PPE 2013 Final Mark Plan: Question 2 A Parts (1), (2) and (3)
Candidate number
Part (1)
Marker number
Part (2)
=
Part (3)
Part (1)
1. Inadequate backups:
1.1. Risk assessment procedures (e.g. enquiry from the IT manager) should
be performed to:
1.1.1. Corroborate the CEO’s statement that no data relating to the
accounting system was lost during the year;
- To ensure no risk of material misstatement due to inaccurate
or incomplete data.
1.1.2. Ensure, despite this finding, that the general controls remain
sufficiently effective to warrant reliance on the application
controls.
1.2. Unless these risk assessment procedures indicate that financial data
that was material to the financial statements was lost or this is a
manifestation of more systemic weaknesses in general controls,
this finding will have no effect on the nature and extent of the further
audit procedures (i.e. tests of control or substantive procedures) that
should be undertaken.
Otherwise, perform substantive tests, eg. consider the effect of lost data
on the company’s ability to continue as a going concern.
2. Facilities – Fire extinguishing equipment was noted that could
potentially be detrimental to the health and safety of the staff if used:
2.1. Risk assessment procedures (e.g. enquiry of the IT manager/insurance
broker/company attorney) should be undertaken to corroborate the
CEO’s statement that the fire extinguishing equipment was not used
before 30 September 2013.
2.1.1. This is to ensure that there is no risk of material misstatement
arising from unrecorded penalties/ unrecorded legal
claims/unrecorded contingent liabilities.
2.2. Unless the fire extinguishing equipment was used before 30 September
2013 (which appears not to be the case), this finding will have no effect
on the nature and extent of the further audit procedures that should be
undertaken.
3. Incompatible duties – the individual responsible for generating invoices
is also able to generate credit notes:
3.1 Risk assessment procedures (eg. enquire of sales manager/perform
walk through) should be undertaken
3.1.1 to gain a better understanding of the compensating control
identified by the CFO.
3.1.2 Evaluation of controls necessary where controls manage
significant risk (fraud risk).
3.2 If the control identified by the CFO has been suitably implemented, then
testing of the credit manager’s review and authorisation of credit notes
should be undertaken (as part of the control testing strategy determined
by Mrs Ache).
3.2.1 The credit notes, or logs of credit notes approved electronically,
should be inspected for evidence of credit manager review and
authorisation, and the details on the credit notes should be
agreed to supporting documentation (i.e. to reperform the review
process).
3.3 To respond specifically to the fraud risk: The firm’s generalised audit
software should also be used to identify those credit notes that were
captured by Mr Nurse and processed, and that appear unusual (e.g.
credit note issued without valid number for Goods Received Note being
entered).
3.3.1 Substantive tests of detail (e.g. inspection of supporting
documentation) should be performed on such credit notes to
ensure that they are valid/genuine.
Page 1 of 7
Total mark out of 56
Corroborate (eg. enquire) no
data lost
- To ensure no RMM from
incomplete/inaccurate data
Ensure (eg. enquire) that GC
sufficiently effective to rely on
application controls
Unless financial data
material to FS lost or
systemic weaknesses in GC,
1
no effect on nature and
extent(Alt: substantive
tests/consider going concern)
1
Otherwise, substantive
tests/consider going concern
1
1
1
1
Corroborate (eg. enquire) fire
extinguisher not used before
30 Sept 2013
1
-
ensure no RMM from
unrecorded penalties/
legal claims/contingent
liabilities
Unless fire extinguisher used
before 30/9/2013, no effect
on nature and extent
1
Risk assessment procedures
(eg. enquiry/walk through)
to understand CN approval
process by sales manager
Evaluation of controls
necessary – significant risk
Inspect for sales manager’s
review and authorisation
(approval) of CNs (Test of
control)
Inspect CNs or logs of
electronically approved CNs
and agree CN details to
supporting documents
1
Fraud risk: Use GAS to
identify unusual CNs
captured by Mr Nurse and
processed (eg. CN without
valid GRN number)
Substantive test of detail (eg.
inspection of supporting
docs) on CNs to ensure
valid/genuine
1
1
1
1
1
1
1
4. Unauthorised changes to data in master files:
4.1 The ‘control’ identified by the CEO that debtors will complain about data
that was incorrectly captured in the debtor’s master file is unlikely to
detect situations where an inappropriately high credit limit has been
assigned, or where credit has been inappropriately (e.g. fraudulently)
extended to a customer.
