FACULTY OF COMMERCE, MANAGEMENT AND LAW OLD CURRICULUM MODULES experience to determine whether a carpet is genuine or fake. The House of Persia (Pty) Ltd claims that it deals only in genuine carpets, but is currently in dispute with a wealthy customer who is challenging the authenticity of a number of carpets she purchased. 5. Every carpet is unique (no two carpets are the same) in terms of colour, pattern, material used and density of the knots, and cost can vary considerably. Whilst each carpet is supported by some form of purchase documentation, this documentation is not always comprehensive and is frequently in a foreign language. e.g. Turkish. Purchases are made in various foreign currencies. Carpets do not carry any form of identification tag or number, but each carpet can be identified by an expert, by its style, colour, pattern, region etc. When carpets are sent to The House of Persia (Pty) Ltd's outlets a label, giving a brief description of the carpet and its selling price is attached to the carpet. All selling prices are set by Ronnie Irani. Because of the uniqueness of each carpet, there is no standard mark up, and prices can vary considerably. As the carpets sell consistently and do not deteriorate over time, only a small allowance for "obsolete stock" is made each year. 6. There is no tight audit deadline for the upcoming financial year-end audit. However, as the bank relies on the audited financial statements when reviewing its continued support of the company's overdraft banking facilities, a copy must be sent to the bank once the audit is complete. 7. Although the Irani family is concerned about political tensions in the Middle East, they are satisfied that their supply of carpets will be unaffected. YOU ARE REQUIRED TO: a) Evaluate the risk that the annual financial statements, on which your firm will report, contain material misstatement as a result of fraudulent financial reporting. (8) Page 13 of 25 FACULTY OF COMMERCE, MANAGEMENT AND LAW OLD CURRICULUM MODULES b) Discuss your strategy for the upcoming audit of The House of Persia (Pty) Ltd. (7) c) Assess the risk of material misstatement of The House of Persia (Pty) Ltd's inventory for the upcoming financial year-end audit. Structure your answer in terms of the assertions. You are not required to consider "presentation and disclosure". (10) Question 3 (26 marks) In terms of ISA 315 (Revised) - Identifying and assessing the risks of material misstatement, the components of internal control are as follows: (i)control environment (ii) the entity's risk assessment process (iii) the information svstem relevant to financial renortina and communication In terms of ISA 315 (Revised) - Identifying and assessing the risks of mater misstatement, the components of internal control are as follows: (i)control environment (ii) the entity's risk assessment process (iii) the information system relevant to financial reporting and communication (iv) control activities and (v) monitoring of controls. The statement recommends that dividing internal control into the above componer provides a useful framework for the auditor to consider the client's internal control. At Black 'n Blue Ltd the following policies, procedures or conditions exist. 1. There is strong segregation of duties in the inventory cycle between receiving invento its custody, the issue of inventory and the recording of all movement in the perpett inventory records. 2. The board of directors and senior management meet every six months to identify t challenges facing the company and how successfully they are being addressed. 3. The company's organizational structure is designed in such a way as to provide board with a realistic chance of achieving its objectives on an ongoing basis. 4. The human resource department goes to great lengths to define the skills necessa for each job category and to recruit suitable personnel. 5.The financial director meets frequently with the financial accountant to ensure th information required to be disclosed by IFRS (the reporting standard used by company) is properly accumulated, recorded and processed. Page 14 of 25 FACULTY OF COMMERCE, MANAGEMENT AND LAW OLD CURRICULUM MODULES 6. Access to the company's network is controlled by the use of comprehensive logic controls e.g. user IDs, user profiles, passwords, and is granted on a need to know bas 7. The recording in the general ledger of sales, purchases etc, processed by the compu is achieved by passing journal entries. All journal entries are scrutinised and authoriz by two senior financial accounting department employees. 8. All transactions keyed into the computer via terminals are subject to a wide range input controls. 9. The internal audit department conducts frequent reviews of breakdowns in intern control and how these are corrected. 10. To enter Black ' n Blue Ltd's computer facility, warehouse and processing plant, individual must place his thumb on a biometric scanner. YOU ARE REQUIRED TO: a) Briefly describe each of the components of internal control as identified by ISA 315 b) Indicate to which component each of the policies, procedures or conditions listed points 1 to 10 relate. c) Explain the difference between an automated control and a manual control. d) Suggest 4 ways in which computerization (IT) benefits a company's internal control. (4)