Unisa Study Notes



16668754445AUDITING 3A – 2014QUESTION BANK: THE AUDIT PROCESS (AP)Question AP-1Materiality; Financial statement and assertion level risks; Audit Plan (NTE)Question AP-2Understanding the entity and its environmentQuestion AP-3Part A: Pre-engagement activities; Scope, Direction & Timing; Specialised audit evidence; AssertionsQuestion AP-3Part B: SamplingQuestion AP-4PlanningQuestion AP-5Pre-engagement activitiesQuestion AP-6Overall Audit PlanQuestion AP-7Materiality; Nature, Timing & ExtentQuestion AP-8Sampling; Working paper templateQuestion AP-9Financial statement level risks & MaterialityQuestion AP-10Part A: Pre-engagement activitiesPart B: Assertion level risksQUESTION AP-1 (45 MARKS : 54 MINUTES)Source: Test 1 - 2012Swift Kick Soccer Club (Pty) Ltd “SKSC” is a company that organises football (soccer) leagues where corporate teams are ranked into categories based on their level of skill. Soccer games are played on Wednesday evenings where teams play against each other in order to improve their ranking. The year end of the company is 31 December. You are the Auditor in Charge (AIC) of this audit client. This is the first year that your audit firm will audit this company. The previous auditors resigned as a result of a disagreement with management. Your firm has already performed all the necessary pre-engagement activities and during these activities, no irregularities were identified. You are in the process of planning and performing the audit of this company for the year ended 31 December 2011. The deadline for the audit is 15 March 2011.The company was formed 3 years ago, and although for the first two years, the company was not able to make any profits, it has been able to make a small profit in the current year of assessment.The company earns its revenue from subscription fees paid by corporate teams that enter the league. The league begins at the beginning of June each year, and the soccer year ends at the end of April the following year. All subscriptions that the company receives from its teams are received in advance for the period beginning June and ending April of the next year. After a discussion with the previous auditor, it was discovered that during the previous year of assessment, one of the members of management responsible for the receiving of subscription fees from teams, took a certain amount of cash from a couple of teams, and manipulated the accounting records to reflect those teams as having paid their fees. The company employs 15 referees who referee on Wednesday evenings and 5 ground staff to ensure that the soccer fields are kept at the highest quality. The previous accountant of SKSC resigned at the beginning of January after a disagreement with management regarding the accounting policy of revenue recognition. The accountant argued that the revenue should be recognised according to the number of months remaining in the current financial year, and should not recognise all the Revenue from subscription all at once when they are received. One of the referees, Mr M Zidane, who claims to have received a “C” symbol in matric for Accountancy, has taken on the duty to produce the accounting records of the company. He assured the directors of the company that, although his Taxation knowledge was a bit “shaky”, he does believe that his Accounting knowledge is up to date. In addition to keeping the accounting records up to date, Mr Zidane also handles all the cash received for the subscriptions of all the soccer teams that enter the league.During the planning stage of the audit of the company, a reasonableness test was performed on the revenue account by taking the number of teams that entered into the league, multiplied by the league subscriptions of a once off payment of R7500 that all teams are required to pay at the beginning of the season. These fees cover all the referee fees, hiring of the practice fields and maintenance of the pitches for the whole season. The reasonableness test showed some inconsistencies with the expected amount and was a lot higher than the expected for the period under review. It was also identified during the planning stage that the company does not have a very good system of internal control. According to discussions with management of SKSC, it was communicated to you that implementing a system of internal control was just not cost effective for the company.The rent for the use of the soccer fields are charged in advance by the owners of the sports complex that SKSC uses for its Wednesday soccer games. After a discussion with Mr Zidane, it became apparent that he is not aware of the accrual basis of accounting.During the year, a new soccer club was opened 5 kilometres from where SKSC holds its soccer games. It has been quite apparent to the directors that this new soccer club has had quite a negative impact during the year on the amount of teams that entered the league. The managers of the company often use the profits of the company to buy tickets to go watch the Super 8 Soccer Tournament at Soccer City in Johannesburg. After an initial discussion with them, you determine that they believe these expenses to be company expenses, and therefore treat them as such by processing the payments to the “entertainment” expense account. During the planning of the audit, you obtained an extract of the following financial information:Actual – current yearBudget – current yearActual – prior year1/01/2011 - 