1 (15 Marks) You are the audit manager on a new client, which is listed on the Johannesburg Stock Exchange (JSE), called Desla Ltd (hereafter Desla). Desla builds not only all-electric vehicles but also infinitely scalable clean energy generation and storage products. Desla believes that it will be better if the world could stop relying on fossil fuels and quickly move towards a "zero emission" future. Desla has recently fired their auditors and approached your audit firm to perform the audit for the 31 December 2018 year-end. Your senior team members are currently busy planning the audit, before the rest of the team arrives. Mr. Mosk, the founding shareholder and CEO of Desla, held a meeting with you and your team to give you an overview of some activities and also to answer your questions. The following information was provided during the meeting: The company has shown significant growth in profit of more than 50% year on year for the last three (3) years. Mr. Mosk gave you a structure of the company and the locations of all 10 234 branches, which they are currently operating from across the world. They have opened 1 000 branches just in the last year and they are planning to double that figure for 2021. The innovations and design team has released a new product called an "Astrosuit" that customers can wear at home which takes away the effects of gravity. However, various customers were injured when they gravitated too close to airplanes. The market found out that the suit did not go through all the quality checks as required by law, before it was sold and various lawsuits were brought against Desla by the injured customers. The company's lawyers think that the settlements to keep customers happy will be significant and that settling these claims will bring the future of Desla into question. However, Mr. Mosk is of the opinion that all this publicity is good publicity. Mr. Mosk has casually noted that he fired the previous auditors, since they were not willing to prepare the financial statements for the company. He has further emphasised that he is not used to anyone telling him that they will not do what he has asked them to do, as everyone in his company does exactly what he wants. 21 Page There is an employee incentive scheme for all of the employees, which states that for each year that they keep growing the profit of Desla with 50%, the employees will all receive double their salaries for that specific year. This applies to everyone, from the personal assistants right through to the directors. YOU ARE REQUIRED TO: a. Explain the term significant risk, as well as the minimum matters that an auditor must consider to determine whether or not a risk is significant. (5) b. Identify and discuss the risk of material misstatement at the overall financial statement level for Desla for the year ended December 2018. (10) Present your answer in the following table: Risk indicator Question 2 Discuss risk of material misstatement (25 marks) Your firm was recently appointed as auditors of Furnex (Pty) Ltd (Furnex), a small company that sells standard office furniture. Below is more information regarding two of Furnex's departments. Inventory Below is the detail of Furnex's inventory listing which has been extracted from their accounting software system by the Financial Director. 3 Page Unit Cost Inventory ID Name Description Price (NAD) Stock Quantity in Selling Price (NAD Inventory Value Reorder (NAD) Level INV001 Chair Decr1 850,00 INV002 Table Decr2 1300,00 950,00 1150,00 7 650,00 10 5 200,00 INV003 Desk Decr3 1200,00 2500,00 7 200,00 INV004 Cupboard Decr4 980,00 10 8 000,00 9 800,00 5 INVOOS Open shelf Decr5 350,00 34 INV006 Closed shelf Decr6 450,00 20 500,00 650.00 11 900,00 20 9 000,00 20 INV007 INV008 Notice board - big Notice board - small Decr8 Decr7 200,00 -12 400,00 24 380,00 590,00 -2400,00 10 9 600,00 10 Payroll It is normal practice for Furnex to pay their employees at the end of each month. The Payroll. Manager will sign off on the list of salaries which shows how much money is paid to each employee, by reviewing this list for reasonableness. This list is only accessible by the Payroll Manager by entering his unique username and password. When new employees join Furnex, their details are entered into the Employee Masterfile and this same masterfile is deleted when their employment is terminated. The role of creating, maintaining and deleting this information is given to the Payroll Supervisor. Any other changes made to the Employee Masterfiles must be approved by the Payroll Manager before being effected. The Payroll Clerk will run the automated payroll processing each month, by doing this, the system calculates each employee's gross salaries, deductions and net salaries payable. YOU ARE REQUIRED TO: a) Briefly describe, using CAAT's, audit functions which can be carried out on the inventory listing report. b) Explain the following: Auditing around the computer Auditing through the computer Auditing with the computer (10) (3) c) State the controls noted upon your audit of the Payroll system described above AND also explain how you can test each of the controls noted. (10) 41 Page d) Mention 2 controls over passwords which the Payroll Manager must keep in mind when creating his unique password. Question 3 (2) (10 marks) Electronic fund transfers (EFT) is a system that is used to transfer money electronically from a company's bank account to make direct payments to suppliers and employees. In summary, the transfer of funds is effected by means of a direct transfer from the paying company's terminal or by means of a data file that is sent from the paying company's terminal to the bank, which then makes the payment. There are certain risks associated with this type of payment system, and