- ow projections. The capital expenditure committee has
always trusted the CFO to allocate funds as needed, and has seen
no need to review the effectiveness of past capital expenditure
decisions on a regular basis to ensure that returns on the
investments are in line with the expectations of Yest’s
shareholders.
Yest has a project management policy document; however, this

could not be located and provided to the auditors at the time
requested. Any available staff at the time are appointed on an
available project. The project manager believes he always attracts
the best staff and therefore does not feel it is necessary to ensure
staff have the relevant quali cation necessary to perform the job.
The project manager does not have to present regular progress
reports to the capital expenditure committee. The last time he
made such a presentation was six months ago due to the fact that
he is always busy inspecting projects at the various sites.
REQUIRED
Identify the weaknesses in the controls implemented by Yest to reduce
the risk associated with capital expenditure and provide
recommendations to improve them.
[11]
Question 6 LEVEL 2
[33 marks]
You are the senior auditor of Supermart (Pty) Ltd (Supermart), a chain
of grocery stores located in the Gauteng province while their corporate
head office is located in Sunninghill. e company has a December
nancial year-end.
You met with Mrs Vilakazi, the newly appointed chief executive
officer, at the start of the nancial year when she indicated to you that
she does not want a repeat of the prior year’s modi ed audit report that
arose as a result of material misstatements in xed assets. She has
requested you to spend a week at the company visiting stores and head
office to identify all of the weaknesses in the current control system and
to draft a report including suggestions for improvement which they can
implement to ensure that the company receives an unmodi ed audit
report in the current year.
e following was identi ed during the week spent at the client:
Fixed asset acquisitions

Where a store manager at the company identi es a need for a xed
asset, he/she contacts the closest supplier to nd out if the company
has the item in stock. If the supplier indicates that they do, a contract is
sent to the manager who has the authority to enter into the agreement
on behalf of the company. Once the contract has been signed by the
manager, a copy is returned to the supplier and the order for the item is
then placed.
Once the order is placed, the manager sends a copy of the contract
to the accountant at head office.
e accountant uses his unique user ID and password when
recording the asset on the accounting records. Prior to recording the
assets in the accounting records, the accountant inspects the contract to
determine if the contract and underlying asset is in the name of the
company and uses the detail in the contract (cost, transportation and
installation costs) to capitalise the amount to the accounting records.
For assets requiring that the full acquisition price must be settled on
delivery
In some instances, the company is required to settle the full acquisition
price on delivery of the asset to a store. Where this is the case, the
accountant records the asset on the accounting system on the date that
he receives the contract from the manager by using the detail (e.g. cost
price, installation costs and delivery costs) in the contract and sets up
an automatic electronic payment from the company’s bank account to
the supplier for the delivery date recorded in the contract.
e asset is immediately recognised in the xed asset register when
the asset is recorded on the accounting system.
For assets where the acquisition price is to be settled over the course
of the useful life of the asset
Where the acquisition price of the asset is to be settled over the useful
life of the asset, the manager at the store informs the accountant via an
email that the asset has been installed. e accountant uses the email
instruction as his basis for recording the asset on the accounting
system.
e asset is immediately recognised in the xed asset register when
the asset is recorded on the accounting system.
ere have been instances in the past where installation and
transportation costs have been handled by third parties (i.e. not the
supplier) and store managers have indicated that they were not aware
that they needed to furnish the accountant with this information as the
delivery and installation was normally handled by a family or friend in
order to save the company money.
Disposal of assets
Where the manager at the store feels that the asset is not producing as
much economic bene t for the store as expected, he/she has the right
to dispose of the asset to whomever he/she wants. Where the asset has
passed its original useful life, the manager has the authority to take the
asset for him/herself or to give the asset to an employee at the store.
Where an asset has been disposed of for cash or zero value, the
manager informs the accountant at head office via email to remove the
asset from the xed asset register.
e accountant logs onto the system and removes the asset from the
accounting system and simultaneously from the xed asset register. e
accountant is required to print and le the instruction emailed to him,
but it was noted during a discussion with him that there were a few
email instructions that were not available. He attributed this to email
storage problems and that he must have erroneously deleted the email
instructions in order to free up space in his inbox.
Depreciation
When a new asset is purchased, the accountant inspects the contract
with the supplier and, based on the detail located in it, determines the
depreciation rate and useful life of the asset. e accountant checks the
internet for detail on the residual value of assets of a similar kind and
records this in the accounting system when initially capitalising the
asset.
e system automatically calculates the depreciation for the month
and posts the depreciation to the accounting records.
Impairment
Managers are informed that if they see damaged xed assets at their
store, they should take a photo of the asset and email it to the
accountant. e accountant assesses whether or not the asset is
impaired based on the photo and writes down the asset to the
appropriate carrying value amount in the accounting records and xed
asset register. e accountant has indicated that it is not feasible to drive
out to a store to view the asset, especially considering the time he would
have to spend in traffic.
REQUIRED
Draft a report to Mrs Vilakazi where you identify weaknesses
surrounding the xed assets at the company and make
recommendations to address them.
[33]
Note: [2] marks will be awarded for using the correct format.
Question 7 LEVEL 2
Recommendations
[18 marks]
Wowlands Ltd (Wowlands), founded by Wouter Landman, opened its

doors for the rst time in Melville, Johannesburg, on 1 February 1998.
Today, the company, which is listed on the JSE, is one of South Africa’s
leading retail chains with over 60 stores across South Africa. e success
of Wowlands is driven by Wouter’s belief that service should be
consumer focused and that superior quality food, clothing and home
appliances should be made available at reasonable prices. is belief is
shared, and upheld, by Wowlands’s board of directors.
As a member of the company’s internal auditing department, you
are currently busy with the internal audit for the current nancial year.
e following breakdown, setting out certain transactions that took
place during the current nancial year, was received from management:
Transaction 1
Wowlands issued 2 000 8% debentures of R1 000 each during February
20X1 in order to raise long-term debt nancing for an investment in a
new branded environmental programme, Enviro-Aware, a programme
aimed at communicating environmental issues to customers via the
labels and the logos on selected Wowlands products on which
customers receive discounts.
Transaction 2
During the nancial year, Wowlands purchased a new accounting
software system called COMPUWARE from Spectacular Connections
(Pty) Ltd as a standard accounting package. Owing to the highly
specialised technical nature of the new system, employees involved
with its operation had to undergo speci c training.
Transaction 3
Wowlands purchased 35 new desktop computers from Spectacular
Connections (Pty) Ltd during the year for use in the accounting
department.
REQUIRED
List the key controls that you, as the internal auditor, would want to see
relating to:
1. the occurrence and management authorisation of long-term debt
nancing in transaction 1 (5)
2. the occurrence and authorisation of the purchase of the
COMPUWARE accounting software system in transaction 2 (8)
3. the completeness of property, plant and equipment records for
computers purchased in transaction 3. (5)
[18]

1. a) e long-term debt nancing transaction should be properly
initiated, reviewed and authorised by the board of directors. (1)
b) e authorisation for this nancing transaction should be properly
documented and kept as proof thereof (e.g. minutes taken at the
board meeting at which approval was given). (1)
c) ere should be proper debenture agreements or contracts in
place with debenture holders. (1)
d) ese agreements or contracts should be signed by authorised
individuals from Wowlands as well as the debenture holders. (1)
e) e debenture agreements or contracts should set out all terms
and conditions, dates of repayment, interest rates, etc. (1)
f ) A proper segregation of duties should be in place between the
execution of and accounting for this transaction. (1)
Available marks (6); maximum marks (5)
2. a) A feasibility study should be performed regarding the accounting

software. (1)
b) Competitive quotations should be obtained and considered
(possibly even tenders). (1)
c) ere should be a speci c capital budgeting process and provision
speci cally made in this budget for the purchase of the
COMPUWARE accounting system. (1)
d) e board of directors should take ultimate responsibility for the
acquisition of property, plant and equipment (including the
purchase of the new accounting system), and this should be set
out in the company’s memorandum of incorporation (MOI). (1)
e) Approval for purchase should be documented in the minutes of
the board meeting at which such authorisation was given. (1)
f ) Management should monitor capital expenditure against the
budget. (1)
g) Special approval and authorisation from the board of directors
should be obtained for any overruns on the capital expenditure
budget. (1)
h) ere should be an authorisation table (setting out which
managerial level may approve transactions between certain
monetary ranges) based on the size of the capital asset transaction
(e.g. only the board of directors may authorise a purchase of
property, plant and equipment above a certain amount). (1)
i) Both the IT and the accounting departments should have input in
the technical speci cations of software and approve it. (1)
j) A proper segregation of duties should be in place between the
authorisation for and the accounting of transactions. (1)
3. a) Detailed property records (manual or computerised) should be

maintained for PPE items, and should be updated with the
purchase of the computers. (1)
b) e following should be documented in these records:
i) Description, location and the asset number (1)
ii) Date of acquisition and the cost (purchase and installation
costs) (1)
iii) Depreciation rate, methods, estimated useful life, etc. (1)
c) e PPE subsidiary ledger should be reconciled periodically to the
general ledger account in order to ensure that it is complete. (1)
d) Periodic comparisons should be performed between the
subsidiary ledger and the existing capital assets (from the assets to
the ledger). (1)
Notes:
In order to be able to answer the question, you should have a
thorough knowledge and understanding of key controls and the
control objectives/assertions.
A further point to take note of is the following part of the required:
‘would want to see’, which is another way of asking for
recommendations. us there should be ‘shoulds’ in all the controls
that you have written down.
Question 8 LEVEL 2
Recommendations
[5 marks]
You are a trainee auditor at TPC & Co. (TPC), a rm of registered

auditors assigned to the 20X1 statutory audit of Orange (Pty) Ltd
(Orange), whose year-end is 31 August 20X1.
e company specialises in a unique South African clothing brand
for children that is not only affordable, but also fashionable and
functional. Orange trades from its 15 retail stores across South Africa.
Each branch has its own account with ABBA bank, which allows it to
pay certain expenditures on an ad hoc basis. Both the accounting and
the internal audit departments of Orange operate from their head office
in Durban.
REQUIRED
Brie y list the key controls over the branch bank accounts that you
would expect to see at Orange.
[5]
Question 9 LEVEL 2
Recommendations
[10 marks]
ABC Earthworks (Pty) Ltd (ABC Earthworks) is a civil construction

company operating in the eld of road construction, mass earthworks,
township development and plant hire. It has extensive experience in all
forms of roads and earthworks, including construction, upgrading,
rehabilitation and resurfacing.
e company operates an extensive eet of modern earthworks
plants and equipment, including excavators, graders, loaders, dozers,
trucks, crushers, and asphalt and surfacing machinery. e company
attracts and retains highly quali ed and experienced individuals with
solid track records in the road construction sector.
In the current year, ABC Earthworks was awarded a tender worth
R150 million to demolish, reconstruct and refurbish rundown buildings
in the city centre owned by the local municipality. To meet tender
requirements, ABC Earthworks purchased additional earthworks
equipment and increased its staff base.
REQUIRED
List the key controls the auditor can expect over the purchase of the
additional earthworks equipment.
[10]
Question 10 LEVEL 3
Tests of controls
[10 marks]
You are the independent auditor of Car Manufacturing (Pty) Ltd, a

company that manufactures motor vehicles.
You intend to place reliance on the investment system of internal
control. From the previous year’s working papers, and after discussions
with management, you documented the ordering and recording of the
xed asset system as follows:
Purchases of xed assets are divided into two categories: purchases

below R50 000 and purchases above R50 000. Different authorisation
levels are required for purchases below and above R50 000.
Ordering xed assets
All orders of xed assets under R50 000 occur as follows: e
nancial officer in each division completes a pre-numbered xed
asset purchase requisition and the manager in the division
approves the requisition. e requisition is then sent to the
purchase division.
All orders of xed assets above R50 000 occur as follows: For all
asset purchases above R50 000, a xed asset purchase application
form is completed by the nancial officer in each division and
approved by the manager of that division.
e xed- asset purchase application form is then sent to the head of

the purchasing division. ere is a xed asset committee that meets
once a month and looks at all the xed asset purchase application
forms and decides which xed asset items will be purchased. e
chairman of the committee signs the xed asset purchase
application form and sends it to the purchase division.
Purchase division:
e purchases clerk receives the purchase requisition form or
xed asset purchase applications and completes the pre-
numbered orders in threefold.
Purchases are only made from a list of approved suppliers.
e purchases manager compares the requisition or ‘request for
purchase’ form, depending on whether the purchase is above or
under R50 000, with the purchase order, ensures that the order is
placed with an approved supplier and signs the purchase order.
One copy of the order is sent to the supplier, one copy is sent to the
division that placed the order, one copy is sent to the creditors
clerk and one copy remains in the purchase division. e purchase
manager regularly follows up on long-outstanding orders and
reviews the number sequence of orders.
Recording xed assets

An invoice is received from the supplier. e invoice is compared
to the order and goods received note.
e accounts clerk records the purchases in the purchase journal,
after invoices are received from suppliers.
e general ledger clerk then transfers the transactions to the
general ledger.
e capitalised xed assets are recorded in the xed asset register
and the other purchases of xed assets are recorded as expenses.
e accountant reviews the recordings of the xed assets.
e calculation of the depreciation is done by the accountant. e
nancial manager reviews the calculations.
REQUIRED
Formulate the tests of controls you would perform on the internal
controls for the ordering and recording of xed assets as described
above. You have already formulated tests of control for the classi cation
and cut-off of transactions.
[10]
Question 11 LEVEL 2
Key controls and assertions
[11 marks]
You are a member of the audit team responsible for the audit of Amanzi
Ltd (Amanzi), a company that sells natural spring water, for the year
ended 30 June 20X2. You are responsible for the audit of the share
capital account.
Share capital
AMOUNT (R) NOTES
Opening balance 1 July 20X1 600 000 1
Share issue: general public 300 000 2
Share issue: directors 90 000 3
Closing balance 30 June 20X1 990 000 4
Notes:
1. e opening balance represents 200 000 shares at R3 per share. e
share register is updated every time there is a change in shareholding.
Every month, the balance in the share register is matched to the share
capital account in the general ledger.
2. During the year, 100 000 shares were issued to the general public at
R3 per share in order to raise funds for the expansion of Amanzi’s
operations. At the time of the new share issue, the company had 250
000 authorised shares, which fact, con rmed by the directors, was in
line with the company’s memorandum of incorporation. In order to
allow for the additional share issue, the memorandum was amended
(by means of a special shareholder’s resolution obtained by the
directors prior to the amendment) in order to increase the number of
authorised shares to 500 000. Payments made in this regard are
matched to the cash book and the proof of payments.
3. An additional 10 000 shares at R3 each were issued to the directors
themselves by means of a loan granted to them in order to help them
acquire them. For the transactions (which were conducted in line
with Amanzi’s memorandum of incorporation stipulations) to be
valid, a shareholders special resolution was obtained.
e nancial accountant matched all considerations received during
the year with regard to share issues to the share issue price as
determined by the board and then recalculated the amounts.
4. At year-end, the nancial accountant agreed the balance of the share
capital account in the general ledger to the trial balance, the
statement of changes in equity and the statement of nancial
position.
REQUIRED
Identify the key controls relating to the share capital account of Amanzi
for the year ended 30 June 20X2. For each key control identi ed,
allocate the applicable assertion(s). Answer using the following tabular
format:
KEY CONTROLS ASSERTIONS

[11]
Question 12 LEVEL 3
Internal control vs test of control, control objectives
[9 marks]
You are the auditor of Fast Freight (Pty) Ltd (Fast Freight), a freight
company well known in South Africa since its incorporation in 20X2
that specialises in sea, air and road freight. Customers, ranging from
individuals to large corporations, are all guaranteed valuable advice on
the best distribution methods as well as the other options available to
them.
Although their head office is situated in Pretoria, Fast Freight has
branches across South Africa, the rest of Africa and the UK. e
company has a large eet of vehicles and operates an innovative system
that prints labels, waybills and so on.
During the year under review, the following activities took place:
1. A new online tracking system (Track & Trace), which allows
customers to log into the system via Fast Freight’s website in order to
view the status of their delivery, was purchased. Owing to its highly
specialised nature and the value of the purchase, the board of
directors was directly involved in authorising the purchase
transaction for the addition to property, plant and equipment at a
board meeting.
2. e company conducted a physical veri cation of vehicles during the
last month of the nancial year. is entailed employees physically
inspecting each vehicle in their eet and comparing them to the
details in the xed asset register.
3. One of the vehicles in the eet was involved in an accident, during
which several items for delivery in the vehicle were damaged.
Included in the nancial statements of Fast Freight for the year under
review is a provision for damages arising from a pending court case as
the driver of the delivery vehicle had been under the in uence of
alcohol at the time of the accident. As a result, the company decided
to provide for the damages based on the estimated market prices of
the affected items. However, the auditors obtained their own
estimated market prices for the items and compared them to those
provided by the company.
4. Having obtained the company’s insurance register, the auditors noted
that, as part of their nancial records, a substantial amount had been
included for prepaid insurance. In addition, all new insurance
policies were inspected in order to con rm that they had been signed
by an authorised individual at Fast Freight.
5. Jamal Daily, a company clerk, is responsible for updating the xed
asset register, while Peter Davies, the asset manager, is responsible for
authorising the low-value purchases and disposals of any property,
plant and equipment.
REQUIRED
For each of the activities referred to above, state whether it is an internal
control or a test of control. In addition, state the control objective(s)
applicable.
[9]
Question 13 LEVEL 3
Test of control vs substantive procedure, objective of audit procedure
[13 marks]
You are the audit manager assigned to the audit of BWM (Pty) Ltd
(BWM) for the nancial year ending 30 June 20X1. Founded in 1998, the
company is currently one of the 25 largest vehicle manufacturers in the
world.
In August four years ago, BWM opened a new manufacturing plant
in Johannesburg boasting a high-tech assembly line that carries with it
the promise of producing the planned capacity of 230 BWM vehicles per
day by December 20X1. e total investment cost relating to the full
construction of the plant and machinery totalled R9,8 million for the
relevant nancial year. e new assembly line, on which operations are
performed by both humans and robots, includes a conveyor belt that
transports the vehicles from one station to the next, and allows the
vehicles to be tilted and rotated some 90 degrees from the horizontal.
e plant is divided into three buildings arranged in a circle around the

central office building, an arrangement that divides operations into:
the construction of the main framework
the paint job
the assembly of other remaining car parts.
Audit procedures were performed on the new manufacturing plant and

related machinery, both of which constitute part of the property, plant
and equipment (PPE) account balance in the nancial statements for
the year ending 30 June 20X1:
1. Material expenses relating to the new manufacturing plant in
Johannesburg (obtained from invoices, contracts, etc.) were
compared to approved capital expenditure budgets.
2. Minutes of directors meetings were inspected for approval of the
capital expenditure budgets relating to the new manufacturing plant.
3. A sample of plant and machinery assets was extracted from BWM’s
asset register (including the material additions for the year); such
selected assets were inspected physically and matched to the
descriptions in the xed asset register.
4. All purchase documents and documents of title deeds relating to the
new manufacturing plant were inspected in order to con rm that
they were in the name of BWM.
5. e dates on material purchase documentation (i.e. invoices) for the
new manufacturing plant, as well as the dates in the relevant ledger
accounts, were inspected in order to verify the accounting period in
which these expenses had been incurred.
6. Relevant job descriptions were inspected in order to ensure that the
person(s) responsible for the initiation of a capital asset acquisition
had not been the same persons responsible for the nal approval
thereof.
7. e minutes of directors meetings were inspected in order to ensure
that all purchases relating to the new manufacturing plant upon
which the directors agreed were recorded in the nancial records of
BWM.
8. Amounts in the general ledger (relating to the purchases of the plant
and the machinery) were agreed to the minutes of the directors
meetings, the capital expenditure budgets, the invoices, the contracts
and other relevant documentation.
REQUIRED
For each of the audit procedures listed above, state whether the audit
procedure is a test of control or a substantive procedure, and explain
what the objective of the audit procedure is.
[13]
Question 14 LEVEL 3
Tests of controls vs substantive procedures

[16 marks]
Owing to the uniqueness of transactions in the investment and

nancing cycle as well as the fact that the number of transactions that
take place in this cycle is considerably smaller than in other business
cycles, the functional areas depend on the type of transaction.
Authorisation, which is an example of one such area, depends on
the type of transaction. When a company intends issuing shares, the
authorisation might have to come from the board of directors and may
also be subject to other authorisation requirements as laid down in the
company’s memorandum of incorporation. On the other hand,
authorisation for a prepayment of insurance might only include the
signature of an individual authorised staff member.
Although the functional areas are unique, internal controls are still
implemented by management in each of them in order to ensure the
achievement of an entity’s control objectives (occurrence and
authorisation, accuracy and the completeness of nancial information).
Auditing the investment and nancing cycle may be divided into three
categories:
1. Audit of certain current and non-current assets, such as prepaid
expenses, intangible assets, goodwill, property, plant and equipment
2. Audit of nancial instruments, shareholders’ equity, long-term
liabilities and statement of comprehensive income accounts
3. Audit of cash and investments
Bearing this in mind, consider the following scenario. Rent-a-Car (Pty)

Ltd (Rent-a-Car), one of the leading car rental companies in South
Africa, offers a eet of approximately 16 000 vehicles at over 98 locations
throughout South Africa. In the performance of your duties as the
company’s auditor during the year-end audit, you have:
1. examined copies of debenture agreements in order to con rm that
they were in the name of Rent-a-Car (Pty) Ltd
2. inspected a sample of monthly bank reconciliations for the signature
of the person performing the authorisation
3. observed whether the function of initiating a property, plant and
equipment acquisition had been segregated from the nal approval
thereof
4. examined the minutes of the board of directors meetings, as well as
any communication with Rent-a-Car’s legal counsel, in order to
determine whether or not there was any pending litigation with
regard to trademarks, patents and/or copyrights
5. veri ed the mathematical accuracy of the last bank reconciliation for
the year under audit and agreed the balance to the general ledger,
trial balance and nancial statements
6. determined the basis for valuing investments by tracing values to
published quotations for marketable securities
7. inspected the minutes of meetings of the board where the acquisition
of a long-term loan had been authorised by the directors
8. compared the schedule of provisions for the current nancial year to
that of the previous year, following up on any provisions not included
on the current year’s list or those that had changed signi cantly in
value
9. traced the proceeds from the disposal of vehicles in the eet to the
bank statements of the company
10. con rmed the market value for the listed shares in which the
company had invested by means of an inspection of the relevant
stock exchange publications.
REQUIRED
For each of the 10 audit procedures provided above, identify the
category of the investment and nancing cycle in which the audit
procedure would typically be performed, stating whether such a
procedure is a test of control or a substantive procedure. Present your
answer in tabular form.
[16]
CHAPTER 11 Overview of the audit process
CHAPTER 12 Pre-engagement and planning activities
CHAPTER 13 Audit procedures: Essential concepts
CHAPTER 14 Audit procedures: Speci c considerations
CHAPTER 15 Completion of the audit
CHAPTER 16 e independent review

CHAPTER 17 Additional questions
INTRODUCTION
e topics contained in this chapter provide a background to those

included in the rest of the book. Normally, they are not tested on their
own, but a thorough understanding of them will enhance your
application of these topics in later chapters.
QUESTIONS
Question 1 LEVEL 1
Stages and steps
[13 marks]
External audit is a systematic process of obtaining and evaluating
evidence and information objectively regarding assertions about
economic actions and events in order to determine the degree of
correlation between those assertions and prede ned criteria, and to
communicate the results in writing to the users of the nancial
statements.
REQUIRED
List the phases of the audit process and discuss the steps or
considerations appropriate to each phase.
[13]
Question 2 LEVEL 1
Audit evidence
[7 marks]
In order to demonstrate compliance with the International Standards

on Auditing when conducting an audit, an auditor is required to
prepare and to retain audit documentation, which is presented in the
form of working papers kept in an audit le.
REQUIRED
List examples of audit documentation that should be prepared and
retained by an auditor and explain why an auditor should prepare audit
documentation in a timely manner.
[7]
Question 3 LEVEL 1
Audit evidence
[7 marks]
An auditor’s audit opinion and report are based on audit evidence that
the auditor collected during the ‘obtaining audit evidence’ phase of the
audit process and which is contained in his/her working papers (audit
documentation).
REQUIRED
Describe the requirements for audit evidence.
[7]
1. e audit evidence needs to be:

a) sufficient (the measure of quantity); and (1)
b) appropriate (the measure of quality). (1)
2. e sufficiency and appropriateness of audit evidence are
interrelated. (1)
3. e quantity of audit evidence required is affected by the auditor’s
assessment of the risk of material misstatement (the higher the
assessed risks, the more audit evidence is likely to be required). (1)
4. e quantity of audit evidence required is also affected by the quality
of such evidence (the higher the quality, the less audit evidence may
be required). (1)
5. When determining the quality (appropriateness) of audit evidence,
the relevance, as well as the reliability, of such evidence needs to be
taken into account. (2)
6. e relevance of audit evidence refers to the logical connection to, or
bearing upon, the purpose of the audit procedure and, where
appropriate, the assertion under consideration. (1)
7. e reliability of audit evidence is in uenced by the source and the
nature of the evidence. (1)

Note:
As the concepts/principles of sufficient and appropriate audit evidence
are important, they should be kept in mind when formulating audit
procedures in chapters 13 and 14.
Question 4 LEVEL 2
Impact of computerised environment on audit procedures
[7 marks]
Most entities have their nancial statements prepared using accounting

software packages. As a result of using these packages for generating the
nancial statements subject to audit, the auditor has to consider the
impact of the computer environment on the audit process.
REQUIRED
Indicate and discuss the impact/effect of the computer environment on
the audit process during the four phases of that process.
[7]
1. Pre-engagement activities
a) Prior to accepting the audit engagement, the auditor needs to
consider the existence of the computer environment and the
complexity thereof, which will in uence his/her consideration of
his/her professional competence to conduct the audit with proper
care, and speci cally the need for an information technology (IT)
specialist (expert), and the availability thereof. (1)
b) If the auditor concludes that an IT specialist is required, but such a
specialist is not available at the time of the audit, the audit should
not be accepted. (1)
2. Planning
During the planning stage of the audit process, the auditor will
a)
consider the in uence of the computer environment when
identifying and assessing the risk of material misstatement (i.e.
inherent and control risk). (1)
b) Suitable audit procedures should be formulated in order to
respond to the assessed risks, which may include testing the
computerised controls implemented by the management of the
auditee. (1)
3. Obtaining audit evidence
a) In obtaining audit evidence that is sufficient and appropriate, the
auditor may consider the use of computer-assisted audit
techniques (CAATs) in a case where the auditee stores nancial
information electronically. (1)
b) CAATs may be used to perform both tests of controls and
substantive procedures. (1)
c) CAATs are audit procedures performed through the use of
software in order to gather audit evidence in a computerised
environment when it is impractical or inefficient to obtain audit
evidence manually. (1)
d) In order to obtain evidence about the effectiveness of the
computerised control environment and control activities, the
auditor will use system-orientated CAATs. Data-orientated CAATs
are used in order to perform mainly substantive procedures and,
in some instances, also tests of controls. (1)
e) e evaluating, concluding and reporting phase of the audit
process is not affected signi cantly by the existence of the
computer environment. (1)
Question 5 LEVEL 1
Audit opinion: Modi ed and unmodi ed
[4 marks]
An audit opinion is an opinion expressed by an auditor in an audit

report as to whether the nancial statements of an entity are fairly
presented or not. e auditor can express either an unmodi ed or a
modi ed audit opinion.
REQUIRED
Discuss the difference between an unmodi ed and a modi ed audit
opinion and list the different types of modi ed audit opinions.
[4]
INTRODUCTION
e following types of application question may typically be asked

regarding the pre-engagement and planning phase of an audit:
Discuss the factors to be considered prior to accepting an audit
engagement.
Discuss the strategy that an auditor will follow for a speci c audit.
Calculate the planning materiality gure for a speci c audit.
Describe the audit risk or the risk of material misstatement at
nancial statement level.
Assess the audit risk or the risk of material misstatement at nancial
statement level.
Describe the risk of material misstatement at assertion nancial
statement level.
EXAMPLE QUESTION 1
Pre-engagement
[10 marks]
Solomon & Phillips (S&P) is a rm of registered auditors with offices in

Pretoria, Bloemfontein and East London. In October 20X6, S&P was
awarded a tender to be the statutory auditors of Zondi Ltd (Zondi) for
the 20X5 nancial year, after the previous auditors resigned, as they
could not provide Zondi with a quality audit service as a result of staff
shortages.
Zondi, a company listed on the JSE, supplies paper manufactured at
their plant in Mpumalanga, and has distribution outlets in 10 major
South African cities. Zondi’s clientele comprises, among others,
universities and corporate organisations.
e chief executive officer of the company is a quali ed chartered
accountant who is highly regarded in the industry. Since his
appointment 12 years ago, Zondi has been reporting favourable results
and has awarded its shareholders a handsome dividend.
S&P has allocated eight audit team members, including the partner
in charge, who has a 7.5% shareholding in Zondi, to the audit for the
year ended 30 June 20X5.
REQUIRED
Discuss the factors S&P should have considered prior to accepting the
statutory audit engagement of Zondi for the year ended 30 June 20X5.
[10]
GUIDANCE
Discuss the factors1 S&P should have considered prior to accepting2

the statutory audit engagement of Zondi3 for the year ended 30
June 20X6.
[10]

In order to answer a pre-engagement question, you should know the
pre-engagement steps, namely:
Does the auditor want to perform the audit?
Can the auditor perform the audit?
Are there any ethical reasons why the auditor should not perform the
audit?
Are there any statutory reasons why the auditor should not perform
the audit?
Remember that the last action during the pre-engagement phase of the
audit is to nalise the terms of the engagement by means of an
engagement letter.
In order for you to identify the relevant information in the scenario, you
should also know what each of the above-mentioned steps involves. For
example, in order to know whether the auditor wants to perform the
audit, you will need to establish:
whether the auditor is satis ed that his/her rm is not prohibited
from performing the audit in terms of the ISA 210 requirements
whether the auditor wants to be associated with this industry
whether the auditor wants to be associated with the owners or
management of the entity (you need to remember that the auditor
would not want to be associated with management if there were
indications that they lacked integrity: refer to ISQC 1 Guidance on
Management’s Integrity)
what the nature of the client–auditor relationship is likely to be
any signi cant risks of material misstatement that the auditor might
be aware of at this stage
whether taking on the engagement would be a sound business
decision (i.e. whether the company would be willing, and able, to pay
the audit fee).
Read the question
Solomon & Phillips (S&P) is a rm of registered auditors with offices

in Pretoria, Bloemfontein and East London.4 In October 20X5, S&P
was awarded a tender to be the statutory auditors of Zondi Ltd
(Zondi) for the 2016 nancial year after the previous auditors
resigned, as they could not provide Zondi with a quality audit
service5 as a result of staff shortages.
Zondi, a company listed on the JSE, supplies paper
manufactured at their plant6 in Mpumalanga and has distribution
outlets in 10 major South African cities.7 Zondi’s clientele
comprises, among others, universities and corporate organisations.
e chief executive officer of the company is a quali ed
chartered accountant who is highly regarded in the industry.8
Since his appointment 12 years ago, Zondi has been reporting
favourable results and awarded its shareholders a handsome
dividend.9
S&P has allocated eight audit team members, including the
partner in charge, who has a 7.5% shareholding in Zondi,10 to the
audit for the year ended 30 June 2016.
Exam technique
In general, there is not a lot of examination technique involved in a pre-
engagement question. However, in order to obtain the maximum
marks, structure your answer according to the steps set out above under
the heading Identify the theory applicable to the question.
When dealing with the auditor’s ethical issues, remember to structure

your answer according to the Code of Professional Conduct’s
conceptual framework:
Identify the issue.
State the type of threat and the fundamental principle being
threatened.
Consider the signi cance of the threat and, if it is signi cant, deal
with the safeguards.
SUGGESTED SOLUTION
1. Zondi: the industry11

S&P will not have a problem associating itself12 with Zondi, as the
paper manufacturing and supply industry within which it operates is
not a dubious one. (1)
2. e integrity of Zondi’s management13
e CEO of Zondi appears to have integrity, as he is a quali ed
chartered accountant14 who is highly regarded in the industry. (1)
3. Communication with the previous auditor 15
S&P needs to contact the previous auditor in order to identify

whether or not there is any reason why the audit engagement of
Zondi should not be accepted. It is unlikely that there is a reason16
not to accept the audit engagement, as the previous auditor resigned
as a result of not having adequate staff with which to service Zondi.
4. Zondi’s ability to pay the audit fee17 (1)
Zondi will be able to pay the audit fee, as the company has been
paying its shareholders handsome dividends for the past 12
years.18 (1)
5. Auditor’s ethical requirements19
a) e partner in charge of the audit engagement of Zondi has a 7.5%
shareholding in the company. (1)
b) is might create a self-interest threat to objectivity. (1)
c) e threat could be regarded as signi cant. (1)
d) e safeguard that could be applied in this regard is to let the
20
partner dispose of the shareholding, or not to let him/her be

involved in the statutory audit of Zondi. (1)
6. e auditor’s skills, competence and resources21
S&P needs to consider if it has the adequate skills, the competencies
and the resources to service Zondi by taking into account the fact
that:
a) the previous auditors resigned owing to a shortage of staff22 (1)
b) Zondi has a manufacturing plant located in Mpumalanga and
distribution outlets in 10 major cities across South Africa. (1)
7. Engagement letter23
When it is comfortable with accepting the statutory audit of Zondi,
S&P needs to draft an engagement letter highlighting, among other
issues, (1)
a) the responsibility of Zondi’s management and that of the auditors
of S&P
b) the duty of S&P to report a reportable irregularity, if it exists. (1)
EXAMPLE QUESTION 2
Strategy
[4 marks]
You have been the audit partner of Pink Boyd (Pty) Ltd (Pink Boyd) for
the past ve years. Recently, the company decided to expand its
business, not only by selling music both online and in its stores, but also
by providing online lessons for various instruments.
is has made it necessary for you to obtain knowledge of the new
expansion, in the process of which you gathered that:
1. Pink Boyd (Pty) Ltd has branches in 10 different cities throughout
South Africa
2. the maintenance of the application programs used for online sales
are subcontracted to Help Inc.
REQUIRED
Explain how each of the above instances will in uence your audit
strategy.
[4]
GUIDANCE
Explain how each of the above instances24 will in uence your audit
strategy.
[4]

In order to answer the question, you need to know that the audit
strategy typically consists of:
the scope of the audit (what has to be performed)
the timing of the audit (by when it needs to be performed)
the direction of the audit (how it is going to be performed)
the resources to be deployed in order to perform the audit.
Read the question
You have been the audit partner of Pink Boyd (Pty) Ltd (Pink
Boyd) for the past ve years. Recently, the company decided to
expand its business, not only by selling music both online and in
its stores, but also by providing online lessons for various
instruments.25
is has made it necessary for you to obtain knowledge of the new
expansion, in the process of which you gathered that:
1. Pink Boyd (Pty) Ltd has branches in 10 different cities26
throughout South Africa
2. the maintenance of the application programs27 used for online
sales are subcontracted to Help Inc.
Exam technique
ere is not a speci c way of answering audit strategy questions. In
general, though, because the necessary information is provided in the
scenario, you need only to identify the issues and explain how they will
affect the audit strategy and thus the scope, the timing and the direction
of the audit, as well as the resources allocated to the audit.
SUGGESTED SOLUTION
1. a) is will affect the scope of the audit, as all the branches will have
to be visited28 in order for inventory counts to be performed and
their internal controls reviewed. (1)
b) erefore it will have to be ascertained whether or not there are
enough staff members29 available in order to perform all 10 audits
c) Timing is also of the essence, as the branches will have to be (1)
visited both during the course of the year and at year-end,30
which places a burden on human resources. (1)
2. a) is will affect the scope, as the auditors would have to gain an
understanding of both the general and the application controls
(computerised controls)31 at Help Inc. in order to ensure that they
can place reliance on the latter’s internal controls. (1)
b) e auditors might have to make use of a computer audit
specialist32 to help with the evaluation of the general and
application controls (computerised controls) at Help Inc. (1)
EXAMPLE QUESTION 3
Materiality
[10 marks]
You are a rst-year trainee on the audit of Zondi Ltd (Zondi), a company
listed on the JSE that supplies paper manufactured at their plant in
Mpumalanga. Zondi’s clientele comprises, among others, universities
and corporate organisations.
Your audit rm has recently been appointed as the auditors of Zondi.

e following is an extract from the company’s nancial information:
BUDGETED JUNE AUDITED JUNE

20X1 R’000 20X0 R’000
Revenue 12 000 9 500
Gross pro t 9 600 7 600
Operating 4 650 3 850

expenses
2 830 1 820
Pro t before tax
Total assets 45 000 32 000
Total liabilities 28 000 19 000
e actual 20X1 nancial results are not yet available, as management is

currently nalising the closing entries.
Notes:
1. It is anticipated that the sales volume of paper for 20X1 will increase
by at least 10%, as a result of Zondi being able to sell paper in Lesotho
and Swaziland.
2. Zondi plans to purchase new machinery to be used in the production
of paper, in order to meet increased demand.
Your audit rm applies the following percentages in calculating
planning materiality:
Revenue 0.5–1%
Gross pro t 1–2%
Pro t before tax 5–10%
Total assets 1–2%
REQUIRED
Discuss, with calculations, the planning materiality gure for Zondi for
the 30 June 20X1 year-end audit.
[10]
GUIDANCE
Discuss, with calculations,33 the planning materiality34 gure for

Zondi Ltd for the 30 June 20X1 year-end audit.
[10]

In order to calculate planning materiality, you need to know the steps
involved in calculating the gure, as well as the reasons for using certain
information ( gures, etc.):
Choose a set of nancial statement gures to use in the calculation.
Choose a base component within the set of nancial statements
selected.
Determine a range for the base component.
Calculate and conclude on a planning materiality gure within the
range (remember to take the inverse relationship between audit risk
and materiality into account).
Conclude on performance materiality and clearly trivial matters.
You also need to know that planning materiality consists of both overall
and performance materiality, and that the latter will always be lower
than the overall materiality gure.
Read the question
You are a rst-year trainee on the audit of Zondi Ltd (Zondi), a

company listed on the JSE that supplies paper manufactured at their
plant in Mpumalanga. Zondi’s clientele comprises, among others,
universities and corporate organisations.
Your audit rm has recently been appointed35 as the auditors of

Zondi. e following is an extract from the company’s nancial
information:
BUDGETED JUNE AUDITED JUNE

20X1 R’000 20X0 R’000
Revenue 12 000 9 500
Gross pro t 9 600 7 600
Operating 4 650 3 850

expenses
2 830 1,820
Pro t before tax
Total assets 45 000 32 000
Total liabilities 28 000 19 000
e actual 20X1 nancial results are not yet available, as

management is currently nalising the closing entries.
Notes:
1. It is anticipated that the sales volume of paper for 20X1 will
increase by at least 10%, as a result of Zondi being able to sell
paper in Lesotho and Swaziland.
2. Zondi plans to purchase new machinery to be used in the
production of paper in order to meet increased demand.
Your audit rm applies the following percentages36 in calculating

planning materiality:
Revenue 0.5–1%
Gross pro t 1–2%
Total assets 1–2%
Exam technique
Remember: As the calculation of planning materiality is a matter for the
auditor’s professional judgement, you need to motivate the decisions
taken in calculating such materiality. Also remember to deal with the
inverse relationship between audit risk and materiality, and to consider
both overall and performance materiality.
SUGGESTED SOLUTION
1. Decision on nancial results to use in calculating planning
materiality37
a) e choice38 is between the current year’s budgeted gures and
the previous year’s audited results, since the actual results of the
current year are not yet available. (1)
b) e current year’s budgeted gures will be the most appropriate to
use, since they take into account the 10% growth in sales
volumes and the acquisition of the new machinery.39 (1)
c) e current year’s budgeted gures also appear to be stable when
compared with the previous year’s audited gures, and no
other adjustments will be necessary, as the gures already
include the changes in circumstances (the 10% growth in sales
volumes and the acquisition of the new machinery).40 (1)
2. Choose a component in the set of gures selected
a) Zondi is a pro t-orientated entity, therefore it would be
appropriate to use components from the statement of
comprehensive income. (1)
b) Pro t before tax can be considered to be the most appropriate
benchmark, because Zondi is a pro t-orientated entity. (1)
3. Determine a range for the selected component
5–10% of R2 380 000 = R119 000 to R238 000 (1)
4. Calculate a materiality gure within the range
a) Given the fact that this is a new audit engagement, inherent risk41
is assessed as high. (1)
b) As a result, it will be appropriate to consider a planning
materiality gure towards the lower end of the range.42 (1)
c) e lower planning materiality will allow the auditor to obtain
sufficient and appropriate audit evidence to address the high
inherent risk, thereby reducing the audit risk. (1)
5. Conclusion on planning materiality gure43
Based on the calculation above and the discussion on the high
inherent risk the overall planning materiality44 for Zondi will be set at
R119 000. (1)
6. Conclusion on performance materiality gure
75% can be applied to the planning materiality gure to arrive at
performance materiality. A performance materiality gure of R89 250
has thus been calculated for Zondi’s audit. (1)
7. Clearly trivial matters
Clearly trivial matters will be those below R2 380 (2% of materiality)
unless they are qualitatively material. (1)

EXAMPLE QUESTION 4
Risk at nancial statement level

[6 marks]
You are the auditor of Fixit Ltd (Fixit), a company listed on the JSE with
a nancial year-end at the end of February. You are busy with the
planning of the audit for the nancial year ended 28 February 20X1.
For ve years, Fixit, the holding company for a group of smaller
companies, had the contract to supply repair and maintenance services
to 15 municipalities in Gauteng. When the contracts expired in
February 20X1, the company had gentlemen’s agreements with all the
municipalities that the contracts would be renewed. In February 20X1,
when 13 of the municipalities put their repair and maintenance
contracts out to tender, Fixit won only ve contracts.
At the end of January 20X1, the purchase manager had imported
R800 000 worth of inventory from China on credit. is bulk purchase
had been estimated to be sufficient in order to conduct repairs for all 15
municipalities over the following 18 months. Payment for the bulk
purchase, on which penalties and interest are payable on late payment,
is due on 1 May 20X1. As Fixit will receive retention fees from the
municipalities by the end of March 20X1, the company is expected to be
able to meet the payment deadline.
As a result of the loss of clients, Fixit has implemented an incentive
scheme: all managers who achieve a total pro t of R500 000 for their
department for the year ending February 20X1 will each receive a bonus
of R50 000.
While updating your knowledge of the business questionnaire, you
have determined that the company has a lack of internal controls in
various departments. e 20X1 audited nancial statements are
required by 31 March 20X1.
REQUIRED
Describe the risk of material misstatement at overall nancial statement
level.
[6]
GUIDANCE
Describe the risk of material misstatement45 at overall nancial

statement level.46

In order to answer the question, you need to know the difference
between two important concepts in auditing:
1. Audit risk versus the risk of material misstatement
2. Risk at overall nancial statement level versus risk at assertion level
Audit risk comprises three components:

1. Inherent risk
2. Control risk
3. Detection risk
e rst two can be controlled by the company, and the third by the
auditor. Risk of material misstatement refers to the rst two
components only. us, the nancial statements could be misstated
materially as a result of:
fraud
error, or
the incorrect preparation of the nancial statements on the going
concern basis instead of on the liquidation basis.
You also need to know, and understand, the difference between risk at
overall nancial statement level and risk at the assertion level:
Risk at overall nancial statement level refers to risks associated with
the nancial statements as a whole and/or risks that cannot be linked
to a speci c line item.
Risk at the assertion level refers to risks associated with speci c line
items, which could normally be linked to a speci c assertion as well.
Read the question
You are the auditor of Fixit Ltd (Fixit), a company listed on the JSE47
with a nancial year-end at the end of February. You are busy with
the planning of the audit for the nancial year ended 28 February
20X1.
For ve years, Fixit, the holding company for a group of smaller
companies,48 had the contract to supply repair and maintenance
services to 15 municipalities in Gauteng. When the contracts expired
in February 20X1, the company had gentlemen’s agreements with all
the municipalities that the contracts would be renewed. In February
20X1, when 13 of the municipalities put their repair and
maintenance contracts out on tender, Fixit won only ve contracts.49
At the end of January 20X1, the purchase manager had imported
R800 000 worth of inventory50 from China on credit. is bulk
purchase had been estimated to be sufficient to conduct repairs
for all 15 municipalities51 over the following 18 months. Payment for
the bulk purchase, on which penalties and interest are payable on
late payment, is due on 1 May 20X1. As Fixit will receive retention
fees from the municipalities by the end of March 20X1, the company
is expected to be able to meet the payment deadline.
As a result of the loss of clients, Fixit has implemented an
incentive scheme: all managers who achieve a total pro t of R500
000 for their department for the year ending February 20X1 will
each receive a bonus of R50 000.52
While updating your knowledge of the business questionnaire,
you have determined that the company has a lack of internal
controls53 in various departments. e 20X0 audited nancial
statements are required by 31 March 20X1.54
Exam technique
When required to describe the risk of material misstatement at nancial
statement level, you need to establish the indicators that increase the
risk of material misstatement (thus inherent risk and control risk).
erefore, read the scenario line by line and identify such indicators.
Remember that you are looking for indicators that might indicate that
the nancial statements are materially misstated as a result of:
fraud
error, or
You cannot write down the indicator only and expect to earn marks
(unless you are required merely to list the indicators). As part of your
answer, you need to:
write down the indicator
link it to fraud, error or the incorrect preparation of the nancial
statements on the going concern basis instead of on the liquidation
basis
explain how the indicator would lead to the risk mentioned (e.g.
fraud, error or the incorrect preparation of the nancial statements
on the going concern basis instead of on the liquidation basis).
When required to describe audit risk, follow the same approach

described above. However, you need to establish the indicators that
increase detection risk. erefore, read the scenario line by line and
identify such indicators. Remember that you are looking for indicators
that might show that the auditor’s procedures might not detect material
misstatements in the nancial statements. You need to:
link it the auditor’s procedures that might not detect material
misstatements in the nancial statements
explain how the indicator would lead to the auditor’s procedures not
detecting material misstatements in the nancial statements.
When required to assess or evaluate the risk of material misstatement or

audit risk, you need to establish the indicators that increase and
decrease the risk of material misstatement or audit risk. In addition, you
need to reach a conclusion about the risk, indicating whether it is high,
medium or low. Read the scenario line by line and identify the
indicators. Remember: this time you are looking for indicators that
might increase or decrease the possibility that the nancial statements
are materially misstated as a result of either:
fraud
error, or
If asked to do so, look for audit risk indicators that might increase or
decrease the possibility that the auditor’s procedures might not detect
material misstatements in the nancial statements.
SUGGESTED SOLUTION
1. As Fixit is listed on the JSE,55 the company’s nancial statements
might be materially misstated as a result of fraud56 perpetrated in
order to adhere to the JSE’s listing requirements.57 (1)
2. As the company is listed on the JSE,58 the company’s nancial
statements might be materially misstated as a result of fraud59
perpetrated in order to improve the nancial results with a view to
increasing the share price, thereby attracting investors.60 (1)
3. Fixit was contracted to ve municipalities only, which might lead
61
to a major loss of income and pro t;62 therefore, the company’s

nancial statements might be materially misstated as a result of
the incorrect application of the going concern assumption.63 (1)
4. e company has already imported inventory for the repairs and
maintenance for the contracts that they did not win;64 therefore,
the company will not generate any income,65 and they have already
incurred expenses on which penalties and interest are payable, if late
payments are made. e company’s nancial statements might be
materially misstated as a result of the incorrect application of the
going concern assumption.66 (1)
5. Fixit has a lack of internal controls;67 therefore, their nancial
statements might be materially misstated as a result of errors and
fraud,68 as a lack of internal controls make it easier to commit fraud.
Errors will not be picked up.69 (1)
6. Fixit is the holding company for a group of smaller companies.70
Consolidation requires specialised knowledge,71 and mistakes
could be made that might lead to material misstatement in the
nancial statements as a result of error.72 (1)
7. e company requires the audited nancial statements within a
month of year-end,73 which constitutes a tight audit deadline that
might lead to mistakes being made by the compilers of the
company’s nancial statements,74 the outcome of which might be
material misstatement resulting from error.75 (1)
8. Incentive bonuses based on pro ts are payable to the managers,76
which might lead to material misstatement in the nancial
statements as a result of fraud 77 perpetrated in order to increase the
pro ts with a view to achieving the required pro t and thereby the
award of incentive bonuses.78 (1)
EXAMPLE QUESTION 5
Risk at assertion level

[4 marks]
You are working on the audit of Inkwe Ltd (Inkwe), a company that has
been listed on the JSE for the past ve years. Recently, Inkwe decided to
buy a total of 100 properties for use as storage space. As the properties,
the majority of which were nanced through the raising of mortgage
bonds, are situated across South Africa, it will be impossible for you to
visit them all.
REQUIRED
Describe the risk of material misstatement at the assertion level for
property, plant and equipment (PPE).
[4]
GUIDANCE
Describe the risk of material misstatement79 at the assertion level

for property, plant and equipment.80

Refer to the discussion of theory for the previous question.
Read the question
You are working on the audit of Inkwe Ltd (Inkwe), a company that
has been listed on the JSE for the past ve years. Recently, Inkwe
decided to buy a total of 100 properties for use as storage space.81
As the properties, the majority of which were nanced through the
raising of mortgage bonds,82 are situated across South Africa, it will
be impossible for you to visit them all.83
Exam technique
When required to describe the risk of material misstatement at
assertion level, establish the indicators that increase the risk of material
misstatement (inherent risk and control risk). Read the scenario line by
line and identify the indicators. However, remember to include the
inherent risks, such as accounting standards and requirements. In
general, look for indicators that might show that the speci c line item
might be materially misstated as a result of error or fraud.
You cannot write down the indicator only and expect to earn marks
(unless you are required merely to list the indicators). In your answer:
link it to fraud or error
explain how the indicator could lead to the risk mentioned (e.g.
through fraud or error)
state the relevant assertion.
When required to describe the audit risk, follow exactly the same
approach described above. However, you also need to establish the
indicators that increase the detection risk. erefore, read the scenario
line by line and identify these indicators. Remember: you are looking
for indicators that might show that the auditor’s procedures might not
detect material misstatements in the nancial statements.
In your answer:
link it the auditor’s procedures that might not detect material
misstatements in the nancial statements
explain how the indicator could lead to the auditor’s procedures not
detecting material misstatements in the nancial statements
state the relevant assertion.
When required to assess or evaluate the risk of material misstatement or

audit risk, establish the indicators that increase and decrease the risk of
material misstatement or audit risk, and conclude whether the risk is
high, medium or low.
Read the scenario line by line and identify the indicators.
Remember that this time you are looking for indicators that might
increase or decrease the possibility that the speci c line item is
materially misstated as a result of fraud or error.
If asked to do so, look for audit risk indicators that might increase or
decrease the possibility that the auditor’s procedures might not detect
material misstatements in the nancial statements.
SUGGESTED SOLUTION
1. ere is a risk that the properties were not accounted for at the
correct amounts,84 because all the costs on acquisition of the
properties might not have been included in the cost of the
properties, or might have been included incorrectly in the cost of
the properties (valuation and allocation).85 (1)
correct amounts,86 because the useful life of the properties87 might
have been incorrectly estimated (valuation and allocation).88 (1)
correct amounts,89 because their residual value90 might have been
incorrectly estimated (valuation and allocation).91 (1)
correct amounts,92 because the depreciation method selected93 in
order to depreciate them might not re ect the manner in which they
decrease in value (valuation and allocation).94 (1)
correct amounts,95 because the borrowing costs on the mortgage
bonds96 might have been incorrectly allocated (valuation and
allocation).97 (1)

QUESTIONS
Question 1 LEVEL 2
Planning materiality
[7 marks]
You are the auditor of Took his Toll (Pty) Ltd (Took his Toll). e
company, which is responsible for the maintenance of toll roads,
receives a signi cant amount of fees (turnover) by requiring motorists
using the toll roads to pay a minimum fee at the applicable toll gates.
Besides spending approximately 40% of the fees received on the
maintenance of the toll roads and approximately 20% on their labour-
intensive site workers, Took his Toll has invested a signi cant amount of
its pro t accrued over the years on tollgate buildings, including an
offsite cafeteria for its employees.
Appointed as the audit manager responsible for the planning of Took

his Toll’s audit for the year ending 31 March 20X1, you have obtained
the following gures from management on their management accounts
of Took his Toll for the period 1 April 20X0 to 30 September 20X0:
BUDGET ACTUAL BUDGET

