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Tutorial letter 106/2023

APPLIED AUDITING
AUE4862/NAU4862/ZAU4862

Year Module

Department of Financial Governance

IMPORTANT INFORMATION:
This tutorial letter contains important information
about your module.
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INDEX Page

Due date 3

Lecturers and contact details 3

Introduction 4

Suggested working programme 4

Preparation for the exam 5

Exam techniques 8

Case studies 12

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DUE DATE

DUE DATE FOR THIS TUTORIAL LETTER: 27 JULY 2023

LECTURERS AND CONTACT DETAILS

Personnel E-mail address

Lecturers
Dr L Grebe (Course leader) grebel@unisa.ac.za
Mr Z Abrahams abrahz@unisa.ac.za
Ms M Ditaole ditaomc@unisa.ac.za
Mr N Hoosen hoosen2@unisa.ac.za
Mr W Kriel krielw@unisa.ac.za
Ms J Kritzinger kritzja@unisa.ac.za
Dr A Terblanche terbleaj@unisa.ac.za
Ms R van Beek vbeekr@unisa.ac.za

The Department of Financial Governance has a helpdesk for postgraduate students. You may direct
all queries, except those of a purely administrative nature, to the helpdesk, either by e-mail or
telephonically between 08:00 and 16:00, Mondays to Fridays.

E-mail AUDpostgrad@unisa.ac.za

Please also note that the School of Applied Accountancy will be implementing an online
booking system during the course of the year to discuss subject content and not
administrative issues. Please refer to announcements posted on myUnisa for more
information.

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INTRODUCTION

INTRODUCTION

Tutorial letter 106 is the final tutorial letter for 2023. At this point in your studies you
should have already worked through all the previous tutorial letters.

You should have completed all your studies by now and therefore be able to attempt a
complete examination. It is for this reason that we have chosen to give you recent final
exam papers in this tutorial letter for you to attempt them as simulated examinations.
Again, we urge you to attempt these examinations under exam conditions, for the full
three hours per 100 marks (including reading time).

The final examination for 2023 will consist of two 100-mark questions and there will be
half an hour reading time for each question. You will thus be given two sessions of
3 hours each (which includes the half hour reading time per question) to complete the
examination.

We wish you all the best for the forthcoming exams and happy studying.

SUGGESTED WORKING PROGRAMME

Please refer to your Calendar tab on the myUnisa/Moodle platform to obtain the suggested working
programme for this tutorial letter.

Refer to myUnisa for any changes for test and exam dates.

This is the suggested working programme to work through the case studies in this tutorial letter.
Remember to attempt these questions under exam conditions.

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PREPARATION FOR THE EXAM

The section below is a practical guideline which you can consider during your preparation for the
exam.

PRACTICAL EXAM PREPARATION

5 to 8 Weeks Before

It is a good time at around five to eight weeks before exams to draw up a detailed revision timetable.
This will replace your usual timetable or study program.

You need to:

• give time to each subject which has an exam, at least 8 to10 hours each week;
• organise your time by the sections you need to cover;
• plan to study when you are most alert;
• give extra time to subjects or sections you find difficult;
• revise work during this final revision time;
• take time off to relax; and
• use useful study techniques

Example study program

No of
bud- No of Com-
Section Name of geted actual pletion Revi- Revi- Past
no topic Source of coverage hours hours status sion 1 sion 2 papers
TL 105 and Auditing
Companies Notes as well as
1 Act Companies Act for 16 15
referencing

MONITORING YOUR PLAN

• Check your plan regularly to see how well you are doing.
• You may need to amend your plan e.g. If something unexpected happens or if some revision
takes longer than expected.

FOCUS ON CONCEPTS
• Most of the students do not focus enough on frameworks.
• If you do not focus on frameworks, you will not be able to understand the interrelationship
within and across the auditing standards.

MOCK EXAMS
• At least 10 days before the exam conduct real time mock examinations.
• Simulate exam conditions.
• Assess yourself.
• Identifying weaknesses.
• Work on weaknesses.
• Do not just go through the solutions.

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SELF ASSESSMENT
Appraisal of performance is best directed by responding to five questions relating to the
marks gained.
• What was your total mark?
• How many marks were lost because you did not understand the theory?
• How many marks did you lose as a result of simple errors in your responses?
• How many marks were lost because you could not interpret the question, or you did not
answer what was asked?
• How many marks were lost because you ran out of time?

Think positively - If I put in the work, I will succeed!

• Work through past exam papers and tests.
• Work with a study partner or group.
• Find out the exam location and organise transport (if venue based).
• Organise exam equipment e.g. ID card, paper, pens, calculator, water, energy bar, etc.
• Look forward to the exam to show off your knowledge!
• Focus yourself positively for the whole exam experience.
• Visualise how you achieve success!

The night before

• If you have studied well, glance through your summaries/cards/flowcharts.
• Gather exam equipment - pens, ruler, ID card, calculator etc.
• Check transport arrangements (if venue based).
• If the exam is online check your internet connections, access to the Invigilator app, scanning
applications and the functioning thereof, access to MyUnisa, load shedding time schedules
etc.
• Revisit MyUnisa for all the communication and guidance relating to online submissions to
ensure that your scripts are submitted on time as no emailed scripts will be accepted.
• Use relaxation/stress management techniques.
• Have adequate sleep.

The day of the exam

• Eat a good breakfast. (Remember to take snacks and drinks with you.)
• Check your exam equipment, especially ID cards, calculators and other stationary such as
pen and paper.
• Arrive 20 to 30 minutes early (for venue-based exams).
• In cases of an online assessment use this time indication to settle in, make sure your internet
connection is fine, access to MyUnisa, Invigilator app etc.
• If possible, choose your favourite position in the exam room.
• Take deep breaths, think positively.
• Proper time management.
• Do not discuss the subject to be written with fellow students prior to writing the exam.

During the exam

• Calculate the time available for each question.
• Start every question by reading through the required first.
• Plant your answers properly.
• Start each question on a new page, as well as every sub-section.
• Write legibly and double-space your writing - examiners like this!
• If calculations are required, include working and define variables.
• Keep to the time limit for each question.
• Mental block? - relax, breathe deeply, and talk positively to yourself.
• Stop briefly after each question/set of questions and take a short break to relax, stretch, or
have a snack.
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After the exam

• In the case of online examinations use the designated time for the uploading of your papers
to ensure that you submit your papers on time and avoid the disappointment of your script not
being marked at all.
• Avoid exam post-mortems.
• Plan to spend time unwinding.
• Remind yourself there is more to life than exams.
• You are a person beyond your mark!
• Review your schedule for the next exam!

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EXAM TECHNIQUES

Pre-engagement activities

1. Always address the following four principles when answering a pre-engagement

activities question.
(a) Client investigation
(b) Auditor’s competence, capabilities and resources
(c) Ethical requirements
(d) Other significant matters

Read the required carefully to determine if you should limit your answer to only
certain aspects of the above.

2. Typical types of questions to expect.

• Discuss your concerns regarding the acceptance/continuation of the audit
engagement.
• Discuss the factors to consider prior to accepting the audit engagement.
• Discuss your concerns with regards to the engagement letter (ISA 210
appendix 1).

Risk at overall financial statement level

1. Remember that risk of material misstatement is limited to the risk of fraud and error
for inherent and control risk. As this still forms part of the planning phase of the
audit, detection risk should not be considered when determining risk of material
misstatement (as opposed to Audit Risk).

2. Types of risks usually associated with risk at overall financial statement level include
amongst others, going concern, the integrity of management, corporate governance
compliance, a new audit engagement that involves unresolved disagreements with
the previous auditor, JSE listing requirements and the nature of the industry. Can
you think of other risk indicators?

Risk at assertion level

1. Remember that certain assertions are usually more at risk within specific
transactions or business cycles. This is illustrated in the table below.

Cycle
Revenue & Overstatement Occurrence &
Receipts Existence
Acquisition & Understatement Completeness &
Payments Cut off
Payroll & Overstatement Occurrence &
Personnel Existence
Inventory & Overstatement Occurrence &
Production Existence
Finance & Overstatement / Existence /
Investment Understatement Completeness

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From the above, if you discuss risk of material misstatement at an assertion level,
for example revenue, your answer should mainly address the assertions of
occurrence and existence. Remember to still address all the assertions, but with
your focus on the assertions most at risk.

2. Remember to limit your answer to only the required transactions or business cycle.
For example, students often provide risk for the trade receivables as well when risk
of material misstatement for revenue is required. These additional risks are
irrelevant and do not earn marks.

Internal control

1. Students often struggle to differentiate between weaknesses in a given scenario of

internal control, the associated risks and the internal controls that should be
implemented to mitigate those risks. The table below sets out the difference.

Internal control
What should be… What should be but isn’t… Potential consequence
(Internal control (IC) not of IC weakness…
being performed).

The correct formulation of your answer is crucial as the above differs in principle.

2. Always base your internal control weaknesses, risks and internal control on the
different control activities and the components of internal control as set out in
ISA315 and in Chapter 5 of Auditing Notes for South African students. Ensure that
you understand the control activities and the components of internal control well
enough to know how to apply it when answering examination questions.

Internal control in a computerised environment

1. Remember that general and application controls include automated as well as

manual controls in a computerised environment. The key is that these are controls
that function within a computerised environment or system (as opposed to purely
physical controls). Students tend to address only automated computer controls when
answering questions regarding controls in a computerised environment.

2. Always use the table below when answering computer control questions. This will
enable you to determine the scope and parameters of your answer. Ensure that you
understand the five control activities well enough to know which ones to focus on
when answering examination questions.

Control objective Input Processing Output Master file

Occurrence and
Authorization (validity)
Accuracy
Completeness

Refer to your study material again for details instructions and examples on how to
use the table.

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Reporting

The new and revised standards on reporting are effective for audits of financial
statements for period ending on or after 15 December 2016. King IV is effective in
respect of financial years starting on or after 1 April 2017. For illustration purposes the
solutions of the case studies were adapted as if, the new and revised auditing standards
as well as King IV were applicable at the time.

SAICA Code of Professional Conduct (CPC)

We recommend that you study the CPC directly from the SAICA Student Handbook, as
you may have this book with you when writing the test and/or examination according to
the open-book policy. Bear in mind that the level of application may be higher because
CPC is open book. It is therefore important that you know your way around CPC.

Most students struggle to identify all the relevant matters relating to improper ethical
conduct in any given scenario. A very good theoretical knowledge of the CPC will help
you with this. You should also enhance this knowledge by attempting many questions
under examination conditions.

Remember that both CA(SA)s and RAs must comply with the CPC. It is therefore very
important to ensure you deal with the ethical conduct of all the relevant persons in the
given scenario, for example a financial director who is a CA(SA).

The threat to the auditor's independence will always be a topical issue, and you should
be on the lookout for this threat and any others hidden in a scenario. Please refer to the
CPC as well as Auditing Notes for practical examples on threats, considerations with
regards to the significance of the threat as well as actions and safeguards.

Auditing Profession Act (APA)

Reportable irregularities (RI) can be hidden in a scenario, and you should always be on
the lookout for them. It is very important to test whether it is a RI by comparing the given
information to the definition and requirements of a RI in section 1 of the APA. Marks will
be allocated for applying the theory to the scenario and not for merely stating the theory.

Do not discuss the auditor's reporting responsibility when you have identified an RI.
Rather analyse the "required" part of the question carefully to make sure you have to
mention this. Also, use the mark allocation of the question as guidance. Because the
reporting responsibilities as per section 45 are extensive, they will increase the amount
of marks that a question will count significantly.

King IV Report on Corporate Governance

We recommend that you study King IV directly from the SAICA Student Handbook, as
you may have this book with you when writing the test and/or examination according to
the open-book policy. Bear in mind that the level of application may be higher because
King IV is open book. It is therefore important that you know your way around King IV.

Please note that when a question refers to the term "corporate governance", it implies
that you have to consider King IV. In addition, you may need to consider corporate
governance issues arising from other sources (e.g. the Companies Act, Insider Trading
Act, business ethics, etc.).

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Corporate governance is very topical and will therefore be examined on a regular basis.

Corporate governance can be integrated with more than one topic. In preparing for tests
and examinations, always envision how the aspects from King IV can be linked to other
topics within auditing (especially with the Companies Act) as well as with your other
subjects.

Good examination technique includes reading carefully what is required of you. If you
are required to identify instances of non-application of King IV, do not waste time by
mentioning instances where the entity in question has applied King IV (a common
mistake that students make).

It is very important that you do not make assumptions from the facts given to you,
except when you are instructed to do so. By making assumptions, you are wasting
valuable time by providing information that will not earn you marks.

Companies Act

We recommend that you study directly from the SAICA Student Handbook, Legislation
and flag all the important sections. If the sections come up in a test or examination, they
will be easy to find.

In the examination and in the test, the Companies Act may be integrated with the rest of
your auditing syllabus as well as with other statutory, regulatory and ethical matters,
such as the King IV Report on Corporate Governance. Certain sections of the
Companies Act have a direct link with the King IV Report; therefore, you should not
study them in isolation.

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CASE STUDIES

Case Question Source Topics covered Marks Page

study
1 Kookoola Unisa Exam Pre-engagement activities 60 13
Incorporated paper 1 - Risks
2022
Setlhare Ltd Ethics 40 21
Audit opinion
2 Superior Unisa Exam Statutory matters and ethics 100 41
Workwear Ltd paper 2 - Computer controls
2022
3 Healthcon Ltd Unisa Exam Pre-engagement 50 63
paper 1 – Risks
2021 Internal controls
Squarehouse Audit procedures 50 69
(Pty) Ltd Computer-assisted Audit techniques

4 Med Group Ltd Unisa Exam Companies Act/Audit considerations. 50 85

paper 2 – Subsequent events
2021
Lehumo Ltd King IV Code on Corporate 50 88
Governance
Companies Act
Substantive procedures
SAICA Code of Professional Conduct
5 Greys Limited Unisa Exam Pre-engagement 50 106
paper 1 – Audit planning – risks
2020
Eezee Bookings Computer controls 50 110
(Pty) Ltd Risks

COMMENTS

Please note that the questions provided in this tutorial letter were updated taking into
account the following:
• King IV Code on Corporate Governance
• Conforming amendments and revisions of International Standards on Auditing (ISAs)
• SAICA Code of Professional Conduct 2021/2022 edition
• Updates to the accounting reporting standards

The dates on which these documents/changes came into effect will in most cases be
subsequent to the dates mentioned in the specific questions.

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CASE STUDY 1 100 marks

CASE STUDY 1 CONSISTS OF 2 UNRELATED QUESTIONS

YOU HAVE 30 MINUTES TO READ QUESTION 1 AND QUESTION 2

QUESTION 1 60 marks

INTRODUCTION

You have recently been appointed as a first-year trainee auditor at Kookoola Incorporated (Kookoola),
a medium-sized audit firm. Kookoola has offices across South Africa and its head office is situated in
Johannesburg. Kookoola has accepted many new clients in the current year and is also in the process
of merging with a reputable international audit firm, Cheekoola Incorporated (Cheekoola), with offices
across the globe. Kookoola would only have access to the resources of Cheekoola in 2023.

On 31 July 2022, Kookoola was assigned to conduct the external audit of a new client, Emergency
Room Anatonomy (Pty) Ltd (Eratonomy) and the overall Eratonomy Group. All subsidiaries including
the holding company in the group have a 31 August 2022 financial year-end and have their own
independent external auditors.

You recently attended the external audit planning meeting of Eratonomy held on 15 August 2022.
Attendees of the meeting included yourself; Ms Fizzers, the external audit engagement partner; and
Mr Ramakatchi, the external audit engagement manager.

UNDERSTANDING OF THE ENTITY AND ITS ENVIRONMENT

Eratonomy was established in 1960 and has been a supplier of medical equipment since its
incorporation. Eratonomy operates within South Africa through its subsidiaries, and independently on
an international level. Eratonomy’s objective is to be the most preferred and cost-efficient supplier of
medical equipment globally. Eratonomy’s strategy has historically been to obtain subsidiaries in the
medical equipment sphere so that inventory can be sourced on an intra-group level in achieving its
aforementioned objective. Eratonomy is perceived in the market as a reliable and reputable supplier of
high quality and cost-efficient medical equipment. This is due to the professionalism and expertise
extrapolated by Eratonomy’s sales personnel. Eratonomy achieves this by continual investment into
new innovation and staff training. Eratonomy is also affiliated with various reputable medical
associations to ensure that regulations and health standards are adhered to.

Ms Tamogotchi, the group chief executive officer (CEO), and Ms Inkatchimura, the group chief
operating officer (COO) are both confident in all work performed by Eratonomy’s internal audit
department based on Eratonomy’s historical experience with the internal audit department.

The following documentation are available for the audit of the Eratonomy Group for the
financial year ended 31 August 2022:

Documentation Reference Documentation Description

Annexure A Minutes of the audit planning meeting held on 15 August 2022
Annexure B Email from Ms Tamogotchi
Annexure C Acquisition of Yanos (Pty) Ltd

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Annexure A
Page 1 of 3
Entity name: Eratonomy Year end: 31 August 2022
Prepared by: You (first-year Date: 15 August 2022
trainee auditor)
Reviewed by: Audit Manager Date: 17 August 2022
Audit section: Minutes of the audit planning meeting held on 15 August 2022
Purpose

The purpose of this working paper is to document the details of the minutes of the audit planning
meeting for the audit of Eratonomy for the financial year ended 31 August 2022.

Attendance:

Ms Fizzers Audit Engagement Partner

Mr Ramakatchi Audit Engagement Manager
You First-year Trainee Auditor

Apologies:
None

Welcome
Ms Fizzers welcomed all to the meeting.

Minutes of the previous meeting

There were no previous minutes as this is a new audit engagement.

Audit tender
Eratonomy conducted an appropriate tender process in the appointment of the group auditors,
adhering to all Companies Act requirements. Ms Fizzers indicated that Kookoola had made a
strategic decision to rather tender for the audit under the name ‘Cheekoola’ as they believed the audit
firm would stand a bigger chance if they used the name of the bigger audit firm. Ms Fizzers justified
this action as she believes that when the audit is concluded, the merger between Kookoola and
Cheekoola would be complete. Ms Fizzers further indicated that it is unnecessary to inform
Eratonomy that the merger is not yet concluded. The terms of the audit were briefly discussed at the
annual general meeting (AGM), where all of Eratonomy’s major shareholders were present. Kookoola
(who signed the audit tender documentation as ‘Cheekoola’) accepted the appointment as the
external auditors, after assuring the shareholders at the AGM that they were sufficiently experienced,
skilled and resourced to conduct the audit for the group of companies. The shareholders were
impressed with ‘Cheekoola’s’ reputation and broad international client base.

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Annexure A
Page 2 of 3
Entity name: Eratonomy Year end: 31 August 2022
Prepared by: You (first-year Date: 15 August 2022
trainee auditor)
Reviewed by: Audit Manager Date: 17 August 2022
Audit section: Minutes of the audit planning meeting held on 15 August 2022
Previous auditors

Eratonomy provided written permission to Kookoola to contact the previous auditors, however,
Mr Ramakatchi indicated that we should not contact them as it was unnecessary, and that the
relevant information could merely be obtained from Eratonomy.

Engagement letter

Ms Fizzers indicated that you (the first-year trainee auditor) should commence with drafting the
engagement letter. Ms Fizzers further indicated that based on an agreement reached with
Eratonomy’s management, a quoted audit fee of R10 000 000, which is 20% less than the previous
auditor’s fee, will be charged by Kookoola. Ms Fizzers indicated to Eratonomy’s management that she
believes the previous auditors had substantially overcharged on the audit fees and that Kookoola
would therefore charge a much lower fee. Eratonomy’s management indicated that they would budget
for any incremental increase in the audit fee for the current audit cycle, should more audit work be
required. Ms Fizzers indicated that the quoted audit fee should not be exceeded in order to sustain
client retention and that the audit plan and audit approach should be adjusted accordingly to address
this objective.

Planning and interim audit

Mr Ramakatchi indicated that he had commenced with the audit planning working papers based on
previous meetings that he and Ms Fizzers attended with the chief financial officer (CFO) of
Eratonomy. Mr Ramakatchi indicated that all pre-conditions for an audit have been met. Mr
Ramakatchi requested that all staff members (currently operational and those forthcoming) should
obtain an understanding of the working papers that he had commenced on. Mr Ramakatchi indicated
that you should address all of the comments and queries that he had included therein and complete
the relevant working papers where necessary. Mr Ramakatchi then presented a work schedule, which
indicated that you would be responsible for completing the remainder of the audit planning working
papers within the next week. Thereafter you should commence with the interim audit work to ensure
that the audit is completed timeously and that internal controls were operational effectively.

