University of South Africa
The Audit Process
AUE 3761
2024
Assessments & Solutions
,UNIVERSITY EXAMINATIONS
COLLEGE OF ACCOUNTING SCIENCES
DEPARTMENT OF AUDITING
EXAMINATION: OCTOBER/NOVEMBER 2021
AUE3761
THE AUDIT PROCESS
THIS PAPER CONSISTS OF ELEVEN (11) PAGES
IMPORTANT INSTRUCTIONS:
The answering of this paper:
1. This paper consists of eight (8) questions.
2. This is a closed-book examination.
3. All questions must be answered.
4. Each question must be commenced on a new (separate) page.
5. You are reminded that answers may NOT be written in pencil.
Honesty Declaration:
By submitting my exam solution, I declare that:
• I know what plagiarism is, that plagiarism is wrong and that disciplinary steps can be taken
against me if I am found guilty of plagiarism;
• This exam solution, submitted by myself, is my own work;
• I have not assisted any other student in any manner and I have not had the assistance of
any other person, in completing this exam;
• I will not assist any other student in any manner and I will not obtain the assistance of any
other person, in completing this exam;
• I know that if I am found to be in violation of this declaration I will receive 0% for this
examination.
Please note: You do not have to sign the declaration. By submitting your solution, you automatically
declare that you adhere to all the above with regards to this specific examination.
Submission instructions:
The exam paper will remain available throughout the examination session.
Commence the submission (uploading) of your answer file as soon as you have completed the
assessment, do not wait for the session to conclude.
Suggestion: Start uploading your answer file at 11:00 (3 hours after the start of the exam session) at
the latest, to allow enough time for any delays in the process.
[TURN OVER]
, CONFIDENTIAL
Page 2 of 11
AUE3761
Oct/Nov 2021
The file name of your pdf document must be in the following format: Student number, space,
AUE3761. For example: 33445566 AUE3761.
• Log onto myExams https://cas.myexams.unisa.ac.za, AUE3761 module site.
• Click on the link “Submit answer file”.
• Follow the instructions on the screen.
Additional student instructions:
1. You HAVE to submit your answers in one pdf file (answer scripts must not be password
protected or uploaded as “read only” files).
2. Incorrect file format and uncollated answer scripts will not be considered.
3. NO emailed scripts will be accepted.
4. Students are advised to preview submissions (answer scripts) to ensure legibility and that the
correct answer script file has been uploaded.
5. Incorrect answer scripts and/or submissions made on unofficial examinations platforms (including
the invigilator cell phone application) will not be marked and no opportunity will be granted for
resubmission.
6. Mark awarded for incomplete submission will be the student’s final mark. No opportunity for
resubmission will be granted.
7. Mark awarded for illegible scanned submission will be the student’s final mark. No opportunity for
resubmission will be granted.
8. Submissions will only be accepted from registered student accounts.
9. Students who have not utilised invigilation or proctoring tools will be subjected to
disciplinary processes.
10. Students suspected of dishonest conduct during the examinations will be subjected to
disciplinary processes. UNISA has a zero tolerance for plagiarism and/or any other forms of
academic dishonesty.
11. Students are provided one hour to submit their answer scripts after the official examination time.
Submissions made after the official examination time will be rejected by the examination regulations
and will not be marked.
12. Students experiencing network or load shedding challenges are advised to apply together with
supporting evidence for an Aegrotat within 3 days of the examination session.
13. Students experiencing technical challenges, contact the SCSC 080 000 1870 or email
or refer to URL link for the list of additional contact numbers or
alternatively email your module lecturer. ONLY communication from your myLIfe account will be
considered.
Your submission will be date stamped and only submissions received up to 12:00pm will be
marked.
The Invigilator
ON THE DAY OF ASSESSMENT:
• Please log into The Invigilator App. You need to be connected to the internet in order to log in and
scan the QR code.
• Scan the QR code above as soon as you have downloaded your question paper during the 15-
minute download window. Please take note that you can only scan the QR code for a limited time
and it should therefore be scanned as soon as possible to start the invigilation.
• If you encounter difficulty with scanning of the QR code you can also enter the QR access code at
the bottom of the QR code in order to start the assessment.