FOR THE YEAR TO YEAR TO
YEAR R DATE R DATE R
Gross revenue 10 000 000 4 617 853 5 000 000
Construction costs 3 800 000 1 662 428 1 850 000
Gross pro t 6 200 000 2 955 425 3 150 000
Operating 3 460 000 1 223 571 1 842 000
expenses (labour
and overheads)
Pro t before 2 740 000 1 731 854 1 308 000
taxation
Property, plant and 4 400 000 4 816 577 4 600 000
equipment
Long-term loans 945 000 1 016 561 875 000
Accounts 1 050 000 1 255 872 900 000
receivable
After reviewing the above gures, you believe them to be reasonably

accurate. In addition, you anticipate that Took his Toll will achieve the
budgeted gures for the year ending 30 March 20X1. You have assessed
the overall risk of material misstatement as high.
According to audit rm policy, the following indicators and percentages

may be used in order to calculate materiality:
0.5–1% of turnover
1–2% of gross pro t
5–10% of operating pro t before tax
1–2% of total assets
2–5% of equity
REQUIRED
Determine the planning materiality gure that needs to be used during
the planning phase of the audit of Took his Toll for the year ending 31
March 20X1. Give detailed reasons for your answer, providing all
relevant steps in determining the planning materiality gure. Base your
materiality calculation on the guidelines provided above.
[7]
Question 2 LEVEL 2
[10 marks]
You are the senior auditor on the newly awarded audit of Budget Fly Ltd
(Budget Fly). e company has been listed on the JSE for ve years and
has a December nancial year-end. Your audit rm was appointed as
auditor in October. e previous audit rm was a well-established audit
rm with a reputable reputation. e previous auditors issued an
unmodi ed audit opinion in prior years and the former engagement
partner has agreed to communicate with our rm with regard to
previous audit work conducted by her rm.
e following information was obtained during the planning stage of

the audit:
DESCRIPTION AUDITED BUDGETED UNAUDITED

RESULTS (CURRENT RESULTS
(PRIOR YEAR) (CURRENT
YEAR) RAND YEAR)
RAND RAND
Revenue R980 million R1.2 billion R1.4 billion
Pro t before tax R25 million R50 million R53 million
from continuing
operations
Total assets R9 billion R9.9 billion R10 billion
Additional information:
e current year’s unaudited results are not nalised as the
management of the company are still in the process of updating the
nancial accounts for the last month of the nancial year and will do
so after returning from their end-of-year vacation.
Budget Fly expanded their ying routes to include two locations
outside South Africa:
– three ights a week to Namibia
– two ights a week to Zanzibar
e budgeted gures for the current year take into account the
impact of these additional international ights.
Budget Fly acquired two additional aircrafts in December of the
current year. ey each seat 125 economy class and 32 business class
passengers, which enabled Budget Fly to increase the number of local
ights offered on the Johannesburg-to-Cape Town and
Johannesburg-to-Durban routes.
It is estimated that the aircraft will have a 20-year useful life and a
10% residual value.
e company obtained a R1.8 billion loan from a bank in Switzerland
to acquire the two additional aircraft.
e acquisition of the two additional aircraft was not included in the
20X6 budgeted gures.
It is your rm’s audit policy to use the following benchmark percentages

when calculating planning materiality:
DESCRIPTION PERCENTAGE
Revenue 1–2%
Gross pro t 1–2%
Pro t before tax from continuing operations 5–10%
Total assets 1–2%
Your overall assessment of the risk of material misstatement is high for

the current year.
REQUIRED
Discuss, with calculations, the planning materiality gure for Budget Fly
for the December year-end audit.
[10]
Question 3 LEVEL 3
[11 marks]
You are an audit partner at Du Toit & Mbeka Inc., a medium-sized audit
rm in Cape Town. Go Travel (Pty) Ltd (Go Travel) was recently
allocated to your portfolio during the year and you requested an audit
trainee to commence with the planning of the audit after the pre-
engagement activities were successfully performed. e audit trainee
prepared the following working paper:
Working paper P-1
Client: Go Travel (Pty) Ltd WP P-1

Financial 31 March 20X1 Prepared A.C. Lerk
year-end: by:
Section: Understanding of the Date 15/04/20X1

entity and its environment prepared:
Reviewed
by:
Date
reviewed:
Go Travel was founded in April two years ago and is situated 15 km

outside Cape Town Its main business activity is a travel agency for
outside Cape Town. Its main business activity is a travel agency for
international tours. This will be the rst year that an audit will be
conducted on the nancial statements. The previous year’s gures
were independently reviewed by other external auditors and no
concerns were highlighted in the review report. Go Travel earns
between 5 and 10% commission on all tours, depending on the
agreement with its travel partners.
The entity is run by Chloe Vermaak ( nancial director) and Chris

Moloi (executive director), who are also the founders and
shareholders of the entity. Chloe and Chris are planning to expand
Go Travel rapidly and require the audited nancial statements
within two weeks after year-end in order to apply for additional
nancing from Money Bank. Previous communication from Money
Bank stated that additional funding would be considered when
healthy solvency and pro tability indicators were achieved.
e directors provided you with the following extract from the nancial
statements:
Extract from the nancial statements
ACCOUNTS 31 MARCH 20X1 31 MARCH 20X0

Commission earned (turnover) R552 749 R305 285
Other expenses R95 489 R76 587
Total assets R157 931 R125 879
Total liabilities R105 682 R117 859
During the 20X1 nancial year, Go Travel was awarded a R100 000
one-off contract in order to perform travel arrangements for a
soccer team.
Du Toit & Mbeka Inc. applies the following percentages in

calculating planning materiality:
Turnover 0.5–1%
Gross pro t 1–2%
Total assets 1–2%
REQUIRED
Calculate, properly motivated, the planning materiality to be used for
the audit of Go Travel for the period ending 31 March 20X1. Ignore
taxation for purposes of the question.
[11]
Question 4 LEVEL 3
[14 marks]
You are the audit senior on the audit of Pro Gear Ltd (Pro Gear), a
company which manufactures a wide range of sporting apparel and
footwear, and supplies it to wholesalers around the country. Pro Gear
has a 30 September nancial year-end and is listed on the JSE. e
company is highly leveraged.
e following schedule was compiled by you during the planning stage

of the current year’s audit, re ecting actual and budgeted nancial
gures of Pro Gear:
DESCRIPTION AUDITED BUDGETED UNAUDITED

(PRIOR (CURRENT (CURRENT
YEAR) 12 YEAR) 12 YEAR) 9
MONTHS MONTHS MONTHS
RAND RAND RAND
Revenue R750 million R850 million R630 million
Pro t before tax R22 million R29 million R97 million
from continuing
operations
Total assets R1.15 billion R1.4 billion R1.3 billion
It is your rm’s policy to use the following benchmark percentages

when calculating the planning materiality level:
DESCRIPTION PERCENTAGE
Revenue 1–2%
Pro t before tax from continuing operations 5–10%
Total assets 1–2%
It is also the rm’s policy to reduce the calculated planning materiality

gure by 50% in order to determine performance materiality, while the
clearly trivial level for the audit is calculated at 10% of the performance
materiality gure.
Note:
Management of the company decided at the March board meeting that
it was unnecessary for the company to own a Citation X private plane.
Subsequently, the company was able to sell the plane for R125 million
on 1 April 20X1. is resulted in the company making a pro t of R75
million, calculated as follows: Cost price of R200 million less the
accumulated depreciation up to 31 March 20X1 of R150 million equals
the carrying value of R50 million. Sales price of R125 million less the
carrying value of R50 million equals the pro t of R75 million. R10 million
depreciation is charged to the asset on an annual basis.
e sale was not budgeted for and is therefore not included in the
company’s current year budget appearing above. All effects of the sale
are however, included in the nine months’ unaudited gures.
Your rm’s past experience as the auditor of Pro Gear has shown
that the company’s sophisticated budget process normally provides an
accurate re ection of the actual nancial results and position of the
company presented in the nal nancial statements.
Your overall assessment of the risk of material misstatement was set
as ‘high’ for the current year.
REQUIRED
1. Explain the difference between a factual and likely error.
2. Explain the difference between a qualitative and quantitative
misstatement that might arise in a set of nancial statements.
3. Discuss with detailed workings how you would calculate the planning
materiality, performance materiality and clearly trivial level for the
audit of Pro Gear.
[14]
Question 5 LEVEL 3
[21 marks]
You are the external auditor of Natasha’s Gambling Palace (Pty) Ltd
(Natasha’s Gambling Palace) located in Cape Town. Natasha’s Gambling
Palace’s operations consist of various casinos that conduct business
across the Western Cape. e company is listed on the JSE. Its largest
development is located at the Western Grand entertainment complex.
Natasha’s Gambling Palace owns its own equipment, while the
buildings from which it operates its casinos are leased from the
company’s main investor. During the 20X1 nancial year, Natasha’s
Gambling Palace opened a new casino, also in one of the main
investor’s hotels where it leases business space. For this purpose, it took
out a sizable loan from AfriBank Ltd to fund the addition of new roulette
tables, slot machines and other equipment for the gaming area.
You have just completed the assessment of internal controls for all the
business cycles within the company and concluded that control risk
should be provisionally evaluated as ‘low’, while the susceptibility of all
account balances and classes of transactions to material misstatement,
without considering internal control, is ‘high’ in general. e audit
partner instructed you to calculate planning materiality using the
following guidelines:
Income 0.5–1%
Gross pro t 1–2%
Pro t before taxation 5–10%
Total assets 1–2%
Although the statement of comprehensive income has been fairly

unstable over the past three years, the company has been able to
manage and maintain its gross pro t percentage to the extent of
remaining consistent. Regardless, the company’s nancial situation has
changed signi cantly from the prior year: the statement of nancial
position is not as strong as the directors would like it to be as the
company is running a large overdraft and its trade creditors are long
outstanding.
Also during the 20X1 nancial year, the company’s main investor
invested in improving the infrastructure of the buildings from where
Natasha’s Gambling Palace operates – in order to increase the lease
income potential of the buildings. e investor built, among others, an
amphitheatre next to one of its hotels which can seat 50 000 people.
us far, shows hosted at the amphitheatre by Natasha’s Gambling
Palace have been mostly booked out, with artists like PitBull, Nivo &
Vinz, Fallout Boys and 1Direction (less one member) having performed
there. It is expected that these developments will improve income
during the next couple of years.
You obtained the following actual nancial statement gures from the
chief accounting executive:
31/10/20X1 31/10/20X0
UNAUDITED R’M AUDITED R’M
Extract of statement of comprehensive income

Income 1 452 1 582
Gross pro t 832 870
Pro t before tax 195 230
Extract of statement of nancial position

Property, plant 211 180
and equipment
Total current 575 650
assets

Equity 250 250
Non-current 211 160
liabilities
Total current 464 420
liabilities
During preliminary enquiries to the accounting staff about the

company’s nancial performance and position, they commented that
several errors were made in drafting the actual nancial statements.
ese have not been corrected as yet:
1. It is likely that errors have occurred in the debtors’ book, included in
current assets, because a new accounts receivable clerk was
appointed at the beginning of the nancial year.
2. Income in the amount of R500 000 was not recorded and is not
re ected in the gures above. e effect of this error on gross pro t
amounted to R275 000.
3. ‘Operating expenses’ of R700 000 were re ected under ‘other
expenses’.
REQUIRED:
1. Calculate, with proper motivation, taking all information into
account, the planning materiality gure for the 20X1 nancial
statement audit of Natasha’s Gambling Palace.
2. Brie y explain the relationship between ‘materiality’ and ‘audit risk’.
[21 marks]
Question 6 LEVEL 2
Pre-engagement
[20 marks]
You are a rst-year trainee accountant at Ofentse & Kelebohile Inc.

(O&K), a rm of registered auditors recently appointed the statutory
auditors of Foodworth Ltd (Foodworth) for the 30 June nancial year-
end.
Foodworth is a retail company that manufactures its mainly organic
food products and sells them to upper- and middle-income customers.
Foodworth, which has 32 outlets situated in upper class suburban areas
country-wide, has a factory in Cape Town and a farm on the outskirts of
the city, where it grows its products. Head office is in Johannesburg. e
company has been listed on the JSE since 1999.
O&K became aware that Foodworth would be changing its statutory
auditors when Mrs Jacobs, the wife of the audit partner in charge of the
audit of Foodworth, advised him to tender for the audit. She considered
O&K to be the most appropriate auditors for the company, as the
majority of O&K’s clients are in the food retail industry. Mrs Jacobs is
the chief nancial officer (CFO) at Foodworth.
After O&K was awarded the tender, Mrs Jacobs requested O&K to assist
the company with the following non-assurance services:
e identi cation of potential investors to invest in Foodworth (the
investments will be used to expand into the East African market)
e preparation of the company’s tax returns (the CFO will take full
responsibility for the returns, including any signi cant judgement
made)
For the year ended 30 June, Foodworth’s reported pro t for the year was
R13 million. e processing of all transactions is done using Data-
Adapta-System (DAS) accounting software, and, in order to create a
greener environment and cut down on the use of paper, all
communications with suppliers and bankers are electronic. Foodworth
has a strong, competent internal audit department that assists in
evaluating and monitoring the assessed risks.
e team members for the Foodworth audit comprise the audit
partner, the audit manager and you. e CFO has informed the audit
partner that the audited nancial statements, which will be used in
order to assist the management of Foodworth on strategies for
expanding its market share in South Africa, as well as the signed audit
report, are required three weeks after year-end.
REQUIRED
Discuss the factors that O&K should have considered prior to accepting
the statutory audit engagement of Foodworth for the year ended 30
June.
[20]
Note:
Refer to example question 1 for guidance on how on to approach
answering this question.
1. O&K should have considered the ethical requirements.

a) i) ere is a familiarity threat to the independence of the audit
partner, as the CFO of Foodworth is married to the audit partner in
charge of the company audit. (2)
ii) Safeguard: e audit partner should not have been involved
in the audit. (1)
b) i) ere is an advocacy threat to the objectivity of O&K, as
identifying potential investors in Foodworth could be seen as
promoting Foodworth’s shares. (2)
ii) Safeguard: O&K should not have been involved in identifying
any potential investors in Foodworth. (1)
c) e audit rm will be providing the tax services (the preparation of
tax returns) for Foodworth. In terms of SAICA’s Code of
Professional Conduct, the preparation of tax returns will not create
any threat to independence, as the CFO is taking responsibility for
the returns, including any signi cant judgement made. (2)
d) i) O&K should have considered whether there would be any
con ict of interest between Foodworth and existing clients in the
food retail industry, which might create a self-interest threat to
O&K’s objectivity and con dentiality. (1)
ii) Safeguards: Notifying all the relevant parties that O&K will be
acting for two or more parties; the use of separate
engagement teams. (2)
e) As Foodworth has reported pro ts for the year of R13 million, its
ability to pay the audit fee is not in question. (1)
f ) O&K should have considered whether there was a vacancy for the
appointment of a statutory auditor in terms of the Companies Act
71 of 2008 prior to accepting the audit engagement of Foodworth.
g) O&K should have contacted the previous auditors in order to (1)
identify whether there was any reason not to accept the statutory
audit engagement of Foodworth. (1)
h) Foodworth is in the food industry. ere is nothing that suggests
that the audit rm would not want to associate itself with this
industry, given the fact that it has other clients in the same
industry. (1)
2. e rm should have considered its skills, competencies and
resources.
a) ree people are not sufficient to audit an entity the size of
Foodworth. (1)
b) As the audit needs to be completed three weeks after year-end,
this will be a tight audit deadline and, given the limited number of
audit team members, the deadline might not be met. O&K should
have considered increasing the number. (1)
c) e audit rm should have considered whether it had the
necessary auditing software in order to audit the nancial data
stored in the DAS accounting software. (1)
d) Consideration should have been given to engaging an IT expert to
assist with auditing the computerised controls. (1)
e) O&K should have considered the in uence that work performed
by the internal audit would have on the statutory audit. (1)
3. O&K should have given consideration to drafting an engagement
letter highlighting, among other issues:
a) the responsibilities of both the auditor and management (1)
b) the duty of the auditor to report any reportable irregularity (1)
c) the tax return services to be provided. (1)
Question 7 LEVEL 2
Pre-engagement activities
[12 marks]
Feldmans Inc. has been the auditor of the Eastland Dairy Ltd group
(Eastland Dairy) for the past four years and is currently considering
whether to accept reappointment as the company’s auditor for its
September 2015 nancial year-end.
Company background
Eastland Dairy was incorporated 22 years ago and is listed on the JSE.
Down Under Investment Ltd, a company based in Sydney, Australia,
owns 65% of the company’s shares and the remaining 35% of the shares
are owned by members of the South African public.
e entities in the Eastland Dairy group produce a wide range of
cheese, butter, yoghurt, milk and ice cream products. e group sells its
products both in local and in the Zambian, Namibian and Botswanan
markets. Some of the products sold in these foreign markets are
produced in the other countries by dairies owned by the group, while
other products are imported from South Africa.
Eastland Dairy has level 1 BBBEE contributor status and was
recently recognised for its efforts in leading the industry in the area of
corporate social responsibility.
Other pertinent company information

During the nancial period (in July), the company recalled its
strawberry yoghurt product sold in South Africa after it emerged that
some consumers had become seriously ill after eating it. It was
subsequently discovered that an ingredient used in manufacturing the
strawberry yoghurt was contaminated. e recall cost the company
millions of rands, but the company’s chief operating officer, Mr Ryan,
was quoted as saying that the ‘health and safety of the public was more
important to the company than the bottom line’. e company has
sourced a new supplier of the ingredient and plans on re-launching the
product in the next nancial year.
e recall of the yoghurt product had an effect on the public’s
con dence in the other products sold by the group, which resulted in
the group losing a portion of its market share to smaller dairies in South
Africa.
e company migrated its accounting records from an old
accounting system it had used for the past 10 years to a newly
developed in-house accounting software package. e migration was
done in stages and completed in June during the nancial year.
Audit-related aspects
Ms Kelly has been the engagement partner on the audit of Eastland
Dairy for the past three years, while Mr Milner was appointed as the
human resources director of Eastland Dairy at the start of the 20X5
nancial year. e two were introduced at a Christmas party at the end
of the previous nancial year and got engaged in April of the 20X5
nancial year. e interim audit is scheduled to take place during the
rst two weeks of July 20X5.
Feldmans Inc. does on occasion make use of component auditors to
assist it with audit work to be performed in regions located outside
South Africa.
As part of planning the audit, signi cant reliance has been placed
on the internal control audit procedures performed by Eastland Dairy’s
internal audit department during the nancial year.
A representative of Down Under Investment Ltd has indicated that it
requires audited nancial statements by the end of the third week of
October in order for the company to consolidate its results.
REQUIRED
Discuss the matters that Feldmans Inc. would have considered prior to
accepting the reappointment as auditor of Eastland Dairy for the 2015
nancial year.
[12]
Question 8 LEVEL 2
[15 marks]
You are a manager at Ace Audits Inc. (Ace Audits) a medium-sized audit
rm with offices in Johannesburg, Pretoria and Cape Town. Ace Audits
Inc. is currently considering whether to accept the appointment as
external auditor of All Bronze Ltd (All Bronze) for All Bronze’s nancial
year ending 31 January 20X6. is is as a result of Mr Peach, the chief
executive officer (CEO) of All Bronze, asking Jakes Apricot in January
20X6 to have Ace Audits tender for the position of external auditor. Jakes
Apricot is a trainee accountant at Ace Audits and the nephew of Mr
Peach. Mr Peach also requested that Ace Audits should perform some
secretarial and taxation services for All Bronze.
All Bronze is an entity manufacturing chutney and was formed in
the early 1980s. e company had a turbulent period during the rst
decade of operation, but pro tability has increased steadily. Currently,
the entity is highly pro table. All Bronze owns approximately 35% of the
chutney product market of South Africa and faces only one noteworthy
competitor, Mr Molls (Pty) Ltd. All Bronze’s manufacturing plant is in
Johannesburg, and its head office is in Pretoria.
e entity imports all product ingredients from various countries
around the world in order to ensure high quality of its nal product.
Management has always promoted a strong internal control
environment and therefore all import transactions are hedged.
Management also strives to fully comply with the requirements of King
IV™ and communicates ethical codes to all levels of employees at All
Bronze. e deadline for completion of the nancial statements is
strictly adhered to in accordance with the Companies Act.
Most of Ace Audits’ clients’ year-ends are between the end of
December and the end of February each year, and its clients’ type of
industries range vastly, from retail to manufacturing to investments. e
previous auditors of All Bronze resigned due to a staff shortage, but are
willing to meet Ace Audits, with All Bronze’s permission, in order to
provide Ace Audits with relevant information and prior year working
papers.
REQUIRED
Discuss whether Ace Audits should accept the audit engagement of All
Bronze for its 31 January 20X6 nancial year.
[15]
Question 9 LEVEL 2
[13 marks]
You are an audit manager at KBNV Inc. (KBNV), which operates

primarily from Port Elizabeth and has been assigned to the 29 February
20X1 audit of Fresh Air Ltd (Fresh Air), a company that has been
providing the South African public with a wide range of fragrant
solutions since the company was incorporated 20 years ago. e
company listed on the JSE 10 years ago and has a March year-end. It is
the rst year that the audit rm you work for will be auditing Fresh Air.
e company is 65% owned by the Fresh family, from where the
company draws its name, and the remaining 35% is owned by other
investors. From your initial discussions with the chief operating officer
(COO) of Fresh Air, you gathered the following information:
Product information
e company’s products are produced in a variety of forms and
fragrances, from robust aerosols to slow releasing gels. A total of 75% of
its products are manufactured at the company’s newly completed
factory located at Coega, near Port Elizabeth, in the Eastern Cape. e
remaining 25% of the products are produced at the company’s other
factories located in Cape Town and Johannesburg. Fresh Air aims to
have all production moved to the new facility over the course of the next
two years.
e products are sold to both wholesalers and retailers around the
country.
Marketing information
Fresh Air was forced to reconsider its sales and marketing strategy at the
start of the 20X1 nancial year due to an unexpected increase in market
competition. e increase came about as a result of a number of new
fragrance suppliers importing cheap products from the Far East and
then selling these to wholesalers and retailers at prices much lower than
that of Fresh Air’s products.
e company implemented a new state-of-the-art supply chain
management computer system during July 20X0. e new system has
enabled the company to produce more products at a reduced cost,
which may result in greater market share through increased sales. All
employees involved in the supply chain process were sent on rigorous
training courses.
e change in sales and marketing strategy as well as the
implementation of the new supply chain management computer
system has ensured that the company has remained pro table in the
midst of the new competition.
Other pertinent information

Mrs Nel, the marketing director, recently got married to Mr Nel, an
audit partner at KBNV not assigned to the audit of Fresh Air.
KBNV was appointed as the company’s external auditor at the
company’s annual general meeting held in June 20X0. It was
announced at the annual general meeting that the 20X1 audit was
awarded to KBNV as a result of the rm’s excellent reputation and
great technical ability.
KBNV increased the number of audit trainees it appointed at the start
of the 20X1 calendar year from 50 to 75 new trainees. e decision
was made to ensure that the existing employees of the rm do not
work unreasonable hours for months on end.
Fresh Air was previously audited by Canister Inc. (Canister). e
engagement partner at Canister, who was the designated auditor for
Fresh Air, indicated at the above annual general meeting that
Canister had resigned as a result of the audit rm changing its focus
and strategy: it has decided to grow its advisory services division and
to decrease the amount of time spent on external audits. e partner
thanked the board of directors for their commitment to business
excellence and for always paying the audit fees on time, and he
wished the executive leadership and shareholders all the best for the
future.
REQUIRED
Discuss the matters that KBNV would have considered prior to
accepting the appointment as the auditor of Fresh Air for its 20X1
nancial year.
[13]
Question 10 LEVEL 3
Client acceptance decision
[26 marks]
You are a partner at FZ, a rm of chartered accountants and registered

auditors, and you are a member of a three-person panel tasked with
deciding whether or not new clients should be accepted by the rm.
e information below relates to three prospective clients that have to

be assessed for client acceptance by the panel of which you are a
member:
1. LifeAfrika Ltd (LifeAfrica), a JSE-listed company, markets life
assurance products and related nancial services in South Africa and
14 other countries on the African continent. LifeAfrica was recently
ned an amount of US$2.6 billion by regulators in one of the
countries where it operates (one of the most populous countries in
Africa), and may lose its licence to provide services in that country.
LifeAfrica’s management released information about the ne only
after journalists became aware of the ne having been imposed and
started contacting the company for comment. LifeAfrica was also
ned by regulators in another country less than two years ago.
2. Breadwinners Ltd (Breadwinners), a JSE-listed company, is a
diversi ed food group. In the previous nancial year, the company
had problems with acquisitions that did not prove as successful as
had been hoped, impermissible accounting practices, and lower-
than-expected demand in its substantial milling division. In response
to these problems, Breadwinners red its auditors (after the
conclusion of the prior year audit), and all three of its executive
directors (the chief executive officer and managing director, the chief
nancial officer and the chief operating officer) who served on the
company’s board resigned in the past year. e company’s chairman,
who used to be its chief executive officer, has been acting as its chief
executive officer for the past six months.
3. Upinsmoke (Pty) Ltd (Upinsmoke) is a manufacturer of cheap
cigarettes that it distributes in the major cities of South Africa.
Upinsmoke was founded three years ago by former senior
management-level staff members of a multinational cigarette
manufacturing company, and has gained a good market share since
then. e company has informed you that it needs loan funding to
expand its manufacturing plant in Germiston and will be presenting
its next set of audited nancial statements to a number of banks as
part of that process. e managing partner of FZ is a close friend of
Upinsmoke’s chief executive officer and is strongly in favour of taking
the company on as a client.
REQUIRED
Discuss how the information provided above would in uence your
judgement on the acceptance decision relating to each of the
prospective clients.
[26]
Question 11 LEVEL 2
Pre-engagement
[12 marks]
As the audit partner in the medium-sized audit rm of Perfect Services

Inc. (PSI), you have had a discussion with a friend who has recently
completed her electronic engineering degree. ree years ago, together
with fellow students from the same faculty, she registered a private
company, Special Speech (Pty) Ltd (Special Speech), a company
specialising in speech technology services that has shown signi cant
growth in the last two years. Transactions are processed using a Unix
system.
Because her previous auditors did not apply International Financial
Reporting Standards (IFRS), which would have presented the company
in the most favourable light, she asked you to perform the audit.
You asked the audit senior at PSI to contact your friend with a view
to drawing up a potential client pre-acceptance working paper.
Working paper
Prepared by: H.D.C. du Plessis (audit senior)
Date: 15 March 20X1
Subject: Pre-acceptance working paper
SUITABLE CRITERIA SATISFIED

Independence of the auditor YES
Special Speech (Pty) Ltd has demonstrated the YES
ability to settle the audit fees
Issue of engagement letter agreeing to the YES
engagement terms
REQUIRED
Describe any additional pre-engagement activities that need to be
considered and addressed before you accept the auditing engagement
of Special Speech.
[12]
Question 12 LEVEL 2
[9 marks]
Mereki Platinum Mines Ltd (Mereki) is a small platinum mine situated

in Rustenburg, North-West Province with head offices in Johannesburg.
e company, which was established in 1989, is listed on the JSE.
As a rst-year trainee accountant at Mbatha Inc. (Mbatha), which has

been the auditors of Mereki for ve years, you are responsible for the 30
June audit of the property, plant and equipment section. You have been
provided with the following information:
AMOUNT (R) NOTES

Property 41 250 000 1
Plant 39 689 890 2
Equipment 27 100 300 3
Total 108 040 190 4
Notes:
1. ‘Property’ relates to the land on which the mining operations take
place and on which the head offices are located.
2. ‘Plant’ relates to the actual mine and warehouse, which have been
provided as security for the bank loan acquired that year.
3. During the course of the year, additional mining equipment was
acquired from a supplier in Germany, as a result of which such costs
as import duties and transportation were incurred. Settlement was
made in euros. In order to ensure that they operate optimally, the
machines undergo maintenance every six months.
4. Mereki follows IFRS. Property, plant and equipment (PPE), which is
measured at a cost model, is depreciated using the estimated useful
life of each signi cant component, after the residual value has been
deducted on a straight line method.
REQUIRED
Describe the risks of material misstatement at the assertion level for
property, plant and equipment of Mereki Platinum Mines for the year
ended 30 June as evinced in the above scenario.
[9]
Question 13 LEVEL 2
[12 marks]
As a rst-year trainee accountant at Motholo Inc. (Motholo), you are

currently assigned to a team responsible for the audit for the nancial
year ended 30 June of BesaNama (Pty) Ltd (BN), whose nancial
statements have not been audited before.
An entertainment outlet that provides facilities for braaiing and for
having one’s car washed and valeted while one enjoys a drink (either
non-alcoholic or alcoholic) and snacks, BN operates weekdays between
11h30 and 22h00, and on weekends between 11h30 and 02h00. On
Saturdays and Sundays, which are the busiest days for BN, customers
are entertained by a live band.
BN’s operations are based in Tembisa, a township in the Ekurhuleni
municipality, and Mamelodi, a township in the City of Tshwane
municipality.
e company, which was established 15 years ago, is a family
business managed by the husband and wife team of Mr and Mrs
Chauke. Until just over a year ago, when an accounting software system
was purchased, Mrs Chauke was responsible for handling BN’s nancial
affairs, manually recording all transactions. en, when abo Chauke,
the couple’s son, who had just completed Grade 12, was appointed
nancial manager, he took over responsibility for the company’s
nancial affairs and the recording of all transactions.
Although he attended a training course in order to become
acquainted with the newly acquired accounting software system, abo
has acknowledged that he is not as yet fully au fait with the system, as a
result of which he sometimes makes mistakes while capturing
transactions. In addition, as a result of the high volume of transactions
and his being the only responsible person (apart from a cousin who
helps with the capturing of transactions at the Mamelodi outlet) for the
recording of transactions, he was not able to record all such
transactions. abo and his cousin are paid an annual bonus based on
pro ts for the year.
BN’s monthly revenue averages R600 000. Sometimes, however,
when the company operates on weekends beyond 02h00 in order to sell
alcoholic drinks in contravention of the South African Liquor Act, this
gure can rise to R1 000 000.
e company has seen a gap in the market and intends to grow its
business to other townships in Gauteng. In order to do so, BN has
applied for a bank loan, approval of which depends on its audited
nancial statements.
REQUIRED
Identify the risk indicators evinced in the above scenario. In each case,
describe the risks of material misstatements at overall nancial
statement level of BN the year ended 30 June. Answer using the
following tabular format:
RISK INDICATOR RISK DESCRIPTION

[12]
Question 14 LEVEL 2
Risk at assertion level, the audit approach and the risk thereto
[22 marks]
Dikoloi Ltd (Dikoloi) is an automobile-, motorcycle- and engine-

manufacturing company founded in 20X2 with its head office and
manufacturing plant in Brits, North-West Province. Dikoloi adopts IFRS
in preparing its nancial statements.
As a rst-year trainee accountant at Phillips & Sons Inc. (Phillips &

Sons), you have been assigned to the team responsible for the audit of
Dikoloi for the year ended 30 June. You are tasked with the audit of the
following accounts:
Inventory
AMOUNT (R) NOTES

Raw material 410 000 000 1
Work in progress 320 000 000 2
Finished goods 860 000 000 3
Total 1 590 000 000
Notes:
1. Raw material is sourced both locally and in Germany with the
German account being settled in euros. Such costs as import duties
and transportation are incurred when raw material is purchased from
the foreign supplier. At year-end, there was inventory, purchased free
on board from the supplier, that was still at sea.
2. Work in progress represents automobiles and motorcycles that are
incomplete and therefore not yet ready to be sold.
3. Dikoloi follows a standard costing method in order to account for the
allocation of costs to its nished goods.
Loan
Two years ago, Dikoloi obtained a ve-year term loan from ABBA Bank
in order for the company to increase production. e loan attracts
interest at 12% per annum, with interest payable twice a year.
Share capital
During the year under review, additional shares were issued in order to
raise funds to open an additional plant in East London. e directors
issued the shares without rst con rming that there were enough
unissued shares for issue in terms of Dikoloi’s memorandum of
incorporation.
Salaries and wages
AMOUNT (R) NOTES

Salaries 5 600 000 1
Wages 3 280 000 2
Total 8 880 000 3
Notes:
1. Salaries are payable at the end of each month to permanent
employees, who are paid according to set salary scales.
2. Dikoloi has over 500 employees who earn wages, which are paid
weekly on a Friday. Such employees are employed on a contract basis
and earn a speci ed rate per hour. A higher rate is paid to employees
who work overtime.
3. ere are such third-party costs as PAYE and medical aid
contributions that Dikoloi withholds from the payment of employees
in order to pay the amount over to the respective authorities.
REQUIRED
1. Describe the risks of material misstatement at the assertion level
relating to the identi ed accounts at Dikoloi as evinced in the above
scenario for the year ended 30 June. Link each of the risks to an
assertion. (11)
2. Describe the audit approach/responses appropriate to addressing the
risks of material misstatements identi ed in the rst question.
Detailed audit procedures are not required. (11)
[22]
Question 15 LEVEL 3
Risk at assertion level and the response thereto
[20 marks]
You are the audit senior on the audit of Leading-Page (Pty) Ltd
(Leading-Page). e company, which is growing at a rapid rate,
manufactures coated paper that it distributes throughout Africa. e
company has a March nancial year-end.
e following information was brought to your attention during a

meeting held in November with the chief nancial officer of the
company:
Leading-Page obtained a loan from Financial Bank in the US for $1
million.
e four-year loan is payable annually in arrears at a rate of 12% per
annum on the outstanding balance.
e funds from the loan were used to purchase several of the latest
paper-manufacturing machines from a supplier in the US at a cost of
$125 000 each.
Four of the eight machines ordered had arrived by year-end, while
the remaining three are scheduled to arrive in June of the next
nancial year.
e company has two production facilities: one in Cape Town, which
specialises in the production of graphic paper, and the other in
Johannesburg, where a range of coated paper is manufactured.
Leading-Page uses several logistics companies for the transportation
of paper within South Africa and to neighbouring countries. In the
case of those foreign cities/towns located more than 4 000 km away,
the company makes use of sea freight in order to transport the paper
to the closest port of entry for that country, after which it is the
buyer’s responsibility to arrange transport of the imports to their nal
destination(s).
All sales to buyers outside South Africa are concluded in US dollars.
Leading-Page hedges 40% of its foreign transactions.
As the company does not accept cash or cheque payments, all sales
are concluded via EFTs. e credit terms stated in the contracts
between Leading-Page and its buyers determine the amounts due
and the dates by which payments are required.
A select group of buyers has been granted the right to hold 30% of the
inventory ordered on consignment on a trial basis. If it proves to be
pro table, the company might increase the number of such buyers.
REQUIRED
Describe the risk of material misstatement at assertion level as
evidenced in the above scenario, in each case giving your responses
thereto in your capacity as the auditor of the company.
[20]
Question 16 LEVEL 2
[10 marks]
You are commencing your third year as a trainee accountant. e senior

manager on the client has selected you to plan the current year’s audit
of the Gold Group (Pty) Ltd (Gold Group). e company has a
December year-end. You obtained the following information while
preparing your planning working papers:
Inspection of the prior year audit le

e company was incorporated eight years ago and owns a large
number of retail stores in South Africa.
e company’s stores are located in and around shopping malls
across South Africa. e Gold Group is made up of the following
companies:
– Gold’s Elegant (Pty) Ltd sells high-end clothing from 10 stores
with a target market being young and seasoned professionals.
– Gold’s Bridal (Pty) Ltd sells male and female bridal apparel from
ve stores with a target market being engaged couples.
– Gold’s Sporting (Pty) Ltd sells both sporting apparel and a limited
number of sporting goods from 10 stores with a target market
being sportsmen and -women of all ages.
– Gold’s Urban and Youth (Pty) Ltd sells urban clothing from 15
stores with a target market being youth and young adults.
Customers can acquire products from any of the stores in the group
by either paying cash or buying on credit when using their Gold’s
customer card which has a predetermined credit limit on it.
Customers who acquire products on credit are charged interest
– on their outstanding balance.
– e interest is compounded on a daily basis.
– e interest charged on the outstanding amount is based on the
customer’s risk pro le and could be charged up to the maximum
interest rate allowed in terms of the National Credit Act.
– Where the customer defaults on a monthly payment, penalty
interest will be charged using the maximum interest rate allowed
in terms of the National Credit Act.
Customers qualify for loyalty programme discounts when purchasing
certain products.
Customers are permitted to return products up to 60 days after
acquiring them. All returns must be accompanied by an original
receipt and are subject to a quality control check.
e chief nancial officer estimates that 10% of the products
purchased will be returned and it is the company’s policy to
recognise only 90% of the sale until the 60 days has passed by.
Products sold by the stores within the Gold Group are acquired from
local suppliers and foreign suppliers in the Far East. Products
purchased from foreign suppliers are generally shipped freight on
board to Durban harbour before being distributed to the various
stores.
Discussion with the chief nancial officer

e group attributes its success to having built up relationships with
good suppliers in the Far East. It is the group’s policy to make use of
foreign exchange hedges to mitigate the effect of exchange rate
movements. e group hedges 50% of its foreign purchases as their
transactions are denominated in US dollars.
e company’s primary focus is the sale of clothing to the South
African public, but it recently acquired the Home Specialist Store, a
private company with 10 stores around the country which specialises
in supplying kitchen and bedroom related products.
– Customers are able to use their existing Gold Store customer
cards to purchase goods on credit from the Home Specialist Store.
– e ‘Home Specialist Store’ had sold products only for cash prior
to being acquired by the Gold Group.
e company obtained a R15 million loan from the Industrial
Development Corporation in October of the current nancial year in
order to acquire the Home Specialist Store. e loan is repayable over
the loan term of seven years with interest charged at prime +2%
payable on a monthly basis.
REQUIRED
Describe the factors that increase the risk of material misstatement at
account and assertion level.
[10]
Question 17 LEVEL 2
[16 marks]
You have recently been appointed as auditor of Mobile Connectivity Ltd

(Mobile Connectivity). e company is one of the largest internet
service providers in South Africa and was incorporated 10 years ago.
e company was listed on the JSE two years ago. During the
preliminary engagement procedures, you held discussions with senior
personal.
Ms Brittany Sumrall, the chief executive officer, indicated the following:

e company’s central administration office is located in Durbanville
and it has several branches located in shopping malls in and around
South Africa, as well as four branches in Namibia from which the
products (ADSL available in both South Africa and Zimbabwe, bre
optic cables and wi on-the-go currently available only in South
Africa) are sold.
e company signed an agreement with the Western Cape Provincial
Government to supply bre optic cables to several underdeveloped
urban areas in and around the City of Cape Town. e project will
grant thousands of people access to high speed internet which they
normally would not have had and is part of a drive by the local
government to uplift the social standing of individuals in the
province. e contract was awarded to the company as a result of its
excellent track record, the integrity of management, and the fact that
the company is a leader in the eld of corporate social responsibility.
e company expanded its ADSL services to Zimbabwe by opening
two branches in Harare and two in Bulawayo. e company has a
seven-year plan to expand its footprint into other neighbouring
countries.
Invest PLC, the majority shareholder in Mobile Connectivity, requires
the audited nancial statements within three weeks of the December
nancial year-end in order to meet its reporting deadline.
Mr abo Vilakazi, the chief nancial officer, indicated the following:

e pro t margin of the company increased slightly over the past year
even though there was an increase in the number of smaller service
providers entering the industry.
e company’s management took a strategic decision half way
through the year that it would reduce its rates substantially in order to
compete with the rates being offered by the smaller service providers.
e company imports its bre optic cables from Fibre Corp, a
manufacturer of bre optic cables, in Dallas, Texas. e uctuation of
the rand has caused the directors of the company to reconsider the
current policy of hedging 25% of foreign purchases.
Mr James, the human resources director, indicated that the company’s

bonus structure works in the following way:
Employees of the company, other than executive directors and senior
management, receive a bonus equal to one month’s salary in the
month of their birthday.
Executive directors and senior management receive a bonus linked to
the pro t generated by the company during the nancial year.
Additional information:
Mobile Connectivity’s previous auditor resigned after servicing the
company for nine years. e previous auditors determined that it was
not able to service a client of this size appropriately any longer. e
senior engagement partner on the audit has indicated that his audit
rm is willing to assist your audit team with information regarding
previous audits, but has requested that such assistance be
communicated in a timely manner as all of his managers are
generally extremely busy at that time of the year.
e rm will make use of an audit rm in Zimbabwe to assist in the
performance of audit procedures that are required to be completed at
these branches.
Mobile Connectivity’s reporting currency is South African rand.
REQUIRED
Describe the factors that increase the audit risk at the nancial
statement level.
[16]
Question 18 LEVEL 3
[12 marks]
e following paragraphs provide information about Collectors’

Emporium (Pty) Ltd (Collectors’ Emporium). e business is managed
by Mr Jonah Abercrombie, who has been involved in art and book
dealing for more than 30 years. He also has a 50% shareholding in
Collectors’ Emporium. Collectors’ Emporium’s nancial year-end date
is 31 December:
1. Collectors’ Emporium’s business involves dealing in collectible books
and artworks.
2. Books and artworks are imported from and exported to a number of
countries. Items are transported by plane, as far as possible. Items
that are sold are despatched or released to the buyer only after receipt
of payment, and such items generally are despatched within 48 hours
after receipt of payment. e business closes two weeks before
Christmas and re-opens only in the third week in January.
3. Not long before Collectors’ Emporium’s nancial year-end date,
Flossie Visagie, the company’s bookkeeper, managed to delete all
Collectors’ Emporium’s receivables records while trying to make
backups. She has since tried her best to reconstruct the receivables
records, but due to her poor record-keeping, the process involved a
considerable degree of guesswork.
4. e business operates from Mr Abercrombie’s sprawling house in
Houghton, Johannesburg, with most of the rooms used to display
business inventory. Mr Abercrombie is a collector himself, and many
of his own artworks are displayed in the rooms where the business
inventory is displayed.
5. Mr Abercrombie takes items in for selling on a consignment basis,
but these items are not kept in a de ned area.
6. Collectors’ Emporium employs a full-time art and book restorer, who
is known for the high quality of his work. He restores only books and
artworks that form part of Collectors’ Emporium’s inventory.
REQUIRED
Explain how the information in each of the numbered paragraphs
increases the risk of material misstatement at the assertion level in the
nancial statements of Collectors’ Emporium.
Note: Your answer should not deal with risk at the overall nancial
statement level.
Use the following tabular layout for your answer:
AFFECTED ASSERTION(S) EXPLANATION

1.
2.
[12]
Question 19 LEVEL 3
Audit risk overall level
[19 marks]
You are a senior manager under the employment of Boswell & Sons
Audits Inc. (Boswell & Sons). Boswell & Sons has been recently
appointed as the auditors of Sniffindale Ltd (Sniffindale) for the 20X0
nancial year-end.
Sniffindale is a ski resort located in a very small town called
Sniffindale, South Africa. Sniffindale attracts thousands of local and
overseas tourists and has been in operation for 15 years. e entity is a
subsidiary of a group that is listed on the Australian stock exchange. In
order for all entities in the group to have the same year-end, Sniffindale
changed its nancial year-end during the current year from 28 February
20X1 to 31 December 20X0. In order to complete the consolidation, the
Australian holding company requested Sniffindale’s nancial
statements to be nalised at 21 January 20X1. Sniffindale reports in
rand.
Sniffindale’s management promotes a strong internal control
environment. e accounting function has 10 highly competent,
quali ed and experienced accountants. As Sniffindale strives to
promote care for the environment, all transactions within the company
occur on a fully integrated, computerised system, limiting any
paperwork to the minimum.
Previously management received earnings-based bonuses.
However, on 1 January 20X0, the policy was amended and management
currently earns bonuses based on customer satisfaction.
During the 20X0 nancial year, a global recession hit and Sniffindale
had approximately 25% less customers than previous years. Sniffindale
therefore had to arrange for overdraft facilities at Money Bank, which
requires a liquidity ratio of at least 2:1.
REQUIRED
Evaluate the audit risk at the overall nancial statement level of
Sniffindale, for the 31 December 20X0 nancial year-end.
[19]
Question 20 LEVEL 3
[20 marks]
You are the audit senior on the audit of Poison Ltd (Poison) for the year
ending on 31 October 20X1. e company manufactures poisons for use
against intrusive plants and weeds. Poison was established
approximately seven months ago by a group of friends who recently
obtained their BSc degrees. ey inadvertently and successfully
developed the new poison as a result of a failed experiment during
which they initially attempted to develop a kitchen cleaning product.
ey subsequently formed the company.
e company has been experiencing nancial difficulties and has
not made a pro t to date. e company found it difficult to gain market
share due to strong market competition. As a result, an audited set of
nancial statements is required for submission to the bank to negotiate
additional nancing. e company is also struggling to collect debts,
with an average outstanding debtor period of 101 days at year-end.
e above matter also impacted the company’s ability to pay
suppliers. Two large suppliers have already refused to supply Poison
with any further products until the outstanding debts have been settled.
e current creditor payment period is 79 days. e directors have,
however, told you that the board managed to source two suppliers
located in China due to past trade talks initiated during a visit by South
Africa’s minister for trade and industry and his business delegation. e
products will be imported by Poison free-on-board to South Africa. e
minister’s delegation was able to negotiate a 60-day credit term on
behalf of Poison.
REQUIRED
Describe the factors that will increase the risk of material misstatement
on assertion level for inventory, accounts payable and accounts
receivable in respect of the audit of Poison for the year ending 31
October 20X1. Ignore control risks.
Structure your answer as follows:
FACTOR THAT WILL ACCOUNT(S) ASSERTION(S)

INCREASE RISK OF AFFECTED AFFECTED
MATERIAL
MISSTATEMENT

[20]
Question 21 LEVEL 3
Risk and response at assertion level
[17 marks]
You are the senior auditor on the audit of Power (Pty) Ltd (Power), a
company that distributes generators and transistors to wholesalers and
the public from its warehouse in Durban. e company has a December
nancial year-end.
e company was incorporated seven years ago by two friends, Miss
Chumanga and Mr Casey, on completion of their undergraduate studies
at the same local university. ey both have an equal stake in the
company. Miss Chumanga is the marketing director at the company, as
she obtained a marketing degree, and Mr Casey is the chief nancial
officer, as he obtained a degree in accounting. ey both receive a
bonus linked to the revenue generated by the company over the course
of the nancial year.
e company obtained a R40 million loan from the Industrial
Development Corporation on 1 July in order to nance a plant from
which it intended to mass produce generators instead of purchasing
generators from the Far East. It has not yet started constructing the
plant and therefore plans to start producing generators and transistors
only in the next nancial year.
e terms of the loan are as follows:
e loan draws interest of 22% per annum.
e interest and a portion of the capital on the loan are payable
monthly in arrears.
e loan must be paid back in full within seven years from the date of
receiving the loan.
e Industrial Development Corporation requires signed nancial
statements within 30 days of the nancial year-end.
e Industrial Development Corporation can demand immediate
settlement of the loan if Power’s current ratio drops below 2.5:1.
Should the loan be recalled at the year-end, Power’s current liabilities

would exceed its current assets by a substantial amount.
Neither Miss Chumanga nor Mr Casey has any additional money to
contribute to the business – part of the loan conditions from the
Industrial Development Council required that they invest R10 million
each into the project.
e company hedges 45% of the generators and transistors
purchased in the Far East with forward exchange contracts which it
takes out with the company’s local bank.
e generators and transistors normally take 1.5 months to arrive in
Durban from the date that the goods leave the supplier’s warehouse and
an additional week to clear customs. ereafter, the generators and
transistors are transported to the company’s warehouse from which
they are sold to the wholesalers and public. R2 million worth of
generators and transistors were on route from the supplier in the Far
East to the Durban warehouse at year-end.
Power saw an increase in its sales during the winter months as a
result of promotions that it ran during the month. ese included
granting customers up to 5% off from their initial invoiced cost if they
settled their accounts within 30 days from the date of purchase. e
discounts were approved at the director’s board meeting held on 5
April.
REQUIRED
Describe the factors that increase the risk of material misstatement at
assertion level and brie y how you, as auditor, would respond to the
risk.
[17]
Question 22 LEVEL 3
Detection risk
[22 marks]
HKL Auditors Inc. (HKL), with its main office in Johannesburg, is
currently engaged in planning the audit of Diamond Hardware (Pty) Ltd
(Diamond Hardware) for the client’s 31 December 20X1 nancial year.
Diamond Hardware is a large wholesaler of hardware equipment and is
also situated in Johannesburg.
During the audit planning meeting, where only some of the junior audit
team members were present, the susceptibility of the client’s nancial
statements to material misstatement was discussed. e engagement
partner, Hein Williamson, addressed the audit team members present
and made the following comments, inter alia:
The budget for the 31 December 20X1 year-end audit of Diamond

Hardware is unfortunately very tight. The two owner-managers of
the company have speci cally asked me to keep the audit fees the
same as last year, otherwise HKL might get replaced by another
audit rm next year. This, despite Diamond Hardware having
installed a new accounting system in 20X1, which meant a change
to a signi cant part of the company’s system of internal controls.
I would also like to announce that Karina McKay, a second-year
trainee accountant at our rm, will be the responsible audit senior
on the audit seeing that the prior year’s audit senior is currently on
study leave. In addition, the audit manager, who is newly assigned
to the audit, should not be bothered with any questions except in
very important cases, as she will be too busy on other audits at that
time. Karina, although we know you have not been on the audit in
any prior year, we are forced to throw you into the deep end. We
trust that you will be able to cope!
To take some pressure off the audit team, I will ensure that the
sample sizes used in substantive audit procedures are smaller than
usual.
Also keep in mind that the audit manager on the prior year’s audit
of Diamond Hardware, Terence Radebe, has recently been
appointed as the nancial manager of Diamond Hardware. As you
might know, Diamond Hardware’s previous nancial manager was
dismissed two months prior to the 20X1 year-end as a result of
possible fraud that took place in the company’s accounting
department. They needed a person with Terence’s skills to restore
order in their accounting function.
Please note that we will be making use of many rst-year trainee
accountants on this assignment to save on costs. More
experienced, senior audit staff members will be too expensive.
REQUIRED
Identify and explain the factors that increase detection risk on the audit
of Diamond Hardware for its 20X1 nancial statement audit, evident
from the scenario. Structure your answer as follows:
FACTOR THAT EXPLANATION (WHY DOES THE

INCREASES FACTOR INCREASE DETECTION
DETECTION RISK RISK?)

[22]
Question 23 LEVEL 2
Audit strategy
[6 marks]
You were recently appointed as the auditor of People Ltd (People). As

part of the planning of the audit, you are trying to gain an
understanding of the company’s operations. e following information
has been brought to your attention.
People Ltd is a holding company with ve subsidiaries, two of which
reside outside South Africa.
Your audit rm will be responsible for the audit of the holding
company only and not the subsidiaries.
REQUIRED
Indicate how each of the above pieces of information will affect your
audit strategy.
[6]
Question 24 LEVEL 2
Planning strategy
[9 marks]
You are an audit manager at the audit rm of UHK Inc. (UHK) and have
been assigned to the audit of CashNow Bank Ltd (CashNow), a
registered bank in South Africa. CashNow provides banking, insurance
and investment products and services to retail, commercial, corporate
and public sector customers. CashNow has a 31 December year-end.
You acquired the following information during the preliminary

engagement phase of the 2015 audit:
1. e bank is listed on the JSE.
2. It has four divisions, three subsidiaries and two associates. One of the
subsidiaries is audited by another audit rm, while all other entities
are audited by UHK.
3. CashNow’s trading systems are fully computerised.
4. CashNow has an internal audit department which focuses on areas
relating to nancial reporting identi ed by its audit and risk
committee.
5. As a result of an unfavourable economic environment, CashNow has
been experiencing high levels of bad debt write offs and has incurred
losses during the 20X1 nancial year.
6. e audit reporting deadline is 10 February.
REQUIRED
Explain how each of the matters listed in points 1 to 6 affects the scope,
timing and/or direction (whichever is relevant) of the 20X1 audit of
CashNow.
[9]
1 Either good or bad.