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Annexure A
Page 3 of 3
Entity name: Eratonomy Year end: 31 August 2022
Prepared by: First-year trainee Date: 15 August 2022
auditor (You)
Reviewed by: Audit Manager Date: 17 August 2022
Audit section: Minutes of the audit planning meeting held on 15 August 2022
Materiality

Ms Fizzers indicated that Eratonomy’s management stated that they think the previous auditors used
R7 000 000 as the materiality figure. Therefore, Ms Fizzers indicated that she believes a higher
amount of R14 000 000 should rather be used and that it is stated in the draft engagement letter. Ms
Fizzers indicated that R14 000 000 is justified in sticking within the audit budget and would assist in
eliminating unnecessary audit work.

Additional resources and final audit

Mr Ramakatchi indicated that there are limited resources available within Kookoola currently. This is
mainly due to staff members either being allocated to other audit engagements and those being
occupied with the merger process. He further indicated that he and the engagement partner are very
busy with the merger and will not always be available during the audit. Therefore, only one or possibly
two additional trainee auditors have been booked for the final audit, and they will only be available
two weeks after year-end.

Deadlines

Ms Fizzers indicated that Eratonomy requires the audited annual financial statements to be finalised
within three months subsequent to year-end. Other than that, Eratonomy did not indicate a specific
deadline for the audit and requested that ongoing meetings should be arranged in discussing the
progress.

Conclusion

Ms Fizzers indicated that the meeting be adjourned and that any questions or queries be addressed
at a follow up meeting in two weeks.

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Annexure B
Page 1 of 2
Email from Ms Tamogotchi
From: Ms Tamogotchi (CEO)
To: First-year trainee auditor (You)
Cc: Ms Fizzers; Mr Ramakatchi
Date: 19 August 2022
Subject: Internal audit department
Dear First-year trainee auditor (You)

I trust that this email finds you well.

Based on my experience, I know that an audit requires a lot of work. To assist in reducing your audit
work you may use most of the work of our internal audit department who we have full confidence in
as I approve most of their recommendations. I expect that your audit fee for the 31 August 2022
financial year-end audit should be significantly lower than that of previous years (perhaps even lower
than the 20% reduction) as you can use most of the work of our internal audit department. We have
competent individuals in our internal audit department hence, we have excluded them from training
and having procedure manuals for their policies and procedures. Please note that the internal audit
department falls operationally under Ms Inkatchimura (COO). All the issues identified by the internal
audit department are reported directly to Ms Inkatchimura, who then reports to me. The members of
the internal audit department may only communicate their findings with external auditors and the
audit committee after obtaining prior approval from Ms Inkatchimura and myself. Furthermore, Ms
Inkatchimura interviewed, appointed and negotiated the remuneration of the six personnel in the
internal audit department. Four of them are family members of the directors and the remaining two
are administrators whose positions became redundant. Herewith is an extract from our dashboard
report in the human resources file for the individuals in the internal audit department:

Description Ms Alu Mr Dali Ms Ava Ms Lily Mr Ms Sho

Awe
Registered with the Institute of No No Yes No Yes No
Internal Auditors (IIA)
Qualifications: Tertiary Yes No Yes No Yes Yes
Qualifications: Bachelor’s Degree in Yes No Yes No No Yes
Internal Auditing

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Annexure B
Page 2 of 2
Email from Ms Tamogotchi

I look forward to hearing from you.

Kind Regards,

Ms Tamogotchi
Group Chief Executive Officer
tamogotchi@eratonomy.org.va

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Annexure C
Page 1 of 2
Acquisition of Yanos (Pty) Ltd
Eratonomy has recently been receiving many inquiries about supplying cleaning and disinfection
chemicals. Ms Tamogotchi saw this as a tremendous opportunity for Eratonomy to improve on its
financial position. After all relevant laws and regulations were adhered to, Eratonomy’s board acquired
80% of the share capital in Yanos (Pty) Ltd (Yanos), a company that manufactures cleaning and
disinfection chemicals for healthcare. Yanos holds a patent for an advanced cleaning chemical called
Hlweka®, which works not only for cleaning and disinfecting but also for fighting healthcare-associated
pathogens and other emerging threats. Hlweka® is highly sought after by healthcare centres due to its
effectiveness and eco-friendliness. Eratonomy has started with due diligence on Yanos, and the team
involved received the information below.

An extract standard cost for producing a batch of 1000 litres of Hlweka® is as follows:

Description Notes Standard Cost (R)

Slobet: 300 kg 1 27 000
Zesta : 150 litres 2 16 500
Alchohol : 750 litres 3 63 750

Notes :

1. Suppliers of Slobet supply it in 100kg ice blocks sold at R90 per kg.

2. The supplier of Zesta delivers 1000 litres per order charging R110 000.

3. Alcohol is sold in 500 litres of steel barrels at R42 500 per barrel.

4. The normal wastage of 20% for materials input is stored and sold at R55 per litre.

5. All inventory items are recorded at standard cost.

6. Hlweka® is packaged in 250ml bottles for the final consumer.

7. 1 kg of ice = 1 litre of liquid.

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Annexure C
Page 2 of 2
Acquisition of Yanos (Pty) Ltd
The following were the actual results for the month of August 2022:

• There was no opening inventory at the beginning of the month.

• Slobet: Made a bulk purchase of 15 000 kg of ice, paying R1 387 500, of which 12 400 kg was
issued to production.

• Zesta: 7 000 litres @ R122 per litre acquired, of which 6 250 were used in production.

• Alcohol: Purchased 30 500 litres at R93 per litre and issued 30 100 litres to production.

• The world price increases in fuel have resulted in general price increases on all the input
materials. At the time of purchase of Slobet and Zesta, prices were R95 per kg of ice and R120
per litre, respectively. The market price for Alcohol increased to R92.50 per litre

• In September 2022, 32 000 bottles of Hlweka® have been produced and sold.

Adverse Material variances calculated – August 2022

Description Price Variance (R) Material Yield Total Variance (R)
Variance (R)
Slobet 37 500 16 875 73 500
Zesta 84 000 30 937,50 111 500
Alcohol 244 000 39 843,75 252 500

Yanos management was unhappy with the above variance outcome, which prompted a suspension of
their two experienced staff, the production manager and the purchase manager, pending a hearing.

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QUESTION 2 40 Marks

BACKGROUND

You are an audit manager at Kaone Auditors Incorporated (Kaone), an audit firm with its head office
located in Johannesburg and a regional office in Polokwane, South Africa. You are currently busy with
the final stage of the audit of the financial statements of Setlhare Limited (Setlhare) for the financial
year ended 31 August 2022. Setlhare is listed on the Johannesburg Stock Exchange Limited (JSE
Ltd). Kaone have been the auditors of Setlhare since 1 September 2021 after taking over the audit
from Radebe Incorporated (Radebe), who had resigned due to mandatory audit firm rotation. Mrs
Loreto CA(SA), RA, an audit partner at Kaone, is the engagement partner, responsible for the Setlhare
audit.

Setlhare was established in 2012 by its current chairperson (an executive director), Mr Modi and the
chief financial officer (CFO), Mr Kutu CA(SA). Setlhare is a registered Value Added Tax (VAT) vendor.
Setlhare’s business entails the supply of physical protection security services and derives 90 percent
of its revenue from government tenders across various national departments, municipalities, and state-
owned enterprises. The other 10 percent of its revenue is derived from individual households across
South Africa.

Additional information

You were caught off-guard by the details reported by both News@4 and Daily Marvellous newspapers
about Setlhare’s involvement in the so-called state capture in South Africa. It is alleged in the two
newspaper articles that Setlhare is one of the entities identified by South African Chief Justice,
Raymond Zondo, for its involvement in wrongdoing. These allegations pertain to protection security
tenders of five state owned entities. It is alleged that Setlhare benefited from all security tenders for the
past eight years from these five state owned entities and it is further alleged that Setlhare gave
kickbacks to top managements of the five state owned entities in exchange for these tenders.

Setlhare prepares three sets of annual financial statements in a year. One set is prepared for the
South African Revenue Service in terms of the Tax Administration Act 28 of 2011, the second set is
prepared for tender purposes and the third set comprises of actual amounts as per bank statements
etc.

Final materiality for the 2022 audit is set as R1 000 000.

The following audit working papers are available for your consideration for the year ended 31
August 2022:

Working paper reference Description

Annexure A Extract of the minutes of a meeting held with Radebe on 03 September
2022
Annexure B Extracts from the three sets of the annual financial statements for the
financial year ended 31 August 2022

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Annexure A
Page 1 of 1
Entity name: Setlhare Year end: 31 August 2022
Prepared by: You (Audit Manager) Date: 08 September 2022
Reviewed by: Reviewer Date: 10 September 2022
Audit section: Extract of the minutes of a meeting held with Radebe on 03 September
2022
Purpose
The purpose of this working paper is to discuss various aspects with Radebe relating to the audit of
Setlhare for the financial year ended 31 August 2022.

Date and Venue

03 September 2022, 09:00, Radebe Incorporated’s office, Kgorong Boardroom

Attendance
Mrs Loreto CA (SA) RA - Audit partner at Kaone
You (Audit Manager) - Audit manager at Kaone
Mrs Mbombela CA (SA) RA - Audit partner at Radebe

Matters discussed in obtaining an understanding of the entity and its environment

Mrs Mbombela indicated that Radebe enjoyed a great relationship with Setlhare over the years and
said she will forever treasure that relationship. She indicated that she was the partner responsible for
both assurance and taxation services of Setlhare and advised that if Kaone has capacity, it would be
great to do both as it is easier. Setlhare’s management also prefers to deal with one service provider
for both these services. Mrs Mbombela further indicated that there is a lot of money to make from the
Setlhare audit engagement since Kaone would have to audit three different sets of financial
statements prepared annually by Setlhare.

Mrs Loreto thanked Mrs Mbombela for putting in a good word for her, which resulted in Kaone
obtaining the audit engagement. Mrs Mbombela told Mrs Loreto to always make time for golf with Mr
Modi and to remember that directors’ personal expenses must be classified as corporate social
expenses for taxation purposes. Mrs Mbombela further reminded Mrs Loreto to remain the audit
partner for Setlhare as this is key to her friendship with Mr Modi as well as for Kaone to continue
keeping Setlhare as one of their main clients. Mrs Mbombela also reminded Mrs Loreto that the issue
of three sets of financial statements should be kept under wraps as this is the secret weapon for
Setlhare winning more tenders as their financials look great as well as paying less tax due to less
turnover depicted and more expenses claimed.

Conclusion
Mrs Mbombela indicated that the meeting be adjourned, the meeting concluded at 10:25.

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Annexure B
Page 1 of 2
Entity name: Setlhare Year end: 31 August 2022
Prepared by: You (Audit Manager) Date: 11 September 2022
Reviewed by: Reviewer Date: 12 September 2022
Audit section: Extracts from the three sets of the annual financial statements for the
financial year ended 31 August 2022
Purpose

The purpose of this working paper is to provide extracts from the three sets of the annual financial
statements of Setlhare for the financial year ended 31 August 2022.

Description

Audit procedures performed by Kaone confirmed the claims made by Mrs Mbombela regarding the
preparation of three sets of annual financial statements. Audit procedures further provided audit
evidence that the annual financial statements prepared for submission to the South African Revenue
Service (SARS AFS) for purposes of Tax Administration Act 28 of 2011 showed a lower tax liability
compared to the annual financial statements submitted for tender purposes (Tender AFS). Audit
procedures further provided sufficient and appropriate audit evidence relating to the actual amounts
(Actual) depicted below.

Extract of the Statement of Profit or Loss and other comprehensive income for the financial
year ended 31 August 2022:

Statement of Profit or Loss and other SARS AFS Tender AFS Actual
comprehensive income R R R
Revenue 89 800 000 143 600 000 179 600 000
Cost of sales and Operating expenses (66 800 000) (33 400 000) (33 400 000)
Profit before tax 23 000 000 110 200 000 146 200 000

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Annexure B
Page 2 of 2
Entity name: Setlhare Year end: 31 August 2022
Prepared by: You (Audit Manager) Date: 01 September 2022
Reviewed by: Reviewer Date: 02 September 2022
Audit section: Extracts from the three sets of the annual financial statements for the
financial year ended 31 August 2022

Extract of the Statement of Financial Position for the financial year ended 31 August 2022:

Statement of financial position SARS AFS Tender AFS Actual

R R R
Tax payable 6 440 000 30 856 000 40 936 000
Other 140 000 181 371 140 000
Current liabilities 6 580 000 31 037 371 41 076 000

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CASE STUDY 1
REQUIRED

QUESTION 1

Marks
(a) With reference to the introduction, understanding of the entity and its
environment and Annexure A:

(i) Discuss the concerns relating to Kookoola’s acceptance of the Eratonomy Group
as an audit client for the financial year ended 31 August 2022. 19

(ii) Discuss the effect of the information provided on your assessment of the risk of
material misstatement at the overall financial statement level, in the annual
financial statements of the Eratonomy Group for the financial year ended
31 August 2022. 9
(b) With reference to Annexure B:

Draft a response email to Ms Tamogotchi in which you discuss the aspects that
Kookoola should consider when evaluating whether the work of the internal audit
function can be used for purposes of the Eratonomy Group’s external audit in terms of
the International Standard on Auditing (ISA) 610. 11

Communication skills: format/email 1

(c) With reference to Annexure C:

(i) Provide a detailed analysis of the material variances. 17

(ii) Comment with reasons on whether you agree with Yanos' decision to suspend
the two employees. 3
Total 60

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QUESTION 2

Marks
(a) Discuss whether Kaone should have accepted the appointment to audit Setlhare for
the financial year ended 31 August 2022 by only focussing on the ethical matters. 13

Note: Do not discuss any aspects of the SAICA and IRBA codes of professional
conduct.
(b) With reference to Annexure A and B:

(i) Discuss the aspects that the auditor should consider with regards to the three
sets of financial statements and whether the preparation of the three sets of
financial statements constitutes a reportable irregularity in terms of the Auditing
Profession Act 26 of 2005, for the financial year ended 31 August 2022. 15

Note: Do not discuss reporting requirements to management,

professional bodies and the regulatory board.

(ii) Discuss the impact of the information provided on the audit opinion in terms of
International Standard on Auditing (ISA) 700, for the financial year ended
31 August 2022. 11

Communication skills: logical argument 1

Total 40

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CASE STUDY 1
SUGGESTED SOLUTION

QUESTION 1

(a) With reference to the introduction, understanding of the entity and its environment and
Annexure A:

(i) Discuss the concerns relating to Kookoola’s acceptance of the Eratonomy Group
as an audit client for the financial year ended 31 August 2022.

Discussion Marks
1 Kookoola is a medium-sized audit firm, yet they have accepted many clients in
the current year. They might not be able to service Eratonomy, especially
considering that they have mislead the shareholders into believing that Kookoola
has the resources of CheeKoola. 1
2 Kookoola is a local medium sized firm and Eratonomy is an international group.
No consideration has been given as to whether all the financial information is
situated centrally or whether component audit teams/external teams will have
to be used in the audit if Kookoola does not have enough staff to go to all places. 1
3 The audit was accepted a month before year end, no consideration was given as
to whether that is enough time to plan the audit, as this would limit any interim
audit work that may have been necessary. 1
4 No consideration was given as to whether Kookoola would be able to comply with
relevant ethical requirements such as Independence. 1
5 The audit was accepted without considering if Kookoola could service Eratonomy
Whether they have the necessary competence and skills. This seems unlikely
considering that very limited staff seem to be available, and a first-trainee auditor
has been given significant responsibilities in the audit. 1
6 There appears to be shortages of resources. There are limited resources
available within Kookoola currently. This is due to other staff members being
allocated to other audit engagements and being occupied with the merger process. 1
7 The first-year trainee auditor has been assigned to do planning and test other
significant risks and will not have the necessary experience to do so. 1
8 The first-year trainee auditor does not have the competence to audit a company
in any industry, has no previous experience in any industry and received no 1
training.
9 The audit engagement partner and manager are not always available to
provide sufficient supervision and direction on the audit. 1
10 The first-year trainee auditor has been provided very little time to perform all
planning activities and the audit with only the assistance of limited resources. 1
11 The planning has been started but the engagement letter is still a draft format,
hence, this is non-sensical. 1

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Discussion Marks
12 Kookoola did not communicate with the previous auditor as required by ISA220.
Instead, reliance is placed on management of the audit client to supply the
necessary information. 1
13 No consideration was therefore given as to whether any prior year matters
identified by the previous auditors and not necessarily included in the audit report
may affect the current audit, such as: 1

• High risk and problem areas identified by the previous auditors would not
have been identified. 1
• The audit team would lose out on significant insight into the audit client
that the previous auditors would have obtained through experience. 1

14 Ms Fizzers inappropriately set the materiality figure and included it in the draft 1
engagement letter, without considering any of the following factors:

• The basis of the materiality calculation used by the PY auditor and the risk
of material misstatement in the current year. 1
• Any changes in the entity that could influence the materiality level 1
• The increased risk in the current year due to this being a first-time client. 1
• The auditor is responsible for setting materiality, not management, and should
continually reassess the materiality figure during the audit, it is therefore
inappropriate to fix it in the engagement letter. This questions the competence
of the auditor. 1

15 No consideration was given to determine whether the audit software of Kookoola

would be compatible with the information system of Eratonomy which may limit the
use of CAATs by Kookoola. 1
16 No consideration was given as to the integrity and ethical values of principle
owners and key management as to the integrity of management as required by
ISA220 and ISQC1. 1

Management appears to have integrity and skills. However, this should have been
investigated. 1
17 Based on the above, the acceptance of Eratonomy as audit client is not in-line
with the APA, Companies Act and ISA’s and CPC. 1
18 CPC – Any other valid points 2
Available 26
Maximum 19

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(a) With reference to the introduction, understanding of the entity and its environment and
Annexure A:

(ii) Discuss the effect of the information provided on your assessment of the risk of
material misstatement at the overall financial statement level, in the annual
financial statements of the Eratonomy Group for the financial year ended
31 August 2022.

Discussion Marks
1 Eratonomy is a new client, and the financial statements may be fraudulently
materially misstated by management because the new auditors have limited
knowledge of the entity and management may therefore be in a position to hide
fraudulent activities from the auditors. Hence, there is an increase in ROMM. 1

There is a specific risk that the opening balances could be materially misstated
especially considering that the previous auditors will not be contacted to
determine whether their audit adhered to strict quality controls standards. Hence,
there is an increase in ROMM. 1

Eratonomy might also not have been applying the accounting policies correctly
and/or consistently which could result in the financial statements being
misleading. Hence, there is an increase in ROMM. 1
2 Eratonomy forms part of a group structure of several subsidiaries and operates
internationally. Hence, there is a risk of material misstatement in the consolidated
annual financial statements of Eratonomy in:

• That complex IFRS requirements not being applied correctly. Hence, there is
an increase in ROMM. 1
• That intercompany transactions are not eliminated (or cancelled), because
the group sources many of its inventory within the group. Hence, there is an
increase in ROMM. 1
• That related party transactions not at arm’s length (considering that it is
mentioned that there are cost savings through intergroup transactions) and
are not correctly identified and not disclosed separately. Hence, there is an
increase in ROMM. 1
• That internal controls might not be effectively and consistently implemented
throughout the group, resulting in material misstatements. Hence, there is an
increase in ROMM. 1
3 The group operates internationally and the AFS may be materially misstated, as
Eratonomy might not comply properly with the relevant laws and regulations,
possibly resulting in material misstatements of unrecorded liabilities, expenses,
etc. For instance, different laws and regulations in other countries. Hence, there is
an increase in ROMM. 1
4 The board appears to be very cooperative and transparent and seems to value
ethics and a quality audit. This is evident from their appropriate tender process,
and they adhered to the Companies Act requirements). Hence, there is a
decrease in ROMM. 1
5 Management has not set a tight deadline as Eratonomy does not indicate a
specific deadline for the audit and requested that ongoing meetings should be
arranged in discussing the progress of the audit thereof. Hence, there is a
decrease in ROMM. 1

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Discussion Marks
6 The fact that Eratonomy has been in the industry for over 40 years indicate that
it has the skills and experience to face any crises. Hence, there is a decrease in
ROMM. 1
7 Eratonomy is also affiliated with various reputable medical associations in
ensuring that regulations and health standards are adhered to. This is an
indication of strong corporate citizen awareness. Hence, there is a decrease in
ROMM. 1
8 The new auditors Kookoola were only appointed in Aug 2022, a month before
year-end. They might not have enough time to properly plan the audit resulting
in material misstatements going undetected. Hence, there is an increase in
ROMM. 1
Available 13
Maximum 9

(b) With reference to Annexure B:

Draft a response email to Ms Tamogotchi in which you discuss the aspects that
Kookoola should consider when evaluating whether the work of the internal audit
function can be used for purposes of the Eratonomy Group’s external audit in terms of
the International Standard on Auditing (ISA) 610.

