AUDITING 3B ASSIGNMENT 2
MOLEBATJI MASHIANE
30 September 2023
Damelin Lynnwood
Student number: 202000389
Table of Contents
QUESTION 1 .......................................................................................2-3
QUESTION 2 ....................................................................................4-6
QUESTION 3 .................................................................................6-7
1|Page
QUESTION 1
INTRODUCTION
An audit is a type of professional service provided to a customer. The evaluation of
accounting, financial, and other activities is the foundation of this service. An auditor
must thoroughly prepare himself before beginning an audit. Audit planning,
preparatory preparations by the auditor, audit program, audit notebook, audit working
papers, audit evidence, start of a new audit, test checking, and routine checking are
all part of audit preparation.
FORMULATION OF THE OVERALL AUDIT PLAN
1. Gain an awareness of the entity and its surroundings.
• The homeopathic / pharmaceutical sector is subject to many rules - gain
knowledge of the legislation / regulations that apply to the industry.
2. Learn about accounting information and internal control systems.
• Create a system documentation.
• Research the accounting policies used.
• Perform a preliminary examination of controls to evaluate whether the system
can be relied on.
3. Consider audit risk and material misstatement risk. The following inherent
hazards impact audit risk and must be considered:
• 1st time our company oversees the audit.
• The audit team and audit partner have no prior knowledge of the customer.
Because the firm only makes and sells one product, it is reliant on market
demand.
• When the product's patent expires, the firm's viability may be called into
question, unless the company can compete with generic competition.
• The machinery used to make the ear drops are uniquely developed for the
product and will not be able to make other items, allowing the firm to broaden
its product line.
• The homeopathic market is rather tiny.
• The manufacturing process raises the risk of valuation. A Hungarian firm
supplies and services the company's machine, which raises the risk if the
Hungarian company is no longer willing or able to do so.
• There is a risk associated with the accuracy of the accounting for
maintenance expenses and foreign currency transactions.
• Because the firm is the only one of its kind, finding statistical data for
benchmarking purposes will be challenging. A portion of the company's
merchandise is provided on a consignment basis. The danger rose in terms
of existence, rights, and worth.
• The managing director has recently been hired and lacks industry
experience.
• The firm is presently under financial stress because of:
2|Page
With reduced sales over the last year, net income is under pressure since the
corporation looks to be losing money. And the liquidity ratio is falling.
4. Determine the importance of planning. Indicator stability:
• The figures do not appear to be steady.
•
Profitability is declining for the firm.
Indicator
Range
Forecast
Lower
Top
Turnover
0.5-1%
40 000
200
400
Gross profit
1-2%
400
40
80
Net profit
5-10%
(56)
Equity
2-5%
400 000
8000
20 000
Assets
1-2%
Not given
Conclusion: As profits decline, management may manipulate results. CR is reduced
by a solid accounting and internal control environment. The audit risk is rated as
medium. Because net income is not consistent, we shall utilize gross profit or
revenue as an indication. Materiality is set to R200 000, which represents the lower
end of the Turnover range.
5. Audit methodology (type, scope, time)
•
Because this is a new customer, extra processes on opening balances must
be completed.
•
The timing of the inventory counts and debtors' circularization should be
carefully considered.
•
It is necessary to consider the usage of professionals. - There is a time
constraint, and we must finish our audit before the deadline.
6. Coordination, supervision, and review, as well as other aspects
•
Staff requirements should be carefully considered.
Conclusion
Planning an audit entail more than just gathering company knowledge and executing risk
assessments. Planning is a dynamic process that may evolve during the audit and
should always adapt to changes in the audited entity's circumstances. ISA 300
compliance should result in a well-focused audit, manned by competent professionals,
executing relevant and acceptable audit methods.
Source: https://www.accaglobal.com/gb/en/student/exam-supportresources/professional-exams-study-resources/p7/technical-articles/audit-financialstatements.html, Written by a Paper P7 examination team member
QUESTION 2
3|Page
(a) Alba



If Alba Co does not respond, the team should arrange to send a follow-up
circularisation with the client's permission.
If Alba Co does not respond to the follow-up, the auditor should call the
customer and ask if they are able to respond in writing to the circularisation
request, with the client's permission.
If no response is received, the auditor should pursue alternative procedures to
confirm the balance owed to Alba Co., such as detailed testing of the balance
by agreeing to sales invoices and goods dispatched notes
Floue



For the response from Flounder Co, with a difference of R5 850, the auditor
should identify any disputed amounts and determine whether they are due to
timing differences or possible errors in Triggerfish's records.
If the difference is due to timing, such as cash in transit, this should be agreed
upon after year-end cash receipts are recorded in the cash book.
If the difference is due to goods in transit, a pre-year-end GDN should be
agreed upon.
Manh



Discuss the reason for the credit balance with Manh with the credit controller
or finance department to understand how the credit balance arose.
Examine the payables ledger to see if Manh is both a supplier and a
customer; if so, a purchase invoice may have been posted to the receivables
rather than payables ledger in error.
If the difference is due to credit notes, it should be agreed to send pre-yearend credit notes around the year's end.
(b) Substantive procedures for allowance for trade receivables




Discuss the rationale for not providing against any receivables with the
finance director, and consider the allowance's reasonableness.
Obtain a breakdown of the R125 000 opening allowance and consider
whether the receivables provided for in the previous year were fully recovered
as a result of the additional credit control procedures or if they have now been
fully written off.
Examine the aged trade receivables ledger for any slow moving or old
receivable balances, and discuss their status with credit controllers to
determine whether they are likely to be received.
Check for any post-date cash receipts for identified slow moving/old
receivable balances.
4|Page