30/11/20111/01/2011 - 31/12/20111/01/2010 - 31/12/2010Turnover 350,698 241,987 232,923 Cost of Sales 112,439 111,429 115,274 Gross Profit 238,259 130,558 117,649 Other expenses 101,987 110,219 132,722 Net Profit 136,272 20,339 -15,073Total assets 786,000 499,400 698,000 Current assets 657,000 365,100 525,000 Fixed assets 129,000 134,300 173,000 Total equity 654,879 694,600 460,700 During the planning stage of the audit, you identified the following significant account balances of SKSC:Income received in advanceAccounts receivableBank and cashRevenue – subscription feesRent paid – soccer fieldsEntertainment expensesProvisionsTaxation expenseREQUIRED :(i) What is the definition of materiality? (2) (ii) Define the relationship between Audit Risk and Materiality. (3)(iii) Calculate planning materiality, taking into account both qualitative and quantitative factors in the above scenario. (10) Based on your risk assessment procedures, discuss, with reasons, the nature, timing and extent of your audit procedures of the abovementioned company. (5)Identify the overall financial statement level risks related to the abovementioned company. (8)Identify the assertion level risks for each significant account balance. (15) Your answer should be provided as follows (per significant account): -Significant account:Risk identified:Primary Risk Assertion: Presentation (2)[45]QUESTION AP-2 (30 MARKS : 36 MINUTES)Source: Test 1 - 2012You have recently accepted the engagement to audit the financial statements of GameOn (Pty) Ltd, after the retirement of the company’s previous auditor from the auditing profession. The following information is of relevance:The company has been established for many years, specializing in gaming equipment. The past few years’ audit reports have been unmodified and their financial performance has been excellent. It has a very good reputation in its industry and has received numerous ISO quality awards and certifications, pertaining to products as well as to business processes and management achievements. The company runs a virtual record keeping system, in which all accounting and system documents are electronically generated, processed, stored and signed through the use of various passwords, finger print identification and cornea recognition technology for highly secure transactions. The company’s accounting, production and payroll software are interfaced with each other. In addition, their accounting and production software interfaces with their customers’ production systems, enabling on-line transfer of order, purchase and billing data.GameOn (Pty) Ltd has a limited, international and lucrative client base. The company imports its materials and manufactures the gaming equipment locally. However, the company has various warehouses in London, New York, Tokyo and Sydney, with a staff complement at each, which it uses to store finished goods intended for its international customers, until such time as the parts are physically ordered by these clients. The company retains ownership of the finished goods until such time as they are delivered to the clients. Because of the need to import its raw materials, the company has entered into a number of FEC contracts with its bank in order to hedge against foreign exchange losses.During the year under review, the company’s Tokyo warehouse was destroyed in a fire that was started at a nearby restaurant. The intense heat of the fire rendered the machined parts unusable. As a result, the client for whom these parts were intended suffered production losses due to supply delays, and has instituted legal action against the company to recover such damages. The company’s credit policy requires payment within 60 days. The banking accounts are operated in South Africa. Customers are quoted in Euro, US Dollar, Australian Dollars and Yen, and invoices are issued accordingly. When invoices are recorded, they are converted at the ruling spot rate on the date of the transaction. Receipts are captured at the amount that appears on the bank statement on date of receipt. The foreign currency balances owing by the customers are computed manually. The customers are all very co-operative; balances are few and are very material to the financial statements.The reporting requirements of the company are strict, with the audit deadline being 6 weeks after year end.REQUIRED: Discuss the 3 stages of pre-engagement activities and one consideration in each of these areas. (6)List the factors extracted from the above information which would have an impact on your audit strategy, i.e. Scope, Direction and Timing. (10)List 4 different types of specialized audit evidence which need to be obtained based on the information provided above. Give a brief explanation of each. (4)List and explain the assertions applicable to transactions and events. (10) [30]QUESTION AP-3 PART A (15 MARKS : 18 MINUTES)Source: Test 1 - 2012You have recently been appointed as senior-in-charge of the audit of Signage (Pty) Ltd with a year end 30 June 2011. The company is a subsidiary of Signs Ltd and all companies in the group are required to have their annual financial statements externally audited. The company produces a wide selection of signs and signboards, ranging from small signs used on doors etc to large freestanding road signs. Traffic and road signs form the major portion of the company’s sales. Signage (Pty) Ltd only supplies signs; it does not attach or construct them.Your firm, which