Email to Ms Tamogotchi 1 Mark

To: Ms Tamogotchi
From: First-year trainee auditor (You)
Cc: Ms Fizzers; Mr Ramakatchi
Date: 2022
Subject: Internal audit department
Dear Ms Tamogotchi

I trust that this email finds you well.

Please refer to the below discussion.

Regards,
First-year trainee auditor (You)
Discussion Marks
Objectivity
1 In determining whether the work of the internal audit function can be used for purposes
of the audit we should evaluate the objectivity of the internal audit function: 1
1.1 The internal audit function is not seen to be objective, as the internal audit function
reports directly to Ms Tamogotchi, the group chief executive officer (CEO), and Ms
Inkatchimura, i.e. those charged with governance. 1
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Discussion Marks
1.2 The internal audit function is not seen to be objective as Ms Inkatchimura oversees
the appointment and determination of remuneration of the internal audit function (ISA
610 par A7). 1
1.3 The internal audit function is not seen to be objective, as there are restrictions placed
on the internal audit function by management as they need prior approval from Ms
Tamogotchi, the group chief executive officer, and Ms Inkatchimura before they
(internal audit) may communicate their findings with the external auditors and the
audit committee. 1
1.4 The internal audit function is not seen to be objective, as four of the six personnel are
family members of directors. 1
Competence: (ISA 610 par A8)
2 In determining whether the work of the internal audit function can be used for
purposes of the audit, we should evaluate the competence of the internal audit
function (ISA 610 par A8): 1
2.1 The internal audit function does not have the necessary formal qualifications, training,
experience and expertise, as only three of the internal auditors have an internal audit
degree. 1
2.2 The internal audit function does not have the necessary formal qualifications, training,
experience and expertise, as only four of the members in the internal audit
department have tertiary qualifications. 1
2.3 The internal audit function does not have the necessary formal qualifications, training,
experience and expertise as two of the three staff members that do have an internal
audit degree are not registered members of the Institute of Internal Auditors (IIA) and
thus might not be subject to the quality control procedures and requirements of the
IIA. 1
2.4 The internal audit function does not have the necessary formal qualifications, training,
experience and expertise, as no training was provided to the internal audit department
as the audit work is based only on practical experience due to Ms Tamogotchi
perceiving them to be competent. 1
2.5 The above (point 2.1 to point 2.4) is partially mitigated by the fact that management
have full confidence in the competence of the internal audit function, as they approve
most of their recommendations. 1
Systematic and disciplined approach (ISA 610 par A10)
3 In determining whether the work of the internal audit function can be used for
purposes of the audit, we should evaluate the application of a systematic and
disciplined approach (ISA 610 par A10): 1
3.1 The internal audit function does not follow a systematic and disciplined approach as
there are no procedure manuals in place, which addresses the policies and
procedures relating to the internal audit function. 1

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Discussion Marks
Conclusion
4 Based on the above aspects it is doubtful that we will be able to rely on the internal
audit function, as there is doubt over their objectivity, competence and approach. 1
4.1 Furthermore, the audit fee is dependent on time spent on the audit as well as the
experience and expertise of staff involved. 1
4.2 Only if we (the auditors) can rely on the work performed by the internal audit
department, then it would reduce the extent of work that will have to be performed
which will result in lower audit fees. 1
Communication skills: Format/Email 1
Available 17
Maximum 11

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(c) With reference to Annexure C:

(i) Provide a detailed analysis of the material variances

Recalculation of the material variances:

Material price planning variances

Std price Gen. mkt Variance Purchased Variance

R per l R per l R Litres R
Slobet 90,00 95,00 (5,00) 15000kg ( 75 000,00) A ½ c #
Zesta 110,00 120,00 (10,00) 7000 litres ( 70 000,00) A ½ c #
Alcohol 85,00 (1 r) 92,50 (7,50) 30500 ½c#
R63750 / 750 litres
lt
(R42500/500l) ( 228 750,00)A
2 r (½ each) 1½ r (½ (373 750,00)A
each)
Available 5 / Total 5

# Note to marker:
→ Must be a price variance (i.e. the difference between two prices multiplied by a quantity
→ Must not be purchasing efficiency (price operational) variance

Material price purchasing efficiency (price operational) variances

Gen. mkt Actual price Variance Purchased Variance

R per l R per l R Litres R
Slobet 95,00 2,50 15000 37 500,00 F ½ c
92,50 #
Zesta 120,00 (2,00) 7000 (14 000,00) A ½c
122,00 #
Alcohol 92,50 (0,50) 30500 (15 250,00) A ½ c
93,00 #
1r 1½ (½ each) 1r 8 250,00 F
Available 5 / Max 5
@ Actual price per litre:
Slobet: R1 387 500 / 15 000 l = R92,50 per litre

# Note to marker:
→ Must be a price variance (i.e. difference between two prices multiplied by a quantity

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Material mix variances

Actual Actual input Variance Std price Variance

issued in std mix (l) (l) R R
in *
actual
mix (l)
Slobet 12400 12 187,50 (212,50) 90,00 (19 125,00) A ½c*#
(48750 x (300 / 1200))
Zesta 6250 6 093,75 (156,25) 110,00 (17 187,50) A ½c*#
(48750 x (150 / 1200))
Alcohol (48750 x (750 / 30100 30 468,75 368,75 85,00 31 343,75 F ½c*#
1200))
48 750 48 750,00 (4 968,75) A
(1) r (1½) c
(½ each)
Available 4 / Total 4

Allow limited rounding differences.

Standard mix:
Slobet: 300 litres / 1200 litres = 25,0% x 48 750 litres = 12 187,5 litres
Zesta: 150 litre / 1200 litres = 12,5% x 48 750 litres = 6 093,75 litres
Alcohol: 750 litres / 1200 litres = 62,5% x 48 750 litres = 30 468,75 litres

# Note to marker:
→ Must use the correct formula: [Quantity difference based on Actual and attempted actual Q in Std
proportions] X [Standard price]
→ Must not attempt yield (quantity) variance instead of mix variance, nor total volume variance

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Maximum 17

Material yield variances (per raw material) Totals given in the scenario

Actual input Std qty for Variance Std price Variance

in std mix (l) actual (l) R R
* production
(Expected input)
Slobet 12 187,50 12000 (187,50) 90,00 (16 875,00)A
(40 000 x 300 l)
Zesta 6 093,75 6000 (93,75) 110,00 (10 312,50)A
(40 000 x 150 l)
Alcohol 30 468,75 30000 (468,75) 85,00 (39 843,75)A
(40 000 x 750 l)
48 750,00 48 000 (67 031,25) A

Output in litres =
32000 x 1,25l
= 40 000 litres
# Note to marker:
→ Must use the correct formula: [Quantity difference based on attempted actual Q in Std proportions
and Std Q] X [Standard price]
→ Must not attempt margin mix instead of yield (quantity) variance, nor total volume variance

(ii) Comment with reasons on whether you agree with Yanos' decision to suspend the two
employees.

Commentary:
Price variances – Purchasing manager
1. The price planning variances were not within the control of the assistant 1 d Planning
production manager since he did not set the standard costs, and he can variances not
therefore not be evaluated on those variances. within control
2. The purchasing manager should be held accountable for the price purchasing 1d
efficiency variance, proving an excellent performance as indicated by the
Favourable variance of R8250,00.
3. Therefore, I would disagree with Yanos on the purchasing manager 1d
Sub-total max for discussion 3
Material mix variances
4. The production manager deviated from the standard mix for producing Hlweka®, 1 d Product
which compromised the final product quality. quality
Material yield variances
5. The production manager performed poorly in terms of production since all the 1d
yield variances are adverse, implying wastage. Wastage
6. Given the adverse results of the two variances usage variances, especially the 1d
seriousness of the product quality, I would agree with the suspension of the
production manager
Maximum: Sub-total max for mix and yield discussion 3
Available 6
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QUESTION 2

(a) Discuss whether Kaone should have accepted the appointment to audit Setlhare for the
financial year ended 31 August 2022 by only focussing on the ethical matters.

Note: Do not discuss any aspect of the SAICA and IRBA codes of professional conduct.

1. The integrity of the directors of Setlhare is brought into question, as it is alleged by

Mrs Mbombela that Setlhare prepares three sets of different annual financial statements
for different purposes. (1)

2. The preparation of three sets of different annual financial statements is fraudulent, as it is

an intentional act by management. (1)

3. Since Setlhare was identified for wrongdoing / corrupt activities (tender fraud and other
kickbacks) by the Chief Justice in the state capture report, it seems that their revenue is
derived from illegal transactions involving taxpayers’ money as 90 percent of their
revenue is derived from government. This further brings into question the integrity of
management of Setlhare. (1)

4. Kaone should consider Mrs Mbombela’s information regarding the acceptance of the
Setlhare engagement, as Setlhare partakes in illegal activities for SARS and Tender
purposes. (1)

5. In addition to the above, Kaone’s management need to consider whether they were
appointed on merit or only because of the recommendation made by Mrs Mbombela
since Mrs Mbombela and Mr Modi are friends. (1)

6. This is exacerbated by the condition of Mrs Mbombela of ensuring that Mrs Loreto must
remain as the audit partner for Setlhare as well as ensuring that Mrs Loreto remembers
the importance of availing himself for golf with Mr Modi. (1)

7. Kaone may suffer potential reputational damage based on its association with Setlhare
and this can affect Kaone negatively. (1)

8. King IV suggests that the principle of ethics is to consider what is good for self and good
for others. In making this decision, the following approaches / ethical theories may be
relevant in deciding what is “good”: (1)

9.1 The practical consequences of advising Mrs Loreto to accept the appointment of
Setlhare needs to be looked at from the perspective of whether the action results in
“happiness” for the majority of those impacted by the decision. (1)
9.2 Although Kaone may benefit from this appointment, this may negatively impact
Kaone through association with Setlhare and thus Mrs Loreto should not have
advised Kaone to accept the offer as it may be to Kaone’s detriment. (1)

9. The standard for good behaviour through pure rational reflection lends itself to the fact
that Mr Kutu, as a CA(SA), with an understanding of the current negative impact around
the CA(SA) profession and the need to uphold objective standards of good behaviour
should strive to avoid being implicated in situations that will further tarnish the profession.
(1)

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10.1 Based on Setlhare’s preparation of three sets of different financial statements

annually as well as being identified for involvement in tender corruption and in state
capture. (1)

11 Mrs Loreto and Mrs Mbombela will need to evaluate principles (virtue theory/other
description of relevant theory) and determine whether taking on Setlhare as a client to
potentially implicate itself in a potentially adverse scenario is aligned with their virtues. As
they are both CA (SA)’s and upholds a high standard of ethics, this would not be aligned
to their professional virtues (which should correlate to personal virtues). (1)

Mrs Mbombela should not advise Kaone to have accepted the appointment. And
Mrs Loreto should not have accepted the appointment (1)

12. Based on potential reputational damage as a result of the audit engagement, Kaone
should consider withdrawing from the audit of Setlhare. (1)

13. Mrs Loreto and the audit team to consider the appropriateness of being remunerated
more than once for the same service: for auditing three sets of AFS for Setlhare this is
not considered fair business practice. (1)
Available 16
Maximum 13

(c) With reference to Annexure A and B:

(i) Discuss the aspects that the auditor should consider with regards to the three sets
of financial statements and whether the preparation of three sets of financial
statements constitutes a reportable irregularity in terms of the Auditing Profession
Act 26 of 2005, for the financial year ended 31 August 2022.

Note: Do not discuss reporting requirements to management, professional bodies

and the regulatory board.

Aspects that the auditor should consider

1. The auditor should consider their conduct in terms of adhering to the “Practice” of
section 41 of the APA. Hence, auditing three sets of financial statements is not
good practice as the use thereof of these AFS by Setlhare is fraudulent. (1)

2. The auditor should consider “compliance with rules” prescribed by the regulatory in
terms of section 42 of the APA. Hence, auditing three sets of financial statements
knowing that the amounts differ is in contravention of compliance with the rules of
providing an appropriate audit opinion. (1)

3. The auditor should consider all “information to be furnished” in terms of section 43

of the APA. Hence, all information iro all three AFS should be considered. (1)

4. The auditor should consider “duties in relation to the audit” in terms of section 44 of
the APA. Hence, auditing three sets of financial statements knowing that the
amounts differ is in contravention of the duties in relation to the audit whereas the
auditor should indeed express an appropriate audit opinion on one set of AFS. (1)

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5. The auditor should consider “limitation of liability” in terms of section 46 of the APA.
Hence, auditing three sets of financial statements knowing that the amounts differ
could be proved that the opinion was expressed, or the report or statement made,
maliciously, fraudulently or pursuant to a negligent performance of the registered
auditor’s duties. (1)

Whether the preparation of three sets of financial statements constitutes a

reportable irregularity

6. The auditor should consider whether the preparation of three sets of different
annual financial statements annually meets the requirements of a reportable
irregularity in terms of the APA Act. In terms of section 1 of the Audit Professions
Act (APA) a ‘reportable irregularity’ means any unlawful act or omission.

7. Preparation of three sets of different annual financial statements annually is an

unlawful act. (1)

8. Preparation of three sets of annual financial statements appears to be fraudulent

for the following reasons:

8.1 to be favoured and be awarded government tenders not using the appropriate
ways. (1)

8.2 To ultimately lower the output vat. (1)

8.3 Preparation of three sets of financial statements annually for the purpose of
concealing / reducing the actual income tax payable. (1)
8.4 As well as for getting more tax deductions by overstating expenses is
fraudulent. (1)
8.5 The understatement of Revenue as shown on the SARS annual financial
statements submitted for tax purposes to the tax authorities would result in:
8.5.1 The under declaration of VAT output tax relating to Revenue (1)
8.5.2 As well as low-income tax since the Revenue declared by Setlhare is
lower than the actual revenue. (1)

8.6 Therefore, the preparation of three sets of annual financial statements

annually by Setlhare is fraudulent. (1)

9. Committed by any person responsible for the management of an entity:

9.1 The preparation of the three sets of annual financial statements was done
with the knowledge of Mr Kutu, the chief financial officer, therefore it has
been committed by a person responsible for the management of the Setlhare.
(1)

10. Has caused or is likely to cause material financial loss to the entity; or

10.1 In this instance, it will result in Setlhare being held liable for penalties and
interest by SARS on the under declaration of revenue and overstatement of
expenses which will result in material loss to Setlhare. (1)

11. Represents a material breach of any fiduciary duty owed by such person to the
entity or any partner, member, shareholder, creditor or investor of the entity under
any law applying to the entity or the conduct or management thereof.

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11.1 As Setlhare prepared three sets of annual financial statements annually with the
guidance and knowledge of Mr Kutu, this is material breach of fiduciary duty of
Mr Kutu and the chairperson. (1)

11.2 The preparation of three different sets of annual financial statements which is
unlawful will results in the directors’ non-compliance with the Companies’ Act and
may constitute a material breach of their fiduciary duty in accordance with section
76 of the Companies’ Act. This contravention of the Companies’ Act by directors. (2)

12. Overstating of revenue for tender purposes where it appears to be for the sole
purpose of winning the tenders and the under declaration of revenue for SARS
purposes results in under-declaration of output VAT and/or Income Tax in a specific
tax period which is unlawful. It is in breach of the VAT Act and/or Income Tax. (1)

13. Based on the above, this is a reportable irregularity. (1)

Communication skills: logical argument (1)
Available 21
Maximum 15

(b) With reference to Annexure A and B:

(ii) Discuss the impact of the information provided on the audit opinion in terms of
International Standard on Auditing (ISA) 700, for the financial year ended 31
August 2022.

In arriving at the audit opinion, various aspects need to be considered which are
discussed below.

1. As there are three sets of financial statements that are in contradiction to each
other and the actual amounts, the overall financial statements are not fairly
presented in all material respects. (1)

2. The preparation of three sets of financial statements results in these being

quantitively material as all differences in amounts are in excess of R1000 000.
These are represented by: (1)

4.1 Revenue has been overall understated as the actual amounts are higher than
the SARS AFS and Tender AFS. (1)
4.2 Revenue has been understated in the SARS AFS compared to the Tender
AFS as management are conducting tax evasion. (1)
4.3 Operating expenses and cost of sales has been overall overstated as the
actual amounts are lower than the SARS AFS. (1)
4.4 Operating expenses and cost of sales has been overstated in the SARS AFS
compared to the Tender AFS as management are conducting tax evasion. (1)
4.5 The tax evasion is evidential as the actual tax payable is higher than the
amounts included in the SARS AFS and Tender AFS. (1)

3. The preparation of three sets of financial statements results in these being

qualitatively material as:

5.1 Sethlare is partaking in unlawful activities to obtain tenders and submissions

to SARS. (1)
5.2 Sethlare is partaking in tax evasion which is non-compliance with the
companies act 71 of 2008. (1)

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5.3 Non-compliance with the companies act 71 of 2008 is a reportable

irregularity. (1)
5.2 There are potential going concern issues based on multiple uncertainties and
that is impactful on the audit opinion. (1)

4. The above misstatement is factual. (1)

5. As the preparation of three sets of annual financial statements constitute a

reportable irregularity, Kaone must issue a modified audit opinion. (Section 44 of
APA). (1)

7.1 The reportable irregularity must be separately disclosed in the audit report.
(1)

6. This matter of three sets of financial statements is pervasive as it affects disclosure,

and it is therefore not confined to specific elements of the annual financial
statements. (1)

7. If there is a disagreement with management, and no adjustments are made to the

financial statements by management, it would result in an “adverse opinion”. (1)

8. If there is a scope limitation, it would result in an “disclaimer of opinion”. (1)

Available 19
Maximum 11

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CASE STUDY 2 100 marks

YOU HAVE 30 MINUTES TO READ THE QUESTION

QUESTION 1 100 marks

BACKGROUND INFORMATION

Superior Workwear Ltd (Superior) is a manufacturer and wholesaler of a wide range of workwear,
safety wear and uniforms to various industries in the private and public sector. Superior’s specialised
products and workwear include safety and protective clothing, reflective clothing, safety footwear, road
safety workwear, uniforms, medical personal protective equipment (PPE), gloves, ear and eye
protection, safety boots, road cones, first aid kits and overalls, among others. Superior was
established in 2010, and their head office and warehouse are located in KwaZulu Natal, South Africa.
Superior is listed on the Johannesburg Stock Exchange Ltd (JSE).

You are an audit manager at You-Got-This Auditors Incorporated (You-Got-This), a large registered
firm of auditors. You have been assigned to the audit of Superior for the financial year ended
31 August 2022.

The following working paper and other matters pertain to the audit of Superior for the financial year
ended 31 August 2022:

Working paper Working paper

reference
Audit procedures performed on the loan obtained from BigLenders AZ105

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OTHER MATTERS

1. MATTERS RAISED BY THE AUDITING TEAM:

Matter 1 – Press release

Your audit team completed the planning for Superior’s audit for the financial year ended 31 August
2022 and is currently busy with the fieldwork. You were surprised to see a headline in the business
section of the morning newspaper which read as follows: “Superior Workwear Ltd replaces You-Got-
This Auditors as their registered auditors”.

According to the news report, the board of Superior announced earlier that day (23 September 2022)
that they would be appointing Give-Your-Best Auditors Incorporated (Give-Your-Best) as auditors of
Superior, replacing your firm with immediate effect. The report further stated that Superior’s directors
cited growing tensions and irreconcilable differences between themselves and You-Got-This as the
reason for the replacement. Give-Your-Best would therefore complete the audit for the 2022 financial
year. You-Got-This had been the auditors of Superior Ltd for several years, prior to this incident.