2 Pre-engagement.
3 Use the information contained in the scenario.
4 Where the audit firm is located could also be an indication of the size of the firm.
5 This indicates that it was not as a result of wrongdoing on the part of management.
6 As this is not a dubious industry, S&P should not have a problem being associated with
Zondi.
7 Does S&P have the resources to travel to all of the outlets?
8 As a CA(SA), he is bound by SAICA’s Code of Professional Conduct, which is an
indication of management’s integrity.
9 This indicates that the company will be able to pay the audit fee.
10 This is an ethical issue for the auditor to consider.
11 Structured according to the pre-engagement steps.
12 You need to supply the information contained in the question, and apply it to the pre-
engagement steps.
14 Given that he is a CA(SA), he is likely to have integrity.
16 Given that they resigned as a result of staff shortages, it is unlikely that there is reason not
to accept the engagement.
18 It should thus be able to pay the audit fee.
20 Following the Code of Professional Conduct’s conceptual framework.
22 S&P might thus not have adequate resources.
23 Remember to include the engagement letter as part of the pre-engagement steps.
24 Deal with each instance separately.
25 Background information: the two instances mentioned below are what are required.
26 Scope (what needs to be audited) = branches in 10 cities = resources needed in order to
perform the audit.
27 Scope (what needs to be audited) = maintenance of application programs that are
outsourced = resources needed in order to perform the audit.
28 Information contained in the scenario is linked to what needs to be done.
29 This adds in human resources.
30 When it needs to be done. In addition, it adds in human resources.
31 Information contained in the question is linked to what needs to be done.
32 It adds in human resources.
33 You need to do (and explain your reasoning behind) the calculations, thus motivating your
decisions.
34 Thus overall as well as performance materiality.
35 New auditor = high audit risk.
36 Use this in your calculation.
37 Choose a set of financial statement figures to use in your calculation.
38 Give the different options.
39 This indicates which is the most appropriate, in addition to motivating why it is.
40 Stable plus motivation.
41 It is appropriate, plus there is motivation.
42 Inverse relationship with risk.
43 Determine a range in which to work.
44 This provides an overall planning materiality figure in addition to motivation.
45 Describe risks only: in other words, those indicators that increase risk plus the risk
associated with those indicators.
46 Deal specifically with those indicators affecting financial statements as a whole, or with
indicators where you cannot pinpoint risk to a specific line item.
47 This indicates possible fraud perpetrated in order to meet listing requirements and to
attract investors.
48 This is an indication of possible errors, as consolidations are complex.
49 It indicates possible going concern problems, the risk that financial statements might be
incorrectly prepared on a going concern instead of a liquidation basis.
50 Specific line item = assertion level.
51 This indicates possible going concern problems, the risk that financial statements might
be incorrectly prepared on a going concern basis instead of on a liquidation basis.
52 It indicates possible fraud perpetrated in order to receive incentive bonuses.
53 Indicates possible fraud and error.
54 Indicates errors.
55 Indicator.
56 Risk.
57 Explanation.
58 Indicator.
59 Risk.
60 Explanation.
61 Indicator.
62 Explanation.
63 Risk.
64 Indicator.
65 Explanation.
66 Risk.
67 Indicator.
68 Risk.
69 Explanation.
70 Indicator.
71 Explanation.
72 Risk.
73 Indicator.
74 Explanation.
75 Risk.
76 Indicator.
77 Risk.
78 Explanation.
79 Inherent and control risk.
80 Remember the balances assertions.
81 PPE accounting requirements, such as depreciation method, residual value, useful life,
allocation of costs, etc. = inherent risk.
82 Borrowing costs incorrectly allocated = inherent risk.
83 Detection risk.
84 Explanation, error.
85 Assertion.
87 Indicator (accounting requirement).
88 Assertion.
91 Assertion.
94 Assertion.
97 Assertion.
INTRODUCTION
Substantive questions fall into two main categories:

1. ose regarding balances or items appearing on the statement of nancial position at year end
2. ose regarding transactions or items included in the statement of pro t or loss for the
nancial year end
It is important to identify whether a substantive question relates to balances or to transactions,

since the framework to be applied in answering questions referring to both types will differ
according to the audit assertions. Example question 1 provides the framework to be applied in
answering those questions regarding balances, while example question 2 provides the
framework for answering questions regarding transactions.
Important in an analysis of what, and how much, to write is the mark allocated to each
question. Although a detailed answer may be required if the mark allocation is 20 (for example),
the answer should be limited to the essentials if only ve marks have been allocated.
Remember that the solutions provided in this chapter, which have been suggested by the
compilers of the questions themselves, are merely guides to the types of procedures that should
be performed. No solution to substantive questions can be comprehensive, as many other
procedures may exist. In addition, because each student communicates differently, the examiner
will not expect him/her to produce an answer set out exactly as in the suggested solution.
EXAMPLE QUESTION 1
Balances
[17 marks]
Your rm was recently appointed as auditors of Quench (Pty) Ltd (Quench), a company
manufacturing a range of beverages at its plant in Atlantis. e company, which has a December
year-end, has a fully integrated computerised system that runs on local area network (LAN).
You have been assigned to audit the purchases and payments cycle. In the course of the
planning stage of the audit, you met with the chief nancial officer, Mrs Price, and the chief
buyer, Mr Pravesh, in order to gain an understanding of this cycle.
Extract from a meeting held with Mrs Price and Mr Pravesh on 5 October
All the ingredients needed in order to produce the beverages are purchased from local
suppliers, most of which are paid via EFT. However, a few of them still prefer cheque
payments.
The receiving process is as follows:

The ingredients and the pre-labelled bottles are delivered to the warehouse situated next
to the manufacturing plant.
On the arrival of goods at the warehouse, the receiving clerk calls up the purchase order
on a tablet computer in order to generate a pre-numbered GRN. The computer, which
connects to the intranet via 3G cards, has an application loaded onto it that enables the
receiving clerk to access the order after he/she has input the purchase order number,
whereupon the accounting system is immediately updated.
Your rm conducted the inventory count on 31 December, during which it was noted that the
last GRN number was XJ 10980.
You have received a listing of all the trade payables at both the current and the previous year-
ends.
In addition to the credit manager, Mr Paton, the credit department comprises two other staff
members, namely Ms Louwrens and Mr Tabane.
Trade payables at 31 December are stated as R9 350 000 (previous year: R12 345 000).
REQUIRED
Describe the substantive audit procedures that you should perform in order to verify (a) the
trade accounts payable balance at year end, and (b) that the amount is not understated.
[17]
GUIDANCE
Describe the substantive audit procedures that you would perform in order to verify (a) the trade
accounts payable1 balance at year end, and (b) that the amount is not understated.2

In order to answer substantive questions, you need to:
understand the speci c audit assertions to be addressed
understand the audit procedures that are usually relevant to the speci c item(s) being audited
identify the speci c issues and risks that need to be addressed
identify the IFRS criteria
identify the speci c audit standards applicable to the scenario.
e best way to prepare yourself for tests/examinations is to work through as many substantive
questions under examination conditions as possible, noting the different frameworks and the
procedures applicable in the various types of questions.
Read the question
Your rm was recently appointed as auditors of Quench (Pty) Ltd (Quench), a company
manufacturing a range of beverages at its plant in Atlantis. e company, which has a
December year-end, has a fully integrated computerised system that runs on local area
network (LAN).
You have been assigned to audit the purchases and payments cycle.3 During the
planning stage of the audit, you met with the chief nancial officer, Mrs Price, and the chief
buyer, Mr Pravesh, in order to gain an understanding of this cycle.
Extract from a meeting held with Mrs Price and Mr Pravesh on 5 October4
All the ingredients needed in order to produce the beverages are purchased from local
suppliers, most of which are paid via EFT. However, a few of them still prefer cheque
payments.
The receiving process is as follows:

The ingredients and the pre-labelled bottles are delivered to the warehouse situated next
to the manufacturing plant.
On the arrival of goods at the warehouse, the receiving clerk calls up the purchase order
on a tablet computer in order to generate a pre-numbered GRN. The computer, which
connects to the intranet via 3G cards, has an application loaded onto it that enables the
receiving clerk to access the order after he/she has input the purchase order number,
whereupon the accounting system is immediately updated.
Your rm conducted the inventory count on 31 December, during which it was noted that the
last GRN number was XJ 10980.5
You have received a listing of all the trade payables6 at both the current and the previous year-
ends.
In addition to the credit manager, Mr Paton,7 the credit department comprises two other staff
members, namely Ms Louwrens and Mr Tabane.
Trade payables at 31 December are stated as R9 350 0008 (previous year: R12 345 000).
Exam technique
1. Use the audit assertions of balances as a framework for your answer:
Completeness and existence
Obligations
Valuation
Disclosure
Note: Each assertion contains one or more substantive procedures.

Since the scenario indicates a possible risk of understatement of accounts payable, more
procedures than usual apply to the completeness and existence assertion. However, this is not
the case when auditing accounts receivable (management usually overstates trade debtors in
order to increase pro ts), with the result that fewer procedures need to be performed for the
assertion.
Both the obligations and the disclosure assertions are usually covered by one procedure
each.
Valuation, the most important one to address, contains the most procedures, since material
misstatement could easily occur.
Study your textbook in order to:

understand the subtle changes in the auditor’s approaches to substantive testing, and
ensure that you become familiar with these procedures.
2. Start your sentences with the words:

inspect
inquire
re-perform
observe
scrutinise
select a sample (or extract)
OR
agree (or match).9
If you start your sentence with ‘ensure’, ‘check’, ‘con rm’ or ‘verify’, you risk losing marks, since
they indicate that you are not tackling the speci cs of how to perform the procedure.
Furthermore, the words ‘Check that cut-off procedures were properly performed at year-end for
revenue’ will mean nothing to someone with no experience in that speci c eld. erefore,
describe your audit procedure as if you were explaining it to a novice.
3. Communicate properly.
If the examiner is able to write HOW, WHAT or WHY next to your answer, you will forfeit marks.
For example, in the sample answer already quoted (‘Check that cut-off procedures were properly
performed at year-end for sales’), he/she is able to discern the WHY (the cut-off of sales), but not
the HOW (the last 20 delivery notes before and after year-end) or the WHAT (the dates on the
delivery note).
SUGGESTED SOLUTION
1. Completeness and existence
a) Obtain a management representation10 letter with speci c reference to the completeness
and existence assertion for trade accounts payable. (1)
b) Inquire from Mr Paton about any explanations for the material decrease in the creditors
11
balance from R12 345 000 (previous year) to R9 350 000 (current year), and follow up his
explanations with supporting documentation.12 (1)
c) Compare the list of creditors at 31 December to the previous year’s working listing for:13
i) creditors on the latter list who do not appear on the former (1)
ii) creditors balances that are signi cantly smaller at 31 December than during the
previous year. (1)
Elicit reasons from the creditors clerks and corroborate them with Mr Paton where they are
material or necessary. Obtain supporting documentation for all explanations given. (1)
d) Extract a listing of creditors from the creditors master le that has an entry in the disputes
eld. By means of the number, trace the dispute to the correspondence or supporting
documents. Follow up on the status of disputed accounts with both Mr Paton and the
creditor. (1)
e) Perform analytical review procedures on the creditors balance and follow up on such
14
material uctuations as those revealed when comparing current year purchases and
creditors, as well as those for previous years. (1)
f ) Inspect working papers relating to the inventory count for any instances where physical
inventory materially exceeded theoretical inventory,15 which could indicate purchases
that were received before year-end but were not raised as a liability at year-end. (1)
g) After stratifying the purchases journal for January, select a sample of 20 material purchases
and trace them to the GRNs. Con rm that the GRN numbers are greater than XJ 10980,16
and that the dates on the notes and the supplier’s delivery notes are later than 31
December, the nancial year-end. (1)
h) Select a sample of 20 material payments made subsequent to 31 December, and by means
of an inspection of the dates on the corresponding GRNs and the supplier delivery notes,
con rm whether or not the goods were received prior to 31 December and if the
corresponding creditors had been raised at year-end. (1)
2. Obligation
Inspect from the samples17 selected that source documentation was made out in the name of
Quench (Pty) Ltd. (1)
3. Valuation
a) Extract and cast the creditors balances of the creditors located in the master le and agree
them to the creditors control account in the general ledger. (1)
b) Re-perform a sample of the cross cast (days outstanding) on the master le. (1)
c) Scan the master le for such error conditions as duplicate supplier numbers and duplicate
addresses. (1)
d) Inspect the master le for debit balances, follow up on the reasons for them with Mr
Paton, and reclassify the remaining debit balances to accounts receivable.18 (1)
e) Scrutinise the creditors control account for unusual entries (particularly rounded-off
amounts) and follow up with supporting documentation. (1)
f ) Select a sample of creditors reconciliations at 31 December (which includes19
reconciliations prepared by both the clerks) and:

i) test logic, and re-perform the casts on the reconciliations (1)
ii) agree the balances on the reconciliations to the creditor’s statements and the listing of
creditors (1)
iii) inspect the validity of the reconciling items by reference to supporting documentation.
g) Extract from the listing of creditors any to whom payment is outstanding signi cantly (1)
beyond the credit terms granted to Quench, upon which follow up with Mr Paton and the
creditors clerk in order to establish the correct status of the amount due. (1)
4. Disclosure
Inspect the correct disclosure of revenue in the nancial statements, including the
accounting policies.20 (1)
Any other valid procedures. 21
(1)
EXAMPLE QUESTION 2
Transactions
[15 marks]
You are a senior auditor on the audit of Gracys Ltd (Gracys), a company with a September year-
end. Your audit rm has been Gracys auditors for the past ve years.
e company sells clothing, shoes and beauty products at 22 branches located across the
country as well as from their virtual store at which online sales are made.
Management usually pays close attention to the sales gures, as the manager of each store
receives a performance bonus that is linked to sales.
Sales
e chief nancial officer, Mr Chris Tommylin, has indicated that total sales (R833 million) for
the year have increased by 7% over those of the previous year (R778 million).
e accounting systems of the company, whose head office is located in Cape Town’s central
business district, are fully integrated and run on a wide-area network. e points-of-sales
systems at each of the stores are connected to Gracys intranet via Telkom’s virtual private
network.
In-store purchases
In-store purchases are made with cash, on credit and by using either the Gracys customer store
card (on which a pre-determined credit limit has been set) or the customer’s bank credit card.
Once a transaction has been processed, the sale is immediately posted to the sales account
with a unique branch code in order to identify the branch to which the sale relates. A copy of the
invoice handed to the customer is automatically generated at head office at the conclusion of the
transaction. ese copies are archived electronically until needed.
Online purchases
Online purchases are concluded by the customer inputting his/her credit card details. Deliveries
are made to South African addresses only.
Noti cation is sent to the store located closest to the customer whenever an approved order
is received. A designated sales clerk at the store then processes the order based on the
information received in the noti cation. ree delivery notes are generated, after which a courier
delivers the product(s) to the address indicated by the customer. However, before the courier
leaves the company’s premises, the security guard at the gate checks the description of the goods
on the delivery note against the goods in the courier’s vehicle, signing the delivery note as proof
that he/she has performed this task.
Upon receiving the goods, the customer signs all three copies of the delivery note, one of
which he/she retains. e other two copies are returned to a designated sales clerk at the store
from which the products were delivered. e sales clerk then captures the delivery date on the
system and scans one of the delivery notes onto the system in order for it to serve as proof of
delivery. e accounting system then generates an invoice (much like the invoice for in-store
sales). At the end of each week, the sales clerk les one copy of the signed delivery note, sending
the third to head office, where it is led. e sales manager at head office, Mrs Kobe, has
indicated that her team performs weekly reconciliations between the delivery notes that arrive
via courier and those scanned into the system at the store. To date, they have discovered no
discrepancies.
REQUIRED
Describe the substantive audit procedures that you would perform in order to verify sales as part
of your year-end audit. Ignore goods returned.
[15]
GUIDANCE
Describe the substantive audit procedures that you would perform in order to verify sales22 as
part of your year-end audit. Ignore goods returned.
Note: e previous example was the audit of balances. We are now going to focus on audit
transactions.

Once again, because it is important to know the theory relevant to the auditing of the item at
hand, you need to:
understand the speci c audit assertions that need to be addressed
understand the audit procedures that are usually relevant to the speci c item(s) being audited
identify the speci c issues and risks that need to be addressed
identify the IFRS criteria applicable to your answer
identify the speci c audit standards applicable to the scenario.
Read the question
You are a senior auditor23 on the audit of Gracys Ltd (Gracys), a company with a September
year-end. Your audit rm has been Gracys auditors for the past ve years.
e company sells clothing, shoes and beauty products at 22 branches24 located across
the country as well as from their virtual store at which online sales are made.
Management usually pays close attention to the sales gures, as the manager of each store
receives a performance bonus25 linked to sales.
Sales
e chief nancial officer, Mr Chris Tommylin, has indicated that total sales (R833 million) for
the year have increased by 7% over those of the previous year (R778 million).
e accounting systems of the company, whose head office is located in Cape Town’s
central business district, are fully integrated and run on a wide-area network. e points-of-
sales systems at each of the stores are connected to Gracys intranet via Telkom’s virtual private
network.
In-store purchases 26
In-store purchases are made with cash, on credit and by using either the Gracys customer
store card (on which a pre-determined credit limit has been set) or the customer’s bank credit
card.
Once a transaction has been processed, the sale is immediately posted to the sales
account with a unique branch code in order to identify the branch to which the sale relates. A
copy of the invoice handed to the customer is automatically generated at head office at the
conclusion of the transaction. ese copies are archived electronically until needed.
Online purchases27
Online purchases are concluded by the customer inputting his/her credit card details.
Deliveries are made to South African addresses only.
Noti cation is sent to the store located closest to the customer whenever an approved
order is received. A designated sales clerk at the store then processes the order based on the
information received in the noti cation. ree delivery notes are generated, after which a
courier delivers the products to the address indicated by the customer. However, before the
courier leaves the business premises, the security guard at the gate checks the description of
the goods on the delivery note against the goods in the courier’s vehicle, signing the delivery
note as proof that he/she has performed this task.
Upon receiving the goods, the customer signs all three copies of the delivery note, one of
which he/she retains. e other two copies are returned to a designated sales clerk at the store
from which the products were delivered. e sales clerk captures the delivery date on the
system and scans one of the delivery notes onto the system as proof of delivery. e
accounting system then generates an invoice (much like the invoice for in-store sales). At the
end of each week, the sales clerk les one copy of the signed delivery note, sending the third
to head office, where it is led. e sales manager at head office, Mrs Kobe, has indicated that
her team performs weekly reconciliations between the delivery notes that arrive via courier
and those scanned into the system at the store. To date, they have discovered no
discrepancies.
Exam technique
1. Use the audit assertions of transactions as a framework in answering the question:
occurrence
accuracy
classi cation28
cut-off
completeness
disclosure
2. Start your sentences with:
inspect
inquire
re-perform
observe
scrutinise
select a sample (or extract)
OR
agree (or match).29
3. Communicate properly.
Note: Although a lot of information was given in the question relating to the internal control of
Gracys, this will be relevant only if the auditor needs to perform test of controls. If the questions
are substantive, you may ignore this information, since it will have no relevance to your answer.
SUGGESTED SOLUTION
(Note the difference in headings from the previous example question.)
1. Occurrence30
a) Obtain the sales schedule from Mr Chris Tommylin and cast31 it. (1)
b) Agree the total of R833 million to the general ledger and the trial balance. 32
(1)
c) Scrutinise the sales schedule for any such unusual entries as duplicate sales invoices,
duplicate account holders and duplicate addresses. (1)
d) Stratify the in-store sales further (e.g. per region and branch) and select a sample of
33
invoices to be tested. (1)

e) Print the sample selected and, using the invoice numbers noted on the sales schedule,
agree the invoice numbers to the signed led invoices or delivery notes (which have been
sent to head office by the store from which the goods were delivered), in order to con rm
that the debtor has acknowledged the debt or the transfer of risk. (1)
2. Accuracy 34
For a sample of invoices selected:

a) cast the invoices (1)
b) recalculate the VAT on them (1)
c) agree the sales prices on the invoices to the approved sales price listing35
(1)
d) scrutinise the sales account for any suspicious journal entries (1)
e) follow up on items noted on any exception reports affecting sales. (1)
Identify the key information (such as product sold, quantity, date, etc.) recorded on the
invoices selected and agree the key information to the detailed audit trail of each sale
recorded in the accounting records. (1)
3. Classi cation 36
Scrutinise the sales account in the general ledger for non-revenue items incorrectly posted to
sales, such as dividend income and interest received. (1)
4. Cut-off
a) In-store sales
As management receive bonuses,37 select a sample of 20 invoices from one month prior to
and one month after year-end and trace them through to the sales account in order to
determine whether the sales were recorded in the correct nancial period. (1)
b) Online sales
Select a sample of 20 signed delivery notes from one month prior to and one month after
year end and trace them through to the invoices and the sales account in order to
determine by an inspection of the dates on the delivery notes whether the sales were
recorded in the correct period. (1)
5. Completeness
a) For a sample of delivery notes and invoices:
i) inspect the sequences for missing numbers, and, where exceptions arise, follow up on
them with management; and (1)
ii) reconcile the delivery notes and invoices in order to ensure that all transactions are
accounted for. (1)
b) Perform the following analytical review procedures: 38
i) For each store: Make a year-on-year comparison of credit sales, cash sales, total sales
and online versus in-store sales in order to obtain reasons for any unexpected
uctuations. (1)
ii) For each region: Make a year-on-year comparison of credit sales, cash sales, total sales
and online versus in-store sales in order to obtain reasons for any unexpected
deviations. (1)
Any other valid procedures. (1)
6. Disclosure
Inspect the correct disclosure of revenue in the nancial statements, including the accounting
policies. (1)
QUESTIONS
Question 1 LEVEL 3
Revenue applying IFRS 15
[14 marks]
Trackster Ltd (Trackster) operates in the private security sector. e company’s external auditor
is currently auditing the revenue gure disclosed in Trackster’s draft annual nancial statements
for the nancial year ended 30 September 20X1. Trackster earns revenue in two ways: the sale of
GPS-based tracking services and the sale of emergency roadside kits, accounted for in two
separate general ledger accounts. Trackster applies IFRS 15.
Tracking services
GPS-based tracking services involve Trackster installing a GPS-based tracking device in a
customer’s vehicle in a position that makes the device difficult to nd. When a customer’s
vehicle is stolen, the customer can identify its location by means of Trackster’s smart phone app
and, at the same time, alert Trackster to the theft. Trackster will send out an armed response
team to attempt a retrieval of the vehicle.
In order to obtain a tracking device, a customer must subscribe to a 12-month contract
priced at R100 per month, invoiced at the beginning of a month. Should the customer want to
make use of a discount of 20%, he/she must pay a one-off (up-front) fee of R960 at the beginning
of the 12-month contract and does not have to pay any monthly fee thereafter. e tracking
device remains the property of Trackster throughout the subscription period. New customers
must sign a written sales agreement either at a Trackster retail outlet or in the comfort of their
homes in the presence of a Trackster sales agent. All prices charged are the same as in the 20X0
nancial year.
Trackster records the details of all subscribers’ contracts, including amounts recognised each
month as revenue, in a contracts spreadsheet.
Emergency roadside kit

Another product which Trackster offers is an emergency roadside kit for everyday use, sold at a
standard price. A kit consists of various items that enhance vehicle safety, including a re
extinguisher, emergency belt cutter with attached glass breaker, re ective jacket and triangle
warning sign, medikit, jumper cables and a ashlight. In past nancial years, an average of 10%
of kits were returned to Trackster for refunds due to product faults and unhappy customers. Total
sales from emergency roadside kits for 20X1 amounted to R1 785 400.
REQUIRED
1. Discuss in detail why Trackster will not be able to recognise the full R1 785 400 revenue from
emergency roadside kits for the 20X1. (3)
2. Describe the substantive audit procedures which Trackster’s auditor must perform in order to
test the occurrence, accuracy and cut-off of revenue derived from the sale of GPS-based
tracking services and recorded in Trackster’s annual nancial statements.
Note: Ignore the cost implications of the GPS tracking device for Trackster and do not address
the testing of the presentation assertion or related disclosures in your answer. (11)
[14]

1. Revenue from emergency roadside kits
a) In terms of the requirements of IFRS 15, the amount of revenue that Trackster earns from
the sale of emergency roadside kits constitutes a ‘variable consideration’. (1)
Variable consideration can only be included to the extent that it is ‘highly probable that its
inclusion will not result in a signi cant revenue reversal in the future when the uncertainty
has been subsequently resolved’ (IFRS 15:56). (1)
b) Due to a history of refunds of the kits, i.e. a likelihood of future reversal of the revenue (10%
are brought back by customers), there will be a limit on the amount of revenue that can be
recognised from the sale of the kits. (1)
c) erefore, because 10% of products are usually returned and the kits are all sold at a
standard price, Trackster will likely only be able to recognise R1 606 860 in the 20X1
nancial year (R1 785 400 less 10%). (1)
2. Revenue from GPS-based tracking services

a) Obtain the contracts spreadsheet from management and select a sample of both ongoing
and new subscriber contracts. (1)
Agree the contract details on the spreadsheet to the sales agreement, ensuring that:
i) a sales agreement exists for the contract, signed by both customer and Trackster
(occurrence) (1)
ii) the type of the contract, invoiced month-to-month or paid up-front, is accurate (1)
iii) the amount recorded is supported by the same amount on the agreement to which the
customer agreed (R100 per month or R960 one-off recognised at R80 per month)
(accuracy) (1)
iv) the agreement pertains to the 20X1 nancial year (either still ongoing with reference to
the date started or signed in the 20X1 nancial year). (occurrence and cut-off ) (1)
b) For a sample of contracts on the contract spreadsheet, agree the amounts recorded to the
cash book and bank statement to ensure a receipt exists for the revenue. (occurrence) (1)
Note: Service renewals might not involve the signing of a new contract, therefore for
contracts renewed in the 20X1 nancial period, the above procedure in combination with
an inspection of the sales agreement will verify the occurrence assertion. (1)
c) Inspect the contracts spreadsheet for evidence that the contracts invoiced on a month-to-
month basis are recognised at R100 per month and that the contracts invoiced annually
have been recognised at R80 per month and not as R960 in the month the contract was
signed for. (accuracy) (2)
d) Recalculate the contracts spreadsheet by casting each month’s revenue recognised in the
20X1 nancial year. (1)
Add up the 12 months’ recalculated totals to arrive at the total annual revenue recognised
and agree this total to the general ledger account for GPS tracking services and trial
balance. (1)
e) Inspect the minutes of the board meeting where the decision was taken not to increase the
monthly and annual subscription fees for 20X1 and ensure at the same time that the same
fee structure as for 20X0 still applies in 20X1. (accuracy) (1)
f ) Perform analytical procedures on the revenue recognised for GPS tracking services by
creating an expectation of what the revenue should be with reference to the number of
contracts active in 20X1 and follow up any unexpected differences with management. (1)
g) Obtain a written representation letter from management in which they con rm the
occurrence, accuracy and cut-off assertions for GPS tracking services revenue. (1)
Question 2 LEVEL 2
Revenue
[15 marks]
Prompt Health (Pty) Ltd (Prompt Health), a private hospital founded 15 years ago, focuses on
neonatal and neurological cases. In addition, the company is the 100% owner of a pharmacy,
Health Products (Pty) Ltd (Health Products), located on its premises, to which it sells medicines
and related products at a 5% mark-up.
With the exception of a handful of private patients, all Prompt Health patients have medical
aids. Before a patient in the latter category is admitted, authorisation for treatment is obtained
from his/her medical aid. Although medical aids are able to pay outstanding amounts within 30
days, private patients need to pay in advance.
Currently employed at Auditors4U Inc., you have already completed the rst two years of
your three-year articles. Owing to your knowledge and experience, you have been appointed as
the senior on the audit, for which the revenue and receivables sections have been assigned to
you. After performing walk-through tests on all the relevant sections, the audit manager has
concluded that a substantive-based audit will be performed for the 30 September 20X1 year-end
audit.
You have received the following trial balance extracts from the nancial manager of Prompt
Health:
ACCOUNT ACCOUNT 20X1 ESTIMATED 20X0 AUDITED

NUMBER DESCRIPTION R’000 R’000
BS-025 Gross debtors 25 586 21 586
BS-085 Provision for bad 3 587 2 897
debts
IS-001 Revenue 152 475 141 586
IS-042 Finance income 1 475 1 986
IS-095 Bad debts 1 748 1 875
REQUIRED
Describe the substantive audit procedures that you would perform with regard to the 20X1 year-
end revenue gure of Prompt Health in order to obtain appropriate audit evidence regarding the
relevant audit assertions (excluding classi cation).
[15]
Question 3 LEVEL 2
Revenue
[13 marks]
Flowers.Net (Pty) Ltd (Flowers.Net), specialists in the online retailing of owers and gifts, has
appointed RightWay Incorporated (RightWay) as its external auditors for the 30 June 2016 year-
end audit. e auditing rm was appointed by the shareholders of Flowers.Net at the annual
general meeting held on 30 September 20X1, after the decision had been taken to rotate external
auditors in terms of the Companies Act.
Flowers.Net’s sales system operates as follows:

Cash sales only are made.
Customers (mainly private individuals) need to register on Flowers.Net’s website before
gaining access to its catalogue of gifts. is is done in order to build up a database so that
customers may be emailed about special offers.
After customers have placed goods in their online baskets, their credit card details are required
before sales may be transacted. A number of edit checks exist on the system, with the result
that orders are accepted only if all the necessary details (delivery addresses, customers’
names, contact numbers, etc.) have been supplied.
Sales are processed once con rmation has been received from the customers’ banks that the
transactions have been approved.
Customers are emailed automatically with con rmations and the reference numbers for the
orders.
Orders are logged automatically onto Flowers.Net’s computer system.
e system automatically generates a picking slip, which is used to pick the goods in the
warehouse and signed by the picker. A warehouse clerk produces a printout of all picking slips.
e goods are delivered to customers by Flowers.Net’s couriers.
Staff members in the delivery section generate a duplicate delivery note from the invoicing
module, one copy of which is signed by the customer on receipt of the goods. is copy is
returned with the delivery staff.
REQUIRED
Describe the substantive audit procedures that you would perform with regard to the sales
system of Flowers.Net in order to obtain audit evidence regarding the following revenue
assertions:
Occurrence
Accuracy
Completeness
[13]
Question 4 LEVEL 2
Revenue
[25 marks]
As the audit manager, you are currently busy with the year-end external audit of Advertising
Space (Pty) Ltd (Advertising Space), a company selling advertising space on billboards along the
highways of South Africa. e company was formed by an entrepreneur who wanted to create
direct competition to ‘Below the belt advertising’ CC, which he believed provided a poor service
to its customers. Advertising Space earns commission on every square metre of billboard space
that it sells. Since the commission account is considered a high-risk balance, you decided to
audit the balance yourself. You are busy with the substantive procedures of the commission
account in the statement of comprehensive income for the year ended 31 October.
Since Advertising Space does not have the necessary capital with which to build its own
billboards, it has signed contracts with billboard companies (operators) in terms of which
Advertising Space sells the billboard spaces (referred to henceforth as packages) on their behalf.
Fees vary, depending on the nature of the billboards, their location, whether they are static or
electronic, etc.
Advertising Space, which has seen much growth of late, has several packages on its books.
Commission on the packages is earned through selling them to clients from other operators.
Once the sale of a package has gone through, a contract is concluded between the operator and
the client, the commission being calculated as a percentage of the purchase price of the package.
Clients are obligated to pay a deposit of 10% of the purchase price of the package on top of the
commission to be paid to Advertising Space.
e company uses a bank-clearing account system that records all monies deposited by
customers and generates a pre-numbered receipt, a copy of which is sent to the client as proof of
the receipt of payment. Advertising space then transfers a portion of the amount due to the
account of the relevant operator. e commission owing to Advertising Space is paid into its
current bank account by means of a cheque. No electronic payments, cash payments or transfers
are made.
For each transaction, a sales le is maintained, in which all details of that transaction are
led, including a copy of the contract, details of the terms and conditions and the terms of
payment.
REQUIRED
Describe the substantive procedures you would perform in order to audit the commission
account in the statement of comprehensive income for the year ended 31 October.
[25]
Question 5 LEVEL 2
Revenue
[22 marks]
You are the audit manager on the 20X1 year-end audit of DreamHomez (Pty) Ltd
(DreamHomez), a company with a 31 December year-end that specialises in domestic design
and interior decoration. As DreamHomez believes in investment in the local economy, all
building materials are purchased from South African suppliers.
You have assigned one of your second-year trainees, Tim Hanks, to the revenue cycle. After
discussions with the client, Tim drafted the following working paper.
Client: DreamHomez (Pty) Ltd

Year end: 31 December 20X1 Working paper B4
Description: System Description: Income
Prepared by: Tim Hanks Reviewed by: Date: 21-11-20X1
1. All sales are made on credit.

Potential clients complete credit application forms.
The credit clerk, Tom Willings, allocates credit terms and a credit limit to each
customer after verifying their creditworthiness with the credit bureaux.
After ensuring that all the necessary information and documentation has been
received from the client, the credit manager, Sandy Lee, signs the application form
as approval of the credit terms and limit.
DreamHomez provides nancing to creditworthy clients.
2. DreamHomez provides clients with pre-numbered, obligation-free quotations.

Once a client has accepted and signed the quotation, the project manager, Thabo
Mhlangu, veri es his/her creditworthiness on the approved credit application form
and signs the quotation as proof of his having performed the check.
3. After having received an approved quotation, the legal department draws up a

contract, which is signed by both the credit manager and the client, thereby legally
binding the latter to the repayment of the loan and the payment of all costs relating to
the work done.
4. Revenue recorded is based on the percentage of completion.
Clients are invoiced monthly on pre-numbered invoices.
Interest on the loans accrues from the date of invoicing.
5. The nancial manager performs monthly debtor reconciliations, which she signs as
proof of performance.
REQUIRED
Design the audit procedures that should be performed in order to obtain sufficient, appropriate
audit evidence regarding the revenue gures of DreamHomez for the 31 December 20X1
nancial year-end, indicating in each case whether it is a substantive procedure, a test of control
or a dual-purpose test.
[22]
Question 6 LEVEL 3
Revenue
[28 marks]
You are employed as the auditors of TOP Fashion (Pty) Ltd (TOP Fashion). TOP Fashion became
a market leader in fashion after it launched its TCL reality show: Say heck yay to the shirt. e
company provides fashion advice and tips to clients. TOP Fashion has two main income streams.
One-third of the income is generated from consultation fee income and ad hoc services the
company provides during consultations. e other two-thirds of the company’s income is
generated from the personal shopping service TOP Fashion provides to its customers.
Income generated during consultation

TOP Fashion sends a consultant to a client’s house to review the client’s wardrobe. e
consultant then provides the client with feedback on which clothes would t them the best. e
feedback is contained on a printed feedback report. e report contains a description of the
clothes, recommended sizes and measurements, colours, etc.
Consulting fees are payable, quarterly in advance. Various packages can be purchased, each
with a different number of visits. Entry-level packages allow for two annual visits, while the
superior packages include monthly visits plus two additional ad hoc specialist consultation visits
that focus on evening wear for special events. If the ad hoc specialist consultation visits are not
utilised, the sessions are forfeited. Consultants also provide various value-added services during
the consultation. ey provide:
a cleaning service to clean one or two clothing items required at short notice (the consultant
cleans the clothing item at the client’s premises)
a tailoring service to jazz up a clothing item or make necessary alterations.
ey also carry a line of costume jewelry and semi-precious gems with them, which they can sell
to clients during consultations.
Income generated from the personal shopping services

e feedback report received by the clients after a consultation can either be used by clients to
purchase their own clothing at a retailer of their choice, or clients can make use of TOP Fashion’s
personal shopping service. TOP Fashion has buyers who will source the recommended clothing
from various suppliers around South Africa. TOP Fashion guarantees the best possible price.
Clients who would like to make use of the personal shopping service must review the
feedback report, make any amendments (if necessary) and then sign and date it. It is returned to
the consultant, who issues the client with a quotation based on the signed feedback report. e
quotation includes time required to provide the personal shopping service and the cost per hour.
If the client accepts the quotation, a date for the tting of the clothing is recorded on the
quotation. A TOP Fashion personal shopper sources the clothing and a tting is held in the
comfort of the client’s home on the agreed date. Once the tting is complete, the quotation for
the personal shopping service is stamped with a date stamp by the personal shopper and placed
in a suspense le until invoiced, if not invoiced immediately. Two pre-numbered invoices are
prepared by the personal shopper based on the completed quotation. A copy, payable in 30 days,
is given or sent to the client, and the other is attached to the stamped quotation. Clothing sold to
the client is invoiced separately, as it must be paid cash on delivery (COD), since TOP Fashion
cannot return worn clothing to its suppliers. A sales invoice is issued immediately together with a
cash receipt. e invoices for sale of goods and for services rendered are recorded daily by the
accounting department.
REQUIRED
1. Discuss the risks (other than those relating to the presentation assertion) which will increase
the chances of material misstatement on account/assertion level in respect of revenue
generated during consultations. Also, list the assertion(s) affected by the risk. (8)
Presentation (table and assertion) (1)
2. Assuming that the general procedures have already been performed, formulate the
substantive procedures that you would perform in respect of the revenue from services
provided. In documenting the test of details, clearly show how the requirements of IFRS have
been met. (18)
Presentation (application of requirements of IFRS) (1)
[28]
1. Audit risk at account and assertion level
The risk exists that consulting fee income is not recognised accurately and completely Accuracy and
according to the different performance obligations: consulting fees, cleaning services, completeness
sewing services, etc. (1) of revenue (1)
Risk exists that revenue is overstated and revenue recorded where consultations did not Occurrence of
take place. Alternatively, excessive hours can be recorded to render the service. (1) sale (1)
The risk exists that income from the various services and sales are incorrectly classi ed Classi cation
as: of revenue
consulting income
sale of goods, or
service income.
(1) (1)
A risk exists that income is recognised when it is invoiced and not when the service is Cut-off and
rendered and incorrectly classi ed as income rather than income received in advance. classi cation
(1) of revenue (1)
The risk exists that income did not actually occur and that not all fees have been paid, Occurrence
since depending on the consultation, fees are payable at different frequencies, while ad hoc and
payments must also be accounted for. completeness
(1) of revenue (1)
Presentation (table and assertion) (1)
2. Income from services rendered

Analytical procedures
a) Develop an expectation for the revenue from services based on your knowledge of business
and operations, previous year’s revenue from services and budgeted gures as well as
industry norms. (1)
b) Calculate the following ratios for the current year, prior year (previous year’s working
papers) and budgeted gures and compare them with each other:
i) Total revenue from services rendered
ii) Revenue from services rendered month to month
iii) Revenue from services rendered per month as a percentage of total revenue from
services rendered
iv) Revenue from services rendered as a percentage of total income
v) Net pro t percentage (max 2)
c) Compare the data used to calculate the ratio(s) above with the nancial information
system. (1)
d) Evaluate the results of the ratio analysis and investigate any unusual uctuations. (1)
Tests of detail
Identify the contract with the customer:
e) Select a sample of transactions from the revenue journal and perform the following:
i) Check that the invoice is made out in the name of TOP Fashion (Pty) Ltd. (1)
ii) Agree the details on the invoice to the signed feedback report and signed quotation.
iii) Agree the amount on the invoice to the bank statement. (1) (1)
f ) Select a sample of invoices from the revenue journal and inspect whether the revenue as
per the invoice has been recorded in the correct account as revenue from services rendered
and not sales. (1)
Identify the performance obligations in the contract:

g) For the sample of invoices:
i) Inspect the details on the invoice and con rm that they relate only to services rendered
and not goods sold, which is invoiced separately. (1)
ii) Inspect the date of the invoice and the date stamp of the signed quotation to con rm
the transaction is recorded in the correct period. (1)
Determine the transaction price:

h) For the sample of invoices:
i) Recalculate the income as per the invoice by multiplying the price for services
rendered with the hours worked as per the quotation. (1)
ii) Agree the amount on the invoice to that in the revenue journal. (1)
iii) Calculate a reasonable time required to provide the service to evaluate the
reasonability of the time allocated to render the service. (1)
iv) Agree the price on the invoice to the historic prices on the database underlying the
feedback report. (1)
Recognise revenue when the entity satis es the performance obligation:

i) Select a sample of stamped quotations before year-end and after year-end and inspect the
date stamped on the completed quotations. Follow through to the invoice and con rm
whether the invoice has been recorded in the correct period in the income journal. (1)
j) Select a sample of signed stamped quotations and corresponding invoice, and recalculate
the income. Con rm whether the income has been recorded in the income journal and
debtors ledger. (1)
k) Select a sample of completed stamped quotations awaiting an invoice (suspense le) and
con rm whether these have been recorded in the revenue journal.
Enquire from management about outstanding invoices. (2)
l) Perform a sequence check on invoices and con rm that all invoices have been recorded in
the revenue journal. (1)
m)Select a sample of receipts from the bank statement and agree the receipt to the
corresponding invoice. Note the date of the service rendered and con rm that the income
has been recorded in the revenue journal and has been correctly classi ed as revenue from
services rendered. (2)
Presentation (application of requirements of IFRS) (1)
Question 7 LEVEL 2
Commission paid
[15 marks]
You are currently engaged on the audit of Mobile mania (Pty) Ltd (Mobile mania), a company,
which was incorporated in 2002 by Mr Jenkinson and Mr Sotherby, selling a range of mobile
phones, tablet computers and laptops from their 20 branches located in shopping malls across
South Africa.
All of the branches are linked to head office in Sunninghill via a virtual private network. e
company’s nancial accounting system (LAN) is housed at head office, where all personnel les
are stored.
All administration and nance staff earn a monthly salary and an annual bonus. Employees
are paid via EFTs on the 23rd of each month. While branch managers earn a monthly salary and
receive a bonus based on the performance of the branch during the course of the year, the sales
representatives at the branches earn a basic salary and earn a commission on each sale made.
At the conclusion of a sale, the client receives a hard copy of the contract, while a duplicate is
led at the applicable branch. e information recorded on the hard copy contract is captured
onto the system by the sales representative, who inputs his/her staff number and the sale code,
thereby ensuring that he/she receives the commission due to him/her for the sale.
e next day, the branch manager validates the legitimacy of the sale by comparing the
original hard copy contract to the information loaded onto the system. Once the sale has been
validated, the commission on the sale is posted to the commission account, whereupon the
system identi es all commission due to each sales representative by the payroll run date and the
amount is allocated as part of his/her monthly salary.
Administration and nance staff, as well as the branch managers, belong to the company’s
provident fund and medical aid. Sales representatives do not receive this bene t, as they tend to
be students who usually leave the job after a year or two.
REQUIRED
Describe the substantive audit procedures you would carry out in respect of commission paid
during the nancial year under review.
[15]
Question 8 LEVEL 3
Purchases and payments balances
[18 marks]
You are the auditor of Packaging Solution (Pty) Ltd (Packing Solution), a South African company
that supplies the public and wholesalers with a wide range of packaging products. e company
has a 30 September nancial year-end.
You are responsible for the audit of the trade payables balance on the audit engagement and
the only outstanding audit work is the substantive audit procedures to be performed on the
creditor reconciliations at year-end.
e following is an example of a creditor’s reconciliation that you obtained from Mrs Mary
Mhlongo, the credit manager, who is responsible for approving all pending payments to creditors
after she has reviewed each creditor reconciliation:
CORI SUPPLIES CC
Description Amount Explanation by the client’s creditors clerk
Balance per R297
statement on 000
30 September
Goods (R47 Invoice 244 was not recorded because the goods ordered
received after 000) (high-gloss paper material) were still en route from Cape Town
year-end: to our production facility in Johannesburg at year-end. The
invoice 244 goods arrived on 10 October.
Error: invoice (R35 Invoice 227 indicated that Cori Supplies CC charged
227 000) Packaging Solution for 10 pallets of high-gloss material, but
we received only 9 pallets on 28 September. Each pallet has
1 000 sheets of high gloss paper on it at a cost of R35 a
sheet.
Goods (R74 High-gloss paper was delivered to Packaging Solution on 22
returned: 000) September. However, the items were of an incorrect colour.
invoice 229 The whole shipment was subsequently returned to Cori
Supplies CC by way of goods returned note 76. Cori Supplies
CC indicated that it would write us a credit note (for invoice
229), but by year-end the supplier has not yet done so.
Payment (R52 Payment made to Cori Supplies CC on 28 September not
000) taken into account on the supplier statement.
Balance as R89 000 M Mhlongo
per creditors
ledger on 30
September
REQUIRED
1. Describe what the term ‘dual-purpose test’ means. (1)
2. Describe two tests of controls you could perform on the creditors reconciliation of Cori
Supplies CC. (2)
3. Describe the substantive audit procedures you would conduct on the creditors reconciliation
of Cori Supplies CC. Assume that computer-assisted audit techniques (CAATs) will not be
used in the testing of the reconciliation. (15)
[18]
Question 9 LEVEL 2
Purchases
[14 marks]
You are the auditor of Fitness Supplies (Pty) Ltd (Fitness Supplies), a company with a December
nancial year-end that supplies a range of personal training equipment to the public.
Although the company imports its equipment from suppliers in China and the USA, all
purchases are denominated in US dollars. As a result of an increase in demand for training
equipment, Fitness Supplies imported more goods in the current year than in the previous three
years combined. e goods are sold from its stores located in shopping malls across the country.
e company’s integrated computerised system links all the stores’ individual computer
systems. When the inventory level for a particular item of equipment reaches the economic
order quantity level pre-set into the computer system, an order request is sent through to the
chief buyer. Once he/she has signed his/her approval, the order is placed with the relevant
overseas supplier.
Once the equipment reaches South Africa and has been cleared by the customs division of SARS,
it is delivered to the company’s warehouse in Epping, Cape Town, in one section of which the
administration office is located. e following reports are then sent to the creditors department:
A completed GRN
e customs report
e clearing agent’s invoice
e logistics company’s invoice
e warehouse manager dispatches inventory to the relevant stores.

Once the invoice for the equipment has been received from the supplier, a corresponding
creditor is recognised by the accountant using the information (the rate of exchange, the
transaction date, etc.) located on the order form, the delivery note and the invoice.
REQUIRED
Discuss the substantive audit procedures that you would perform on the purchases recorded for
the nancial year under review. In answering the question, make use of general audit software as
far as possible.
[14]
Question 10 LEVEL 3
Substantive procedures: Expenses
[20 marks]
You are the audit senior on the audit of Open Oceans (Pty) Ltd (Open Oceans) for its 30
November 20X1 nancial year. Open Oceans is a deep-sea shing and sh processing company
which is situated close to a large harbour. Its facilities consist of a processing and sh-freezing
factory, which includes several cold rooms and an ice plant (for making arti cial ice). Open
Oceans is registered as a VAT vendor.
e company’s operations are electricity intensive. e total electricity expense recorded for
the 30 November 20X1 nancial year amounted to R1 278 400, which is material for audit
purposes. Included in this total is R245 390 spent on diesel that was used to power generators
during periods of load shedding. Management prepared a spreadsheet to show how the diesel-
related expense was allocated to the electricity account from diesel purchases. e spreadsheet
shows the litres of diesel used by the generators, the cost allocated per litre for a particular
month and the quantity of kilowatts generated as per the generators’ built-in meters. Municipal
and diesel expenses are recorded separately in the general ledger account.
Electricity bills are received from the local municipality on a monthly basis, but at the time of
the audit in January 20X2, the invoice for November 20X1 has not yet been received by Open
Oceans. Accordingly, management created an accrued expense in the amount of R85 500
relating to November 20X1.
REQUIRED
Describe the substantive audit procedures that should be performed to test the electricity
expense recorded by Open Oceans for its 30 November 20X1 nancial year. Structure your
answer in terms of the relevant assertions and include any relevant general procedures.
[20]
Question 11 LEVEL 3
Prepaid expenses
[8 marks]
You are a second-year trainee accountant at Q&Z Inc. and are currently busy with the audit of
A2Z Ltd (A2Z) for the 28 February 20XX nancial year. A2Z is a clothing wholesale retail
company and sells its products to clothing retail companies across the country. You are
responsible for the audit of the company’s accounts receivable balance as at year-end. You
obtained the schedule below, detailing the general ledger accounts that represent the accounts
receivable balance contained in the statement of nancial position as at year-end, from the
company’s accountant:
GENERAL LEDGER ACCOUNT DESCRIPTION R

NUMBER
1011 Trade debtors control 58 985
account 356
1014 Prepaid expenses – Note 1 175 982
Accounts receivable balance – 28 February 20XX 59 161 338
You have already performed all the necessary procedures regarding the company’s trade debtors.
Note 1:
is amount consists of additional amounts which the company paid on its municipal and
telephone accounts.
REQUIRED
Formulate the substantive procedures that you should perform to obtain sufficient and
appropriate audit evidence regarding the company’s prepaid expenses included in the statement
of nancial position as at 28 February 20XX.
[8]
1. Obtain a list from management of all the items included in the prepaid expense balance on 28
February 20XX and recalculate the total on the list. (1)
2. Compare this list to last year’s working paper for completeness purposes. Discuss any changes
with the accountant and corroborate his/her reply with invoices/statements. (1)
3. Agree the total on the list to the balance re ected in the prepaid expense account in the
general ledger and on the trial balance. (1)
4. Inspect correct opening balance to working paper of previous year and con rm this opening
balance was reversed at the beginning of the nancial year. (1)
5. Re-perform the calculation on the list to check that it adds up to R175 982. (1)
6. Agree the amounts on the list for the water and electricity and telephone accounts to the
actual statements on 28 February 20XX. (1)
7. Inspect the water and electricity, telephone and other periodic expense accounts in the
general ledger to determine whether all amounts have been correctly included (e.g. 13
payments instead of 12). (1)
8. Perform an analytical review of the prepaid expenses in the current year to the prepaid
expenses of the previous nancial period for reasonableness and investigate any variances.
9. Obtain a management representation letter regarding the existence, completeness, (1)
accuracy, valuation and allocation, rights and obligations, classi cation and presentation of
the prepaid expenses balance at 28 February 20XX. (1)
10. Inspect the nancial statements and the notes to the nancial statements to ensure the
prepaid expenses have been included as a separate line item in the accounts receivable
balance note. (1)
Question 12 LEVEL 3
Prepayments
[16 marks]
You are the audit senior on the audit of Peru Rocks (Pty) Ltd (Peru Rocks). e company has
been your client since your rst year of articles. Peru Rocks imports rocks from South America,
against the hills of Machu Pichu, to sell across South Africa. e rocks are used in building
projects, gardens, landscaping and other similar projects.
Peru Rocks discloses two prepaid balances on the face of its statement of nancial position.
Marketing campaign
e company has seen a drop in sales and as a result, the sales director approached a marketing
company to run a marketing campaign. Peru Rocks had never previously relied on any form of
marketing other than word of mouth. e marketing campaign would run for a 10-month period.
e contract consisted of two elements. An amount of R250 000 was payable ve months after
the commencement of the campaign. is amount was payable only if Peru Rocks realised an
increase in sales of R1 million. If this target was reached, Peru Rocks could decide whether it
wanted to extend the contract for another ve months for an additional amount of R250 000, due
when the target was reached. Peru Rocks saw an increase in sales in excess of R1 million four
months after the commencement of the campaign and as a consequence decided to make the
additional payment a month before year-end, while the contract still had a further four months
to completion.
Other prepayments
Peru Rocks pays various other smaller expenses in advance, which include, inter alia, rental and
insurance payments.
REQUIRED
1. Assuming you have already completed the general procedures relating to the marketing
campaign account, formulate the substantive procedures you would perform in respect of the
prepaid marketing campaign expense account in the statement of nancial position. (10)
2. Formulate analytical procedures that you would perform in respect of the other prepayments
in the statement of nancial position. (6)
[16]
Question 13 LEVEL 2
Wages
[25 marks]
You are the audit manager on the audit of Playground (Pty) Ltd (Playground), a manufacturer of
self-assembly playground equipment. You are currently busy with the audit for the year ended 31
December. e preliminary work performed by one of the audit trainees involved the
documentation of the client’s wages system for its 40 wage employees.
After evaluating the system description and following discussions with the trainee, you
decided that a substantive-based audit approach with limited reliance being placed on
substantive analytical procedures would be the most appropriate.
Documentation of the wages system of Playground

All potential employees are interviewed by management, after which reference checks are
performed. As a result of the number of high-pro le credential frauds published in the media
recently, the company has over the past few months placed greater emphasis on verifying the
credentials of each applicant.
Once an offer of employment has been made, both the personnel manager and the new
employee sign a letter of appointment, which is led in the personnel department.
Annual performance evaluations are performed by the production supervisor and the
production manager. ese are used in order to determine annual increases, which are
communicated to the personnel department. After the personnel manager has approved them,
the wage increase letters are led in the personnel department.
Most employees, who are required to wear red overalls while on duty, work in the factory. In
order to ensure that no injuries occur during working hours, all work-based activities are
monitored through the deployment of CCTV cameras. No employee is required to work
overtime, but may do so voluntarily.
At the beginning of each week, the wages clerk prepares the wage journal, calculating the
gross wage of each employee by multiplying the hours worked – information on which is gleaned
from the computerised clock-card system – by the appropriate hourly rate. At the same time,
deductions for income tax and medical aid contributions are made. Both the personnel manager
and the nancial manager sign the weekly net payment schedule that is sent to the bank. A copy
of the schedule is led in the personnel department.
e company uses a wages control account in order to control the payment of wages, which is
made by the bank directly into each employee’s bank account at the end of each week.
REQUIRED
Formulate the substantive procedures that you would perform on the wage expense of
Playground. You are not required to address salaries or the directors’ remuneration.
[25]
Question 14 LEVEL 2
Salaries
[15 marks]
You are currently engaged on the audit of Maxi-Med Ltd (Maxi-Med), the 10th largest private
hospital group in the world. With nearly 6 300 beds in 32 multidisciplinary hospitals in South
Africa and Namibia, Maxi-Med employs approximately 7 600 people.
Payroll
e accounting system, which includes a payroll module, is run on a LAN at head office in
Durban. e payroll expense for the current nancial year end is R3 955 229 340 (the previous
year was R3 638 610 839). All employees are paid via EFT on the 25th of each month.
An employee’s signed contract and appointment letter, which are led at the administration
office at the hospital in which he/she works, are scanned by the administration clerk at that
particular hospital and emailed to the human resources (HR) officer at head office. e HR
officer inspects the letter for the signatures of both the hospital manager and the employee, and,
if he/she is satis ed, inputs the data into the payroll master le system.
REQUIRED
Describe the substantive audit procedures you would carry out in respect of salaries at year-end.
[15]
1. In order to establish if an employee is a genuine employee of Maxi-Med Ltd (Occurence):

a) After stratifying the salaries le by hospital (e.g. per hospital name), extract the name of an
employee and request that the hospital where his/her original documents (employment
contract, letter of appointment, certi ed copy of ID document, etc.) are kept courier the
original documents to head office. (1)
b) Inspect the documents for validity. (1)
c) Inspect all third-party correspondence (e.g. with SARS) in order to con rm validity. (1)
d) Perform a positive identi cation of salary earners whilst visiting hospitals randomly
selected during the audit. (1)
e) rough discussion with the staff in the human resources section and an examination of
the authorised employment and dismissal documentation, con rm that staff are
introduced to, and removed from, the salaries register within the correct time period. (1)
f ) Using general audit software, identify whether or not any employees have been noted with,
for example:
i) duplicate identity numbers
ii) missing names
iii) duplicate addresses
iv) missing tax numbers. (2)
2. In order to con rm accuracy:
a) agree the total salaries expense of R3 955 229 340 (the previous year it was R3 638 610 839)
for the year to the trial balance, the general ledger and the annual nancial statements (1)
b) by inspection, agree the employee’s gross salary paid to that authorised in the employee’s
contract, and vice versa (1)
c) compare all deductions (e.g. PAYE/SITE, pension and medical aid) to the appropriate tables
and to the authorised deduction form at the human resources department, inquiring into
any discrepancies with human resources and, if necessary, the employee (1)
d) recalculate a sample of the deduction calculations (1)
e) re-perform some calculations on both the salaries account and the monthly payroll
printouts (1)
f ) re-perform a sample of postings from the salaries account to the general ledger in order to
determine that postings have been correctly performed (net salaries and all deductions).
3. In the case of classi cation, scrutinise the payroll accounts for any unusual entries and (1)
wrong postings. (1)
4. In order to con rm completeness and cut-off:
a) establish that the payroll account has 12 salary debits for the year in order to ensure
completeness of payroll expense (1)
b) scrutinise monthly reconciliation reports where the current month’s salary has been
reconciled to the previous month’s with regard to new employees, employees dismissed,
changes in salary rates, bonuses paid, etc. (1)
c) trace a sample of these changes to master le amendment forms and supporting
documentation, or personnel les. (1)
5. During analytic procedures, compare:
a) the salaries for Maxi-Med Ltd on a month-to-month basis and investigate any large
uctuations by means of supporting documentation (1)
b) the salaries for each hospital on a month-to-month basis and investigate any large
uctuations by means of supporting documentation. (1)

Question 15 LEVEL 3
Lifetime expected credit losses
[21 marks]
You are auditing Zazo (Pty) Ltd (ZA), a group of exclusive fashion boutiques that operates shops
at all the main shopping centres in South Africa. ZA is a subsidiary of a Spanish company which
has been in the fashion industry for over ve decades.
e company allows sales on credit to customers to maximise sales. Before customers can
purchase on credit, they must complete a credit application form which will be followed up by
head office’s credit department. Only creditworthy customers will then be allocated a credit limit
which is strictly enforced by the company. ZA’s nancial year-end is 30 June.
Trade receivables
e company will be using a provision matrix approach to calculate the lifetime expected credit
loss on trade receivables as stipulated in IFRS 9. e trade receivables age analysis has the
following balances at year-end:
R EXPECTED DEFAULT RATE

