AUDITING SUBJECT

Assignment 2 Question 1 (50 marks) Jasmine Shilongo, the owner of Space Bar (Pty) Ltd, has patent right on a useful bathroom device that proved popular in the open market place. Initially she manufactured and sold the device herself, but as sales increased, she found it necessary to move into a warehouse in Southern industrial park and employed seventeen staff members. She soon realised that the need to improve her internal controls, and having no previous accounting background or formal business training, she decided to make an appointment with a business consultant. However, she found what she was told by the consultant very confusing and has now asked you to explain some of the views expressed by the consultant. The business consultant says she must implement control activities and ensure a strong control environment, and that although having a risk assessment process is an important part of good internal control, as an owner/manager of a small company I didnt need to worry about it. I really do not understand what he is talking about! He also says my financial statements must be prepared in terms of IFRS for SMEs. At this stage Jasmine will not computerize her business. Required: 1.1 Briefly describe the term internal controls. (5 marks) 1.2 Explain in detail to Jasmine Shilongo what the consultant means by the term control activities (15marks) 1.3 Explain to Jasmine Shilongo what the term control environment means, and how he can ensure a strong control environment in his business. (15 marks ) 1.4Explain to Jasmine Shilongo what the term risk assessment procedures means? (15 marks) Question 2 (35 marks) Vintage Time Ltd, is a company which sells antiques of all kinds. The company which is owned and run by Rose Gareses, is a new client of your Audit firm and you have been placed in change of the 28 February 2019 year-end audit. In gathering information about the business, you noted the following. The company obtains its stock in a number of ways. Auctions are attended at which specific items and antique bales are purchased. When a bale is purchased, the buyer bids a single price on a number of items and must take whatever is in the bales. Each bales contains assorted items of varying values, some items being worthless.

Page 14 of 15 Two buyers, who are experts in the field of antiques, travel widely, visiting second hand furniture shops in different country villages and towns. These purchases are always made for cash, often with minimal accompanying documentation. Rose travels to Angola to purchase cheap antiques, generally these items sell successfully, but there have been occasions when the items have had to be sold below cost. Before being placed on the showroom floor, most items are repaired, renovated and cleaned in the restoration department. All items placed on the showroom floor have a price tag attached but this price is not necessarily adhered to. Customers can negotiate prices and large discounts are given if the customer pays cash, particularly for items which have been on the floor for long periods. Credit cards are accepted and e wallet services. At 28 February 2019, Vintage Time (Pty) Ltd will have a material debtors balance. The debtors vary from large interior decorating companies to private individuals. No formal creditworthiness checks are done on prospective customers and there is no credit limit set. To open an account a customer must pay a negotiable cash deposit on the first purchase and must be interviewed by Rose. She explained it to you as follows, People who buy antiques usually really want what they are buying and are prepared to pay. They feel they must have it. Mark ups are high and if they take a while to pay, so what? Where a sale is made on account or is paid for by credit card, an invoice is written out, and if the sale is for cash, a receipt is made out if the customer requests it. Susan Mwaee, the bookkeeper, manually writes up a debtors ledger and a simple stock ledger. The stock ledger contains a description of the item and its selling price. After the item is sold it is crossed out in the stock ledger and the word sold inserted next to the deletion. Vintage Times overdraft at First Bank Limited has climbed steadily over the year under audit, and Rose has indicated that unless sales improve over the next few months, he will have to retrench one or more of his craftsmen in the restoration department. A number of discussions have been held with First Bank Limited, who have expressed concern about the financial position, and are awaiting the audited financial statements. REQUIRED: Assess the audit risk at the financial statement level and assertion level relating to the audit of Vintage (Pty) Ltd. (35 marks) Question3 (30 marks)

Page 15 of 15 You are an audit supervisor of Owen & Co and you are reviewing the documentation describing Sonic Publishing Co.s purchases and payables system in preparation for the interim and final audit for the year ending 30 September 2019. The company has twenty bookshops and a warehouse, which holds the majority of the companys inventory. Your firm has audited Sonic Publishing Co for a number of years and as such, audit documentation is available from the previous years file, including internal control flowcharts and detailed purchases and payables system notes. As far as you are aware, Sonic Publishing Co system of internal control has not changed in the last year. The audit manager is keen for the team to utilise existing systems documentation in order to ensure audit efficiency. An extract from the existing systems notes is provided below Extract of purchases and payables system Procurement managers are responsible for ordering books for their shop. It is not currently possible for procurement managers to request books from any of the other nine stores. Customers who wish to order books, which are not in stock at the branch visited, are told to contact the other stores directly or visit the company website. As the inventory levels fall in a store, the store procurement raises a purchase requisition form, which is sent to the central warehouse. If there is insufficient inventory held, a supplier requisition form is completed and sent to the purchase order clerk, Oliver Tembo, for processing. He sends any orders above N$500 for authorisation from the purchasing director. Receipts of goods from suppliers are processed by the warehouse team, who agree the delivery to the purchase order, checking quantity and quality of goods and complete a sequentially numbered goods received note (GRN). The GRNs are sent to the accounts department every two weeks for processing. On receipt of the purchase invoice from the supplier, an accounts clerk matches it to the GRN. The invoice is then sent to the purchase ordering clerk, Oliver, who processes it for payment. The finance director is given the total amount of the payments list, which she authorizes and then processes the bank payments. Due to staff shortages in the accounts department, supplier statement reconciliations are no longer performed. 3.1 Briefly describe the term Substantive procedures. (5 marks) 3.2 Identify and explain 5 areas in the purchase and payables system at Sonic Publishing Co. that lack internal controls. (10 marks) 3.3 Describe substantive procedures the auditor should perform to obtain sufficient and Appropriate evidence in relation to Sonic Publishing Co.s purchases and other expenses. (15 marks)