1 Mr Elliot has recently been appointed as the Chief Executive Officer at the company at which you are the Chief Financial Officer. As part of his induction program, you have been tasked with familiarising him with the audit matters. One of your first tasks is to explain to Mr Elliot the different types of audit that may be carried out. REQUIRED Write a memo to Mr Elliot explaining five different types of audits. (15 marks) You are a member of the computer audit section of your firm. The team is about to commence the audit of a new client, Furncraft (Pty) Ltd, a manufacturer of office fumiture. The following information is relevant: a) The company has a centralised IT department. Data is processed on a mainframe computer which is located in the computer room along with various other pieces of computer equipment. The various departments are linked to the mainframe by on line terminals. b) The IT department which is headed by Michael Morgan the IT manager, reports to Peter Breedt the financial manager as he (Peter Breedt) has a keen interest in computers. However, the management style at Furncraft (Pty) Ltd is very relaxed and Peter Breedt does not interfere with Michael Morgan, leaving the IT department's affairs to him. The IT department is staffed by an adequate number of personnel whose individual skills combine to run the IT department and service the user departments. The various members of the IT department assist each other with their duties on a day to day basis. 5. Besides manufacturing its own range of products, Alphachem (Pty) Ltd manufactures pills under licence on behalf of a number of pharmaceutical companies. These companies supply Alphachem (Pty) Ltd with the necessary refined chemical raw materials which are then processed by Alphachem (Pty) Ltd. The finished goods (pills) are then stored in bulk by Alphachem (Pty) Ltd in its temperature controlled warehouse before being dispatched to the pharmaceutical companies. Alphachem (Pty) Ltd charges a processing and storage fee for this service. 6. It is anticipated that at 31 March 2018 , inventory in the statement of financial position will be reflected at approximately R48 million. It is also anticipated that it will make up 65% of current assets and will be broken down as follows: a. Raw materials : R16 million b. Work-in-Progress: R12 million c. Finished Goods: R20 million 7. Alphachem (Pty) Ltd has agreed that you may engage a chemical engineer to assist you in your audit of inventory (as well as any other aspects of the business) should you deem it necessary. The previous auditors had engaged Frans Fredericks, an independent consultant, to assist them with the audit, but he is no longer available as he has recently joined a large international chemical company on a full-time basis. Your firm has decided to approach Jason Ladd, a Durban based chemical engineer to assist with the audit of inventory. When gathering audit evidence the auditor is required to obtain sufficient appropriate evidence to support the audit opinion. For obvious reasons the auditor cannot test every transaction or event that has occurred during the year and generally what happens is that the auditor uses different means for selecting items. The means available to the auditor for selecting items for testing are: a) selecting all items ( 100% examination) of a population or a stratum of a population b) selecting specific items from a population c) applying audit sampling, which is defined as the application of audit procedures to less than 100% of items within a population such that all sampling units in the population have a chance of selection. A combination of the above may also be used. On the audit of Masstores (Pty) Ltd a manufacturer of a very large range of garden products and a subsidiary in the Gardenworld Ltd group, the following procedures will take place: REQUIRED 2.1 Discuss the matters your firm would have considered prior to accepting this engagement. (10 marks) 2.2 Explain the term significant risk and comment on whether there are any significant risks for the 31 March 2018 audit of Alphachem (Pty) Ltd. ( 5 marks) 2.3 Comment on whether the fact that this is our first audit has any effect on audit risk relating to the 2018 audit of Alphachem (Pty) Ltd. (5 marks) Your firm has been appointed for the first time as auditors of Alphachem (Pty) Ltd, a medium sized company which manufactures chemical products. Alphachem (Pty) Ltd and its directors are well thought of in the industry for their integrity and efficient management of the business. The previous audit firm had, after a long association with the company, resigned from the audit as the partner in charge of the audit had retired. The remaining partners were not satisfied that they could service Alphachem (Pty) Ltd adequately due to the overall complexity of the business. Your firm's appointment came about as a result of the fact that one of your firm's partners, Megan Martin, is married to Michael Martin the production director of Alphachem (Pty) Ltd. You have been assigned early in February to the audit for the financial year-end 31 March 2018 to assist in the evaluation of the risk of material misstatement, and have gathered the following information. 