[TURN OVER]
, CONFIDENTIAL
Page 3 of 11
AUE3761
Oct/Nov 2021
• Once the QR code is scanned, you can place your smartphone next to you. The Invigilator App will
notify you when an action is required. Ensure your media volume Is turned up.
• You may access your MyExams in the application if you only have one device by pressing the
‘access LMS’ button.
• Please remember to keep your smartphone on charge for the duration of the assessment.
• Keep The Invigilator app open on your cell phone during the assessment. You are not allowed to
leave or minimise the application.
• When an action is required, a notification beep will be heard. Action the request.
• Please ensure you are connected to the internet in order to commence the examination as well as
at the end of the examination. No internet connection is needed during the assessment.
• It is important to first upload your script to the MyExams. Uploading of app data is not time
sensitive and you can do it after you have uploaded your script to the MyExams.
• It is important to note that you have to adhere to the time limit in your MyExams assessment as the
invigilation time in the app could exceed the time allocated to complete your assessment.
• You can click the "Finish Assessment" button in the app if you finish early.
• Should you encounter any technical difficulty, please WhatsApp (only) The Invigilator Helpdesk on
073 505 8273.
[TURN OVER]
, CONFIDENTIAL
Page 4 of 11
AUE3761
Oct/Nov 2021
CONFIDENTIAL
This paper deals with the following main topics:
REQUIRED MAIN TOPIC MARKS
1. Risks of material misstatement at the financial statement level 13
2. Risks of material misstatement at the assertion level 12
3. Uncorrected misstatements, key audit matters and audit opinion 10
4. Substantive procedures – Accounts receivable 20
5. Ethical considerations 7
6. Impact of using an auditor’s expert on the stages of the audit 13
process
7. Substantive procedures – Related parties 12
8. Going concern assessment 13
100
NOTE:
The main objective of the examination is to test your knowledge and ability to apply the study
material. However, the examiners will also consider your ability to organise and present that
knowledge in writing and in an acceptable standard.
[TURN OVER]
, CONFIDENTIAL
Page 5 of 11
AUE3761
Oct/Nov 2021
CASE STUDY 100 marks
READ THE "REQUIRED" PART ON PAGES 10 AND 11 BEFORE YOU
CONTINUE.
You have been appointed as a first-year trainee accountant at TJM Incorporated.
The following information relates to one of your audit clients, PerfectViews (Pty) Ltd
(PerfectViews), with a financial year end of 30 September.
BACKGROUND INFORMATION (Required 1 to 8)
PerfectViews manufactures and installs aluminium windows and doors and has operations in
South Africa and Namibia. The business is a family-owned company that has been in the
Sekwale family for two generations. Mr Sekwale owned all the shares in the company until
Capital Investments (Pty) Ltd (Capital Investments) acquired the majority of shares in
PerfectViews (see detail below). He was also the chief executive officer (CEO). The “gold
standard” of quality of PerfectViews’ patented products have resulted in a broad customer base
both locally and internationally. All their customers pay them in South African rand. The
company had experienced significant growth until two years ago and as a result to keep up with
customer demand, expanded significantly by purchasing more assets and also increasing their
employee taskforce. The capital expansion was financed through utilising debt.
PerfectViews’ 2021 financial year has been exceptionally challenging mainly due to order
delays and poor customer satisfaction because of the Covid-19 pandemic. The pandemic
resulted in a reduced global demand, forced closure of South African facilities for certain
periods and the reduced ability to transport finished products between locations which
ultimately resulted in a decline in revenue and increased costs to adhere to certain health and
safety regulations in the manufacturing processes. In addition, PerfectViews also had to write
off many debtors who entered business rescue proceedings and some who have been
liquidated.
PerfectViews and its holding company prepares their financial statements in accordance with
International Financial Reporting Standards (IFRSs) on the basis that it will continue as a going
concern for the foreseeable future.
Acquisition of majority of shares in PerfectViews
Towards the end of the 2020 financial year, Capital Investments acquired the majority of shares
in PerfectViews. There are various companies in the Capital Investments group and all of them
provide goods or services to one another at normal market prices. The acquisition of
PerfectViews was subject to the following contractual terms:
, CONFIDENTIAL
Page 6 of 11
AUE3761
Oct/Nov 2021
• Replacing Mr Sekwale as CEO with Mr Ncombe with immediate effect.
