QUESTION ONE: [20]

Keep Trying Inc. has grown tremendously in the past few years, with most clients requesting/requiring an audit of their annual financial statements.
You have worked at this firm for a number of years and have been a member of the Quality Control Committee for the most part. The committee reviews current and potential clients before accepting engagements for the following year.
Below is a list of the clients;

1. Sailor Made Ltd (a public but not listed entity), has recently been convicted for exceeding its fishing quotas. As a result, the company has been threatened by the authorities which would result in the company closing its doors. The previous auditors have resigned. (5)
2. Chocolate Cake (Pty) Ltd (a large baking company) is owned by the wife of Keep Trying Inc.’s partner in charge of the tax department. Calculation of the PI Score revealed that Chocolate Cake (Pty) Ltd must be externally audited. (5)
3. Give It A Shot (Pty) Ltd engages in the selling of firearms as well as hires out mercenaries to foreign governments involved in disputes. The company is not listed. (5)

4. Ruby Ruthless is a chairman on the board of Tech Savvy Ltd ( a listed entity). Ruby is quite outspoken and vocal. She regularly expresses her critical thoughts on King III’s Report on Corporate Governance. She believes that all transparency, disclosure and fairness is not required. “It gives competitors insight into your business!” she says. (5)

Required:

Prepare a memorandum to the board of directors detailing the concerns about acceptance/continuance of an audit engagement on the above clients.
QUESTION TWO [20] Sufficient audit evidence means that a satisfactory amount (quantity) of audit evidence has been gathered, appropriate audit evidence means that the evidence is reliable and relevant, ie. it has the necessary quality which the auditor requires. The following audit procedures have been carried out by the audit team on the audit of Futex (Ply) Ltd, an electronics manufacturer:
1. Extracted a sample of Items from the inventory sheets and performed test counts at the annual Inventory count.
2. Reviewed the report of an electronics expert who was engaged (by the audit firm) to value work in progress at year end.
3. Attended a wage count.

4. Discussed the allowance for bad debts with the credit controller.

5. Re-performed the casts and extensions of (he payroll for three different weeks.

6. Reviewed the client’s debtor’s age analytics

Required:

2.1. Discuss the factors which the auditor should consider when assessing the quality of audit evidence (12)
2.2. Discuss the reliability of the evidence gathered from each of the above audit procedures. (5)
2.3. State to which assertion each of the above a most relevant. (3)

QUESTION THREE [20] You have recently started work as a trainee accountant. While performing procedures on certain cycles at your client, Blue Bottles (Pty) Ltd, you came across the following:

1. 60% of sales comprise of cash.

2. Blue Bottles (Pty) Ltd sells blue milkshakes which have an expiration date.

3. Errors were found in the depreciation calculation of recently purchased bottling machinery.

4. Bank reconciliations are prepared on a monthly basis.

5. Employees are given an increase on an annual basis.

Required:

Identify and briefly explain the assertions which would be affected by each of the above.
QUESTION FOUR: [40] During the “understanding the entity and its environment” stage of planning for the audit of You’ve Got This (Pty) Ltd you obtain the following information, inter alia, about the company.

1. The company imports large quantities of inventory.

2. Some of the products which You’ve Got This (Pty) Ltd sells have expiry dates, after which they are not usable.
3. The company sells, inter alia, chemicals.

4. Inventory is stored in several warehouses around South Africa.

5. 40% of the company’s sales are for cash.

6. During the year under audit, credit terms and policies were made less stringent to boost sales.
7. The company’s manufacturing division leases some of its assets.

8. Obtaining spares for some of the manufacturing assets which the company owns, is extremely difficult which has resulted in a number of machines standing idle.
9. The work force at You’ve Got This (Pty) Ltd fluctuates quite significantly from month to month. Casual labour is brought in frequently for short periods.

Required:

Identify the financial statement assertions which will’ be affected by the above information. Provide reasons.

Answers to Above Questions on Keep Trying Inc Case

Answer 1: An analysis of the case scenario above indicates information related to four clients. This memorandum takes into account the issues related to the acceptance or continuation of audit engagement with all these clients. The case scenario of each and every client is analysed separately as follows: