$[$TURN OVER$]$CASE STUDY $40$ marksREAD THE "REQUIRED" PART ON PAGE $8$ BEFORE YOU CONTINUE.BACKGROUND INFORMATIONYou are a trainee accountant at ABC Inc and have been engaged in the audit of Chique$-$Spa$($Pty$)$ Ltd $($CS$)$ for the prior two years, with the engagement partner accepting the audit for thefinancial year$-$end $30$ April $2024.$Business operationsCS is a well$-$established beauty salon with service offerings that include beauty and wellnesstreatments. CS is located in the upmarket suburb of Hyde Park, Johannesburg. CS is familyowned and managed by two sisters, Becky Sibeko and Nkululeko Sibeko CA$($SA$).$ Beckyperforms duties as the operational director and Nkululeko serves as the financial director andoversees the financial functions, including the compilation of annual financial statements andthe authorisation of business expenditure. Nkululeko is also permanently employed as anauditor at a small audit firm $($the audit firm is unrelated to CS$).$During May $2023($previous financial year$),$ the two directors resolved to expand their flagshipproduct range through the addition of Hydro$-$bar, which is a specialised service offeringoriginating in ancient Japan. It focuses on hydration and skincare products using advancedtechnologies and high$-$quality products. Using social media platforms, Becky marketed theHydro$-$bar treatments as the most luxurious and hydrating treatments for which organic andworld$-$renowned Polaplex hydro$-$therapy products are used. These products have been provento provide immediate results for both skin and hair. The Hydro$-$bar adverts were shared andtrended on social media platforms. Initial offerings of the Hydro$-$bar treatments were wellreceived by the market, and many customers opted for CS as the preferred Hydro$-$bar spasolely on the basis of it use of Polaplex hydro$-$therapy products.Inventory count and hydro$-$therapy productsDuring the inventory count procedures on $30$ April $2024$ you identified the inclusion of Kerahairgeneric products in the inventory count sheets. Upon further enquiry, the beauty therapistindicated that a consignment from Japan, which included the designated Polaplex hydro$-$therapy products, had been delayed at the port of entry and, consequently, Nkululeko hadprocured a generic version from a local supplier. The therapist further indicated that Nkululekohad requested her not to inform anyone else since this was only a once$-$off event and theoriginal Polaplex products were received after two weeks. You have identified that the genericproducts were significantly cheaper than the Polaplex products. However, hydro$-$therapytreatments during that time were billed at the full price, and the use of the generic products wasnot communicated to the customers. You have also ascertained that the generic products hadnot been subjected to any quality assurance processes.CONFIDENTIALPage $6$ of $8$AUE$3761$ Test $3$July $2024[$TURN OVER$]$Trade creditorsIn June and October $2023,$ orders #$010$ and #$015$ were placed with a Japanese supplier$($documented as the preferred supplier in the payables master file$)$ to acquire hydro$-$beds andPolaplex hydro$-$therapy products. Full payment was made.During March $2024,$ due to increasing demand from customers and a need for additional bedsand Polaplex hydro$-$therapy products, Becky instructed the creditors clerk to place an orderwith Limpopo Manufacturers Ltd$,$ an alternative supplier from South Africa. This was becausethe preferred Japanese supplier could not expedite the order due to backlogs in orders. Order#$1209$ was created by the creditors clerk and approved by Becky. An amount of R$3925000$was billed and recorded in the creditors ledger and correctly allocated to trade creditors on $25$April $2024.$ At year end, the total trade creditors amount reflecting in the annual financialstatements was R$7500000(2023$: R$4750000).$ The balance owing to Limpopo ManufacturersLtd represented a significant line item in the $2024$ annual financial statements. You weresatisfied with the opening balances included in the FYE$2024$ AFS. Upon verbal discussionswith Nkululeko, you noted that credit note #CR$007$ had been issued on $30$ April $2024$ and itrelated to one of the beds in order #$1209$ that was defective. This credit note was only reflectedon the May $2024$ creditor statement. The amount has been included in the creditorsreconciliation and correspondence file.Limpopo Manufacturers LtdCredit noteDocument number: #CR$007$ Customer ID: I$-2025$Prepared for: Chique$-$Spa? $($Pty$)$ Ltd Date: $30$ April $2024$VAT number: $10201909$ItemdescriptionQuantity Amount Discount Total amountHydro$-$bed $1$ R$1668125-$ R$1668125$VAT $(294375)$Total credit R$1962500$Operating, payroll and financial systemsThe payroll function has always been manually compiled and captured onto the accountingsystem by Nkululeko. However, during $2024,$ Becky expressed concern over the possibility oferrors and payments to fictitious ad$-$hoc beauty therapists and$/$or fictitious days and hoursworked due to inadequate controls regarding timekeeping and the payment of wages.CONFIDENTIALPage $7$ of $8$AUE$3761$ Test $3$July $2024[$TURN OVER$]$As a result, both directors agreed that there is a need for a more streamlined and automatedprocess for weekly wages paid to beauty therapists that is also integrated with the accountingsystem. During the early part of the $2024$ financial year, the directors purchased a basic off$-$the$-$shelf clocking system and payroll application that automatically syncs to the accounting andbanking systems. CS also uses spa management software that includes dates, times, customernames and therapist names and that integrates with the other systems. Nkululeko, Becky andan independent bookkeeper have access to all these integrated applications on their laptopdevices in their own offices. These applications are compatible with your audit firms auditsoftware.Wages paid to beauty therapists and audit evidenceBeauty therapists comprise the largest number of employees at CS$.$ Their details are capturedby the bookkeeper onto the wages master file $($including hiring, dismissal and other changes$).$The beauty therapists have to provide their certified personal details $($including name, surname,ID number, cell number and residence$),$ bank account details and tax registration forms tocreate an employee file with a unique wage earner number. Wages are paid on a weekly basisto permanent and ad$-$hoc beaty therapists using the automated systems for the calculation ofnormal and overtime multiplied by the applicable rates of pay. Deductions $($UIF and PAYE$)$ arealso deducted prior to payment and paid over to the relevant authorities.A junior staff member on the audit team has requested and obtained the documents listedbelow but requested your assistance and advice regarding additional audit evidence and auditprocedures to address Beckys concerns regarding fictitious employees.Audit evidence already requested:$1.$ Trial Balance$/$General Ledger$/$draft AFS as at $30$ April $20242.$ Wages general ledger account$3.$ Weekly reports of dates and amounts paid to beauty therapists$4.$ Process flow chart relating to timekeeping, payroll preparation, and payment preparationand payout to beauty therapists$5.$ Manual compilations and accounting records before the implementation of the new systemCONFIDENTIALPage $8$ of $8$AUE$3761$ Test $3$July $2024$REQUIRED Marks$1.$ With reference to the background information and business operations:Describe the ethical concerns of Nkululeko regarding the use of the Kerahairgeneric hydro$-$therapy products. Your answer should be based on the SAICACode of Professional Conduct $($CPC$)$ and address the threats andconsequences linked to fundamental principles $($SAICA adapted$).(8)2.$ With reference to the background information, business operations andtrade creditors:Provide the substantive audit procedures that should be performed to addressthe accuracy, valuation and allocation and completeness of the amountowing to Limpopo Manufacturers as at $30$ April $2024.$ You can assume thetransactions listed above represent the balance owing.Communication skills: appropriate style$(9)(2)3\mathrm{.}4\mathrm{.}4\mathrm{.}14\mathrm{.}2$With reference to the operating, payroll and financial systems and wagespaid to beauty therapists and audit evidence:Describe the access controls required for the payroll application within theaccounting software that facilitates occurrence and authorisation. Yoursuggested access controls should make specific reference to the personneland processes in the scenario.Communication mark: layout and structureWith reference to the operating, payroll and financial systems and wagespaid to beauty therapists and audit evidence:Describe additional audit evidence that is sufficient and appropriate to berequested from management to support wages paid to beauty therapists forthe year ended $30$ April $2024.$Describe the substantive audit procedures that should be performed toensure that beauty therapists paid are not fictious as at $30$ April $2024.$ Yourprocedures should also include the use of Computer Assisted AuditProcedures $($CAATs$).(8)(1)(6)(6)$