4.2 Given the inadequate controls in this area, substantive procedures
rather than test of controls will have to be performed on the existence
and valuation of accounts receivable.
4.3 The firm’s generalised audit software should be used to identify debtors
whose standing data appears suspect (e.g. contains blank fields, has
details that are the same as those on the employee master file, or has a
high credit limit compared to other similar debtors).
4.4 Substantive tests of detail procedures at year-end should be performed,
as follows:
4.4.1 To investigate the occurrence of transactions with debtors whose
standing data appears suspect (refer 4.3); and
4.4.2 To obtain additional audit evidence about the existence of
debtors, by increasing the sample size used in the debtors
circularisation.
4.5 Given the weaknesses in the controls for the granting of credit, the
extent of audit work performed on management’s estimate for the
allowance for doubtful debts should be increased (see 6.2 below).
5. The system does not produce sufficient exception reports as standard
reporting:
5.1 The deficiency increases the risk that exceptions/errors may go
undetected by the auditee’s staff, increasing the risk of material
misstatement for all assertions affected by the revenue cycle (e.g.
revenue and accounts receivable).
5.2 Risk assessment procedures (e.g. further discussions with the IT audit
specialist/management) should be performed to identify those
assertions that are affected by a lack of exception reports – and an
understanding obtained as to whether the lack of exception reports will
undermine in any way reliance on the operating effectiveness of the
internal controls.
5.3 If the reliance on controls is rendered inappropriate by the lack of
sufficient exception reports, substantive testing rather than tests of
control should be performed.
5.4 The extent to which the firm’s generalised audit software is used to
identify/detect data anomalies in the databases/data files should be
increased, provided the information is available to be downloaded from
the system electronically (as has been suggested by the CFO).
Page 2 of 7
Customer complaints
unlikely to detect
inappropriately high credit
limit or inappropriate
granting of credit (fraud)
Inadequate control, so
substantive procedures on
existence & valuation of
accounts receivable
Use GAS to identify debtors
with suspect standing data
(eg. blank fields, details
same as on employee file,
high credit limit)
1
-
Substantive tests for
occurrence of
transactions with
debtors with suspect
standing data
- Existence of debtors-by
increasing e.g.
debtors circularisation
sample size
(substantive extent)
Increase extent of audit
work on management’s
doubtful debts allowance
1
Increased RMM for all
revenue and accounts
receivable assertions
1
Identify (eg. enquire)
assertions affected and
understand whether
reliance on operating
effectiveness of internal
controls undermined
If reliance on controls
inappropriate, substantive
testing
Increase extent of use of
GAS to identify/detect data
anomalies in database/
data files if info available for
electronic download
1
1
1
1
1
1
1
1
6. Errors in the data of ‘sales-by-product’ and ‘debtors age analysis’
reports:
6.1 Errors in the ‘sales-by-product’ report:
6.1.1 Consider whether or not the audit team intend relying on this
report during the audit process (e.g. in testing for possible asset
impairments).
6.1.2 If no reliance is placed on this report, this finding will have no
effect on the nature and extent of the further audit procedures, as
this relates to a business process and will not give rise to material
misstatements in the financial statements.
6.2 Errors in the ‘debtors age analysis’:
6.2.1 Given that the data reflected in this report is incomplete, there is a
risk that not all problematic debtors were taken into account by
management when the allowance for doubtful debts was
estimated.
6.2.2 As the problem appears to have been fixed shortly before yearend, the IT audit specialist should be requested to test whether
the problem identified in his report regarding the debtors age
analysis has been corrected in the debtors age analysis for 30
September 2013.
 If so, reliance can continue to be placed on the process
followed by management in making the estimate, and this
process can be audited.
