Friedman Limited is a company that sells new and second-hand executive cars to the public. The company has showrooms in Cape Town, Pretoria and Johannesburg. The Cape Town premises has spare capacity and a large warehouse is used for the sale of various types of spare parts and accessories to motor mechanics. These items are sold on a cash or credit basis. According to the organisations discount policy, a standard rate of 2,5% settlement discount is granted for payment received within 30 days of the invoice date for credit sales. Car dealers are responsible for selling the vehicles in the showrooms. A limited number of vehicles are kept in a centralised storage facility at the Johannesburg branch. When a customer requests a vehicle that is out of stock, an order is placed with the manufacturer. No advance payment is required from the customer when receiving the request. Due to the popularity of these executive cars, potential customers can wait up to six months for the desired model. All transactions are on credit. You are an internal auditor at Friedman Limited and are responsible for the audit of several business processes. Your audit team has compiled a risk analysis of the purchasing of new and second-hand cars. The risk analysis has indicated amongst others, the following risks: Car dealers might order cars for personal use, because they prepare the purchase requisitions, process the purchase orders and take the vehicles in receipt Vehicles that do not meet the customers specific requirements might be ordered. Car dealers might obtain second-hand vehicles of inferior quality. Car dealers might place orders for new vehicles that are never acted on and delivered. This will result in a loss of income as well as dissatisfied customers.

REQUIRED

1.1 For each of the procurement risks listed above, identify and describe an internal control activity that will mitigate these risks. (6)

Part B

You have completed the planning of the audit of Friedmans revenue and procurement processes. The senior manager of the Cape Town branch has indicated that there appears to be several fictitious sales generated by one of the shop attendants at the warehouse selling spare parts. The purpose of these fictitious sales transactions is to inflate the sales figure for the specific shop attendant to ensure that he/she receives a higher commission (based on the inflated sales). You decide to select a sample of invoices and perform relevant audit engagement procedures to assess, amongst other issues the validity of the sales transactions. You also decide to perform substantive procedures regarding the accounts receivable balance of Friedman Limited to assess the fairness thereof.

REQUIRED 1.2 Compile eight (8) audit engagement procedures that can be used to test the fairness of the accounts receivable balance of Friedman Limited. (12)