Examine customer correspondence to identify any balances that are in
dispute or are unlikely to be paid, and confirm that these have been taken into
account when calculating the allowance.
Examine board minutes to determine whether there are any significant
concerns about customer payments and whether these have been taken into
account when determining the allowance.
Recalculate the potential level of non-recoverable trade receivables, compare
to allowance, and discuss differences with management.
c) Going concern indicators



Mega Electro has paid some of its suppliers much later than usual and only
after numerous reminders; as a result, some of them have withdrawn credit
terms, requiring the company to pay cash on delivery. This indicates that the
company was struggling to meet its liabilities as they became due, and it will
also put significant additional pressure on the company's cash flow because
the company will have to pay for goods on delivery but will likely have to wait
for cash from its receivables due to credit terms.
Mega Electro main supplier, who supplies over 60% of the company's
specialized equipment, has recently gone out of business. If the equipment is
highly specialized, Marlin Co may be unable to obtain these products from
other suppliers, limiting the company's ability to trade. Other suppliers are
more likely to be available, but they may be more expensive or may not offer
favourable credit terms, increasing Mega Electro outflows and worsening the
cash flow position.
The overdraft at Mega Electro has grown significantly this year and is due for
renewal within the next month. If the bank does not renew the overdraft and
the company is unable to obtain alternative financing, it may be unable to
meet its liabilities as they become due, especially if suppliers continue to
demand cash on delivery, and the company may be unable to trade.
Mega Electro has decided not to pay a final dividend for the fiscal year ended 30
April 20X5 in order to conserve cash. This may cause shareholders to lose faith in
the company and attempt to sell their shares; they are also unlikely to invest
additional equity, and Marlin Co may need to raise funds to repay their overdraft.
(d) Going concern procedures



Obtain the cash flow forecast for the company and examine the cash in and
outflows. Examine the assumptions for reasonableness and share the results
with management to determine whether the company will have sufficient cash
flows.
Conduct a sensitivity analysis on the cash flows to determine the company's
margin of safety in terms of net cash in/outflow.
Consider the feasibility of management's plans for future actions, including
contingency plans in relation to ongoing financing and revenue generation
plans.
5|Page










Examine the company's post-year-end sales and order book to determine
whether trade levels are likely to increase and whether the revenue figures in
the cash flow forecast are reasonable.
Examine any agreements with the bank to see if any covenants have been
broken, particularly in relation to the overdraft.
Examine any bank correspondence to determine whether the bank will renew
the overdraft facility.
Examine post-year-end correspondence with suppliers to see if any have
threatened legal action or refused to supply goods.
Examine any contracts or correspondence with suppliers to ensure that the
company's specialized equipment is supplied. If no new supplier has been
confirmed, discuss with management how the company intends to continue
meeting customer demand.
Inquire with Mega Electro Co's lawyers about the existence of any litigation.
Conduct audit tests in relation to subsequent events to identify and mitigate
any items that may indicate or mitigate the risk of going concern not being
appropriate.
Examine the post-year-end board minutes for any other issues that may
indicate additional financial difficulties for the company.
Examine the post-year-end management accounts to see if they are in line
with the cash flow forecast.
Consider whether any additional disclosures regarding material uncertainties
over going concern, as required by IAS 1 Presentation of Financial
Statements, should be made in the financial statements.
QUESTION 3
i) Audit procedures using CAAT’s





The audit team can use audit software to calculate inventory days for the year
to date and compare them to the previous year to see if inventory is turning
over slower, which could indicate that it is overvalued.
Audit software can be used to generate an aged inventory analysis in order to
identify any slow moving goods that may require a write-down or allowance.
Cast the inventory listing to ensure that the inventory is complete and
accurate. To confirm net realisable value and/or cost, audit software can be
used to select a representative sample of items for testing.
Audit software can be used to recalculate the cost and net realizable value of
inventory samples. CAATs can be used to verify cut-off by determining
whether the dates of the last GRNs and GDNs recorded are prior to the end of
the fiscal year and that any with a date of 1 January 2013 or later have been
excluded from the inventory records.
CAATs can be used to confirm that any inventory adjustments noted during
the count were properly updated into final inventory records.
6|Page
(ii) Benefits of Using CAATS





CAATs allow the audit team to accurately and quickly test a large volume of
inventory data.
If CAATs are used on Lily's audit, they can be cost effective after setup as
long as they do not change their inventory systems.
CAATs can test inventory system program controls as well as general IT
controls such as passwords.
Allows the team to test the actual inventory system and records rather than
system printouts, which may be incorrect.
CAATs reduce the level of human error in testing, resulting in higher quality
audit evidence.
(iii) Drawbacks of Using CAATS





The cost of using CAATs will be high in the first year due to significant set-up
costs; it will also be a time-consuming process, which increases costs.
Because this is the first time CAATs will be used on Lily's audit, the team may
need training on the specific CAATs that will be used.
If Lily's inventory system is likely to change in the near future, costly revisions
to the designed CAATs may be required.
If the inventory system is incompatible with the audit firm's CAATs, bespoke
CAATs may be required, increasing audit costs.
If testing is done on the live inventory system, there is a chance that the data
will be corrupted or lost.
Bibliography
 https://www.accaglobal.com/gb/en/student/exam-supportresources/fundamentals-exams-study-resources/f8/technical-articles/auditingcomputer-environment.html
 Jackson and Stent: Auditing notes for south African students eighth edition
 Pieter Von Wielligh et al : Auditing fundamentals in a south African context 2 nd
revised edition
7|Page