Aue3702 exam pack solutions AND explained NOTES

Aue3702 exam pack solutions AND explained NOTES. QUESTION 2 41 marks Librarians Ltd's (Librarians) main business involves the sale of books to various book stores all over South Africa. You are the audit senior in charge of the audit for the year ended 31 December 2015. Sales Librarians uses an automated sales system. Based on your identification and assessment of risk in the planning stage of the audit of Librarians, you decided to use a combination of tests of details and substantive analytical procedures to obtain audit evidence of Librarians' sales total during the current financial year. The financial manager of Librarians, Mr Jenkins, provided you with the following information: • Librarians' financial statements and trial balance for the current and prior financial year-end, • Librarians' budget for the current financial year-end, and • Financial statements of other enterprises in the same operating sector with a similar clientele Subsequent events During the performance of the subsequent events review in March 2016, you identified the following matter that has to be considered before finalising the financial statements: During November 2015, a fire broke out in one of Librarians' warehouses. Stock to the value of R1.2 million was lost. The stock was insured. Mr Jenkins wrote the stock off on 31 December 2015. He also recognised a small loss that was anticipated when taking into account the expected pay-out from the insurance company. The insurance claim was raised as a debtor. You were satisfied with this accounting treatment. However, late in February 2016, the insurance company notified Librarians that it would not be paying out any amount in respect of the stock as its investigation revealed that the fire was instigated by an aggrieved staff member of Librarians. The staff member, who was an employee of Librarians, resigned from the company shortly after the incident. Librarians referred the matter to its lawyers who indicated that, in terms of a strict interpretation of the insurance policy, the insurance company could be correct. They recommended that the matter be taken to court and Librarians intends doing this. Going concern uncertainty The financial losses resulted in Librarians' current liabilities exceeding its total assets by R700 000. Final materiality has been set at R250 000. Furthermore, Librarians was unable to pay its creditors for the last three months and it is struggling to repay the minimum monthly instalments due on its bank overdraft. This places substantial doubt on the company's ability to continue trading as a going concern. Downloaded by: aviva9296 | Distribution of this document is illegal S - The study-notes marketplace © Edge Business School REQUIRED 2.1 Refer to the information under the heading "Sales" and describe the analytical procedures that you will perform during the audit of the sales of Librarians Ltd. (8) 2.2 Refer to the information under the heading "Subsequent events" and (a) Write an e-mail to Librarians' Financial Manager, explaining to him whether or not you agree with his accounting treatment of the subsequent events in the financial statements. (7) Communication skills Layout and structure of e-mail (2) (b) Describe the auditor's considerations in determining the nature, timing and extent of the procedures when relying on the work of the lawyers that were appointed by the management of Librarians Ltd. (9) 2.3 Refer to the information under the heading "Going concern uncertainty" and (a) Describe how management should disclose the uncertainties that affect the entity's ability to continue as a going concern. (8) (b) Describe the effect on your audit opinion (set out your reasoning) if management refuses to disclose these uncertainties (do not write down the opinion or basis of opinion paragraphs). (7) Downloaded by: aviva9296 | Distribution of this document is illegal S - The study-notes marketplace © Edge Business School AUE S2 - QUESTION (UNISA) Background information You are an audit senior at XYZ Incorporated. You are a member of the audit team performing the audit of Bikes are Best Ltd (BrB) for the year ended 30 April 2016. The company wholesales motorbike accessories (ie helmets, safety jackets and safety boots) to motorbike dealers. The company's administration offices and warehouse are situated in Durban. Extract of working paper relating to going concern (Required part 1) BrB is currently experiencing going-concern problems. Management is however of the opinion that the going concern assumption is still appropriate, and has implemented the following measures to improve the company's situation: 1. Long-term loans obtained from private companies that amount to R2 million have been converted into share capital. 