Amounts owing 1–30 days 15 000 000 0.3%
Amounts owing 120+ days 2 700 000 12.6%
e expected default rate as shown above was determined by the procurement manager at head
office.
Your audit rm has performed tests of controls on the revenue/trade receivables cycle of ZA.
REQUIRED
1. Calculate the lifetime expected credit loss at year-end, using the provision matrix approach on
the information supplied in the question.(3) Also discuss the taxation effect of this provision
on the current year as well as the next nancial year. (3)
2. Describe the audit procedures to verify the valuation of the lifetime expected credit loss as
calculated in (1) above. (15)
[21]
1. Provision matrix
1–30 31–60 61–90 91–120 120+ TOTAL
DAYS DAYS DAYS DAYS DAYS
Default rate % 0.3 1.6 4.6 3.6 12.6
Gross carrying 15 m 7.5 m 4m 2.5 m 2.7 m 31.7 m

amount
Lifetime 45 000 120 000 184 000 90 000 340 200 779
expected credit 200
loss
Marks: R779 200 (or R780 000 rounded) (2 marks); framework used (1 mark)
Available marks [3]; maximum marks: [3]
Taxation effect on taxable income

Section 11(j)(i)(aa)(A) applies
Taxable income will decrease by (779 200 @ 40%) R311 680 in the current year (2)
is amount must be added back to taxable income in the following year. (1)
e percentage used can increase to 85% if a directive is obtained from SARS. (1)
2. Valuation procedures for calculation above
Audit of default rate percentage

a) e 3.6% used in the above calculation is suspect and shows bias. It should have been
between 4.6% and 12.6%. (2)
b) Enquire from the procurement manager how he decided on the default rate percentages.
Corroborate his explanation with supporting documentation. (1)
c) Determine the competency and experience of procurement manager to calculate the
default rate percentage by investigation of previous work prepared by him/her. (1)
d) Investigate the actual defaults in the current year and compare them to the default rate
percentages used in the prior year. is will indicate how accurate the default rate
percentage was calculated in the previous year. (2)
e) Follow up payments after year-end by debtors and have discussions with debtors clerks
regarding possible defaults. Also take into account accounts handed over to attorneys
for collection and disputes with debtors. Up to now, we have only covered possible bad
debt that already existed at year-end. Certain ‘good debt’ will also go bad later after year-
end. e auditor must estimate a provision for these losses. (4)
f ) Also investigate any other subsequent events after year-end which indicate that debtors
need to be impaired. (1)
g) For example, if you calculated that lifetime expected credit loss amounts to R1 200 000
based on procedures performed under points (e) and (f ) above, then you know the amount
calculated by the client of R779 200 used in the provision matrix is too low. (2)
h) Follow up any large discrepancies as revealed by procedures in (e) above with the CFO. If
the CFO does not rectify the matrix, take audit difference to unders/overs schedule. (1)
Audit of gross carrying amount

i) Inspect each amount in the matrix to the amount in the debtors age listing. (1)
j) Agree the total of R31.7 million to amount in the debtors control account/TB. (1)
k) Re-perform the debtors aging to dates on invoices/delivery notes to verify correctness of
aging. (1)
Audit of lifetime expected credit loss

l) Re-perform the calculation on the matrix to verify amount is R779 200. (1)
m)Agree the total of R779 200 in the matrix to the amount in the general ledger’s provision for
lifetime expected credit losses. (1)
Available marks: [19]; maximum marks: [15]
Question 16 LEVEL 2
Accounts receivable
[18 marks]
Soft Cloud (Pty) Ltd (Soft Cloud) is a manufacturer and wholesaler of high-quality mattresses,
whose clients comprise such bulk-buyers as hotels and game lodges. You were appointed as the
audit senior on the 31 August 20X1 year-end audit.
In the course of the planning phase of the audit, the nancial manager, Mr Zuchter, who
assigned the revenue and receipts cycle to you, informed you that during the nancial year Soft
Cloud adopted a new bad-debt provision policy.
e following extract from the trial balance was provided to you by Mr Zuchter:
TRIAL BALANCE AS AT 31 UNAUDITED 20X1 AUDITED 20X0

AUGUST R’000 R’000
Credit sales 142 582 125 879
Cash sales 59 142 65 475
Inventory 32 125 25 154
Debtors 52 175 49 487
Allowance for credit losses 11 154 10 475
REQUIRED
Describe the substantive procedures that you would perform in order to obtain appropriate and
sufficient audit evidence for the valuation assertion with regard to the net debtors balance of R41
021 000 at year-end.
[18]
Question 17 LEVEL 2
Provision for future expected credit losses
[14 marks]
You are the auditor of Cape-Dairy (Pty) Ltd (Cape-Dairy), a company producing organic milk at
its facility in Durbanville. e company has a December nancial year-end.
e only audit work performed on the allowance for credit losses balance at year-end was an
analytical review procedure:
Extract from the analytical review procedure performed by the auditors
Expectation: We expect the allowance for credit losses to increase in line with the industry
average of 11%.
Accepted deviation: Up to 2% either side of the expectation; that is, 9% or 13%

Actual allowance calculated by management: R10 000 000 (gross receivables) @ 7.5% =
R750 000
Action: Follow up with management and corroborate explanations through the performance
of substantive audit procedures.
Extract from a discussion held with the chief nancial officer
Auditor: My ndings following an analytical review procedure indicate that the allowance for
future expected credit losses for the current year is 7.5% of gross receivables, which is
substantially lower than the industry average of 11%.
Chief nancial of cer: Based on my experience in the industry, and the fact that we have an
aggressive collections policy, I do not see any valid grounds for increasing the allowance
for future expected credit losses, as this would not be a fair re ection of what is taking
place within our company. In any event, if we are wrong, the difference should not be
material. We provided for 7.5% in the previous year when the industry average was 10%,
with which gure your rm was satis ed. So I don’t see that there is any valid reason for
increasing the allowance for the credit losses gure in the current year.
Other information
During the performance of subsequent events testing, it was brought to your attention that a
debtor included in the 60-days total at year-end had become insolvent, which served to
strengthen your view that the provision for future expected credit losses at the company was
understated. You informed the chief nancial officer about the debtor and that you believed that
the industry average percentage of 11% would be more reasonable in determining the allowance
for credit losses. e chief nancial officer indicated that he did not agree and refused to make
any additional adjustments.
e provision for future expected credit losses for the previous year was R525 000.
Extract from the electronic age analysis
CURRENT 30 DAYS 60 DAYS > 90 DAYS

Age analysis: previous year
Rand value of debtors R4 760 000 R740 000 R875 000 R625 000
% of total amount receivable 68% 10.5% 12.5% 9%
Age analysis: current year
Rand value of debtors R5 400 000 R3 250 000 R500 000 R850 000
% of total amount receivable 54% 32.5% 5% 8.5%
REQUIRED
Discuss the substantive audit procedures that you would perform on the allowance for the credit
losses gure at year-end.
[14]
Question 18 LEVEL 2
Accounts receivable
[20 marks]
An audit manager at Audit Inc., a rm of registered auditors based in Cape Town, you have
reached the completion stage of the December year-end audit of Saucy Ltd (Saucy). A company
listed on the Alternative Exchange (AltX), Saucy manufactures a variety of condiments that it
sells to wholesalers, retailers, restaurants and hotels. Your audit rm has been Saucy’s auditors
for the past ve years.
All audit work has been sufficient and effectively completed (including a positive and
negative debtors circularisation), except for the outstanding work to be performed on the
valuation assertion for accounts receivable.
Accounts receivable
e company’s accounting systems are fully integrated and run on a local area network (LAN).
Sales are made on a credit basis only. By the end of November, customers have been supplied
with a product catalogue, together with the following year’s approved price list. Although prices
are generally xed, they may change, depending on the quantities purchased and the discounts
granted.
Each prospective client completes a credit application. Mr Melapo, the credit manager,
compares the information noted on the form to the information obtained from the credit
bureaux in order to determine whether or not he/she should be granted credit. For each
applicant whom he approves, he requests one of the debtors clerks (Ms Mokumbe, Mr Pienaar or
Mr Adams) to load the client onto the system with a pre-approved credit limit.
In addition to all customers receiving 30-day settlement accounts, it is company policy to
make an allowance for credit losses against the customer if he/she has not settled his/her debt
within 90 days. In the previous year, the allowance for credit losses amounted to R220 500.
e current year age analysis obtained from Mrs Newton, the chief nancial officer, is as follows:
ACCOUNTS CURRENT > 30 > 60 > 90 > 120

RECEIVABLE (R) DAYS DAYS DAYS DAYS
4 275 000 2 308 500 1 325 342 000 171 000 128 250
250
Percentage of total 54% 31% 8% 4% 3%
debtors
e previous year’s age analysis reads:
ACCOUNTS CURRENT > 30 > 60 > 90 > 120

RECEIVABLE (R) DAYS DAYS DAYS DAYS
3 675 000 2 131 500 1 065 257 250 109 000 111 500
750
Percentage of total 58% 29% 7% 3% 3%
debtors
REQUIRED
Describe the substantive audit procedures that you would perform in order to satisfy yourself
that the accounts receivable balance is valued correctly at the December year-end.
[20]
1. In order to establish the gross amount:

a) extract a list of accounts receivable from the accounts receivable master le and agree the
total of R4 275 000 on the list to the accounts receivable control account or trial balance
b) review the list for credit balances, obtain the reasons from Mr Melapo and, if material, (1)
request a reversal of the amounts (1)
c) reclassify remaining credit balances to the accounts payable balance (1)
d) scrutinise the accounts receivable control account for debtors with unusual credit limits; if
there are any, follow up on them with Mr Melapo (1)
e) re-perform casts of the control account and the accounts receivable list (1)
f ) compare the balances on the list of accounts receivable to the responses received from
debtors circularisation. Follow up on any queries or reconciling items. (1)
2. In order to establish provision for future expected credit losses:
a) by inquiring from Mr Melapo and an inspection of the previous year’s working papers:
i) establish the method and the procedures (all balances exceeding 90 days) adopted by
Mr Melapo in determining the allowance for credit losses of R299 250 (R171 000 + R128
250) (1)
ii) assess the basis, the method and the procedures for reasonableness and consistency
with the previous year’s balance of R220 500 (R109 000 + R111 500) (in this scenario, it
is consistent) (1)
iii) evaluate the effectiveness and reliability of the procedures adopted in order to
authorise the allowance for future expected credit losses by management (1)
iv) select a small sample of accounts receivable and, by tracing the amounts owed back to
the invoices and the subsequent receipts, con rm that the manual ageing of the
amount agrees with the ageing as calculated per the master le. (1)
b) using general audit software, stratify the debtors master le into the following categories:
i) A debtor’s amount in an age eld that exceeds the accounts receivable individual
credit terms (1)
ii) A debtor’s amount in the over-90-days age eld (1)
c) for each debtor identi ed above, discuss with Mr Melapo his/her historical payment history
and the likelihood or not of him/her paying the outstanding amount (1)
d) inspect Saucy’s legal and customers correspondence les in order to identify disputes with
customers, and (1)
if there are any, follow up with the Mr Melapo in order to obtain the latest information on
the state of the disputes (1)
e) compare the amount written off in the current year to the allowance made in the previous
year in order to assess management’s ability to provide realistic provision for future
expected credit losses (1)
f ) perform analytical review procedures on the accounts receivable balance and the provision
for future expected credit losses (2)
g) calculate the days outstanding and compare them to those of the previous year (1)
h) compare the R299 250 to the R220 500 provision (1)
i) compare the accounts receivable age analysis to that of the previous year (1)
j) compare the accounts receivable to the credit sales for both the current and the previous
year (1)
k) for all of the above, obtain reasons from management for any unusual variances, and follow
up on their explanations employing source documentation (1)
l) after performing all the above procedures, determine one’s own provision for future
expected credit losses based on the audit evidence obtained, comparing that allowance to
the R299 250 calculated by management.
3. Follow up any difference with management, and then conclude. (1)
4. Any other valid procedures (1)
Question 19 LEVEL 2
Positive con rmation and provision for future expected credit losses
[26 marks]
You are the audit senior on the external audit of Leep Frog Ltd (Leep Frog), a company that owns
and leases buildings across South Africa. During the current year, there was a signi cant
decrease in the number of properties leased as a result of declining interest rates. Consequently,
the company’s rentals in arrears account has grown dramatically over the past few months. In
response, the audit manager has decided to send out positive con rmation letters to lessees.
e lease system in place at Leep Frog operates as follows:

New applications and approvals
Once a prospective tenant has completed a rental application form and successfully undergone a
credit check, a rental agreement, which is pre-numbered, is entered into with the lessee and
signed by both parties. A copy of the agreement, as well as the rental application form, is led in
a correspondence le for the lessee, who is assigned a unique lessee number.
Invoicing
e accounting department at head office maintains a rent register in which all rentable office
space is listed, along with the details of all lessees.
On the rst day of every month, an invoice serving as a reminder of the rent due on or before
the fourth day of the month in terms of the rental agreement, is mailed to each lessee. In
addition, the invoice is debited to the lessee’s account in the rent register.
Receipts
Rentals are paid directly to head office. When payment has been received from a lessee, it is
credited to the client’s account in the rent register.
Month-end procedures
All lessees with outstanding rent payments receive a monthly statement prepared and mailed on
the 10th of each month. Copies of these statements are led in the respective correspondence
les of the lessees.
e credit manager determines the provision for future expected credit losses by inspecting the
age analysis at year-end and considering the recoverability of all individual lessee amounts
outstanding for more than 90 days.
According to the audit program, you should perform the following audit procedures:
Verify the existence of lessees and rental in arrear balances relying on positive circularisations.
With regard to the provision for future expected credit losses, inspect and test the procedures
performed by the audit client when calculating such a provision.
REQUIRED
1. Describe the procedures that you would perform in respect of the positive con rmation by lessees of the gross amount of
rental in arrears. (11)
2. Formulate the substantive procedures that you would perform at year-end relating to the provision for future expected
credit losses. (15)
[26]
Question 20 LEVEL 2
Creditors statement reconciliation
[15 marks]
A junior trainee accountant assigned to the 31 December 20X1 audit engagement of Raffles (Pty)
Ltd (Raffles), a large retailer of furniture and electronic appliances with outlets across the
country, you have been allocated to the testing of trade payables and will perform the audit of
Raffles’s creditors reconciliations in mid-January 20X2.
e following creditors statement reconciliation, performed for a supplier, Furnley Ltd, by the
Raffles creditors clerk, was included in a sample for testing. e reconciliation for January 20X2
for Furnley Ltd, which closed down on 23 December 20X1, is not yet available.
DESCRIPTION NOTE R
Balance as per Furnley Ltd statement 23/12/20X1 466 980
Add:
Goods received note GRN681 not yet invoiced 113 750
Correct mathematical adding error on supplier’s statement 15 789
Correct posting error (invoice FRN1078 from Furnley Ltd) 1 75 380
Less:
Discount allowed on invoice FRN1105 not on statement 2 55 320
EFT payment to supplier on 30/12/20X1 184 100
Debit note RFL540D for goods returned to supplier 3 80 550
Balance per creditors ledger account CR408, 31/12/20X1 351 929
Notes:
1. e creditors clerk at Raffles erroneously posted the amount charged as per Furnley Ltd’s
invoice FRN1078 to the creditors ledger account of Hautmanns (Pty) Ltd, indicating the
correction on the reconciliation only. FRN1078 has not yet been settled.
2. Raffles quali ed for a 5% discount on invoice FRN1105 as a result of making a payment to
Furnley Ltd within 30 days of the invoice date, which Furnley Ltd did not take into account on
its statement.
3. Raffles purchased several LED television sets from Furnley Ltd. According to Raffles, some of
the goods received were older models than those originally ordered. However, Furnley Ltd
disputes this claim, saying that Raffles never indicated the model number on its order.
REQUIRED
Describe in detail the substantive audit procedures you will perform on the creditors statement
reconciliation for Furnley Ltd prepared by the creditors clerk of Raffles (Pty) Ltd. Consider all
amounts and reconciling items material, ignoring any VAT implications.
[15]
(Noteswithin brackets are for informational purposes only and do not form part of the required
answer.)
1. Agree the supplier’s balance of R466 980 as per the reconciliation to Furnley Ltd’s statement,
con rming that the date on the statement is 23 December 20X1. (1)
2. Agree the balance of R351 929 per Raffle’s reconciliation to the creditors ledger at 31
December 20X1. (1)
3. Re-perform the casting of the reconciliation, testing the logic of the calculations (i.e. where
items fall under the heading ‘Less’, that these were indeed subtracted and not added) in order
to ensure mathematical accuracy. (1)
4. Inspect the supplier’s statement for amounts incorrectly duplicated on the reconciliation as
well as other unusual entries not adequately addressed on the reconciliation (e.g. GRN681’s
invoice should not appear on the supplier’s statement as well). (1)
5. With reference to the goods received note:
a) inspect GRN681 for the date of the delivery of the goods in order to con rm Raffles’
acknowledged receipt of the shipment in December 20X1 (the test for cut-off ) (1)
b) request from the creditors clerk the client’s calculation of the amount of R113 750 and agree
items/quantity on the supplier’s delivery note and prices to such supporting evidence as
the invoice subsequently received in January 20X2 (Note: the supplier delivery note might
not contain item prices). (1)
6. Recalculate the supplier’s statement in order to con rm that he/she made a mathematical
error and agree the result (R15 789) with the correction as per Raffle’s calculation. (1)
7. With reference to the correction of posting error:
a) inspect invoice FRN1078 for the amount of R75 380 in order to con rm that the date shown
is within the 20X1 nancial year. Alternatively, ensure that the invoice appears on Furnley
Ltd’s December 20X1 statement, as it should do (1)
b) recommend to the client a correction to the creditors ledger accounts of both Furnley and
Hautmanns, as currently the former’s account is understated and Hautmanns’ overstated
by R75 380 (Note: this entry on the reconciliation should be removed once the correction to
the accounting records has been made). (1)
8. With reference to the discount allowed:
a) inspect the invoice, the supplier contract or other correspondence between Raffles and
Furnley Ltd for evidence that Raffles quali es for a 5% payment discount should it settle an
invoice within 30 days of the invoice date (1)
b) compare the date on invoice FRN1105 to the payment date on the bank statement in order
to verify that payment took place within 30 days of the amount having been invoiced (1)
c) recalculate the discount by multiplying the discount percentage by the invoiced amount in
order to arrive at the discount amount of R55 320. (1)
9. With reference to the EFT payment:
a) con rm from the December 20X1 bank statement that payment of R184 100 took place in
the 20X2 nancial year (1)
b) agree the amount paid to the corresponding invoice from Furnley Ltd in order to verify that
the payment relates to debt owing to Furnley Ltd and not to another supplier. (1)
10. With reference to the debit note:
a) con rm from the goods return voucher that the goods sent back to Furnley Ltd were
returned before the 20X1 year end, which therefore justi es the recording of a debit note
b) if the goods were not returned in the 20X1 nancial year (this seems likely, though, (1)
owing to the dispute between Raffles and Furnley Ltd) or returned only in January 20X2,
recommend to management a reversal of the debit note (Note: in terms of generally accepted
accounting practice, a debit note may not be processed if the goods have not been returned)
c) inspect the original purchase order for an indication that the model number of the (1)
affected television sets was not speci ed by Raffles, as this will lend support to Furnley’s
refusal to accept the returns, thereby warranting a reversal of the debit note (1)
d) if the recording of the debit note is justi ed, recalculate the debit amount with reference to
the quantity and the description of the goods returned and the original invoiced item
prices. (1)
Question 21 LEVEL 2
Trade payables
[12 marks]
You are responsible for the audit of trade payables of Neoplats Trading (Pty) Ltd (Neoplats
Trading). e audit manager requested that you read through the debenture agreements to
identify loan covenants that will affect the audit of trade payables. While reading the agreements,
you came across the following section:
Loan covenants
The Borrower undertakes that for each accounting period ending, its nancial position
shall have been such that:
a) the ratio of net cash ow to debt service liability shall not be less than 1.3:1; and
b) the current ratio (current assets over current liabilities) shall not be less than 1.5:1.
Upon inspection of Neoplats Trading’s preliminary annual nancial statement, you noted that
current liabilities consisted of trade payables and provisions. rough discussions with
management, you discovered that management only raises a provision for management fees
payable to its holding company. e provision for management fees was audited by your audit
senior who was satis ed that it was not understated. However, you are now concerned that trade
payables may be understated in order to improve the current ratio.
REQUIRED
Formulate audit procedures that you will perform to test for the completeness of trade payables
at year end.
[12]
Question 22 LEVEL 3
Trade and other payables
[25 marks]
You are an audit manager at Q&Z Inc. and are currently busy with the audit of Pick-A-Party Ltd
(Pick-A-Party) for the 28 February 20XX nancial year. Pick-A-Party is a wholesale company
which buys snacks, sweets, cold drinks and themed party items such as paper plates, plastic
glasses, serviettes, balloons, etc. on credit from various local and overseas suppliers, which are
then sold by Pick-A-Party to retail companies and the public across the country.
REQUIRED
1. Discuss the assertion(s) which will normally be at risk when auditing the trade creditor’s
balance of a company. (3)
2. Describe the substantive procedures that the audit team should perform to obtain sufficient
and appropriate audit evidence regarding the creditors balance re ected in Pick-A-Party’s
notes to its nancial statements at year-end. (22)
[25]
1. High risk assertion(s)

a) Completeness is normally at risk when auditing the trade creditors balance as companies
generally tend to overstate assets and understate liabilities such as trade creditors. (1)
b) In addition to the general tendency to understate liabilities, companies might record trade
creditors based on invoices (which might only be received after year-end) and not on goods
received notes, which are prepared as the goods are received. (1)
Depending on whether it is a new creditor or a current creditor who already has an account
c) in the company’s books, the late recording of the purchase and the corresponding entry in
the creditors account will affect either the completeness (new creditor) or the accuracy,
valuation and allocation (current creditor) assertion. (2)
2. Substantive procedures
Completeness
a) Compare the list of creditors at the current year-end to the previous year-end and identify:
i) creditors on the previous list who do not appear on the current list (1)
ii) creditors balances which are signi cantly smaller at the current year-end than at the
previous year end (1)
iii) and by enquiry from management and inspection of the necessary supporting
documents, determine and evaluate the reasons for the differences.
b) Obtain the list of goods received notes (GRNs) which were unmatched to invoices at year-
end and inspect the journal entry which was raised for the corresponding creditors at year-
end. (1)
c) Recalculate the amount owed as recorded in the journal with reference to price of the goods
received (from the order or pricelist or corresponding invoice if it has arrived) and the
quantity as indicated on the GRN. (1)
d) Select a sample of large payments from the cash payments journal for the month(s) after
the nancial year-end and inspect the GRN and delivery note to con rm that if the payment
relates to goods or services received prior to year-end, the corresponding creditor had been
raised at year-end (subsequent payment testing). (1)
Accuracy, valuation and allocation

e) Compare a sample of individual creditors’ balances on the list according to the creditors
ledger to the individual creditor’s account in the creditors ledger. (1)
f ) Compare the list of individual creditors’ balances according to the creditors ledger to the
balance in the creditors control account in the general ledger. (1)
g) Compare the balance of the creditors control account in the general ledger to the creditors
balance on the trial balance. (1)
h) Recalculate the balance of the creditors control account in the general ledger and the total
of the creditors list obtained from the creditors ledger. (1)
i) Select a sample of creditors (which includes the company’s major suppliers) from the
creditors list and obtain the year-end creditors reconciliations performed by the creditors
clerks and perform the following procedures:
i) Re-perform the logic of the reconciliations. (1)
ii) Recalculate the calculations on the reconciliations. (1)
iii) Agree the balances on the reconciliations to the balances as per the creditors
statements and the creditors listing. (1)
iv) Inspect supporting documentation and/or enquire regarding the reconciling items on
the reconciliations. (1)
j) Select a sample of overseas creditors from the creditors list and inspect the creditors
statements at year-end (28 February) to determine the amounts owed to the creditors in the
foreign denominated currency. (1)
k) Obtain the applicable foreign currency exchange rate at nancial year-end (28 February)
and using the obtained rate, recalculate the amounts owed to the creditors at the nancial
year-end in rands (local currency). (1)
l) Compare the recalculated amounts to the amounts recorded for the creditors on the
creditors list. (1)
m)Inspect the creditor’s correspondence le for correspondence relating to unsettled disputes
with suppliers, and by discussion with management, determine whether any adjustments
to creditors are required. (is could also address accuracy, valuation and allocation if the
actual delivery or condition of the goods delivered is disputed.) (1)
n) Inspect the creditors control account in the general ledger for any unusual debit entries and
enquire from management. (1)
Rights and obligations

o) Inspect the supporting documentation such as the creditors statements while auditing the
creditors reconciliations to make sure that the documents are addressed to Pick-A-Party Ltd
(this also addresses existence). (1)
Classi cation
p) Identify any debit balances on the creditors list and request management to transfer the
balances to trade debtors. (1)
Presentation
q) Inspect the notes to the nancial statements to ensure that creditors are included as part of
the company’s current liabilities. (1)
General
r) Obtain a management representation letter addressing the existence, completeness,
accuracy, valuation and allocation, classi cation, rights and obligations and presentation
assertions of the creditors balance as at year-end. (1)
s) Perform analytical procedures and obtain supporting documentation for any material
uctuations, for example:
i) current year’s purchases and creditors at year-end to prior years (1)
ii) creditors as a percentage of current liabilities at year-end to prior years. (1)
t) If necessary, obtain con rmation of balances directly from a sample of creditors, i.e.
conduct a positive creditors con rmation. (It may be appropriate to obtain direct
con rmations of nil balances; major creditors (to con rm that the balances are not
understated despite being large); balances which have signi cantly reduced since the prior
year, and creditors for which there are no statements.) (1)
u) Scrutinise the creditors ledger and the trade creditors control account in the general ledger
for any abnormal entries and con rm any material adjusting entries with supporting
documentation. (1)

Question 23 LEVEL 3
Trade and other payables balance
[23 marks]
You are a trainee accountant at Q&Z Inc. and are currently busy with the audit of Pick-A-Party
Ltd (Pick-A-Party) for the 28 February 20XX nancial year. Pick-A-Party is a wholesale company
which buys snacks, sweets, cold drinks and themed party items such as paper plates, plastic
glasses, serviettes, balloons, etc. on credit from various local suppliers, which are then sold by
Pick-A-Party to retail companies and the public across the country. As part of the substantive
testing of the trade and other payables balance at year-end, you have selected the following
creditors reconciliation for testing:
Creditors reconciliation – Paper Plates Galore (Pty) Ltd
CREDITORS RECONCILIATION: FEB 20XX

Name: Paper Plates Galore (Pty) Ltd
Account nr: P078
Address: PO Box 2954, Pretoria, 3265
R
Balance according to creditor statement dated 28/02/20XX 146 493.36
Invoices: (17 964.00) (5
Incorrectly invoiced for goods purchased by Pick-Your-Party (Pty) Ltd – 920.50)
invoice nr INV09678 (23/02/20XX)
Overcharging on invoice nr INV0567 – Note 1
Payments: Direct electronic transfer – 28/02/20XX (57 541.73)

Goods returned: Goods returned in respect of invoice nr INV04512 – (8 975.00)
Note 2
Balance according to creditors ledger on 28/02/20XX 56 092.13
Note 1:
is overcharging resulted from an order for 15 boxes of themed serviettes at R499.00 per box
which was received by Pick-A-Party but Paper Plates Galore incorrectly invoiced Pick-A-Party for
51 boxes.
Note 2:
e delivery of the salt biscuits, with comic characters’ pictures printed on them, relating to this
invoice took place on 26/02/20XX, but while moving the boxes to the warehouse, the warehouse
clerk noticed that the sell- and use-by date was 31 January 20XX. Paper Plates Galore was
noti ed and acknowledged the mistake and collected the expired salt biscuits from Pick-A-Party
on 28 February 20XX – goods returned note number GRN0478.
REQUIRED
1. Explain what external con rmations are and why external con rmations are normally
obtained as part of the substantive procedures for debtors, but not for creditors. (3)
2. Describe the substantive procedures that should be performed on the creditors reconciliation
of Paper Plates Galore (Pty) Ltd for the 28 February 20XX nancial year-end. (20)
[23]
1. a) External con rmations are written responses obtained directly from a third party, for
example a debtor, and are used by the auditor to obtain evidence regarding the entity’s
account balances, etc. (1)
b) When auditing debtors, all the supporting documentation supporting the debtors balances
are generated within an entity, for example delivery notes, invoices and debtors statements.
One way of con rming these debtors balances is by speaking to the debtors directly. (1)
c) Creditors normally send creditors statements to an entity, which serves as external
con rmation, which is then used by the auditor when auditing the creditors reconciliations.
2. Substantive procedures – creditors reconciliation (1)
General
a) Inspect Paper Plates Galore’s creditor statement to con rm that:
i) it is issued to Pick-A-Party Ltd (1)
ii) the date on the statement is 28 February 20XX (1)
iii) the balance owing on the statement is R146 493.36 as re ected on the reconciliation.
b) Inspect Paper Plates Galore’s account in Pick-A-Party’s creditors ledger (and list of (1)
creditors) as at 28 February 20XX and con rm that the balance is R56 092.13 as re ected on
the reconciliation. (1)
c) Re-perform the logic of the reconciliation and the reconciling items, assessing logic and
reasonableness. (1)
d) Recalculate the calculations on the reconciliation. (1)
e) Inspect Paper Plates Galore’s March 20XX creditor statement/creditors reconciliation to
con rm that all the February 20XX reconciling items were resolved. (1)
f ) Inspect the creditors correspondence le for any correspondence relating to the reconciling
items. (1)
Invoice INV09678
g) Inspect the goods receive note for any deliveries on 22 to 24 February 20XX from Paper
Plates Galore and inspect that such a delivery was not received. (1)
h) Inspect the invoice (if available) and con rm that Pick-Your-Party was invoiced and not
Pick-A-Party. (1)
INV0567 (note 1)
i) Obtain INV0567 and inspect for the corresponding goods received note number. Inspect
the relevant goods received note to con rm:
i) the description of the goods received (themed serviettes) (1)
ii) that 15 boxes were received. (1)
j) Inspect invoice number INV0567 from Party Plates Galore and con rm that Pick-A-Party
was invoiced for 51 boxes. (1)
k) Inspect the inventory records to con rm the accurate recording of the 15 boxes received.
l) Recalculate the reconciling item amount (51 − 15 = 36 × 499.00 = R17 964.00). (1) (1)
Direct electronic transfer

m)Inspect the February 20XX creditors statement to check that the payment of R57 541.73 has
not been accounted for in the balance. (1)
n) Obtain the payment requisition/bank statement/proof of payment and con rm that:
i) the transfer took place on 28/02/20XX (1)
ii) payment was made to Paper Plates Galore (1)
iii) the amount of the payment was R57 541.73. (1)
Goods returned
o) Inspect goods returned note number GRN0478 to con rm that:
i) it was signed by a Paper Plates Galore representative, acknowledging receipt of the
returned goods (1)
ii) it was for the quantity as indicated on invoice number INV04512 (1)
iii) the date returned was 28/02/20XX. (1)
p) Inspect the inventory records to con rm that the salt biscuits were not included in the
inventory balance as at year-end. (1)
Question 24 LEVEL 2
Inventory
[18 marks]
Berck (Pty) Ltd (Berck) is a leading company for innovative and top-quality high-tech products
in healthcare, life science and performance materials. A substantial part of the business consists
of the manufacturing of medical supplies such as medicine. A large portion of the inventory
balance at year-end is made up of medicinal products. e schedule below is an extract from the
notes to the draft 20X1 nancial statements detailing the medicine inventory balance:
Extract from the draft 20X1 nancial statements
Medicine
Inventory at 29 February 20X1 prior to adjustments R179 352 177 607
Sundry write-downs: damaged packaging R181 153 262
Inventory obsolescence entry (net realisable value) R2 017 663 325
Inventory at 29 February 20X1 according to nancial statements R177 153 361 020
e inventory obsolescence entry is an accounting estimate to write down the remaining

inventory to the lower of cost and net realisable value at year-end. is method of calculation has
been consistently applied over the years.
To this end, you were provided with a detailed age analysis of all the inventory items. e
inventory obsolescence entry is based on the age of the inventory items and an estimate of an
immediate sales trend of a product on hand older than 100 days. If a product does not sell, Berck
may be left with particular medicine supplies on hand which will soon reach expiry date and
therefore cannot be sold. Once a sales projection of product items is made and the slow movers
are extracted from the inventory list, the inventory obsolescence entry is calculated.
You also have access to the inventory database and the necessary audit software to retrieve
any information you may require for your audit procedures.
REQUIRED
Describe the substantive audit procedures you would perform to test the reasonableness of the
inventory obsolescence entry (net realisable value) disclosed in the draft nancial statements in
the amount of R2 017 663 325.
[18]
Question 25 LEVEL 2
Inventory and roll forward procedures
[25 marks]
CleanWorxx (Pty) Ltd (CleanWorxx) is a company in the technical industry that specialises in the
selling of industrial cleaning equipment. e company has a 31 December 20X1 nancial year-
end.
Concerned about inventory levels, the MD of CleanWorxx, Mr Zumba, has requested that a
full stock count take place on 30 September 20X1 and not at year-end, as is normally the case. Mr
Yoga, the engagement partner on the audit, has agreed to this, as CleanWorxx has a record of
clean audits, and the internal control environment of the company is satisfactory.
Assigned as audit manager on the 20X1 year-end audit, you have requested your second-year
trainee, Ms Kickbox, to prepare an inventory audit working paper setting out the audit evidence
that she plans to obtain over the year-end balance of inventory. She has produced the following
preliminary working paper:
Client: CleanWorxx WP BS-05

Financial year-end: 31 December 20X1 Prepared by:
Section: Inventory Reviewed by:
Audit procedures on inventory:
1. Attend the inventory count on 30 September 20X1.
2. Verify ownership of inventory at 31 December 20X1.
3. Verify that inventory is carried at the lower of net realisable value or cost.
4. Verify that no equipment is allocated as inventory, and vice versa.
REQUIRED
Redraft audit working paper BS-05 in order to set out the audit procedures you would need to
perform with a view to gathering sufficient, appropriate audit evidence with regard to the gross
inventory balance of CleanWorxx as at 31 December 20X1. Disregard the provision for obsolete
stock.
[25]
Question 26 LEVEL 2
Inventory
[16 marks]
You are the senior on the audit of Grand Dairy Ltd (Grand Dairy), a company with a September
nancial year-end. e dairy, which has ve plants across the country, is one of the larger ones in
South Africa, and was incorporated in 2000.
e company, known for its superior quality products, has won several awards at the
prestigious SA Dairy Championships: a testament to the company’s ability to compete with the
best in the industry. e company sells a variety of products: cheeses, milks (long-life and
avoured), yoghurts and butter.
Grand Dairy’s accounting records are fully computerised and include a perpetual inventory
module. e accounting systems installed at the plants are linked to one another via Telkom VPN
Professional. e main accounting and administration functions are handled at head office in
Port Elizabeth.
Inventory
In addition to a year-end inventory count, the company performs cyclical counts at all of the
plants on the last Saturday of every month. All differences identi ed during the counts are
recorded on the inventory system, so that quantities on the system re ect the actual quantities at
hand. Accounting policy is to value inventory on the rst-in- rst-out (FIFO) method.
e inventory master le includes the following information:
Inventory description Milk

Inventory item code MO1Y22
Inventory category Milk
Quantity on hand 1 400 000 litres
Unit cost R6.50 per litre
Selling price R8 per litre
Date inventory was received 30 December
Quantity sold year to date 13 302 342 litres
During the year-end inventory count, no material differences were noted by the audit team.
REQUIRED
Describe the substantive procedures that you would perform in order to satisfy yourself
regarding the valuation assertion of inventory of Grand Dairy Ltd at year end.
[16]
Question 27 LEVEL 2
Inventory
[23 marks]
You are an audit manager at Q&Z Inc. and are currently busy with the audit of Dizzy Fizzy Ltd
(Dizzy Fizzy) for the 28 February 20XX nancial year. Dizzy Fizzy is a wholesale company which
buys cold drinks and avoured sparkling mineral water from local suppliers, which are then sold
by Dizzy Fizzy to retail companies across the country. e company’s inventory is recorded on
the rst-in, rst-out (FIFO) cost basis.
Dizzy Fizzy makes use of a perpetual inventory system. Regular inventory counts are
performed, and the differences identi ed as a result of the counts are investigated and corrected.
In addition, year-end inventory counts are performed by the company.
REQUIRED
Describe the substantive procedures that the audit team should perform after the inventory
count attendance to obtain sufficient and appropriate audit evidence regarding the inventory
balance re ected in Dizzy Fizzy’s nancial statements at year-end.
[23]
SUGGESTED SOLUTION FOR QUESTION 23

1. Compare the quantities of inventory items on the auditor’s copies of the inventory sheets
(obtained during the inventory count) to the client’s quantities on the inventory records. (1)
2. Recalculate the calculations on the inventory system (e.g. quantity × cost) for each inventory
item on each item’s inventory record and the total of the inventory value in the extension
column on the inventory list (adding all the totals per individual inventory records). (1)
3. Compare the totals as per the individual inventory records to the totals as per the inventory
list. (1)
4. Review the inventory list for any negative inventory item values and follow up with
management. (1)
5. Compare the total inventory value per the inventory list to the inventory account in the
general ledger and on the trial balance. (1)
6. Select a sample of inventory items on the inventory list and compare the price on the
inventory records to the related suppliers’ invoices. (1)
7. Inspect the selected suppliers’ invoices for any relevant costs (e.g. transportation) that should
be included in the cost of the inventory items. (1)
8. Select a sample of inventory items on the inventory list (or use the same sample that was
previously selected) and obtain the selling price of the selected items from the authorised
price list or the most recent sales invoices. (1)
9. Compare the obtained selling prices for the selected inventory items to the cost prices on the
selected inventory’s inventory records. (1)
10. Enquire from management regarding:
a) the process used to determine the inventory obsolescence allowance and evaluate the
process for reasonableness and consistency with prior years (1)
b) the procedures in place for the approval of the nal inventory obsolescence allowance (1)
c) any speci c events which may have occurred during the year which may have an impact on
the allowance (1)
d) any speci c inventory items which may already be obsolete (or soon will be) and how this
has been recognised in calculating the allowance for inventory obsolescence. (1)
11. Perform analytical procedures to con rm the reasonableness of the inventory obsolescence
allowance (e.g. by comparison of current year gures and/or ratios to prior year
gures/ratios). For example:
a) compare the current year’s inventory obsolescence allowance to the previous year’s (1)
b) compare the inventory obsolescence allowance as a percentage of total inventory for this
year to that of the previous year. (1)
12. Enquire from management regarding indicators of inventory obsolescence problems such as
no recent sales or purchases of particular items, products which have reached their sell by
dates in the post-reporting period, or correspondence relating to inferior products supplied to
customers. (1)
13. Compare the inventory obsolescence allowances raised in prior years to the actual write-offs
in subsequent years. (1)
14. Inspect the inventory obsolescence allowance for the inclusion of the inventory items that
were identi ed as damaged/obsolete/slow moving during the attendance and test count at the
year-end inventory count as per the audit working papers. (1)
15. Recalculate the inventory obsolescence allowance and compare to the amount calculated by
management. (1)

16. Obtain a listing of inventory of goods in transit at the nancial year-end and enquire from
management or inspect the relevant orders/contracts to determine whether ownership has
passed to the Dizzy Fizzy. (1)
17. Inspect minutes of directors meetings and bank con rmations to establish whether inventory
is in any way encumbered (e.g. offered as security). (1)
Presentation
Inspect the nancial statements as well as the notes to the nancial statements for the following:
18. Inventory is a separate line item under current assets on the face of the statement of nancial
position and is shown net of impairments. (1)
19. e disclosure in the notes re ects inventories before and after the inventory impairment
allowances. (1)
General
20. Obtain a management representation letter addressing the existence, completeness, accuracy,
valuation and allocation, classi cation, rights and obligations, and presentation assertions of
the inventory balance as at year-end. (1)
21. Perform analytical procedures and obtain supporting documentation for any material
uctuations, for example:
a) current year’s inventory at year-end to prior years (1)
b) inventory as a percentage of current assets at year end to prior years. (1)
22. Scrutinise the inventory records and the inventory control account in the general ledger for
any abnormal entries and con rm any material adjusting entries with supporting
documentation. (1)
Question 28 LEVEL 3
Inventory
[15 marks]
You are an audit manager at Q&Z Inc. and are currently busy with the audit of Dizzy Fizzy Ltd
(Dizzy Fizzy) for the 28 February 20XX nancial year. Dizzy Fizzy is a wholesale company which
buys cold drinks and avoured sparkling mineral water from both local and overseas suppliers,
which are then sold by Dizzy Fizzy to retail companies across the country. e company’s
inventory is recorded on the FIFO cost basis.
Dizzy Fizzy makes use of a perpetual inventory system. Regular inventory counts are
performed and the differences identi ed as a result of the counts are investigated and corrected.
In addition, year-end inventory counts are performed by the company.
REQUIRED
1. Describe the substantive procedures that the audit team should perform during the
attendance of Dizzy Fizzy’s year-end inventory count which will assist them in obtaining
sufficient and appropriate audit evidence regarding the inventory balance re ected in Dizzy
Fizzy’s nancial statements at year-end. (5)
2. Describe the substantive procedures that the audit team should perform to obtain sufficient
and appropriate audit evidence regarding the accuracy, valuation and allocation of the
inventory balance re ected in Dizzy Fizzy’s nancial statements at year-end. Exclude any
procedures dealing with the inventory obsolescence allowance from your answer. (10)
[15]
Question 29 LEVEL 2
Property, plant and equipment
[20 marks]
You are the auditor of Fitness Extreme (Pty) Ltd (Fitness Extreme), a company that was launched
15 years ago with 10 branches across South Africa. Since then, a further 35 branches have been
opened, making it the second largest tness club in the country.
e company’s head office is in Sandton, Johannesburg, where the account system, which
runs on a LAN, is housed. Fitness Extreme has a March year-end.
Each branch is run as a pro t centre, with branch managers being held accountable if pro t
targets are not achieved.
Fitness Extreme has the following categories of property, plant and equipment (PPE):
Buildings
Training equipment
Computer hardware
Office furniture
Asset procurement process

e branch manager completes and submits a budget to the chief nancial officer at head office
by no later than 31 January. e board of directors reviews the budget and authorises it at a
board meeting held in the last week of February each year.
An asset requisition is completed by the branch manager electronically, after which the
nancial manager at head office receives noti cation of the request to purchase. He logs onto the
budget master le in order to determine if the request was approved by the board of directors in
February. In the event of it having been approved, the nancial manager approves the
requisition, whereupon the buyer receives noti cation to place an order for the asset required. In
the event that the asset was not originally budgeted for, the branch manager needs to motivate
why it was not and reallocate funds from an asset previously budgeted for. e chief nancial
officer has the authority to authorise a reallocation up to an amount of R150 000.
After the branch manager has scanned the original goods received note into the system, he
couriers the original document to head office, where the asset will be loaded onto the system.
e training equipment master le contains the following elds:
Asset description Treadmill ADZ 350

Asset number 45693
Branch code KznBell
Original cost R28 000
Date of purchase 14 Jan XXXX
Date of disposal Not applicable
Depreciation method Straight line (25% per annum)
Current year depreciation Rand amount
Accumulated depreciation Rand amount
Carrying value Rand amount
REQUIRED
Describe the substantive audit procedures you will perform in respect of property, plant and
equipment at year-end. Disregard depreciation and impairment of assets procedures.
[20]
1. Valuation
Cost
a) Compare the opening balances for each category of property, plant and equipment (PPE) to
the previous year’s working papers and xed asset register. (1)
b) Re-perform a sample of calculations of the carrying value eld for all PPE categories. (1)
c) Agree the total of the lead schedule per the PPE category to the closing balance in the xed
asset register. (1)
2. Additions
a) Occurrence and completeness
i) Stratify the asset accounts (the land and buildings, the training equipment, the
computer hardware and the office equipment) per region (e.g. per branch name or the
branch with the most valuable PPE assets). Having done so, select a sample and agree
the assets purchased to the minutes of the board of directors meeting and capital
budget for evidence of the authorisation to acquire the asset selected for testing. (1)
ii) Inspect the purchase contract in order to con rm that the contract or the invoice is
made out to Fitness Extreme, and (1)
that it matches the detail of the asset selected in the sample (asset number, erf number,
description, etc.). (1)
iii) Agree the new assets on the insurance document of the client to the list of the
additions prepared by management. (1)
b) Accuracy
i) Con rm that the amount posted to the relevant asset account excludes VAT, and that it
agrees with the purchase price re ected on the contract or the invoice and the xed
asset register. (1)
Recalculate the calculations and any applicable discounts on the invoices or the
ii) contracts. (1)
3. Disposals
a) Occurrence and completeness
i) Obtain con rmation from Fitness Extreme’s insurers of all the assets that have been
removed from the list of those assets insured during the course of the year and
compare this to the list of disposals. (1)
ii) Scrutinise any assets that:
have a date of purchase exceeding the original useful life of the asset category (e.g. if
treadmills have a three-year life-span, search for a treadmill that still appears on the
asset register six years after the date of purchase)
do not have disposal dates.
If any are found, follow up on them. (1)

iii) Inspect the date of disposal eld for any disposal dates during the current nancial
year. Compare these to the list of disposals prepared by the client. (1)
iv) Review the minutes of the board of directors meeting for all the disposals that were
authorised during the course of the year and compare them to the list of disposals in
the asset register. Follow up on any discrepancies. (1)
b) Accuracy
i) Con rm that the amount posted to the relevant asset account agrees with the sales
price re ected on the contract or the invoice. (1)
ii) Recalculate the pro t or loss on the sale and compare this to the general ledger
account regarding pro t or losses on disposals. (1)
iii) Scrutinise the xed asset account for the month immediately following the sale of the
asset in order to determine whether or not the asset has been correctly removed from
the xed asset register. (1)
4. General
a) Using general audit software, scan each of the master les on PPE owned by Fitness Extreme
for:
blank or missing elds (asset number, asset description, etc.)
duplicated asset numbers
negative carrying values. (2)
b) Inspect the asset accounts for any repairs and maintenance expenses incorrectly
capitalised. (1)
c) Con rm that the accounting policy used with regard to PPE is consistent with that of the
previous year. (1)
5. Existence
Physically inspect a sample of high-value items in the xed asset register, noting their
condition for testing reasonableness of carrying value of the asset. (1)
6. Rights
a) Inspect that all invoices for new additions are made out in the name of Fitness Extreme.
b) Obtain a certi cate from the bank in order to identify assets pledged as security. If (1)
there are any, they must be disclosed in the nancial statements. (1)
7. Disclosure
Inspect the correct disclosure of PPE in all nancial statements, including accounting policies
and notes. (1)
Question 30 LEVEL 3
Investment property
[14 marks]
You are an audit manager assigned to the audit of HighRise (Pty) Ltd (HighRise) for its 20X1
nancial year. HighRise operates in the real estate sector. It owns several residential apartment
buildings as well as commercial office complexes that it rents out to tenants under operating
leases. (e company refers to these properties as its ‘rental properties’.)
During a recent discussion about how HighRise accounts for its properties, the company’s chief
executive officer made the following statement to you:
HighRise accounts for its rental properties as investment properties in terms of IAS 40. In
addition, we use the fair value model to measure these assets subsequent to initial
recognition. During the 20X1 nancial year, the company was faced with the following
two matters in regard to its properties:
1. We moved HighRise’s administrative headquarters to one of the office complexes which
the company rented out up to that point. All tenants who occupied the complex were
given the legal notice period to vacate the premises after which HighRise moved in.
e board of HighRise decided to continue accounting for this property as ‘investment
property’ for 20X1, because we think it is still a very good investment despite the
change in the nature of the occupancy!
2. One of the company’s residential buildings, located in Milnerton, Cape Town, was
identi ed as having the potential to be sold, at a good pro t, in the next year or two.
We decided rather to account for this property on the cost model in the 20X1 nancial
year and going forward, until it is sold.
You have been provided with a list of properties that make up the total investment property
balance of R145 800 000 disclosed in the 20X1 nancial statements of HighRise. e list contains
seven properties, indicating the registered erf number and address of each. It also includes the
above two properties mentioned by the CEO.
Audit procedures have already been performed on the opening balance of investment
properties, while the closing balance as per the above list has been agreed to the general ledger
account for investment properties, the trial balance and nancial statements.
REQUIRED
1. State whether you agree or disagree with the CEO regarding the accounting treatment of the
two matters pertaining to the head office and Milnerton properties and explain your answer.
(5)
2. Describe the additional substantive audit procedures that should be carried out to test the
existence, rights and obligations and completeness assertions relating to the investment
property balance of R145 800 000 disclosed in the 20X1 annual nancial statements of
HighRise. Ignore procedures to test the presentation assertion and related disclosures. (9)
[14]
1. a) I do not agree with the CEO on either of the matters. (1)

b) HighRise cannot continue accounting for its head office as an investment property as it
does not comply with the de nition of ‘investment property’ in terms of IAS 40 anymore.
As the property has become ‘owner occupied’, it should now be accounted in terms of (1)
IAS 16 Property Plant and Equipment. (1)
e CEO seems to be under the impression that ‘investment property’ means that a
property is a ‘good investment’; however, this is a misinterpretation, as the term ‘investment
property’ for accounting purposes has a speci c meaning in terms of IAS 40.8 and does not
describe an economic investment. (1)
c) HighRise will not be able to account for the Milnerton property in terms of the cost model,
as IAS 40 makes it clear that one valuation model should be adopted for all investment
properties. (1)
IAS 40 further notes that it is ‘highly unlikely’ that a change from the fair value model to the
cost model will result in more appropriate presentation. (1)
2. Additional substantive procedures
Existence
a) Obtain from management the list of investment properties making up the total balance in
the nancial statements and physically inspect each property for existence. Note: (1)
depending on physical inspections in prior years, a sample may be selected; however, all new
investment properties to be inspected at a minimum; (2) the head office will be tested under
IAS 16 procedures. (1)
b) Inspect the bank statement and cash book for evidence of large receipts of funds which
could indicate that an investment property might have been sold during the year and
therefore should have been derecognised as an asset. (1)

c) For all properties on the list, request the title deeds from the deeds office and inspect each
deed for evidence that the property is registered in the name of HighRise and that the erf
number, property description and address agree with that on the list. (2)
d) rough inspection of the property’s title deed, minutes of the board meetings,
correspondence documents with nancial institutions and enquiry with management,
verify that no encumbrances or mortgages exist over the properties. (1)
Where mortgages exist by means of long-term borrowings, inspect loan statements from
nancial institutions to ensure HighRise is not behind on any instalment payments. (1)
e) Request the rental agreements for each investment property on the list and ensure the
landlord (owner) is stipulated as HighRise. (1)
Completeness
f ) rough enquiry with management, verify that no other investment properties should have
been recorded that are not on the list (e.g. property acquisitions). (1)
Inspect rental expense accounts to identify properties rented by HighRise under an
operating lease which may comply with the de nition of investment property and ensure
these have been disclosed as investment properties accordingly (IAS 40.6). (1)
g) Request a schedule of properties from the deeds office registered in HighRise’s name and
agree each property on the schedule that quali es as an investment property to the list of
investment properties provided by management. (1)
h) Compare the current year list provided by management to the prior year working papers on
investment properties and obtain reasons for any properties which appear in the prior year
working papers, but not on the current year’s list. (1)
Question 31 LEVEL 3
[18 marks]
You are a trainee accountant assigned to the audit of Bastion City College Ltd (BCC). e
nancial year being audited ends 31 October 20X1 and you have been allocated the task of
auditing the balance relating to vehicle assets as disclosed in BCC’s nancial statements.
BCC is a large private institution that offers tertiary education to several thousand students
across three campuses located in the province of Gauteng. BCC has a eet of vehicles it owns,
used for various purposes, including staff and student transport, security services, maintenance,
official travel, etc. e balance for vehicle assets, included in property, plant and equipment, is
re ected in the trial balance as at year-end as follows:
20X1 20X0
Vehicles R10 750 000 R12 500 000
During the 20X1 nancial year, the company acquired three new minibuses, each at a cost of
R450 000, utilised for transporting students between certain pick-up locations in cities and its
campuses. At year-end, BCC owned 40 vehicles in total that are recorded in a xed asset register
which provides details of each vehicle, including registration and licensing numbers,
descriptions, acquisition and disposal dates, accounting values, etc. According to BCC’s nancial
manager, there were no disposals of vehicles during the year of which he is aware.
BCC makes use of AutoSure, an insurance company specialising in providing insurance for
corporate vehicle eets.
Each campus has a facilities management complex where vehicles are cleaned and kept and
from where they are signed out by staff authorised to make use of BCC-subsidised transport. At
any given point in time, some vehicles might not be on any particular campus (e.g. they have
been signed out and are located off-campus).
Some vehicles may also be off-campus at vehicle servicing and repair shops, undergoing
routine maintenance, or having faults that have been discovered, or being repaired after an
accident. According to a report by the main campus’s facilities manager, who oversees all
facilities management complexes, one vehicle sustained severe damage in an accident during
the 20X1 nancial year, but is still listed on the xed asset register. e manager con rmed that
the accident was reported to AutoSure and that a response from the insurer was sent to the
nance department.
According to BCC’s accounting policy disclosed in its prior year audited nancial statements,
it accounts for all its assets on the cost model. Carrying value is arrived at by subtracting
amortisation (at 20% straight-line per year) and any impairment losses.
e following substantive audit procedures have already been performed:

Agree the opening balance for vehicles in the general ledger to the opening balance as per the
xed asset register and the prior year audit working papers (‘lead schedule’).
Recalculate the general ledger account for vehicles.
Obtain a written representation from management in which they con rm the existence, rights
and obligations, completeness and accuracy, valuation and allocation assertions for vehicles.
REQUIRED
Describe the substantive audit procedures that should be performed to verify the fair
presentation of the balance relating to vehicle assets included in property, plant and equipment
in the nancial statements of Bastion City College Ltd. Ignore the following in your answer:
Testing of the presentation assertion and disclosures relating to all other assertions
Tax effects
e use of computer-assisted audit techniques
Procedures already performed
[18]
Existence of vehicles and occurrence and cut-off of purchase transaction for new vehicles
1. For a sample of vehicles selected from the xed asset register, physically inspect the vehicles
for existence. (1)
Include the three new minibus vehicles in the sample. (½)
During physical inspection, for each vehicle, agree the VIN (vehicle identi cation
number) and licence plate number as per the xed asset register to the numbering on the
vehicle itself. (1)
Note: the VIN is usually visible where it is embedded in the dashboard towards the bottom
of the windscreen, whereas the licence plate number should also be con rmed on the licence disc
attached to the inner side of the windscreen.
For vehicles selected that are off-campus on the day the test is performed, request
management to arrange for the vehicles to be available on a particular day when the
inspection will be nalised. (1)
2. For the three new minibus vehicles, obtain the purchase documentation (invoice(s) from
supplier of the vehicles) and verify that:
a) the buyer is BCC (occurrence) (½)
b) the invoices are dated within the 20X1 nancial year (tests cut-off ). (1)
3. Inspect the cash book for large receipts from vehicles sold and correspondence with AutoSure
of vehicles written off/stolen and, if any, verify through inspection of the xed asset register
that these vehicles are shown at zero carrying value at year-end. (1)

4. For the sample of existing vehicles selected above, inspect their licence renewal
documentation to verify that the assets are still registered in the name of BCC. (1)
For the three new minibuses, inspect their registration documents (original licensing
documentation) to verify the vehicles are registered in the name of BCC. (1)
5. Inspect correspondence from nancial institutions from which BCC borrows money (if any),
minutes of board meetings and minutes of the capital acquisitions committee for indications
that any vehicle assets might be encumbered or have been offered as security. (1)
Accuracy, valuation and allocation of vehicles and accuracy and classi cation of
transactions for new vehicles
Cost
6. Inspect the purchase documentation relating to the three new minibuses and to ensure that:
a) the cost of each vehicle is R450 000 (1)
b) any additional costs relating to the purchase of the vehicles that can be capitalised have
been included in the cost (e.g. delivery charges, sales fees, etc.) (1)
c) the total cost of each vehicle has been correctly transferred to the general ledger account for
vehicles/PPE. (1)
Carrying values
7. Recalculate the xed asset register for vehicles by subtracting depreciation and impairment
losses from opening carrying value, in order to arrive at closing carrying value and re-perform
all castings. (1)
Depreciation and impairment losses

8. Recalculate the depreciation charge for each vehicle (a sample could also be considered) by
applying 20% to the cost of the vehicles as per the xed asset register. (1)
For vehicles purchased or sold during the year, apportion the depreciation calculation
based on the number of months the asset was in use by BCC. (1)
9. For the three vehicles that are in for repairs at the ‘shop’, inspect maintenance records for any
indication of possible impairment and follow up on this procedure by discussing with
management the necessity to impair the assets if applicable. (1)
10. For the vehicle that was damaged in an accident, inspect the correspondence from the insurer
(AutoSure) to verify whether it has certi ed the vehicle as ‘written off’ or repairable. (1)
If a ‘write-off’, request management to remove the vehicle from the accounting records or, if
repairable, discuss with management the need for impairment of the asset. (1)
11. Enquire with management whether they have reviewed the useful lives and residual values of
all vehicles and inspect that there have not been any changes in the accounting policy for
vehicles. (1)
12. During physical inspection of vehicles across the three campuses, note any indication of
possible damage to vehicles or vehicles which appear not to be in working condition and, if
any, discuss with management the necessity for impairment. (1)
Completeness
13. Inspect the latest list of insured vehicles received by BCC form AutoSure and agree all vehicles
on the list to the xed asset register to verify the register is complete. (1)
14. Enquire from the facilities manager and client staff assigned to assist the auditor with physical
inspection of vehicles whether they are aware of any other vehicles which might not be on the
campuses at the time of physical inspection and which are not in the xed asset register. (1)
Question 32 LEVEL 3
Intangible asset
[10 marks]
You are the trainee accountant assigned to the audit of Veripoint (Pty) Ltd’s nancial statements
and have been tasked with the audit of its intangible asset balance. Veripoint (Pty) Ltd
(Veripoint) is an importer of electronic ‘gadgets’, security systems and remote-controlled toys. It
sells its products through Veripoint outlets located in malls throughout the country. e
company’s year-end is 31 December 20X1.
On occasion, Veripoint also buys patents that describe ‘high-tech’ gadgets destined for future
release onto the market. e latest patent that Veripoint acquired during the current nancial
year documents a new invention for a sophisticated ‘security drone’ used with alarm systems.
is drone can automatically proceed along a pre-programmed path of a building’s perimeter
towards the area where motion has been detected by the alarm system, taking video footage as it
proceeds. e patent was bought from an American company specialising in product design and
development. e total purchase price was $150 000, or R2 100 000, and the patent was registered
in the name of Veripoint on 1 July 20X1. e patent has an expected useful life of 10 years.
At year-end, Veripoint disclosed the above security drone patent as an intangible asset at R1
995 000 in its nancial statements, after having expensed the appropriate amortisation. e
accounting policy of the company indicates that intangible assets are measured using the cost
model.
REQUIRED
Describe the substantive audit procedures necessary to test the transaction relating to the
acquisition by Veripoint in the current nancial year of the security drone patent.
[10]
is answer is limited to the acquisition of the intangible asset only, not the audit procedures at
year-end on the balance.
1. Inspect the minutes of the board meeting where the decision was taken to acquire the security
drone patent and verify that the board authorised its acquisition. (1)
2. Inspect the sales agreement between Veripoint and the American company which sold it the
patent for evidence that:
a) the buyer is Veripoint (½)
b) the purchase price is $150 000 (½)
c) the date of transfer of ownership is 1 July 20X1 (½)
d) both parties’ representative signed the contract. (½)
3. Inspect the letters patent (the legal document evidencing the registration of the patent) to
ensure it has been registered in the name of Veripoint (Pty) Ltd, effective 1 July 20X1. (1)
4. Obtain in the nancial media the rand:dollar exchange rate applicable on 1 July 20X1 to verify
that the correct exchange rate (R14) was used in the calculation of the rand value of the patent.
Recalculate the conversion of the purchase price of R2 100 000 ($150 000 × R14). (1) (1)
5. Inspect the minutes of the board meeting (or sales agreement) for an indication that the
expected useful life of the patent is 10 years and discuss with management the reasonability of
this assumption. (1)
Recalculate the amortisation expense of R105 000 (R2 100 000 over 10 years, apportioned
for six months in 20X1 since its acquisition). (1)
6. Enquire from management whether there has been any change at year-end in the future
economic bene ts expected from the patent, which may necessitate an impairment charge.
7. Corroborate management’s answer with a prepared discounted cash ow forecast to (1)
verify that future bene t will exceed amount capitalised as at year-end.
8. Inspect that items appearing on discounted cash ow forecast with supporting evidence, for
example sales with future sale forecasts, expenses taking in ation into account, etc. (2)
9. Obtain from management a written representation letter on the occurrence, accuracy,
classi cation and cut-off assertions pertaining to the acquisition of the security drone patent.
Transactions and events assertions are con rmed, as a transaction is tested instead of a
balance. (1)
Question 33 LEVEL 3
[24 marks]
You recently quali ed as a CA(SA) and accepted full-time employment at Patagonia CA(SA) Inc.
Patagonia CA(SA) Inc. has been the auditor of Ice CAPS (Pty) Ltd (Ice CAPS). Ice CAPS consists
of a group of companies that imports bottled water harvested from the glaciers in the Patagonia
Mountains in Argentina, near Ushuaia. ese bottles are then resold to supermarkets across
South Africa.
During the course of the previous nancial year, Ice CAPS launched a new line of avoured
water. Ice CAPS used a previously dormant company in the group to house the production. e
only asset on the dormant company’s statement of nancial position at the beginning of the
nancial year was land and buildings purchased 10 years ago. In order to add the avour to the
water, Ice CAPS purchased two machines. One machine was purchased locally from a registered
VAT vendor and the other imported from Ushuaia for Argentinian pesos.
In terms of the group policy, land and buildings that are in use should be revalued annually
by independent experts, while other assets are depreciated over their economic useful life on the
straight-line method, depending on the class of the asset. Expected residual values are taken into
account in determining the depreciable values of assets. Patagonia CA(SA) Inc. makes use of its
own independent, suitably quali ed expert to determine the value and the residual value of
assets.
REQUIRED
Formulate the substantive procedures that you will perform relating to property, plant and
equipment of the dormant company owned by Ice CAPS. You are not required to address
substantive analytical procedures, nor procedures relating to the disclosure and presentation
assertion.
[24]
Question 34 LEVEL 3
Goodwill
[22 marks]
You are the auditor of Global Furniture Ltd (GB), a large listed entity. e company’s year-end is
30 September. You have been the auditor of GB for the last three years.
Over more than a few decades, GB has developed into a global retailer that provides everyday
household products at affordable prices, serving customers at their convenience. GB aims to be
the number one retailer of choice for household goods for quality and value, with more than 8
500 stores in more than 22 countries. To achieve this, various subsidiaries were acquired during
the previous few years. Two loss-making subsidiaries were also sold during the current year. To
obtain nance for these acquisitions, numerous shares were issued during the last ve years. GB
disclosed R85 million goodwill at year-end, that was all related to acquisition cost when
subsidiaries were acquired all over the world. GB’s main objective is to provide everyday
products at discount prices.
From big box destination stores, to store-in-store concepts, to focused speciality stores, GB’s
goal is to make shopping as easy and convenient as possible. Customers can view, experience
and buy in ways that are most convenient to them. Shopping can be done in-store or online, with
purchases being delivered to homes, or collected in-store via click-and-collect.
To support the retail stores and ultimately provide the best shopping experience to
customers, GB has a well-established supply chain in place. is means that various specialist
group divisions ensure that the nal product is provided at the best quality and price. ese
divisions control or manage everything from raw material sourcing, manufacturing and product
sourcing to shipping and delivery. Owning or managing these activities not only enhances the
group’s ability to deliver, but also bene ts the customer in terms of providing products at
affordable price points.
REQUIRED
Describe the substantive procedures you would perform to gather sufficient appropriate
evidence regarding the R85 million goodwill amount in the consolidated accounts of GB.
[22]
Opening balance
1. Agree opening balance to prior year working paper. (1)
Current year
Valuation
Impairments made in the current year by management:
2. Recalculate all impairments made by management in the current year. (1)
3. Inspect cash ows and other documentation (e.g. budgets, marketing reports) to verify their
impairments made. (1)
Audit of impairments:
4. Inspect working paper of goodwill that all possible impairments have been calculated:
a) Inspect discounted cash ows of every division/subsidiary to verify that future
bene ts/pro ts will exceed amount capitalised at year-end. (1)
b) Agree discount rate used to that used on popular sites like Moneyweb and to rates used on
other audits where discounted cash ows were used. Also obtain rates used by merchant
banks which are involved with takeovers and mergers. (1)
c) Inspect marketing reports of every division/subsidiary to verify that revenue stated in cash
ows is achievable. (1)
d) Inspect current year’s budgets regarding expenses of every division/subsidiary to verify that
expenses adjusted for in ation stated in cash ows are achievable. (1)
e) Enquire from divisional managers and perusing operating reports the reasonableness of the
assumptions made in the cash ows. (1)
f ) If a division/subsidiary is continuously making a loss, its goodwill should be impaired. (2)
g) If future pro ts of a division/subsidiary do not exceed the amount capitalised at period end,
calculate the amount that needs to be impaired. (1)
h) Discuss your possible additional impairments with the audit committee since there might
be other factors that you did not consider. (1)
i) After your discussion, calculate nal impairments that need to be made. If management is
not prepared to adjust, take differences to overs/unders schedule. (1)
j) Scrutinise that GB is not trying to write back goodwill which was previously impaired since
this is not allowed. (1)
Additions
5. Inspect contracts for any new subsidiaries acquired in the current period and recalculate
goodwill on purchase date. (2)
6. Inspect management’s goodwill calculation and compare this to your calculation made in 8
above. Discuss any variances with CFO. (1)
Disposals
7. Inspect contracts for any disposals of subsidiaries in the current period. (1)
8. Inspect that all goodwill amounts relating to disposals have been removed in the general
ledger account. (1)
9. Inspect minutes for board approval for any disposals. (1)
Rights
10. Inspect shareholders’ registers and minutes of board meetings that GB does hold substantive
rights to control all the subsidiaries where goodwill was calculated. (1)
Completeness
11. Compare this year’s goodwill working paper that you prepared to that of last year to verify any
goodwill that might have been left out. (1)
12. Write to the legal advisors and merchant banks regarding any new or any disposal of
subsidiaries/divisions that needs to be taken into account. (1)
General
13. Obtain a management representation letter regarding the valuation of all goodwill. (1)
14. Agree the balance of the goodwill as calculated on your working paper to the amount
disclosed as goodwill in the statement of nancial position as at year-end. (1)
Disclosure
15. Inspect that goodwill has been properly disclosed in the statement of nancial position under
non-current assets. (1)
16. Inspect that a note shows all the movements in the goodwill amount for the 12 months ended
(IFRS 3 – par. B67). (1)
Question 35 LEVEL 3
Loans
[10 marks]
You are the auditor of Hip & Hap (Pty) Ltd, a company that sells a wide range of clothing from its
stores located in shopping malls around the country. e company has a December year-end.
e company’s majority shareholder is Mr Hip, the founder of the company, who owns 51%
of the company. e remaining 49% is owned by 37 other shareholders.
In order to fund the expansion plans of the company, the following two loans were made during
the course of the year (the schedule was prepared by Mr Jones, the nancial manager):
DESCRIPTION LOAN RAND

NUMBER
Foreign loan 1 R10 664
202.25
Loan from Industrial Development Corporation 2 R9 796 084.68
Loan balance as disclosed in the nancial R20 460
statements 286.93
Loan 1
e company obtained a loan from Mr Hip’s uncle in London to the amount of £500 000 on 1 July
of the current year. e loan is repayable over a period of ve years with equal monthly
instalments at an interest rate of 1%.
e rand:pound exchange rate at the initiation date of the loan was R20.50:£1.
e loan was therefore recognised in the accounting records at R10 250 000 on 1 July.
e balance on the loan at 31 December was £459 663.89.
e rand:pound exchange rate at 31 December was R23.20:£1.
e balance of the loan is therefore stated at R10 664 202.25 on 31 December in the nancial
statements.
Loan 2
e company obtained a loan of R10 million from the Industrial Development Corporation on 1
August of the current year. e loan is repayable over a period of seven years with equal monthly
instalments at an interest rate of prime + 3%.
e ruling prime lending rate at the time of taking out the loan was 9.5% and it has remained
unchanged at year-end.
e balance of the loan is therefore stated at R9 796 084.68 on 31 December in the nancial
statements.
General
Both loans are loaded into the loan system by Mrs Naicker, the accountant, who uses her unique
user ID and password to gain access to the loan system. e system automatically calculates the
interest charged on the loan using the detail loaded onto the system, which is based on the terms
located in the loan contracts.
Payment is made via EFT into the bank accounts stated on the contracts.
Mrs Naicker processed a manual journal entry at the end of the nancial year to take into
account the foreign exchange loss made on the rst loan as a result of the rand depreciating in
value.
REQUIRED
Describe the substantive procedures that you would perform on both loans at year-end.
[10]
Question 36 LEVEL 3
Long-term borrowings
[20 marks]
You are a trainee accountant employed by an audit rm and have been assigned to the audit of
Letsatsi Printing (Pty) Ltd (Letsatsi) for its nancial year ended 31 October 20X1. Letsatsi owns
several premises throughout South Africa from where it provides printing and copying services
to government departments and schools. In order to fund its properties, Letsatsi makes use of
loans it acquires from various nancing institutions. In this respect, mortgages (long-term
borrowings) exist over all its properties.
You are in the process of auditing Letsatsi’s long-term borrowings, disclosed under liabilities in
its 20X1 annual nancial statements. Management provided you with a list of what the year-end
balance of R12 340 000 for long-term borrowings comprises:
R R
Provider of loan Note 20X1 20X0

Samatra Mutual 1 4 500 000 -
African Investments Inc. 2 990 000 3 100 000
Easbank Financiers 3 650 000 4 200 000
Gerald Dean 2 1 200 000 1 200 000
Second National Bank 3 - 3 500 000
Topstarr Holdings 3 - 1 950 000
12 340 000 13 950 000
Notes:
1. e loan from Samatra Mutual was obtained during the 20X1 nancial year in order to fund a
newly acquired property.
2. e account for the loan from Gerald Dean did not show any movement during the year.
Gerald Dean is the chief executive officer of Letsatsi. e nancial manager indicated that
there is no written loan agreement for this amount and that it was provided by Dean based on
a verbal agreement between him and Letsatsi.
3. Both loans from Second National Bank and Topstarr Holdings were settled in full during the
20X1 nancial year.
REQUIRED
1. Explain why, in general, it may be challenging for an auditor to obtain sufficient appropriate
audit evidence regarding the completeness assertion for long-term borrowings. (4)
2. Describe the substantive audit procedures that should be performed to verify the fair
presentation of long-term borrowings as disclosed in the annual nancial statements of
Letsatsi. Assume the nominal and effective interest rates of each loan are the same. Exclude from
your answer:
procedures relating to the testing of opening balances
analytical procedures. (16)
[20]
1. a) Management may have an incentive to keep long-term borrowings off the statement of

nancial position in order for the nancial statements to re ect a stronger net asset
position. (1)
ey may therefore engage in active manipulation of the long-term borrowings balance by
attempting to hide some loans from the auditor. (1)
Because the direction of testing for the completeness assertion generally is from
supporting documentation to the nancial records, the hiding of evidence will result in the
auditor nding it particularly challenging to test for completeness of long-term borrowings.
b) e non-recording of loans may encompass error rather than fraud: there is the (1)
possibility that management might not be aware of all the company’s long-term borrowings
and, as a result, the loans do not all get recorded. (1)
Where a company’s system of internal control fails to identify long-term borrowings or
misidenti es them as not being long-term borrowings, the possibility exists that not all
loans are recorded. (1)
2. Substantive audit procedures
Existence and rights and obligations

a) For the newly obtained loan on the list of long-term borrowings (from Samatra Mutual),
obtain the underlying loan agreement between Letsatsi and the provider of the loan.
Inspect each loan agreement for: (1)
i) the parties to the loan and signatures of each party’s representative (½)
ii) the initial loan amount and repayment details (½)
iii) interest rate and any special clauses that may affect the rate (½)
iv) loan period, including nal repayment date. (½)
Inspect the company’s memorandum of incorporation to ensure the board has the
authority to obtain new loans and that they have not exceeded the company’s borrowing
powers by obtaining the loan from Samatra Mutual. (1)
Inspect the bank statement for the month when the loan was received to verify receipt
of the R4.5 million in funding. (1)
b) Obtain the original loan agreements between Letstatsi and the nancial institution for each
loan not yet settled at year-end and verify that the agreement is in the name of Letsatsi as
borrower of the loan.
Note: e extent of this procedure will depend on the audit evidence obtained for long-term
borrowings on previous years’ audits and the risk of material misstatement. (1)
c) Consider the need to request positive con rmations from all the providers of the loans on
the list to verify the outstanding balance and to con rm that the provider has made the loan
to Letsatsi. Also addresses the accuracy, valuation and allocation assertion. (1)
Request from the CEO, Gerald Dean, a written con rmation that he has provided a loan to
Letsatsi, in addition to the amount outstanding, requesting any additional information on
repayment terms, etc. (1)

d) For each loan, obtain the latest loan statement (will likely have been sent by the provider to
Letsatsi) and agree the outstanding balance as per the statement to the year-end balance
recorded by Letsatsi on the list. (1)
Note: Where loan statements do not cover the month of October 20X1 (i.e. year-end
statements will only be received after the audit procedures are performed), obtain a direct
con rmation from the lender.
e) Request from management an amortisation schedule (or draw up amortisation schedules)
for each long-term loan and recalculate the year-end balance with reference to the
particulars of the loan as per the latest loan statement from the nancial institution. (1)
Follow the amount through from the recalculated amortisation schedule to the list of long-
term borrowings obtained from management. (1)
Agree the total (year-end balance) of the loans on the list to the corresponding
account in the general ledger account and the trial balance. (1)
Completeness
f ) Inspect the minutes of the board meetings and if applicable, capital acquisitions committee
as well as the xed asset register, for indications of new properties bought during the year
and any decision taken on the source of funding of the asset. (1)
Note: Since the company nances all properties with long-term borrowings, each property
likely will have a corresponding loan.
g) Inspect the general ledger account for interest paid on long-term loans and reconcile all
interest to a corresponding loan on the list of long-term borrowings. (1)
h) Inspect the bank statements for the year and cash book for indications of large amounts of
funding received, discuss the nature of these receipts with management and agree the
receipts to the list of long-term borrowings (new loans obtained). (1)
i) Compare the prior nancial period’s list of long-term borrowings with the current year’s list
to ensure that all loans have been included in the current year, except where settled in 20X1.
Presentation and disclosure (1)
j) Inspect the (draft) nancial statements of Letsatsi to ensure that management has disclosed
the short-term portion of the loans under current liabilities. (1)
With reference to the amortisation schedules used above, recalculate the short-term
portion of each loan, consisting of the outstanding capital amount repayable within 12
months from year-end. (1)
k) Inspect the notes to the nancial statements for evidence that management has disclosed
the details of security (properties) provided for loans. (1)
General
l) Obtain a written representation from management in which they con rm the existence,
rights and obligations, accuracy, valuation and allocation, completeness and presentation
assertions regarding Letsatsi’s long-term borrowings included in the company’s 20X1
nancial statements. (1)
Question 37 LEVEL 3
Loans
[22 marks]
One of your audit clients is experiencing nancial difficulties. You are the engagement partner
on this audit. During the course of the previous nancial year, the company which you now have
to audit took out a R5 million long-term loan with Zero Bank to ease its short-term cash ow
burden. e loan bears interest at prime minus two basis points per annum and is repayable in
20 equal instalments of which the rst is payable three months after year-end. e full loan
amount received was used to settle some of its overdue short-term debts and purchase much
needed inventory.
e audit client has no other long-term liabilities, however in a discussion, the chief nancial
accountant informed you that the company is in the process of obtaining additional nancing in
the form of other long-term loans from external parties, while also making arrangements with
Zero Bank and current trade creditors on extended repayment terms. Management is also trying
to convince debt suppliers to grant the company a debt holiday so that the company can trade
out of its current nancial difficulties. Debt suppliers will then be required to sign subordination
agreements regarding debt amounts that do not have to be paid till the company is once again
nancially secure. Management is prepared to give certain of its assets as security to debt
suppliers.
REQUIRED
1. Formulate the substantive procedures your audit team have to perform in respect of the long-
term loan as at year-end. (11)
2. Describe the additional audit procedures you would perform in order to substantiate
management’s statements relating to the additional nancing arrangements. Do not address
any Companies Act requirements. (11)
[22]
Question 38 LEVEL 3
Interest paid/debentures
[25 marks]
You have recently been promoted to audit manager at the auditing rm Brazil Inc. You are
excited because the promotion comes with an office with a lovely view. You are busy planning
the year-end external audit of Rio (Pty) Ltd (Rio). Rio imports parrots from South America to be
sold as pets in South Africa.
During the middle of the nancial year, Rio sold three of its delivery vehicles for R1 800 000.
e CEO wanted to use the funds to expand inventory of parrots, however the nancial director
heard of a good investment opportunity. Rather than use the proceeds from the sale of the
delivery vehicle to purchase inventory, the nancial director decided to invest the proceeds in a
debenture and borrow money for inventory from Bankrupt Bank, since the interest rate offered
on the debentures exceeded the borrowing costs from the bank. is would be Rio’s rst
investment in debentures, and therefore would be recorded at amortised cost. You may assume
that the IFRS requirements have been met.
Loan from Bankrupt Bank
Rio negotiated a 9% xed interest rate per annum on the loan from Bankrupt Bank. e interest is
calculated monthly on the outstanding balance of the loan in arrears. Interest is payable before
the 10th of the following month. Rio receives a monthly loan statement from the bank.
Investment in debenture
Rio purchased a ve-year debenture with a nominal value of R2 000 000 at a discount of 10% and
therefore recorded a rst-day pro t in its general ledger. Rio would incur transaction costs
payable on initial of the transaction. e debentures bear interest at 13% on the nominal value of
the debenture, payable biannually in the middle of the year and at year-end. A market-related
interest rate on similar investments was 15% per annum (compounded biannually). Rio received
its rst coupon payment at year-end, much to the excitement of the nancial director.
REQUIRED
1. Formulate the substantive procedures you would perform regarding the interest paid expense
included in the statement of comprehensive income of Rio. You are not required to provide
analytical procedures. (10)
2. Formulate the substantive procedures you would perform in respect of the journal entries
relating to the debentures in which Rio invested during the current nancial year. Ignore any
Companies Act requirements, as well as allowances for credit losses. (15)
[25]
Question 39 LEVEL 3
Warranty provision
[14 marks]
RCA Stores (Pty) Ltd (RCA Stores) is a large retailer of electronic equipment and appliances to
the public. It operates from several stores located in malls across the country. Each year, the
company includes a provision for warranty claims in its nancial statements based on an
estimate of the costs the company could incur on faulty products returned by customers.
e draft 20X1 nancial statements of RCA Stores indicate a provision for warranty repairs of
R1 150 000. e previous year’s audited nancial statements included a provision of R1 100 000.
While waiting for the audit senior to brief him on the audit procedures for warranty provisions,
Jeff Solomons, a trainee accountant assigned to the audit of the company’s 20X1 nancial year,
made the following remarks to other team members:
I think it is unnecessary for me to be briefed on audit procedures for the warranty

provision, because the auditing of estimates involves low risk. In fact, it is an area where
an auditor can save much time on an engagement by simply ticking the boxes. In the case
of RCA Stores, the increase of R50 000 in the provision for warranty claims is in line with
a 5% in ation adjustment and may therefore be considered reasonable. All I have to do is
to obtain a written representation letter from management con rming that they have
taken the necessary care in calculating the estimate and that the data on which the
estimate is based are complete and accurate. I then simply recalculate management’s
estimate in order to ensure mathematical accuracy.
REQUIRED
1. Discuss why Jeff Solomons’ views are inappropriate, not only as to the audit of estimates
generally but also to RCA Stores’s 20X1 warranty provision in particular. (8)
2. Describe brie y the additional substantive audit procedures that should be performed in
order to determine the reasonableness of RCA Stores’s 20X1 provision for warranty claims.
(6)
[14]
Question 40 LEVEL 3
Provision for bonuses
[18 marks]
Poolsure Ltd (Poolsure) is a manufacturer of chemicals used in the treatment of swimming pool
water (i.e. chemicals such as chlorine, sodium bicarbonate (baking soda) and stabilising agents).
e company has a large footprint on the African continent and supplies its products to 15
countries. Its head office is situated in Johannesburg, while three factories are located across
South Africa. e company employs over 270 salaried and 180 wage employees and has a
nancial year-end of 31 December.
You have been assigned to the audit team that audits Poolsure’s 20X1 nancial year, in your
capacity as a trainee accountant. One of your rst tasks is to audit the bonus accrual included in
Poolsure’s nancial statements as a provision under current liabilities. e balance included in
the notes to the draft nancial statements appears as follows:
20X1 20X0
Provisions
Bonus accrual 2 175 200 1 854 500
Bonuses are payable to all salaried employees in January of each year in addition to their normal
remuneration for that month. A bonus equals the preceding December’s salary, excluding
bene ts. However, employees who are appointed during a nancial year receive a bonus that is
apportioned in accordance with the number of months they have worked for the company up to
the end of December. In order to determine the total provision for bonuses for the year, the
nancial manager of Poolsure logs in to the human resources system and generates, from the
December payroll, a list of all salaried employees. e list displays each employee’s gross
remuneration including bene ts, together with the amount excluding bene ts, equalling the
provision required. e total on the list becomes the ‘new’ provision balance for the year,
consisting of the bonus accruals of around 270 salaried staff members.
e monthly payroll for salaried staff is generated by the computer from the employee
master le. Standing information for each employee in the master le is supported by a paper-
based employment contract and salary adjustment form indicating the latest approved gross
salary of the employee and shows the various bene t amounts included. Salary increases occur
only at the beginning of July of each year.
One of your fellow trainee accountants was unsure as to whether a provision for bonuses is
allowed as an acceptable accounting practice. e trainee argued that a payment for the bonuses
will take place in a subsequent nancial year, which therefore does not pertain to the 20X1
nancial year of Poolsure and which should therefore rather be expensed in its 20X2 nancial
year.
REQUIRED
1. Explain, from an accounting perspective, why Poolsure may recognise a provision for bonuses
at year-end. (3)
2. Describe the substantive audit procedures that should be performed to obtain sufficient
appropriate audit evidence about the provision for bonuses included in current liabilities in
Poolsure’s 20X1 nancial statements. Ignore the following:
Tax implications and the use of computer assisted audit techniques
Procedures relating to the audit of the presentation assertion (15)
[18]
1. Recognition of a provision
Poolsure may create the provision for bonuses at year-end given that the amount complies
with the de nition of a ‘provision’ in accordance with IAS 37.14:
a) A legal, present obligation has arisen at year-end to pay future bonuses as a result of a past
event, the signing of a contract with employees in which Poolsure promises to pay salaried
employees a bonus in January of each year. (1)
b) Payment is probable as there are no indications the bonuses are not paid every year. (1)
c) e amount can be reliably estimated, given that the amount is clearly equal to one month’s
salary excluding bene ts. (1)
2. Substantive procedures: bonus provision

a) Obtain and inspect Poolsure’s company policy on bonus payments and verify that:
i) salaried employees are entitled to a bonus in January of each year (1)
ii) wage workers are not entitled to a bonus payout (1)
iii) bonuses are calculated on an employee’s December gross monthly remuneration
excluding bene ts (1)
iv) there has been no change from the prior year in how bonuses are accounted for. (1)
b) Obtain from the nancial manager the December 20X1 provision list which indicates the
provision to be created and:
i) inspect the list for any unusual entries (as it is a computerised list, it is unlikely that a
casting of the list will be performed, especially if reliance is placed on general controls)
ii) agree the total on the list to the gross remuneration excluding bene ts as per the (1)
payroll for December 20X1 (1)
iii) agree the number of salaried employees on the list to the number of salaried
employees on the December 20X1 payroll (1)
iv) re-perform all calculations on the list (1)
v) agree the total provision as per the list to the corresponding general ledger account
and the trial balance. (1)
c) For a sample of employees selected from the provision list, perform the following:
i) Agree the gross remuneration of each employee as per the list to the gross
remuneration on their employment contract in their employee le. (1)
ii) Subtract their bene ts as per their employment contracts from gross remuneration and
compare the amount excluding bene ts to the amount displayed on the provision list.
iii) For employees whose employment contracts indicate they have been employed (1)
during the nancial year (date of appointment in 20X1), recalculate their provision by
apportioning their gross remuneration excluding bene ts in terms of the months they
have been working at Poolsure and agree this amount to the provision list. (2)
d) Select a sample of salaried employees from the December 20X1 payroll and agree their
details against the provision list to ensure they have been included. (Completeness) (1)
Inspect the bonus provision general ledger account to ensure the prior year’s provision has
been reversed and for any unusual entries (especially abnormal debit entries decreasing
the balance). (1)
e) Perform analytical procedures by comparing the bonus provision made in the 20X1
nancial year to the provision made in 20X0 and discuss unexpected differences if any with
management, taking into account: (1)
i) the average increase in salary in July 20X0 (½)
ii) the average number of employees across the two years. (½)
f ) Obtain a written representation letter from management with regard to the existence, rights
and obligations, completeness and accuracy, valuation and allocation assertions pertaining
to the provision for bonuses. (1)
Question 41 LEVEL 3
Provision created for environmental rehabilitation costs
[15 marks]
You are the audit manager on the 20X1 audit of Ityuwa Lakes Ltd (Ityuwa), a company that
manufactures table salt. Ityuwa owns several large salt evaporation ponds in the Eastern Cape
from which it extracts and harvests the salt and from where it is sent to a nearby factory for
further processing. Most of Ityuwa’s products are manufactured for the export market.
During the 20X1 nancial year, Ityuwa established a new salt evaporation pond after limited
rock salt deposits were found next to a natural lake near Coega. However, before it could
commence with evaporation activities, in a designated area to the side of the lake, the company
had to agree to terms and conditions laid down by the Department of Environmental Affairs. e
agreement indicated the various aspects of rehabilitation required. An important condition was
that Ityuwa had to rehabilitate the land after 10 years of operation when the rock salt deposits
were expected to become depleted.
e company obtained the services of Jerome Randall, an environmental engineer employed by
an external company, Green to Go Consultancy Inc., to determine the amount of the provision
that needs to be created in the 20X1 nancial year. In his report, Mr Randall indicated that the
provision to be accounted for covers the following rehabilitation costs:
Drying of the salt evaporation pond
Levelling of any sand banks created
Re-establishment of the natural vegetation
Consulting fees of conservation specialists who will assist with the rehabilitation
At rst, management of Ityuwa questioned Mr Randall’s calculation of the provision, indicating

that it appeared too high compared to what it cost to establish the evaporation pond in the rst
place. However, management nevertheless relied on Mr Randall’s calculations and recorded a
provision for rehabilitation costs at R3 350 000 in the company’s 20X1 nancial year.
REQUIRED
1. Describe in general why a company’s management might want to understate a provision for
environmental rehabilitation costs in its nancial statements. (3)
2. Describe the substantive audit procedures that should be performed to verify the existence
and accuracy, valuation and allocation assertions relating to the provision for environmental
rehabilitation costs as disclosed by Ityuwa in its 20X1 annual nancial statements.
Ignore any tax implications and the future value of the provision. Do not address related
disclosures or the presentation assertion in your answer. (12)
[15]
1. Incentives to understate the provision

a) Management may want to overstate the net assets of the company, in order to portray a
stronger nancial position to potential nanciers and shareholders, perhaps with the aim of
obtaining additional nance. (1)
b) Management may want to overstate net pro ts by reducing the expense associated with the
recording of the provision in order to earn greater bonuses or other pro t-based
remuneration. (1)
c) Management may want to downplay the impact of future rehabilitation costs, which, if very
high, may put off potential investors, who may doubt whether the company will be able to
comply fully with future mandatory rehabilitation requirements. (1)
2. Substantive procedures to audit the provision: existence and accuracy, valuation and
allocation
a) Perform the following procedures to determine whether reliance can be placed on the
environmental specialist, Mr Jerome Randall, as a professional:
i) Evaluate Mr Randall’s competence and expertise by requesting and inspecting
evidence of his quali cations and certi cation with professional bodies. (1)
Furthermore, request his curriculum vitae or client portfolio and inspect the document
for evidence of environmental assessments he undertook for similar projects in the
past. (1)
To assess his reputation and reliability as a professional, contact, with permission,
previous clients of his and enquire about the quality of his service. (1)
ii) Evaluate Mr Randall’s objectivity by enquiring from both his employer and
management of Ituywa whether he has performed any previous work for Ituywa and
the nature of the work if relevant as well as the effect of any possible personal and
professional relationships with Ituywa personnel. (2)
b) Evaluate the scope, adequacy and correctness of Mr Randall’s work by inspecting the report
he prepared and in which his calculations of the provision appear. (1)
i) Scrutinise the report for any indications of restrictions placed by Ituywa management
on his work. is may also be determined through discussion with the expert. (1)
ii) Determine whether the assumptions and data used in the calculation appear
reasonable and complete. (1)
iii) Recalculate any calculations Mr Randall performed in order to arrive at the provision
he proposed and agree the result to the R3 350 000 recorded in the accounting records.
c) i) Inspect the report for the ‘aspects of the rehabilitation’ (what the provision consists (1)
of ) and agree these to the agreement between Ituywa and the Department of
Environmental Affairs for completeness (i.e. this procedure will affect the accuracy and
valuation of the provision). (1)
ii) Inspect the agreement for any other pertinent requirements relating to the
department’s conditions of establishing the evaporation pond, including the date of
the agreement and signatures of the parties involved. (1)
d) With reference to other audit evidence obtained during the course of the audit, and in light
of the auditor’s experience and knowledge of similar provisions created, consider whether
the conclusions reached by Mr Randall in his report appear reasonable and appropriate.
e) i) Recalculate the provision for rehabilitation costs account in the general ledger and (1)
agree the amount to the balance in the trial balance. (1)
ii) Scrutinise the provision for rehabilitation costs account in the general ledger for any
unusual or unexpected entries and discuss these with management. (1)
f ) Obtain a written representation letter from management in which they con rm the
existence and accuracy, valuation and allocation assertions for the provision for
rehabilitation costs balance as per Ituywa’s 20X1 nancial statements. (1)
Question 42 LEVEL 3
Provision for leave pay
[14 marks]
You are a trainee accountant employed by the audit rm of Sabata & Lerato Inc. and have been
assigned to the audit of Tecnika (Pty) Ltd (Tecnika) for the company’s 31 December 20X1
nancial year-end. It is your task to audit the provision for leave pay.
Tecnika employs about 200 permanent staff members. Each staff member may take 21 days’
vacation leave per annum, of which 10 days may accrue during a calendar year (i.e. 10 of the 21
days’ leave may be untaken and rolled over to the next year). Seeing that accrued leave will have
to be paid out to a staff member should he/she leave the employment of Tecnika, the company
creates a provision at year-end for all leave days which have not been used during the year, but
which have accrued to its personnel. e amount provided per staff member is based on a staff
member’s monthly salary payable for the last month of the year divided by 21 business days,
multiplied by the number of leave days that have accrued as at year-end.
At 31 December 20X1, the ‘provision for leave pay’ balance amounted to R1 204 290 as per the
trial balance. You are aware that, in the prior year and pertaining to the previous provision, the
audit team found that:
some employees were never included in the provision
for some who were included in the provision, the incorrect number of leave days accrued was
used in the provision calculation – in all cases, fewer days than should have been used.
e following is an example entry for a staff member on the schedule of accrued leave pay. e
schedule is maintained in electronic format using a spreadsheet application installed on the
company’s computer system:
EMPLOYEE EMPLOYEE SALARY SALARY LEAVE PROVISION
CODE NAME DECEMBER PER DAYS FOR LEAVE
20X1 DAY ACCRUED PAY
AT 31
DECEMBER
20X1
EMP114 H.G. Wellz R58 625.00 R2 8 R22 333.33
791.67
Each staff member has a paper-based employee le stored in the office of the human resources
manager. Inside the le, there are, among other documents, printouts of monthly pay slips and a
leave schedule for each employee indicating leave days taken and leave days accrued at the end
of each month.
REQUIRED
1. Describe the major risks of material misstatement relating to the provision for leave pay
created by Tecnika for its 20X1 nancial year, evident from the information provided. (2)
2. Describe the substantive audit procedures that should be performed to verify the existence,
completeness and accuracy, valuation and allocation assertions relating to the provision for
leave pay balance as at 31 December 20X1. (12)
Do not use computerised assisted audit techniques in your answer and ignore any tax
implications.
[14]
Question 43 LEVEL 3
Provision for leave pay/share option scheme
[31 marks]
You are an audit specialist employed by the Zondo Inc., a forensic auditing rm. You have been
tasked by the newly appointed CEO of a state-owned entity (SOE) Gold Pot Power Utility to
review its human resource policies and, in particular, its remuneration policy. e new CEO was
appointed after a whistleblower implicated some of the senior management team of the SOE in
state capture and self-enrichment. One senior management team member had been implicated
in a ctitious employee scheme worth millions of rands.
e CEO also requested that you formulate substantive procedures that the internal auditors
could perform that would form the foundation of work that the SOE’s external auditors could
place reliance on during the next nancial audit. e SOE has a 30 June year-end.
e CEO provided you with the following information relating to the most recent nancial year:
e SOE employs 291 employees and consists of a senior management team of eight
members. All permanent employees receive a basic salary, which includes a 13th cheque. All
employees are entitled to receive a long-service award equalling one month’s extra salary
every 10th year of employment. At the most recent directors meeting, the company approved a
general increase of 12% in the basic salaries of all staff. e increase was signi cantly above
in ation due to pressure from the unions following labour action.
e SOE is expecting further labour action because of a change in the leave policy of the SOE.
e change in the policy resulted in a decline of the provision for leave pay in the statement of
nancial position. As from 1 July, it was decided that only the senior management team are
allowed to transfer their leave from one nancial year to the next, whereas previously, all
personnel were allowed to transfer unused leave from one year to the next.
Other than the senior management team, no other members of staff receive bonuses. In terms
of their employment contract, the senior management team receive bonuses and share
options. A new incentive scheme was approved at a directors’ meeting for the senior managers
at the beginning of the nancial year. At the beginning of the nancial year, each senior
management team member will be entitled to 20 000 share options. is will allow them to
purchase shares after a three-year period at R55 per share, provided they remain employed by
the company and reach their annual individual sales targets during this period. At the end of
the nancial year, the programme was amended to reduce the purchase price by R10. None of
the senior staff from the senior management team had resigned or had been red since the
inception of the scheme. One senior management team member who had been implicated in
state capture did not reach his individual target. e fair value of the share options is being
determined by independent professional valuers.
REQUIRED
Assuming the external auditors will rely on the work performed by the internal auditors:
1. Formulate only the general (generic) substantive procedures that you would recommend be
performed to substantiate the amount shown in the statement of nancial position for both
the senior managers’ share option scheme and the provision for leave pay. (6)
2. Other than the procedures in part (1) above, formulate the additional substantive procedures
that you would perform to substantiate the amount disclosed in the statement of nancial
position for the senior managers’ share option scheme. You are not required to formulate
substantive analytical procedures, nor any procedures relating to the Companies Act. (9)
3. Other than the procedures in part (1) above, formulate the additional audit procedures you
would perform in respect of the provision for leave pay. You are not required to formulate
substantive analytical procedures. (9)
4. Using computer-assisted audit techniques, list the exception reports the external auditors
would extract, to determine whether ctitious employees are present on the payroll system.
(7)
[31]
Question 44 LEVEL 3
Provision for bonuses

[14 marks]
Given all the accounting scandals that have occurred in South Africa recently, your audit practice
has gone through hard times. Your practice has lost some clients, however you were able to
retain some of your long-standing ones. One of these is Stones, Rocks & Tiles (Pty) Ltd (Stones,
Rocks & Tiles), a retailer of tiles and stone cladding, situated outside Paarl. Stones, Rocks & Tiles
has a 30 September year-end.
You have completed the audit of payroll. You followed a system based audit approach. e
test of controls con rms the preliminary low control risk assessment. You only need complete
the audit work relating to the provision for the bonuses.
Stones, Rocks & Tiles has had a good nancial year and the management decided to pay
bonuses to all employees. e payment is expected to be included on the December payslip.
Permanent employees receive a 13th cheque equal to one month’s salary at date of payment.
Casual employees will receive a gift worth 25% on their net wage of the last work week in
December. e only requirement for a bonus to be paid is that the employee should still be
employed at payment date. Management indicated that historic resignation patterns show that
approximately 10% of the casual staff and 5% of the permanent employees would resign before
payment date. ey used this assumption when raising a provision for bonuses at year-end.
REQUIRED
Formulate the substantive procedures you would perform in respect of the provision for
bonuses. You are not required to perform substantive analytical procedures.
[14]
1. Obtain a schedule from HR manager of the bonus provision calculation and re-perform all
calculations and castings. (1)
2. Agree the total of this schedule to the account in the general ledger, trial balance and nancial
statements. (1)
3. Obtain a management representation letter con rming the completeness and accuracy of the
provision. (1)
4. Inspect minutes of meetings of the board for any reference to the bonuses and the approval of
them. (1)
5. Inspect the nancial statements to con rm whether the provision has been disclosed as a
current liability in accordance with IFRS. (1)
6. Enquire from management to gain an understanding of the process management used to
calculate the provision. Evaluate the reasonableness of the estimate based on your knowledge
of the business. (1)
7. Select a sample of employees from management’s schedule and con rm the payroll (for both
permanent employees and casual staff ) for existence of the employees (or by physical
veri cation). (1)
8. Select a sample of employees from the bank statements and con rm that they appear on the
schedule. (1)
9. For a sample of employees on the schedule:
Agree the monthly salary for December as used in the calculation with the payroll for
a) December. (1)
b) Recalculate the salary to be paid out in December (taking into account potential increases
in salary) and the cost of the gift (being a week’s wages × 25%). (1)
c) Should employees receive an increase after year-end, obtain a copy of any approved
increase letters in recalculating the adjusted salary. (1)
d) Con rm the nature of employment (permanent vs casual staff ) by inspecting a sample of
employees’ appointment letters in their staff les. (1)
10. Inspect the payroll and employee records between year-end and payment date to identify
resignations. (1)
11. Enquire from the human resources department of any resignations after year-end, other than
the two resignations that you are aware of. (1)
12. Con rm the reasonableness of the management’s percentage (%) of resignations before
payment date by inspecting the employee records for the trends in resignations during the
year as well as after year-end. (1)
13. Develop an expectation of a reasonable bonus and provision by discussions with
management, industry knowledge, etc. (1)
14. Calculate the following ratios:
a) Bonuses as a percentage of salaries
b) Bonuses per class of employee (e.g. permanent vs casual staff )
Investigate any unusual uctuations through discussion with management and obtaining
corroborating documentation. (max 2)
Question 45 LEVEL 3
Provision for rehabilitation of land
[20 marks]
Your rm, UNIVEN Inc., specialises in high-risk audit clients. It has a team of specialists, each
focusing on a speci c industry. Your area of expertise is the specialised weapon industry and you
have been asked to assist one of your clients, Denel Advanced Weapons SA Ltd (DAW), in the
audit of a provision for the rehabilitation of land around DAW’s advanced weapons development
facility in Somerset West. New weapons are developed and tested at the advanced weapons
development facility.
During the course of the nancial year, an environmental pressure group began protesting
outside the gates of the advanced weapon development facility. ey claim that one of DAW’s
facilities, where the chemical weapons and weapons of mass destruction are tested, is polluting
the environment and killing the native species of tortoises. Publically, DAW is denying any
responsibility. Internally, a con dential memo from DAW’s lawyers con rms the following:
DAW has a 20-year lease of the land from the Western Cape government that contains a clause
that any damage, caused by DAW’s activities, to the land and surrounding areas must be
recti ed.
Statements in DAW’s previous integrated reports that they are a socially responsible company
that causes no harm to anyone gives rise to a constructive obligation for DAW to rehabilitate
the land.
An environmental study conducted by DAW’s maintenance department found sufficient
evidence that DAW is having a negative impact on the surrounding environment. Moreover,
they prepared a discounted cash ow calculation of the expected cost to rehabilitate the land
when the lease expires. e maintenance department is headed by an environmental
specialist who reviewed the study.
Although DAW does not want to admit guilt, the nancial director decided to raise a provision for
the rehabilitation of the environment.
REQUIRED
Formulate the audit procedures that you would perform in respect of the provision for
rehabilitation.
[20]
Question 46 LEVEL 3
Provision for chemical spill
[25 marks]
You are an audit manager at Mabusa Inc., a medium audit rm situated in Cape Town. You are
currently at one of your clients, African Chemicals (AC), performing the audit of a provision for
the rehabilitation of land around AC’s testing facility in Paarl. e company’s year-end is 30 April.
Mabusa Inc. has been the auditor of AC for the last four years. New chemicals are developed and
tested at the Paarl facility which caused damage as discussed below.
e site manager at the Paarl facility has alerted the management of AC regarding a chemical
spill at the facility during the year, which polluted the environment and killed the indigenous
species of plants and various small animals. e groundwater has also been affected, which
resulted in livestock from neighbouring farms also dying. Publically, the rm is denying any
responsibility regarding damages. A letter from AC’s lawyers con rms, however, that the site
manager is correct in his assessment that environmental damage did occur. Some of the farmers
in the vicinity sent water samples to a laboratory, which found traces of toxic chemicals used by
AC and con rmed that their livestock were killed from drinking it.
An environmental study was conducted by an external environmental expert regarding
possible damage that needs to be recti ed. Moreover, he prepared a discounted cash ow
calculation of the expected cost to rehabilitate the land where the Paarl facility is situated as well
as to clear the groundwater of the toxic chemicals. e expert estimates that it will take at least
three years to eradicate the effects of this chemical spill.
Although AC does not want to admit guilt to the farmers, the chief nancial officer (CFO)
decided to raise a provision of R14.2 million at year-end for the rehabilitation of the
environment.
REQUIRED
Formulate the audit procedures that you would perform in respect of the R14.2 million provision
for rehabilitation at year-end.
[25]
Obligation/existence
1. Obtain legal representative’s letter where it was stated that the chemical spill did have a
negative impact on the environment. (1)
2. Inspect correspondence and other audit evidence from farmers indicating damage due to
chemical spill. (1)
3. Obtain and analyse laboratory reports indicating that toxic chemicals used by AC were found
in the groundwater. (1)
4. Enquire from the site manager at the Paarl facility how he discovered the environmental
damage due to chemical spill. (1)
5. Conclusion: All the above clearly indicate a present obligation which will lead to future
payments that can be reasonably estimated. (1)
Completeness/cut-off
6. Inspect the site and ask the site manager if there are other areas of AC that also experienced
damage. (1)
7. Inspect board minutes for any discussion on the additional provision that is needed regarding
the rehabilitation of the environment. (1)
8. Inspect claims from farmers who surround AC’s facility to determine the total extent of
damages that need to be recti ed. (1)
Valuation
9. Obtain a schedule of the discounted cash ow calculation from the external expert and re-
perform the calculations on the discounted cash ow calculation. (1)
10. Enquire from the environmental specialist about the assumptions used and evaluate the
reasonability of these assumptions to source documents and reports/claims from farmers in
the surrounding area. (1)
11. Determine that the damage to groundwater was included in the cash ow forecast. Chemicals
tend to in ltrate the groundwater, which has led to death of livestock on the surrounding
farms and claims for losses suffered by farmers. (2)
12. Enquire from the external expert about the procedures and methods that were followed in the
preparation of the discounted cash ow forecast. Scrutinise the logic of these procedures and
methods used; for example, was in ation taken into account? (1)
13. Was livestock loss on neighbouring farms veri ed to claims instituted by farmers? (1)
14. Evaluate the reasonableness of the estimates in the cash ow, relying on your knowledge of the
business, the environmental expert’s report and discussions with the Paarl site manager. (1)
15. Corroborate the cost estimates by inspecting the underlying documents/quotes/invoices to
repair damage to the environment and contaminated groundwater. (1)
16. Compare the discount rate used with that of a similar market rate obtain from a nancial
institution. (1)
17. Verify the reliability of expenses on cash ow to payments already made after year-end
regarding cleaning up of chemical spill. (1)
Conclusion: After performing all the procedures on cash ow as mentioned above, the
auditor must determine his/her own point estimate with ranges which can be supported by
audit evidence obtained. If AC’s point estimate of R14.2 million does not fall within this range,
discuss with the CFO and resolve the difference, otherwise take difference to overs/unders
schedule. (2)
18. Before you can rely on the environmental expert’s workings you must:
consider his independence/objectivity by doing a background check
determine his quali cations and membership of a professional body and corroborate with
the professional body
determine his experience in this industry and reputation by obtaining his CV and
investigate any internet posts regarding this
determine any possible bias when he prepared the report
determine his reputation and standard of work previously performed on similar
engagements. (max 5)
19. Inspect the minutes of the audit committee meeting approving the present value of the cash
ows and the provision itself. (1)
20. Enquire from the external expert and site manager about the nature of the rehabilitation
required and extent of work required to rehabilitate the environment. (1)
21. Con rm the discussion with the expert and site manager by inspecting relevant
correspondence and corroborative technical documentation. (1)
Analytical review
22. is is the rst year that this provision is raised and therefore no analytical review will be
possible.
Disclosure
23. Inspect the note disclosure relating to the provision of R14.2 million as a long/short-term
liability in the nancial statements and con rm the compliance with IFRS. (1)
General procedures
24. Compare the total of the calculation to the year-end balance of R14.2 million in the general
ledger and trial balance. (1)
25. Obtain a letter of representation from management con rming the completeness and
accuracy of the provision. (1)
Question 47 LEVEL 3
Provision for defective work

[13 marks]
You rm, UNIVEN Inc., specialises in high-risk audit clients. It has a team of specialists, each
focusing on a speci c industry. Your area of expertise is the specialised weapon industry and you
have been assigned to the audit of Big Guns SA Ltd (Big Guns). Big Guns sells customised heavy
calibre weapons to clients across South Africa. Clients can order heavy calibre weapons from Big
Guns with any speci cations they might require. Big Guns holds a large inventory of weapons
and spare parts and if it does not have a particular weapon or spare part in its inventory, it can
source it from reliable suppliers. It is rumoured that Big Guns even has some illegal gun dealers
on its books. Big Guns does not assemble the weapons itself, rather sub-contracting this task. Big
Guns then sells the weapons to licensed dealers approved by the government.
At the beginning of the nancial year you are currently auditing, Big Guns sold a vehicle with
a mounted high-calibre machine gun with extended ammunition storage to a security company.
Since this was the rst time it mounted a weapon on a vehicle, Big Guns subcontracted the
assembly as well as the mounting of the weapon on the vehicle to Vin Petrol, an auto body shop.
Big Guns struggled to nd a body shop that was willing and able to mount the weapon. Vin Petrol
agreed to mount the weapon only after an immunity agreement was signed in terms of which no
claim could be instituted against it. e vehicle was delivered in the middle of the year.
Shortly after receiving the vehicle, the security company complained that the gun kept on
jamming and that the weapon had become faulty due to the vibration of the vehicle. In terms of
Big Guns warranty policy, it appears as if Big Guns is responsible for rectifying any product
defects. Because of the immunity agreement signed with Vin Petrol, Big Guns will not be able to
recover anything from Vin Petrol. One of Big Guns’ supervisors inspected the vehicle and the
weapon and concluded that the jamming resulted from poor workmanship of a sub-contractor
that installed the large ammunition storage unit and Vin Diesel’s assembly. He also contracted
an independent specialist who con rmed this and recommended that the vehicle undergo a full
inspection. Recti cation work will be necessary to reduce the impact of the vibration on the
assembly unit which attaches the weapon to the vehicle. Shortly before year-end, a new
contactor was appointed to perform the necessary work. He commenced the work but still had a
lot of work to complete after year-end. e independent specialist prepared an estimate of the
total costs involved, which was approved by management and formed the basis of the provision.
Estimated cost of remedial work to be incurred 550 000