• Appoint the group auditors, TJM Incorporated as its new external auditor, effective from
the 2021 financial year.
As part of the acquisition the following steps were initiated:
Step 1: Improve governance and oversight to ensure that PerfectViews complies with the
requirements of principle 7 of the King IV Report on corporate governance.
Step 2: Conduct an inventory verification exercise.
Step 3: Implement new sales and cost saving strategies.
INVENTORY (Required 2 and 3)
PerfectViews’ inventory consists of raw material, work-in-progress and finished goods which is
disclosed as such in the 2021 financial statements. Inventory are measured at the lower of cost
or net realisable value using the standard cost formula. The inventory balance for the 2021
financial year end is material.
PerfectViews purchases aluminium extrusions and glass from local aluminium smelters and
glass manufactures from where they process it further into windows and doors. The aluminium
price per ton is dependent on the price and availability of electricity.
As soon as the locally sourced material (raw material) is combined with human labour it is
classified as work-in-progress. A product in its final form which is ready for installation is
classified as finished goods. Finished goods are only installed when fully paid by the customer.
During the inventory verification that continued into the 2021 financial year, you identified
inventory classified as finished goods in a separate store room. These goods were covered in
dust and might have been stored there for a long time. You confirmed that these goods are
included in the inventory balance at the end of the 2021 financial year, which is worth about
R10 million. When enquiring why these goods are stored separately, you obtained information
that one of PerfectViews biggest contracts was cancelled during the 2020 financial year as the
customer was being liquidated due to experiencing a lot of challenges during the pandemic.
The liquidation of the customer was finalised during 2021. The customer did not pay for the
goods in full and won’t be able to do so, and therefore it remained in PerfectViews’ storeroom.
As these goods were manufactured using certain customer specifications, it is unlikely to be
sold to another customer.
You considered the final materiality of R8 million and performance materiality of R5.6 million
and proposed that a journal entry should be passed to write off the inventory in the 2021
financial year. Management however, did not agree with the journal and will not be correcting
it in the 2021 financial statements.
, CONFIDENTIAL
Page 7 of 11
AUE3761
Oct/Nov 2021
ACCOUNTS RECEIVABLE (Required 4)
Sales are made on a cash or credit. Each customer should complete a customer registration
form in order for their profiles to be loaded onto the system. Registration forms for customers
buying on credit should also be accompanied by a credit application. Credit is only approved
after a successful credit background check has been done after which a credit limit and specific
credit terms are set for each customer. Accounts due should be settled within a thirty-day
period and if not paid within sixty days, the customers are handed over to debt collectors.
The following age analysis has been obtained at year end:
Total Closing More than 30 More than 60 More than 90 More than 120
Current
balance Days days days days
R 6 500 000 R3 185 000 R1 314 800 R 455 000 R 180 200 R1 365 000
Percentage of
49% 20% 7% 3% 21%
total debtors
An allowance for credit losses is made against a customer if the account has not been settled
within 90 days. Included in the outstanding balance for more than 120 days are debtors that
have entered into business rescue proceedings and some who have been liquidated.
You obtained the accounts receivable list with the amount due by each debtor, accounts
receivable control account and positive debtors confirmation letters (responses received back
from the debtors for the year ended 30 September 2021). You have already performed all the
applicable analytical procedures on the debtors’ accounts.
NEW EXTERNAL AUDITOR (Required 5 and 6)
TJM is a medium-sized audit firm that audits most of the companies in the Capital Investments
group. All TJM’s audit partners are chartered accountants and registered auditors. The correct
process in appointing TJM as the new external auditor for the 2021 financial year in terms of
the Companies Act was followed. The audit will be led by Mrs Prang, one of TJM’s audit
partners, who predominantly has audit clients in the insurance and mining industries. She will
be assisted by one audit manager, one third-year trainee, yourself and two post-graduate
accounting students. In comparison with the previous auditors, the audit team seems to be
smaller and less experienced.