2. Management is also of the opinion that the continuous increase in fuel prices will boost the company's sales, as motorbikes' fuel consumption is low in comparison with that of motor vehicles. According to management, this expected increase in motorbikes' sales will place the company back on the road to profitability. BrB's management is prepared to disclose, in a note to the balance sheet, that the company is experiencing going-concern problems and how it proposes to address those problems. Trade and other payables (Required part 2) As part of the verification procedures for purchases you decided to satisfy yourself as to the validity of the reconciling items appearing on a sample of trade payables reconciliations of BrB at 30 April 2016. BrB's policies require that all purchases must be accompanied by an authorised order and goods-received note. One of the creditor reconciliations that was included in the audit sample is detailed below. Creditor reconciliation of Chang Enterprises Ltd: 30 April 2016 Description Amount (R) Balance as per creditor statement translated to a rand value using the spot rate as at 22 April 2016 1 950 000 Add Invoice 18700 dated 01 April 2016 Note 1 311 700 Less Receipt 20069 dated 25 April 2016 (400 000) Balance as per creditors ledger at 30 April Note 1 BrB ordered 100 motorbike helmets at a cost of US $300 per helmet from its foreign supplier in China, Chang Enterprises Ltd, on 1 March 2016. BrB was issued with invoice number 18700 on 1 April 2016. The goods were shipped free on board (FOB) on 5 April 2016. The goods were received at the Durban Harbour on 15 April 2016. The goods were personally collected by the warehouse manager on 26 April 2016 and received at BrB's warehouse on the same day. The Downloaded by: aviva9296 | Distribution of this document is illegal S - The study-notes marketplace © Edge Business School invoice was not included in the creditor statement as at 22 April 2016. The following spot rates are available to you: 01 April 2016 $10.41 05 April 2016 $10.39 15 April 2016 $10.43 26 April 2016 $10.45 30 April 2016 $10.55 Audit sampling and confirmation requests (Required part 3) Your audit plan for the year-end audit will include meaningful subsequent receipts testing for the existence of the accounts receivable (debtors) balance (i e motorbike dealers to whom BrB wholesales motorbike accessories). You also plan to perform a debtors circularisation (confirmation) on a sample of BrB's debtors (motorbike dealers). However, BrB's clients have a poor track record of responding to confirmation requests. You assessed the risk of material misstatement of the existence assertion relating to the accounts receivable balance as high. Extract of working paper relating to inventory (Required part 4) 1. An automated perpetual inventory system is utilised. All inventories are issued directly to customers from the warehouse in Durban. 2. All the motorbike accessories are imported from China. Imported goods arrive in containers at the harbour, where Cleanwater (Pty) Ltd (a company used by BrB) arranges for the successful cleaning of BrB's imports. 3. All inventory imported is entered in the system using a goods-received note (GRN). Sales invoices are used to record the sales of inventory on the system. 4. You and other team members attended the inventory count and concluded that an accurate and efficient inventory count took place on 30 April 2016. The warehouse was closed and no inventory was received or despatched on the day of the count. Count teams recorded count quantities on pre-printed inventory sheets. The discrepancies between the theoretical and the actual quantities were resolved and damaged (unsaleable) inventory was identified. All the necessary amendments were made to the inventory masterfile after being authorised on an inventory adjustment form. 5. BrB measures inventory at the lower of cost or net realisable value. The cost of inventory is determined on a first-in first-out (FIFO) basis. 6. The final automated inventory master file is available for audit purposes and contains the following fields: - Inventory code {every item of inventory has its own alpha-numeric item code, e g BA 0332) - Description of the motorbike accessory - Costing report number* - Date of last purchase - Date of last sale Downloaded by: aviva9296 | Distribution of this document is illegal S - The study-notes marketplace © Edge Business School - Quantity on hand at the beginning of the financial year - Quantity sold year to date - Quantity purchased year to date - Quantity on hand at the end of the financial year - Unit selling price at year end - Unit purchase price in rand at year end (calculated on a FIFO basis) (cost) - Value of inventory at the end of the financial year (quantity x cost) *The costing report number applies to the hard-copy file that contains the various costing reports (including the invoices from Clearwater (Pty) Ltd) of all imported motorbike accessories. 7. You are satisfied that the value of inventory as per the inventory masterfile at year end should not be reduced by a write-down for slow-moving or obsolete inventory. 8. During the 2015/2016 financial year, Better Bikes Ltd, a competitor of BrB that also sells motorbike accessories, enquired from BrB's management if it could store a number of inventory items in BrB's warehouse BrB's management decided to decline the request. As a result, at year end, no inventory held on behalf of a third party was stored in BrB's warehouse. Finalising the audit (Required part 5) On completion of the audit the following items were still outstanding on the working papers and management was not prepared to make adjustments to the financial statements: 1. During discussions with the warehouse manager, you became aware of a lawsuit that had been filed against BrB in May 2016. A major customer of BrB, Head-Safe Ltd (Head-Safe), had purchased specialised helmets to the value of R3 000 000 during the 2016 financial year. BrB had sourced these helmets from a supplier in China and sold them to Head-Safe. These helmets were found to be detective and of an inferior quality, as customers of Head-Safe Ltd had sustained head injuries while wearing the helmet. Head-Safe consequently withdrew the entire class of helmet from the market. BrB does not have any of these defective helmets in inventory at year-end. 2. Legal counsel indicated that the possibility that Head-Safe will succeed with the litigation is very good. The value of the claim is R6 000 000 to compensate Head-Safe for the loss in sales as well as injuries suffered by its customers. 