 If not, the auditor should compute his own estimate of the
allowance for doubtful debts, and compare this to that
computed by management for reasonableness.
6.3 If these standard reports are required for audit purposes, the firm’s
generalised audit software should be used to recreate these reports –
rather than using the standard reports generated by the client’s system
as a basis for the audit procedures.
Other valid points
Communication skills (logic of answer)
Page 3 of 7
‘sales-by-product’ report
Does audit team intend
relying on report during
audit process?
If not, no effect on nature
and extent – relates to a
business process and no
risk of material
misstatement in FS
‘debtors age analysis’
Risk that not all problematic
debtors taken into account
in allowance for doubtful
debts
IT specialist should test
whether problem corrected
in 30 September 2013
debtors age analysis
-
If corrected, place
reliance on
management’s process
for estimate and audit it
- If not corrected, auditor
to compute doubtful
debts allowance and
compare to
management’s estimate
for reasonableness
If standard reports to be
used for audit purposes,
use GAS to recreate
reports rather than using
reports generated by
client’s system
Other valid points
Communication (logic)
Maximum
1
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2
20
Part (2)
Debit
R
JE1
JE2
JE3
Dr Salaries and wages
Cr Capitalised development costs
Credit
R
1
1 200 000
1 200 000
Correction of incorrect capitalisation of costs that are not directly
attributable to creating, producing, and preparing the asset (patented
vaccine) (per IAS 38.66)
Dr Retained earnings
Cr Capitalised development costs
Correction of expenditure on an intangible item that was initially
recognised as an expense that may not be recognised as part of
the cost of an intangible asset at a later date (per IAS 38 para 71)
Dr Accumulated depreciation: Equipment
Dr Impairment loss
Cr Depreciation [1 million X 7/12]
Cr Equipment
/2
/2
1
1
6 070 000
6 070 000
3 600 000
983 333
583 333
4 000 000
/2
/2
1
1
1
1
1
/2
/2
1
/2
1
/2
/2
/2
1
Write-off of equipment destroyed
JE4
Journal entry correct
Dr Equipment, at cost [7410 X 100/114]
Dr VAT control account (input) [7410 X 14/114]
Cr VAT control account (output) [3990 X 14/114]
Cr Gain on insurance [3990 X 100/114]
Cr Capitalised development costs
1
6 500 000
910 000
/2
/2
1
/2
1
/2
1
1
490 000
3 500 000
3 420 000
1
(Max
2)
JE5
Correction of incorrect treatment of insurance proceeds
Journal entry correct
Dr Capitalised development costs
Dr Depreciation
1
108 333
1
541 667
Cr Accumulated depreciation: Equipment
650 000
/2
1
/2
1
(Max
1)
Depreciation of new equipment
[R6,5 m x 20% x 6/12 months]
Journal entry correct
JE6
JE7
Dr Capitalised development costs
Cr Depreciation
1
333 333
333 333
Reallocation of depreciation on the equipment that was used for the
development of MiraCale prior to its destruction
[R1 m x 4/12 months]
Journal entry correct
Dr Amortisation of capitalised development costs (470 000 – 256 493)
Cr Amortisation expense
/2
/2
1
1
1
213 507
213 507
Correction of incorrect calculation of amortisation for the 2013
financial year
[Amortisation for 2013 = 12 311 666 X 5% X 5/12 = ]
Journal entry correct
/2
/2
1
1
1
1
/2
1
Communication skills (presentation of journals, including appropriate
narrations)
Communication
(journal presentation,
incl appropriate
narrations)
Maximum
Page 4 of 7
/2
2
(17)
Part (3)
ComSense & Partners
PO Box 13
Pretoria
0001
Letter layout (to reflect
appropriately the
addressee, date, heading,
sign-off by Mrs Ache)
2
Appropriate
introductory/closing
sentence
1
Inventory count on
30/9/2013 (near closing
time) - 2 weeks’ notice to
ChemSave
Separate out Medimade
stock & pack systematically
for count
1
IA Staff to have inventory
count skills or provide
advance training
Familiar with consignment
contract terms
Familiar with Chemsave’s
stock count procedures
Prior to count, gain
/update understanding of:
- Results of prior year
counts and problems
- details of stock holdings
at warehouse/20 stores
- IC systems relating to
inventory(ie. Custody,
handling receipt, issue
& obsolescence,
recording) at Chemsave
- System for identification
and distribution of free
samples
1
-
1
10 September 2013
Head: Internal Audit
Medimade (Pty) Ltd
PO Box 201
Pretoria
0001
Dear Mr Roids
CONSIGNMENT INVENTORY COUNT AT CHEMSAVE PHARMACY CHAIN
As part of our statutory audit, we would like to rely on the work performed by
your department on the consignment inventory counted at the ChemSave
pharmacies on 30 September 2013, and which will form part of the inventory
figure reflected in the 2013 financial statements of Medimade (Pty) Ltd. Thank
you for agreeing to assist us with this task.
