Question 1 (15 Marks) Thando Mahlangu is a first-year trainee accountant. You are the audit senior in charge of the audit of Bad Wolf (Pty) Ltd, a large pig farming operation in Limpopo. The financial year-end of Bad Wolf is 31 December 2020. During the year under review, Bad Wolf acquired a new truck and trailer on 1 September 2020. They also sold a tractor on 31 October 2020. You asked Thando to perform audit procedures on the non-current assets in the financial statements. Non-current assets in the financial statements of Bad Wolf consists of property, plant and equipment. Thando is not sure about the assertions that he will need to test as well as the audit procedures that he would have to perform on non-current assets. Required 1.1. Explain to Thando what assertions should be tested during the audit of the non-current assets and why you have to test these assertions. You do not need to discuss the classification and presentation assertions. (8marks) 1.2. Explain to Thando what is meant by sufficient and appropriate audit documentation and how this will apply to the audit of non-current assets (7marks) Question 2 (20 Marks) Trevor Msinga is a newly appointed CFO of Amazing Ltd. Amazing Ltd has not been doing well in the past few months. Trevor had pressure from the company's stakeholders to turn things around. He entered into and approved the supplier agreement, where goods are to be sourced from Ndlovu Trading Inc. in the next 3 years. Ndlovu Trading Inc. is a company that owns a manufacturing plant in the Limpopo surrounds. The company started trading last year and is owned and managed by Themba Mnisi, Trevor's brother-in-law. As a result of the agreement, Amazing was able to source the inventory at a very low price, the inventory does not go through a quality standard test before being sold to customers. This resulted in the company making a higher Gross Profit on sale of goods to customer due to lower costs (cost of sale). The GP margin increased by 75% from its historical GP margin of 25%. Required 2.1. Discuss fully whether the above situation constitutes a reportable irregularity in terms of section 45 of (10 marks) the APA, 2005 2.2. Explain what actions you would take, if any, regarding the above matter. (10 marks) Question 3 (20 Marks) Kosmas is a high-quality, private motor manufacturing company. It has recently joined a consortium for the purchase of parts. Kosmas 's purchases and capital expenditure systems are not integrated. Purchase orders are generated automatically by the computerised inventory system when inventory levels fall below a given level in the context of scheduled production. This system does not work well because the system uses outdated purchasing and production patterns and many manual adjustments are required. The orders are reviewed by the production controller and her junior managers and changes are made informally by junior clerical staff in the production controller's department. Some of the purchases are input into the buying consortium system which shows the optimum supplier for any combination of cost, delivery time and specification. This system has only been in operation for a few months. The system takes up a substantial amount of disk space on the company's computers and is suspected of causing problems in other systems. It is difficult to use and so far, only two of the production controller's junior managers are able to use it. As a result, the parts ordered through the system are sometimes of the incorrect specification or are delivered late. The remaining purchases are ordered directly from manufacturers, as before, through a reasonably well controlled buying department. Required: 3.1. Describe errors and misappropriations that may occur if purchases and capital expenditures are not (5 marks) controlled 3.2. Explain the weaknesses relating to the purchases and capital expenditures systems of Kosmas (15 marks) Question 4 (20 Marks) Smithson Co provides scientific services to a wide range of clients. Typical assignments range from testing food for illegal additives to providing forensic analysis on items used to commit crimes to assist law enforcement officers. The annual audit is nearly complete. As audit senior you have reported to the engagement partner that Smithson is having some financial difficulties. Income has fallen due to the adverse effect of two high-profile court cases, where Smithson's services to assist the prosecution were found to be in error. Not only did this provide adverse publicity for Smithson, but a number of clients withdrew their contracts. A senior employee then left Smithson, stating lack of investment in new analysis machines was increasing the risk of incorrect information being provided by the company. A cash flow forecast prepared internally shows Smithson requiring significant additional cash within the next 12 months to maintain even the current level of services. Smithson's auditors have been asked to provide a negative assurance report on this forecast. Required: 4.1. Define 'going concern' and discuss the auditor's responsibilities in respect of going concern. (10 marks) 4.2. State the audit procedures that may be carried out to try to determine whether or not Smithson Co0 is a (10 marks) going concern. Siyabakulisa (Pty) Ltd is a small manufacturing company. The company's accounting functions are carried out by the accounting staff consisting of the accountant, Zandile Zulu, and two clerical assistants, Mlungisi Dube and Timothy Kazembe. The new owner of the business, Mary Kay is concerned about a number of processes followed and, not having a business background, has asked you to review and report on certain of these processes. However, her immediate concern is the control over the payment of creditors. To gather first-hand knowledge of how the system currently works, Mary herself compiled an accurate description of the system which he has given to you. 1. When an invoice is received from a supplier, it is promptly entered into the purchase journal by Mlungisi Dube and filed alphabetically by supplier name. When the supplier's monthly statement arrives, Mlungisi agrees the invoices received to the statement. She also checks that any payments that were made to the supplier by the company are reflected on the statement. 2. If an invoice reflected on the statement has not been received, Mlungisi highlights the invoice(s) and marks it "outstanding" on the statement. The full amount reflected on the statement is paid. When the outstanding invoice is received, it is filed with the statement to which it relates and the "outstanding" mark on the statement is crossed out and dated. 3. Using the statements, Mlungisi Dube then makes a list of all creditors and the amounts which they are to be paid. The list is passed to Zandile Dube, who writes out a cheque for each creditor under R5 000. All cheques are carefully written out and marked "not transferable". Zandile Dube signs each cheque and returns them with the list to Mlungisi Dube. Mlungisi Dube confirms the amounts of each cheque and that there is a cheque for each creditor on the list under R5 000 . Mlungisi writes the cheque number next to each payment on the list and then mails the cheques to the creditors attached to a Siyabakulisa (Pty) Ltd compliment slip. If the amount to be paid is more than R5 000, it is paid by EFT and not by cheque. 4. To pay creditors over R5 000, Zandile Dube accesses the electronic funds transfer facility on her computer and compiles a schedule of payments to be made by EFT to creditors. She obtains this information from the creditors list prepared by Mlungisi Dube. She carefully checks the details, namely the bank, branch code and account number of the creditor to be paid against a hard copy listing which she keeps for all creditors. 5. Mlungisi Dube passes the creditors list to Dean Johnson, as he is solely responsible for the cash payments journal, namely writing it up, posting transactions to the general ledger and reconciling the cash receipts and payments journal to the bank statement monthly. Required: Identify the weaknesses in the payments system described by Mary Kay. For each weakness you identify, explain briefly why you consider it to be a weakness (i.e., what can go wrong because of this weakness)