Inspection costs of independent specialist Costs of other work done to date 22 000
22 500
594 500
REQUIRED
Describe the audit procedures you would perform in respect of the provision for defective work
at year-end.
[13]
Question 48 LEVEL 3
Issue of shares: Equity
[15 marks]
You are a trainee accountant at the audit rm of Glass and Cupp Inc. and have been assigned to
the audit of High Lights (Pty) Ltd (High Lights), a wholesaler of electrical lights and ttings. e
company’s nancial year under consideration ends 31 December 20X1. During the year the
following two transactions, which require your further attention, occurred:
Issue of shares
According to your prior scrutiny of High Light’s memorandum of incorporation (MOI), the
company had 500 000 authorised and issued shares as at July 20X1, the day its board of directors
decided to issue another 100 000 shares. In terms of the decision, the shares are to be issued at
R10 each and no directors are allowed to take up any of the shares. You also con rmed through
inspection of the MOI that the directors do not have the power to change the number of
authorised shares. After the necessary legal requirements were considered, all shares were duly
issued and monies received in full. Inspection of the general ledger revealed that the share
capital account was credited with R1 million and the bank account debited with the same
amount.
Dividends declared
In December 20X1, the board of directors declared the only dividends for 20X1, payable to all
shareholders, at R3 per share. e amount of the dividends declared has not yet been paid by the
time the dividend declaration was audited.
REQUIRED
Describe the substantive audit procedures that should be performed to test the fair presentation
of the transactions in High Lights relating to:
the issue of shares in July 20X1 (9)
the declaration of dividends. (6)
Do not repeat any procedures already performed as per the above scenario and ignore any
procedures relating to presentation and disclosure of the matters in the nancial statements.
[15]
Question 49 LEVEL 2
Equity
[21 marks]
Greyfox Protection Services Ltd (Greyfox) is a large, but unlisted company that provides security
services throughout the country. e auditor of Greyfox required audit evidence for the following
matters that applied during the course of the company’s most recent nancial year:
NO. MATTER MARKS: MARKS:
DOCUMENT(S) EVIDENCE
a. The board of directors resolved to issue an (½) (2)
additional 200 000 shares in Greyfox (the only
share issue that took place).
b. The shareholders have allowed the above (½ × 2) (4)
shares to be issued.
c. Some of the above shares were issued to (½) (1)
directors of Greyfox.
d. Funds were received from all shareholders who (½ × 2) (1)
took up the above shares.
e. The shares taken up by each shareholder were (½) (1)
documented by Greyfox.
f. A dividend was declared for the 2019 nancial (½) (1)
year. (Note that you have already con rmed that
there are no restrictions to this extent in
company’s MOI.)
g. The company had the nancial means to pay (½ × 2) (3)
the above dividends.
h. The nance committee of Greyfox, carrying out (½ × 2) (2)
its mandate as obtained from the board,
decided to obtain a long-term loan for Greyfox
from West-end Bank and subsequently agreed
to terms and conditions with the bank for the
loan.
REQUIRED
For each of the above controls/activities:
1. name the document on which you will nd evidence for the matter (6)
2. for each document named, brie y describe the nature of the evidence that it provides for audit
purposes. (15)
[21]
Note: More than one document may apply for each matter. Do not address matters for which you
have already obtained audit evidence as described in the scenario.
NO. (1) (2) NATURE OF THE EVIDENCE

DOCUMENT(S)
DOCUMENT(S)
a. Minutes of the Evidence of a resolution by the directors to issue shares
board meeting Any pertinent matters relating to the share issue, (1)
(½) including whether shares are to be issued to directors,
share price, nancial assistance to any party to take up
shares, etc. (1)
b. MOI (½) Any restrictions that may apply to the directors’ ability to
Minutes of issue shares (1)
the shareholders’ Evidence of there being a suf cient number of authorised
meeting (½) shares in respect of the prospective share issue (1)
Rules regarding the directors’ ability to change the MOI in
order to increase the authorised number of shares
(otherwise, a special resolution by shareholders will be
required) (1)
Evidence of the shareholders’ approval, by means of a
special resolution, to increase the authorised share capital
should there not have been a suf cient number of authorised
shares (1)
c. Minutes of the Evidence of the shareholders’ approval, by means of a

shareholders special resolution, either for this particular issue of shares,
meeting (½) or made within the past two years, allowing the directors to
take up shares in the company (1)
d. Bank statement The bank statement provides evidence that funds were in
Cash book (½) fact received from shareholders and the cash book provides
(½) evidence that the receipts were recorded in the accounting
records. (1)
e. Shareholders’ The shareholders’ register is prepared by Greyfox to record

register (½) the particulars of each shareholder, including the number of
shares held by each.(1) Note that the number of shares can
also be calculated by taking the total amount of funds
received and dividing it by the share price. However, this is a
calculation more so than a ‘document’.
f. Minutes of the Evidence of a resolution passed by the directors to declare

board meeting a dividend (1)
(½)
DOCUMENT(S)
g. Minutes of the Evidence that the directors applied the solvency and liquidity
board meeting test as per section 4 of the Companies Act (1)
Trial balance (½) Indication that the board, subsequent to the performing the
at time of test, concluded that Greyfox will satisfy the solvency and
dividend liquidity test immediately after completing the proposed
declaration/other distribution (1)
valid accounting Evidence that the assets of the company, as fairly valued,
information (½) equal or exceed the liabilities of the company, as fairly
valued and it appears that the company will be able to pay
its debts as they become due in the ordinary course of
business for a period of 12 months following the distribution
of the dividends to shareholders (1)
h. Minutes of the Evidence of approval for the loan to be acquired from West-
nance end Bank (1)
committee’s Indication that both parties (Greyfox and the bank) agreed to
meeting (½) the terms of the contract and that an authorised
Loan representative of Greyfox signed for the loan (1)
agreement with
West-end Bank
(½)
Question 50 LEVEL 3
Other reserves
[14 marks]
Matchstix Ltd (Matchstix) is a large manufacturer of matchsticks used for lighting res. During its
most recent nancial year, the company’s auditor was concerned about the board of directors’
treatment of the following matters affecting the 20X1 statement of pro t and loss and other
comprehensive income and statement of changes in equity:
e company owned three properties during its 20X1 nancial year, consisting of open pieces of
land in the following locations: Midrand, Pretoria and Mbombela. By year-end, the company
owned only two of these properties as the land in Pretoria was sold. Further details are as
follows:
A revaluation surplus to the value of R380 000 existed on the Pretoria property at the time
when it was sold. e Pretoria property was last revalued seven years ago. is surplus amount
was transferred to the 20X1 retained earnings through pro t and loss.
e directors decided to revalue the Midrand property on which the company is planning to
build a future match stick factory. As a result, the board requested property agent Mark Shaw,
a cousin of the chief executive officer, to perform the revaluation. e revaluation resulted in
the Midrand property increasing in value by R550 000 and was duly recorded as such in the
20X1 nancial statements.
e Mbombela property was not revalued for the 20X1 nancial year.
REQUIRED
1. Discuss the possible reasons as to why the auditor of Matchstix was concerned about the
company’s accounting treatment of the matters relating to the three properties. (5)
2. Describe the substantive audit procedures you would expect the auditor of Matchstix to have
performed to gather sufficient appropriate audit evidence about the accuracy, valuation and
allocation assertion and related disclosures of the revaluation surplus of R550 000 (Midrand
property) recorded in the nancial statements. Assume all amounts are material and that use
will not be made of an auditor’s expert. Ignore any tax consequences. (9)
[14]
1. Other concerns of the auditor

a) e auditor may have been concerned that the accounting policy of Matchstix Ltd did not
allow for the revaluation of land, i.e. that the cost model is in fact used for the accounting of
land and not the revaluation model. (1)
b) e motives for why the directors would transfer the Pretoria property’s revaluation surplus
through pro t and loss seems questionable, given that IAS 16.41 requires a revaluation
surplus on disposal to be transferred directly to retained earnings, but through other
comprehensive income and not through pro t and loss. (1)
c) According to IAS 16.31, under the revaluation model which Matchstix seems have adopted,
revaluations should be carried out regularly, ‘to avoid instances where the carrying amount
of an asset differs materially from its fair value’. However, the disposed Pretoria property was
last valued seven years ago, begging the question as to whether other classes of properties
subject to the revaluation model may also have been valued too long ago, resulting in
understatement of assets. (2)
d) e auditors may have been concerned about whether the R550 000 revaluation surplus of
the revalued Midrand property was appropriately transferred through other comprehensive
income and accumulated in equity under a revaluation surplus, rather than through pro t
and loss (IAS 16.39). (1)
e) ere is a possibility that the Midrand property’s revaluation surplus is materially
overstated, given that the property valuator is not independent from the CEO (his cousin
performed the revaluation), which could have provided opportunity for upward
manipulation of the amount. (1)
f ) If an asset is revalued, the entire class of assets to which that asset belongs should be
revalued, according to IAS 16.36. However, the Mbombela property was not revalued during
the year under audit. (1)
2. Substantive audit procedures: revaluation surplus of R550 000

a) Discuss with management any concerns about the objectivity of the property valuator who
valued the property, given that he is the cousin of the CEO, and consider any measures
taken by management to mitigate the risks of a con ict of interest. (1)
b) Request from Mark Shaw, the property agent and valuator who performed the revaluation,
evidence of his quali cations and experience and inspect the evidence to determine
whether he:
appears competent and skilled in property valuations (1)
is registered or certi ed with a professional property valuation body. (1)
c) Request from management the agreement signed between Mark Shaw and Matchstix to
determine whether the scope of the property valuator’s work is adequate and enables the
valuator to perform his work without restrictions or in uence from management. (1)
Discuss with Mr Shaw whether he was free to perform the valuation without limitations
placed on his work. (1)
d) Inspect the valuator’s valuation report and:
i) con rm by means of this inspection that the Midrand property’s fair value at year-end
results in an increase in R550 000 as per the accounting records (1)
ii) recalculate any calculations made by the valuator in the report (1)
iii) assess the reasonability of any assumptions used by the valuator given the auditor’s
knowledge of the industry and any other audit evidence obtained during the course of
the audit of Matchstix. (2)
e) Inspect the statement of other comprehensive income and note the increase of R550 000
transferred through retained earnings. (1)
f ) Inspect the statement of changes in equity and note the increase in R550 000 under
revaluation surplus. (1)
Question 51 LEVEL 2
Bank reconciliation
[7 marks]
NOCDE Ltd (NOCDE) for the 28 February 20XX nancial year-end. NOCDE is a clothing retail
company with branches across the country. You are responsible for the audit of the company’s
bank balances at year-end and were presented with the following bank reconciliation by the
company’s accountant:
BANK RECONCILIATION – BMX BANK: FEB 20XX

R R
Balance according to bank statement 28 Feb 20XX 146 493.36
Less: outstanding electronic fund transfers 1 794.68 (8 131.89)
EFT transfer nr 749 746.96
EFT transfer nr 752 5 590.25
EFT transfer nr 756
Plus: outstanding deposit 7 541.73
28 Feb 20XX
Plus: other adjustments 897.50
Bank charges Feb 20XX
Balance according to cash book 28/02/20XX 146 800.70
REQUIRED
Describe the substantive procedures that you should perform on the bank reconciliation
presented to you as part of obtaining sufficient and appropriate audit evidence regarding the
company’s bank balance at year-end.
[7]
General
1. Obtain a bank con rmation con rming the balance according to the bank statement on 28
February 20XX and agree the bank balance per the reconciliation to the balance on the bank
statement or the bank con rmation as at 28 February 20XX. (1)
2. Recalculate the calculations on the reconciliation. (1)
3. Re-perform the logic of the bank reconciliation and the reconciling items on the
reconciliation. (1)
4. Agree the balance according to the cash book on the reconciliation to the balance in the cash
book as at 28 February 20XX. (1)
Outstanding electronic funds transfers

5. Follow the outstanding electronic funds transfers as at 28 February 20XX through to the
March 20XX bank statements. (1)
6. Agree the date and the amount of the outstanding electronic funds transfers to the February
20XX cash payment journal. (1)
Outstanding deposits
7. Agree the amounts of the outstanding deposit to the March 20XX bank statements. (1)
8. Agree the date (28 February 20XX) and the amount R7 541.73 to the cash receipt journal to
ensure that it was recorded in the correct period. (1)
9. Inspect the deposit slip for the amount of R7 541.73 and the date of the deposit (28 February
20XX). (1)
Bank charges
10. Agree the amount of the bank charges (R897.50) to the February 20XX bank statement. (1)
Question 52 LEVEL 2
Bank con rmation letters
[10 marks]
NOCDE Limited (NOCDE) for the 28 February 20XX nancial year-end. NOCDE is a clothing
retail company with branches across the country. e company has multiple bank accounts and
you are responsible for the audit of the company’s bank balances as at year-end and are in the
process of preparing bank con rmation letters for the company’s bank accounts at year-end.
REQUIRED
1. List and explain the assertions relating to the cash and bank balance contained in the nancial
statements for which evidence will be obtained by means of bank con rmation letters. (2)
2. Discuss any other information (other than the cash and bank balance) which will also be
obtained as part of the bank con rmation process and how it can be used by the auditor. (8)
[10]
1. a) Existence, as the banks will con rm that the bank accounts existed at year-end (1)
b) Accuracy, valuation and allocation assertions, as the banks will be con rming the balance
of the various bank accounts at year-end (1)
Available marks [2]; Maximum marks [2]
2. a) Interest paid and received during the nancial year for all the entity’s bank accounts (1)
is will be used by the auditor to verify the occurrence, completeness and accuracy of the
entity’s interest expenses and interest revenue. (1)
b) Details of any pledged and ceded balances and any collateral provided for liabilities (1)
is can be used to verify the accuracy and completeness of disclosure and the presentation
of, inter alia, contingent liabilities in the nancial statements as well as rights and
obligations and completeness of the related assets and liabilities. (1)
c) Details of any forward contracts (1)
is can be used to verify the nancial instrument, including the relevant year-end
disclosures and presentation in the nancial statements. (1)
d) Available overdraft facilities that the entity may use and the date of the review of these (1)
is can assist in the going concern evaluation because it provides information regarding
the availability of short-term funding to the entity. (1)
e) Information regarding the authorised signatories on the entity’s bank accounts (1)
is can be used during the audit of payments made by the entity during the year to identify
invalid payments which would assist in the identi cation of fraudulent transactions. (1)
Question 53 LEVEL 3
Deferred taxation
[16 marks]
Since you recently completed your MCom (Taxation) the audit partner on the audit of Screen
Capture (Pty) Ltd (Screen Capture) requested that you assist in the audit of the deferred taxation
asset balance. Screen Capture is a rm of private investigators that specialise in electronic
surveillance.
Following the revelations of the State Capture commission of bribery, fraud and corruption
by government officials, Screen Capture has seen a signi cant increase in demand for special
investigations and has been awarded various contracts to conduct electronic surveillance. In
order to store all the data that is generated by the new contracts, Screen Capture purchased 10
new servers during the nancial year. Electronic equipment is written off on a straight-line basis
over the period of expected use and is impaired where necessary.
Screen Capture estimates that the expected period of use of the electronic equipment is
shorter than the write-off period allowed by the South African Revenue Service. e nancial
directors recommended that the equipment be written off using the official tax wear-and-tear
rates, however the board of directors agreed that the actual useful life would result in a better
re ection on the statement of nancial position. is resulted in a deferred taxation asset, arising
from the deductible temporary differences in respect of the servers purchased.
REQUIRED
Assuming that the xed assets have already been audited and that the deferred taxation asset
account is separately disclosed from the deferred taxation liability account, formulate the
substantive procedures that you would perform in respect of the deferred taxation asset account.
[16]
1. Scrutinise the general ledger account (for both the deferred taxation liability and asset
accounts) for unusual entries and enquire from management about any such entries. (1)
2. Inspect the deferred taxation liability account as well as the related deferred taxation liability
calculation for any unusual items. (1)
3. Inspect all material journal entries processed during the preparation of the nancial
statements and enquire from management about their purpose. (1)
4. Obtain the deferred taxation calculation;
5. agree its total to the general ledger, trial balance and nancial statements. (1)
6. Recalculate the:
a) carrying amount of the asset
b) tax base
c) deferred tax asset. (max 2)
7. Compare the tax rate and wear-and-tear rate used in the calculation with current (‘enacted or
substantially enacted’) legislation. Note the date of the enactment. (2)
8. Obtain forecasts from management and review whether it is probable that sufficient taxable
income will be earned in future, against which the temporary difference can be deducted.
a) Enquire from the accountant about the procedures and methods that were followed in the
preparation of the forecast. (1)
b) Enquire from the accountant about the basis of the assumptions made in respect of the
taxability, tax planning events, probabilities, possible variances and timing of future cash
ows, and compare it with trends and industry norms considering the knowledge of the
business and the industry. (1)
c) Compare the discount rate used by the accountant with the ruling interest rate in the media
or on the internet. (1)
d) Recalculate all calculations and projections. (1)
e) Con rm the details in the projections with the underlying evidence and consider the
taxation impact of the projections (evaluate whether there will be sufficient taxable pro t
earned, against which deductions can be set off; also refer to other requirements of IAS 12,
para 36) and the recoverability of the deferred taxation asset. (max 2)
f ) Evaluate events after year-end that provide additional information in respect of the above-
mentioned assumptions (e.g. changes in the interest rate and the economy which may
impact future sales and sales volumes; timing when temporary difference could potentially
reverse; tax planning opportunities) in order to con rm that the loss will be realised.
g) Inspect the minutes of management meetings to verify that the requirements of (max 2)
IAS 12, para 36 are discussed. (1)
9. Inspect the disclosure of the deferred taxation in the nancial statements to con rm that it is
disclosed in accordance with IFRS. (1)
Question 54 LEVEL 3
Taxation payable
[22 marks]
You are the audit senior employed by Wingman Accounting Inc. (Wingman). Wingman received
a phone call from the local university. e chairman of the School of Accountancy at the
university urgently needs a guest lecturer with taxation experience as well as audit experience.
Wingman’s managing partner suggests that you present the lecture, since it would assist
Wingman’s recruitment activities on campus. e brief you received from the university via
email states the following:
Dear Wingman
Thank you for agreeing to lecture next week. I would like to request that you give a 50-
minute lecture on the various forms of taxation, and since we (at the university) have
started implementing the CA2025 framework, you must please integrate taxation with
auditing during your lecture. Please focus on substantive procedures. Integrated thinking is
a key principle in the CA2025 framework.
Thank you again.
Regards
Chairperson of School of Accountancy
In preparing for the lecture, you decide to explain the substantive procedures using a case study
of a company that had seen an increase in revenue and a decline in expenses due to cost-cutting
measures. Payments to SARS consisted of provisional payments for income tax as well as
payments made for penalties and interest incurred during the year. In order to make the scenario
more realistic, you decide that the company will pay penalties and interest only when it receives
a request for payment from SARS, however the company does not raise a provision for potential
penalties nor interest due.
REQUIRED
Ignoring capital gains taxation and other taxes, formulate the substantive procedures which you
would include on your lecture slides to audit the SARS balance in the statement of nancial
position giving consideration to the facts in the scenario.
You are not required to formulate analytical procedures. Moreover, do not address the disclosure
and presentation assertion.
[22]
1. Obtain the calculation of the tax liability and recalculate the amounts on the schedule. (1)
2. Compare the balance in the tax calculation with the balance in the general ledger to the trial
balance and nancial statements. (1)
3. Inspect the general ledger account to identify any unusual entries. Enquire from management
reasons for the unusual entries. (1)
4. Obtain a management representation letter con rming the completeness and accuracy of the
tax liability. (1)
5. Compare the opening balance of the general ledger to the balance in the prior year’s signed
nancial statements as well as the prior year’s tax return and assessment received. (2)
6. Recalculate the amount of any over/under provision and compare it to the amount in the
general ledger account. (1)
7. Inspect the journal entries transferring over/under provisions to the statement of nancial
position to ensure that these are not carried forward. (1)
8. Compare all the payments (provisional taxation) in the general ledger with:
the bank statement as well as with the receipt as received from SARS (1)
the provisional returns completed by the client (1)
statements from SARS in respect of penalties and interest and with
the amount of interest and penalties as recalculated by you. (1)
9. Inspect the SARS general ledger account to con rm that payments for penalties and interest
made during the year are not allocated to this account, but rather expensed. (1)
10. Obtain a schedule with the income taxation calculation and recalculate the income tax
expense by multiplying the taxable income with the statutory rate. (1)
11. Inspect income taxation calculation:
Agree the pro t before taxation with the amount in the statement of comprehensive income.
a) Evaluate the nature of all items and (1)
i) con rm the classi cation and treatment of non-taxable items against supporting
documentation (1)
ii) con rm that all items that are non-deductible are added back (1)
iii) con rm that all special allowances are appropriately claimed. (1)
b) Review the detailed nancial statements for any other items requiring adjustment. (1)
c) Enquire from management whether there are any other items that are non-taxable/non-
deductible. (1)
12. Recalculate the amount of capital allowances. (1)
13. Inspect the general ledger and ensure that the taxation expense per the tax calculation (per
schedule) agrees with the entry/journal of the provision in the general ledger. (1)
14. Enquire from SARS or investigate documentation and payments after year-end to identify any
unrecorded outstanding penalties and interest. (1)
15. Compare the balance on the nancial statements to the amount on the tax return as well as
assessment. (1)
a) Inspect the prevailing tax legislation for the prevailing tax rate and other relevant
provisions. (1)
b) If necessary, obtain the assistance of a tax expert. (1)
c) Review the calculation for completeness and reasonableness using your taxation
knowledge. Inspect last year’s tax calculation and return, and enquire from management
regarding any differences (i.e. new or missing amounts). (2)
Question 55 LEVEL 3
Audit of unlisted investment/accruals
[24 marks]
You are working for a small audit rm, FMA Inc. You are currently busy with the audit of Body
Beautiful (Pty) Ltd (BB). e company has a 30 June year-end. FMA Inc. has been appointed as
the new auditor in the current year.
Background information
BB was established eight years ago by Mr Mangaliso, the company’s largest shareholder. e
purpose of the company was to import into South Africa Chinese products which had a price
advantage compared to other similar products available in the South African market. Due to the
poor quality of certain of these products, this was not a satisfactory long-term proposition.
Currently weight-loss products are very popular in South Africa. ese products supposedly
act as appetite suppressants, fat burners, metabolism enhancers and energy boosters. BB has
therefore changed its strategy and now only focuses on these products. BB imports these
products from suppliers in China that it has worked with previously and with which it has good
working relationships.
Investments
ree years ago, BB made a 10% investment in Wonder Slim (Pty) Ltd (Wonder Slim). At year-
end, the investment is stated at R2 250 530 in the general ledger. ere was no movement in this
account during the current nancial year.
Accruals
Mr Mangaliso provided you with a list of accruals as at year-end that he had prepared himself,
because the post of chief nancial officer is currently vacant. He ‘hopes’ the balance of R245 540
includes all the relevant accruals at year-end. Your audit senior has now delegated the task of
verifying the accruals amount to you. You have already agreed the balance of his list of R245 540
to the accruals amount per the trial balance and general ledger.
REQUIRED
1. Describe the audit procedures that you would perform to verify the valuation of the
investment of R2 250 530 of BB at year-end. (12)
2. Describe the audit procedures that you would perform to verify the accruals of BB at year-end.
(12)
[24]
1. Audit of investments – valuation assertion only

As this is a new audit, the opening balance of valuation needs to be veri ed to check for any
material misstatement:
a) Agree opening balance of R2 250 530 to previous year’s closing balance in the general ledger
investment account and AFS. (1)
b) Investigate and obtain corroborative supporting documentation for any difference relating
to the above. (1)
c) Inspect share certi cate to verify the 10% shareholding and investment amount at year-end.
(1)
Valuation assertion only
Obtain audited AFS for Wonder Slim and perform the following:
d) Inspect that equity/net asset value is at least R22 505 300 to justify investment amount of R2
250 530 at year-end. (2)
e) Perform a valuation to verify 10% holding of at least R2 250 530 by using:
i) the discounted cash ow model (1)
ii) the price-earning model (1)
iii) the dividend yield model/Gorden growth model (1)
to identify if any impairment is needed.
f ) Inspect the statement of comprehensive income to verify that Wonder Slim is making a
reasonable pro t and that no impairment is needed. (1)
g) Inspect the AFS to verify that Wonder Slim is a going concern to verify that no impairment is
needed. (1)
h) Scrutinise chairman’s report to determine viability and pro tability of future operations to
verify that no impairment is needed. (1)
i) Inspect that an unmodi ed audit report was issued. (1)
j) If not, determine what effect the quali cation will have on the equity and pro t gures, to
verify that no impairment is needed. (1)
k) If management are not prepared to do the necessary impairments identi ed in your audit
work above, take amount to overs/unders schedule. (1)
2. Substantive procedures regarding accruals

As this is a new audit, the opening balance of accruals needs to be veri ed to check for any
material misstatement:
a) Obtain a list of opening balances from the previous auditor or management or prepare your
own list. (1)
b) Inspect the accuracy of this list with payments made subsequent to last year’s year-end to
verify the accuracy of the opening balance of accruals. (1)
c) If there is any material difference regarding the above (or procedures performed below),
discuss with management and take any audit differences to overs/unders schedule. (1)
d) e current year-end accruals list was prepared by a person who is not a quali ed
accountant, therefore extended audit procedures need to be performed. (1)
e) Cast the current year’s list and agree if total does add up to R245 540. (1)
f ) Compare the list of accruals given to you by Mr Mangaliso and compare the list that you
prepared regarding opening balances; identify and follow up differences with Mr
Mangaliso. (1)
g) Since Mr Mangaliso ‘hopes’ the list is correct, which does not inspire any con dence,
extended procedures will need to be followed to identify further the completeness of the
list, therefore review telephone, electricity, rent and other expenses to verify 12
payments/debits were made during the year, otherwise follow up differences with Mr
Mangaliso. (2)
h) Review all agreements, contracts, board minutes, etc. to determine whether the accruals list
is complete. (1)
i) Select invoices and statements for services rendered, and other documentation received
before year-end to ensure these are recorded as accruals at year-end. (1)
j) Trace payments after year-end to identify payments made regarding accruals that existed at
year-end but which do not appear on the list of Mr Mangaliso. (1)
k) Enquire from staff members/payments clerk whether they are aware of any unrecorded
accruals at year-end. (1)
l) Trace the amounts on the list of Mr Mangaliso and test them to invoices, statements and
other supporting documentation. (1)
m)Re-perform calculations on documents above to con rm accuracy of accrual amount. (1)
n) Perform an analytical review of each accrual and inspect documentation for any abnormal
increases/decreases that are not in line with in ation. (1)
Available marks [15]; maximum mark [12]
Question 56 LEVEL 3
Directors emoluments
[26 marks]
Nat Jafta Kitchen Cupboards (Pty) Ltd (Nat Jafta) engaged your rm to perform the external audit
for the nancial year ending 31 December. e company was founded by Mr Nathaniel Jafta and
his wife. Nat Jafta manufactures custom-made kitchen cupboards from its warehouse in Rylands.
ere are 61 permanent employees working in the warehouse, including ve administrative staff
members. Nat Jafta also employs ve four-man crews that install the cupboards at client’s
premises. Nat Jafta had a good nancial year with revenue doubling. e growth in sales started
after Mr Jafta was selected as one of the Mail & Guardian Top 200 entrepreneurs and a SAICA
Top under-35 nalist.
A month before the close of the nancial year, Mr Jafta wanted to thank his employees for
their hard work and made an announcement that all salaried employees would receive a cash
bonus, payable two months after year-end. e bonus was calculated pro-rata on the employees’
December salary, based on the number of months they were employed during the nancial year
ending 31 December. e employees were excited since it was the rst time that they received a
bonus. ere were, however, two employees who had resigned after year-end and were unhappy
since they were not included in Mr Jafta’s calculation of the bonus payable (i.e. ‘provision for
employee bonuses’). Mr Jafta argued that they did not qualify for the bonus since they would no
longer be on the company’s payroll. Moreover, he decided not to include the directors in the
bonus payment.
e following procedures have already been performed regarding the disclosure of salary- and
remuneration-related balances:
1. Obtain a payroll printout of all salary and remuneration amounts (including bonuses) and
supporting calculations and re-perform all calculations and castings. Agree the totals of these
schedules and supporting calculations to the relevant account in the general ledger, trial
balance and nancial statements.
2. Review the relevant general ledger accounts of all salary- and remuneration-related balances
(including bonuses) and investigate any unusual entries, including journals.
3. Obtain a management representation letter con rming all relevant assertions relating to all
salary- and remuneration-related amounts (including bonuses).
4. Inspect minutes of meetings of the board and the remuneration committee for any reference
to salary- and remuneration-related matters (including bonuses).
5. Review the nancial statements and complete the rm’s standard disclosure checklist based
on the disclosure in the nancial statements. Con rm that all salary- and remuneration-
related matters (including bonuses) have been disclosed in accordance with IFRS.
6. Compare the salary- and remuneration-related payments (including bonuses) and related
disclosures to that as disclosed in the prior year’s nancial statements and investigate
variances.
REQUIRED
1. Draft a working paper that describes the additional substantive procedures that you would
perform in respect of the directors’ remuneration account in the statement of nancial
performance.
You are not required to describe any substantive analytical procedures, nor any substantive
procedures relating to the presentation and disclosure assertions. (14)
2. Describe the risks of material misstatement at account and assertion level in respect of the
provision for employee bonuses in the statement of nancial position.
You are not required to describe risks relating to the presentation and disclosure assertions. (6)
3. Assume that sufficient appropriate audit evidence has already been obtained in respect of
salary records of both employees and directors, and formulate the additional test of details
that you will perform in respect of the provision for employee bonuses in the statement of
nancial position.
You are not required to describe any substantive analytical procedures, nor any substantive
procedures relating to the presentation and disclosure assertions (6)
[26]
Question 57 LEVEL 3
Audit procedures regarding legal matters
[14 marks]
You are the audit manager on the 31 December year-end audit of OwnWay (Pty) Ltd (OwnWay),
a company founded 20 years ago that owns most of the country’s school tuck shops. During the
planning phase of the current audit, while you were inspecting the minutes of the company’s
board meetings, the following transactions came to your attention:
Transaction A
Bob Owny, the managing director, borrowed R50 000 from the company in order to purchase a
boat. e loan was approved by the directors at an interest rate of 1.5%.
Transaction B
OwnWay declared a dividend of 50 cents per share during the year.
Transaction C
Carli von Dagel, one of the executive directors, proposed a contract with SweetsUnlimited (Pty)
Ltd (SweetsUnlimited) for the supply of crisps to OwnWay. Although Carel von Dagel owns 55%
of the shares in SweetsUnlimited and is married to Carli, the contract was approved by the board.
REQUIRED
1. Based on the information supplied, discuss in terms of the Companies Act requirements and
contraventions (the theory and the application thereof ) the validity and the consequences of:
a) transaction A (5)
b) transaction B. (4)
2. Formulate the audit procedures that you would perform in order to obtain sufficient,
appropriate audit evidence as to the legality of transaction C. (5)
[14]
Note:
Although audit procedures include tests of controls and substantive procedures, transactions
regulated by the Companies Act occur only once in a while, as a result of which there are no
internal controls to test. Your approach in answering this type of question is to verify compliance
with the Companies Act.
1. a) i) As the award of the loan made to the director was not within the scope of the normal
trading activities of OwnWay, it was not in the ordinary course of business. (1)
ii) OwnWay is not a bank or a nancial institution in terms of section 45(1)(a) of the
Companies Act 71 of 2008. (1)
iii) Although the loan was approved by the directors, it should have been authorised by
means of a special resolution of the shareholders in accordance with section 45(3)(a)
(ii). (1)
iv) As the loan was approved at an interest rate of 1.5%, which is much lower than the repo
rate, the terms may not be considered reasonable and fair to the company (section
45(3)(b)(ii)). (1)
v) e loan is thus void (invalid). (1)
vi) e directors, whether they approved of or failed to vote against the loan, could be held
liable. (consequence) (1)
b) i) Inspect the minutes of meetings of the directors for:

the board resolution authorising the distribution (1)
the acknowledgement of the application of the solvency and liquidity test immediately
after the proposed distribution was completed as well as the conclusion that the
company satis ed the solvency and liquidity test. (1)
ii) Having recalculated the solvency and liquidity ratios, agree them to management’s
calculation in order to verify that the company was solvent and liquid after the
distribution. (1)
iii) Inspect the bank statement in order to verify that the distribution was made within 120
days of the solvency and liquidity test having been performed or inspect the minutes of
board meetings for references to the subsequent solvency and liquidity test. (1)
iv) Inspect the memorandum of incorporation in order to verify whether there are any
restrictions on interim distributions. (1)
2. a) Inspect the minutes of the board meeting in order to verify that Carli:
i) disclosed her interest in the contract (1)
ii) disclosed all the necessary details and information regarding the contract (1)
iii) left the boardroom after the disclosure of her interest (1)
iv) formed part of the quorum of the meeting, but did not take part in the vote on this
contract. (1)
b) Inspect the con ict register in order to verify that Carli registered her interest in the
contract. (1)
c) Inspect the memorandum of incorporation in order to verify that there are no restrictions
with regard to contracts involving con icts of interest. (1)
1 Auditing of a balance.
2 In order to detect possible understatement, more completeness procedures need to be performed.
3 You are a member of the audit team.
4 All this is irrelevant, since you have to perform substantive procedures and not tests of controls.
5 Use this information in your cut-off procedures.
6 Use this information in your answer.
7 Use Mr Paton’s name in your answer.
8 As the amount is lower than that of the previous year, the completeness assertion needs more procedures.
9 In performing substantive tests, the auditor will try to obtain external audit evidence with a date as close as possible to
year-end.
10 This is the only time you will earn a mark in tests and exams if you start your sentence with the word ‘obtain’. You are not
required to write ‘Obtain an invoice for’ and then ‘Inspect an invoice for’ when describing substantive procedures.
11 Inquiry from management is a poor audit procedure, since they may tell the auditor what he/she wants to hear, rather than
the truth. Your procedure should therefore include a follow-up in order to corroborate management’s answers.
12 This is essential in order to earn a mark, since answers to inquiries from management are poor audit evidence.
13 By performing these procedures, the auditor is testing for possible understatement, as required in the question.
14 Always mention analytical review procedures if they are relevant.
15 This procedure specifically addresses the risk of understatement presented in the scenario.
16 Observe how the information contained in the question was brought into the solution.
17 Samples are often taken, since it is impossible for the auditor to inspect all documentation.
18 This procedure is applicable only to accounts payable and accounts receivable.
19 This procedure is unique to accounts payable.
20 This is a generic procedure that you may mention if the item is separately disclosed in the financial statements.
21 This serves only to indicate that many other alternative procedures exist.
22 Audit of transactions.
23 You are the senior auditor on this audit.
24 Remember to address this issue in your cut-off and analytical review procedures.
25 Management has therefore an incentive to overstate sales.
26 This detailed information is not really needed, since the question does not ask for test of controls.
27 This detailed information is not really needed, since the question does not ask for test of controls.
28 Notice the three different assertions in auditing transactions compared to balances.
29 When auditing transactions, the auditor is vouching for many of the company’s internal documents. By comparison, when
auditing balances, he/she is trying to obtain external audit evidence.
30 Occurrence is used as a heading since the auditor is verifying transactions.
31 The mark is allocated for ‘cast’ and not ‘obtain’.
32 This is a generic statement that may be used for most substantive questions.
33 Usually no mark is allocated for this. In this scenario, where the client has 22 outlets, you will need to stratify.
34 Accuracy is used as a heading since the auditor is verifying transactions.
35 Using information given in the scenario.
36 Classification is used as a heading since the auditor is verifying transactions.
37 This is a risk identified in the scenario.
38 Once again, discuss analytical review procedures. Note: In this solution, it has been given its own heading, which you can
do if you forget to address analytical review procedures.
INTRODUCTION
is chapter also deals with substantive procedures.
QUESTIONS
Question 1 LEVEL 2
Revenue
[15 marks]
You have recently been appointed as an audit manager at Sexy Audit

Inc. Your rst audit client is Investex Ltd (Invest), a company that sells
investment textbooks. e audit for the year ended 31 September is
almost complete, with only the audit of the asset management fee
accounts still outstanding.
Investex has a R15 million investment on the statement of nancial
position at year-end. e investment, which was acquired four years
ago as capital reserves and has already been veri ed, is classi ed and
recognised as available-for-sale in terms of International Accounting
Standards (IAS) statements. e investment is managed by Investex at a
fee of 0.5% per month calculated on the market value of the said
investment. e fee is payable in cash 15 days after month end.
An audit trainee accountant has requested your assistance in
auditing this balance.
REQUIRED
Formulate the substantive procedures that you would perform relating
to the asset management fee in the statement of comprehensive
income.
[15]
Question 2 LEVEL 2
Opening balances
[16 marks]
CA(SA) Inc. was appointed as the external auditor of Corricraft (Pty) Ltd
(Corricraft) on 1 April. e success of the company, which sells the
furniture it manufactures at its Durban plant from showrooms across
South Africa, lies in the fact that its products are durable. In addition,
lounge suites have removable, washable covers. e company’s year-
end is 31 December.
During the planning phase of the current year’s audit, the CA(SA)
Inc. audit team experienced difficulty in reconciling opening balances
to the nancial statements audited by the previous auditor, who had
issued a quali ed audit opinion of the previous nancial year. In an
attempt to resolve the issue, CA(SA) Inc. contacted the previous auditor,
who replied in writing that he had resigned from the audit, and that
there is no reason why CA(SA) Inc. should not accept the appointment.
As he was now retired, he was not able to assist with them further.
During the course of the previous nancial year, Corricraft had
embarked on a large capital expenditure expansion project with a view
to improving aspects of its infrastructure, the result of which, it was
hoped, would be an increase in sales and a decrease in costs. In
anticipation of this, at the time of the previous nancial year-end,
Corricraft had large inventory, accounts receivable and PPE balances.
Although increased sales did materialise after the expansion,
customers purchasing on credit with 24 months to repay struggled with
repayment, which resulted in signi cant credit losses for the company.
Management uses a provision matrix that speci es xed provision
rates (based on past experience and industry trends) for the number of
days a debt is overdue.
REQUIRED
Formulate the substantive procedures you would perform during the
current year’s audit on the opening balance of trade accounts
receivable. You are not required to perform substantive analytical
procedures or consider the presentation and disclosure assertions.
[16]
Question 3 LEVEL 2
Accounts receivable
[23 marks]
For the past three years, your audit rm has been the external auditor of
Pamala Ltd (Pamala), a company that owns and leases buildings across
South Africa. During the current year, there has been a signi cant
decrease in the number of properties leased as a result of declining
interest rates, with the result that it has become more cost effective for
those seeking office space to purchase premises. e company’s year-
end is 31 August.
e company’s draft nancial statement re ects the following balances:
Income
Rent received** R4 656 641
Current assets
Rent in arrears # R341 000
Current liabilities
Rent received in advance R93 500
VAT payable R264 000
**The income gure was obtained from the monthly rental registers.
# Rent in arrears refers to the unpaid invoices for August as well as
those for previous months.
e rental system operates as follows:
New applications and renewals

Once a prospective tenant has completed a rental application form and
successfully undergone a credit check, a rental agreement, which is pre-
numbered, is entered into with the lessee and signed by both parties. A
copy of the agreement as well as the rental application form is led in a
correspondence le for the lessee, who is assigned a unique lessee
number.
Invoicing
e accounting department at head office in Johannesburg maintains a
rent register in which all rentable office space is listed, along with the
details of the lessees. On the rst day of every month, an invoice,
serving as a reminder of the rent due on or before the 5th of the month
in terms of the rental agreement, is mailed to each lessee. In addition,
the invoice is debited to the lessee’s account in the rent register.
Receipts
Rentals are paid directly to head office. Pamala’s policy is to grant terms
of rental payable in advance only. When a payment is received from a
lessee, it is credited to the client’s account in the rent register.
Month-end procedures
All lessees with outstanding rent payments receive a monthly statement
prepared and mailed to the lessee on the 15th of each month. Copies of
these statements are led in the correspondence les of the lessees.
REQUIRED
Describe the substantive procedures you would perform in respect of
the gross amount of rentals in arrears before any provision for
irrecoverable losses is included in the statement of nancial position for
the year ended 31 August. You are not required to address any matters
concerning either taxation or the procedures relating to debtors
con rmation letters.
[23]
Question 4 LEVEL 2
Accounts receivable
[25 marks]
You are a second-year audit trainee on the audit of ComfortAir (Pty) Ltd
(ComfortAir), the largest supplier of commercial and residential air
conditioners in southern Africa. e company, which has a December
year-end, requires the nancial statements by the third week of January.
As a result of the tight year-end, your audit rm opted to con rm the
existence of debtors at 30 September during the interim audit
conducted during the rst two weeks of October. Roll-forward
procedures for October, November and December were performed
during the year-end audit. e reason for adopting this approach was
the delayed response from debtors returning debtors con rmations for
the previous nancial year, which threatened to delay the issuing of the
audit report.
e following additional information is available at year-end:

ComfortAir signed contracts with several commercial building
developers and building suppliers, who sell directly to the public in
Namibia and Zimbabwe, to supply them with air conditioners. e
rst purchases, which, as with all transactions, were settled in US
dollars, were made in February of the current nancial year.
Although it is not the policy of ComfortAir to hold air-conditioning
units on a consignment basis, Building Warehouse Supplies (Pty) Ltd
(BWS), which accounts for 32% of the total accounts receivable
balance at year-end, requested that an exception be made for it. e
directors of ComfortAir approved this request at a board meeting
held in January of the current nancial year, since which date all
goods to BWS have been held on a consignment basis.
ComfortAir’s accounts receivable master le contains the following

elds:
FIELD EXAMPLE
Account number Prod430
Name Productive (Pty) Ltd
Address and contact details 430 S Poplar Avenue, Parow 7501
Date account opened March 20XX
Total amount owed R53 000
Aging of total amount owed 52 days
Credit limit amount R120 000
Credit terms 30 days
REQUIRED
1. Discuss the audit procedures you would have performed during the
interim audit in order to con rm the existence of the accounts
receivable balance on this date. (6)
2. Discuss the audit procedures you would perform in order to con rm
the valuation of the accounts receivable balance. In answering the
question, use general audit software as far as possible. (19)
[25]
Question 5 LEVEL 2
Audit procedures
[13 marks]
You have been the auditor of the ABC Ltd Group (ABC), a company with
a 30 June nancial year-end, for the last six years. ABC is a leading toy
manufacturer in Africa with ve manufacturing facilities, three of which
are located in South Africa, one in Kenya, and one in Nigeria.
e company has production capabilities for a wide variety of toy
products. It employs a substantial workforce.
ABC’s products are renowned for their quality and affordability.
Results from research conducted by the South African Bureau of
Standards show that no toxic paints are used in toys manufactured by
ABC. In addition, they have no small parts that could be harmful to
children.
During the course of the current year, ABC implemented a new
payroll system that is more effective than that used over the last seven
years. All payroll data is now stored at PayrollCloud Inc., a designated
cloud site.
Extract from minutes taken at a directors meeting held on 8

June 20X1
Note 1: Feedback on new payroll system

All payroll applications and modules have been successfully
transferred from the previous payroll system to the new. The initial
problem encountered with PayrollCloud Inc. over the storage of the
payroll data has been successfully resolved. As far as we are
aware, there have been no other malfunctions. From that, we
conclude that everything is functioning normally.
Note 2: Consultation with labour unions

It was decided that all workers at the Cape Town manufacturing
facility will be retrenched on 30 June owing to this facility making
continuous losses. Since the retrenchment packages, which were
approved by the labour union, will be paid out only during July
(after the year-end), it was decided by management that no
provision needs to be made for this at year-end.
REQUIRED
Discuss the impact that Note 2 above would have on your audit, and
describe the audit procedures that you would perform in order to verify
the retrenchment payment.
[13]
Question 6 LEVEL 2
Audit procedures
[15 marks]
For the rst time, your audit rm will be conducting the audit of XARO
Ltd (XARO), a South Africa-based group specialising in the mining of
coal. You are a junior audit clerk assigned to the 30 June 20X1 year-end
audit.
Because the company is currently the largest coal producer in the
country, EXCOM, the national power utility, as well as several other
municipal power stations, are XARO’s biggest clients. e company has
been listed on the JSE for the last seven years.
On 5 April 20X1, a strike involving approximately 2 000 miners took
place at the Arnox mine in Mpumalanga, one of six mines owned by
XARO. e strike, sparked by the non-payment of performance bonuses
as a result of certain operations not achieving their performance targets,
led to a production stoppage of several weeks. In addition, the event
gained international attention after the strike, which had become
violent, had led to the serious injury of 38 striking mineworkers.
Legal action against XARO resulted, with the men claiming damages
of R23 million for injuries sustained during the strike. According to
XARO’s legal advisors, the mineworkers have a 90% chance of being
granted compensation. Consequently, XARO raised a provision for R23
million in its nancial statements for the year ending 30 June 20X1.
Working Paper H/100 provides a breakdown of the audit procedures

performed:
Working Paper H/100
Entity XARO Ltd Year-end: 30 June

name: 20X1 WP
Prepared J. Jackson Date: 2 August H/100
by: 20X1 Page 1 of
Reviewed P. Date: 4 August 1
by: Masanabo 20X1
Audit Provisions
section:
Activity 1: Audit procedures performed on provisions in general
AUDIT TYPE OF ASSERTION/CONTROL

PROCEDURE AUDIT OBJECTIVE
PERFORMED PROCEDURE ADDRESSED
Compared the Test of control Valuation of provisions
schedule of
provisions for
the current year
to that of the
previous year.
Certain major
provisions for
the previous
year were not
present in the
current year. No
further audit
work was
performed on
these
provisions, as
they had no
impact on the
current year’s
audit.
Discussed with Test of detail: Segregation of duties
the previous substantive
auditor the procedure
process used to
develop
provisions,
including the
approval
process thereof.
Activity 2: Audit procedures speci cally performed on the provision

for R23 million raised in the nancial statements for the year
ending 30 June 20X1 with regard to damages for injuries
sustained during the strike
AUDIT TYPE OF ASSERTION/CONTROL

PROCEDURE AUDIT OBJECTIVE
PERFORMED PROCEDURE ADDRESSED
Obtained the Test of control Presentation and
schedule from disclosure
management
making up the
balance of R40
million for this
provision. Re-
performed all
calculations on
the schedule.
Evaluated, Analytical Isolation of responsibilities
tested and procedure:
discussed the substantive
basis on which procedure
the amount of
the provision
was determined
in order to
decide whether
or not it is a
reliable
estimate.
REQUIRED
Discuss the concerns you have with the audit procedures, the type of
audit procedures and the assertions or control objectives addressed as
documented in Working Paper H/100. Where there are concerns, make
recommendations on how these could be mitigated. Present your
answer in tabular form.
[15]
QUESTIONS
Question 1 LEVEL 3
Series ISA 560 Phase 1–3 (the same scenario will be used and tailored to
explain the various possibilities)
[66]
SCENARIO 1 OF 6: SUBSEQUENT EVENTS

[10 marks]
You are a chartered accountant and an audit manager at Audit Inc., a

medium-sized audit rm. One of your major audit clients is FlyAway
Ltd (FlyAway), a listed company. FlyAway is an airline company that
specialises in providing an exclusive private jet service to wealthy
individuals, including government officials and celebrities.
FlyAway’s assets include a eet of luxury jets and, as it has been in
operation for a number of years, it also has access to a substantial
network of other luxury aeroplane service providers.
e following dates are relevant to the audit:
ACTIVITY DATE
Financial year-end 30 September
2019
Financial statements to be approved by board 30 November
of directors 2019
Financial statements to be sent to 5 December
shareholders 2019
e nal and overall materiality gure for the nancial statements was
calculated as R8.5 million. e audit eldwork has been completed and
you are reviewing the completion and nalisation ndings. Below is
Working Paper L1 – LITIGATION AND POSSIBLE CLAIMS, which you
are currently reviewing:
Working paper
Client FLYAWAY Prepared M Date 25 L1
name LTD by Hilton prepared October
2019
Year- 30 Reviewed You Date
end September by reviewed
2019
Audit LITIGATION AND POSSIBLE CLAIMS
section
Discussions with the company’s legal advisor revealed the

following:
A legal claim has been made against the company by six
passengers who assert that the airline served them contaminated
food. It came to management’s attention that the passengers were
admitted to hospital shortly after landing in Durban on 28 August
2019.
The passengers have instituted a claim for damages against the

company. The medical reports, dated 3 October 2019, revealed
that the passengers suffered from food poisoning. Upon
investigation, traces of an industrial cleaning chemical were found
in the food that the passengers were served.
The legal advisor is of the opinion that the passengers will be

successful in their claim, however the value of the claim could not
be determined at year-end.
On 15 October 2019, the following estimate of the claim was

made by the legal advisor: R10 million. This estimate was based
on other similar cases in the past. This estimate is considered to
be reasonable for audit purposes.
Management disclosed a contingent liability in the draft nancial

statements regarding this matter.
REQUIRED
Discuss the appropriate audit responses (all steps and further audit
procedures) in reaction to the relevant information provided. Assume
the date is 27 October 2019 today for the purpose of answering the
question. (10)
Notes:
Ignore any taxation and deferred taxation implications of this
information.
Ignore any aspects regarding possible fraud or a reportable
irregularity.
Ignore the effect of the matter on the formulation of the audit
opinion.

[15 marks]

ACTIVITY DATE
20X9
Financial statements approved by board of 30 November
directors 20X9
Financial Statements to be sent to 5 December 20X9
shareholders
calculated as R8,5 million. You have issued an unmodi ed audit report
(dated 1 December 20X9) pertaining to the 20X9 nancial year.
On 2 December 20X9, you read the following in the newspaper:
ere is a legal claim against the company by six passengers

who assert that the airline served them contaminated food. It
came to management’s attention that the passengers were
admitted to hospital shortly after landing in Durban on 28
August 20X9. e passengers have instituted a claim for
damages against the company. e medical reports, dated 3
October 20X9, revealed that the passengers suffered from food
poisoning. Upon investigation, traces of an industrial cleaning
chemical were found in the food that the passengers were
served. Legal experts whom this newspaper interviewed are of
the opinion that the passengers will be successful in their claim.
e claim is estimated to be R10 million according to the legal
experts.
Management did not disclose this information to the audit team during
the audit, nor was it disclosed in the audited nancial statements.
REQUIRED
the date is 2 December 20X9 today for the purpose of answering the
question. (15)
Notes:
information.
irregularity.
Do not discuss detailed audit procedures as per ISA 540.
Do not address the formulation of the audit opinion.

[15 marks]

ACTIVITY DATE
20X9
directors 20X9
Financial statements sent to shareholders 5 December 20X9
ere is a legal claim against the company by six passengers

who assert that the airline served them contaminated food. It
came to management’s attention that the passengers were
admitted to hospital shortly after arriving in Durban on 28
August 20X9. e passengers have instituted a claim for
damages against the company. e medical reports, dated 3
October 20X9, revealed that the passengers suffered from food
poisoning. Upon investigation, traces of an industrial cleaning
chemical were found in the food that the passengers were
served. Legal experts whom this newspaper interviewed are of
the opinion that the passengers will be successful in their claim.
e claim is estimated to be R10 million according to the legal
experts, based on similar cases in the past.
REQUIRED
question. (15)
Notes:
information.
irregularity.

[8 marks]

ACTIVITY DATE
20X9
directors 20X9
Financial statements to be sent to 5 December 20X9
shareholders
In the chairman’s report, there is a section that deals with ‘ ight
incidents’. In that section, the company’s chairman highlighted that
during the current nancial year, there was one incident ‘where
passengers did not feel well after a ight to Durban’. He also stated that
‘the matter was investigated and preventative measures were instituted’.
A legal claim has recently been laid against FlyAway Ltd by six
passengers who assert that the airline served them
contaminated food. It came to the company’s attention that the
passengers were admitted to hospital shortly after landing in
Durban on 28 August 20X9. e passengers have instituted a
claim for damages against the company. e medical reports,
dated 3 October 20X9, revealed that the passengers suffered
from food poisoning. Upon investigation, traces of an industrial
cleaning chemical were found in the food that the passengers
were served. A legal expert whom the newspaper interviewed is
of the opinion that the passengers will be successful in their
claim. e claim is estimated at a value of R4,5 million, given
similar cases in the past.
REQUIRED
question. (8)
Notes:
information.
irregularity.

[10 marks]

individuals, including government officials and celebrities. FlyAway’s
assets include a eet of luxury jets and, as it has been in operation for a
number of years, it also has access to a substantial network of other
luxury aeroplane service providers.
ACTIVITY DATE
20X9
Financial statements to be approved by the 30 November
board of directors 20X9
Financial statements to be sent to shareholders 5 December
20X9
calculated as R8,5 million. e audit eldwork has been completed and
Working Paper L1 – LITIGATION AND POSSIBLE CLAIMS that you are
currently reviewing:
Working paper

20X9
20X9
section

following:
There is a legal claim against the company by 60 passengers who

claim that the airline served them contaminated food. It came to
management’s attention that the passengers were admitted to
hospital shortly after landing in Durban on 3 October 20X9. The
passengers have instituted a claim for damages against the
company. The medical reports, dated 5 October 20X9, revealed
that the passengers suffered from food poisoning. Upon
investigation, traces of an industrial cleaning chemical were found
in the food that the passengers were served.
On 15 October 20X9, the following estimate of the claim was

made by the legal advisor: R60 million. This estimate was based
on other similar cases. For audit purposes, this estimate is
considered reasonable.
REQUIRED
procedures) in reaction to the relevant information provided. In
addition, discuss the impact on the audit report. Assume the date is 27
October 20X9 today for the purpose of answering the question. (10)
Notes:
information.
irregularity.

