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Smart - Pack is registered for value - added tax ( VAT ) as a category C vendor. The previous auditor resigned on 1 6

Smart-Pack is registered for value-added tax (VAT) as a category C vendor.
The previous auditor resigned on 16 November 2018 with immediate effect, due to irreconcilable differences between the engagement partner and the Smart-Pack Board. This related to the audit fees that were charged. Accordingly, Decker and Young Inc. (Decker and Young) was appointed as the new independent external auditor on 30 November 2018, for the 31 December 2018 year-end audit. Decker and Young is a medium-sized auditing, tax and advisory firm. The previous auditors did make prior year working papers available to Decker and Young and based thereon the new engagement partner is satisfied that reliance can be placed on all opening balances for the current financial year audit.
Smart-Pack is currently experiencing cash flow difficulties and is operating at the limit of its overdraft facilities. Therefore, Alicia requested that the signed audited financial statements be available by 4 February 2019, as Smart-Pack wants to apply for increased bank overdraft facilities from Invest Bank. Invest Bank requires audited financial statements that comply with International Financial Reporting Standards (IFRSs). The companys poor cash flow position is largely due to poor working capital management. The poor working capital management was first noticed in the South African operations but has been worsened by the increased production needs to service the new Lesotho and Botswana business liNES
Documentation reference Description
Memo B Planning notes on trade receivables and related items
Christine Tlaka is the senior sales and trade receivables accountant with extensive relevant experience. She is not a chartered accountant but has a Bachelors Degree in Accounting Sciences. She is assisted by John Mzini, a part-time, third-year accounting student.
All Smart-Packs sales transactions are on 30 days credit from date of invoice and subject to terms and conditions. Smart-Pack currently does not have written sales agreements with their customers. All invoices are accompanied by delivery notes, which are signed by the relevant customer upon delivery.
When customers place orders (usually telephonically), Christine issues invoices with reference to the price list that Peter approves on a monthly basis. Smart-Packs expansion of its business into Lesotho and Botswana has been a great success. There is potential for significant growth in both these countries, as well as other African countries. As a result, Smart-Pack sales have grown significantly compared to the prior year. Sales to customers in Lesotho and Botswana are invoiced in the applicable foreign currency and delivered directly to the customers.
Smart-Pack currently does not perform reconciliations on any of their customer accounts, but does send monthly statements to all customers via email. Payments received from a specific customer are allocated to that customers longest outstanding invoice first.
Notes 20182017
R R
Sales in South Africa 2563000032000000
Sales in Lesotho 17440000-
Sales in Botswana 18400000-
Total sales 6147000032000000
Cost of sales B1(48258500)(22500000)
Gross profit 132115009500000
Net profit /(loss)(47750)(1425450)
Note
B1 The R2800000-facilitation fee paid to P&P to ensure preferential procurement is included in FY2018s cost of sales figure.
Description Notes 20182017
R R
Total trade receivables 146121005752000
Customers from South Africa 54601005752000
Customers from Lesotho 4352000-
Customers from Botswana 4800000-
Allowance for credit losses B2(1513452)(1162800)
Net trade receivables 130986484589200
Total inventory 76125003170000
Trade payables B3(7785671)(3432860)
Bank overdraft (5650700)(2838600)
Total other non-current liabilities (14286094)(12994946)
Total other non-current assets 66709897565280
Shareholders equity and reserves 28268762779126
Notes
B2 The detailed calculation for the allowance for credit losses is available from Peter. Trade receivables contain no significant financing component. Smart-Pack uses the provision matrix as the practical expedient as suggested by IFRS 9, Financial Instruments.
B3 All purchases of raw materials used for manufacturing are on credit, payable within 30 days from date of invoice.
Question 1(15 Marks)
Discuss the factors that you would consider when assessing the risk of material misstatement relating to the inappropriate use of the going concern basis of accounting in the 2018 annual financial statements of Smart-Pack.
Question 2(15 Marks)
Formulate the substantive audit procedures that should be performed to respond to the assessed risk of material misstatement.

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