QUESTION 1 (50 marks)

You are the audit manager of the audit of Felix (Pty) Ltd. You are currently reviewing the working papers for Accounts Receivable and Repairs and Maintenance for the financial year ending 31 December 2022. You have called the trainee on the audit to explain to you the assertions she will be testing relating to the following accounts:

Repairs and Maintenance – R3 575 058 Accounts Receivable – R25 185 300

Her response was as follows:

Repairs and Maintenance
Occurrence Repairs and Maintenance were done i.e., they have occurred.
Validity Repairs and Maintenance are accounted for at the right amount in the right account.
Valuation The amount of Repairs and Maintenance is valued at the correct amount.
Transparency Felix (Pty) Ltd has declared all Repairs and Maintenance in its financial statements.
Completeness All the above assertions have been dealt with. Usefulness The repairs and maintenance are useful to Felix (Pty) Ltd.

Accounts Receivable
Rights Felix (Pty) Ltd has the right to receive the accounts that are receivable. Reliability The account balance for Accounts Receivable is reliable.
Accrual The accounts that are receivable accrued to Felix (Pty) Ltd. Obligation The debtors have an obligation to pay the accounts of Felix (Pty) Ltd.
Accuracy All details pertaining to Accounts Receivable has been accurately disclosed in the financial statements.
Completeness All the above assertions have been dealt with.

REQUIRED:

Discuss the trainee’s assertions for Repairs and Maintenance and indicate whether it is valid or not by justifying your answer.
Use the following table to present your answer:

Discuss the trainee’s assertions for Accounts Receivable and indicate whether it is valid or not by justifying your answer.
Use the following table to present your answer:

Conclude whether the trainee has an adequate understanding of the assertions for Repairs and Maintenance and Accounts Receivable based on your determination in 1.1 and 1.2. (6 marks)

Provide the correct assertions applicable to Repairs and Maintenance and explain what each assertion tests. (10 marks)

Provide the correct assertions applicable to Accounts Receivable and explain what each assertion tests.
(10 marks)

QUESTION 2 (10 marks)

Waltzon (Pty) Ltd (Waltzon) is a stationery shop for the local community of Kraaifontein. Waltzon buys and sells stationery and is currently doing very well. They have different stationery that is purchased from local as well as international suppliers. As a result, Waltzon’s inventory contributes to a large value on the Statement of Financial Position.

The following procedures were performed during the audit of the inventory balance:
1. Tested the authorisation for adjustments to inventory records by inspecting the signatures of relevant personnel.
2. Performed an inventory count.
3. Tested procedures for recording the movement of inventory.
4. Performed an analysis of the inventory that was in transit.
5. Authorisation of write-off or scrapping of inventories was tested by inspecting the signatures of relevant personnel.

REQUIRED:

Indicate for procedures 1 – 5 above whether the procedure is a test of control or a substantive procedure. Provide a reason for your answer. (10 marks)

QUESTION 3 (24 marks)

You are the acting Financial Manager of FBI (Pty) Ltd (FBI) since the Financial Manager, whom you are standing in for, was suspended. In your position, you will be responsible for providing the auditors appointed with the information that they require to perform the audit of FBI. The suspension of the Financial Manager resulted in you not receiving a handover of the required duties. Therefore, you set up a meeting with the auditors to understand certain concepts and how they will affect what is required from you.

The trainee auditor of the audit firm, Kelvin, is the only person available to discuss your questions. Instead of waiting for the senior auditor in charge, Jason, you decided to ask Kelvin as he just passed his BComm degree. He explained all the concepts in the table listed below. However, once Jason was available, you found that some of the concepts as explained by Kelvin, were not exactly correct. You, therefore, had to discuss all the concepts with Jason and enquired for an example or further explanation of each concept.

Kelvin’s explanations of certain concepts:

REQUIRED:

For concepts 1 – 8 (relating to issue number one) which Kelvin explained to you, indicate:

• Whether Jason agreed with him by just indicating ‘Yes’ or ‘No’ (i.e., is Kelvin’s explanation correct for the particular concept), and what the number (e.g., A, B, or C, etc.) of the correct explanation of the particular concept is that Jason pointed out to you. (16 marks)
• Provide an example, explanation or more detail on what the concept is to illustrate or explain the answer. (e.g., Nr 1 which is Audit sampling explain the concept in your own words.) (8 marks)

Use the following table to present your answer:

QUESTION 4 (16 marks)

You are an Audit Trainee and your very first audit is that of Y&G Retailers (Pty) Ltd. During the audit you overheard the following conversation between the Audit Supervisor and Audit Partner:

“What can be wrong with that!” asked the Audit Supervisor from the Audit Partner. “The Financial Manager (FM) told me himself that the balance outstanding owed by Pack and Pay (Pty) Ltd of R3 million is recoverable!”

Pack and Pay (Pty) Ltd is one of Y&G Retailers (Pty) Ltd’s biggest customers. Although the balance from Pack and Pay (Pty) Ltd is now outstanding for 240 days, the FM of Y&G Retailers (Pty) Ltd is confident that there is no need to make a provision for the write-off of the Pack and Pay (Pty) Ltd debt. You also read in the newspaper that Pack and Pay (Pty) Ltd applied for voluntary liquidation. It is Y&G Retailers (Pty) Ltd’s policy to provide for all debt that is more than 120 days outstanding.

Assume that the above is the only evidence gathered to confirm the recoverability of the Pack and Pay (Pty) Ltd debt and you can also assume that the amount is material.

REQUIRED:

With reference to ISA 500, discuss the appropriateness of the audit evidence gathered for the valuation of the accounts receivable balance for the Pack and Pay (Pty) Ltd debtor included in the financial statements of Y&G Retailers (Pty) Ltd. (16 marks)

Answers to Above Questions on Auditing

Answer 1: An analysis of the trainee’s assertion for repairs and maintenance and an evaluation of its validity is performed as follows:
Repair and maintenance were done, and it is evaluated that the right amount has been accounted for. This implies that the repairs and maintenance are valued at the correct amount, and there is complete transparency identified as they are clearly disclosed in the financial statement. All these indicate that the repairs and maintenance are valid as stated in the books of accounts of the company.

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