Below please find the key matters that you should attend to before the
inventory count, and the key audit procedures that you should perform at the
count of the consignment inventory held by ChemSave.
1. Key matters that should be attended to before the inventory count:
 The inventory count must be conducted on 30 September 2013
(preferably late in the afternoon – close to the closing times of the
stores), and as per the agreement you must give two weeks’ prior notice
to ChemSave of the intention to conduct the count.
 Request Chemsave to separate Medimade inventory (incl. free
samples) and pack it in a systematic fashion for count purposes.
 The staff assigned to the engagement must:
o be skilled in the processes of conducting inventory counts, failing
which suitable training should be provided to them in advance; and
o familiarise themselves with the terms and conditions of the
consignment stock supply contract with ChemSave.
o familiarise themselves with and gain an understanding of
Chemsave’s procedures for counting inventory.
 Preferably in advance of the inventory count, internal audit must
gain/update its understanding of:
o the results of prior year counts & problems experienced, etc that
could impact on the current count;
o the details of the specific consignment inventory holdings at the
central warehouse and each of the twenty stores;
o the internal control systems (including accounting systems) relating
to the inventory (i.e. custody; handling the receipt, issue and
obsolescence of such inventory; recording) in use at the ChemSave
central warehouse and stores;
o the system for the identification and distribution of inventory to be
used as free samples by ChemSave (due to ChemSave being able
to use a maximum of 5% of the inventory supplied by Medimade as
free samples);
o How inventory movements will be controlled during the count and
how cut-off procedure will be effected.
 With reference to the assignment of staff to the ChemSave warehouse
and stores selected (see below), you should ensure that:
o the internal audit staff assigned are independent, both in fact and in
appearance, from Chemsave and its staff.
o sufficient internal audit staff are available to attend the inventory
count at the warehouse and five stores.
Page 5 of 7
Stock movement control
during count and cut-off
procedures
IA staff to be independent
from Chemsave & its staff
Sufficient IA staff to attend
warehouse & 5 stores
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2. Store selection:
 We want your staff to attend inventory counts at the central warehouse
in Alberton and at a selection of five stores operated by ChemSave.
 In determining which of the five stores to visit for the inventory count,
you should bear in mind that the results of the testing will be used as
substantive audit evidence, hence we would like a representative
selection that covers a substantial proportion of the consignment
inventory balance at 30 September 2013.
 Perform analytical procedures to identify stores to be selected.
 Store selection should also be targeted to include:
- Stores with a history of inventory issues, shortages, obsolete
inventory;
-
Stores with significant management and staff changes;
-
Stores with problems with record keeping, accounting issues and
adjustments; and
-
Stores with results that are significantly below or above expectations.
3. Sample size and method of item selection:
 The sample size should be determined using a statistical sampling
basis, recognising that1:
-
our planning materiality figure is R4 million;
[insert information on other parameters to enable internal audit to
determine sample size, not provided in scenario].
 The items to be test-counted from ChemSave’s consignment stock
records at the central warehouse and selected stores should be
selected randomly.
4. Method of counting:
 Request a list/report of the consignment stock on hand at the site at the
start of the count.
