You have recently accepted the engagement to audit the financial statements of Game (Pty) Ltd, after the retirement of the company’s previous auditor from the auditing profession. The following information is of relevance:

The company has been established for many years, specializing in gaming equipment. The past few years’ audit reports have been unmodified and their financial performance has been excellent. It has a very good reputation in its industry and has received numerous ISO quality awards and certifications, pertaining to products as well as to business processes and management achievements.

The company runs a virtual record keeping system, in which all accounting and system documents are electronically generated, processed, stored and signed through the use of various passwords, finger print identification and cornea recognition technology for highly secure transactions.

The company’s accounting, production and payroll software are interfaced with each other. In addition, their accounting and production software interfaces with their customers’ production systems, enabling on-line transfer of order, purchase and billing data.

Game (Pty) Ltd has a limited, international and lucrative client base. The company imports its materials and manufactures the gaming equipment locally. However, the company has various warehouses in London, New York, Tokyo and Sydney, with a staff complement at each, which it uses to store finished goods intended for its international customers, until such time as the parts are physically ordered by these clients. The company retains ownership of the finished goods until such time as they are delivered to the clients.

Because of the need to import its raw materials, the company has entered into a number of FEC contracts with its bank in order to hedge against foreign exchange losses.

During the year under review, the company’s Tokyo warehouse was destroyed in a fire that was started at a nearby restaurant. The intense heat of the fire rendered the machined parts unusable. As a result, the client for whom these parts were intended suffered production losses due to supply delays, and has instituted legal action against the company to recover such damages.

The company’s credit policy requires payment within 60 days. The banking accounts are operated in South Africa. Customers are quoted in Euro, US Dollar, Australian Dollars and Yen, and invoices are issued accordingly. When invoices are recorded, they are converted at the ruling spot rate on the date of the transaction. Receipts are captured at the amount that appears on the bank statement on date of receipt. The foreign currency balances owing by the customers are computed manually. The customers are all very co-operative; balances are few and are very material to the financial statements.

The reporting requirements of the company are strict, with the audit deadline being 6 weeks after year end.

REQUIRED:

a) Discuss the 3 stages of pre-engagement activities and one consideration in each of these areas. (6)

b) List the factors extracted from the above information which would have an impact on your audit strategy, i.e. Scope, Direction and Timing. (10)

c) List 4 different types of specialized audit evidence which need to be obtained based on the information provided above. Give a brief explanation of each. (4)

d) List and explain the assertions applicable to transactions and events.