NKK Public Accountants was assigned for the first time to audit the financial statements of Bakumoa Enterprises Ltd for the period ending 30 June 2020. In obtaining an understanding of internal controls the following issues were identified.

i. There are poor controls over inventory in that only three people are employed in monitoring stock. The stock controller places the order of inventory and receives the inventory. The two assistants interchangeably assist with recording the new stock received, in releasing stock to the divisions that need them. While incoming stock are recorded, there are no records kept of outgoing stock. Moreover, all three staff employed in stock keeping have a key to the storeroom where stock is stored.

ii. The cashier, who is the niece of the senior accountant, receives cash and issues the receipts electronically to the customer. At times, the cashier prepares the cash summary and the lodgement for banking of daily receipts. More often when the senior accountant is busy the cash summary and lodgements are not checked before funds are taken to the bank for depositing. While the system is updated automatically with each receipt issued, the cashier and the senior accountant are the only people who can access it and the senior accountant reviews the system once a month. Bank reconciliations were only done at the financial year end

iii. Sales staff are encouraged to offer discounts between 5% to 20% in order to increase sales at any point in time. Customers can make payment to any sales staff who issues a receipt from a sub-receipt they carry. Often, some customers who are well known to the sales staff do not ask for receipts. At the end of the day, the sales staff then submits their sales amount with sub-receipt book to the cashier who then issues a master receipt for these takings.

iv. Bakumoa recently purchased 5 new vehicles to help with delivery services. On inspection of the vehicles at close of business, only four vehicles were in the companys yard. Enquiries of staff revealed that the fifth vehicle is driven by the wife of the CEO. According to the CEO, one of the benefits of his contract is that he is entitled to a vehicle for personal use of his family. Inspection of asset register reveals that the vehicle is included in the list and that depreciation is applied.

REQUIRED:

a. Identify 4 misstatements that could occur as a result of the weaknesses in the controls and for each misstatement, recommend how controls may be strengthened in order to reduce future misstatements. (8 marks)

b. Outline the factors that will determine whether the auditor has obtained sufficient appropriate evidence to support risk assessment. (4 marks)

c. What conclusion is the auditor likely to draw from the assessment of each of the above controls? Identify the next step for the auditor with respect to each of the control deficiencies identified. (8 marks)

Q2. You were selected to lead the audit of Down Low Ltd for the year ended 30 September 2021. One of the assistants has been auditing the accounts receivable which has an ending balance of $3,800,000. This balance is made up of 2100 accounts receivable ledger account transactions.

It is noted in the working papers that 90 accounts were selected for checking. The basis of the sample selection was as follows:

The 20 largest accounts were selected

Haphazard sampling of the remainder

Any balance under $5,000 were regarded as too small to be chosen

The test performed on those items selected was to ask the customers to confirm in writing what they think the balance outstanding was at year-end (accounts receivable circularization).

The results of the test show the following:

	Number of items selected	Balance in sales ledger	Balance confirmed by debtor
No errors found (includes the 20 largest accounts)	65	$405,000	405,000
No confirmation by accounts receivable	7	16,000	16,000
Difference due to goods in transit to customers	6	14,500	8,200
Errors in calculating invoice total	2	21,000	12,000
Invoices posted to incorrect debtors ledger account	6	11,300	9,800
Invoice disputes with customer	9	12,000	7,500
Total	95	479,800	458,500

REQUIRED

a. Discuss the method of sample selection (including possible sampling risks) and suggest how this could be improved in order to be able to detect other material misstatements. (8 marks)

b. For any two of the categories where errors have been identified, discuss the potential misstatement that could arise and any adjustments that should be made to the financial statement. (6 marks)

c. Describe any further procedure that you will need to carry out in order to provide reasonable assurance about the test results, taking into consideration the sampling method used to produce the above test results. (6 marks)