3. BrB's insurance does not cover the legal claim. 4. Final materiality was set at R5 000 000. Subsequent events (Required part 6) Despite of the discussions with management and staff members, you have not performed further procedures to identify possible subsequent events that relate to BrB. Downloaded by: aviva9296 | Distribution of this document is illegal S - The study-notes marketplace © Edge Business School Required Marks 1. With reference to the extract of the working paper relating to going concern: Describe the audit procedures that you will have to perform in order to be satisfied with the preparation of the annual financial statements on a going- concern basis, taking into account the issues raised in the working paper. 6 2. With reference to the information contained under the heading trade and other payables: Describe the substantive audit procedures you will perform on the creditor reconciliation of Chang Enterprises Ltd as at 30 April 2016. Communication skills - proper formulation of substantive audit procedures 22 2 3. With reference to the information contained under the heading audit sampling and confirmation requests: a. Describe what effect successful subsequent receipts testing will have on the sample size of the debtor’s circulation (confirmation) if the auditor intends to obtain sufficient, appropriate audit evidence regarding the existence of trade receivables. b. Define the terms "positive confirmation" and "negative confirmation" and indicate the type of confirmation that should be used during the audit at BrB. Provide reasons for your selection. 3 9 4. With reference to the extract of the working paper on inventory: a. Formulate the substantive audit procedures that you will perform, including those that you will perform with the assistance of computer assisted audit techniques (CAATs), to ensure that inventory is correctly valued at year end. Your answer should exclude substantive audit procedures relating to the attendance of the year-end inventory count. Communication skills - proper formulation of substantive audit procedures b. Assume that BrB granted permission to Better Bikes Ltd to store its inventory in BrB's warehouse. Explain why it will be necessary to conduct audit procedures on inventory held for a third party (i e Better Bikes Ltd). 22 2 3 5. With reference to the information contained under the heading finalising the audit: a. Describe how the litigation should be treated in the financial statements at 30 April 2016. b. Discuss the effect of management's refusal to adjust the financial statements on the audit report of BrB for the year ended 30 April 2016. You do not need to write down the opinion and basis of opinion paragraphs. Communication skills - clarity of expression and logical flow of arguments 6 9 1 6. With reference to the information contained under the heading subsequent events, formulate the audit procedures to identify possible significant subsequent events in terms of ISA 560 - Subsequent events. 15 Downloaded by: aviva9296 | Distribution of this document is illegal S - The study-notes marketplace © Edge Business School AUE S1 P1 – QUESTION (UNISA) BACKGROUND INFORMATION (Required parts 1 and 2) BZN Auditors has been re-appointed as the external auditor of Bacchus Wines Limited (Bacchus Wines). You are the audit senior in charge of the 2017 audit. The company has a 31 March year-end. Bacchus Wines farms only with one grape cultivar, namely Pinotage. The grapes are grown under environmentally controlled conditions (in greenhouses) on the farm, Pure Pleasure. Bacchus Wines farms, produces, bottles, markets and sells its own internationally renowned wine, Purely Pinotage. The wine production process entails the handpicking of grapes, pressing the grapes, fermenting the pressed grapes, filtering the fermented wine, aging the wine in oak barrels and then bottling the wine. Bacchus Wines is also the holding company of numerous large subsidiaries. Management have supplied you with a list of related parties. Mr Winey was appointed by Bacchus Wines directly after he received his marketing degree and was, since then, only employed by Bacchus Wines in the Finance Department. During the 2017 financial year, Bacchus Wines established an Internal Audit Function and management reassigned Mr Winey from the Finance Division to the Internal Audit Function. He is the head of the Internal Audit Function and also the only staff member in this function. Since Mr Winey studied marketing, he is not a member of an auditing/accounting professional body. Mr Winey noted that he is confident that the audit work