To assist PerfectViews with their cash flow constraints, as part of audit fee negotiations with
Mrs Prang, PerfectViews offered to renovate TJM’s offices by replacing their wooden window
frames with aluminium frames as well as the current clear glass of the windows with tinted
glass. The cost of the renovations will amount to 80% of the audit fee, which means that
PerfectViews only has to pay 20% of the audit fee in cash to TJM. The audit fee is on the audit
fee charged by the preceding auditors plus 5% inflation.
, CONFIDENTIAL
Page 8 of 11
AUE3761
Oct/Nov 2021
PerfectViews has a very complex and unusual tax calculation and Mrs Prang therefore decided
to use the work of an auditor’s expert in taxation law to assist in this regard. TJM has used the
taxation law experts many times before and are familiar with their work.
As part of your pre-engagement audit activities, the audit manager contacted the expert and
they confirmed that they will be available to assist TJM.
In the concluding stage of the audit, you already evaluated the work that they performed and
deemed it to be adequate. The audit findings of the expert also did not seem to have any
influence on the audit opinion.
RELATED PARTIES (Required 7)
You decided to update your professional profile on LinkedIn, an employment-oriented online
service which is primarily used for professional networking and career development. It allows
job seekers to post their curriculum vitaes and employers to post vacancies. By chance, Mr
Ncombe’s profile also popped up. You were amazed by all his references and connections,
however one of his listings stood out to you. On his profile he was listed as the CEO of Sand
and Stone (Pty) Ltd (S&S). You recently audited the accounts receivable balance of
PerfectViews and remember that there was a significant amount of products sold on credit to
S&S during the 2021 financial year. What is of concern to you is that S&S was not disclosed
as a related party in PerfectViews’ annual financial statements. You immediately performed the
following substantive audit procedures to ascertain whether S&S are indeed a related party of
PerfectViews:
• Obtain the minutes of meetings for the 2021 financial year and inspect whether Mr
Ncombe declared his interest when deciding to sell products on credit to S&S.
• Obtain a written representation, listing all related parties of PerfectViews.
GOING CONCERN ASSESSMENT (Required 8)
The following working paper was prepared by one of the trainees on the audit of PerfectViews:
Client: PerfectViews (Pty) Ltd Year end: 30 September 2021
Date prepared: 29 October 2021 Prepared by: TR Ainee
Date reviewed: Reviewed by:
WP 300
Subject: Going concern assessment
, CONFIDENTIAL
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AUE3761
Oct/Nov 2021
Objective
The objective of this working paper is to assess the appropriateness of the client’s accounting
and presentation of its annual financial statements on a going concern basis through
obtaining sufficient appropriate audit evidence.
Background and work performed
It was deemed unnecessary to identify risks relating to the company’s going concern
assessment as the company is currently liquid and solvent.
Management assessed the entity’s ability to continue as a going concern and concluded that
there is no uncertainty that the company will exist in the foreseeable future based on the
mitigating factors presented below. The assessment which includes the cash flow forecast
for the following three years were obtained and filed in the audit file.
Although the company is currently liquid and solvent, the following events and conditions
have been identified:
• Reduced global demand, inability to operate due to forced closure as stipulated in the
Regulations due to the Covid-19 pandemic and reduced ability to transport finished
products which all resulted in a decline in revenue.
• Write-off of a number of debtors who entered business rescue proceedings or were
liquidated.
The following factors were considered to substantiate why the going concern assumption
basis should be appropriate when preparing the annual financial statements for the year
ended 30 September 2021:
• New sales strategies were implemented towards the end of the financial year and it
is expected (as indicated on the cash flow forecast) that revenue will grow with 10%
year on year.
• The board of directors is satisfied that two huge contracts were concluded with certain
government institutions during the 2021 financial year and the prospect of concluding
more contracts in the 2022 financial year with government will boost revenue
substantially.
• Management undertook a cost saving exercise to reduce the cost of sales and
operational costs of the company. While the estimated inflation rate for South Africa
is expected to be 6%, all costs were therefore inflated with only 2% year on year.
Conclusion
Based on discussions with management, it was not deemed necessary to perform any other
further audit procedures.
