QUESTION 1 (35 marks)

You are a third-year Audit Trainee at Nexus Audit Firm (“Nexus”), and you are currently part of the audit team of Techno Genius (Pty) Ltd (“Techno”).

Background information on Techno
Techno manufactures high-end laptops and operates in South Africa with a central warehouse in Durban. The entity has a 31 December financial year-end.

Techno was established in March 2001, is privately owned by Ben Knowles, and is VAT-registered with SARS. Techno complies with the International Financial Reporting Standards (IFRS).

Revenue
Sales are made on credit to customers. You were assigned to audit Techno’s revenue section, and the Audit Manager, Mike Fetch, requested that you formulate substantive procedures. Techno maintains a price list of all the manufactured laptops and updates the price list every month.

During the audit, you received an extract of a sales tax invoice as follows:

Trade receivables
Techno has both local and foreign trade debtors. Customers must fill out registration forms and complete a credit application when purchasing on credit. Once the credit department successfully checks the potential customer’s credit history, the potential customer‘s credit application is approved. After that, specific credit limits and terms are determined for each customer. Following Techno’s credit policy, customers must settle amounts due within 30 days. If the payment isn’t received within 60 days, the customer will be referred to debt collectors, and interest will be charged at 8% per annum on these outstanding balances.

You obtained the following debtors’ age analysis from Techno’s Financial Manager, Tim Lee, at year-end:

The allowance for credit losses (previously called bad debts allowance) is raised against a customer if the account is to be settled within 90 days. Outstanding balances older than 120 days include debtors that have been liquidated.

REQUIRED:

With reference to the revenue information, formulate substantive procedures that you would perform on the sales tax invoice provided. (10 marks)

With reference to the trade receivables information, formulate the substantive audit procedures you would perform to obtain sufficient and appropriate audit evidence regarding the accuracy, valuation, and allocation of trade receivables for the year ending 31 December 2022.

Structure the answer using the below headings:
• Trade receivables substantive procedures. (15 marks)

• Allowance for credit losses substantive procedures (previously called bad debts allowances).

QUESTION 2 (20 marks)

You are an Audit Trainee at CWF Assurance Services, and you are currently part of the audit team of Flicks Ltd. Flicks Ltd is a new audit client of CWF Assurance Services, and this is also the very first time that CWF Assurance Services will be conducting an audit in the pharmaceutical industry. The entity has a 31 March 2024 financial year-end.

Background information of Flicks Ltd
Flicks Ltd, a pharmaceutical company listed on the Johannesburg Stock Exchange (“JSE”), maintains its headquarters in Cape Town and operates numerous pharmaceutical outlets throughout South Africa. The recent occurrences of load shedding in the country have significantly disrupted the operations of Flicks Ltd. This disruption stems from the fact that not all of Flicks Ltd.’s pharmaceutical outlets across South Africa are equipped with generators.

Deepening the challenge is Flicks Ltd.’s heavy reliance on sales to diabetic customers, constituting approximately 65% of its total sales. These customers rely on insulin medication that requires storage within refrigerated environments. Unfortunately, the load-shedding instances have led to the deterioration of insulin due to inadequate refrigeration, rendering it unsuitable for sale. Consequently, Flicks Ltd has experienced a substantial decline in sales, plummeting to a mere 30% of its usual sales figures. Annually, the management receives bonuses contingent upon the financial performance of Flicks Ltd., which is determined by Flicks Ltd.’s revenue.

In the 2024 financial year, the Chief Financial Officer opted to transition to a new accounting software due to the outdated accounting software that Flicks Ltd has been using for years. The new accounting software was deployed on 1 August 2023. The Chief Financial Officer determined that formal training for the staff was unnecessary, as all accounting department members are Chartered Accountants. The Chief Financial Officer expressed confidence that the team would be skilled in navigating the new system independently.

During the journal entry testing phase of the audit, it came to your attention that a substantial number of revenue journals were recorded on 31 March 2024. Upon inquiry, the Accountant revealed that the Financial Manager had specifically instructed these revenue journals to be processed, which represented a departure from past practices. Upon further examination of the invoices, it was observed that most of these revenue invoices were dated only in the following month of April 2024.

REQUIRED:

Explain what is meant by “the risk of material misstatement at an assertion level for revenue”?
(5 marks)

Describe the risks of material misstatement at the revenue assertion level for Flicks Ltd for the financial year-ended 31 March 2024. For each risk identified, describe the applicable assertion.
Set your answer out in the following table:

QUESTION 3 (45 marks)

You are a Senior Auditor at Lexus Audit Firm and are currently part of the audit for Cars 4 U (Pty) Ltd, a car manufacturer in Gauteng. The company purchases certain of the car parts from an overseas supplier in Germany.
After observing a walkthrough performed during the audit on the receiving of goods and recording purchases, you gained an understanding of how Cars 4 U (Pty) Ltd receives and records spare parts from suppliers. The company’s operational processes are as follows:

Receiving of goods

The spare parts from all suppliers are received in the reception area, at the administrative office of Cars 4 U (Pty) Ltd, and received by the Receiving Clerk, Tom Silver. Tom Silver had no training on receiving the goods. He omitted to check the goods against the necessary supporting documents and did not check for any damaged goods. Tom Silver performed no other work; he signed the supplier invoice and sent the invoice to the accounts department.

Recording of purchases

All purchases are made on credit from an approved trade creditors list, and this list is updated on the Masterfile once a year. Any employee at Cars 4 U (Pty) Ltd can make amendments to the Masterfile. The password to the Masterfile is shared amongst all the employees, and the password is updated annually.
At the accounts department of Cars 4 U (Pty) Ltd, the Creditor’s Clerk, Patricia Homes, captures the supplier invoice into the accounting software Xrex. Patricia Homes checked the purchase order to the supplier invoice. She noted that the prices of the spare parts differ between the two documents and decided to capture the supplier invoice amount. The supplier invoice is captured and submitted onto Xrex and marked ready for payment, based on the terms agreed upon with the trade creditor.

REQUIRED:

Explain how the risks of weak internal controls within the acquisition cycle can negatively affect an entity. (2.5 marks)

List all the source documents that Tom Silver should have identified during the receiving of goods and provide the purpose for each document. (2.5 marks)

Identify the internal control weakness in the information provided in receiving of goods and recording of purchases for Cars 4 U (Pty) Ltd.
For each internal control weakness identified, describe the potential consequences to Cars 4 U (Pty) Ltd and recommend improvements.
Present your answer by using the following table:

Answers to Above Questions on Audit Planning

Answer 1: It is important to determine the accuracy, completeness and existence of revenue details provided by Techno Genius Pty Ltd in order to formulate the substantive procedures. The substantive procedures that can be carried out includes performing an examination of sales tax invoice which includes verifying the sales data with the sales invoice, checking the accuracy of customer information.

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