At a meeting of the partners of You-Got-This, which was called later the same day to discuss this
matter, Sam Parker, the engagement partner on the Superior audit, summarised the situation as
follows:

"My audit team commenced the year-end audit of Superior six weeks ago and were due to complete it
in four weeks’ time. Two weeks ago, we uncovered a series of related party transactions which, we
believed, and still believe, had been designed to conceal fraud perpetrated by Omar Reddington, the
newly appointed chief financial officer (CFO), and some of the other executive directors. We
proceeded with our statutory duties in terms of section 45 of the Auditing Profession Act, No 26 of
2005. In response, Omar Reddington called an urgent board meeting to discuss this matter, and due
to the influence, which he holds over the board, he was able to convince the other executive and non-
executive directors that it was simply a failure, on our part, to understand the accounting complexities
of the related party transactions. We raised this matter with the audit committee. The announcement
which you saw in today’s newspaper is Superior’s response.”

The rest of the partner’s meeting was devoted to a full discussion of all issues and implications relating
to the matter described above.

Matter 2 – Extract from audit committee meeting

The board of Superior decided, as partial payment for services, to issue 300 000 shares to Virtual
Couriers Incorporated, a company contracted by Superior and its suppliers to provide an “electronic”
courier service of messages between Superior and its trading partners. Denby Keen, Chief Executive
Officer (CEO) and chairperson of the board, recommended that the shares be financed by utilising
R35 000 000 of retained earnings as part of their turnaround strategy to address their cash flow
problems. Denby Keen also brought it to the audit committee’s attention that the shares are currently
trading at R150 per share. The audit committee approved the motion.
Omar Reddington informed the audit committee that Superior has 1 million authorised shares of which
850 000 shares have been issued prior to the abovementioned issue.

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Matter 3 – Wholesaler contracts not accounted for

You-Got-This also assisted Superior with the preparation of all their tax returns. While the staff
members of You-Got-This were preparing the August 2022 Value Added Tax (VAT) return, they
realised that certain of the wholesaler contracts were not reflected in the masterfile. The partner
responsible for Superiors ad hoc functions reported the matter to the audit partner, Sam Parker. Sam
Parker requested you to look into the matter and to advise him on how he should go about this matter.

Further investigation revealed that Elizabeth Wear, the Chief Operations Officer (COO) had concluded
a number of wholesale contracts during the year, but not all the contracts were recorded in Superior’s
accounting records as the payments were made directly into Elizabeth Wear’s bank account. Sam
Parker confronted Elizabeth Wear with these facts and she told him that she did not earn a market
related salary and that this was the only way to increase her salary as her request in this regard was
rejected in the past. No approval was given by Superior’s management, as the matter was never
discussed with them.

To encourage Sam Parker to see things her way, Elizabeth Wear indicated that she would provide
safety wear and uniforms to the workers at You-Got-This as well as to a charity of his choice at no cost
and that she would continue to do so as long as she is the COO of Superior based on the condition
that the matter is not discussed with Superior’s management. She further offered Sam Parker a two-
week all expenses paid holiday at a destination of his choice.

2. REGISTRATION OF NEW CUSTOMERS (USERS) ON SUPERIOR’S WEBSITE

Superior has a versatile website providing practical information on what the company does,
where it is located, the company profile (including its mission, vision and values) and a contact
page. New customers (also referred to as users) can only access the catalogue with the
products and workwear offering (including a gallery of photos and the most recent prices per
item) once they register on the website. This is done as follows:

• The user completes his/her personal details including name, surname, (cell) phone
number, physical address, identification (ID) number and e-mail address on the
registration page. The user has to be 18 years or older to be able to register.
• The user then has to choose a unique username (generally this would be the customer’s
e-mail address) and unique password. The user has to confirm the chosen password by
retyping it again. Passwords have to be ‘strong’, in other words of a certain length and
with certain characters.
• A link to the company’s terms and conditions is then provided. Once the potential
customer is satisfied with the terms and conditions, he/she must select the option, “I
accept the terms and conditions” after which the registration process can continue.
• A verification e-mail is then sent to the potential customer’s e-mail address where he/she
has to click on the link within the e-mail to complete the registration process.

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3. SPECIALISED MACHINERY AND EQUIPMENT

The COVID-19 pandemic brought about an acute shortage of, and unprecedented rise in the
demand for medical PPE such as hospital gowns, face shields, heavy-duty aprons and gloves.
This shortage was experienced not only in South Africa, but globally. As a result of the
disruptions in the global supply chain of medical equipment during COVID-19, Superior ramped
up its production of medical PPE during the financial years 2021 and 2022. Specialised
machinery and equipment had to be obtained for this purpose during the financial year under
review.

3.1 Loan obtained from BigLenders

To fund the equipment purchases, Superior obtained a long-term loan of R4 million from
BigLenders on 1 January 2022. The loan is repayable in monthly instalments over 24 months
and carries interest at an effective fixed rate of 6% per annum. The interest is calculated and
paid at the end of each calendar month. The loan is subject to a covenant that the Superior’s
long-term debt to equity ratio may not exceed 50% and if it does, the loan becomes repayable
immediately.

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Client: Superior Workwear Ltd Year end: 31 August 2022

WP reference
Prepared by: Jo Augustine (trainee) Date: 12 September 2022
AZ105
Reviewed by: Date: Page 1 of 2
Subject: Audit procedures performed on the loan obtained from
BigLenders
Audit procedures performed to obtain sufficient and appropriate audit evidence on the loan
amount from BigLenders

1. Obtained Superior’s schedules and calculations (including amortisation table/schedule) in

relation to the loan obtained from BigLenders supporting the classes of transactions and
account balances for the financial year ended 31 August 2022.

2. Recalculated/reperformed the castings and cross-castings on these schedules and

calculations to ensure the mathematical accuracy thereof.

3. Agreed the closing balance of these schedules to the amounts in the general ledger, trial
balance and the annual financial statements for the financial year ended 31 August 2022 to
ensure the accuracy and completeness thereof.

4. Inspected a log of masterfile amendments and supporting documentation to confirm that

appropriate procedures were carried out in respect of the evaluation of the creditworthiness of
new customers.

5. Performed overall analytical review procedures in respect of the loan obtained. Compared
current year amount to prior year, the approved budget and other entities in similar industries.

6. Recalculated/reperformed the castings and cross-castings of the fixed asset register to

ensure the mathematical accuracy thereof.

7. Inspected the Memorandum of Incorporation of Superior to ensure that no potential

restrictions exist/have been breached in terms of the loan obtained.

8. Performed a positive debtors’ circularisation with the consent of management of Superior.

9. Agreed loan repayment amounts made to BigLenders (interest and capital) for the financial
year ended 31 August 2022, as per the general ledger account/amortisation schedule to the
bank statements of Superior to ensure that all payments have been accounted for correctly.

10. Performed a positive (physical) identification of employees working for Superior by visiting the
head office and warehouse during working hours and inspecting their identity documents or
staff tags.

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Client: Superior Workwear Ltd Year end: 31 August 2022

WP reference
Prepared by: Jo Augustine Date: 12 September 2022
AZ105
Reviewed by: Date: Page 2 of 2
Subject: Audit procedures performed on the loan obtained from
BigLenders
11. Obtained written permission from Superior’s management to send an external confirmation
(third party confirmation) to BigLenders to verify the details of the loan including: outstanding
loan amount as at 31 August 2022, terms and conditions, interest rate, repayment
requirements, surety’s etc.

12 Inspected the loan confirmation letter from BigLenders and agree the amount to the amount
disclosed in the trial balance and financial statements to ensure that the amount is correct.

13. Inspected the loan confirmation letter for any other terms and conditions (different payment
terms etc.) that might affect the valuation of the loan.

14. Obtained a listing of inventory of goods in transit as at 31 August 2022 and inspected relevant
orders/contracts to determine whether ownership has passed to Superior through scrutiny of
the terms of the purchase.

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4. SAFETY UNIFORMS

IGNORE VALUE-ADDED TAXATION

You noted that Elizabeth Wear’s fraudulent activities mostly revolved around Superior’s manufactured
safety uniforms.

To determine the extent of Elizabeth Wear’s fraudulent activities you obtained the following information
relating to the year ended 31 August 2022:

Safety uniforms

Sales
According to Superior’s unaudited financial records, 1 848 safety uniforms were sold during the
financial year ended 31 August 2022. These are valid sales that did occur.

Throughout the year, the uniforms were sold at R1 525 each. However, during the last four months of
the financial year ended 31 August 2022 as the pandemic came to an end, the demand for safety
uniform declined substantially. Superior had to decrease the selling price of its uniforms to R1 020
each and offered free delivery to ensure its product remain lucrative. The cost of free delivery
amounted to R5 per uniform. The normal selling cost amounted to R2 per uniform and is expected to
remain unchanged.

You may assume that the following information relating to the production of safety uniforms is correct:

Accounting policy
According to the accounting policy of Superior, raw materials is accounted for according to the
weighted average cost formula. All other inventory categories are accounted for in terms of the first-in-
first-out cost formula. Superior applies the perpetual inventory system.

Opening inventory at cost (on 1 September 2021)

Units R
Raw material 2 000 meters 500 000
Work-in-process - -
Finished products 1 500 uniforms 1 515 000

Other costs incurred during the 2022 financial year

R

Purchases 4 000 meters 1 120 000

Marketing and distribution costs 18 750
Fixed production overheads 1 225 000
Variable production overheads and labour costs 320 000

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Normal production procedures

• The factory normally produces 3 500 safety uniforms per year.
• Two meters of fabric is used to manufacture one safety uniform.
• As part of the cutting process, 2% of the fabric is cut off and discarded.

Actual production process

• 5 000 meters of fabric were issued to the manufacturing process.
• During the current financial year ended 31 August 2022, 2 400 safety uniforms were
transferred to finished products. The remaining safety uniforms still in production require a final
inspection at a cost of R3 per uniform.

Finished products
• On 31 August 2022, 150 safety uniforms were on hand.
• You’ve noted that certain uniforms are unaccounted for. After prolonged encouragement,
Elizabeth Wear informed you that she donated 200 uniforms to various clients throughout the
2022 financial year. These donations were unauthorised and went unnoticed because Elizabeth
Wear considers it inappropriate to inform colleagues of the good deeds which she performs.

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CASE STUDY 2
REQUIRED

QUESTION 1

Marks
(a) With reference to matter 1 under matters raised by the auditing team:

(i) Analyse the situation described by Sam Parker, in terms of the

Auditing Profession Act, No 26 of 2005, in order to determine whether you
agree with his conclusion that your firm had certain statutory duties arising
from the situation.
9
(ii) Discuss the replacement of your audit firm by Give-your-Best as contained in
the directors’ announcement in terms of the provisions of the Companies Act,
2008. 8
(b) With reference to matter 2 under matters raised by the auditing team:

Discuss in terms of the provisions of the Companies Act, 2008 the issue of 300 000
shares to Virtual Couriers Incorporated as payment for their services. 9

Communication skills: clarity of expression 1

(c) With reference to matter 3 under matters raised by the auditing team:

Write an email to Sam Parker in which you discuss the ethical concerns,
considerations and how this matter should be addressed in terms of the SAICA’s
Code of Professional Conduct (CPC). 12

Communication skills: layout and structure 1

(d) With reference to part 2 relating to the registration of new customers (users) on
Superior’s website:

Describe the automated information processing controls (application controls)

that Superior should implement to ensure the completeness, validity (occurrence
and authorisation) and accuracy of the new customer’s (user’s) registration process
on the website. 19

Communication skills: clarity of expression 1

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Marks
(e) With reference to part 3 regarding specialised machinery and equipment as well
as working paper AZ105:

Critically evaluate the audit procedures performed on the loan obtained from
BigLenders. 19

Please note:
• Do not discuss the documentation requirements of ISA 230.
• Present your answer under the following headings:
- audit procedures correctly performed in the audit working paper,
- audit procedures incorrectly performed in the audit working paper; and
- audit procedures not performed in the audit working paper (provide further
audit procedures to obtain sufficient and appropriate audit evidence in
relation to the loan obtained).
Communication skills – clarity of expression
1
(f) With reference to the information provided in part 4:

i. Calculate the carrying amount of each category of inventory (raw materials,

work-in-progress and finished products) relating to the safety uniforms of
Superior Workwear Ltd for the financial year ended 31 August 2022. 16

ii. Determine the number of safety uniforms which Superior Workwear Ltd has to
write-off due to Elizabeth Wear’s fraudulent activities. 4
Total 100

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CASE STUDY 2
SUGGESTED SOLUTION

QUESTION 1

(a) With reference to matter 1 under matters raised by the auditing team:

(i) Analyse the situation described by Sam Parker, in terms of the Auditing Profession
Act, No 26 of 2005, in order to determine whether you agree with his conclusion
that your firm had certain statutory duties arising from the situation.

1. I agree with Sam Parker’s assessment that my firm had certain statutory duties
arising out of the situation. (1)

2. Superior Workwear Ltd is an audit client and therefore the APA Sec 45 duties apply
to us as the auditor. (1)

3. Our procedures and enquiries have provided sufficient evidence to satisfy us that
the recording of these related party transactions has taken place and is intended to
conceal fraud perpetrated by Omar Reddington, the newly appointed CFO, and
certain of the other executive directors. (1)

4. I agree with Sam Parker that the audit team had a responsibility to report a
reportable irregularity in terms of the APA Sec 45 as: (1)

a) In terms of the Companies Act Sec 94 we must also comply with the Auditing
Profession Act 2005 and failure to report this irregularity is an offence. We
have a duty to report and cannot simply not report because we have been
“removed”. (1)
b) This amounts to unlawful acts or omissions – covering up of the fraudulent
transactions amounts to fraudulent financial reporting. (1)
c) committed by persons responsible for the management of Superior – Omar
Reddington is the newly appointed CFO who perpetrated the fraud. (1)
d) Is likely to cause material financial loss to shareholders and creditors etc, as
their investment and financing decisions will be based on false financial
information; financial losses for the company or related stakeholders in terms
of fines or legal claims (1)
e) The transactions are fraudulent, and the fraud is being covered up – fraud
involves a deliberate deceit, or action, or omission in order to mislead another
party to the other party’s prejudice. (1)
f) This represents a material breach of fiduciary duty on the part of Omar
Reddington (CFO - a person with executive responsibility for the conduct of
the entity’s operations) and certain of the other executive directors; and (1)

5. Based on the information discussed above, the firm will need to report the matter to
IRBA. (1)
Available 11
Maximum 9

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(ii) Discuss the replacement of your audit firm by Give-your-Best as contained in the
directors’ announcement in terms of the provisions of the Companies Act, 2008.

1. This announcement by Superior Workwear Ltd is very premature and Give-your-

Best cannot take office for the current audit. Thus, the appointment of Give-your-
Best by the board is invalid. (1)
(Note S91 of the Companies Act is not applicable as it relates to resignation of
auditors and vacancies.)

2. Superior Workwear Ltd is a public company therefore: (1)

3. The board cannot appoint the auditors. Auditors must be approved/nominated by

the audit committee ito Sec 94(8) of the Companies Act. (1)
4. This nominated auditor (as per the AGM) should be appointed by the majority
shareholders at each annual general meeting. (1)

5. The directors might not be seen as acting in the best interest of the company or in
terms of Section 76. (1)

6. The directors may be held liable for any loss, damages or costs in relation to their
actions in terms of Section 77. (1)

7. With regards to the removal of You-Got-This, there is no provision in the Act which
specifically sets out procedures for our removal, only section 91. In this case,
however, You-Got-This did not resign as auditor and there was also no vacancy
that existed. (1)

8. In terms of Sec 94 the audit committee should deal with concerns or complaints
relating inter alia to the “content or auditing” of the financial statements. (1)

9. The audit committee would if they deemed it necessary, recommend by objection to

the AGM, that the auditor not be re-appointed. (1)

10. Obviously, this has not happened, invalidating our removal. (1)

11. In terms of Sec 93 we (the firm) would have the right to be heard at the AGM in
respect of our “removal”. (1)

12. This was not the case as the firm learnt about their removal in the news. Thus, the
removal is unlawful. (1)

13. In terms of Sec 93, our firm may apply to the court for an appropriate order to
enforce our rights and the court may make an order that is just and reasonable to
prevent the frustration of our duties (e.g. to form our audit opinion) by the directors.
(1)
Available 13
Maximum 8

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(b) With reference to matter 2 under matters raised by the auditing team:

Discuss in terms of the provisions of the Companies Act, 2008 the issue of 300 000
shares to Virtual Couriers Incorporated as payment for their services.

Markers Note: (Section 44 does not apply as this transaction does not relate to the
provision of financial assistance to purchase the shares.)

1. It is of concern that the board has approved the issue of 300 000 shares when there are
only 150 000 authorised shares available for issue. (1)

2. In terms of Sec 36, a shareholder special resolution will be required to amend the MOI to
increase the authorised share capital. (1)

3. In terms of Sec 38, if within 60 business days of the share issue the authorisation for the
additional shares is not received, the share issue of 150 000 shares (300 000 – 150 000)
will be considered null. (1)

4. It is of concern that shares are issued at R10 000 000 ((300 000 *R150) – 35 000 000)
less than the current trading price. (1)

5. Section 40 [section 40 (5ai)] of Companies Act requires that shares issued for services
rendered only to the extent that the value of the consideration for any of these shares has
been realised by Superior. (1)

6. In terms of S40 (a) the board may only issue authorised shares for adequate
consideration in terms of the company. Given that shares are issued below the current
trading price, it is not considered adequate consideration. (The discounted price suggests
that Superior has not realised the full value of the consideration.) (1)

7. The issuance of shares (Incl to a related party such as Virtual Couriers Incorporated) is
subject to a special resolution ito S41(1 & 3) by shareholders. The company was not in
compliance as the board approved the issuance of shares – as approved by the audit
committee. (1)

8. The terms under which the issuance of shares is proposed are not fair and reasonable
to the entity. (1)

9. In terms of S40 (5 &6) The issuance of shares should be transferred to a trust before the
services are rendered, this is not the case (as per the question) and to be transferred
later in terms of the trust agreement. (1)

10. As the company was experiencing cash flow problems and the shares were issued
below trading price, and there was contravention of the companies act due to the
issue of shares, the directors might not be seen as acting in the best interest of the
company or in terms of Section 76. (4)

11. The directors may be held liable for any loss, damages, or costs in relation to their
actions in terms of Section 77. (1)
Communication skills: Clarity of expression (1)
Available 15
Maximum 10

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(c) With reference to matter 3 under matters raised by the auditing team:

Write an email to Sam Parker in which you discuss the ethical concerns, considerations
and how this matter should be addressed in terms of the SAICA’s Code of Professional
Conduct (CPC).

Marks
To: samparker@you-got-this.co.za
From: You@you-got-this.co.za
Date:
Subject: Superior Workwear wholesaler contracts

Good day Mr Parker

Communication mark: Email format 1

1. As a qualified chartered accountant, you are required to comply with the SAICA Code
of Professional Conduct. 1
2. In terms of SAICA’s Code of Professional Conduct (the Code) para R111.2, a
professional accountant shall not knowingly be associated with any return, which is
suspected to contain materially false or misleading statements. 1
3. You-Got-This Auditors may be seen to be associated with a VAT return even if you
were simply involved in the preparation of the VAT return and You-Got-This Auditors’
name is not used in connection with such return. 1
4. In terms of para R111.3, Sam Parker should, as soon as he became aware of the
wholesaler contracts not being reflected in the masterfile, taken steps to be
disassociated from that information. 1
5. You should further consider if a possible NOCLAR exists and ensure compliance with
Section 360. 1

6. Advise management to take appropriate and timely actions, as they are not aware of
the tax evasion and the fraud – management should disclose the matter to SARS as
incorrect amounts of VAT was paid over. 1
7. Consider whether Superior’s management and those charged with governance
understand their legal or regulatory responsibilities with respect to non-compliance –
management should disclose to SARS. 1
8. Due to the fact that you were requested by Elizabeth Wear to not report the wholesaler
contracts which is not accounted for in Superior’s accounting records, there is a self-
interest threat to integrity and professional behaviour because 2
9. Self-interest: You were promised safety wear and uniforms to the workers at your
auditing firm as well as to a charity of your choice at no cost as well as a two-week all
expenses paid holiday at a destination of your choice for not reporting the whole issue
with the unaccounted wholesaler contracts and 1

10. this is not straightforward and honest and will discredit the profession. 1
11. The promise of the above further creates a self-interest threat to objectivity
(independence) as a potential gift. 1

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Marks
12. According to Section R250.8 a professional accountant shall not accept any
inducement that is made with an intention to improperly influence. 1
13. Should you not report the matter, and it later comes out that you knew about the matter
and did not report it; it will cause reputational damage to the profession. 1

14. In terms of the CPC, undue hospitality and gifts should not be accepted from clients by
members, their spouses or their dependents, as this may create self-interest or
familiarity threats to objectivity. 1
15. The above threat is significant as it represents non-compliance to laws and regulations
and should therefore be reduced to an acceptable level. 1
16. Possible safeguards may include:

17. Discuss the matter with Superior’s management. 1

18. Do not accept the things on offer from Elizabeth Wear as mentioned above due to the
significance. 1

19. Other valid point 1

Max 1
Available 18
Maximum 13

(d) With reference to part 2 relating to the registration of new customers (users) on
Superior’s website:

Describe the automated application controls that Superior should implement to ensure
the completeness, validity (occurrence and authorisation) and accuracy of the new
customer’s (user) registration process on the website.