Therefore, in conclusion no material uncertainty exists that casts doubt on the entity’s ability
to continue as a going concern. The audit opinion will therefore be left unchanged.
The Audit Process
AUE 3761
2024
Assessments & Solutions
,UNIVERSITY EXAMINATIONS
COLLEGE OF ACCOUNTING SCIENCES
DEPARTMENT OF AUDITING
EXAMINATION: OCTOBER/NOVEMBER 2021
AUE3761
THE AUDIT PROCESS
THIS PAPER CONSISTS OF ELEVEN (11) PAGES
IMPORTANT INSTRUCTIONS:
The answering of this paper:
1. This paper consists of eight (8) questions.
2. This is a closed-book examination.
3. All questions must be answered.
4. Each question must be commenced on a new (separate) page.
5. You are reminded that answers may NOT be written in pencil.
Honesty Declaration:
By submitting my exam solution, I declare that:
• I know what plagiarism is, that plagiarism is wrong and that disciplinary steps can be taken
against me if I am found guilty of plagiarism;
• This exam solution, submitted by myself, is my own work;
• I have not assisted any other student in any manner and I have not had the assistance of
any other person, in completing this exam;
• I will not assist any other student in any manner and I will not obtain the assistance of any
other person, in completing this exam;
• I know that if I am found to be in violation of this declaration I will receive 0% for this
examination.
Please note: You do not have to sign the declaration. By submitting your solution, you automatically
declare that you adhere to all the above with regards to this specific examination.
Submission instructions:
The exam paper will remain available throughout the examination session.
Commence the submission (uploading) of your answer file as soon as you have completed the
assessment, do not wait for the session to conclude.
Suggestion: Start uploading your answer file at 11:00 (3 hours after the start of the exam session) at
the latest, to allow enough time for any delays in the process.
[TURN OVER]
, CONFIDENTIAL
Page 2 of 11
AUE3761
Oct/Nov 2021
The file name of your pdf document must be in the following format: Student number, space,
AUE3761. For example: 33445566 AUE3761.
• Log onto myExams https://cas.myexams.unisa.ac.za, AUE3761 module site.
• Click on the link “Submit answer file”.
• Follow the instructions on the screen.
Additional student instructions:
1. You HAVE to submit your answers in one pdf file (answer scripts must not be password
protected or uploaded as “read only” files).
2. Incorrect file format and uncollated answer scripts will not be considered.
3. NO emailed scripts will be accepted.
4. Students are advised to preview submissions (answer scripts) to ensure legibility and that the
correct answer script file has been uploaded.
5. Incorrect answer scripts and/or submissions made on unofficial examinations platforms (including
the invigilator cell phone application) will not be marked and no opportunity will be granted for
resubmission.
6. Mark awarded for incomplete submission will be the student’s final mark. No opportunity for
resubmission will be granted.
7. Mark awarded for illegible scanned submission will be the student’s final mark. No opportunity for
resubmission will be granted.
8. Submissions will only be accepted from registered student accounts.
9. Students who have not utilised invigilation or proctoring tools will be subjected to
disciplinary processes.
10. Students suspected of dishonest conduct during the examinations will be subjected to
disciplinary processes. UNISA has a zero tolerance for plagiarism and/or any other forms of
academic dishonesty.
11. Students are provided one hour to submit their answer scripts after the official examination time.
Submissions made after the official examination time will be rejected by the examination regulations
and will not be marked.
12. Students experiencing network or load shedding challenges are advised to apply together with
supporting evidence for an Aegrotat within 3 days of the examination session.
13. Students experiencing technical challenges, contact the SCSC 080 000 1870 or email
or refer to URL link for the list of additional contact numbers or
alternatively email your module lecturer. ONLY communication from your myLIfe account will be
considered.
Your submission will be date stamped and only submissions received up to 12:00pm will be
marked.
The Invigilator
ON THE DAY OF ASSESSMENT:
• Please log into The Invigilator App. You need to be connected to the internet in order to log in and
scan the QR code.
• Scan the QR code above as soon as you have downloaded your question paper during the 15-
minute download window. Please take note that you can only scan the QR code for a limited time
and it should therefore be scanned as soon as possible to start the invigilation.