is located in Port Elizabeth, has held the appointment of auditor for some years but you have not worked on the audit before. No work on the 2011 audit has taken place.Your audit manager also attached a note to the letter suggesting that you get started on the engagement immediately by attending the monthly meeting between Mr Rock and Mr Stone, the financial controller and internal audit manager respectively, of Signage (Pty) Ltd, which was scheduled for the next day. You arranged to attend, and despite your lack of knowledge of Signage (Pty) Ltd, you were able to take note of the following:1. the company’s year-end inventory count has been scheduled for 30 June 2011. Inventory consists of:1.1raw materials for manufacture1.2work-in-progress (the manufacturing process is quite complex)1.3finished goods in the form of standard signs manufactured by Signage (Pty) Ltd; as well as1.4custom-made signs for specific customers awaiting invoicing and delivery. Inventory is held at all of the company’s four manufacturing facilities located in Bloemfontein, Johannesburg, Cape Town and Port Elizabeth.2. the company has numerous debtors, and accounts receivable has always been a material amount. The financial controller mentioned that the company was experiencing difficulty in recovering a number of material amounts owed by certain provincial and national road authorities. This has arisen out of disputes over road signs which Signage (Pty) Ltd has manufactured and invoiced, but which bear the names of towns and streets which have had their names changed during, or subsequent to, the manufacture of the signs. The authorities concerned have refused to accept these signs, claiming that Signage (Pty) Ltd should have been aware of the name changes as they are published in the Government Gazette. Signage (Pry) Ltd have countered that they manufactured the signs “per the order”. Mr Rock indicated that the failure to recover the amounts owed has placed serious strain on cash flow, and could affect future dealings with these customers. Signage (Pty) Ltd’s lawyers are very undecided about what the outcome of a court case would be.3. as a matter of course, Signage (Pty) Ltd’s internal auditors perform ongoing reviews and tests of control on the company’s accounting systems. Having attended the meeting between Mr Stone and Mr Rock you decided to commence with planning your audit right away as suggested by your audit manager.YOU ARE REQUIRED TO: Explain why the “understanding the entity and its environment” step in planning an audit is so important. (5) Discuss how you would go about obtaining the necessary understanding of Signage (Pty) Ltd’s business to effectively develop the audit strategy and plan the 30 June 2011 audit. (10) [15] PART B (10 MARKS : 12 MINUTES)Source: Test 1 - 2012The following are factors that the auditor considers when determining the sample size for a substantive procedure:An increase in the auditor’s assessment of the risk of material misstatement.An increase in the use of other substantive procedures directed at the same assertion.An increase in the amount of misstatement the auditor expects to find in the populationStratification of the population when appropriate.The number of sampling units in the population.YOU ARE REQUIRED TO:Explain the effect, with reasons, on the sample size of each of the factors listed above. (10)QUESTION AP-4 (20 MARKS: 24 MINUTES)Source: Test 1 – 2011You are a 3rd year article clerk of a local audit firm, Tickbash Inc. The firm is in the process formalising its policy regarding planning and obtaining knowledge of the firm’s audit clients. The partner has approached you for some help in this regard.REQUIRED:Discuss the factors that influence the extent of planning of an audit required by the auditors. (4)Identify the factors the auditor will consider in obtaining knowledge of the firm’s clients.(12)Explain the importance of obtaining a sufficient level of knowledge of the business. (4)QUESTION AP-5(45 MARKS: 54 MINUTES)Source: Test 1 – 2011You are the senior partner in an audit firm. Your audit firm has recently been appointed as the auditors of Free Style SA Limited “Free Style SA”, a recently listed company on the JSE Securities Exchange. The year-end of Free Style SA is 31 January 2011. Upon discussions with management, you discover that the previous auditor resigned as a result of a disagreement with management.The company specialises in organising diving excursions to popular dive sites off the coast of South Africa as well as Mozambique. The company caters for both South African and overseas customers. Free Style SA accepts foreign currency from overseas customers, and although it is not widely publicised, prefers to receive cash, rather than credit card payments or electronic transfers. The head office of the company is situated in Durban, and it has branches situated in Sodwana, East London and Hermanus. The company is doing extremely well, and has recently shown a steady increase in turnover. Due to the recent growth in the company, the previous manual accounting system became inadequate for the company, and it was decided during the year ended 31 January 2011, to change over to a computerised system. The computerised accounting package is an “off the shelf package”. None of the staff were familiar with the package, so it was decided to employ an IT manager to oversee the processing of the accounting records, as well as monitoring