Note to marker – If controls are given under incorrect control objectives, marks are still
given for the controls as some controls also address more than one control objective.

Completeness:

1. The registration page should contain mandatory fields where the registration process
cannot continue or be completed unless certain fields, such as user ID number, e-mail
address, terms & conditions, have been completed. These fields are normally indicated/
highlighted in red or with a star. (1)

2. A field presence check linked to mandatory fields to ensure that all fields that are
required for a user to complete a profile, are completed. (1)

3. The system should perform missing data checks that detect blank fields where they
should not exist (e.g. user did not complete name and surname, etc). (1)

4. An error message should appear stating that mandatory fields have not been
completed/ missing data checks identify errors etc. (1)

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5. The system should allocate a unique sequential customer/user number (apart from
the user ID, e-mail address etc.) to users that register on the website. (1)

6. The system should perform automatic sequence checks on the customer/user numbers
and any missing numbers in the sequence should be reported on through error
messages/exception reports. (1)

7. The system should generate logs/reports for interruption of input/registration that

could result in information not captured/not being completely processed/information that
gets lost. (1)

Validity (occurrence and authorisation):

8. The system should perform automatic sequence checks on the customer/user numbers
and any duplicate numbers in the sequence should be reported on through error
messages/exception reports. (1)

9. The system should perform a validation test / matching tests to validate any data
keyed in against the masterfile / database; e.g. when an username and password is
chosen by the user, the system should do a validation check against the
masterfile/database to verify that the chosen username and password has not already
been created by the user/another user. (1)

10. The verification e-mail that is sent to the potential customer’s e-mail address where
he/she has to click on the link within the e-mail to complete the registration process, is
also a form of validation. (1)

11. The user has to validate/confirm the chosen password by retyping it again. The system
then does a matching test to match the password chosen by the user to the second
password typed. If there is no match, an error message should appear. (1)

12. The system should perform data approval/authorisation tests to confirm the input
against a pre-set condition. E.g. the user has to be 18 years or older to be able to
register, so the system should detect through the ID number if the customer is 18 years
or older and then approve/authorise. (1)

13. Logical access controls in terms of strict control over passwords should be in place:

(i) Passwords should be unique to each user; (1)

(ii) Passwords should consist of at least eight characters, be random, not obvious, and
a mix of letters, numbers, upper/lower case and symbols to reduce the cracking of
passwords. (1)
(iii) Passwords should be changed regularly, and users should be forced by the
system to change their password. (1)
(iv) The user should be logged out after three unsuccessful attempts at entering the
password.
(v) Any other valid password control. (1)
Max 3 marks

14. Data should be encrypted and backed up to prevent it from being corrupted/hacked/
lost. (1)

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Accuracy:

15. The layout and design of the registration page must be simple/user-friendly with a help
function for assistance. (1)

16. The screen should be formatted to receive the information in the order in which it is
required. (1)

17. Certain fields should be shaded/greyed out to ensure that only accurate and valid
information is captured in a field, i.e. the user will not be able to click on these fields or
change them, e.g. When the customer selects an area of residence from a dropdown list,
the postal code might appear (linked to the selected area) as a shaded field that cannot
be altered. (1)

18. There should be extensive use of screen dialogue and prompts for the user to confirm
the accuracy, validity and completeness of data captured, e.g. requesting the user to
retype the password, indicating to the user when a password is not ‘strong’ enough, ‘are
you sure?’ messages, or prompting the user to select the option, “I accept the terms and
conditions”. (1)

19. The registration page on the website should allow the minimum keying in of data/
information by the user (less information being keyed in, less errors are likely to be
made), for example: (1)

(i) The registration page should contain dropdown lists where possible where the
user can ‘select and click’ an option as opposed to typing information, e.g. In the
physical address field, the area, town and province should be selected from a
dropdown list. (1)
(ii) The user’s current location (if this is the user’s chosen delivery address) can also
be automatically retrieved by the system by means of live location tracking. (1)
(iii) Where possible the number of little boxes within a field should reflect the number of
digits required of that field, e.g. In the field where the ID number should be
completed, there should be 13 digits (13 little boxes). (1)

20. Alphanumeric checks should be performed to detect/prevent numeric fields entered as

alphabetic and vice versa. This could be done on fields such as the name, surname,
identity number, cell phone number, address, postal code, password etc. (1)

21. The system should perform field size checks to detect when a field does not conform to
pre-set size limits, e.g. the ID number has to be 13 digits. (1)

22. Valid character and sign checks should be performed on e.g. cell phone numbers. The
number must for example start with a +27 or 0. The e-mail address should e.g. contain
an @. The system should also check whether a minus sign (-) was not entered in fields
where it should not have been. (1)

23. A check digit can be generated for critical fields such as the ID number of the user. (1)

24. The system could perform certain limit checks and reasonableness checks to ensure
that data entered falls within certain reasonable limits. (1)
Communication skills: Clarity of expression (1)
Available 30
Maximum 20

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(e) With reference to part 3 regarding specialised machinery and equipment as well as
working paper AZ105:

Critically evaluate the audit procedures performed on the loan obtained from
BigLenders.
• Do not discuss the documentation requirements of ISA 230.

The following audit procedures were correctly performed in the audit working paper:
(note to markers: the student should not only repeat these procedures, but should
indicate that they have been correctly performed – even if it is under one heading)

Marks
Obtained Superior’s schedules and calculations in relation to the loan obtained from
BigLenders supporting the classes of transactions and account balances for the
financial year ended 31 August 2022. (½)
Recalculated/reperformed the castings and cross-castings on these schedules and
calculations to ensure the mathematical accuracy thereof. (½)
Agreed the closing balance of these schedules to the amounts in the general ledger,
trial balance and the annual financial statements for the financial year ended 31
August 2022 to ensure the accuracy and completeness thereof. (½)
Performed overall analytical review procedures in respect of the loan obtained.
Compared current year amount to prior year, the approved budget and other entities in
similar industries. (½)
Inspected the Memorandum of Incorporation of Superior to ensure that no potential
restrictions exist/have been breached in terms of the loan obtained. (½)
Agreed loan repayment amounts made to BigLenders (interest and capital) for the
financial year ended 31 August 2022, as per the general ledger account/amortisation
schedule to the bank statements of Superior. (½)
Obtained written permission from Superior’s management to send an external
confirmation (third party confirmation) to BigLenders to verify the details of the loan
including: outstanding loan amount as at 31 August 2022, terms and conditions,
interest rate, repayment requirements, surety’s etc. (½)
Inspected the loan confirmation letter from BigLenders and agree the amount to the
amount disclosed in the trial balance and financial statements to ensure that the
amount is correct. (½)
Inspected the loan confirmation letter for any other terms and conditions (different
payment terms etc.) that might affect the valuation of the loan. (½)

The following audit procedures were incorrectly performed in the audit working paper:
Note to markers:
½ mark for stating incorrect procedure
½ mark for stating reason

1. “Inspected a log of masterfile amendments and supporting documentation to confirm that

appropriate procedures were carried out in respect of the evaluation of the
creditworthiness of new customers.” (½)
This procedure does not relate to the loan obtained but is rather a test of control for
debtors/revenue and receipts. (½)

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2. “Recalculated/reperformed the castings and cross-castings of the fixed asset register to

ensure the mathematical accuracy thereof.” (½)
This procedure does not relate to the loan obtained but is rather an audit procedure to
address the accuracy, valuation of fixed assets. (½)

3. “Performed a positive (physical) identification of employees working for Superior by

visiting the head office and warehouse during working hours and inspecting their identity
documents or staff tags.” (½)
This procedure does not relate to the loan obtained but is rather a procedure to confirm
that employees on the payroll are not fictitious. (½)

4. “Performed a positive debtors’ circularisation with the consent of management of

Superior.” (½)
This procedure does not relate to the loan obtained but is rather a procedure to test for
the existence of trade receivables. (½)

5. “Obtained a listing of inventory of goods in transit as at 31 August 2022 and inspected

relevant orders/contracts to determine whether ownership has passed to Superior
through scrutiny of the terms of the purchase”. (½)
This procedure does not relate to the loan obtained but is rather a procedure to address
the rights the company holds over inventory. (½)

The following audit procedures were not performed and should be included in the
working paper

6. Obtain a signed management representation letter relating to the loan from BigLenders,
covering all relevant assertions. (1)

7. Consider the effectiveness of internal controls regarding classes of transactions and

account balances and its impact on the nature, timing and extent of the substantive
procedures. (1)

8. Inspect the schedules and general ledger accounts for any abnormal/unusual entries
(e.g. negative, zero, large and round numbers, and back-dated journals entries). (1)

9. Follow up on all discrepancies/unusual amounts/fluctuations (also from analytical

procedures) through enquiry from management and by inspecting supporting
documentation. (1)

10. Inspect the minutes of the meeting(s) where management/board of directors/

shareholders approved the decision to obtain the loan from BigLenders. (1)

11. Inspect these minutes/enquire from management to obtain an understand how

management determined the reasonability of the interest rate of 6% as well as other
terms and conditions of the loan. (1)

12. Determine the reasonability of the 6% interest rate by obtaining the official prime interest
rates during the financial year as per the reserve bank notice/3rd party source. (1)

13. Obtain the loan agreement between Superior and BigLenders and:

(i) Inspect the loan agreement to ensure that the agreement has been duly signed by
both parties. (1)

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(ii) Inspect the loan agreement to confirm the amount of the loan is the approved
amount as per the resolution taken at the management/board of directors/
shareholders meeting. (1)
(iii) Inspect the agreement and ensure that the terms and conditions are the same as
per the resolution taken at the management/board of directors/shareholders
meeting (e.g. Interest rate, repayment terms, purpose of the loan, details of any
security offered for the loan, any salient features e.g. penalties for late payment/
loan covenants). (1)

(iv) Inspect the loan agreement to confirm the date on which the loan was offered to
ensure that the loan has been accounted for in the correct financial period(s). (1)

14. If any more loan advances were made during the FY2022, agree amounts/advances as
per the general ledger account/amortisation schedule received from BigLenders during
the year to the bank statements. (1)

15. Through inspection, agree interest amounts incurred on the loan for the year as per the
general ledger account/amortisation schedule to the relating journal entries raised for the
FY2022. (1)

16. Obtain the amortisation table/schedule relating to the loan obtained from BigLenders:

(i) Inspect that the interest rate used in the amortisation table/schedule is 6% as
agreed in the loan agreement. (1)
(ii) Test the arithmetical accuracy of the amortization schedule by recalculating interest
amounts using the interest rate obtained from the previous procedure; (1)
(iii) Recalculate short and long-term portion of the loan and confirm the accuracy of the
amounts per the amortisation schedule. (1)

17. Inspect the financial statement notes for the FY2022 for the disclosures in respect of the
BigLenders loan to ensure it is provided according to the requirements of IFRS 7. Ensure
the following are disclosed in the notes for the financial statements: Interest expense;
exposure to interest rate risk; exposure to liquidity risk; exposure to market risk, how the
liabilities were classified (amortised cost). (1)

18. Inspect the financial statements for the FY2022 and determine that the following general
disclosures are correct:

(i) Any loan covenants/other terms; (1)

(ii) Amounts, facts, and dates are accurate and complete through agreeing to the loan
agreements; (1)
(iii) Short and long-term position: Agree the value of the short-term portion of the long-
term debt disclosure to the amortisation schedule for 12 months post year-end and
our workings. (1)

19. Obtain the calculations performed by management on the debt to equity ratios of Superior
throughout the FY2022 and recalculate the debt to equity ratio to ensure that it does not
exceed 50% at any stage during the financial year. (1)
Communication skills: Clarity of expression (1)
Available 31½
Maximum 20

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(f) With reference to the information provided in part 4:

(i) Calculate the carrying amount of each category of inventory (raw materials, work-
in-progress and finished products) relating to the safety uniforms of
Superior Workwear Ltd for the financial year ended 31 August 2022.

Closing balance
R
Raw material [C1] 270 000 (4)
Work-in-progress [C2] 101 500 (10)
Finished products [C3] 152 250 (2)
523 750
Total (16)

(ii) Determine the number of safety uniforms which Superior Workwear Ltd has to write-
off due to Elizabeth Wear’s fraudulent activities.

Inventory write-off due to fraudulent activities

Units Write-off
Actual unit sold [C3] 3 750
Opening finished products (given) 1 500 (½)
Transferred from work in progress 2 400 (½)
Closing balance (given) (150) (½)
Sales recognised (1 848) (½)
Unauthorised Donations (200) 200 (1)
Fraudulent sales 1 702 1 702 (1)
1 902 (4)

CALCULATIONS

C1. Raw material (RM)

Meters Cost Rand per

R meter
Opening balance (given) 2 000 500 000 [1]
Purchases (given) 4 000 1 120 000 [1]
(R1 620 000/6 000 meters) 6 000 1 620 000 270 [1]

Transferred to WIP (given) (5 000) [½]

(5 000 meters x R270) (1 350 000) [½]
Closing balance 1 000 270 000
[4]

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C2. Work-in-progress (WIP)

Number Cost Rand/ unit

of units R
R
Transferred from RM 1 350 000 [½]
(5 000 m/ 2 uniforms) 2 500 [1]
Fixed production overheads
(R1 225 000/ 3 500 units (normal
capacity) x 2 500 units (actual capacity)) 875 000 [1½]
Variable production overheads 320 000 [½]
Rand per unit manufactured for 2022 2 500 2 545 000 1 018 [1]
(R2 545 000/2 500 units)
Transferred to finished products (2 400) 2 443 200 [1½]
Closing balance WIP
(100 units x R1 018) 100 101 800 [1]

Carrying amount
Accounted for at lower of cost and net
realisable value (NRV): [½]

(100 x R1 015) 101 500 [1]

NRV 1 015 [1]

- Selling price 1 020 [½]
- Cost to complete (inspection cost) (3) [1]
- Selling cost (2) [½]

Avail
able
11.5
[10]

C3. Finished products (FP)

Number Cost Rand/

of units unit
R R
Closing balance (given) 150 [½]
@ R1 015 (FIFO) 152 250 [½]
(R152 250/150) 1 015
Carrying amount (Lower of cost and NRV) 152 250

NRV 1 018
- Sales price 1 020 [½]
- Selling cost (2) [½]

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CASE STUDY 3 100 marks

CASE STUDY 3 CONSISTS OF 2 UNRELATED QUESTIONS

YOU HAVE 30 MINUTES TO READ QUESTION 1 AND QUESTION 2

QUESTION 1 50 marks

Background information

You are an audit manager at Protick Auditors Inc (Protick), a firm of registered auditors based in
Pretoria. Protick has performed the group audit of Holdco Holdings Ltd (Holdco) and its wholly owned
subsidiary, Subco (Pty) Ltd (Subco) for the past three years. Holdco is an investment holding company
that invests in businesses identified as part of its investment strategy. You have been assigned to
manage the audit of the Holdco Holdings Ltd group. The year end of the group is 30 September 2021
(FY2021).

Apart from Holdco and Subco, Protick has also accepted Healthcon Ltd (Healthcon) as an audit client
on the 3rd of September 2021. Healthcon listed on the Johannesburg Stock Exchange (JSE) in 2019,
and the shareholding of Healthcon is as follows:
• Holdco owning 70% (a controlling interest),
• The Public Investment Corporation (PIC) owning 20% (and exercising significant influence) and
• the BDM Trust (of which the founders, trustees and beneficiaries are the founding directors of
Healthcon) owning the other 10%.

The founders, trustees and beneficiaries of the BDM Trust are Joe Boom CA(SA), a qualified
chartered accountant, Danny Dumesela, a medical doctor and Markus Mahindra, a venture capitalist.
Their children went to the same school and after many discussions around the sport fields, they found
a common interest to start a company that will have a meaningful impact on the African continent.

Holdco Holdings Ltd

BDM Trust
70
100 10%

Healthcon Ltd
Subco (Pty) Ltd
20

Public Investment Corporation (PIC)

As stipulated above, Healthcon was incorporated ten years ago by these 3 individuals. They identified
the need for low-cost mobile medical facilities (clinics) to address healthcare needs in rural African
landscapes. These clinics are manufactured by converting second-hand shipping containers, which are
acquired by Healthcon. The workshop where the second-hand shipping containers are converted to
clinics is located in Silverton, Pretoria. There are several branches in the main cities of
Southern African countries responsible for the sales, renting and maintenance functions of these clinics

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(see working paper A100 below for more information). The second-hand shipping containers are
imported from European countries. All other materials used in the conversion process are sourced
from South African suppliers. From the start of COVID-19 in 2020, Healthcon has created multi-
faceted mobile screening, examining, testing and patient care mobile clinics from converted shipping
containers. Mr Dumesela is the Chief Executive Officer (CEO) of Healthcon and ensured that he is
surrounded by a team of very dynamic directors. Mr Boom is the Chief Financial Officer (CFO) and
Mr Mahindra the Chief Operating Officer (COO).

Healthcon’s previous audit firm had, after a long association with Healthcon, resigned from the audit, as
the partner in charge of the audit had retired. The remaining partners of the previous audit firm were not
satisfied that they could provide Healthcon with the adequate service, as the retiring partner had all the
knowledge about Healthcon’s business.

Healthcon has exhausted all of its overdraft facilities and the bank has indicated that additional facilities
(needed by Healthcon to invest in future projects) will only be considered if Healthcon receives an
unqualified audit report for FY2021. Management of Healthcon have subsequently requested that the
audit for the financial year ended 30 September 2021 (FY2021) be completed at the latest in the first
week of November 2021 to ensure that the audit report can be presented to the bank for the required
financing. Healthcon has for the last two years relied heavily on the previous auditors to provide them
with accounting services and with the preparation of the financial statements in accordance with
International Financial Reporting Standards (IFRS). The directors of Healthcon have stated that they
require the same services from Protick as their new auditors.

The following documents and working papers are included for the FY2021 audit:

Document/Working paper
Working paper A100: Summary of information obtained from client meeting at Healthcon (an extract)
Email from the audit manager

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Client: Healthcon Ltd Year-end: 30/09/2021

WP
Prepared by: Audit Trainee Date: 06/09/2021 A100
Page 1 of 3
Reviewed by: Audit Manager Date: 07/09/2021
Subject: Summary of information obtained from client meeting at Healthcon (an extract)
In attendance at the planning meeting held on the 6th of September 2021

From Healthcon: From Protick:

Chief financial officer Audit Manager
Sales director Audit Trainee
Production manager

Purpose of meeting:

The purpose of the meeting was to obtain an understanding of the client’s business processes.
Healthcon has three main sources of revenue. The largest source of revenue is from selling mobile
clinics (units). The second source of revenue is from renting out units. The third source is providing
maintenance services to the container units that are rented out. Below is an extract of the information
obtained with regard to the selling of units. The extract also provides an overview of the purchasing and
receiving of inventory.