• If you encounter difficulty with scanning of the QR code you can also enter the QR access code at
the bottom of the QR code in order to start the assessment.
[TURN OVER]
, CONFIDENTIAL
Page 3 of 11
AUE3761
Oct/Nov 2021
• Once the QR code is scanned, you can place your smartphone next to you. The Invigilator App will
notify you when an action is required. Ensure your media volume Is turned up.
• You may access your MyExams in the application if you only have one device by pressing the
‘access LMS’ button.
• Please remember to keep your smartphone on charge for the duration of the assessment.
• Keep The Invigilator app open on your cell phone during the assessment. You are not allowed to
leave or minimise the application.
• When an action is required, a notification beep will be heard. Action the request.
• Please ensure you are connected to the internet in order to commence the examination as well as
at the end of the examination. No internet connection is needed during the assessment.
• It is important to first upload your script to the MyExams. Uploading of app data is not time
sensitive and you can do it after you have uploaded your script to the MyExams.
• It is important to note that you have to adhere to the time limit in your MyExams assessment as the
invigilation time in the app could exceed the time allocated to complete your assessment.
• You can click the "Finish Assessment" button in the app if you finish early.
• Should you encounter any technical difficulty, please WhatsApp (only) The Invigilator Helpdesk on
073 505 8273.
[TURN OVER]
, CONFIDENTIAL
Page 4 of 11
AUE3761
Oct/Nov 2021
CONFIDENTIAL
This paper deals with the following main topics:
REQUIRED MAIN TOPIC MARKS
1. Risks of material misstatement at the financial statement level 13
2. Risks of material misstatement at the assertion level 12
3. Uncorrected misstatements, key audit matters and audit opinion 10
4. Substantive procedures – Accounts receivable 20
5. Ethical considerations 7
6. Impact of using an auditor’s expert on the stages of the audit 13
process
7. Substantive procedures – Related parties 12
8. Going concern assessment 13
100
NOTE:
The main objective of the examination is to test your knowledge and ability to apply the study
material. However, the examiners will also consider your ability to organise and present that
knowledge in writing and in an acceptable standard.
[TURN OVER]
, CONFIDENTIAL
Page 5 of 11
AUE3761
Oct/Nov 2021
CASE STUDY 100 marks
READ THE "REQUIRED" PART ON PAGES 10 AND 11 BEFORE YOU
CONTINUE.
You have been appointed as a first-year trainee accountant at TJM Incorporated.
The following information relates to one of your audit clients, PerfectViews (Pty) Ltd
(PerfectViews), with a financial year end of 30 September.
BACKGROUND INFORMATION (Required 1 to 8)
PerfectViews manufactures and installs aluminium windows and doors and has operations in
South Africa and Namibia. The business is a family-owned company that has been in the
Sekwale family for two generations. Mr Sekwale owned all the shares in the company until
Capital Investments (Pty) Ltd (Capital Investments) acquired the majority of shares in
PerfectViews (see detail below). He was also the chief executive officer (CEO). The “gold
standard” of quality of PerfectViews’ patented products have resulted in a broad customer base
both locally and internationally. All their customers pay them in South African rand. The
company had experienced significant growth until two years ago and as a result to keep up with
customer demand, expanded significantly by purchasing more assets and also increasing their
employee taskforce. The capital expansion was financed through utilising debt.
PerfectViews’ 2021 financial year has been exceptionally challenging mainly due to order
delays and poor customer satisfaction because of the Covid-19 pandemic. The pandemic
resulted in a reduced global demand, forced closure of South African facilities for certain
periods and the reduced ability to transport finished products between locations which
ultimately resulted in a decline in revenue and increased costs to adhere to certain health and
safety regulations in the manufacturing processes. In addition, PerfectViews also had to write
off many debtors who entered business rescue proceedings and some who have been
liquidated.
PerfectViews and its holding company prepares their financial statements in accordance with
International Financial Reporting Standards (IFRSs) on the basis that it will continue as a going
concern for the foreseeable future.