 To verify existence of consignment stock: For the items selected from
ChemSave’s consignment stock records, physically count the inventory
on hand that matches the selected item descriptions – and agree the
quantity counted to that per ChemSave’s records.
 When counting the items:
- Enquire concerning damaged/obsolete inventory and verify that the
items counted are original Medimade inventory items, that they are
unopened and in a good condition (eg. stored in refrigerator where
necessary).
-
inspect the expiry dates of these items. If the expiry date is found to
be before 31 December 20132, such items should be recorded (for
consideration as part of our audit of inventory obsolescence).
As items are counted, they should be neatly marked/labelled by your
staff – to ensure that the same items are not presented for counting
more than once.
Follow up and resolve any differences between the inventory counted
and Chemsave’s counts.
Observe Chemsave’s staff performing counts and determine adequacy
of their count procedures.
If large unopened boxes of inventory are on hand (e.g. at the central
warehouse), open a few such boxes at random and compare the
contents to the description on the label – to confirm that the contents
agree to the description.
-




1
2
Attend counts at
warehouse and 5 stores
Five stores selected to be
representative sample
covering substantial
proportion of consignment
inventory at 30/9/2013
Analytical procedures to ID
stores for selection
Including stores with:
- history of inventory
issues, shortages,
obsolescence
- significant management
/staff changes
- problems with record
keeping, accounting
issues and adjustments
- Results significantly
above/below
expectations
1
Sample size - statistical
sampling basis based on
(OR specify sample size):
- planning materiality –
R4 million
- [Other parameters] detail
Randomly select
consignment stock to be
counted from records
1
Request list/report of stock
at start of count
Existence – consignment
stock: Agree quantity from
list/report to physical count
(direction)
1
Enquire re
damaged/obsolete stock &
verify that original
Medimade, unopened and
in good condition
Inspect expiry dates – if
before eg. 31/12/2013
consider for obsolescence
Mark/tag items as counted
– avoid duplicating count
1
Resolve differences
between counts
Observe Chemsave’s staff
counting for adequacy
Open random boxes and
agree contents to label
description
1
Alternatively, the letter should indicate the size of the sample that must be counted.
Or other appropriate date
Page 6 of 7
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M
a
x
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5. Inventory movements and cut-off procedures:
In order to prevent the incomplete counting or double-counting of inventory as
a result of inventory movements:
 For the sites visited, evaluate the reasonableness of any sales
transactions that account for the difference between the quantities
counted and the quantities reflected as being on hand at the close of
business on 30 September 2013.
 Enquire about any Medimade inventory sold but not yet despatched and
ensure it is excluded from the inventory counts.
 For a sample of the last few orders of goods despatched by Medimade
(Pty) Ltd to ChemSave, trace to the relevant ‘goods received note’ to
ascertain whether it was received by ChemSave prior to the count, and
if received, inspect ChemSave’s consignment stock records to ensure that it
was included before 30 September 2013.
 For a sample of transfers from ChemSave’s central warehouse to stores
indicated as being ‘in transit’ on 30 September 2013, inspect the records
of both the central warehouse and the relevant store to ensure that the
inventory has been counted once (i.e. not omitted or double-counted).
Please feel free to contact me should you have any queries regarding the
foregoing.
Evaluate reasonableness of
sales that account for
difference between physical
and recorded quantities
Enquire re inventory sold
but not yet despatched – is
it excluded from count?
Sample of last few orders
despatched to Chemsave –
trace to GRN to ensure
received by Chemsave
prior to count
AND inspect Chemsave’s
records to ensure included
before 30/9/2013
For a sample of “in transit”
transfers from warehouse
to stores on 30/9/2013,
inspect warehouse & store
records to ensure only
included once
See above (appropriate
sign-off and closing
sentence)
1
Other valid points
Communication:
- Focused and relevant
answer
- Appropriate structure
and logical layout
1
Maximum
(19)
1
1
1
1
0
Yours faithfully
Mrs Heather Ache, Registered Auditor
Other valid points
Communication skills:
Focused and relevant answer (i.e. not listing points irrelevant to the set of
facts)
Appropriate structure and logical layout
Page 7 of 7
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