Revenue from unit sales

When a prospective customer contacts Healthcon for a quotation, an appointment is scheduled

between the customer, a sales consultant and the architectural team to determine the customer’s
needs and preferences. The architectural function is outsourced to Arctech (Pty) Ltd (Arctech), a
company specialising in architectural design and civil engineering. Marcus Mahindra’s wife, Penny,
owns 100% of the shareholding in Arctech. When the customer is satisfied with the design done by
Arctech, a quantity surveyor (QS) and cost accountant prepares a cost budget in order to estimate
the costs, including inventory (direct materials), labour, overheads as well as other related costs. The
inventory costs are estimated by preparing a bill of materials (BoM) that reflects the quantities and
descriptions of the inventory items needed. The QS has a strong personal network with several
business people and uses his “connections” to select the most suitable and affordable supplier.

The profit margin added to the costing budget for any new contract is not fixed and is determined by
the specific sales consultant. To ensure that sales consultants charges the best prices, bonuses are
based on the total sales that a specific consultant secures on an annual basis. The sales consultant
sends the quoted contract price to the customer, which includes Value Added Tax (VAT) because
Healthcon is registered for VAT.

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Client: Healthcon Ltd Year-end: 30/09/2021

WP
Prepared by: Audit Trainee Date: 06/09/2021 A100
Page 2 of 3
Reviewed by: Audit Manager Date: 07/09/2021
Subject: Summary of information obtained from client meeting at Healthcon (an extract)
The quotation, costing budget and the completed bill of materials are then filed in a pending file in
the purchasing department, awaiting the customer’s decision and signed contract before the purchase
department places an order for the required inventory.

If the customer is satisfied with the design and accepts the quotation, the customer and Healthcon
completes and signs a sequentially numbered contract generated by the computer system called
AccPac. AccPac is an integrated online, real-time computer system used by Healthcon.

Invoicing and receipts

Healthcon applies IFRS 15, Revenue from contracts in the recognition of sales, and invoices its
customers as follows:
• 40% when the customer order is accepted, and the contract is signed (Stage 1);
• 35% when the unit is delivered at the customer’s premises (Stage 2); and
• 25% upon the successful installation of proper plumbing, electricity and other fixtures to make
the unit ready for use. The customer also needs to “sign-off” on the project at this stage as proof
that the project is complete and the customer takes full ownership of the unit (Stage 3).

Once the contract has been signed by the customer and loaded onto the AccPac system, the system
automatically generates a “Stage 1” sales invoice based on the contract data captured. The
AccPac system then processes a journal recording the sale and the corresponding debtor:

Dr Debtors
Cr VAT control account
Cr Revenue

Customers are required to settle invoices within 30 days of invoice date (for each of the respective
stages of the contract). The whole process from initial acceptance of the contract by the customer to
signing the contract (stage 1), to handing over the keys of the unit takes no longer than six (6)
months. The contracts signed with customers impose a penalty on Healthcon for late delivery. The
penalty is capped at 1,5% of the contract price. Healthcon incurred some penalties during the year due
to delayed deliveries from one of their suppliers.

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Client: Healthcon Ltd Year-end: 30/09/2021

WP
Prepared by: Audit Trainee Date: 06/09/2021 A100
Page 3 of 3
Reviewed by: Audit Manager Date: 07/09/2021
Subject: Summary of information obtained from client meeting at Healthcon (an extract)
Purchases and receipt of inventory

After the customer accepts the quote and pays the first 40% of the contract amount, the buyer in the
purchasing department removes the applicable “bill of materials” (BoM) from the pending file and
reviews the BoM to identify suppliers that do not appear in the supplier masterfile (see discussion
earlier on selection of suppliers by QS). All additions and changes to the supplier masterfile are done
by the buyer. The senior purchasing manager reviews and approves the updated masterfile, with
reference to the BoM, to ensure that all the required changes have been made.

After the required supplier masterfile changes, the buyer captures the inventory quantities to be
ordered as reflected on the BoM, onto the “purchasing ordering” application programme on the
AccPac system. Once captured, a sequentially numbered purchase order is generated and
e-mailed to the relevant supplier.

All deliveries from suppliers are received in a separated and secured receiving bay by the goods
receiving clerk. Receipt of inventory is recorded using the online “Goods Received” application on the
AccPac system. Upon receipt of the goods, the goods receiving clerk keys in the order number
obtained from the supplier delivery note on the system. If the order number is not on the AccPac
system, an error message is displayed, and the goods are not accepted. If the order number is on
the system, the system displays all the relevant order details (e.g., supplier name, item descriptions
and quantities ordered) on the screen.

The goods receiving clerk agrees the details on the screen to those on the suppliers’ delivery note and
signs the delivery note. He then captures the delivery note number and quantities reflected on the
delivery note onto the system. Once this data is captured, the system automatically:

• Increases the “quantity on hand” field in the Inventory Masterfile for the applicable inventory
items; and
• Generates and prints multiple copies of the sequentially numbered goods received note (GRN).

The copies of the GRN’s are correctly distributed to the relevant parties.

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Email from the audit manager:

From: auditmanager@protick.co.za
Sent: Thursday 30 September 2021,17h15pm
To: auditpartner@protick.co.za
Subject: Healthcon Audit matter

Good day

I think I picked up something which will have a material impact on the audit! Whilst at the coffee
machine, I overheard a disgruntled employee (Stanley) chatting to his co-worker about today being his
last day at Healthcon due to “the retrenchments” and that “HAWU (Holdco Allied Workers Union) really
tried their best to get us decent payouts”. After hearing this, I took the liberty of introducing myself to
Stanley.

Apparently Healthcon took the decision to retrench a large number of sales staff due to the entrance of
many competitors to the market (although Stanley believes they would have been retrenched
regardless of the competition due to the challenging economic conditions brought about by Covid-19).
No single branch is to be closed down, but several sales employees from each branch were identified.
On the 16th of August an agreement was reached with HAWU, stipulating the terms of the
retrenchment packages. The employees’ last working day is today, 30 September!

I failed to get hold of you via WhatsApp earlier to confirm if you knew anything about this, so I went
directly to Joe Boom CA(SA) to question why these retrenchments don’t appear anywhere in the 2021
draft annual financial statements!?

He apologised profusely for this “oversight” saying it must have slipped his mind and joked about how
age has affected his memory - To be honest though, he actually looked really surprised when I
mentioned IAS 37, Provisions, Contingent Liabilities and Contingent assets!

I asked him for a detailed calculation and schedule. He drafted and provided me with such a schedule
depicting an amount of R1 950 000 computed. It had reference to the names of the 16 employees to be
retrenched, their remuneration at 30 September 2021; and the number of days to be paid as a
retrenchment benefit (based on number of years' service). I’ll obviously go ahead and perform audit
procedures on these calculations now.

Regards
Audit Manager

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QUESTION 2

Background information

You are the senior-in-charge of the audit of Squarehouse (Pty) Ltd (Squarehouse) for the financial
year ended 30 September 2021. Your audit firm, MakeSure Incorporated (MakeSure), was recently
appointed as the new registered auditors of Squarehouse. MakeSure has a reputable Information
Technology (IT) audit division, under the leadership of Mr John McBride who is the audit partner in
charge of the IT division.

Squarehouse is a family-run company which has grown into an industry leader in the manufacturing of
prefabricated (prefab) homes. Squarehouse employs a permanent staff compliment of 65 and
contracts additional staff when required. The owner and Chief Executive Officer of Squarehouse,
Mr Alex Hlabini, established the company in 2013 after realising that the cost of building or buying a
starter home was beyond the reach of so many South Africans. Mr Hlabini, with years of experience in
the furniture manufacturing industry, came up with an innovative solution to this problem through the
manufacturing of prefabricated modular units as starter homes, garden cottages and small offices. His
wife, Mrs Beauty Hlabini, was the architectural design specialist of Squarehouse from 2013, but left
the employment of Squarehouse in 2016 to start her own small architecture firm.

Squarehouse prefabricated modular units are affordably priced, compared to traditional houses and
offices. A single Squarehouse modular home, for example, costs approximately R230 000 (including
VAT) and includes one bedroom, a kitchen, lounge, bathroom, fitted lighting and a stove. A second or
third bedroom can then be added at around R85 000 each (depending on the size). The units are
furthermore eco-friendly, insulated, waterproof, fireproof and corrosion-resistant with a 15-year
structural guarantee. The prefabricated modular units are designed for modern living, maximum
comfort and cost efficiency. Show houses are available for viewing at the three show rooms located in
Pretoria, Johannesburg and Cape Town. The units are built at the factory located in Midrand, where
after they are delivered to the customer’s preferred location for assembly, which only takes a single
day. Transportation charges to the customer’s location are calculated based on the kilometres
travelled by the assembly teams. Squarehouse requires a level surface for assembly of the unit, truck
and crane access as well as pre-established water and electrical connections.

Discussions were held with the financial director, Mr George Malwani, on 7 October 2021. The
following matters were brought to your attention on the meeting:

Matter 1:
Mr Malwani indicated that a loan of R3 780 000 was granted and paid over to Mrs Hlabini on
1 February 2021. An e-mail from Mrs Hlabini to Mr Malwani with the request for the loan, served at a
board meeting held on 20 January 2021. In the e-mail she indicated that the loan would enable her to
purchase 7 704 m2 of vacant land situated in the heart of the picturesque Hermanus wine route in the
Heaven-and-Earth (Hemel-and-Aarde) valley. She explained in the e-mail that she would like to
explore the establishment of a wine farm on this property. She furthermore envisages building a
spectacular house on this piece of land assembled out of Squarehouse modular units and going
completely “off-the-grid” (living autonomously without reliance on a utility for power). She believes that
the property would be an advertisement for Squarehouse in the future and should therefore be seen
as an “investment”. The board agreed and approved the loan at an interest rate of 2% per annum
payable monthly alongside the monthly capital instalments of R105 000, over a three-year period.

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Matter 2:
Mr Malwani explained that on 23 July 2021 he received an e-mail from a customer,
Mr Emile Bezuidenhout, threatening to take legal action against Squarehouse. In the e-mail,
Mr Bezuidenhout explains that he bought three prefabricated modular units at a total cost of R455 000
from Squarehouse in November 2020. These units were delivered to his stand in Waverley, Pretoria,
and assembled on 4 December 2020. Mr Bezuidenhout claims in the e-mail that, during a
thunderstorm in December, these units started shifting around and leaking water resulting in major
damages to the units. Mr Bezuidenhout claims that he and his family were also traumatised by the
events. He would be taking legal action against Squarehouse for damages to the modular units, as
well as for the emotional anguish and distress suffered by his family.

On 25 August 2021 Squarehouse received a letter from Mr Bezuidenhout’s attorneys stating that
Mr Bezuidenhout was suing Squarehouse for a total amount of R1 250 000. A hearing notice was
subsequently issued, and all parties are to appear in court on 20 October 2021. Mr Malwani explained
that Squarehouse directors are not concerned about this matter. He noted that a further investigation
done by the architectural designer and structural engineer of Squarehouse, established that
Mr Bezuidenhout had made extensive changes to the roofs of the units himself after they had been
assembled. This, according to the legal counsel of Squarehouse, Butterscotch Incorporated, was the
main reason for all the leakages and damages during the thunderstorm in December 2020. The matter
was however disclosed as a contingent liability in the notes to the financial statements of Squarehouse
for the year ended 30 September 2021.

Matter 3:
Mr Malwani explained that Squarehouse has a versatile online website where more information can be
obtained about the company, for placing orders and viewing of their catalogues. Given the constraints
brought about by the recent Covid-19 pandemic, it is also possible to view show houses online via
Zoom chats or via pre-recordings available on the website. Squarehouse also recently invested in
well-designed Facebook-, Pinterest- and Instagram pages to increase its online presence. This has
paid off with significant increases in sales volumes during the current financial year. It would also
seem that although the economy took a downturn in recent years, more and more South Africans have
shown a keen interest in cheaper forms of housing, which had a positive effect on Squarehouse’s
sales figures for this financial year.

Mr Hlabini has always been a big believer in “going green” and therefore strives for a paperless
environment. Almost all paperwork, including orders, invoices, delivery notes, quotes etc. as well as
the inventory master file, debtors master file etc. are stored in electronic format in the “cloud”. Although
the accounting system is not overly sophisticated and complex, it is extensively computerised.
Mr Malwani stated that Squarehouse would support all audit initiatives in auditing these online files
and transactions as quickly, cost effectively and efficiently as possible.

Matter 4:
In the beginning of January 2021, The Gauteng Member of Executive Council (MEC) for Human
Settlements together with the Ekurhuleni mayor, launched the Rebatla Hills affordable housing
development project in Germiston. The project was aimed at providing low cost housing to citizens of
Ekurhuleni and to encourage emerging black property developers to invest and participate in the
affordable housing residential property market. Squarehouse was approached by MakeItWork (Pty)
Ltd (MakeItWork), a small construction company, to form a partnership from 1 February 2021 to
produce low cost prefab homes for the Rebatla Hills housing project. MakeItSquare (Pty) Ltd
(MakeItSquare), a separate legal entity, was formed for this purpose. Squarehouse and MakeItWork
both have a 50% shareholding in MakeItSquare.

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An agreement was signed on 11 January 2021, which outlines all activities of the arrangement and the
establishment of a joint operating committee. A representative from each company serves on this
operating committee and all decisions require unanimous consent. The agreement sets out all
responsibilities of the two parties as MakeItWork and Squarehouse would each be responsible for their
own areas of expertise. MakeItWork would mainly be responsible for laying cement slabs, paving,
electrical work, plumbing and other small construction jobs. Squarehouse would be responsible for
producing two to three-bedroom prefab houses. The agreement furthermore stipulates that revenue
from the sales and joint expenses would be shared. A separate bank account was opened for these
purposes.

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CASE STUDY 3
REQUIRED

YOU NOW HAVE 150 MINUTES TO ANSWER QUESTON 1 AND

QUESTION 2

QUESTION 1

Marks
(a) Based only on the background information, discuss the factors that
Protick Auditors should have considered before accepting the audit engagement of
the subsidiary, Healthcon Ltd for the financial year ended 30 September 2021. 11
(b) With reference to the email from the audit manager, discuss the effect that the
undisclosed retrenchment provisions would have on the assessment of the overall
risk of material misstatement (RoMM) in the 2021 annual financial statements of
Healthcon Ltd. 9

Communication skills: logical argument 1

(c) With reference only to the background information and the information presented
under the subheading, “Revenue from unit sales” on working paper A100, identify
and discuss the inherent risks at assertion level for revenue for the financial year
ended 30 September 2021. 7

Communication skills: logical argument: presentation 1

(d) With reference to the information presented under the subheading “Purchases and
receipt of inventory” on working paper A100, identify and explain the weaknesses
in the system used by Healthcon Ltd for the purchasing and receiving of inventory.
Present your answer in the following tabular format: 14

Identify weakness Reason/explain the weakness

You can assume the following for purposes of answering part (d):
• Sound access controls, including adequate password controls, are in place
restricting access to all applications to staff members based on their job
descriptions.
• The necessary edit and validation checks have been built into all applications.

Communication skills: presentation 1

(e) Identify, with reasons, the names of all related parties to Healthcon Ltd in terms of
IAS 24 Related Parties. 6
Total 50

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QUESTION 2

Marks
(g) With reference to the background information and only matter 1, formulate the
audit procedures that should be performed in order to obtain sufficient and appropriate
audit evidence with regard to the long-term loan made to Mrs Hlabini as reflected in
the annual financial statements of Squarehouse for the financial year ended
30 September 2021. 21

Note: Exclude any tests of controls over the EFT payments

Communication skills: clarity of expression 1

(h) With reference to the background information and only matter 2, formulate the
audit procedures that should be performed to obtain sufficient and appropriate audit
evidence with regard to the contingent liability disclosed in the notes to the annual
financial statement of Squarehouse for the financial year ended 30 September 2021. 10
(i) With reference to the background information and matter 3, discuss the factors that
you would consider when deciding on whether to make use of computer assisted audit
techniques (CAATs) in the audit of Squarehouse for the financial year ended
30 September 2021. 12

Communication skills: clarity of expression 1

(j) With reference to matter 4, discuss whether you would classify the agreement
between Squarehouse and MakeItWork as a joint arrangement in terms of IFRS 11
Joint Arrangements. 5
Total 50

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CASE STUDY 3
SUGGESTED SOLUTION

QUESTION 1

(a) Based only on the background information, discuss the factors that Protick Auditors
should have considered before accepting the audit engagement of the subsidiary,
Healthcon Ltd for the financial year ended 31 September 2021.

Marks
Considerations regarding the need to accept the engagement because of the group
1. As Protick Auditors is the group auditor of the Holdco Holdings Ltd group it is beneficial
to accept the audit to ensure that sufficient and appropriate audit evidence, on which to
base the group audit opinion, is obtained, especially if Healthcon Ltd is a significant 1
component. Based on ISA600.19 it will be easier to be involved in the planning of the
audit and the communication will also be easier.
Consider the integrity of the client and business risk
2. Management has in incentive to manipulate the AFS because 1
(i) they are having Going concern problems as Healthcon has exhausted all of its
overdraft facilities and should apply for new finance for expansion purposes. Does
this indicate an unfavourable financial position? 1
(ii) Consequently, management is under pressure to obtain an unqualified audit
report as the audit report is required for the additional financing. 1
Sufficient and competent staff
3. Consider whether Protick have sufficient knowledge about
(i) the type of industry with its complexities, namely the conversion of containers and
manufacturing (Does Protick have enough staff with the relevant experience to
audit a client where the previous auditors felt that they could not satisfy the
service of Healthcon due to the overall complexity of the business?) and 1
(ii) has a JSE approved Audit partner available to perform this audit of a listed
company that will be independent on this audit. 1

4. Considering the audit need to be done in November for the whole group and it seem we
were asked in September 2021 to take up this client, we will need to determine whether
we have enough additional trainees (with enough time) in this period of the year to 1
perform all the additional work (including audit procedures on the previous auditor /
additional audit procedures to verify opening balances in terms of ISA510)
(i) We will need to perform additional audit procedures on the opening balances
because the previous auditors also performed accounting services and prepared
the AFS, which does seem that they were not independent, and we may not be
able to rely on the work they performed? (See discussion below on independence 1
if you perform accounting services for a Public interest entity)
5. The risk of legal liability in terms of section 46 of the APA given the fact that the bank
will rely on the financial statements for purposes of granting additional funding and we 1
as auditors are aware that they will rely on our work.

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Marks
Ethical considerations
Providing accounting and financial statement preparation assistance
6. This might create a self-review threat to independence as the auditor will possibly be 1
auditing its own work
7. Consideration should be given to how significant the threat is, namely the nature of the 1
services provided, and management’s involvement in taking responsibility for the
financial statements and accounting records.
8. It should also be considered that, as Healtcon is listed, it would qualify as a public 1
interest entity in terms of the CPC and the provision of these services to audit client will
not be allowed in terms of the Code of Professional Conduct 1
9. The threat is significant, and should the audit be accepted, these accounting/financial 1
statement preparation services should rather not be provided.
Other Engagement Considerations
10. Establish whether the preconditions for the audit are present, such as whether the 1
financial framework is acceptable (ISA 210.6).
11. Is the client is prepared to sign the standard engagement letter to acknowledge that it 1
understands its responsibilities with regards to the audit?
12. Consider whether the appointment of the auditors in terms of section 91has been 1
affected in terms of the Companies Act. It does seem that there will not be a problem
because the previous auditors have already indicated that they are not willing to take
up this engagement.
13. The client is experiencing financial difficulties and the auditor has to consider whether
the client will be able to pay the audit fees. 1
14. Any other relevant matters 1
Available 19
Maximum 11

(b) With respect to your discussion with the retrenched employee, described in the email
you sent to the audit partner, discuss the effect that this matter would have on the
assessment of the overall risk of material misstatement (ROMM) in the 2021 annual
financial statements of Healthcon Ltd.