Acquisition of majority of shares in PerfectViews
Towards the end of the 2020 financial year, Capital Investments acquired the majority of shares
in PerfectViews. There are various companies in the Capital Investments group and all of them
provide goods or services to one another at normal market prices. The acquisition of
PerfectViews was subject to the following contractual terms:
, CONFIDENTIAL
Page 6 of 11
AUE3761
Oct/Nov 2021
• Replacing Mr Sekwale as CEO with Mr Ncombe with immediate effect.
• Appoint the group auditors, TJM Incorporated as its new external auditor, effective from
the 2021 financial year.
As part of the acquisition the following steps were initiated:
Step 1: Improve governance and oversight to ensure that PerfectViews complies with the
requirements of principle 7 of the King IV Report on corporate governance.
Step 2: Conduct an inventory verification exercise.
Step 3: Implement new sales and cost saving strategies.
INVENTORY (Required 2 and 3)
PerfectViews’ inventory consists of raw material, work-in-progress and finished goods which is
disclosed as such in the 2021 financial statements. Inventory are measured at the lower of cost
or net realisable value using the standard cost formula. The inventory balance for the 2021
financial year end is material.
PerfectViews purchases aluminium extrusions and glass from local aluminium smelters and
glass manufactures from where they process it further into windows and doors. The aluminium
price per ton is dependent on the price and availability of electricity.
As soon as the locally sourced material (raw material) is combined with human labour it is
classified as work-in-progress. A product in its final form which is ready for installation is
classified as finished goods. Finished goods are only installed when fully paid by the customer.
During the inventory verification that continued into the 2021 financial year, you identified
inventory classified as finished goods in a separate store room. These goods were covered in
dust and might have been stored there for a long time. You confirmed that these goods are
included in the inventory balance at the end of the 2021 financial year, which is worth about
R10 million. When enquiring why these goods are stored separately, you obtained information
that one of PerfectViews biggest contracts was cancelled during the 2020 financial year as the
customer was being liquidated due to experiencing a lot of challenges during the pandemic.
The liquidation of the customer was finalised during 2021. The customer did not pay for the
goods in full and won’t be able to do so, and therefore it remained in PerfectViews’ storeroom.
As these goods were manufactured using certain customer specifications, it is unlikely to be
sold to another customer.
You considered the final materiality of R8 million and performance materiality of R5.6 million
and proposed that a journal entry should be passed to write off the inventory in the 2021
financial year. Management however, did not agree with the journal and will not be correcting
it in the 2021 financial statements.
, CONFIDENTIAL
Page 7 of 11
AUE3761
Oct/Nov 2021
ACCOUNTS RECEIVABLE (Required 4)
Sales are made on a cash or credit. Each customer should complete a customer registration
form in order for their profiles to be loaded onto the system. Registration forms for customers
buying on credit should also be accompanied by a credit application. Credit is only approved
after a successful credit background check has been done after which a credit limit and specific
credit terms are set for each customer. Accounts due should be settled within a thirty-day
period and if not paid within sixty days, the customers are handed over to debt collectors.
The following age analysis has been obtained at year end:
Total Closing More than 30 More than 60 More than 90 More than 120
Current
balance Days days days days
R 6 500 000 R3 185 000 R1 314 800 R 455 000 R 180 200 R1 365 000
Percentage of
49% 20% 7% 3% 21%
total debtors
An allowance for credit losses is made against a customer if the account has not been settled
within 90 days. Included in the outstanding balance for more than 120 days are debtors that
have entered into business rescue proceedings and some who have been liquidated.
You obtained the accounts receivable list with the amount due by each debtor, accounts
receivable control account and positive debtors confirmation letters (responses received back
from the debtors for the year ended 30 September 2021). You have already performed all the
applicable analytical procedures on the debtors’ accounts.
NEW EXTERNAL AUDITOR (Required 5 and 6)
TJM is a medium-sized audit firm that audits most of the companies in the Capital Investments
group. All TJM’s audit partners are chartered accountants and registered auditors. The correct
process in appointing TJM as the new external auditor for the 2021 financial year in terms of
the Companies Act was followed. The audit will be led by Mrs Prang, one of TJM’s audit
partners, who predominantly has audit clients in the insurance and mining industries. She will
be assisted by one audit manager, one third-year trainee, yourself and two post-graduate
accounting students. In comparison with the previous auditors, the audit team seems to be
smaller and less experienced.
