QUESTION 1 (50 marks)

You are the Audit Senior at DNA Auditors and you have been assigned to perform the audit of Specter Incorporated (Specter) for the financial year ended 28 February 2023. Specter is listed on the Johannesburg Stock Exchange (JSE) and they have been a long-standing client of DNA Auditors. Specter employs over 350 employees.

Background of Specter Incorported

Specter is both a manufacturer and distributor of headsets. The Head Office is situated in Johannesburg. Distribution warehouses are in the Western Cape, Mpumalanga, and the Eastern Cape. Specter plans to open more distribution warehouses in other provinces in the coming months.

Inventory 2023		2022
R000		R000
Raw Material	6 500	5 250
Work in Process	8 700	6 300
Finished goods	13 100	11 500
Consumables	1 200	800
Total	29 500	23 850

Raw materials are used to manufacture headsets and are purchased from local and European suppliers. European suppliers invoice Specter in euros. Raw materials purchased from European suppliers are normally delivered by sea freight and smaller orders are delivered by plane. At the financial year-end, there was inventory to the value of R1 765 000 in-transit. This inventory was purchased free-on-board (FOB).

Work in progress for the group on 28 February 2023 was valued by Specters Production Manager based on the estimated stage of completion of each product. Work in progress consists of direct materials, direct labour, and allocated manufacturing overheads.

Purchase cycle

During your audit, when conducting the audit procedures of the acquisition and payment cycles, you noted the following regarding the purchase and receipts of raw materials:

Once raw materials reach the minimum inventory level, the Marketing Manager in the sales department prepares a purchase requisition which he also signs. He then forwards the purchase requisition to the Purchase Clerk in the purchasing department, who orders the inventory from suppliers (local or foreign), and the purchase price is negotiated telephonically. The details and rand value of the inventory are recorded on a pre-numbered order form with three carbon copies. This is provided to the Purchasing Manager for approval.

Once the Purchasing Manager receives the order form, he compares each order with the signed purchase requisition and checks the sequence of all the order numbers, after which he signs it. The original order form is kept in the purchasing department. One copy of the order form is sent to the appropriate supplier, whilst a second copy of the order form is provided to the inventory storeroom and a third copy is provided to the accounting department.

When the raw materials are delivered to Specter, a pre-numbered goods received note (GRN) is prepared by the Storeman. The Storeman records the date, nature, quantity, and condition of the raw materials received on the GRN. After the Storeman compared the GRN with the appropriate order, he signs the GRN. If the Storeman is not busy, the raw materials are taken to the store by either the Purchasing Clerks or himself.

The Inventory Clerk records the GRNs, and requisitions prepared in respect of raw materials received in the inventory records. As the company does not have a computer system at its disposal, the Accounting Clerk reconciles the inventory records to the inventory account in the general ledger every month. The accountant signs the reconciliation as having performed the reconciliation correctly. A perpetual inventory system is used. One of the benefits of the perpetual inventory system is that the accounting department has its theoretical inventory level at its disposal on a daily basis. The accuracy thereof must still be tested by performing a physical inventory count every three months by comparing the physical count to the inventory records.

Any differences are investigated, and, if necessary, the inventory records are adjusted with the written approval of the Financial Manager.

All documents used are stored in the administration department. However, due to strikes by some of Specters employees, the administrative department was unguarded for long periods during the year.

REQUIRED:

1.1 List any risks of material misstatement at assertion level relating to inventory for Specter Incorporated for the year ended 28 February 2023. For each risk, provide the appropriate assertion. (10 marks)

1.2 Discuss any weaknesses in the purchase cycle, and for each weakness, provide a consequence. Use the following table to structure your answer. (20 marks)

Weaknesses

Consequences

1.3 Design the test of controls of the purchase cycle. (20 marks)

SAICA Competency Framework Reference:	Perform an audit of historic financial information
a)	By applying F1, follow the stages involved in performing an audit:
(iii)	Evaluate transactional business processes
(iv)	Assess the entitys risk assessment processes, also taking into account its corporate governance and risk profiles
(vi)	Assess the risks of material misstatement at the financial statement level and at the assertion level for different classes of transactions and events, including related disclosures, and account balances with their disclosures