Marks
1. The fact that this was the first time that the auditors became aware of these
retrenchments, increases ROMM at the financial statement level as management of
Healthcon may have intentionally withheld the information, thus management integrity
may be weak. 1
2. The fact that Joe Boom CA(SA) (CFO) is not be up to date with the latest developments
in accounting standards (IFRS) and omitted to record the retirement benefit provision,
increases the risk that: 1
• Financial statement transactions, balances, disclosure may not be in full 1
compliance with IFRS requirements. 1
• Accounting policies may be incorrectly applied in terms of IFRS requirements. 1

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Marks
3. Since the retrenchments may be indicative of possible going concern issues (as thought
by the retrenched staff member) the financial statements may have been prepared on
the incorrect accounting basis. 1
• Section 22 of the Companies Act may have been breached should the directors be
trading recklessly with the intent to defraud creditors. 1
• There is also an increased risk of fraud as management may intentionally
manipulate the financials in an attempt to conceal the going concern issues. 1
4. There is an increased risk that the provision for the retrenchments in the 2021 financial
statements may not be correctly accounted for in terms of IAS37 due to the complexity
in the calculation (several variables) 1
5. Due to the disgruntled employees having remained in employment for several weeks
after they were advised of their retrenchments, there is an increased risk of: 1
• Weaknesses in controls during this period due to a lack of care / focus on their
responsibilities leading to error in the financial statements 1
• Theft of cash or goods having resulted from an attitude of ‘rationalisation’ 1
6. Based on the information available, the effect of the information will increase the overall
risk of misstatement in the 2021 financial statements 1
Communication skills: logical argument 1
Available 14
Maximum 10

(c) With reference only to the background information and work paper A100, “Revenue from
unit sales”, identify and discuss the inherent risks at assertion level for revenue for the
financial year ended 31 September 2021.

Marks
Occurrence
ISA240.26 there is a presumed risk of fraud due to revenue recognition included in revenue.
(Based on background this fraud risk will be to the overstate revenue) 1
The company is a Registered VAT vendor as they account for VAT in the journal and
consequently sales may be recorded inclusive of VAT (mark here or under classification). 1
Because the sales representative receives a bonus based on sales, the sales
representative might inflate sales (by various ways) to obtain a bigger bonus. 1
The full amount could have been recognised through all the stages without all the
performance obligations being met / without control having passed 1
There is a risk that the incurred penalty for late delivery are not accounted for against the
revenue which overstates the revenue. 1
Completeness
The performance obligation could have been met and control could already been passed to
the client, but the invoicing has not reached one of the “stages” of invoicing. 1
Cut-off
At year-end, control could already have passed, and all performance obligations have been
met but the revenue has not been accounted for yet. (Also, the inverse of this) 1
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Marks
Accuracy
Risk that the revenue can be incorrectly calculated with regards to the stages e.g. incorrect
% or calculation errors. 1
As there are various income streams (Sales, renting and maintenance) and each type of
income has a different method of calculating the revenue, it is more likely to make errors
whilst processing transactions. 1
Profit margins are not fixed and the sales personnel may choose which mark- up to add.
The risk is that the sales price can be incorrect due to error or through fraud by the sales
personnel. 1
Invoicing is done on a basis that is not consistent with the revenue recognition requirements
of IFRS 15. Error due to the standard IFRS15 being relatively new and more complex with
various rules. 1
Classification
As there is various income streams and each type of income may be included into the
wrong revenue account. 1
Communication skills: presentation 1
Available 13
Maximum 8

(d) With reference to work paper A100, “Purchases and receipt of inventory”, identify and
explain the weaknesses in the system used by Healthcon Ltd for the purchasing and
receiving of inventory.

You can assume the following for purposes of answering part (d):
• Sound access controls, including adequate password controls, are in place
restricting access to all applications to staff members based on their job
descriptions.
• The necessary edit and validation checks have been built into all applications.

IDENTIFY WEAKNESS REASON/EXPLANATION

PURCHASING
1. ID: No authorised supplier listing This may result in the quantity surveyor
is in place. 1 buying from a “related supplier” resulting 1
in fraud/non-delivery and penalties
imposed.
2. ID: While the buyer is supposed to EXPL: This may result in the buyer
contact authorised suppliers to find simply recording the price charged by
the supplier who can supply the t h e first supplier who is able to
inventory item at the best possible supply the inventory item, resulting in
price, no management review or higher raw material costs and
approval of the process is potentially the loss of contracts (due to
undertaken/The buyer doesn’t 1 uncompetitive pricing). / Penalties for 1
contact the supplier to confirm late deliveries if supplier is not reliable.
delivery dates and
availability of inventory items.
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IDENTIFY WEAKNESS REASON/EXPLANATION

MASTERFILE AMENDMENT
3. ID: Amendments are not captured on EXPL: No evidence of amendments
sequenced, pre- printed, authorised 1 made / Logs of changes made to 1
Masterfile amendment forms. Masterfile cannot be validated.
ID: Controls over the amendments to EXPL: The buyer could fail to identify all
the inventory masterfile are the inventory updates required which
inadequate, as the system of will result in delays in obtaining
identifying what changes are 1 inventory items, or the inappropriate 1
required to the masterfile is rather supplier being used.
arbitrary – the buyer determines what
needs to be updated.
ID: No review or authorisation of the EXPL: Errors may result in stock
order is conducted after the buyer 1 shortages (with consequent contract 1
has captured the details for accuracy. delays and penalties) or excessive
inventory being purchased (which will
result in losses due to inventory theft
and/or obsolescence).
4. ID: There is no indication that EXPL: This may lead to delays in
anyone follows up on long 1 completing contracts, and associated 1
outstanding orders. GRN and cost overruns, penalties and client
purchase orders (PO) are not regularly dissatisfaction.
matched and compared.
RECEIVING OF GOODS
5. ID: The goods receiving clerk does not EXPL: This may result in the
physically count the number of 1 company having to pay for goods not 1
inventory items received. received.
6. ID: The GRN is not prepared based on 1 EXPL: This may result in inaccurate 1
the actual quantity of goods received. inventory records.
7. ID: The goods receiving clerk does not EXPL: This may result in the
physically inspect (even superficially) 1 company having to pay for goods 1
the quality of the inventory items which is faulty.
received.
8. No following up of orders that are 1 It may lead to delays and “penalties” if 1
processed. The receiving clerk the order number or delivery note is
dismisses the order immediately if it incorrect as it is dismissed.
doesn’t appear on the system.
Any other valid marks 1 Any other valid marks 1
Total Available 11 11
Communication and layout (table) 1
Maximum 15

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(e) Identify, with reasons, the related parties to Healthcon Ltd in terms of International
Financial Reporting Standards (IFRS).

Marks
1. Holdco is related to Healthcon as Holdco is the parent company and they are
1
members of the same group (IAS 24.9(b)(i)).
2. Subco is related to Healthcon as they are members of the same group (both are
1
subsidiaries of Holdco) (IAS 24.9(b)(i)).
3. The PIC is related to Healthcon as Healthcon is an associate of the PIC by virtue of
the 20% shareholding. The shareholding of 20% is presumed to provide significant 1
influence over Healthcon in terms of IAS 28 (IAS 24.9(b)(ii)).
4. The directors (all 3 of them) are related to Healthcon as they are members of the
1
key management personnel of Healthcon (IAS 24.9(a)(iii)).
5. Arctech (Pty) Ltd is related to Healthcon as Arctech is owned by Marcus’s wife, who
1
is a close family member of Marcus (IAS 24.9(b)(vi)).
6. The BDM Trust is related to Healthcon as the BDM Trust is controlled by the
1
directors of Healthcon (IAS 24.9(b)(vi)).
7. Marcus Mahindra’s wife, Penny, is related to Healthcon as she is a close family 1
member of Marcus who is a member of the key management personnel.
8. The children of Joe Boom, Danny Dumesela and Markus Mahindra are also related 1
parties to Healthcon, as they are close family members of key management
personnel of Healthcon.
Available 7
Maximum 6

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QUESTION 2

(a) With reference to the background information and only matter 1, formulate the audit
procedures that should be performed in order to obtain sufficient and appropriate audit
evidence with regard to the long-term loan made to Mrs Hlabini as reflected in the
annual financial statements of Squarehouse for the financial year ended
30 September 2021.

Note: Exclude any tests of controls over the EFT payments

1. Consider the effective functioning of the internal controls at Squarehouse regarding the
granting of loans and the effect thereof on the nature, timing and extent of substantive
procedures. (1)

2. Obtain/request a signed management representation letter addressing all relevant

assertions pertaining to the long-term loan. (1)

3. Obtain the schedules relating to the long-term loan made to Mrs Hlabini. (1)

4. Recalculate the castings and calculations on these schedules to ensure accuracy of the
amounts. (1)

5. Agree the balances on the schedules relating to the long-term loan made to Mrs Hlabini
to the general ledger to ensure completeness and accuracy. (1)

6. Agree the balances in the general ledger relating to the long-term loan made to
Mrs Hlabini to the corresponding figures in the trial balance and the annual financial
statements of Squarehouse for the financial year ended 30 September 2021. (1)

7. Inspect and review the schedules, general ledger and other supporting documentation
relating to the long-term loan for any unusual/abnormal items (e.g. large amounts/
negative amounts) and discuss any irregularities with management. (1)

8. As this represents a loan or other financial assistance to a related person to a

director/prescribed officer (Mrs Hlabini is the wife of the CEO Mr Hlabini) in terms of
section 45 of the Companies Act, the following procedures should be carried out:

(i) Inspect the Memorandum of Incorporation (MOI) of Squarehouse to establish

whether there are any conditions and/or restrictions regarding the granting of such
loans (and special resolutions) and whether these were adhered to. (1)
(ii) Inspect the minutes of the board meeting held on 20 January 2021 for the approval
of the long-term loan granted to Mrs Hlabini. (1)
(iii) Inspect the minutes of the board meeting to ensure that the solvency and liquidity
test had been considered at the board meeting (the minutes should indicate that
the board was satisfied that Squarehouse would satisfy the solvency and liquidity
test immediately after the granting of the loan to Mrs Hlabini). (1)
(iv) Reperform management’s solvency and liquidity test shortly after the granting of
the long-term loan to Mrs Hlabini and ensure that Squarehouse was in fact solvent
and liquid when the loan was granted. (1)
(v) Inspect the minutes of the board meeting to ensure that the board considered the
terms under which the loan/financial assistance was granted (the interest rate of
2% per annum and the repayment terms thereof being R10 500 per month over a
three year period) and that they concluded that it was fair and reasonable to
Squarehouse. (1)

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(vi) Inspect that a special resolution had been passed at a shareholders’ meeting within
the previous two years where the granting of a loan to a director/prescribed officer
(or related person) was approved. (1)
(vii) Inspect the minutes of the shareholders’ meeting to ensure that at least 75% of the
voting rights (or the company specific requirement) were exercised on the special
resolution. (1)
(viii) Inspect a copy of the written notice of the special resolution that was sent to all the
directors and trade unions (where applicable). (1)
(ix) Inspect the minutes to ensure that all interests in the granting of the loan were
declared/disclosed by directors at this meeting (Mr Hlabini should have declared his
interest in the loan). (1)
(x) Inspect the minutes to ensure that any director who disclosed an interest in this
transaction did not vote on this matter (Mr Hlabini should not have voted on the
matter). (1)
(xi) Inspect the written notice of the resolution to all shareholders and trade unions
representing the employees, of the board’s decision to provide the financial
assistance. (1)
(xii) If the total value of the financial assistance exceeds one-tenth of 1% of the
company’s net worth at the time of the resolution, inspect that the notice was given
within 10 business days from the adoption. (1)
(xiii) If the total value of the financial assistance does not exceed one-tenth of 1% of the
company’s net worth at the time of the resolution, inspect that the notice was given
within 30 days after the end of the financial year. (1)

9. Inspect the EFT/bank statement/payment records of Squarehouse to confirm that the

amount of R3 780 000 was paid to Mrs Hlabini on 1 February 2021. (1)

10. Inspect the loan agreement between Squarehouse and Mrs Hlabini to confirm the
following:

(i) The parties to the purchase agreement, namely Squarehouse and Mrs Hlabini
(names of borrower and lender appear in agreement); (1)
(ii) Signatures of both parties on the agreement; (1)
(iii) The amount of the loan stated in the agreement, namely R3 780 000; (1)
(iv) The effective date of the loan, namely 1 February 2021; (1)
(v) The terms of the agreement – the agreement stipulates an interest rate of 2% per
annum and monthly instalments of R10 500 over a three-year period; (1)
(vi) Securities offered by Mrs Hlabini (if any); (1)
(vii) Any other terms and conditions, possible penalties for late payments, loan
covenants etc. (1)
Max 3

11. Recalculate the interest on the loan (interest rate of 2% per annum payable monthly), and
follow up any differences with management. (1)

12. Inspect the cash receipt records or bank statements for evidence of monthly repayments
and agree these amounts to the amounts captured on the amortisation schedule and in
the general ledger. (1)

13. Through inspection of the dates of these repayments on the cash receipt records or bank
statements, confirm that the repayments have been recorded in the correct accounting
period. (1)

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14. Obtain a written confirmation of the balance owing on the loan from Mrs Hlabini (after
obtaining permission from Squarehouse) and ask her to confirm the interest rate,
securities offered and repayment terms. (1)

15. Inspect the financial statements for the amount that is disclosed to ensure that the
amount is disclosed correctly in terms of IAS 24 and IFRS 9. (1)

16. Any other valid procedure. (1)

Communication skills: clarity of expression (1)
Available 31
Maximum 21

(b) With reference to the background information and only matter 2, formulate the audit
procedures that should be performed to obtain sufficient and appropriate audit evidence
with regard to the contingent liability disclosed in the notes to the annual financial
statement of Squarehouse for the financial year ended 30 September 2021.

1. Consider the effective functioning of the internal controls at Squarehouse regarding the
identification of contingent liabilities and the effect thereof on the nature, timing and
extent of substantive procedures. (1)

2. Obtain/request a signed management representation letter addressing all relevant

assertions (e.g. completeness and occurrence) pertaining to the contingent liability as
disclosed in the notes to the annual financial statements for the financial year ended 30
September 2021. (1)

3. Obtain and inspect documentation in support of the contingent liability (the e-mail
correspondence from Mr Bezuidenhout, the letter from Mr Bezuidenhout’s attorneys, the
hearing notice and correspondence from Butterscotch Inc.) and evaluate whether there is
a possible obligation that arises from past events whose existence will only be confirmed
by the occurrence or non-occurrence of an uncertain future event. (1)

4. Evaluate Squarehouse’s procedures for identifying provisions and contingent liabilities

and the merits for only disclosing this matter as a contingent liability, through discussion
with Mr Malwani and/or other directors. (1)

5. Inspect minutes of board/directors’ meetings where the possible legal action by

Mr Emile Bezuidenhout against Squarehouse was discussed and where it was decided to
disclose the matter as a contingent liability. (1)

6. Obtain permission/authorisation from Squarehouse management to contact/communicate

with Butterscotch Inc. (1)

7. Request and obtain written representation from Butterscotch Inc. setting out details of the
matter (amount of claim, nature of the matter, claimant, legal expenses to date etc.).
Obtain their opinion on possible future financial exposure or probability of claim
succeeding. (1)

8. Evaluate the competence, objectivity, qualifications and capabilities of the architectural

designer and structural engineer of Squarehouse as well as the legal experts at
Butterscotch Inc. (or any other experts used) through: (1)

(i) through discussions with management regarding the capabilities and experience of
the experts; (1)

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(ii) inspection of the legal counsel’s website, inspection of relevant qualifications,

discussions with other legal counsels, media exposure, registrations with legal
boards, reputation in the market etc. (1)

9. Inspect the contingent liability note to Squarehouse’s annual financial statements for the
financial year ended 30 September 2021 and verify that the following has been disclosed
in terms of IAS37: (1)

(i) A description of the nature of the contingent liability that agrees to the written
representation obtained from Butterscotch Inc.; (1)
(iii) An estimate of the financial effect; (1)
(iv) Any uncertainties relating to the amount of timing of outflows; (1)
(v) Any possibilities of reimbursements. (1)
Max 2

10. Any other valid procedure. (1)

Available 13
Maximum 10

(c) With reference to the background information and matter 3, discuss the factors that you
would consider when deciding on whether to make use of computer assisted audit
techniques (CAATs) in the audit of Squarehouse for the financial year ended
30 September 2021.

1. Consider the complexity of Squarehouse’s accounting systems. Consider whether

Squarehouse’s accounting systems are extensively computerised and of a high level of
complexity or sophistication. (1)

(i) Although the accounting system of Squarehouse is not overly sophisticated and
complex, it is extensively computerised. (1)
(ii) CAATs would therefore be ideal as manual testing would be impractical/impossible
in an extensively computerised accounting system. (1)

2. Consider the volume of transactions that took place during the financial year at
Squarehouse. Consider whether there are large volumes of transactions, large file sizes
which result from processing the transactions etc. (1)

(i) It would seem that there has been significant increases in sales volumes during the
current financial year. (1)
(ii) CAATs would therefore be considered ideal as manual testing of large volumes of
transactions would be impractical. (1)

3. Consider whether the data is stored in electronic format. (1)

(i) Squarehouse strives for a paperless environment. Almost all paperwork, including
orders, invoices, delivery notes, quotes etc. as well as the inventory master file,
debtors master file etc. are stored in electronic format in the ‘cloud’. (1)
(ii) CAATs would therefore be considered ideal as physical documents and normal
audit trails may not exist. (1)

4. Consider the availability of skills in the audit team to make use of CAATs. (1)

(i) MakeSure has an Information Technology (IT) audit division, under the leadership
of Mr John McBride who is the audit partner in charge of that division. (1)
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(ii) With the necessary skills to perform CAATs within MakeSure, CAATs would be
possible and desirable. (1)

5. Consider the potential loss of independence. Consideration should be given to the fact
that the audit team of MakeSure will have to rely quite heavily on the personnel at
Squarehouse to run the CAATs. (1)

6. Consider the attitude of the client. (1)

(i) Mr Malwani stated that Squarehouse would support all audit initiatives in auditing
these online files and transactions as quickly, cost effectively and efficiently as
possible. (1)
(ii) With the support and positive attitude of management towards all audit initiatives,
CAATs would be possible and desirable. (1)

7. Consider the compatibility of MakeSure’s hardware and software with Squarehouse’s

hardware and software. (1)

8. Consider the general controls over the cloud and whether we would have access to the
data stored in the cloud. Determine what data is hosted on the cloud. (1)

9. Consider whether Squarehouse already has certain utilities that could assist. These
utilities are programmes that can frequently perform tasks which are useful to the auditor
such as sorting/re-organising files, copying, printing parts of files etc. (1)
Communication skills: clarity of expression (1)
Available 19
Maximum 12

(d) Discuss whether you would classify the agreement between Squarehouse and
MakeItWork as a joint arrangement in terms of IFRS 11.

The agreement between Squarehouse and MakeItWork will be a joint arrangement if it is an

arrangement of which both Squarehouse and MakeItWork have joint control [IFRS 11.4]. (1)

A joint arrangement has the following characteristics [IFRS 11.5]:

1. Squarehouse and MakeItWork are bound by a contractual arrangement through the

agreement entered into and signed on 11 January 2021. (1)

2. The contractual arrangement gives both Squarehouse and MakeItWork joint control of the
arrangement as evidenced by:

(i) The establishment of a joint operating committee of which a representative from

each company sits on; and (1)
(ii) All decisions made by the joint operating committee requires unanimous consent.(1)

Joint control exists as the decisions about the relevant activities require the unanimous consent
of both Squarehouse and MakeItWork sharing control. (1)

Therefore, the agreement between Squarehouse and MakeItWork is a joint arrangement in

terms of IFRS 11 Joint Arrangements. (1)
Available 6
Maximum 5

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CASE STUDY 4 100 marks

CASE STUDY 4 CONSISTS OF 2 UNRELATED QUESTIONS

YOU HAVE 30 MINUTES TO READ QUESTION 1 AND QUESTION 2

QUESTION 1 Marks 50

Background information

You are an audit senior at Bakeng & Kgomotso Auditors Incorporated (B&K), currently involved in the
finalisation stage of the statutory annual audit of Med Group Limited (Med) and its two subsidiaries,
Medschem Medical Scheme (Medschem) and Medmanage (Pty) Ltd (Medmanage), for the financial
year ended 30 June 2021. Med is a Johannesburg Stock Exchange (JSE) listed company in the health
care industry of South Africa. The final materiality for the 2021 statutory annual audit is set at
R3 million for Medschem, R1,2 million for Medmanage and R 4 million for the consolidated financial
statements of Med.