[8 marks]

individuals, including government officials and celebrities. FlyAway’s
assets include a eet of luxury jets and, as it has been in operation for a
number of years, it also has access to a substantial network of other
luxury aeroplane service providers.
ACTIVITY DATE
Year-end 30 September
20X9
directors 20X9
Financial statements send to shareholders 5 December 20X9
calculated as R8,5 million. e audit eldwork has been completed and
Working Paper L1 – LITIGATION AND POSSIBLE CLAIMS that you are
currently reviewing:
Working paper

20X9
20X9
section

following:
There is a legal claim against the company by one passenger who

asserts that the airline served him contaminated food. It came to
management’s attention that the passenger was admitted to
hospital shortly after landing in Durban on 28 August 20X9. The
passenger has instituted a claim for damages against the
company. The medical reports, dated 3 September 20X9, revealed
that the passenger suffered from food poisoning. There was,
however, evidence of several other food products in the contents of
the passenger’s stomach. These food products were not served
during the ight.
At the moment, the value of the claim cannot be estimated as

legal discussions are still in progress. Legal counsel did, however,
conclude that they think there is an 85% probability that FlyAway
will have to make a payment. Although the amount is still
unknown, the legal counsel expects with 90% certainty that the
amount to be paid as an out-of-court settlement will be less than
R100 000.
REQUIRED
procedures) in reaction to the relevant information provided. In
addition, discuss the impact on the audit report. Assume the date is 27
October 20X9 today.
Notes:
information.
irregularity. (8)
[66]
Question 2 LEVEL 3
Subsequent events
[15 marks]
GLTM Inc. was appointed as the auditor of Perfect Tile Ltd (Perfect
Tile), a national retailer of tiling products, for the 20X8 nancial year.
e nal (performance) materiality gure set by the auditor amounted
to R1,5 million. e following timeline exists:
31 December 20X8: Financial year-end
27 January 20X9: Commencement of eldwork at client’s premises
10 February 20X9: Last day audit team was present at client’s premises
4 March 20X9: Financial statements signed off
4 March 20X9: Audit report signed off
11 March 20X9: Financial statements distributed and made available to
shareholders and other stakeholders
Several events occurred after Perfect Tile’s year-end of 31 December.

None of these matters were addressed in any form in the 20X8 nancial
statements by Perfect Tile:
1. In January 20X9, Perfect Tile acquired the outstanding non-
controlling interest in one of its subsidiaries, Tile-O-Matic (Pty) Ltd
(Tile-O-Matic). e purchase price is R3,6 million, payable over a
three-year period and subject to Perfect Tile achieving pre-
determined levels of nancial performance as per the sales
agreement signed on 21 January 20X9.
2. On 5 February 20X9, the management informed the auditor that
revenue amounting to R720 000 was overstated in the month of
October 20X8 as a result of a junior salesperson who manipulated
sales gures in order to obtain a larger performance bonus. e
salesperson resigned in November 20X8. By 4 March 20X9,
management was still in the process of investigating the matter.
3. On 9 March 20X9, the nancial manager phoned the engagement
partner on the audit. Sounding embarrassed, he informed the
partner that a rental expense amounting to R162 500 for December
20X8 and pertaining to one of Perfect Tile’s branches was accidentally
not recorded in the nancial records. e audit team did not detect
this misstatement.
4. On 21 March 20X9, the engagement partner read an article in the
business section of a newspaper stating that several of Perfect Tile
Limited’s creditors have applied to have the company liquidated due
to outstanding debt.
REQUIRED
Discuss, with reasons, GLTM Inc.’s responsibilities in regard to each of
the above-mentioned events that took place at Perfect Tile after the
20X8 nancial year-end. Detailed audit procedures are not required.
Assume that management is amicable to any full amendment or
disclosures to the nancial statements, where required, for the matters
at hand.
[15]
Question 3 LEVEL 3
Subsequent events
[16 marks]
You are the senior auditor on the audit of Strawbs (Pty) Ltd (Strawbs),
which has a 31 December nancial year-end. e company is one of the
largest suppliers of strawberries in South Africa. e company supplies
many of the major local shopping chains as well as several foreign
grocery stores. e fresh strawberries are harvested from their farms
from October to March of each year. In addition to the sales made to the
stores, the company allows members of the public to pick their own
strawberries at the company’s farms from November to January.
Mr and Mrs Strawbs started the business 25 years ago. e equity of the
company is currently divided as follows:
Harvest Limited Group: 66%
Mr Strawbs: 17%
Mrs Strawbs: 17%
A representative of Harvest Ltd has requested that the audit be

completed by the third week of January as the group’s results are to be
released to the public at the end of the last week of January. An
unmodi ed audit report was submitted to the chief nancial officer of
Strawbs on 21 January. e annual general meeting will be held on 31
January.
e following two unrelated articles appeared in a local newspaper on

24 January and were brought to your attention for the rst time by a rst
year audit trainee the following morning:
Extract from article 1 which relates to one of Strawbs’

creditors
Fire destroys Somer-grocers, a community grocery store that has

served the community of Somerset West for over 30 years. A re
broke out in the early hours of Friday morning and by the time the
re department reached the premises, the entire building with all
its products were destroyed.
Extract from article 2
Strawbs’ spokeswoman Ms. Sharon Mhlanga stated, ‘A lawsuit

was led against us on 28 December and we decided not to
announce it until some background checks had been performed. A
family of ve people claim that while picking strawberries at one of
our farms they were poisoned by the methyl bromide pesticide that
we use on the strawberries, but we cannot provide any further
comment at this point as the legal process is underway.’
Somer-grocers
Somer-grocers owed Strawbs R75 000 at year-end. e company was up
to date with its payments at year-end.
Law suit
Two members of the family are still in hospital recovering from the
poisoning.
e remaining three were released from hospital after spending two
weeks under the watchful eye of specialists.
e family’s cumulative medical bill to date exceeds R3 million.
e family is suing Strawbs for R10 million to cover their total medical
costs, damages suffered due to not being able to return to work on
time and inconvenience caused.
Legal representatives con rmed that there is a 90% probability that
Strawbs will have to pay the R10 million.
e materiality gure at the client for the December nancial year-end

was calculated as R2,5 million.
REQUIRED
Discuss the impact of the two newspaper articles on the current year’s
audit of Strawbs.
[16]
Note: You are not required to discuss whether the requirements for IAS
37: Provisions and contingent liabilities are applicable. You are also not
required to draft detailed audit procedures.
Question 4 LEVEL 3
Subsequent events
[17 marks]
You are an audit manager at Lbw Auditors. e information below

relates to two unrelated audit clients of yours. e audit senior
requested your assistance.
Company 1 – Terminator Pest Control (Pty) Ltd

Terminator Pest Control (Pty) Ltd (Terminator Pest Control) is currently
involved in discussions to have its controlling interest acquired by
Diverse Investments (Pty) Ltd (Diverse Investments). Terminator Pest
Control is the largest pest control company in the Western Cape and
was incorporated 15 years ago. It has a December year-end. Diverse
Investments indicated that it would be relying on the nancial
statements when making its decision. Ms Turner, the chief operating
officer of Terminator Pest Control, has indicated that she would like to
submit the nancial statements to Diverse Investments on 28 January
so that they can nalise the acquisition by the middle of February.
As another matter, Mr Warner, the company’s chief executive officer,
resigned on 29 January. He indicated that his decision was based on his
wanting to spend more quality time with his family and that he would
complete his four weeks’ notice. Mr Warner is entitled to receive two
months’ worth of untaken leave, which equates to R200 000, when he
officially leaves the company. You were informed of Mr Warner’s
resignation on 30 January.
e nal materiality gure for the audit is R150 000.
Company 2 – Electro Frames (Pty) Ltd

Electro Frames (Pty) Ltd (Electro Frames) assembles and distributes
digital photo frames from the warehouse located in Epping and has a
December year-end.
e company sold a large portion of its inventory at below the
inventory’s cost during the month of January. A second-year audit
trainee enquired of the chief nancial officer on 1 February if this was
an indication that inventory was valued at an amount above the net
realisable value at year-end. e chief nancial officer responded by
saying that such a question was a clear indication that we did not know
what we were doing and that he would ensure that we were not
reappointed as the company’s auditors in the following year. e audit
trainee has indicated that she believes that inventory is overstated by
R650 000 at year-end.
e nal materiality gure for the audit is R600 000.
REQUIRED
Discuss the impact of the information noted above on the nancial
statements of each of your clients for their respective nancial years
under review.
[17]
Question 5 LEVEL 3
Subsequent events
[17 marks]
You are the audit manager on the audit of Citrus Fruits (Pty) Ltd (Citrus
Fruits), a company which exports the majority of its harvest to Europe
from its farm in the Northern Cape. e company has a February year-
end. e nancial statements were issued on 4 April.
e following matters were brought to your attention by a member of

your audit team at the end of April:
Settlement of a contingency
e company created a provision for damages of €500 000 (R7,5 million)
at year-end, assuming a 60% probability that it will lose the legal case
made against it by a customer in Europe who claims that the fruit was
contaminated with fungal black spot disease. e disease is harmless to
humans, but has the ability to affect the quality and quantity of the
harvest. e exchange rate used in providing for the damages at year-
end was R15: €1. e court ruled against Citrus Fruits on 23 April.
Damages suffered
On 17 April, a portion of the production plant was severely damaged by
ooding caused by heavy rains. e cost of the damage to the building
was R10 250 000. It is expected that the proceeds from the insurance
claim will cover only about 60% of this. A provision has not been made
in the nancial statements regarding this loss.
REQUIRED
Discuss the impact of the two issues identi ed by your audit team
member at the end of April on the current year’s audit, assuming nal
materiality was set at R4 million. You may assume that the company
does not intend to recall the nancial statements to make the necessary
amendments.
[17]
Question 6 LEVEL 2
Subsequent events
[11 marks]
You are a partner at the auditing rm Karma and Partners and

responsible for the audit of Woods (Pty) Ltd (Woods). Woods has a 31
October year-end. In carrying out the post balance sheet review, you
identi ed the following issue:
Wood supplies imported wood to manufacturers of furniture and other

wooden products. At year-end, a large amount of inventory of wood was
on hand. On 1 December 20X1, certain trading restrictions on wood
were lifted, causing the cost of these products to drop drastically.
REQUIRED
1. Discuss the above situation, indicating how the matter should be
dealt with in the nancial statements for the year-end 31 October.
2. List the procedures commonly performed by the auditors to (5)
identify subsequent events. (6)
[11]
Question 7 LEVEL 3
Going concern
[12 marks]
You are the manager on the 20X9 audit of Lead Balloon Ltd (LB), a
company that provides administrative services to larger South African
municipalities on a contract basis. ese contracts are renegotiated on
an annual basis. Below is LB’s statement of nancial position at 31
March 20X9, drafted on a going concern basis after the company’s
management did its going concern assessment:
20X9 (R) 20X8 (R)

Assets
Non-current assets
Property, plant and equipment 4 879 000 4 694 000
Intangible assets 320 000 2 686 000
Deferred tax 416 000 2 852 000
5 615 000 10 232 000
Current assets
Inventory 0 76 000
Current tax receivable 0 1 328 000
Trade and other receivables 6 328 000 14 988 000
Cash and cash equivalents 4 563 000 1 422 000
10 891 000 17 814 000
Total assets 16 506 000 28 046 000
Equity and liabilities

Capital and reserves
Share capital 18 122 000 18 122 000
BEE reserves (9 923 000) (9 923 000)
Revaluation reserve 1 706 000 615 000
Retained earnings (30 963 000) (21 677 000)
(21 058 000) (12 863 000)
Non-current liabilities
Interest bearing borrowings 86 000 22 760 000
Deferred tax 478 000 1 543 000
564 000 24 303 000
Current liabilities
Current tax payable 906 000 1 768 000
Interest bearing borrowings 23 678 000 88 000
Trade and other payables 12 416 000 14 750 000
37 000 000 16 606 000

Total equity and liabilities 16 506 000 28 046 000
Additional information: the R23 678 000 current liability as at March

20X9 relates to preference shares that are all held by a single
shareholder and are redeemable on 1 October 20X9.
REQUIRED
1. Per the International Standards on Auditing, what are the auditor’s
general responsibilities regarding the going assessment that was done
by the client entity’s management? (3)
2. Given the nancial information provided to you, what further audit
work would you do regarding Lead Balloon Ltd’s going concern
status? (9)
[12]
Question 8 LEVEL 3
Going concern
[18 marks]
You are the auditor manager assigned to the audit of Super Cabs (Pty)
Ltd (Super Cabs), a privately owned taxi cab service. e company has a
eet of 50 vehicles which operates in Cape Town and Johannesburg.
e nancial year under audit is 31 December 20X8.
e company has a wide range of vehicles available and operates
from 5 am until midnight, seven days a week. Prospective customers are
able to reserve a cab via the company’s website or by calling the
company’s central operations office. e company employed a software
developer to build an application for mobile devices which will offer
customers a third option for requesting a cab. e developer indicated
that he hopes that the application will be ready by the middle of 2020.
Super Cabs applied for a transport licence from OR Tambo and Cape
Town international airports, which would have allowed the company to
pick up customers on the airports’ premises. However, the company
was allowed only the right to drop customers off at the airport, not to do
pick-ups. e reason given by the airports for declining the licence,
which would have meant lucrative business for Super Cabs, is that too
many private licences had already been issued to other transportation
companies.
During the nancial year, legal proceedings were initiated against
Super Cabs by one of the approved transportation companies regarding
illegal pick-ups made at the Cape Town International Airport. e pick-
ups in question were made whilst Super Cabs awaited the approval of
its transport licence. e value of the lawsuit is R100 000.
e increasing popularity of individuals registering with the Ubuntu
transport network system, a major competitor of Super Cabs, has seen a
massive decrease in the number of customers using the company’s
services and has translated in the company recording its rst nancial
loss since incorporation. e Ubuntu transport system give customers
with smart phones the ability to submit a trip request which is routed to
Ubuntu drivers in close proximity of where the request was made. e
Ubuntu drivers use their personal cars to transport customers to
destinations.
e company signed a two-year contract, which is set to start on 1
January 20X9, with a large luxury hotel in Cape Town as the sole shuttle
service for the hotel. e contract was awarded on the basis that Super
Cabs purchased two luxury vehicles which were to be used solely for
transporting the hotel’s guests over the next two years. e company
purchased the two vehicles at a cost of R500 000 each in December
20X8.
Certain drivers at the company have demanded an increase in
wages as a result of their having to drive certain ‘dangerous’ routes at
night. ey have indicated that if their 10% wage increase is not met in
January 20X9, they will refuse to drive these routes or may embark on a
wage-related strike.
Super Cabs defaulted on payment of its petrol bill in November
20X8. is outstanding bill amounts to R100 000. e company has
indicated that it needed to retain cash funds in its bank account in order
to qualify to purchase the two additional vehicles needed for the
contract with the luxury hotel. e petrol supplier indicated that it is no
longer allowed to purchase petrol on credit and has initiated legal
proceedings against Super Cabs in order to collect the outstanding bill.
e company is currently purchasing petrol at other petrol stations
on a cash basis for its ongoing operations. e chief operating officer
has indicated that the company fully intends on settling its account
within the next few months and hopes that the petrol supplier will
understand that withholding payment was purely a business decision
and that the company hopes to be able to resume the regular agreement
once payment has been made.
e chief nancial officer of Super Cabs resigned from the company
two months before year-end and, to date, a suitable replacement has
not been found. A consultant has been contracted who comes in one
week a month to review the nancial accounting records processed by
the accounting clerk (a part-time nancial accounting student in his
second year of studies).
e company does not have access to any other funds as its bank
overdraft has been fully extended at year-end.
All of the company’s vehicles are under three years old, are in good
condition and can be sold for cash quite easily, albeit at an accounting
loss.
e following is a schedule of key nancial gures extracted from the

annual nancial statements at year-end:
DESCRIPTION RAND
Total assets 12 000 000
Current assets 450 000
Total liabilities 11 000 000
Current liabilities 540 000
Total equity 1 000 000
REQUIRED
Discuss whether or not Super Cabs will be able to disclose in its 20X8
nancial statements that it will continue as a going concern into the
foreseeable future.
[18]
Question 9 LEVEL 3
Going concern
[16 marks]
You are the auditor of SA Videos (Pty) Ltd (SA Videos), a provider of
home movie and video game rental services. e company has 125
video rental stores located across the country. Its nancial year
currently subject to audit ends 31 December 20X8.
e company was incorporated in 1982 and was the number one
video rental chain in the country for many years, boasting as many as
275 video rental outlets at one point. With the increasing number of
options being made available to the South African market to stream
movies and TV shows via their smart televisions and mobile devices,
the company has been making a loss for the past two years and has seen
25 of its outlets being closed down during the 20X8 nancial year.
Mr Hoskins, the former chief operating officer, retired in October
20X8 after faithfully serving the company for 20 years and is intent on
travelling the world from 20X9 onwards. Mr Hoskins was replaced by
Mrs Plaatjies as the chief operating officer on 10 November 20X8. Mrs
Plaatjies is known as a visionary and the board of directors is con dent
that, with her leading the company, it will be pro table again in the
near future.
Mrs Plaatjies believes that the vast majority of South Africans are not
able to stream movies and TV shows due to the high cost of internet
services compared to other countries as well as the current bandwidth
restrictions in the country. She is of the opinion that the company needs
to reconsider the current manner in which it offers its products to
customers.
Mrs Plaatjies appointed Mr Stewart, a marketing expert, to rebrand
the company beginning in the 20X9 nancial year, with the aim of better
servicing the needs of its customers. is includes launching a website
as well as having a greater social media presence.
During Mrs Plaatjies’s short tenure at the company, she has been
able to negotiate contracts with several petrol stations, convenience
stores and large grocery stores to house automated video and game
rental kiosks on their premises. e rst rental kiosks are expected to be
installed by the end of January 20X9. Mrs Plaatjies envisions having 1
000 mobile kiosks installed by the end of the 20X9 nancial year.
e board voted ve to one in favour of the project. One of the board
members had a concern about the new project as it requires customers
to use their credit cards in order to rent the movies or games at the
rental kiosks, instead of having a cash option too. She felt that the South
African market was not ready for a product of this nature. Mrs Plaatjies
indicated that the reason why rentals had to be made using a credit card
arose due to the possibility of customers not returning the products on
time or at all. A credit card allows a ‘deposit’ to be reserved when the
transaction takes place. Where a customer returns the product within
four days, the customer will receive his/her deposit back via the credit
card and will be charged a rental fee only for the four days. Where a
customer fails to return the product within four days, his/her credit card
will be charged the full reserved deposit price, equal to acquiring
ownership of the product. A customer who falls into this category will
not be permitted to return the product to the rental kiosk from where
he/she obtained the product.
e company suffered losses in the past when customers did not
return movies and games, and Mrs Plaatjies envisions rolling this
particular payment system out to local stores too in the next couple of
years. For this purpose, SA Videos approached its bank for a R5 million
loan, but was rejected as the company’s credit was already totally
extended. e company was able to negotiate a loan with another bank
on 30 December 20X8, despite the company having made losses over
the past two years. e bank indicated that the money will be paid into
the company’s bank account on 2 January 20X6. e bank manager
indicated that the reason he is willing to grant the loan is based on Mrs
Plaatjies’s reputation – he believes that she will ensure that the
company honours its monthly repayments until the loan is settled in
ve years’ time.
Part of the money will be used to fund the initial roll-out of the
mobile kiosks and the remainder of the loan will be used to settle some
of the company’s existing debt, which it was unable to repay over the
past six months. e company has been informed by one creditor,
whom it owes R250 000, that if it is not able to settle its debt by 15
January 20X9, the creditor will be forced to take steps to make sure that
the company is put into liquidation.
e shareholders of SA Videos are unable to contribute any more
money to the company and are hoping for a quick turnaround in the
nancial situation as they have not received a dividend in nearly three
years.
e following is a summary of the key nancial gures of the company

at year-end:
DESCRIPTION RAND
Total assets 14 500 000
Current assets 1 050 000
Total liabilities 12 000 000
Current liabilities 1 600 000
Total equity 2 500 000
REQUIRED
Discuss whether or not SA Videos will be able to disclose in its 20X8
nancial statements that it will continue as a going concern into the
foreseeable future.
[16]
Question 10 LEVEL 2
Going concern
[15 marks]
You are a partner at the auditing rm Karma and Partners and

responsible for the audit of Universal Projects (Pty) Ltd (Universal
Projects), a company that specialises in organising large corporate
events. You are currently busy with the nal phase of the audit for the 30
October year-end.
You have identi ed various issues concerning the nancial position of

the company, including the following:
e company has a very signi cant long-term loan that is due to be
repaid. e cash ow of the company has suffered severely due to
fewer projects being undertaken this year and, as a result, it appears
that the repayment terms may not be met.
e liquidity ratio is less than favourable and far below the industry
norm.
ere is a large claim against the company. Inspection of the letter
from the company’s attorneys con rmed that the company will most
likely lose the case and will have to settle. e settlement is
substantial and will severely impact its trading future.
After issuing the appropriate audit report to the client but before the
release of the report to the organisation, you read a report in a nancial
newspaper regarding the liquidation of one of the largest debtors of
Universal Projects. You are aware that if this debt is not recovered, the
company will not be able to continue trading.
REQUIRED
List the additional procedures that you, as the auditor, would perform in
order to assess the ability of the company to continue as a going
concern.
[15]
Question 11 LEVEL 2
Going concern
[21 marks]
You are the audit manager on the 31 December 20X8 audit of Seatron
(Pty) Ltd (Seatron), a manufacturer of specialist vehicle seats.
Responsible for producing the complete seating structure, including the
frame, the adjustment mechanism, the safety systems, the upholstery
and the head restraints, the company supplies the completed seating
units (according to strict design speci cations) to vehicle
manufacturers, who install them into their vehicles with virtually no
need for further modi cation.
At present, Seatron supplies products to one customer only, DNW
Ltd (DNW), an international manufacturer of luxury motor cars with a
plant situated close to Seatron’s own factory. Although DNW exports
most of the vehicles it manufactures to Europe and Asia, the company
indicated early in 20X8 that it might relocate its manufacturing
operations from South Africa to South America in 20X9 as a result of
continuous local labour problems. Accordingly, the management of
Seatron has entered into negotiations with DNW with a view to
continuing to supply their seating units to DNW at their proposed South
American plant. However, Seatron intends retaining their factory in
South Africa.
e news that DNW will discontinue its South African
manufacturing operations has led to several technicians and engineers
leaving Seatron in order to join their biggest overseas competitor. As a
result of the consequent skills shortage, some manufacturing errors in
seat production have occurred, with the result that DNW have had to
return faulty units to Seatron.
In addition, Seatron’s sales to DNW have steadily decreased during
20X8 owing to a worldwide drop in demand for the latter’s luxury
vehicles. Seatron’s pro t margins have thus become tight, as attempts at
cutting costs have proven futile.
e above difficulties prompted Seatron’s management to prepare a

going concern assessment, in which it outlined the current risks to the
company’s ability to continue operations into 20X9. In addition, the
assessment includes a pro t forecast detailing Seatron’s expected sales
and pro ts, as well as a description of several mitigating factors that
management hopes will ensure that the company remains viable:
Headhunting experts from across the globe and offering them
competitive remuneration packages in order to replace those staff
members who have resigned
Entering into negotiations with other manufacturers of luxury
vehicles in South Africa with a view to supplying them with seating
units
Expanding into additional and highly pro table lines of business,
such as advanced vehicle audio and digital electronics, which, it is
hoped, will increase sales and customer base
Despite the challenges facing the company, Seatron’s management

prepared the company’s 20X8 nancial statements on the going
concern basis of accounting. e company has two non-executive
directors on its board.
REQUIRED
1. With reference to the information provided, describe the detailed
audit procedures you will perform on the appropriateness of the
going concern assumption used in the 20X8 annual nancial
statements of Seatron (Pty) Ltd. (16)
2. Discuss the effect of the audit report on Seatron’s 20X8 nancial year
should it be concluded that material uncertainty exists about the
company’s ability to continue as a going concern. (5)
[21]
Question 12 LEVEL 2
Materiality
[14 marks]
You are the audit manager on the audit of Teatime (Pty) Limited
(Teatime), a company that produces tea and related products at its
manufacturing facility in Malmesbury. Teatime has a March nancial
year-end. Final materiality has been calculated at R200 000.
In order to nalise the audit, you have requested the third-year audit
trainee to summarise all the misstatements arising from the individual
audit sections that were audited. She presents you with the following:
Matter 1
e nancial manager presented the audit team with the following
schedule in respect of the building in which the tea is processed:
Opening balance 13 390 000

Add: improvements 210 000
Less: depreciation 1 000 000
Closing balance 12 500 000
Sufficient audit evidence has been performed on the opening and

the closing balances for the year under review.
e R210 000 capitalised by the chief nancial officer relates to
material and labour costs incurred repairing a portion of the building
damaged by re, costs that neither improved the capacity of the
building nor resulted in Teatime being able to process more tea.
e improvements were completed on 30 June of the current
year, and the company started accounting for depreciation on the
improvement from 1 July. e total depreciation expensed through
the statement of comprehensive income for the current nancial
year under review was R1 million, of which R5 250 related to the
improvements.
Matter 2
During the course of the year, the company installed a new machine
that increases the rate at which tea is processed by 20%. e total
cost of the machine was R1,5 million.
e company paid a logistics rm R25 000 to transport the
machine to Malmesbury from Durban, whereupon an engineer from
the manufacturer installed it at a cost of R75 000. e machine was
available for use on 31 March. No journal entries were processed by
the nancial accountant relating to the machine purchased. It is
company policy to depreciate such machines over a period of ve
years.
Matter 3
As a result of an inspection of the minutes of board of directors
meetings and discussions held with the chief nancial officer, it was
established that Teatime has been sued by a Mr Samuels for an
amount of R5,5 million. Mr Samuels claims that he had to undergo
an emergency operation after drinking tea processed by Teatime. e
application was served on the company during February of the
current nancial year. e hearing is scheduled to take place in June
of the following nancial year. e claim, if successful, will settle Mr
Samuels’s outstanding medical bills and compensate him for lost
remuneration.
e man claims that he purchased caffeine-free tea, as he is
allergic to caffeine, but caffeinated tea had been incorrectly
packaged in a caffeine-free box. Based on the evidence presented to
them, legal advisors have indicated that there is a 95% possibility that
Mr Samuels’s claim could be successful. A provision for the lawsuit
was not made by year-end.
REQUIRED
Discuss the materiality impact of each misstatement identi ed on the
nancial statements of Teatime for the nancial year under review.
[14]
Matter 1
Maintenance
a) It is a factual difference. (1)
b) e building account is quantitatively misstated. is arose
as a result of management inappropriately capitalising
maintenance costs. e amount is above the nal materiality
gure. (1)
c) Each of the building and the maintenance accounts is
overstated by R210 000. (1)
d) e management of Teatime will be required to adjust the
nancial statements in order to achieve fair presentation.
(1)
Depreciation
b) e depreciation is overstated by R5 250 and is immaterial.
c) e management of Teatime is not required to make (1)
any adjustments. e amount may be transferred to the
overs/unders list. (1)
Matter 2
b) e machinery account is quantitatively misstated. is
arose as a result of management not processing any journal
entries related to the acquisition of the machine. e amount
is above the nal materiality gure. (1)
c) e machinery account is understated by R1,6 million (R1
500 000 + R25 000 + R75 000). (2)
e management of Teatime will be required to adjust the
d) nancial statements in order to achieve fair presentation.
(1)
Matter 3
a) It is a judgemental difference. (1)
b) e provision for the lawsuit is quantitatively misstated. is
arose as a result of management not providing for the
lawsuit. e amount is above the nal materiality gure. (1)
c) e provision for the lawsuit is understated by R5,5 million.
d) e management of Teatime will be required to adjust (1)
the nancial statements in order to achieve fair presentation.
(1)
Combined effect of immaterial errors
e only error is the R5 250 depreciation, which will not be material.
(1)
Question 13 LEVEL 3
Final materiality
[13 marks]
Central Prime Ltd (Central Prime) owns and manages a number of

shopping malls and office buildings across the country. e company’s
nancial year currently under audit by Barnes and Belken Inc. ended 31
December.
e planning materiality level for the audit was set at R8,5 million by
means of applying the revenue gure of R850 million (1%) in the draft
set of nancial statements as a benchmark. e company’s revenue
consists primarily of rental income on its various properties.
During the course of the audit, it was discovered that the nancial
accountant, who had been appointed during the nancial year, had
erroneously misapplied accounting standards, with the result that the
revenue gure had to be restated. Accordingly, the audited revenue
gure amounted to R730 million, and not R850 million as per the draft
set of nancial statements.
e assistant audit manager proposed that the audit team ‘not waste
time’ in considering adapting the materiality level of R8,5 million,
despite the restatement of the revenue gure. In the assistant audit
manager’s opinion, no adjustment to materiality is necessary owing to
the planning work papers on the audit le having already been
reviewed and signed off by the engagement partner.
REQUIRED
1. Comment on the assistant audit manager’s opinion that it is not
necessary to consider adapting the planning materiality level for the
audit. Provide reasons for your answer in terms of the International
Standards on Auditing. (6)
2. Discuss in broad terms the impact that the revelation of the
erroneous application of the accounting standards will have on audit
risk and the extent of audit procedures. (3)
3. State whether the materiality level should be increased to R9 million
if, by the conclusion phase of the audit, the audited revenue gure of
Central Prime for its nancial year ended 31 December was R900
million, adjusted from R850 million as a result of the misapplication
of accounting standards. Explain your answer brie y. (4)
[13]
Question 14 LEVEL 2
Audit differences
[10 marks]
You are the partner in charge of the audit of the nancial statements of
Blunder Ltd (Blunder) for the year ended 31 December 20X1. You are
now busy with the evaluating, concluding and reporting stage of the
audit process, and have to consider the impact on the audit report of
misstatements as per the schedule of unadjusted audit differences.
Final materiality for the audit has been set at R6 000 000.
Scenario 1
e schedule of unadjusted audit differences re ects that:
the sales line item has been overstated by R7 200 000
the cost of sales line item has been overstated by R7 800 000.
Scenario 2
e schedule of unadjusted audit differences re ects that:
the property, plant and equipment line item has been overstated by
R2 900 000
the inventory line item has been overstated by R900 000.
Scenario 3
e schedule of unadjusted differences re ects that the company
incurred a ne of close to US$1,5 million during the 20X1 nancial year.
Management is unwilling to disclose this in the nancial statements
and you are of the opinion that it is highly unlikely that the company
will be able to pay the ne amount when it becomes due the next
month.
REQUIRED
For each of the above scenarios, discuss the impact of the information
provided on the audit report.
[10]
Question 15 LEVEL 2
Audit differences
[12 marks]
You are the senior auditor on the audit of Linen World (Pty) Ltd (Linen
World), a company that sells a wide variety of linen from its stores
located around the country. e company has a December nancial
year-end. e materiality at the company has been set at R300 000.
During the completion stage of the audit, the following audit difference
was brought to your attention by the audit team:
1. In order to increase the company’s net asset value, the directors
changed the accounting policy for the buildings owned by the
company from the cost basis to the revaluation basis. e company
revalued all of its buildings on 31 March and stopped depreciating its
buildings on the same date. Management has indicated that they
have not processed any depreciation as the revaluation method of
accounting indicates that they do not have to. e total depreciation
that should have been expensed through the statement of
comprehensive income should have been R 800 000 had the
revaluation basis been applied properly.
2. e company changed the useful life of its entire delivery vehicle eet
from ve years to 10 years. Management could not justify why they
changed the useful life of all the vehicles and it is your opinion that
the depreciation charge for the year has been understated by R200
000.
3. e executive directors at the company refuse to disclose their
remuneration separately in the company’s year-end nancial
statements and have opted to disclose their remuneration and other
emoluments along with the other employees’ salaries at the
company. e total of directors emoluments for the current year is
R800 000.
REQUIRED
Discuss the impact the audit differences had on the audit opinion. In
doing so, compile a summary of these unadjusted audit differences.
From the summary, conclude if these differences are individually
material and indicate the impact it will have on the audit opinion.
[12]
Question 16 LEVEL 2
Audit differences
[12 marks]
You are the senior auditor on the audit of Tasty (Pty) Ltd (Tasty). e
company supplies a wide range of spices and condiments to
wholesalers as well as the public. Materiality has been set at R500 000
for the current year’s audit. e audit has reached the nalisation stage
and the following has been documented on le:
Improvements made to the administration building

e buildings account has been satisfactorily audited but the following
has not yet been resolved. An amount of R700 000 has been capitalised
as improvements to the building. On further investigation, the audit
trainee found that the amount related to repairs that were made to the
administration building as a result of a re which had destroyed a
portion of the building. A faulty cable caused the re.
Impairment of assets
Machines with a collective carrying value of R2 100 000 (cost: R3
million; accumulated depreciation: R900 000) were damaged beyond
repair or salvage when a sprinkler system malfunctioned in a section of
the production facility three days before year-end.
e chief nancial officer processed the following journal entry for the
affected machines:
DESCRIPTION DEBIT CREDIT
Retained income R2 100 000
Accumulated depreciation R800 000
Assets R3 million
Allowance for credit losses

Tasty’s allowance for credit losses provided for in the statement of
comprehensive income during the current year is R750 000. e value
determined by a member of your audit team for the allowance for credit
losses amounts to R1 100 000.
Labelling on certain condiments

It was brought to your attention by one of the audit trainees that the
label used on certain of the products manufactured was in fact
misleading as the ingredients that were used the most were stated last
on the list instead of rst as prescribed by regulation R146 in terms of
the South African food labelling regulations.
REQUIRED
Advise the audit clerk what he/she should do and what the impact
would be on the audit report if Tasty failed to heed the advice (where
applicable).
All audit differences must be discussed in isolation and income tax

implications should be ignored.
[12]
Question 17 LEVEL 2
Evaluation of misstatements
[15 marks]
You are the manager on the 28 February 20X1 audit, currently in its
nalising phase, of Musicon (Pty) Ltd (Musicon), a national retailer of
music CDs and DVDs. e following misstatements in the nancial
statements have not been corrected by management:
1. Musicon purchased a large number of CDs featuring the music of an
international artist, Frightening Freddy, who was due for a concert
tour of the country in March 20X1. However, the tour was cancelled
after Freddy became embroiled in a scandal involving him locking his
girlfriend in a closet for almost a whole day after a domestic
altercation. A public outcry followed, with even ardent fans
boycotting Freddy’s music. Audit evidence suggests that Musicon’s
inventory consisting of Freddy‘s music CDs at 28 February 20X1
should be valued at R500 000 at year-end, instead of the recorded
value of R750 000. is is based on calculations by Musicon’s sales
department which show that the CDs will not trade if they are not
sold below cost.
2. In February 20X1, Musicon was sued by a customer for R500 000 in
damages when the facility that allows customers to preview music
malfunctioned: the volume of the music automatically rose so high
that the customer experienced a degree of hearing loss. e
company’s legal representative indicated to the audit team that at
year-end it was highly likely that the aggrieved customer would be
successful in his lawsuit. e management of Musicon has not
recorded any compensatory amount or made any disclosure in its
20X1 nancial statements, in relation to the lawsuit.
3. Inspection of the bank statement for April 20X1 revealed a payment
of R150 000 made by Musicon to a supplier for inventory recorded as
assets (and a related trade creditor raised) at 28 February 20X1.
Further investigation revealed, however, that the GRN generated for
said inventory was signed and dated 3 March 20X1.
e nal materiality for Musicon’s 20X1 audit is R350 000.
REQUIRED
1. Discuss the materiality and the nature of the above misstatements,
both separately and on aggregate. Ignore any VAT implications. (12)
2. Assuming that management will correct misstatements 1 and 3, but
not misstatement 2, discuss the effect that misstatement 2 will have
on the audit report to be issued for the 20X1 nancial statements of
Musicon. (3)
[15]
Question 18 LEVEL 3
Audit conclusion
[12 marks]
You are an audit manager at a well-known audit rm. e following

matters have been brought to your attention in the nalising of the
audits of several of your clients with a September 20X1 year-end:
Company 1 – Light Distributors (Pty) Ltd

Light Distributors (Pty) Ltd (Light Distributors) has used Super Logistics
CC to transport lights from its warehouse to retailers for the past ve
years. However, Super Logistics CC was put into sequestration on 25
September. Light Distributors was unable to nd another transport
company capable of satisfying its logistical needs.
As a temporary emergency measure, the company subsequently
decided to lease two trucks on 28 September. e lease contract was for
one month and ended on 28 October. e trucks were not depreciated,
but were capitalised at R220 000 each at year-end.
You advised the chief nancial officer of Light Distributors that the
treatment of the trucks was not in accordance with International
Financial Reporting Standards, but he indicated that the company is not
willing to amend the nancial statements.
e nal materiality for the audit has been set at R200 000.
Company 2 – Dynamic Investments Group
Dynamic Investments (Pty) Ltd (Dynamic Investments), a holding
company in the Dynamic Investments Group being audited, is 51%
owned by Mr Jack Peterson (who is also the company’s chief operating
officer) and Mrs Betty Peterson (who is the chief nancial officer). e
remaining shares are held by 19 other investors. e company acquired
a controlling stake in Cape Town Diners (Pty) Ltd (Cape Town Diners), a
well-established restaurant chain located in the Western Cape. e
acquisition was concluded on 5 September of the year under audit,
when the R12 million acquisition price was settled.
Dynamic Investments has, however, not consolidated its new
investment at the end of the nancial year into the group nancial
statements, stating that due to Dynamic Investments and Cape Town
Diners having two different nancial year-ends, it will be too complex to
consolidate the results. Mrs Peterson has indicated that they plan on
changing Cape Town Diners’ year-end in the next year in order for
consolidation to be possible going forward. e investment in Cape
Town Diners is accounted for at cost in Dynamic Investments’s nancial
statements at year-end.
e following note has been included in the nancial

statements:
Note 24: Acquisition of new business

Dynamic Investments (Pty) Limited has acquired Cape Town Diners
(Pty) Limited during the nancial year. This is the company’s
biggest acquisition to date and the board of directors believe that
the return on investment for shareholders as a result of this
acquisition will be signi cant. Due to differing nancial year-ends
however, the investment will not be consolidated into the group
nancial statements.
e nal materiality for the consolidated nancial statements of the

Dynamic Investments Group has been set at R1 500 000.
Company 3 – Wealthy Investments (Pty) Ltd
Wealthy Investments (Pty) Ltd has been forced to shut down
temporarily while investigations are being conducted by the South
African Police Service. e police allege that the company is being used
to launder money from illegal activities conducted by friends of the
company’s chief executive officer.
e police seized all of the company’s accounting records on 7
October and have indicated that they will return the records once the
police investigation has been completed, which is expected to take at
least two months.
e year-end audit commenced on 5 October and the nancial
statements were expected to be signed off by 24 October, as the
company’s bank requested a copy of the nancial statements on this
date.
e audit rm you are employed at was appointed one month
before year-end and an interim audit was therefore not possible.
e nal materiality level for the audit of Wealthy Investments has
been set at R3 000 000.
REQUIRED
Discuss the impact that each of the above-mentioned matters will have
on the audit opinion of the respective clients.
[12]
Question 19 LEVEL 1
Reporting
[10 marks]
e International Standard on Auditing (ISA) 700 (forming an opinion

and reporting on nancial statement) states that an auditor should form
an opinion on the nancial statement based on the evaluation of the
conclusion drawn from the audit evidence.
REQUIRED
Consider whether the following statements are true or false, and if false,
motivate your answer.
e auditor shall evaluate whether:

1. the nancial statements adequately disclose the signi cant
accounting policies selected and applied
2. sufficient appropriate audit evidence has been obtained
3. the accounting policies selected and applied are consistent with the
applicable nancial reporting framework and are appropriate
4. all material events occurring 12 months after the reporting date have
been appropriately dealt with
5. all qualitative aspects of the entity’s accounting practices, including
indicators of possible bias in management judgement, have been
considered
6. the information presented in the nancial statements is relevant,
material, complete and understandable
7. all misstatements (including clearly trivial misstatements) which
have been identi ed during the audit result in a material
misstatement of nancial information
8. the nancial statements, including the related notes, represent the
underlying transactions and events in a manner that achieves
reasonable presentation
9. the accounting estimates made by management are reasonable
10. the terminology used in the nancial statements is appropriate.
[10]
Question 20 LEVEL 2
Reporting
[11 marks]
Rhaindeer (Pty) Ltd (Rhaindeer) manufactures a wide range of clothing

for the local and overseas market. For its 20X1 nancial year, ending on
31 December, its auditor came to the conclusion that a material
uncertainty exists which may cast signi cant doubt on the entity’s
ability to continue as a going concern. Management did not disclose
this observation in the nancial statements, but did mention the
possible going concern difficulties in the directors’ report.
Since the matter affects the auditor’s opinion, the auditor
concluded, based on audit evidence obtained, that Rhaindeer’s
nancial statements as a whole are not free from material
misstatement. e auditor further concluded that the effect is material,
but not pervasive.
is decision was based on the following pertinent information:

Rhaindeer incurred a loss of R32 593 400 in its 20X1 nancial year.
Liquidity is under signi cant pressure as a result of an inability to sell
inventory and collect long-outstanding debts from its trade debtors.
e company has lost much of its overdraft facility and creditors have
restricted their credit terms.
Subordination agreements from large creditors and Rhaindeer’s
parent company have been sought, but to no avail. ese agreements
are important in the company’s ability to remain technically solvent.
A long-term loan of R20 million becomes payable on 30 April 20X2.
Management is in the process of negotiating extended terms – an
important factor in ensuring solvency.
e nancial manager of Rhaindeer made the following comments

during a meeting with senior staff (of Rhaindeer) and the engagement
partner on the audit:
It is ridiculous to think that an auditor should report on the
going concern ability of a client company. e auditor is there
to report on the nancial statements – not the business itself.
Auditors should involve themselves with the accounting aspects
of a company and leave the running of the business to
management.
REQUIRED
1. Prepare the ‘basis for quali ed opinion’ and ‘quali ed opinion’
paragraphs for inclusion in the audit report that will be issued along
with the 20X1 nancial statements of Rhaindeer.
2. State whether you agree or not with the comments made by the
nancial manager of Rhaindeer and provide reasons to support your
answer. You are not required to address matters impacting on the
[11]
Question 21 LEVEL 2
Reporting
[17 marks]
PART A
e engagement partner on the audit of Burtrams (Pty) Ltd (Burtrams)
concluded that a quali ed audit opinion should be expressed on the
company’s nancial statements for the year ended 30 September 20X1.
e auditor obtained sufficient appropriate audit evidence in order to

conclude that Burtrams will more than likely not be able to nance its
operations in the near future or pay off its short-term debt, as the
company has been unable to extend its bank overdraft facilities or
renegotiate an extension of a short-term loan that becomes payable in
full on 14 November 20X2. Additional nance is necessary in order to
acquire inventory and continue payment of month-to-month expenses,
including salaries and wages, and it is as yet uncertain whether the
additional nance can be obtained.
In formulating his opinion, the engagement partner considered the

following four scenarios:
A: B:
The use of the going concern The use of the going concern
assumption is appropriate, but assumption is appropriate, but
material uncertainty exists, and material uncertainty exists, and
disclosure in nancial there is inadequate disclosure in
statements is adequate. nancial statements.
C: D:
The use of the going concern The auditor is unable to obtain
assumption is inappropriate, suf cient appropriate audit
but nancial statements have evidence in order to support the
been prepared on the going going concern assumption. The
concern basis of accounting. effect is pervasive in nature.
REQUIRED
1. Describe the effect that each of the four scenarios above will have on
an auditor’s report. (6)
2. Given the conclusion reached by the engagement partner, draft the
appropriate Basis for Quali ed Opinion paragraph for inclusion in
the audit report to be issued for the 201X1 nancial statements of
Burtrams. (3)
PART B
Nortums (Pty) Ltd (Nortums) is incorporated in South Africa, while its
holding company, Gordums Holdings (Gordums), which has an 80%
shareholding in Nortums, is registered in the Bahamas. Gordums issues
consolidated nancial statements.
A South African-based audit rm was appointed to express an opinion
on the separate annual nancial statements of Nortums in terms of the
International Financial Reporting Standards (IFRS). e audit
engagement team noted the following from Nortums’s 20X1 draft
nancial statements:
1. No disclosure is made of the relationship between Nortums and its
parent company, Gordums. In addition, purchases by Nortums from
Gordums to the value of R2.5 million were not disclosed, even though
the transactions were fully recorded in the subsidiary’s nancial
records and included in its statement of pro t and loss. e amount is
below the nal materiality level.
2. Despite Nortums’s requiring a statutory audit in terms of the
Companies Act 71 of 2008, no separate disclosure is made in the
nancial statements of directors’ emoluments. However, the
applicable amounts are included under expenditure in the statement
of pro t and loss.
Management indicated that they are not willing to make any

amendments to the nancial statements in relation to the above issues.
REQUIRED
Discuss separately the effect that the two issues above will have on the
audit opinion and audit report for the 20X1 nancial statements of
Nortums. (8)
[17]
PART A
1. For A to C, ISA 570 (Going Concern) outlines the requirements in
relation to the audit report.
a) A: An unquali ed opinion will be expressed on the nancial
statements, (1)
but an Emphasis of Matter paragraph highlighting the existence of a material uncertainty
as disclosed by management in the nancial statements will be included. (1)
b) B: Either a quali ed opinion or an adverse opinion will be
expressed on the nancial statements, depending on the
pervasiveness of the non-disclosure. (1)
In such a case, ISA 570.20 further requires the auditor to state in his/her report (in the
Basis for Quali ed Opinion paragraph) that there is material uncertainty that could cast
signi cant doubt on the entity’s ability to continue as a going concern. (1)
c) C: An adverse opinion on the nancial statements will be
expressed. (1)
d) D: A disclaimer of opinion will be expressed on the nancial
statements. (1)
2. Basis for Quali ed Opinion
e company’s nancing arrangements expire, and amounts
outstanding are payable on 15 November 20X2. e company has
been unable to renegotiate or obtain replacement nancing, which
indicates the existence of a material uncertainty that could cast
signi cant doubt on the company’s ability to continue as a going
concern. erefore, it may be unable to realise its assets and
discharge its liabilities in the normal course of business, which is not
disclosed in the nancial statements. (3)
Available marks [6 + 3]; maximum marks [9]
PART B
1. Failure to disclose related party transactions
a) In terms of IAS 24.9, Gordums is a related party to Nortums, and
this relationship should be disclosed as such in the notes to the
nancial statements (IAS 24.13). (1)
b) e purchase transactions undertaken by Nortums from Gordums
should be disclosed separately from their inclusion in the
statement of pro t and loss. (1)
c) Both the subsidiary–parent relationship and the purchase
transactions are qualitatively material (that is, material in nature),
as users of Nortum’s nancial statements will likely be interested
to know not only about the ultimate controlling entity of Nortums,
but also the extent of intercompany transactions. (1)
d) A quali ed opinion will therefore have to be expressed on the
nancial statements of Nortums should management not be
willing to correct this matter. (1)
e) In the Basis for Quali ed Opinion paragraph, the auditor will state
the details around the non-disclosure of the related party, as well
as the nature of, and the amounts involved in, the related party
transactions. (1)
2. Failure to disclose directors’ emoluments
a) In terms of IAS 24.17, a company has to disclose the compensation
paid to its key management personnel, which includes
remuneration paid to its directors. (1)
i) e non-disclosure of the remuneration, despite it having
been recorded in the accounting records and included in the
statement of pro t and loss, results in a qualitative material
misstatement (and a quantitative one, should any or all of the
amounts in question be above the nal materiality level).
ii) e auditor will express a quali ed opinion on the (1)
nancial statements and the auditor will describe the reasons
for the quali cation in the Basis for Quali ed Opinion
paragraph, (1)
since the misstatement is con ned to a speci c element of the
nancial statements only, and is therefore not pervasive in
nature. (1)
(b) i) In addition, section 30(4) of the Companies Act 71 of 2008
requires companies subject to a statutory audit to include
particulars of their directors’ remuneration in its annual
ii) Non-disclosure will give rise to a reportable irregularity,
which will have to be reported in a paragraph under the
Report on Other Legal and Regulatory Requirements included
in the audit report. (1)
Question 22 LEVEL 2
Reporting
[21 marks]
You are the manager on the 31 December 20X1 statutory audit of Ithuta
Education Ltd (Ithuta), an unlisted national company providing private
schooling services. Based on the conclusions reached from the audit
evidence obtained, an unquali ed audit opinion is to be expressed on
the nancial statements. A reportable irregularity did exist, in that the
directors knowingly held back returns from SARS relating to VAT on
account of cash ow constraints.
e reportable irregularity was reported to the Independent
Regulatory Board for Auditors. No material misstatement to the
nancial statements resulted.
A junior trainee accountant on the audit, who requested an opportunity
to draft the audit report in order to expand his understanding of the
reporting phase of the audit, has submitted the following report:
Report of the External Auditor

To the board of directors of Ithuta Education Ltd
We have audited the nancial statements of Ithuta Education Ltd

as set out in the annual report, which statements comprise the
statement of nancial position as at 31 December 20X1, the
statement of comprehensive income, the statement of changes in
equity and the statement of cash ows for the year then ended.
Directors’ responsibility for the nancial statements

The company’s directors are responsible for:
the preparation and fair presentation of these nancial
statements in accordance with International Financial Reporting
Standards and the requirements of the Companies Act of South
Africa; and
such internal control as the directors deem necessary in order
to enable the preparation of nancial statements free from
material misstatement, whether as a result of fraud or error.
The auditor hereby does not accept any responsibility for either the
fair presentation of the nancial statements or the effectiveness
of internal controls.
Basis for unquali ed opinion
As a result of the suf cient appropriate audit evidence obtained,

there was no reason to modify the audit opinion. A clean audit
report is therefore issued.
Unquali ed opinion
In our opinion, the nancial statements present fairly, in all

material respects, the nancial position of Ithuta Education Ltd as
at 31 December 20X1, as well as its nancial performance and
cash ows for the year then ended in accordance with
International Financial Reporting Standards and the requirements
of the Companies Act of South Africa.
Emphasis of matter
The International Standards on Auditing require us to alert users

of the nancial statements where any form of non-compliance with
laws and regulations have occurred. We hereby emphasise the fact
that a reportable irregularity took place, in that the board of
directors did knowingly hold back returns from the South African
Revenue Service relating to value-added tax in contravention of the
Value Added Tax Act 89 of 1991.
[Insert auditor’s signature here]
JDF & Lovitz Incorporated

Registered Auditors
Per: S Johnston CA(SA) RA: Director
31 Graceway
Blue Hills
Crowburgh
REQUIRED
Indicate the errors in, and omissions from, the draft 20X1 audit report of
Ithuta Education Ltd submitted by the junior trainee accountant,
describing the appropriate treatment for each error/omission
identi ed. A rewrite of any particular paragraph is not required.
[21]
Question 23 LEVEL 2
Reporting
[13 marks]
You are an audit manager at Tickbird Inc. (Tickbird). e following

issues have been brought to your attention in the nalising of the audits
of three of your December year-end clients:
Client 1: Fast-Food (Pty) Ltd (Fast-Food)

A class A lawsuit has been brought against Fast-Food. Mr Roberts, the
attorney representing the class, has indicated that over the course of the
year claimants had received spam SMSs offering fast-food deals, with
some customers receiving up to 10 SMSs over a period of a few weeks.
As a result, many of the claimants had suffered a lack of sleep. He
indicated that the franchise had obtained the claimants’ mobile
numbers when they had requested that orders be delivered. e total
value of the lawsuit at year-end was R10 million.
Mrs Leagel, the attorney for Fast-Food, has advised that the
company is likely to be found guilty as charged, but could not give an
estimate of the damages to be awarded. Owing to the fact that the
matter was still unresolved at year-end, the directors are not willing to
account for or disclose this transaction.
Final materiality for the Fast-Food audit has been determined at
R6.7 million.
Client 2: Easy-Travel (Pty) Limited (Easy-Travel)

e pro tability of the travel agency has been greatly affected by the
increasing number of individuals making use of online resources when
planning and booking vacations, because often they are able to obtain
better rates than those offered by Easy-Travel.
e company has disclosed in the annual nancial statements the
impact that the decrease in the number of clients has had on the ability
of the company to continue as a going concern. e nancial
statements have been drafted accordingly.
Client 3: Island Hospitality (Pty) Ltd (Island Hospitality)

e only hotel operated by this company burnt down two hours before
the end of the nancial year when a sprinkler system malfunctioned
after a re broke out during a New Year’s Eve party. Although there were
no casualties, by the time the re department arrived, 95% of the hotel
(including the office where all the accounting records had been stored)
had burnt down.
e nancial statements have been prepared from the information
that the accountant had stored on his personal computer.
REQUIRED
Discuss the impact that the above-mentioned issues will have on the
audit opinion of the respective clients.
Mark allocation
Client 1 (5)
Client 2 (4)
Client 3 (4)
[13]
Question 24 LEVEL 2
Reporting
[13 marks]
e audit team engaged in the external audit of Rolotech (Pty) Ltd

(Rolotech) for its nancial year ended 30 September 20X6 is currently
nalising its audit.
During the year, Rolotech suffered a re at head office that caused
the destruction in its accounting department of some master le data
relating to the company’s accounts receivable and inventory.
Unfortunately, management’s attempts at restoring backups were
largely unsuccessful, as a result of which the audit team is unable to
audit a signi cant part of the accounts receivable and inventory
balances.
A rst-year trainee accountant on the audit made the following
comment:
Companies should take greater care in protecting their

nancial data. Rolotech (Pty) Ltd would not have been subject
to data loss of this magnitude if it had had stronger internal
controls over its backup procedures. We should therefore express
an adverse opinion on Rolotech (Pty) Ltd’s 20X6 nancial
statements in order to make it clear to shareholders the extent of
our difficulty in obtaining audit evidence about debtors and
inventory.
REQUIRED
1. State the three different types of modi cations to an audit opinion.
2. Explain the terms ‘scope limitation’ and ‘pervasive’ in the (2)
context of modi cations to audit opinions. (5)
3. Explain why the rst-year trainee accountant’s comment is
misguided as to the type of modi ed audit opinion that should be
issued for the 20X6 nancial statement of Rolotech (Pty) Ltd. (3)
4. Assuming that the auditor will disclaim his/her opinion on the
nancial statements of the company, draft the audit opinion
paragraph – with a heading – for inclusion in the audit report. (3)
[13]
1. Quali ed opinion (1)