the integrity of the system. The newly appointed IT manager’s previous job, was as a skipper of a ferry that was used to transport tourists to and from Robben Island. The growth in turnover in previous years is mainly due to the fact that the company has implemented a new bonus system for the management staff of the company. The bonus system states that if turnover exceeds budgeted turnover by more than 10%, a percentage of the excess turnover will be paid out to management. Management is extremely excited about this incentive.Free Style SA suffered a substantial loss in the previous year as a result of a legal claim against the company. One of the activities of the company up until last year, was extreme shark-cage diving. The skippers of the boats were enticing sharks to venture closer to the boats, by “chumming” the water (throwing fish scraps into the water). The sharks began to lose their fear of boats, and began harassing other vessels, specifically the smaller vessels that took foreign tourists to view the local penguin and seal populations. After a number of attempts by the local police to put a stop to these practices, the company was eventually taken to court where they lost their case and were forced to pay damages. The date the audit report is required is set for the 7 March 2011. REQUIRED:a)Describe the factors you as auditor should have considered and the procedures you should have performed prior to acceptance as auditor of Free Style SA Ltd.(10)b) A good system of internal control consists of 5 main components. List the 5 components and briefly describe each of the components.(10)c)Audit risk consists of 3 types of risks, detection risk being one of them. Name and define the other 2 risks, and discuss their effect on detection risk.(5) d) Differentiate between the audit strategy and the audit plan and their components.(10)e) State whether the risk of material misstatement at financial statement level should be assessed as low, medium or high. Give reasons for your decision.(10)QUESTION AP-6(35 MARKS: 42 MINUTES)Source: Test 1 – 2011You have recently been appointed as the partner for the 2011 financial year audit of AllNatural (Pty) Ltd, a new client for your firm. AllNatural’s financial year end is 30 September. As a result of a difference in opinion, the previous auditors decided to resign as auditors.You obtained the following information from your recent planning meeting with the financial manager of the company: AllNatural (Pty) Ltd is a manufacturer of a specific homeopathic eardrop that can only be sold to homeopaths. AllNatural (Pty) Ltd has standing contracts with most of the registered homeopaths in South Africa. The homeopathic eardrops are manufactured with machines specifically designed for this purpose and can only be serviced by the technicians of the manufacturer in Hungary. These eardrops were patented in South Africa during 1995.AllNatural (Pty) Ltd sells their homeopathic eardrops on normal credit terms to all registered homeopaths. The only exclusion is sales to the Health Forum that is supplied on a consignment basis.The management director of AllNatural (Pty) Ltd, Mr Louis Kotze was appointed on1 January 2008 after the retirement of the previous management director. Louis worked as a purchase manager from 1995 to 2000 at a homeopathic company. From 2001 to 2007 he coached the Proteas, the South African Senior Cricket team.You received a copy of the monthly management accounts to date during the planning meeting. The audit senior has subsequently vouched the completeness, accuracy and reliability of the information in the management accounts and has come to the conclusion that you can rely on these accounts. Based on these management accounts, the audit senior compiled the following analytics:Forecast30/9/11R’000Actual28/2/11R’000Actual30/9/10R’000Actual30/9/09R’000Sales40,00018,00056,00067,000Gross Profit4,0001,8005,6006,700Net Profit(56)141,3673,091Current Assets: Current Liabilities1:11:1.21:0.751:0.65Share capital and reserves400400400400Average salary4,6904,2594,0113,678You have performed preliminary tests of controls on the sales and receivables cycle and have come to the conclusion that you can rely on the internal controls.The client has informed you that the financial statements are required by 15 November 2011 as the company’s borrowing facility is reviewed on an annual basis and that the bank requires the audited financial statements for this purpose.REQUIRED:Describe which matters you will consider in the development of your overall audit plan for the year ended 30 September 2011. Your answer should amongst others include audit risks affecting the audit as well as an evaluation of the planning materiality.