Question $2(40$ marks$)$

You are the senior on the audit of Akha $($Pty$)$ Ltd for the financial year$-$end $29$

February $2016.$ The company sells building materials. Although Akha $($Pty$)$ Ltd$$s

public interest score is slightly less than $100,$ the company$$s annual financial

statements are externally audited every year. The reason is that none of the

shareholders is active in the company and as a result they have included a clause

in the Memorandum of Incorporation which requires that the company be externally

audited. You have reached the evaluating and concluding stage of the audit and

are considering the following audit differences $($uncorrected misstatements$)$ which

have been recorded in the audit workpapers.

$1.$ During the inventory count your audit team identified a number of tins of

waterproofing sealant which had passed the expiry date stamped on the tins.

This had been reported to the operations director who responded that "although

the product doesn$$t work very well after expiry very few customers look at the

expiry date, so not to worry". However, you requested your audit team to check,

in detail, all the categories of product which made use of expiry dates, to

establish the extent of the problem. At the conclusion of this procedure, it was

revealed that inventory which had passed its expiry date but had been included

on the inventory sheets at year$-$end amounted to R$197233.$ Akha $($Pty$)$ Ltd does

not operate a perpetual inventory system. A simple quantity only Kardex system

is maintained by each section of the business and a comprehensive inventory

count is undertaken at year$-$end to establish closing inventory.

$2.$ Also included on the year$-$end inventory sheets were items costed at R$83491$

which represented goods delivered to Akha $($Pty$)$ Ltd on the day before the

inventory count which had taken place on the last day of the financial year.

However, due to preparations for the inventory count, goods received notes for

these goods were not made out until the following week and were recorded in

the March $2016$ purchase journal

$3.$ The three directors of the company are paid a bonus based upon the gross profit

for the year. Once the gross profit has been calculated by the financial

controller, $10$ percent $136$ thereof is accrued in the year$-$end financial

statements and paid out once the audit is completed. This bonus has not been

disclosed in the note on directors$$ emoluments as the directors feel that it

causes dissatisfaction amongst the company$$s employees.

$4.$ During testing of purchases several misallocations of expenses were revealed.

Fortunately, the audit team was able to isolate the errors to a week just before

year$-$end during which the accountant had been ill and a junior member of the

accounting staff had carried out the allocation. Your detailed analysis revealed

that purchases had been incorrectly debited with $4\mathrm{.}1$ R$8721$ repairs to an Akha

$($Pty$)$ Ltd delivery vehicle, $4\mathrm{.}2$ R$80000$ for a new shelving system used to display

power tools and $4\mathrm{.}3$ R$4648$ of general administration expenses such as

stationery, refreshments etc.

$5.$ The audit of debtors had revealed that an amount of R$56209$ owing from $24$

November $2014$ by Wallblox $($Pty$)$ Ltd was still outstanding on $29$ February

$2016.$ During heavy rain in January $2016$ Wallblox $($Pty$)$ Ltd$$s premises had

been flooded, causing extensive damage and the company$$s creditors are

pressing to have Wallblox $($Pty$)$ Ltd placed in liquidation. The directors of Akha

$($Pty$)$ Ltd have neither provided for, nor written off this debt, and are reluctant to

do so until they have heard the outcome of the creditors$$ action.

Extracts from the draft financial statements:

Gross Profit R$3317913$

Net profit before taxation R$1327165$

Non$-$current assets R$1550000$

Current Assets R$1778683$

Current liabilities R$486321$

Your firm$$s approach is to evaluate the materiality of audit differences both

qualitatively and quantitatively and to assist in this exercise the following

final materiality guidelines have been set for this audit:

Net profit before tax R$99500$

Net current assets R$100000$

Non$-$current assets R$120000$

REQUIRED:

$1.$ Akha $($Pty$)$ Ltd is audited because the shareholders require an audit. How

would this affect your planning materiality for the $2016$ audit. $(4)$

$2.$ What external professional intervention a company with a public interest score

of less than $100$ is required to have in terms of The Companies Regulations

$2011$ with regard to its annual financial statements. $(6)$

$3.$ Distinguish between "factual misstatements" and "judgemental misstatements"

and explain why an auditor would make this distinction. $(4)$

$4.$ Discuss the above audit differences, both singularly and collectively, with

regard to the fair presentation of the financial statements of Akha $($Pty$)$ Ltd at

$29$ February $2016.(26)$

End of Question $2\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_$