performed at Bacchus Wines' subsidiaries is consistent with best practice and in accordance with the requirements of the International Standards on Auditing. Bacchus Wines provided you with a written representation letter referring to the adequacy of the internal auditor's work and informed you that there is no need to evaluate his work. WAGE WORKERS OF BACCHUS WINES (Required part 3) There are 20 greenhouses and approximately 120 weekly paid farm workers responsible for planting, handpicking, pruning, irrigating and soil testing. Mr Mentz is the accountant in charge of the salaries and wages division of Bacchus Wines. All wage workers are permanently employed and are paid by means of electronic funds transfers (EFTS). Bacchus Wines uses a reputable automated payroll system, MoneyToWorkers-Solutions. When new wage workers are appointed, they are requested to sign a contract, setting out their conditions of employment, as well as their hourly wage rate. Newly appointed wage workers are also required to complete a form that contains their full names, banking details and tax numbers. When a wage worker resigns, the resignation letter is added to his/her personnel file. All the aforementioned information is maintained in a personnel file in the human resources department. As soon as a new wage worker is uploaded onto the system, a wage worker number is automatically generated for the wage worker. The wage worker number is unique to a specific worker and will not be allocated again if the worker resigned. For each wage worker, a staff card and magnetic clock card are issued by the line manager to whom the wage worker reports. The magnetic clock card is swiped through a magnetic reader on entry and exit of the greenhouses every day. You are satisfied that the controls over the magnetic reader access system are adequate. The clock card reader is linked to the MoneyToWorkers-Solutions system and accurately records the name, wage worker number and hours worked for each wage worker. The clock card system maintains clock card records for each wage worker. Downloaded by: aviva9296 | Distribution of this document is illegal S - The study-notes marketplace © Edge Business School Wages are paid based on the hours worked (normal and overtime) during the week and are paid the following Friday Ms Olsen, the payroll clerk of Bacchus Wines, is responsible for the computerised generation of payslips on the MoneyToWorkers-Solutions system. A computerised payslip appears on screen for each separate wage worker. The fields on each payslip are pre-populated by the computer, by importing the personal information, amount payable and wage worker number into the payslip. For the wage workers, each working day consists of nine normal hours of work, paid at one times the normal hourly rate. Wage workers are allowed to work overtime if authorised by his/her line manager and may not exceed 25 hours per month. Overtime is paid at 1.5 times the normal rate. The hours recorded on the clock card system is used by the computer to calculate the normal and overtime pay for each wage worker. Pay-as-you-earn (PAYE), standard income tax on employees (SITE) and unemployment insurance fund (UIF) deductions are automatically calculated by using the latest relevant tables loaded onto the MoneyToWorkers-Solutions system. Ms Olsen provisionally approves each payslip which reflects, among others, the normal and overtime hours worked, the rate for normal and overtime hours worked, as well as the PAYE/SITE/UIF deduction. As soon as she clicks the "approved" button on the screen, this payslip gets lined up in the payroll, which is then ready for the final approval by Mr Mentz. After the final approval by Mr Mentz, the payslips are printed. The wage worker masterfile contains the following information: • wage worker name • wage worker number • wage worker identity number • wage worker taxation number • wage worker bank account number • address and contact information • date of employment • date of resignation • normal hours worked each month • overtime hours worked each month • rate for normal hours worked • rate for overtime hours worked • gross wages for each month • gross wages, year-to-date • PAYE/SITE/UIF amount to be paid each month • net wages for each month • net wages, year-to-date CREDITORS RECONCILIATIONS (Required part 4) The products used by Bacchus Wines during the wine production process include wine yeast, oak barrels and empty wine bottles. These products are purchased from local suppliers. Mrs Winestone, the creditors clerk, is responsible to prepare monthly creditors reconciliations. Downloaded by: aviva9296 | Distribution of this document is illegal S - The study-notes marketplace © Edge Business School One of the creditors reconciliations which were included in the audit sample is detailed below: Creditors reconciliation: Hyperstore (Pty) Ltd: 31 March 2017 Balance as per creditors statement at 25 March 2017 R 987 476 Less Payment (electronic transfer) (R 567 887) Less Invoice number 3467 (Note 1) (R 56 003) Less Goods returned note 2345 (Note 2) (R 234 889) Add invoicing error (Note 3) R 1 548 Balance as per creditors ledger 31 March 2017 R 130 245 Note 1 The empty wine bottles relating to this invoice were only received by Bacchus Wines on 5 April 2017 due to a fire at Hyperstore (Pty) Ltd which destroyed its delivery vans. New delivery vans were only operational from 5 April . Note 2 The batch of empty wine bottles relating to this invoice (invoice number 3456) was delivered on 17 March 2017. However, when it was unpacked during April, all of the bottles were damaged. Hyperstore (Pty) Ltd agreed that Bacchus Wines can return this batch of empty wine bottles and to credit Bacchus Wines. Hyperstore (Pty) Ltd is experiencing a backlog in its credit department and it is expected that the credit note will be issued during May 2017. Note 3 Bacchus Wines was undercharged on invoice number 4590. 