controls have to be implemented by companies in relation to the loading of beneficiaries and effecting the payment. The same controls are applicable irrespective of the nature of the payment (i.e. whether suppliers or employees are being paid). You are required to: Outline the control objectives and controls required to address the following risks related to EFT payments: 32 1.1 1.2 Capturing of data: Incorrect amount and incorrect supplier are paid. Fictitious payments are made. (5) (5) 55 effecting the payment. The same controls are applicable irrespective of the nature of the payment (i.e. whether suppliers or employees are being paid). You are required to: Outline the control objectives and controls required to address the following risks related to EFT payments: 1.1 1.2 Capturing of data: Incorrect amount and incorrect supplier are paid. Fictitious payments are made. (5) (5) Present your answer in tabular format with the following column headings: Question Number / risk Control objective Controls Question 4 (10 marks) You are the auditor of a company that purchases packaging materials from large factories and sells them to smaller retailers. The management team of your client consists of a Managing Director (MD), a Sales Director (SD) and an Administrative Manager (AM). Your client recently installed a computerised accounting system using a PC based network, and the MD has given you the task to determine the controls which should be exercised over the system when processing accounting data. The system will initially be used for producing sales invoices and maintaining the accounts receivable and general ledgers. The sales system has 2 standing data files: 1. A customer file containing customer names and credit limits; 2. A price file containing the part numbers, descriptions, and selling prices of the company's products. 5 Page Amendments to the standing data files are recorded on data amendment forms, which are batched and captured on a weekly basis. The system operates as follows: 1. Customer details, part numbers and quantities of goods despatched are input directly into the system through the network terminals. The system calculates the invoice value by accessing the price standing data file. When the operator confirms that the invoice details have been input correctly, the system prints the invoice and posts it to the accounts receivable and general ledgers. 2. Cash received and discounts are input directly into the system, which matches them to the invoices being paid. 3. Credit notes and adjustments are captured directly into the system and the accounts receivable ledger is then automatically updated. 4. At the end of the month the system prints a summary of the invoices, credit notes, adjustments, cash and discount posted to the accounts receivable ledger in the month, as well as an aged list of accounts receivable, and also customer statements. The customer statements show the outstanding transactions as at the end of the month. 5. The system has the facility to print out, during the month, the summaries described above as well as the details of any customer account. Required: List and describe the controls that should be exercised over: a. Unauthorized access to the terminals used for the input of transactions or amendments to standing data. (2) b. Input of transaction data into the system to ensure the risk of errors is minimized and that no unauthorized transactions are input. Question 5 (1 6/7 You have just completed the "understanding the entity and its environment" stage or the planning of a new client Bull Dog (Pty) Ltd. You have established the following: The financial accountant and financial director are not co-operative with the external auditors A significant portion of the company's operational equipment is in remote and isolated areas and in neighbouring countries. The company is involved in long term contracts which can last up to five years All journal entries are put through by the financial director. He is the only person with access to the "journal entry module" on the company's local area network. 6 Page 4. At the end of the month the system prints a summary of the invoices, credit notes, adjustments, cash and discount posted to the accounts receivable ledger in the month, as well as an aged list of accounts receivable, and also customer statements. The customer statements show the outstanding transactions as at the end of the month. 5. The system has the facility to print out, during the month, the summaries described above as well as the details of any customer account. Required: List and describe the controls that should be exercised over: a. Unauthorized access to the terminals used for the input of transactions or amendments to standing data. (2) b. Input of transaction data into the system to ensure the risk of errors is minimized and that no unauthorized transactions are input. (8) Question 5 (12 marks) You have just completed the "understanding the entity and its environment" stage of the planning of a new client Bull Dog (Pty) Ltd. You have established the following: The financial accountant and financial director are not co-operative with the external auditors A significant portion of the company's operational equipment is in remote and isolated areas and in neighbouring countries. The company is involved in long term contracts which can last up to five years All journal entries are put through by the financial director. He is the only person with access to the "journal entry module" on the company's local area network. 6 Page YOU ARE REQUIRED TO: (a) Assess the risk of material misstatement at financial statement level. Give reasons. (6) (b) Assess the risk of material misstatement at assertion level. Indicate which assertions are effected? (6) 7| Page