(35)INCLUDED: PRESENTATION 2QUESTION AP-7You are the auditor of McChicken (Pty) Ltd, a company which operates a chain of fried chicken outlets. McChicken was incorporated on 1 August 2011 and there are currently 10 outlets.You are engaged in planning the audit of McChicken for the year ended 30 June 2012 and the deadline for your audit report is 15 July 2012.You have obtained an understanding of the client and have assessed the risk of material misstatement as “moderate” to “low”. You consider the company be well managed while it has a computerised system to record sales.You have extracted the following figures from the management accounts:BudgetFor the yearR ‘ 000ActualYear to dateR ‘ 000BudgetYear to dateR ‘ 000Revenue10,0005,2155,000Gross profit6,0003,4853,000Operating expenses3,5001,9751,250Profit/(loss) before tax2,5001,5101,750Property, plant & equipment3,5003,2003,000Inventory600700600Accounts Payable500800500You have reviewed the above figures and believe they are reasonably accurate. You anticipate that McChicken will achieve the budget figures for the year.REQUIRED:Compute the materiality figures to be used when planning and performing the audit of McChicken (Pty) Ltd for the year ended 30 June 2012. Give brief reasons for your answer. (6)Briefly discuss the audit plan (Nature, timing and extent) of the further audit procedures to be performed for the 2012 audit of McChicken. (9)QUESTION AP-8(20 marks : 24 minutes)Source: Test 2 - 2011The attached audit working paper has been presented by a newly appointed trainee accountant to you, an audit manager at an audit firm, for review and comment. The trainee requires assistance as to the process of audit sampling and has some questions which she needs your training on.REQUIRED:With reference to the audit working paper which follows these questions:List and explain the steps in the sampling process. (15)Differentiate between the errors noted in the audit working paper, and explain how these errors would be treated in terms of evaluating the impact of the error on conclusions drawn from the audit work performed.(5)[20]AUDIT WORKING PAPERClient: ABC Company LtdPrepared by:Date:Year End: 30 March 2011Reviewed by:Date:Audit area: RevenueObjective: Accuracy of recorded revenueProcedure: Select a sample of invoices recorded in the general ledger sales account and agree the dates, amounts, accounts and details of the recorded amounts to the hard copy invoices and signed delivery notes.Population: The general ledger sales account # 1000/001 with a total of R2 964 387.08.Sampling unit: Individual sales invoices.Sample size: 10 (Refer to calculations in planning section)Audit work performed:Invoice #DateAmountAgreed to invoiceAgreed to DNError: adj requiredTo agree to inv302/10/200914 934.09√√02125/11/200915 209.32√√03914/12/20094 346.10XX10?000.00 Note 15731/01/201010 387.50√√07527/02/201014 389.21√√09318/03/201038 109.22√√011113/04/201012?849.46XX100.00 Note 212916/05/202011 406.43√√014707/06/201012 093.18√√016519/07/201010?479.20XX3?568.00 Note 3144?203.7013 668.00Analysis of nature and cause of misstatements:Note 1: When the timing of this transaction was analysed, it was found that the computer erroneously dropped the “1” from the R14?436.10 when the data capturer captured this amount because of a lightning strike that occurred at precisely the instant that the amount was captured. The CAATS auditors have run diagnostics on the remainder of the accounting data and no other such items were noted in any of the accounting records.Note 2: This is a capturing error. The original invoice is R 12?949.46.Note 3: This is a capturing error. The original invoice is R 14?079.20.Projection of the sample results over the population:The audit team still needs to complete this section of the working paper.Evaluation: The audit team still needs to complete this section of the working paper.QUESTION AP-9 (25 MARKS : 30 MINUTES)Source: June exam 2012You have been assigned as the audit senior on the audit of a Popping Pills Proprietary Limited, a new audit client, for the financial year ending 31 May 2012.The company is a wholly-owned subsidiary of Medicines Limited and manufactures generic medicines. The production process relies on imported raw materials. The company’s products have to be thoroughly tested, approved and registered by the Department of Health before sales are made.The directors of the parent company encourage management of all the companies in the group to make use of their “entrepreneurial spirit” in the management process. Management’s performance evaluations are based on how well this spirit is displayed and the financial results of the companies. The 20 managers in the group who score the highest ratings on their performance evaluations receive large bonuses for their efforts.The company uses an integrated computerised information system for recording all its business process. Accounting records and annual financial statements are also produced by this system. The information system was developed based on the company’s needs by a well respected company in the information technology sector and was implemented on 1 June 2011.The company appointed a legal expert to drive the process of approval and registration of new generic medicines by the Department of Health. This resulted in the average delay of sales after development and testing of new products being reduced by 75%. The financial press and other pharmaceutical companies are seriously speculating about how the company accomplishes this.The company and two other companies received notice on 8th of March 2012 that management has to appear before the Competition Commission after an accusation of alleged price fixing. The hearing is scheduled for 30 April 2012 and the company has to provide all relevant evidence to prove the accusation wrong at the meeting.Extract of financial information:2012Budgeted2012Actual to date(9 months)2011Actual(12 months)2010Actual(12 months)Revenue420 000260 000370 000325 000Net income before tax45 00021 00032 00028 000Inventory50 00042 00038 00034 000Accounts receivable57 00061 00051 00044 000Interest bearing debt59 00081 00054 00042 000Trade payables57 00056 