1. The shares in the company are held by a number of private individuals; none of the directors own shares in the company but they each receive an annual bonus based on the after tax profit for the year. 2. Alphachem (Pty) Ltd is located in an industrial park near the Durban harbour. The administration block, manufacturing plant, warehouses and other storage facilities are situated on the same site. 3. The company imports raw materials from a number of countries as well as purchasing from local suppliers. Some of the chemicals imported by Alphachem (Pty) Ltd take a number of weeks to pass through the Durban harbour as they must be tested by the port authority for authenticity and quality before they can be cleared through customs. During the testing period they are stored at the harbour. Raw materials can be in the form of gas, paste, powder or liquid and range considerably in price. Raw materials (and some finished goods) are stored in huge tanks (liquids) or in canisters (gasses) and plastic bins (pastes and powders) in one of three bulk storage warehouses. Once manufactured, most of the products are stored in a temperature controlled warehouse. c) Access to the computer room is controlled by a security keypad. The access code which must be keyed in to activate the door, is the current date. (The keypad is programmed to automatically change the access code to the following day's date at midnight.) On visiting the computer room on two consecutive days, you found that the system worked efficiently. d) To link your own laptop to the system, you could plug the laptop into one of the spare access points in the staff tea room. Peter Breedt informed you that no user identification was necessary and that the passwords to get onto the system and into any application was the first name and first letter in the surname of the head of each section, for example, his password was "PeterB" and this would get you "where you need to go." e) The company does not have a documented disaster recovery plan. Peter Breedt does not believe that this is necessary as the company has not suffered any disasters in the past and is fully covered by insurance in the event of a disaster. REQUIRED 1.1 Distinguish between general controls and application controls. (4 marks) 1.2 Based on the information given above, identify the weaknesses in the general controls at Furncraft (Pty) Ltd. (16 marks) 3.1 INFORMATION There are two general approaches to audit sampling. Each approach represents a different way of handling audit risk. Each approach may be appropriate for some populations but not others. Both approaches require the use of auditor's professional judgement to plan, perform and evaluate the sample evidence. REQUIRED: Discuss the TWO (2) approaches of audit sampling. ( 8 marks) 3.2 INFORMATION 4.2 Different types of auditors have different functions and responsibilities, depending on the audit they perform. Irrespective of the audit being performed, all auditors have a common principle that binds them towards a unified duty and responsibility. REQUIRED Explain FIVE (5) duties and responsibilities that are common to all auditors. (5 marks) QUESTION 5 (20 Marks) You are the audit manager at a medium sized audit company. The majority of the audit work is currently done using manual audit work papers. The partners are reluctant to introduce the latest audit technology due to the perceived increase in cost. Audit clients are beginning to question audit efficiency and there is a risk that your firm may lose some clients if action is not taken immediately to modernise the audit process being used. REQUIRED Write a report to the managing partner, Mr Deloitte, to convince him of the need to start using computer assisted audit techniques as a means of modernising the audit process. Include in your report the following: 5.1 Compare the FOUR (4) ways of using CAAT's in the audit process (12 marks) 3.2.1 The company's finished goods inventory will be tested for completeness; items of inventory will be traced from the warehouse floor to the inventory records. 3.2.2 The minutes of the monthly director's meeting will be inspected to identify any important decisions taken of which the auditor should be aware. 3.2.3 Tests of controls will be carried out to determine whether all purchase orders are signed by the chief buyer. The company makes thousands of purchases each year. 3.2.4 Lease agreements entered into by the company will be inspected to determine whether those leases which have been categorized as finance leases and capitalized, meet the requirements for the capitalization of the leases. The company entered into twenty nine leases. 3.2.5 The recoverability of amounts owed by debtors which have been outstanding for longer than 90 days will be discussed with the credit manager and the financial manager. The company has over seven hundred debtors of which approximately 10% have amounts outstanding in excess of 90 days. The amount outstanding for longer than 90 days compared to the prior year has increased by nearly sixty percent, whilst sales have remained reasonably constant. 3.2.6 A positive circularization of debtors will take place. The company has twenty two maior customers who Alphachem (Pty) Lid manufactures a wide but standard range of products in its processing plant. Many of the manufacturing processes are complex particularly where raw material chemicals are refined or mixed and must pass through multiple processes. REQUIRED: Indicate which means of selecting items for testing (as listed in a to c above) is most likely to be used for each of the intended procedures listed above (3.2.1 to 3.2.6). Justify your choice. (12 marks)