Adverse opinion (1)
Disclaimer of opinion (1)
2. a) A scope limitation applies where an auditor is unable to obtain

sufficient appropriate audit evidence for speci c amounts and/or
disclosures in the nancial statements on which to base the audit
opinion. (1)
b) e auditor will conclude that the possible effects on the nancial
statements of undetected misstatements, if any, as a result of the
limitation of scope, are either:
i) material but not pervasive, in which case the auditor will
express a quali ed opinion; or (1)
ii) pervasive in nature, in which case the auditor will disclaim
his/her audit opinion accordingly. (1)
c) ‘Pervasive’ is a term used to describe the effects of uncorrected
misstatements on nancial statements, and the effects of possible
undetected misstatements (in the case of the latter, as a result of a
scope limitation). (1)
d) Such misstatements are typically not con ned to speci c aspects
of the nancial statements only, but are rather substantial in
proportion to the nancial statements as a whole or are
fundamental to the users’ understanding. (1)
e) Where misstatements are pervasive in nature, the auditor either
expresses an adverse opinion or disclaims his/her opinion. (1)
3. a) As the audit was subject to a scope limitation, either a quali ed

opinion or a disclaimer of opinion (and not an adverse opinion),
depending on the pervasiveness of the scope limitation, is
required. (1)
b) An adverse opinion does not signal an auditor’s inability to obtain
sufficient appropriate audit evidence. (1)
Such an opinion is expressed rather when the auditor did obtain

sufficient appropriate audit evidence, but concluded, as a result of
the evidence, that the nancial statements were materially
misstated in a pervasive way. (1)
4. Disclaimer of Opinion (1)

Because of the signi cance of the matters described in the Basis
for Disclaimer of Opinion paragraph, we have not been able to obtain
sufficient appropriate audit evidence in order to provide a basis for
an audit opinion. Accordingly, we do not express an opinion on the
[13]
Question 25 LEVEL 2
Reporting
[15 marks]
You are the nancial accountant at Saniprise Ltd (Saniprise), a large,

unlisted manufacturer and exporter of hand-sanitising and chemical
cleaning products. e company’s nancial year end was 30 September
20X1, and it is management’s intention to issue the nancial statements
to shareholders on 1 December 20X1.
It is now mid-October 20X1 and the draft nancial statements have

been prepared for the purpose of the external audit, which is due to
commence shortly. However, the following issues have not yet been
dealt with in the 20X1 nancial statements:
On 6 October 20X1, management declared cash dividends to the
value of R22.5 million, payment of which to shareholders is due on 5
December 20X1.
On 17 October 20X1, one of Saniprise’s debtors, KayLee Distributors
(KayLee), with an outstanding balance of R17.4 million (as disclosed
in the draft nancial statements), entered into business rescue.
Saniprise’s attorneys indicated that it was premature to assume that
Kaylee would be liquidated, given the nancial support that the
company has received from its business associates. However, the
attorneys did not rule out a potential loss for Saniprise, which has,
without success, struggled since July 20X1 to collect the debt in
question.
On 12 October 20X1, a re engulfed one of Saniprise’s chemical raw
materials warehouses, leading to what the media dubbed a
‘spectacular explosion visible from kilometres away’. According to the
company’s inventory records, material worth R32 million was
destroyed in the blaze. e company’s insurer indicated that
Saniprise would more than likely be able to recover most of the losses
by means of an insurance claim. However, as a result of re damage
to surrounding buildings not owned by Saniprise, litigation is
expected to be instituted by third parties against the company.
On 5 October 20X1, Saniprise repaid in full loan debt to the value of
R15.8 million, using internally generated cash resources. e debt,
recognised as short-term debt in the draft 20X1 statement of nancial
position, was previously acquired from a third party nancial
institution. e R15.8 million was the only short-term borrowings
Saniprise had at 30 September 20X1.
Inventory disclosed in the draft nancial statements at R11.25 million
had to be sold at a loss on 10 October 20X1 as a result of a production
error discovered shortly after year-end. e sales price of the affected
inventory amounted to R8.5 million.
On 16 October 20X1, the company’s board of directors announced
that, after negotiations that had begun in April 20X1, they had signed
an agreement with the shareholders of Elmo Chem (Pty) Ltd to
purchase 100% of the shares in Elmo Chem (Pty) Ltd for a total
consideration of R32 million.
REQUIRED
Discuss the effect that each of the above issues will have on the 20X1
nancial statements of Saniprise. Consider all information and
amounts as being material.
[15]
QUESTIONS
Question 1 LEVEL 1
Audit and review engagements
[10 marks]
Consider the following statements:

1. e practitioner expresses a conclusion on the fair presentation of the
nancial statements.
2. Quality control systems, policies and procedures in terms of the
International Standard on Quality Control 1 (ISQC 1) apply to the
engagement.
3. e practitioner expresses reasonable assurance on the fair
presentation of the nancial statements.
4. e practitioner needs to comply with relevant ethical requirements
concerning independence when performing the engagement.
5. Client management needs to con rm in writing that they accept
responsibility for the preparation and the fair presentation of the
nancial statements.
6. e practitioner designs and performs primarily inquiry and
analytical procedures in order to address all material items in the
nancial statements.
7. e practitioner determines materiality for the nancial statements
as a whole.
8. e greater the reliance a practitioner wishes to place on an internal
control’s operating effectiveness, the more persuasive evidence
he/she needs to obtain in this regard.
9. In performing the engagement, the practitioner considers the entity’s
ability to continue as a going concern.
10. e practitioner reports that nothing has come to his/her attention
that causes him/her to believe that the nancial statements have not
been prepared, in all material respects, in accordance with the
applicable nancial reporting framework.
REQUIRED
For each of the above, indicate whether it applies to an external audit
engagement, an independent review engagement, or both.
[10]
Question 2 LEVEL 2
Audit and review engagements
[16 marks]
As a senior trainee accountant at the rm of Doodles Inc. (Doodles),
you have been assigned to the review engagement of Scribbles (Pty) Ltd
(Scribbles). When the company’s nancial statements were audited last
year, a substantive audit approach was followed. However, owing to a
change in its public interest score, the company now requires an
independent review for its 31 March 20X1 nancial year, which it has
requested that your rm perform.
e manager on the review engagement, Kevin Karr, who has already

performed the necessary engagement continuance and planning
procedures, has:
citing a lack of time on his part to design procedures speci cally for
the review engagement, instructed you to refer to the previous
nancial year’s audit le and simply to duplicate the procedures
performed during the 31 March 20X0 audit for the purpose of
gathering evidence for the 20X1 review; and
stated that review engagements are ‘not as complicated as audits’ and
‘would therefore only require a few rst-year trainee accountants to
do most of the work’, explicitly stating that he would thus not expect
either you or him to be involved in the engagement to any signi cant
extent.
REQUIRED
1. Discuss the validity of the engagement manager’s instructions as
evinced in his rst comment. Your answer should be substantiated by
an explanation of the typical procedures commonly performed on a
review engagement in terms of the International Standards on
Review Engagements. (8)
2. Discuss in detail the merits of the statements made by the
engagement manager in his second comment. In formulating your
answer, include reference to the typical procedures performed on a
review engagement and the use of professional judgement by a
reviewer. (8)
[16]
Question 3 LEVEL 2
Independent review
[14 marks]
You are an audit manager at the rm Trolls Inc. (Trolls), a well-known

audit rm in Johannesburg, one of whose clients is Toshoes (Pty) Ltd, a
shoe manufacturer whose public interest score is 250. e audit partner
who completed the pre-engagement activities for this client has
provided you with the following approach and strategy document:
Client: Toshoes (Pty) Prepared by: Date: 31 May

Ltd Partner 20X1
Year 28 February Reviewed by: Date: 31 May A3
end: 20X1 20X1
Subject: Approach and strategy document
After analytical procedures were performed on the linked information

(not provided for the purpose of the question), the following line items
were considered for additional review procedures:
Trade and other receivables

Since the balance is above our expectation, additional review
procedures will be performed.
Trade and other payables

Since the balance is above our expectation, additional review
Revenue
Since the revenue is above our expectation, additional review
REQUIRED
1. Discuss the additional review procedures that you would perform on
trade and other receivables. (6)
trade and other payables. (4)
revenue. (4)
[14]
1. a) e monthly age analysis for the 12 months should be scanned:

i) in order to compare the totals as per the age analysis with the
previous month’s; and (1)
ii) for such unusual items as debtors with credit balances that
should be reclassi ed to creditors, since this will in uence the
outcome of the review procedures. (1)
b) Management should be asked:
i) if the items mentioned in 1(a)(ii) above had been noted and
addressed by them; and (1)
ii) with regard to individual debtors, where the balances
decreased or increased signi cantly from month to month,
substantiating their explanation by obtaining supporting
documentation. (1)
c) e client’s calculation for the allowance for doubtful debt should
be obtained and the debtors age analysis at year-end scanned for
customers with an outstanding balance above 120 days. (1)
d) e debtor’s supervisor or credit manager should be asked about
debtors over 120 days not included in the allowance for doubtful
debt, and their answers analysed. (1)
e) e correlation between debtors and revenue should be
investigated (since revenue is above expectation, it is not unusual
for debtors also to be above expectation). (1)
2. a) e age analysis should be scanned for unusual items; for

example, creditors with debit balances that should be reclassi ed
to debtors since this will in uence the outcome of your review
procedures, inquiring from management if such items had been
noted and addressed by them. (1)
b) e current year’s creditors age analysis should be compared to
the previous year’s age analysis, and inquiries made with regard to
signi cant creditors in the previous year who are not on the
current year’s creditors list. (1)
c) e creditors reconciliation for the 10 highest creditors should be
scanned for unusual items, and inquiries made as to whether such
items had been noted. (1)
d) e correlation between creditors and revenue should be
investigated (because revenue is above expectation, it is not
unusual for creditors also to be above expectation, since more
goods need to be purchased in order for the higher revenue gure
to be achieved). (1)
3. a) e sales report for the current year should be scanned for:

i) signi cant credit entries; and (1)
ii) large credit notes that were processed, as these need to be
investigated. (1)
b) e sales manager should be asked if unusual items had been
noted and followed-up with supporting documentation. (1)
c) Analytical procedures on the gross pro t percentage ratio and the
correlation between sales and cost of sales should be performed;
in addition, the sales manager should be asked about variances
noted and it should be followed-up with supporting
documentation. (1)
Question 4 LEVEL 2
Report
[14 marks]
You are the engagement partner on the independent review of

Compucache (Pty) Ltd (Compucache), a company selling computer
products to customers via the internet, for its nancial year ended 31
December 20X1.
e board of directors of Compucache has adopted the
International Financial Reporting Standards for small and medium-
sized enterprises (IFRS for SMEs) as the company’s nancial reporting
framework. Based on the results of this review, there was no reason to
doubt the reasonableness of this basis of accounting, to modify the
review report or to report on other legal and regulatory requirements. A
directors’ report accompanied the annual nancial statements.
At the conclusion of the engagement, the manager on the review
team, after having taken the previous year’s audit report and adapting it
for the purpose of the review, prepared the following report for your
attention. Although the company opted for an audit last year, it
undertook a review for the current year as per the requirements of the
Independent practitioner’s review report

We have reviewed the accompanying nancial statements of
Compucache (Pty) Ltd comprising the statement of nancial
position as at 31 December 20X1; the statements of
comprehensive income, of changes in equity and of cash ows for
the year then ended; a summary of signi cant accounting policies,
and other explanatory information.
Management’s responsibility for the nancial statements
The company’s nancial accountant is responsible for the

preparation and fair presentation of these nancial statements in
accordance with the company’s standard accounting procedures
and the requirements of the Companies Act 71 of 2008.
Practitioner’s responsibility
Our responsibility is to express an opinion on the accompanying

nancial statements. We conducted our review in accordance with
the International Standard on Review Engagements (ISRE) 2400,
which requires us to conclude whether the nancial statements,
when taken as a whole, were prepared in all material respects in
accordance with the applicable nancial reporting framework.
A review of nancial statements in accordance with ISRE 2400 is

a limited assurance engagement. The practitioner performs
procedures, consisting primarily of making inquiries, where
appropriate, of management and others within the entity, applying
analytical procedures and evaluating the evidence obtained.
Conclusion
[To be prepared by engagement partner]
Engagement partner’s signature to be furnished, together with the

date and the audit rm’s address.
REQUIRED
1. Identify and discuss the de ciencies (including omissions) in the
above independent review report in terms of the requirement of the
International Standards on Review Engagements (ISREs) and the
Companies Act 71 of 2008. (10)
2. Draft a conclusion for the independent review report above. (2)
3. Without referring to the above scenario, state the different types of
review conclusions applicable to independent review reports. (2)
[14]
QUESTIONS
Question 1 LEVEL 1
Internal controls: Various cycles
[10 marks]
As the auditor senior at Brainstorm Corporate (Pty) Ltd (Brainstorm),

you have been provided by one of the rst-year trainee accountants
with a list of key controls that have not yet been matched to a relevant
cycle.
Internal controls: Brainstorm

Access to the warehouse should be restricted to authorised personnel only.
Goods may be ordered based only on a properly authorised requisition form.
One person should be responsible for the payment of taxes and contributions (the
isolation of responsibilities).
All cash should be kept in a secure place, such as a safe.
All invoices should be compared to purchase orders, delivery notes and GRNs before
being posted to the purchases journal.
A complete employee le containing all the required documentation for all employees
should be kept.
The receiving clerk should obtain the purchase order and compare the quantity and the
description against the delivery note and the actual goods.
Any unmatched documents should be followed up.
Clock cards should be prepared by the personnel department in accordance with a
valid and current employee list.
REQUIRED
From the list provided above, group the internal controls to the relevant
cycles, as indicated below.
INTERNAL CONTROL CYCLE

Each internal control matched to the correct cycle (1 mark)

[10]
Internal controls
[24 marks]
PART 1
Internal control activities have to be performed properly in order to be
successful. As human error can occur, the possibility exists that internal
controls will not function as intended. e internal control system may
have weaknesses, and thus inherent limitations.
REQUIRED
Explain the inherent limitations of an internal control system. (6)
PART 2
Internal controls are classi ed as controls that may prevent, or detect
and correct, possible weaknesses. A combination of these controls is
sufficient if they are functioning as intended.
e following controls are those that may either prevent or detect an

error or control weakness:
1 All purchase invoices are compared to payment advices after

payments have been made.
2 The procurement manager conducts spot checks on a
quarterly basis on the authorisation of purchase orders.
3 The system does not allow any user to exceed his/her limit
with regard to an order being placed or payment being
approved.
4 All cheque payments are approved by managers in the
company’s nance department.
5 Security does not check products leaving the premises, as a
result of the company’s belief in each person’s right to
privacy.
6 Only the nancial director may transfer funds electronically,
using passwords on the banking system.
7 All employees may order products by submitting an electronic
purchase requisition. The system does not have any control in
order to verify the validity of the purchase and the budget for
the product.
8 Budgets are prepared for capital expenditure and are
reviewed quarterly by the nancial director. No actions are
taken, and the expenditure is accepted.
9 The storeman receives the products and signs as proof of
delivery. The delivery note and the purchase order are led.
10 Payments for products are processed based on the invoice
and the monthly statement received.
11 Assets below R10 000 are strictly controlled. A purchase
requisition and a purchase order should be authorised by the
responsible supervisor and approved by the department’s
nance manager before the order may be placed.
REQUIRED
Indicate whether the controls listed above are preventative controls, or
detective and corrective controls. Supply reasons for your answers,
which should be presented in tabular form. (18)
[24]
Question 3 LEVEL 2
Key controls, control objectives, tests of controls: Receipts
[25 marks]
Glassnovations (Pty) Ltd (Glassnovations), a large wholesale distributor

of household glass items, has been an audit client of your rm for many
years. Last year, the audit team placed reliance on the internal controls
in the company as part of the audit of cash receipts. e company’s
nancial year for the current audit is 30 June. During the interim audit,
the following updated system description based on an interview with
staff members was prepared by a second-year trainee accountant
responsible for the audit of cash receipts:
All sales by Glassnovations are to retail customers, and on credit.
Customers settle their accounts either by EFT or by paying cash in
person at the company’s administration office.
1. Controls over cash receipts
a) When receiving cash, the company’s cashier, Ms Bonny Blue,
generates a receipt from the computerised cash register to hand
to customers. e transaction is automatically posted to a
pending cash receipts le on the computer system to await
reconciliation with the bank deposit slip (see (e) below).
b) At the end of each business day, Ms Blue counts the cash
received and compares the total to the daily receipt report
printed from the computerised till. She prepares a daily deposit
slip indicating the total cash takings to be banked.
c) Ms Blue places the cash with the deposit slip into a cash bag
and places it in a drop safe located on the premises, to which
only the company’s general manager, Mr Danny Goldberg, and
the guards of the company’s security agent have a key. Both
keys are needed in order to unlock the safe.
d) Cash is banked on a daily basis by the security agent’s
personnel, whereupon a copy of the bank-stamped deposit slip
is returned to the company’s cash book clerk, Ms Bulelwa
Mthuba.
e) Ms Mthuba releases on a daily basis the batch of pending cash
receipts le on the computer system (see (a) above) for
recording to the cash book, after having agreed the total
amount pending to the bank-returned deposit slip. e total of
each day’s deposit, together with the individual receipts making
up the total, is displayed on the on-screen cash book.
f ) On a weekly basis, the company’s nancial manager, Ms Ruby
Padayachee:
prints an exception log from the system of all missing or
cancelled receipts in the cash book for review and follow-up
with the cashier
reviews the sequence of dates in the cash book for recorded
cash deposits in order to ensure that daily batches of receipts
as per (e) above have been released
agrees the total amount of daily deposits recorded in the cash
book to the bank-stamped deposit slip.
g) Ms Padayachee attaches the exception log to the deposit slip,

signs both documents as evidence of the above review having
taken place and les them with the daily receipt report.
2. Controls over EFT receipts
a) Ms Mthuba checks the online bank statements on a daily basis
in order to identify EFT deposits from individual debtors and to
post these to the cash book.
b) She records any unidenti ed deposits on a list of unidenti ed
deposits, indicating all pertinent information relating to such
deposits, such as the dates, the deposit references (if any) and
the amounts.
3. Controls applicable to both cash and EFT receipts
a) At the end of each month, Ms Mthuba prepares a bank
reconciliation in order to reconcile the balance in the cash book
to the balance on the bank statement.
b) Ms Padayachee reviews the bank reconciliation by comparing
all balances to supporting documentation, thereby ensuring
that valid reasons exist for reconciling items.
c) Ms Padayachee also agrees the total of unidenti ed deposits to
the latest list of unidenti ed deposits prepared by Ms Mthuba
and follows up on any differences until they have been properly
resolved.
d) Debtor queries are handled by the company’s credit controller,
Ms abo Mabenge.
REQUIRED
1. Describe the key internal controls evident from the system
description that you would rely on for the purpose of auditing cash
receipts in the company’s nancial statements. Ignore controls over
the segregation of duties, computerised controls and logical access
controls. (5)
2. State the control objective(s) achieved by each of the key controls
identi ed in question 1. (5)
3. Describe the test of control procedures the audit team should
conduct on each of the key controls identi ed in question 1. (10)
For each of the above questions (1–3), present your answers in
tabular form.
4. Comment on whether you consider the segregation of duties over
cash receipts to be strong or weak in Glassnovations. Explain your
answer. (5)
[25]
Question 4 LEVEL 2
Key controls, control objectives and tests of controls
[30 marks]
You are the senior on the audit of Vivaldi Trading (Pty) Ltd (Vivaldi
Trading), a large distributor of self-assembly furniture (procured mostly
from overseas suppliers) to numerous retailers around the country. All
sales are on credit, and deliveries are made using the company’s own
eet of trucks.
Your audit manager has indicated that, as in the previous year, the
audit team intends to rely on the company’s system of internal controls
for the purpose of auditing the nancial statements. You have already
obtained sufficient appropriate audit evidence of such controls over
credit background checks for customers (i.e. the approval and awarding
of credit limits). Other pertinent details about the company’s revenue
and receipts cycle are as follows.
e company’s sales office, staffed by two sales order clerks, receives

customer sales orders by fax. For each order, the sales clerk on duty
makes out a carbon-copied and sequentially numbered internal sales
order (ISO), all of which are submitted to the sales manager, Mr Mozart,
who:
approves each order by checking that the customer is still within
his/her credit limit
signs the ISO as evidence of approval
checks the quantities on the ISO with the original fax order in order to
ensure that the ordered quantities have been correctly included on
the ISO.
ereafter, a duplicate picking slip is prepared by the sales clerk. Using

this slip in order to select the goods from the warehouse shelves, a
storeman requests the warehouse manager, Mr Bach, to authorise the
issue of the goods. Both of them sign the picking slip, if they agree that
the correct goods and quantities are being transferred to the dispatch
area as per the slip. e storeman then prepares a carbon-copied, four-
part and sequenced delivery note, based on the physical goods being
transferred to dispatch, for submission to the dispatch section.
is section, working from a separate fenced-off area in the
warehouse, receives the goods from the storeman, only if the latter can
produce both an authorised picking slip and the delivery note. e chief
dispatch clerk, Mr Schubert, checks all goods before giving instructions
for the goods to be loaded onto a delivery truck. At the exit gate, security
guards perform a spot check on boxes leaving the premises. Each box
clearly indicates the item number and the description of the kit inside
(e.g. VT 3482 Bookcase).
Upon delivery of the goods, the driver requests the customer to sign
the four-part delivery note after the latter has checked the quantities
and the descriptions of the goods in terms of the delivery note. e rst
copy is handed to the customer for his/her records. When the driver
returns to the company, the second copy is sent to the sales office as
con rmation that the order has been lled, while the third copy is given
to Ms Strauss, the invoicing clerk in the accounting department. e
delivery book containing the rst copy of the delivery note is returned
to the storeman for ling with the picking slip. Ms Strauss prepares a
sales invoice based on the quantities as per the delivery note and refers
to the company’s authorised price list for the sales amount of each
product sold. Afterwards, Mr Chopin, the bookkeeper, casts and
recalculates each invoice, and agrees the quantity on the invoice to the
delivery note and each product’s sales amount to the price list. He
stamps the invoice as having been checked, as proof of his having
performed this duty. Ms Strauss sends the original invoice to the
customer, while the rst copy is given to Mr Chopin for posting to the
sales journal. Ms Strauss les the second copy with the supporting
documentation in the number order of the delivery note, in the cleared
delivery notes le.
e assistant nancial manager, Ms Elgar, carries out weekly control

procedures on sales transactions recorded in the sales journal. While
doing so, she performs spot checks on sales entries in the sales journal
in order to ensure that:
each transaction selected is supported by an invoice, a delivery note
and an ISO (referring to the second copy of the invoice kept in Ms
Strauss’s office)
no duplicated invoice entries exist
the amount recorded agrees with the amount invoiced.
At the same time, Ms Elgar carries out a sequence check on the invoice
numbers in the sales journal in order to ensure that no gaps exist in the
recorded sequence. She also reviews the cleared delivery notes le in
order to ensure that there are no gaps in the delivery note sequence.
Any discrepancies are followed up with the dispatch and the accounting
staff members concerned. Ms Elgar signs a weekly control checklist as
proof of having performed the control procedures, noting any
exceptions on the checklist. When an exception is resolved, she
indicates thus next to it.
REQUIRED
1. Identify and describe the internal controls that would be relevant to
the audit of the revenue gure in the nancial statements of Vivaldi
Trading (Pty) Ltd evident from the above system description.
2. State the control objective for revenue that management intends to
achieve with each control identi ed in the rst section.
3. State the management assertion regarding revenue being addressed
by each of the controls identi ed in part A.
4. For each control identi ed, describe the test of control procedure(s)
you would perform in order to obtain audit evidence of the operating
effectiveness of the control.
Present your answers to all four questions concurrently in tabular form.

[30]
NO. (1) CONTROL RELEVANT TO (4) TEST OF

THE AUDIT (2) CONTROL CONTROL
OBJECTIVE ACHIEVED (3) PROCEDURE
ASSERTION AFFECTED
a. 1. Mr Mozart approves sales orders by 4. For a sample of sales
checking that the customer is still within transactions selected from
his/her credit limit. (1) the sales journal, inspect
2. Validity of recorded sales (1) the corresponding internal
3. Occurrence of revenue (1) sales orders for the
signature of approval of Mr
Mozart authorising the sale
(the ISO will most likely be
attached to the invoice). (1)
ASSERTION AFFECTED
b. 1. Security guards at the exit gates perform 4. Observe the security guards
spot checks on the boxes leaving the checking the contents of a
premises. (1) truck leaving the premises.
2. Completeness of sales transactions (1) (1)
3. Completeness of revenue (1) Inquire from
management as to
Note: By checking the goods the reliability and
leaving the premises, the consistency of the
security guards con rm that the security checks
goods have been recorded on applied throughout
delivery notes. If they have not the nancial year,
been recorded, the sales will be noting any problems
lost (incomplete) if the customer of which they might
accepts the goods without be aware.
evidence of the goods having
been delivered. This risk applies (As observation by
especially where invoice the auditor will be a
quantities have been prepared one-off procedure,
based on delivery note details. possibly only after
the nancial year
has ended,
additional evidence
as to the operating
effectiveness of the
control during the
year is also required
[see the points
made above].) (1)
ASSERTION AFFECTED
Inquire from the

security guards
about their checking
function in order to
determine whether
they understand,
and are aware of,
their duties. (1)
c. 1. Customers are required to sign the 4. For a sample of sales
delivery notes as acknowledgement of transactions recorded in the
having taken ownership of the delivered sales journal (it may be the
goods. (1) same sample as in 1
2. Validity of sales transactions (1) above):
3. Occurrence of revenue (1) a) trace the entry to
the supporting
invoice and to the
attached delivery
note (1)
b) inspect the
delivery note for
an indication of
the client’s
acknowledgement
of receipt of the
goods (either a
signature or a
stamp). (1)
ASSERTION AFFECTED
d. 1. The costs and calculations on the 4. For a sample of sales
invoices are checked by a second person recorded in the sales journal
(Mr Chopin), who also agrees quantities (it may be same sample as
to the delivery note and prices to the in 1 above), trace the
authorised price list. (1) entries to the corresponding
2. Accuracy of recorded sales transactions invoice and inspect the
3. Accuracy of revenue (1)(1) invoices for the stamp made
by Mr Chopin as evidence of
the checking control having
been performed. (1)
In order to verify the

operating
control:
a) Re-perform the
costs and
calculations on
the invoices. (1)
b) Agree the item
quantities on the
invoice to the
quantities on the
attached delivery
note. (1)
c) Agree the prices
on the invoice to
the authorised
price list
applicable at the
time of sale. (1)
ASSERTION AFFECTED
e. 1. Ms Elgar reviews the sales journal on a 4. Scrutinise the weekly control
weekly basis in order to ensure that all checklist obtained from Ms
entries are supported by an invoice, a Elgar for any indications of
delivery note and an ISO, and that no weeks for which she did not
duplicate entries exist. (1) sign as proof of having
2. Validity and accuracy of recorded sales performed the weekly review
transactions (2) on the sales journal. (1)
3. Occurrence and accuracy of revenue (2) When performing the above
control test, note any
exceptions for which
‘resolved’ has not been
written next to it, and follow
them up with Ms Elgar as to
the reasons for the delay in
action. (1)

In order to con rm
the operating
control (especially
since only spot
checks are
performed by Ms
Elgar), select a
sample of sales
transactions
recorded in the
sales journal (note
the direction of the
testing) and:
a) re-perform the
control procedure
ASSERTION AFFECTED
by tracing each
selected
transaction to its
supporting
documentation,
and verify
whether a
corresponding
invoice, delivery
note and ISO
exist (1)
b) scrutinise the
sales journal for
duplicated sales
entries (1)
c) agree the amount
recorded in the
sales journal to
the amount on
the invoice. (1)
ASSERTION AFFECTED
f. 1. Ms Elgar, the assistant nancial manager, 4. The control procedure as per
carries out a sequence check on the (e) above will apply equally
invoice numbers in the sales journal in to the following
order to ensure that there are no gaps in completeness control test.
the recorded sequence. (1) In order to con rm the
operating effectiveness of
She reviews the le of delivery the control, re-perform Ms
Elgar’s sequence checks by
notes in order to ensure that inspecting:
there are no gaps in the a) the sales journal
sequence of note numbers, for the sequence
and that an invoice has been of invoice
attached to each of them. numbers in order
2. Completeness of recorded sales (1) to verify that
transactions (1)
3. Completeness of revenue (1) there are no gaps
in the recording
thereof (1)
b) the cleared
delivery notes le
for the sequence
numbers of
delivery notes in
order to detect
any missing
delivery notes
and thus possible
unrecorded sales
transactions. (1)

Question 5 LEVEL 2
Control objectives and tests of controls
[20 marks]
You are a trainee accountant assigned to the audit of the revenue and
receipts cycle of Sure Surf (Pty) Ltd (Sure Surf ) for its nancial year
ended 30 November 2015. A wholesaler of swimming and sur ng gear,
the company operates from an administrative complex in Durban next
to a warehouse used for storing and dispatching the company’s
inventory. Sure Surf sells its products to numerous retailers across the
country. All sales are on credit.
During an interview with the company’s nancial manager, Valerie

Rizzo, you posed several questions concerning key controls in the
revenue and receipts cycle:
1. Are all applications for credit approved after creditworthiness checks have been
performed on the prospective customers applying for credit?
Client response: Yes. I personally approve all credit applications

only once the credit controller, Cara McLaren, has allocated a
credit limit to the customer on the application form. Cara
attaches her worksheet to the application form on which the
result of the creditworthiness check appears, which I then
approve by signature.
2. Are all sales orders approved in order to ensure that the customer’s account will still
be within the allocated credit limit after the sale has been processed?
Client response: Yes. The company takes the approval of

customer orders seriously, and has assigned this duty to the
sales manager, Bongani Mantewu. The sales clerk on duty has
to submit a daily sales order schedule (a summary of the day’s
sales orders) together with the attached pending internal sales
orders (ISOs) to Bongani, who then stamps the sales schedule
as approved after a careful review of each customer’s credit
status.
3. Are spot checks performed on dispatched goods at the exit gate before delivery
vehicles leave the company’s premises?
Client response: We employ an external courier to deliver goods

to customers. After the trucks have been loaded at the
warehouse, they do not get checked at the exit gate. However,
our inventory supervisor, Ron Deacons, is present when boxes
are loaded in order to ensure that the contents of the boxes
agree with the delivery notes. He stamps each delivery note as
evidence of the check.
4. Are customers requested to sign delivery notes as proof of having received ordered
goods?
Client response: We regularly remind the courier company’s

delivery personnel to request customers to sign the delivery
notes, owing to the fact that we experienced instances in the
last nancial year where customers did not always sign them.
5. Does management review the nancial records for evidence of missing sales entries
(sales that have not been recorded)?
Client response: In order to check for evidence of missing sales

entries:
I review the sales journal on a weekly basis to check for any
missing invoice numbers by referring to their number sequence.
The journal has a space for a reviewer to sign, which I duly do.
I also go through the le of unmatched delivery notes in order to
follow up on any missing delivery notes for which no invoice,
and thus no entry in the sales journal, exists. However, I do not
sign as evidence of this check.
REQUIRED
1. State the control objective(s) for each of the controls listed above in
the internal control questionnaire, explaining the purpose of each.
2. Assuming each control in the questionnaire is relevant to the (8)
audit, describe the tests of controls you would perform in order to
obtain evidence of the operation of the controls. (12)
Assume that the company does not make use of computerisation in its
business and accounting processes.
[20]
Question 6 LEVEL 2
Control objectives and purpose: Computerised systems
[18 marks]
You are the senior in charge of the audit of Cutting Edge (Pty) Ltd
(Cutting Edge), a company that provides weekly gardening services to
private residences. You have prepared the following system description
relating to sales:
Interested new customers open a credit account with the company

by completing a credit application form and supplying a copy of
their ID document. Cutting Edge has requested a credit bureau,
Credit Investigations CC, to perform credit background checks on
all potential customers. Based on the results, a credit limit is
awarded to each customer by Cutting Edge’s senior sales agent.
New customers are added to the service module on the company’s
computerised system. On a weekly basis, the company’s nancial
manager requests the computer system to print a report of all new
additions to the service module in order to compare them to the
credit bureau’s credit report and the customer application forms.
e service fees for garden services charged to each customer,
which are determined by the senior sales agent, are entered by
him onto the service module. e nancial manager prints a
report of customers who have exceeded their credit limits in order
to ag such customers on the system. However, this does not limit
the processing of sales should a sale lead to a customer’s credit
limit being exceeded. Flagged customers are not eligible to receive
any further garden services until they have settled their
outstanding accounts.
At the start of each week, the chief gardener prints a service
register from the service module containing a listing of all those
customers eligible to receive garden services that particular week.
e register is completed by the gardening supervisors at the end
of each day in order to indicate which customers received a service
(it does occasionally happen that entry cannot be gained to a
residence). e chief gardener reviews the register on a daily basis,
following up with the gardeners as to why certain gardens were not
serviced.
At the end of a week, the company’s data capturer captures the
details of the services provided to customers from the service
register onto the service module. She can select from an on-screen
drop-down list only those customers who are already on the
service module, as the system does not allow her user ID to add
new customers. Afterwards, the company’s debtors clerk compares
the service register with the data-capturing results.
At the end of each month, Cutting Edge’s debtors clerk prepares
from the service module electronic invoices for emailing to all
customers. After completion thereof, an invoice report is
generated indicating the number of weeks the customer received
services and the weekly rate at which he/she was invoiced (e.g.
four weeks of services at R75 per week = R300). e nancial
manager compares the service register with the invoice report in
order to check for any customers who received services but for
whom no invoice has been prepared.
REQUIRED
By stating the control, as well as the control objective(s), identify the
internal controls from the above scenario that affect the recording of
sales transactions. In addition, describe the purpose of each control.
[18]
1. a) Control: A credit bureau performs a credit background check on all

potential customers, to each of whom a credit limit is awarded.
b) Control objective: Validity of sales transactions (1) (1)
c) Purpose of the control: In order to prevent credit sales to customers
who are unlikely to pay their debts, thereby curbing or mitigating
possible nancial losses. (1)
2. a) Control: e nancial manager compares all new additions on the
service module to the credit bureaux credit reports and the
customer application forms. (1)
b) Control objective: Validity of sales transactions (1)
c) Purpose of the control: In order to ensure that only valid and
approved customers, with whom the company can transact
without excessive risk being taken as to the collectability of debt,
are added to the service module. (1)
3. a) Control: e nancial manager prints a report of customers who
have exceeded their credit limits and ags the customers on the
system. (1)
c) Purpose of the control: In order to prevent future services (sales) to
the customer for which he/she will not be able to pay, which could
result in nancial losses for the company. (1)
4. a) Control: e chief gardener reviews the service register on a daily
basis and follows up with the gardening supervisors as to the
reasons for certain gardens not having being serviced. (1)
b) Control objective: Completeness of sales transactions (1)
c) Purpose of the control: In order to ensure that all services rendered
have been indicated on the register. Owing to the fact that sales are
captured from the service register, they will not be complete if a
service was rendered but not recorded on the register. (1)
(Note: is control has an operational objective, in the sense that customers could
accidentally be overlooked and not have their gardens serviced. e chief gardener’s
review might pick up such instances, which would avoid making such customers
dissatis ed.)
5. a) Control: e data capturer may select only those customers
already on the service module; the system does not allow her to
use her user ID in order to add new customers. (1)
c) Purpose of the control: In order to prevent the data capturer from
creating ctitious debtors or debtors who are not creditworthy (i.e.
credit customers who might not pay their debts). (1)
6. a) Control: e debtors clerk compares the service register with the
results of the data capturing in terms of services rendered. (1)
b) Control objective: Accuracy and completeness of sales transactions
c) Purpose of the control: In order to ensure that the number of (2)
services per customer has been accurately captured, and captured
in full (i.e. no input data are missed): if a service has not been
captured, it will not be invoiced, as the data on the service module
are used for invoicing purposes. (1)
7. a) Control: e nancial manager compares the service register with
the invoice report. (1)
b) Control objective: Completeness of sales transactions (1)
c) Purpose of control: In order to ensure that all revenue transactions
have been recorded that should have been recorded (based on
actual services rendered). (1)
Question 7 LEVEL 2
Control objectives and purpose: Computerised systems
[20 marks]
Kim Kleyn is an internal auditor at Techpoint (Pty) Ltd (Techpoint), a

company that distributes computer hardware to retailers from a large
store on the East Rand. e company, whose system is computerised,
records its sales only after a customer-signed delivery note has been
returned.
During a particularly busy day, Kim observed the following controls in

place:
1. After performing a credit background check, the company’s credit
controller denied a request for an increase to a customer’s credit
limit.
2. e senior bookkeeping clerk scrutinised the le of unmatched
delivery notes in the invoicing section in order to identify any
delivery notes for which no invoices had as yet been prepared by the
invoicing clerk.
3. e security guards at the gate compared the physical goods in a
delivery truck leaving the premises to the delivery note dispatched
with the consignment.
4. e invoicing clerk was prompted by the sales system on the
computer to supply an internal sales order number before she could
proceed with preparing an invoice on the system.
5. While the invoices were prepared by the invoicing clerk on the
computer, the computer automatically assigned a number to each
invoice in numerical sequence.
6. e invoicing clerk did not have to input sales prices manually on the
on-screen sales invoice while the item numbers were being input by
the clerk. Rather, the computer automatically allocated to items
prices sourced from the approved price list master le stored on the
computer system.
7. e cash takings for the day were stored in a secure reproof safe
overnight while awaiting deposit the next day.
8. e senior bookkeeping clerk compared the deposit slip returned
from the bank with the cash recorded in the cash receipts journal.
9. e nancial manager reviewed the most recent bank reconciliation
for any unusual entries and signed the reconciliation as proof of
review.
10. When the sales clerk tried to create a credit note on the sales system,
the system denied her access to the sales adjustments module.
REQUIRED
State the control objective(s) of the internal controls listed above,
explaining the purpose of each.
[20]
Question 8 LEVEL 2
Risks and substantive procedures
[24 marks]
Your audit rm is conducting the year-end audit of ADACO (Pty) Ltd

(ADACO), a leading South African healthcare company that
manufactures, markets and distributes a range of branded and generic
prescription and over-the-counter medicines, as well as personal care
products. e following transaction took place during the nancial year
ended 31 July 20X1.
PHARMA (Pty) Ltd (PHARMA), a medium-sized pharmaceutical sales

and marketing business in South Africa, was acquired on 1 February
20X1. Both parties agreed to the purchase price of R782.4 million. e
fair value of the identi able assets as at the date of acquisition is
outlined below:
ASSETS R’000
Property, plant and equipment 32 000
Marketing-related intangible assets 618 748
Customer-related intangible assets 55 498
Contract-related intangible assets 13 040
Manufacturing-related intangible assets 1 630
Total identi able net assets at fair value 720 916
Goodwill arising from acquisition 61 484
Purchase consideration 782 400
e major factor contributing to the recognition of goodwill of

approximately R61.5 million was related mainly to the fact that
PHARMA has an established presence in the human immunode ciency
virus (HIV) and acquired immunode ciency syndrome (Aids)
pharmaceutical markets in South Africa. PHARMA plays a vital role in
the continuous battle against both the virus and the syndrome in South
Africa through the manufacture of antiretroviral drugs and HIV testing
kits for supply to such stakeholders as the South African government.
Included in the property, plant and equipment balance of ADACO as at

31 July 20X1 are the following items (including the PPE items obtained
through the acquisition of PHARMA):
e land and the buildings on which the production plant and the
four distribution centres are situated
Production plant equipment and machinery
Delivery vehicles
Office equipment and furniture (including computers, servers, etc.)
REQUIRED
1. Provide the factors that you, as the auditor, would consider in
assessing the control risk of intangible assets and goodwill of ADACO.
2. Describe the substantive audit procedures that you would (7)
perform in order to address the rights and obligations assertion
pertaining to intangible assets and goodwill acquired in the
acquisition of PHARMA (Pty) Ltd. (4)
3. Provide examples of substantive analytical procedures that you
would perform in the audit of property, plant and equipment of
ADACO as at 31 July 20X1. (7)
4. Describe the substantive procedures that you would perform in order
to verify the existence of PPE items, as well as the rights of ADACO
relating to these as at 31 July 20X1. You need not discuss those
procedures relating to disposals or unrecorded disposals. (6)
[24]
Question 9 LEVEL 3
King IV™ report

[17 marks]
As audit senior working at FZ Auditors (FZ), a rm of registered

auditors, you have been assigned to the audit of Bestfurn Ltd (Bestfurn),
a JSE-listed furniture retailer. e following information pertains to the
company:
Board of directors
James Kirk (69): chairperson
It is to the leadership of James Kirk, who founded Bestfurn in 1996, that
much of the company’s growth and success may be attributed.
Although he holds some 22% of the issued shares in the company, these
are loaded with voting rights, which enable him to control the company.
James Kirk is involved in the day-to-day operations of the company.
James Kirk is also the chairperson of the remuneration committee,
the social and ethics committee, and the risk committee.
Gary Porter (67): chief executive officer
Gary Porter is a close friend and a long-time colleague of James Kirk.
Last year, his total remuneration package of some R28 million attracted
considerable media attention in the light of Bestfurn’s relatively poor
performance and the low salaries of other employees of Bestfurn that
year.
Gary Porter is a member of the nomination committee as well as the
remuneration committee.
Reginald Khumalo (67): chief operating officer

Jenny Parbhoo (36): marketing director
Arnie Becker (43): non-executive director
Arnie Becker is a director of Secretariat (Pty) Ltd, the company that
provides secretarial services to Bestfurn, and attends Bestfurn’s board
and board committee meetings in order to ensure that members are
kept informed of regulatory requirements. Secretariat (Pty) Ltd is
deemed to be a signi cant service provider of Bestfurn.
Samuel Bloomberg (61): non-independent, non-executive director

Samuel Bloomberg, who holds an MBA from a highly regarded US
business school, serves on the boards of numerous large companies
and non-pro t organisations. He is a close friend of James Kirk, who
approached him to join Bestfurn’s board.
Other information about staff

Pat Johnson is Bestfurn’s chief nancial officer. She is a CA(SA), and has
been with Bestfurn for eight years.
Audit committee
Bestfurn has an audit committee that oversees the effectiveness of
Bestfurn’s assurance function and ensures that it results in:
an effective internal control environment
integrity of internal reports for decision making.
e audit committee members are:
James Kirk
Reginald Khumalo
Samuel Bloomberg.
External auditors
FZ Auditors has been Bestfurn’s auditors since the company’s
incorporation, with Ms Helen Harper, the engagement partner,
responsible for the audit since 2015. FZ Auditors audits only Bestfurn’s
annual nancial statements.
REQUIRED
With reference to the information provided, discuss any concerns that
you may have about Bestfurn’s corporate governance practices in the
light of relevant guidance in the King IV Report on Corporate
Governance for South Africa 2016™ (King IV™). e involvement of the
chairperson of the board as well as the chief executive officer on the
various board committees should be included in your answer. However,
you do not have to address the composition of the nomination
committee, risk committee, remuneration committee, and social and
ethics committee in your answer.
[17]
Question 10 LEVEL 2
Integrated question
[30 marks]
PART A
You are the senior on the year-end audit of Fusion Ltd (Fusion), a
company that manufactures a range of organic cleaning products. e
manufacturing manager, Mr Maker, has explained to you that Fusion’s
products are very popular owing to their being environmentally friendly
and obtaining excellent cleaning results. In the complex manufacturing
process, chemicals are mixed at the company’s plant situated in
Gauteng using machinery imported from Germany. Times when the
machines lie unused could lead to material losses for the company. Mr
Maker added that, because the chemicals are so expensive, Fusion
carries as little inventory as possible. He also indicated that the staff in
the chemical warehouse consists of one manager, Mr Stocks, and four
clerks. Fusion’s internal audit department provided the following
system description:
Orders
The inventory control department orders chemicals weekly, as
requested verbally by Mr Maker. Orders are placed telephonically
with one supplier only, Joy Chemicals, it being the sole supplier of
organic chemicals. After delivery notes have been compared to
orders placed, the orders are marked off as received as soon as
delivery notes have been obtained from the chemical warehouse
(see Received in chemical warehouse below). The delivery notes are
then sent to the administration department.
Received in chemical warehouse
Any available staff member in the manufacturing department at
that speci c time receives inventory at the back of the plant in the
goods receiving area. He/she receives the goods, counts them
and signs the supplier’s delivery note. This note is then handed to
Mr Maker, who sends it to the ordering department at the end of
the day. The receiving department has two security doors:
One to the outside, through which chemicals are delivered
The second to the plant, through which chemicals move to the rest of the plant
All manufacturing staff members have keys for both these doors,
since they should be able to receive chemicals at any given time,
or remove chemicals so that the manufacturing process does not
come to a halt.
Cost department
The costing department calculates the unit costs for the
manufactured products as follows:
The materials, labour and factory overhead cost speci cations are
obtained from each product’s formula (prepared by the chemical
engineer), the plant’s capacity (as per the plant’s manual received
from the German suppliers) and historical results and costs as per
the yearly budget. The standard variances are calculated using the
actual chemicals purchased, the price lists and the actual wage
rates.
Finished goods warehouse
As soon as one hundred items of a product have been completed,
they are packed into a crate and moved to the nished goods
warehouse. Throughout the year, Mr Stocks makes use of a
perpetual inventory system in order to determine inventory on
hand. Fusion performs an inventory count at the end of the
nancial year only.
REQUIRED
1. Under the headings ‘Orders’, ‘Received in Chemical Warehouse’ and
‘Finished Goods Warehouse’, describe the weaknesses evident from
the information. (15)
2. Draw up an audit programme for auditing the standard costs of the
completed inventory at year-end. (10)
PART B
You are of the opinion that inventory forms a material part of the
entity’s assets. As a result, when you contacted Mr Stocks during the last
week of February with a view to your attending the year-end inventory
count, he informed you that Fusion had performed the inventory count
three days before, since the company’s staff has a team-building event
on 28 February, the date originally planned for the year-end inventory
count.
REQUIRED
1. Describe the procedures you should perform in order to con rm
both the existence and the condition of Fusion’s inventory at year-
end. (2)
2. Discuss the effects on the audit opinion if you cannot perform
sufficient procedures on the existence and the condition of inventory.
(3)
[30]
PART A
1. a) Orders
i) Orders are placed without an authorised requisition. (1)
ii) No order forms are issued for orders placed. (1)
iii) e entity does not follow up on long outstanding orders.
iv) e entity does not make use of re-ordering levels. (1) (1)
v) Before goods are ordered, there is no check in order to
con rm that the goods are needed. (1)
vi) e person placing the order does not check with the supplier
as to the availability of the goods. (1)
vii) Orders are not checked and authorised before they are
placed. (1)
b) Received in chemical warehouse
i) ere is no designated goods receiving area. (1)
ii) Access is not controlled, as all staff members have keys to the
security doors. (1)
iii) e delivery truck driver is not required to sign delivery notes.
iv) ere are no dedicated goods receiving personnel, as (1)
any staff member receives orders. (1)
v) On receipt of the goods, the description of such goods is not
checked. (1)
vi) No super cial quality tests are performed on goods received.
vii) No goods received notes are issued. (1) (1)
viii) e movement of delivery notes is not controlled. (1)
ix) ere is no control over the movement of inventory from the
manufacturing plant to the nished goods warehouse. (1)
c) Finished goods warehouse
Inventory counts take place only once a year, and physical
inventory is not compared regularly to the perpetual inventory
system. (1)
d) General
No management supervision controls are in place. (1)
2. a) Quantity
i) Attend the inventory count and perform test counts. (1)
ii) For the items selected during the inventory count, compare
the quantity counted against the perpetual inventory records.
iii) Discuss with management any differences found. (1) (1)
iv) Perform analytical procedures for the reasonability of the
inventory quantity (e.g. compare the quantity on hand (per
item) for the current year to that of the previous year). (1)
b) Unit cost
i) Con rm the speci cations by inspecting:
product recipes (½)
the capacity of the plant (½)
historical results (½)
management projections. (½)
ii) Con rm the cost per unit through inspecting:
the price lists or the invoices (½)
the contracts with suppliers (½)
wage rates or agreements (½)
the trade unions (½)
the effect of in ation. (½)
iii) With reference to variances:
recalculate them (½)
discuss with management the reasons for them (½)
consider whether standards are still appropriate,
or whether variances are:
material (½)
permanent (½)
uncontrollable. (½)
iv) Other:
Compare the information with that contained in the previous
year’s working papers. (1)
and
select a sample of inventory items on hand at year-end in
order to recalculate the standard cost calculation. (1)
PART B
1. e auditor should:
a) undertake a physical count on an alternative date, if unable to
attend the physical inventory count on the date planned as a result
of unforeseen circumstances (1)
b) when necessary, perform audit procedures on intervening
transactions. (1)
Available marks [2]
2. e effects will be that:

a) the fair presentation of the nancial statements will be
compromised (1)
b) sufficient and appropriate audit evidence will not be able to be
obtained, which constitutes a limitation of scope (1)
c) the audit report would be quali ed, since inventory is material
d) the audit report opinion would be a disclaimer, if the auditor (1)
determines the inventory gure to be material and pervasive. (1)
Available marks [4] maximum marks [3]
[30]
List of references
BOOKS
Prinsloo, F & Von Wielligh, P (eds) (2018) Auditing Fundamentals in a South
African Context (second edition), Cape Town: Oxford University Press.
REPORTS
Institute of Directors Southern Africa (2009) King Report on Governance for South
Africa 2009, King Code of Governance Principles for South Africa, Cape Town:
Juta Law, 2010.
Institute of Directors Southern Africa (2016) King IV Report on Corporate

Governance™ for South Africa 2016.
LEGISLATION
Auditing Profession Act 26 of 2005
Companies Regulations 2011 (Companies Act 71 of 2008)
INTERNET SOURCES
Independent Regulatory Board for Auditors (IRBA) (2014) (Revised) Rules
Regarding Improper Conduct and Code of Professional Conduct for Registered
Auditors. [Online] Available:
https://www.irba.co.za/upload/Rules%20and%20IRBA%20Code%20(Revised
%202014)%20Issued%2017%20March%202014.pdf
South African Institute of Chartered Accountants (January 2014) Code of

Professional Conduct for Chartered Accountants. [Online] Available:
https://www.saica.co.za/Technical/Discipline/CodeofProfessionalConduct/tabi
d/701/language/en-ZA/Default.aspx

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Oxford University Press is a department of the University of Oxford.

It furthers the University’s

e moral rights of the author have been asserted.

PART A: e context within which the external auditor operates

PART B: e auditee’s responsibility for nancial information

Chapter 4 Basic concepts of governance and internal control

PART C: e external audit process

Chapter 11 Overview of the audit process

PART A: e context within which the external auditor operates

Chapter 3 Legal responsibilities of the auditor

PART B: e auditee’s responsibility for nancial information

Chapter 4 Basic concepts of governance and internal

Chapter 5 Introduction to risks and internal controls in

Chapter 7 Purchases and payments cycle

Chapter 8 Inventory and production cycle

Chapter 9 Human resources cycle

Chapter 10 Investment and nancing cycle

PART C: e external audit process

Chapter 11 Overview of the audit process

Chapter 12 Pre-engagement and planning activities

Chapter 13 Audit procedures: Essential concepts

Chapter 14 Audit procedures: Speci c considerations

Chapter 15 Completion of the audit

Chapter 16 The independent review

Chapter 17 Additional questions

e purpose of this book is to provide undergraduate students with the

e questions in the text are graded according to levels which

Each chapter addresses a diﬀerent section of the syllabus. e student

We should like to express our gratitude to the many contributors, from

Future editions of this book will be published at regular intervals in

Prescribing lecturers can access additional, unseen questions through

All prescribing lecturers will be given access to the Oxford University

For lecturers, the Learning Zone website provides:

A set of Online Questions

For students, the Learning Zone website provides:

André P. Hamel (Editor) BCom Accounting (University of

André P. Hamel is a Senior Lecturer, and the Subject Head of Auditing in

Rolien Kunz (Editor) BCompt (University of South Africa), BCompt

Rolien Kunz is a Senior Lecturer in the Department of Auditing at the

A broad panel of expert contributors, from various South African

Rika Butler BCom Honours (Accounting) (Pretoria), CTA (Pretoria),

Cornelie Crous BCompt (Free State), BAcc Honours (Free State),

Mandisa Gandela BCom Accounting (Cape Town), BCom Honours

André P. Hamel BCom Accounting (Johannesburg), BCom Honours

Phindiwe Kamolane BCom Accounting (Johannesburg), BCom

Rolien Kunz BCompt (South Africa), BCompt Honours (South Africa),

Jana Lamprecht BCompt Honours (South Africa), MA Higher

Ismail Mohamed BCom (Cape Town), BCom Honours (Natal), CA(SA)

Vincent Motholo BCom Accounting Sciences (Pretoria), BCom

Mari Patterson BAcc Honours (Stellenbosch), MComm (Computer

Pranisha Rama BCom, BCom Honours, CTA (Johannesburg), CA(SA)

Riaan J Rudman BBus Sc Honours (Cape Town), PGDA (Cape Town),

Henriette Scholtz BCom Accounting (Rand Afrikaans University),

Jacques Siebrits BCom (Stellenbosch), LLB (Stellenbosch), BCompt

Olive Stumke BCom (North West), BCom Honours (UNISA), MCom

André (JJ) Swart BCom, Honours BCompt (South Africa), MCom

Alet Terblanche BCom Accounting Sciences (Pretoria), BCom Honours

Judith Terblanche BAcc (Stellenbosch), BAcc Honours (South Africa),

Jolandi Volschenk BCom CA, BCom Honours CTA (North West),

CHAPTER 3 Legal responsibilities of the auditor

As an audit partner at OLX Incorporated (OLX), you are responsible for

A. I found the following de nition in my auditing text book:

A sound knowledge of the SAICA Code of Professional Conduct, as well