200 bottles were charged at R0.86 each instead of R8.60 each, inclusive of VAT. SUBSEQUENT EVENT (Required part 5) Bacchus Wines has a 31 March financial year-end and Mr Cabernet, the chief executive officer, requires the audit report by 15 May 2017. Final materiality was set at R1 500 000 by BZN Auditors. On 11 May 2017, during the finalisation of the audit, you overheard the following conversation between the winemaker and Mr Cabernet: Winemaker: "I am so sorry sir! I accidently added brewer's yeast instead of wine yeast to the harvested grapes in ten of our fermentation vats today. It is not my fault, the supplier delivered the incorrect yeast!" Mr Cabernet: "How could this happen? You do realise the impact of your actions? The wine will have a terrible flavour and could be poisonous. The cost price of the inventory you destroyed amounts to R3 000 000. Our insurance policy covers such losses for only an amount of R1 000 000." AUDIT REPORTING (Required part 6) The machinery used during the wine production process was overstated by R2 500 000 in the final trial balance. You have discussed the matter with management. However, they refuse to adjust the financial statements to correct the overstatement of R2 500 000. Downloaded by: aviva9296 | Distribution of this document is illegal S - The study-notes marketplace © Edge Business School REQUIRED 1. With reference to the information contained under the heading BACKGROUND INFORMATION: Describe the procedures you would have adopted to determine the completeness of the list of related parties supplied by management. (7.5) Communication skills - clarity of expression m formulation of procedures. (1.5) 2. With reference to the information contained under the heading BACKGROUND INFORMATION: (a) Discuss, with reference to the information provided, any concerns you may have during the evaluation of the Internal Audit Function for the purpose of the 2017 audit of Bacchus Wines. Confine your answer to the following areas: • Organisational status and objectivity (3) • Competence (3) (b) Based on the assumption that you evaluated the Internal Audit Function and decided to make use of its work, comment on whether the written management representation letter from Bacchus Wines would serve as sufficient audit evidence for you to rely on the work conducted by the internal auditor without the evaluation thereof. (3) 3. With reference to the information contained under the heading WAGE WORKERS OF BACCHUS WINES: Formulate the substantive audit procedures you would perform in respect of the wages of Bacchus Wines. If applicable, your answer should also deal with substantive procedures using computer assisted audit techniques (CAATs). Exclude any procedures related to presentation and disclosures. (35.5) Communication skills - clarity of expression in formulation of substantive audit procedures (1.5) 4. With reference to the information contained under the heading CREDITORS RECONCILIATIONS: Formulate the substantive audit procedures you would perform in respect of the creditors reconciliation of Hyperstore (Pty) Ltd. (16.5) Communication skills - structuring of the answer according to the components (headings) of the reconciliation (1.5) 5. With reference to the information contained under the heading SUBSEQUENT EVENT: (a) Classify the event as either an adjusting or a non-adjusting event. You should also justify your reasoning. (3) (b) Describe how the subsequent event should be treated in the financial statements at 31 March 2017. (4) 6. With reference to the information contained under the heading AUDIT REPORTING: Discuss the effect of the unresolved matter on the audit report of Bacchus Wines for the year ended 31 March 2017. (18.5) Communication skills - clarity of expression and logical flow of arguments (1.5) Downloaded by: aviva9296 | Distribution of this document is illegal S - The study-notes marketplace © Edge Business School AUE S1 P2 – QUESTION (UNISA) BACKGROUND INFORMATION You are a senior trainee accountant of XYZ Auditors Inc and have been assigned to lead the audit of a new client, Over-the-Sea Ltd (OTS). OTS was previously audited by TTK Incorporated. OTS is a large shipping company and it is listed on the Johannesburg Stock Exchange (JSE). The company is mainly involved in the shipping of pharmaceutical chemicals which are placed in tankers on container ships. These ships sail to and from major harbours around the world. The company's head office and administrative function are situated near the Durban harbour. OTS also owns several buildings, which are rented out as office space to tenants. Trade and other receivables, and investment property represent a material portion of the company's financial statements.