00052 00046 000Non-current assets116 000127 000106 00088 000Debtors days50645049Liquidity ratio1 : 11 : 0.751 : 0.841 : 0.88You are required to prepare a working paper detailing the following: Discuss your assessment of the risk of material misstatement at the financial statement level for the financial statements at 31 May 2012; (12)Calculate, giving reasons, planning materiality. (8)Note: Marks will be awarded for working paper format. (5)QUESTION AP-10 (50 MARKS: 60 MINUTES)Source: June exam 2011You are a newly qualified CA(SA) and an audit manager at a medium-sized audit firm.Your firm has recently been approached to accept the appointment as auditors of Hipvibes (Pty) Ltd, a large manufacturer and retailer of funky personalised motor vehicle MP3 players and sound systems. The company was formed a number of years ago by Mr J Zee as a small one-man operation. To date the company has grown considerably. The Board of Directors now consists of 5 members, all of whom are family to Mr J Zee and his wife, Ms B Knowles (known also as Mrs B Zee). The family also owns 80% of the shares of the company, with the remaining 20% being held by an investment bank.Your firm was approached to accept the appointment as the previous auditor (a small firm) resigned because they no longer felt that they had the necessary technical expertise to continue the audit. Your firm’s senior partner has for a number of years acted as a tax advisor to the Zee family members.You have been assigned to this audit. The year end is 31 July 2011. It is now June and you are considering the information gathered to identify and assess the risk of material misstatement in the annual financial statements. June and July are very busy months for your firm.The company employs highly skilled audio-electrical technicians who design and assemble the car radios, making them to the design, colour, trimming and sound specifications of the individual clients. The units produced are each unique and state-of-the-art, and carry a high value. There are 10 technicians, and they are paid per unit designed, assembled and fitted.The client pays for the unit only after a “test” month. During this month, should the client be unhappy with any aspect of the design and/or performance of the MP3 player and sound system, it may be returned for no charge. Once one month has passed and the goods have not been returned, Hipvibes (Pty) Ltd invoices the client for the items and the client is extended credit term of 60 days, after which interest is charged on overdue accounts.Inventory is kept at the premises and is ordered on a JIT (just-in-time) basis. The raw material is expensive and very state-of-the art, and for this reason not much stock is kept on hand at the premises.Inventory is mostly supplied by a limited number of suppliers and most of them are in Japan. The lead time for inventory ordered from Japan was 5 working days and this was imported inclusive of cost, insurance and freight by air. Unfortunately, the supplier from whom most of their raw materials were sourced was located in the now earthquake and Tsunami devastated north-west peninsula of Japan.The raw materials ordered from the suppliers are personally checked on receipt for quality and quantity by Mr J Zee himself, due to the high value and desirability of the raw material items. This requires a high level of skill.A pre-numbered job card recording the time spent and materials used is made out for each individual MP3 player and sound system that is manufactured. The job card number is then etched onto the casing of the finished product and this becomes the product’s serial number. This serial number is entered into the stock records and becomes that item’s stock code.The business premises contains both the retail and the manufacturing divisions. It is situated in a popular commercial village. The building is owned by the company. It was purchased for cash in 2008 for an amount of R 4 million and it is unencumbered.Hipvibes’ excellent quality and unique, artistic designs have gained international recognition, and the company now manufactures and exports orders to numerous cities around the world. These customers are invoiced immediately for the foreign revenue, and are invoiced in US dollars, Euros, Great British Pounds or Japanese Yen. Goods are also shipped to foreign customers CIF.The account balances on the projected year-end statement of financial position are:Property, plant and equipmentR 5?500?000Debtors: LocalR 2 750?000Debtors: ForeignR 3 350?000Inventory:Raw materialsR 3?400?000Work-in-progressR 2?100?000Finished goodsR 1?500?000Current liabilities:R 5?900?000Planning materiality for your audit has been set at R275?000.00.REQUIREDPART ADiscuss the matters which your firm should have considered prior to accepting this engagement. (10)PART BState whether the risk of material misstatement applicable to each of the account balances listed under point 9 above, should be quantified as low, medium or high. Justify your choice. (40)Important:The account balances are listed in point 9. All the information in the scenario provided should be considered for its possible impact on the items in point 9.You are NOT required to comment on the risk at financial statement levelYou may assume that the projected balance sheet figures will approximate actual figures and you may ignore shareholders’ interests. [50] ................
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