Question 1 (A) (10 Marks)
1. You received a memorandum from your audit manager stating that your allowable rate of deviation for certain tests of controls to be conducted in the acquisition cycle on the audit of Buy-It Ltd, should be increased from the prior year’s allowable rate deviation.
2. Your evaluation of the extent to which management has failed to monitor internal control in the payroll cycle of Kaupa Ltd, has led you to believe that an increase in the expected rate of deviation over the authorisation of overtime payments on time records is necessary.
3. As a result of information obtained when conducting risk assessment procedures on the audit of Castle (Pty) Ltd, you have concluded that the risk of non-existent inventory being included in the inventory balance at year end is substantially higher than for the prior year’s audit. You are about to select a sample of inventory items for existence testing.
4. Due to more efficient and timeous record keeping at Spartam (Pty) Ltd, your audit plan for the year end will include meaningful subsequent receipts testing for the existence of debtors at year end. This is likely to have an effect on the sample size for the planned positive debtor’s circularization.
5. The audit manager on the audit of Bolton (Pty) Ltd has instructed the team that he would like to be in a position to gain more assurance from the operating effectiveness of control so that less substantive work can be conducted.
RQUIRED:
Indicate what the effect on the relevant sample sizes would be for each of the situations described (in 1 — 5) above. Consider each situation separately and justify your answer for each. (10) TOTAL 15+10 = 25 MARKS)
QUESTION 2 (20 marks)
You have recently completed the audit of Wearever (Pty) Ltd’s debtors for the financial year-end 31 March 2018. You had paid particular attention to the allowance for bad debts and having evaluated all the “problem” debtors individually, found that the allowance of N$163 510, which is 10, 5% of debtors was fair and consistent with the allowances for the previous 4 years which had ranged between 10 and 11 percent. Shortly before your manager was due to review your working papers you conducted a final check of the balance on your debtors lead schedule against the draft financial statements. As all aspects of your audit of debtors had been successfully completed, you were surprised to find that they did not agree. On further investigation you established that subsequent to your audit, the allowance for doubtful debts had been reversed.
Besides increasing current assets, the reversal has resulted in an increase of 8 percent in net profit before taxation. You immediately raised the matter with the financial manager who informed you that “the directors decided to reverse the allowance for bad debts at 318 March and to write off any bad debts as and when they occur in the future. As far as we are concerned this is consistent with trends in current accounting theory which aims at fair value accounting’.
When you met with your manager to discuss this matter, he decided to take the opportunity to give you some “on the job training” by posing the following questions:
a) Whatis the justification behind your view that our audit report must be modified? (7)
b) | agree that our audit report must be modified but must we qualify our audit opinion or can we give an emphasis of matter? Can you explain your answer please? (3)
c) If this matter was immaterial we could ignore it for reporting purposes, so what indications do you have that:
1. It is material? (2)
2. It is not actually material and pervasive? (2)
d) Do you regard this as a factual misstatement or a judgmental misstatement? (4)
e) What will the opening phrase in your opinion paragraph be? (2)
Required:
Respond to the questions put to you by your manager.
QUESTION 3: (30 marks)
(a) Explain how the classification of risks into categories such as ‘high’, 'medium' or ‘low’, helps entities manage their businesses. (6)
(b) | You are the internal auditor of a large private company; Himalaya Plc. Himalaya Plc manufactures a high volume of reasonably priced shoes for elderly people. The company has a trade receivables ledger that is material to the financial statements containing four different categories of account. The categories of account, and the risks associated with them, are as follows:
(i) Small retail shoe shops. These accounts represent nearly two thirds of the accounts on the ledger by number, and one third of the receivables by value. Some of these customers pay promptly, others are very slow.
(ii) Large retail shoe shops (including a number of overseas accounts) that sell a wide range of shoes. Some of these accounts are large and overdue.
(iii) | Chains of discount shoe shops that buy their inventory centrally. These accounts are mostly well established ‘high street’ chains. Again, some of these accounts are large and overdue; and
(iv) | Mail order companies who sell the company's shoes. There have been a number of large new accounts in this category, although there is no history of bad debts in this category.
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