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You are an Audit Manager at an audit firm called Finley s Auditors. You have been working at this firm for more than ten years.
You are an Audit Manager at an audit firm called Finleys Auditors. You have been
working at this firm for more than ten years.
You are currently busy finalising the audit of Grace Valley Ltd Grace for the
financial yearend. Grace has been Finleys Auditors client since Graces inception.
Grace has a February financial yearend. Grace has been listed on the Johannesburg
Stock Exchange JSE for more than ten years now.
Grace is a manufacturing and distribution company that produces a variety of instant
foods. Grace owns the manufacturing plant but is renting the entitys Head Office
building. Inventory is the largest balance on the companys Statement of Financial
Position and consists of raw materials, work in progress, and finished goods. Raw
materials are purchased from both local and foreign suppliers.
All of Graces finished goods are distributed and sold in bulk from the entitys
warehouses across South Africa. The entity also recently started selling online in
smaller quantities to the general public and since then, the online platform has really
grown the company and specifically the sales figure.
The materiality is set at R million for the February financial yearend audit.
During the audit, and while conducting substantive audit procedures the following
unadjusted audit differences were identified:
During the inspection of invoices, while testing expenses, the First Year Audit
Clerk found an invoice for the purchase of a new machine, on credit, that is
used in the manufacturing process. The invoice date was January for
an amount of R million. Graces policy is to write depreciation off on this
machinery over five years, according to the straightline method, and no
residual value. No entries regarding this machine were made in the
financial yearend accounting records. This matter was discussed with
management, and they are not willing to process any adjustments.
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Regarding the machine purchased in note you noticed that the authorisation
for the purchase of the machine was inadequate. After you enquire from the
Chief Financial Officer, he mentions that all assets purchased above R million
need the approval of the Board of Directors. However, this acquisition was
approved by the Financial Manager.
Whilst auditing the revenue figure the audit team detected that some of the
sales were fictitiously recorded, such sales amounted to R million. You
discussed this with the Financial Director and he responded that he is aware of
these sales. This journal was made to increase sales and it will be reversed
after the financial yearend. The Senior Auditor mentioned to you that the
directors bonuses are depended on the companys sales figures.
Whilst inspecting the rental agreement for the Head Office building, you noticed
that a deposit a prepayment of rent of R was paid during August
which relates to the prepayment of rent expense for the financial year.
Grace recognised the payment as an expense in the financial statements.
REQUIRED:
Discuss the materiality of each of the unadjusted misstatements and explain
which of these misstatements have to be adjusted to enable Finleys Auditors
to express an unmodified opinion.
marks
Formulate the analytical procedures that would be performed in general as part
of your audit procedures to verify the trade payables of Grace Valley Ltd
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