BACKGROUND INFORMATION You are a trainee on the audit of The Taxi-Hope Company (Taxi). Taxi operates minibus taxis and is listed on the Cape Town Stock Exchange (a stock exchange aimed at small to medium size companies as compared to the Johannesburg Stock Exchange). It is registered for VAT, uses IFRS as its financial reporting framework and has a year end of 31 March. The board of directors of Taxi are champions of the United Nations sustainable development goals (SDGs) which has specific goals regarding: Reduced Inequalities & Sustainable cities and communities, and Industry, Innovation and Infrastructure Working towards these sustainable development goals meant redesigning the taxi industry in South Africa to be more sustainable and to encourage mass use of public transport by all. Taxi has captured the South African market by storm over the past five years, with between 100 000 and 800 000 daily transactions, and has surpassed (and in some cases replaced) other competitors such as Uber, Bolt and private taxi operators. Taxi differs from all these competitors in the type of technology that is used, in the way drivers are remunerated and in the fact that all their taxis are minibuses able to seat 12 users. Goal A: Reduced Inequalities & Sustainable cities and communities Taxi aims to address the commercial problems that perpetuate inequality in the taxi industry affecting taxi drivers, taxi owners and taxi users. The inequalities affecting taxi drivers include the following: Taxi drivers rarely own the taxis they drive. Taxi drivers do not earn enough to live sustainably and pay an exorbitant rental cost for using the owners taxi, and that does not allow the driver to earn a minimum wage. In addressing these inequalities, Taxi believes in paying above minimum wage and paying taxi drivers commission of 50% of each trip undertaken (i.e. 50% of Taxi revenue). The company therefore has to keep its operating costs low, in order for the payment of the commission to drivers to be sustainable. Taxi drivers are called associates. Taxi has 27 000 associate contracts, and the contract terms include paying the associates an amount above the minimum wage as a monthly fixed payment (of R6 000) and commission. Although associates are still not owners of the taxis they drive, they earn over minimum wage and some eventually buy their own taxis. Taxis efforts act as a wealth creation vehicle for the associates. The CEO of Taxi is quoted as saying We have a mantra we try to apply in all aspects of our company: its all about the people, technology and achieving sustainable development goals. AUE3761 Test 3 - July 2023 Page 6 of 9 Based on the results of the audit planning and tests of controls, the audit partner decided that substantive testing in the form of analytical procedures is appropriate for Associate Expenses. You are creating an expectation of Associate expenses for the year, and later you will compare this expectation to the actual amount, to conclude on the accuracy of Associates expenses. Below is an extract of the Associate Expenses workpaper you are preparing: Overview of results of tests of controls, and its effect on substantive testing: Test of controls were conducted on all key controls in the operating expenses business process and these were found to be operating effectively for the financial year Objective: The objective of this workpaper is to perform substantive analytical procedures to test the accuracy of associate expenses. Procedures performed: An expectation of the total associate expense amount is calculated below: Number of associates Fixedrate amount Commission rate Total trip value Total R Rmillion Rmillion Associate expenses Fixed rate 27 000 6 000 R 162* Associate expenses Commission 50% 730 R 365^ Expected associate expenses R 527 The expected total associate expense for the year is R527 million. *This result is the total of number of associate drivers multiplied by the fixed rate amount. ^This result is the total of the annual trip value (revenue) multiplied by the commission rate of 50%. Goal B: Industry, Innovation and Infrastructure Taxi uses a cellphone application and other cutting-edge technology to make daily commute easier and more cost-effective for users. It does that by: - Crowd-travelling: As users order a trip on the cellphone application, Taxis expert navigation system is able to coordinate all nearby trips travelling to a similar destination into a taxi of 12, and use the most efficient taxi route. All users are collected from their doorstep, eliminating the need for a taxi rank. Colleagues or friends in closer areas are able to travel together safely and cost effectively because crowd-travelling allows Taxi to charge a lower rate per kilometre. For this reason, no discounts are offered to users. - Users are linked to a unique profile that can be a prepaid / top-up account or they can apply for credit (payment terms are 30 days and interest is charged at 5% thereafter). - In terms of convenience and innovativeness, Taxi provides a choice of methods to seamlessly tag in when boarding a taxi, such as retina-, fingerprint- or access tag scanning, connecting through Bluetooth or card transactions. All forms of tagging in are linked to the billing system. Taxi does not collect any physical cash. Taxi uses different computer systems that are all integrated, and compatible with your firms audit software. The billing system reflects the invoices billed and the credit management information of debtors (users). The accounting system reflects the general ledgers and trial balance. The reporting system reflects the final amounts used in the annual financial statements. AUE3761 Test 3 - July 2023 Page 7 of 9 1. Multiple users order taxis using cellphones. The navigation system determines the most efficient trip route to collect users (maximum 12). 2. User boards taxi and tags in, thereby linking to their user profile. The billing system checks user funds/ credit before processing. 3. The billing system processes the transaction in real time and sends invoice to user. 4. The sale is recorded in the accounting system (general ledger) 5. Debtors ledgers are also updated. 6. The accounting system feeds into the financial reporting system. An extract of the planning workpaper related to understanding the revenue business process is below. The audit team has obtained all source documents related to the process below. Taxis accounting and financial reporting software is fully compatible with your firms audit software. People Development goals Technology AUE3761 Test 3 - July 2023 Page 8 of 9 The data fields in the debtors billing system consist of the following: Name Surname Contact number Address Unique Account/Profile number Credit limit Amount Owed/ Outstanding Interest charged Difficulties in the acquisition and payments business process In the middle of the financial year, two creditors clerks were found to be colluding with the credit manager to make unauthorised payments to themselves, instead of Taxis creditors. The fraudulent conduct of the employees was reported to the authorities and they were subsequently dismissed. In keeping with Taxis commitment to technology, a new automated and customised payment system was implemented for all payments to creditors.

With reference to the complete case study: Explain, with justification from the scenario the inherent risk factors that arise at the assertion level for each class of transaction or account balance in the scenario. Present your answer as follows: (a) Identification of the related class of transaction or account balance (1 mark each) (b) Explanation of inherent risk factor that arises at assertion level (1 marks each) 1................... 1........................ Note: No marks are awarded without an explanation of the inherent risk factor that arises at assertion level. Communication skills presentation (13) (1)