To assist PerfectViews with their cash flow constraints, as part of audit fee negotiations with
Mrs Prang, PerfectViews offered to renovate TJM’s offices by replacing their wooden window
frames with aluminium frames as well as the current clear glass of the windows with tinted
glass. The cost of the renovations will amount to 80% of the audit fee, which means that
PerfectViews only has to pay 20% of the audit fee in cash to TJM. The audit fee is on the audit
fee charged by the preceding auditors plus 5% inflation.
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PerfectViews has a very complex and unusual tax calculation and Mrs Prang therefore decided
to use the work of an auditor’s expert in taxation law to assist in this regard. TJM has used the
taxation law experts many times before and are familiar with their work.
As part of your pre-engagement audit activities, the audit manager contacted the expert and
they confirmed that they will be available to assist TJM.
In the concluding stage of the audit, you already evaluated the work that they performed and
deemed it to be adequate. The audit findings of the expert also did not seem to have any
influence on the audit opinion.
RELATED PARTIES (Required 7)
You decided to update your professional profile on LinkedIn, an employment-oriented online
service which is primarily used for professional networking and career development. It allows
job seekers to post their curriculum vitaes and employers to post vacancies. By chance, Mr
Ncombe’s profile also popped up. You were amazed by all his references and connections,
however one of his listings stood out to you. On his profile he was listed as the CEO of Sand
and Stone (Pty) Ltd (S&S). You recently audited the accounts receivable balance of
PerfectViews and remember that there was a significant amount of products sold on credit to
S&S during the 2021 financial year. What is of concern to you is that S&S was not disclosed
as a related party in PerfectViews’ annual financial statements. You immediately performed the
following substantive audit procedures to ascertain whether S&S are indeed a related party of
PerfectViews:
• Obtain the minutes of meetings for the 2021 financial year and inspect whether Mr
Ncombe declared his interest when deciding to sell products on credit to S&S.
• Obtain a written representation, listing all related parties of PerfectViews.
GOING CONCERN ASSESSMENT (Required 8)
The following working paper was prepared by one of the trainees on the audit of PerfectViews:
Client: PerfectViews (Pty) Ltd Year end: 30 September 2021
Date prepared: 29 October 2021 Prepared by: TR Ainee
Date reviewed: Reviewed by:
WP 300
Subject: Going concern assessment
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Objective
The objective of this working paper is to assess the appropriateness of the client’s accounting
and presentation of its annual financial statements on a going concern basis through
obtaining sufficient appropriate audit evidence.
Background and work performed
It was deemed unnecessary to identify risks relating to the company’s going concern
assessment as the company is currently liquid and solvent.
Management assessed the entity’s ability to continue as a going concern and concluded that
there is no uncertainty that the company will exist in the foreseeable future based on the
mitigating factors presented below. The assessment which includes the cash flow forecast
for the following three years were obtained and filed in the audit file.
Although the company is currently liquid and solvent, the following events and conditions
have been identified:
• Reduced global demand, inability to operate due to forced closure as stipulated in the
Regulations due to the Covid-19 pandemic and reduced ability to transport finished
products which all resulted in a decline in revenue.
• Write-off of a number of debtors who entered business rescue proceedings or were
liquidated.
The following factors were considered to substantiate why the going concern assumption
basis should be appropriate when preparing the annual financial statements for the year
ended 30 September 2021:
• New sales strategies were implemented towards the end of the financial year and it
is expected (as indicated on the cash flow forecast) that revenue will grow with 10%
year on year.
• The board of directors is satisfied that two huge contracts were concluded with certain
government institutions during the 2021 financial year and the prospect of concluding
more contracts in the 2022 financial year with government will boost revenue
substantially.
• Management undertook a cost saving exercise to reduce the cost of sales and
operational costs of the company. While the estimated inflation rate for South Africa
is expected to be 6%, all costs were therefore inflated with only 2% year on year.
Conclusion
Based on discussions with management, it was not deemed necessary to perform any other
further audit procedures.
Therefore, in conclusion no material uncertainty exists that casts doubt on the entity’s ability
to continue as a going concern. The audit opinion will therefore be left unchanged.