Medschem is an independent non-profit medical scheme governed by the Medical Schemes Act and
regulated by the Council for Medical Schemes. Medschem has a good record of diligently paying their
clients’ qualifying medical costs and providing excellent service to its members. Medschem is
administered separately by Medmanage, an authorised financial services provider and for-profit
private company. By separating medical scheme and administration functions between Medschem
and Medmanage, the Med group of companies has been able to gain a significant competitive
advantage by expanding its offerings to the health care market without contravening the Medical
Schemes Act.

In addition to providing administration services to Medschem, Medmanage offers medical industry

related services and products to medical scheme members. These services and products include for
example the purchase and repackaging of vitamins as well as endorsed weight management
products. The group of companies has proven to be highly profitable since it was founded in 1993.
However, the global Covid-19 pandemic that hit South Africa and the rest of the world in 2020,
changed the healthcare landscape significantly.

The Med group of companies saw a significant decline in profits in the 2021 financial year. Although
Medschem initially experienced large surpluses and reserves after fewer operations and doctors’ visits
at the beginning of the outbreak, the scheme had to pay higher claims as hospitalisations due to
Covid-19 increased later during the outbreak. The Council for Medical Schemes further stressed that
uncertainty exists around how Covid-19 will affect medical schemes in the long term.

Covid-19 vaccinations

The South African government begun its vaccine rollout against Covid-19 in April 2021 through a
phased rollout of the vaccine. Healthcare workers were the first to receive their vaccines, free of
charge. The President promised that all South African citizens would be afforded the opportunity to be
vaccinated, should they wish to. It is expected that so called ‘herd immunity’ would be achieved once
60% of all South Africans have been vaccinated. Whilst the South African government took
responsibility to source, distribute and oversee the rollout of the vaccine, Medical schemes and other
health care industry players partook in the vaccination process. This collaboration would be achieved

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by providing funding for the vaccination to their own members. It was expected that the cost of
providing the required dosages of vaccinations to their members, would be far less than the potential
costs of its members contracting the Covid-19 virus and claiming medical costs from the medical
scheme.

In addition, it is expected that later, during the subsequent phases of the vaccination initiative, the
public-private collaboration between the South African Government and medical schemes, will be
further expanded whereby government would procure the vaccines and sell them to medical schemes
at a small mark-up. These vaccines would then be administered by the medical schemes via private
health care facilities or specially erected vaccination centres across South Africa. This arrangement is
viewed to be ideal for Medschem’s clients who have a strong trust relationship with their medical
scheme. Such a trust relationship could serve to encourage as many as possible citizens of South
Africa to get vaccinated.

Covid-19 vaccination provision by Medschem

Many questions regarding the public-private collaboration between the South African government and
medical schemes during the vaccination process remain unanswered by the end of the Medschem’s
2021 financial year. For instance, it was not clear how many vaccines in the South African government
will procure and when it will be procured. It also remained unclear what the mark-up percentage will be
of the procured vaccines that will be sold to medical schemes. It further remained unclear what
percentage of the costs will be funded by the government and what percentage of the costs would be
for the medical scheme’s own account? Another unanswered question was whether medical schemes
would be required to procure additional vaccines for a second round of vaccinations? However,
Medschem was identified by the Government as one of the medical schemes that will form part of this
initiative.

On 1 June 2021 Medschem publicly announced its support for the country’s Covid-19 vaccination
initiative. Medschem views the successful achievement of herd immunity in South Africa as a factor to
be considered in terms of its own long-term sustainability as a medical scheme. Medschem has
always prioritised its members’ health as a preventative measure to save on medical claims.

As a result, Medschem’s management has further indicated their commitment by creating a provision
for the costs of vaccines expected to be procured and administered during the second half of the 2021
calendar year. Based on in-house actuarial calculations on ‘guestimate’ (an estimate based on a
mixture of guesswork and calculation) numbers of vaccines to be administered, as well as the
expected procurement costs of these vaccines, as calculated by the marketing director, a provision of
R12,7 million was recognised in the financial statements of Medschem for the financial year ended 30
June 2021.

Vitamin supplement packaging and labelling by Medmanage

The management of Medmanage is considering purchasing and repackaging specially formulated

vitamins aimed at strengthening members’ immune systems to combat Covid-19. These vitamins were
developed in Switzerland, have been approved by the Swiss Vitamin Institute and are reported to be
the best off the shelf prevention supplements available. These vitamins will carry the Medschem label
and will be marketed to members at vaccination sites.

A Medschem branded vitamin supplement would signal Medschem’s stamp of approval to its
members and encourage sales. This initiative will not only contribute to the health of Medschem’s
members in general but would also provide Medmanage with the opportunity to generate profits for the
Med group through the repackaging and unique branding of vitamin supplements.

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Medmanage expects the annual demand for the specially branded vitamin supplements to be
approximately 75 000 units. This equals 70% of the total number of expected vaccines to be
administered. The company will have to expand on its current vitamins repackaging and labelling
plant, to allow for the additional repackaging and labelling of the 75 000 additional Swiss vitamin
supplements. The total capital costs for the expansion is estimated at R1 250 000 to procure
additional equipment, with a useful life of ten years.

The production cost (variable and fixed) to repackage and label a bottle of Swiss vitamin supplements
under the correct medical warehousing conditions and temperatures, is estimated to be:

Raw materials R 2,28

Distribution costs R 1,68
Other direct costs (fixed and variable) R 3,88

It is expected that additional packaging and labelling overhead costs of R 98 000 per annum will be
incurred. This excludes annual depreciation of equipment of R 125 000.

Raw material procurement from Bestpack

A decision was taken at a Medmanage board meeting before year end, to procure the necessary
repackaging and labelling raw materials for the Swiss vitamin supplements from Bestpack (Pty) Ltd.
Bestpack is a family business that is renowned for providing high quality packaging materials at
affordable prices.

Medmanage’s marketing director, Mr Adrian Viljoen, owns 15% of the equity interest of Bestpack and
the remaining interest is held by his son. His son is also the managing director of Bestpack. Due to this
relationship, Medmanage was able to negotiate a lucrative discount on the contract. As such, the
entire board of directors, including Mr Adrian Viljoen, unanimously voted in favour of the contract at the
board meeting.

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QUESTION 2

Background information

You are a third-year trainee accountant at Kopanong Incorporated (Kopanong), a firm of registered
auditors with offices in all the major cities of South Africa. Eighty-five percent of Kopanong’s clients are
mining companies which are listed on the Johannesburg Stock Exchange (JSE).

You are currently engaged on the 30 June 2021 financial year audit of Lehumo Ltd (Lehumo). Lehumo
is one of the emerging property development companies in South Africa. Lehumo currently has
20 developments around South Africa. Kopanong has been the auditors of Lehumo since Lehumo’s
incorporation in 2008. Mr Thabang Mokoena CA(SA) has been the engagement partner responsible
for the audit of Lehumo since 2008.

Financial information

Item Opening balance

Rand
Equity
Share capital (760 000 issued shares) 15 520 000
Retained Earnings 89 058 260
Revaluation reserve 852 956

Board composition

The company secretary provided the following information on the composition of the board of
directors:

Note Name Designation

1 Vusi Trust Chairman of the Board and an independent non-executive
director
2 Thato Mohanoe Chief Executive Officer (CEO)
3 Nokhaya Nondyola CA(SA) Chief Financial Officer (CFO)
4 Keneuwe Holo Risk and Governance Director
5 Tammy Botha CA(SA) Independent, non-executive director
6 Jack Trade Independent, non-executive director
7 Timothy Ncube Independent, non-executive director

The following working papers and annexure are available for the year ended 30 June 2021:

Working Paper/ Working Paper Description

Annexure Reference
AA100 Extract from Integrated Report 2021
BB100 Extract from the board of directors meeting minutes held on 25 June 2021
Annexure A Black and White Gala Invite

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Entity name: Lehumo Ltd Year end: 30 June 2021

WP reference
Prepared by: Audit Trainee Date: 29 July 2021
AA100
Reviewed by: Audit Supervisor Date: 30 July 2021 Page 1 of 3
Document: Extract from Integrated Report 2021
Audit and Risk Committee Report *

Owing to the size of the company, the functions of an audit committee and risk committee have been
combined to be directed by a single audit and risk committee and the internal audit function is
outsourced to YMCA Consultants.

The audit and risk committee (“the committee”) has pleasure in submitting this report, which has been
approved by the board and has been prepared in accordance with section 94(7)(f) of the Companies
Act No 71 of 2008 of South Africa (“the Act”) and incorporating the recommendations of the Report on
Corporate Governance for South Africa, 2016 (“King IV”).

The committee assists the board in its responsibilities covering the:

• internal and external audit process for the company taking into account significant risks;
• integrity of financial reporting; and
• risk management and information technology.

The members confirm that the committee has performed all the duties required in terms of section
94(7)(f) of the Act.

Audit Committee Members:

Name Race Gender Appointment Date Qualifications

Ms Tammy Botha (chairperson) White Female 15 March 2012 CA(SA)
Mr Vusi Trust Black Male 5 November 2009 BCom Accounting

All committee members are independent non-executive members. The audit committee collectively
has the required knowledge, skills and experience to execute their duties effectively.

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Entity name: Lehumo Ltd Year end: 30 June 2021

WP reference
Prepared by: Audit Trainee Date: 29 July 2021
AA100
Reviewed by: Audit Supervisor Date: 30 July 2021 Page 2 of 3
Document: Extract from Integrated Report 2021
The key focus areas of the Audit and Risk Committee Report in the year under review were as
follows:

Focus area Progress

Overview of the financial The committee played an active role in engaging with
implications that arise from management and is satisfied with the processes implemented to
the Covid-19 pandemic best mitigate the impact during the pandemic on the financial
performance of the company. This included oversight of the
solvency and liquidity of the company including detailed cash flow
reviews.
Overview of capital allocation The committee performed multiple reviews of management’s cash
and cash utilisation. forecasting during the year and is satisfied with the liquidity
position of the company together with its planning with respect to
the cash management of the company. The committee continued
its overview of the capital allocation and cash utilisation of the
company, including the review of the minimum cash resources of
the company and oversight of the cash flow reporting and
management of the company.

Planned areas of focus for the 2022 financial year are as follows:

• monitoring and management of financial reporting and governance;

• Statement of Financial Position management and financial sustainability in a continued
uncertain trading environment;
• embedment of the combined assurance and continued proactive engagement with the internal
and external audit functions;
• continued overview on IT systems and control.

The terms of reference of the committee have been updated and approved by the board, setting out
its duties and responsibilities as prescribed in the Act and King IV and incorporating additional duties
delegated by the board as indicated below.

The committee:

• fulfils the duties that are assigned to it by the Act and other legislation, including the statutory
audit committee functions;
• assists the board in overseeing the quality and integrity of the company’s integrated reporting
process, including the financial statements and announcements in respect of the financial
results;

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Entity name: Lehumo Ltd Year end: 30 June 2021

WP reference
Prepared by: Audit Trainee Date: 29 July 2021
AA100
Reviewed by: Audit Supervisor Date: 30 July 2021 Page 3 of 3
Document: Extract from Integrated Report 2021
• ensures that an effective control environment is maintained in the company.
• reviewed and adopted a combined assurance model;
• provides the chief financial officer, external auditor and the internal auditor with unrestricted
access to the committee and its chairman as is required in relation to any matter falling within
the ambit of the committee;
• oversees the activities of, and ensures coordination between, the activities of the internal and
external auditors;
• conducts annual reviews of the audit and risk committee’s work plan and terms of reference.

External audit

Kopanong Inc. (Kopanong) and Mr Thabang Mokoena are the external auditors and designated
engagement auditor, respectively, for the financial year ended 30 June 2021.

The committee is satisfied that Kopanong is independent of the company after taking the following
factors into account:

• representations made by Kopanong to the committee.

• the auditor does not render non-audit services.
• the auditors’ independence was not impaired by any consultancy, advisory or other work
undertaken by the auditor; and
• the criteria specified for independence by the Independent Regulatory Board for auditors and
international regulatory bodies.

Internal controls
The committee is satisfied with the effectiveness of the design and implementation on internal
financial controls. No fraud was identified during the current financial year.

*The above audit and risk committee report is the only disclosure made in the integrated report with
regards to the audit committee.

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Entity name: Lehumo Ltd Year end: 30 June 2021

WP reference
Prepared by: Audit Trainee Date: 17 June 2021
BB100
Reviewed by: Audit Supervisor Date: 24 June 2021 Page 1 of 1
Meeting: Extract from the board of directors meeting minutes held on
25 June 2021
Attendees

All board members were present at the meeting:

1. Vusi Trust
2. Thato Mohanoe
3. Nokhaya Nondyola CA(SA)
4. Keneuwe Holo
5. Tammy Botha CA(SA)
6. Jack Trade
7. Timothy Ncube

1. Matters arising

Issue of shares
The board agreed to issue 60 000 shares to Jack Trade as an incentive for him to stay on as a
director. The shares were issued at the market value of R20 per share. Jack Trade indicated to
the board that he is currently experiencing financial difficulties and that the company should buy
his house in Richards Bay to assist with making payment for the shares. The board agreed to
buy the house for an amount of R1 500 000. Lehumo has an authorised capital of 800 000
shares.

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ANNEXURE A

To: tmoekoena@Kopanongauditors.co.za
From: tmohanoe@lerumo.co.za
Date: 28 June 2021
Subject: Black and White Gala Dinner

Good day Thabang

Please find attached the invite, as discussed yesterday, for your attention.

It is important that I highlight that you do not need to pay for the ticket as you are the guest speaker.

Kind regards
Thato Mohanoe

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CASE STUDY 4
REQUIRED

YOU NOW HAVE 150 MINUTES TO ANSWER QUESTON 1 AND

QUESTION 2

QUESTION 1

Marks
(a) Critically evaluate the accounting treatment of the provision raised for Covid-19
vaccines in the financial statements of Medschem Medical Scheme for the year ended
30 June 2021 in terms of IAS 37 Provisions, Contingent Liabilities and Contingent
Assets and also discuss any other considerations for the auditor. 15

Your answer must comply with International Financial Reporting Standards

(b) Describe the key considerations, supported by calculations, that Medmanage Pty (Ltd)
should consider in determining an appropriate selling price per packaged Covid-19
vitamins. 8
(c) Discuss the auditor’s role and aspects that the auditor should consider regarding the
board decision to award the procurement of packaging materials contract to Bestpack,
in terms of Adrian Viljoen’s interest in the contract. 5

Communication skills – clarity of expression 1

(d) Determine whether a reportable irregularity exists in terms of the Auditing Profession
Act with regards to MEd manage (Pty) Ltd’s board decision to award the procurement
of packaging materials contract to Bestpack. 12

Communication skills – clarity of expression 1

(e) Given the uncertainties surrounding the future roll-out of the Covid-19 vaccine and the
potential financial effect thereof, describe the auditor’s responsibilities regarding any
facts which become known to the auditor after the financial statements have been
issued. 8
Total 50

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QUESTION 2

Marks
(a) With reference to the background information and the information in working paper
AA100, discuss any Corporate Governance concerns in terms of the King IV Code on
Corporate Governance 13

Communication skills: logical argument 1

(b) With reference to the background information and the information in working paper
BB100, describe the substantive procedures that you would perform to confirm the
legality of the transactions. 21

Communication skills: clarity of expression 1

(c) With reference to the SAICA Code of Professional Conduct, discuss your concerns
(including the possible safeguards) on the matters discussed in the email from Thato
Mohanoe in terms of the background information and Annexure A. 14
Total 50

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CASE STUDY 4

SUGGESTED SOLUTION

QUESTION 1

(a) Critically evaluate the accounting treatment of the provision raised for Covid-19
vaccines in the financial statements of Medschem Medical Scheme for the year ended
30 June 2021 in terms of IAS 37 Provisions, Contingent Liabilities and Contingent
Assets and also discuss any other considerations for the auditor.

Recognition of a provision
According to IAS 37 an entity must recognise a provision if, and only if: [IAS 37.14]:

• a present obligation (legal or constructive) has arisen as a result of a past event

(the obligating event),
Whilst Medschem is committed to partake in the vaccination initiative through a public-
private partnership, Medschem has not signed any contract for the procurement and
administering of vaccines by 30 June 2021. (1)
Therefore, Medschem has no present legal obligation with regard to the vaccination
initiative on 30 June 2021. (1)

• However, due to Medschem’s public announcement and past practice by prioritising its
members health as a preventative measure to save on medical claims, Medschem has a
constructive obligation with regard to procurement and administering of vaccines on
30 June 2021. (1)

• the settlement of which is expected to result in an outflow from the entity of

resources embodying economic benefits.
The settlement of such vaccine roll out will result in the outflow of economic benefits (1)

• the amount can be estimated reliably.

The amount cannot be estimated reliably as the scenario states that it is based on
“guestimates” of numbers by the marketing director. (1)

From the above it is clear that a provision should not be recognised. (1)
However, since Medschem has a present obligation (constructive obligation) of which the
amount cannot be measured reliably, a contingent liability exists.

The contingent liability should be disclosed unless the possibility of an outflow of economic
benefits is remote. (1)

Since Medschem has made itself available for the administering of the vaccinations and the
government indicated that it is interested in the utilisation of Medschem’s services, it is
probable that there will be an outflow of economic benefits. (1)

Therefore, a contingent liability should be disclosed. The nature and estimated amount of the
contingent liability should be disclosed. (1)

Possible misstatement
1. The financial statements are overstated with R 12,7 million due to the incorrect provision.
(1)
The amount is quantitatively material as it is above final materiality of R3 million. (1)

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2. The provision is qualitatively material as it does not meet IFRS requirements and would
affect users’ understanding of the financial statements. (1)

3. The provision results in a factual misstatement as there is no doubt that it does not meet
IFRS requirements with regard to the incorrect provision. (1)

4. The management of Medschem should be requested to adjust the financial statements by

removing the provision all together. (If students had provided a Journal Entry, a mark
may be awarded limited to 1 mark) (1)

5. Should Medschem refuse to make the required adjustments to the financial statements,
the effect on the audit report should be considered. (1)

6. Should Medschem refuse to make the required adjustments to the financial statements, a
reportable irregularity should be considered. (1)
Available 16
Maximum 15

(b) Describe the key considerations, supported by calculations, that Medmanage Pty (Ltd)
should consider in determining an appropriate selling price per packaged Covid-19
vitamins.

Calculations R
Raw material costs (R 2,28 x 75 000) 171 000 (1)
Distribution costs (R1,68 x 75 000) 126 000 (1)
Other direct production costs (R 3,88 x 75 000) 291 000 (1)
Depreciation of new equipment 125 000 (1)
Indirect overheads 98 000 (1)
Incremental costs to be recovered 811 000 (1)

1. The cost per unit and breakeven point is R 10, 81. As this only achieves breakeven, a
profit margin should still be incorporated into the selling price. (1)

2. Reference to the importation of vitamins/vaccines, eg. Customs, royalties, etc. (max 1) (1)

Other qualitative considerations

3. Medmanage could consider offering lower prices of repackaged and labelled units to
attract more business as part of a price penetration competitive strategy against other
suppliers of vitamins. (1)

4. It should therefore be considered if the repackaged and labelled units could be utilised as
a marketing tool, despite the above possible lower margins per unit. (1)

5. Consider opportunity costs that may arise, for example any other projects that
Medmanage could pursue that might be more profitable. (1)

6. Consider the opportunity cost from forgoing savings on existing costs that might have
been achieved in the long-term if the decision was not taken to repackage and label the
units. (1)

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7. Consider the long-term sustainability or cash flow projections of the project as it is

expected that herd immunity would be achieved once 60% of the South African
population have received the vaccine. (1)
Available 13
Maximum 8

(c) Discuss the auditor’s role and aspects that the auditor should consider regarding to
Medmanage’s board decision to award the procurement of packaging materials to
Bestpack, in terms of Adrian Viljoen’s interest in the contract

1. The auditor is responsible for direction and review of the audit, and ultimately responsible
for identifying and reporting on aspects as deemed necessary (ISA 220) in term of the
Audit Professions Act and the Companies Act. (1)

2. The auditor should identify the operations director, Adrian Viljoen’s interest in the
Bestpack contract. (1)

3. The auditor should investigate whether all statutory requirements in terms of the contract
and Adrian Viljoen’s interest, were met. (1)

4. The auditor should scrutinise the minutes of the board meeting and detect that Adrian
Viljoen actively voted in favour of the contract at the meeting. (1)

5. The auditor should perform procedures to identify related party transactions, including
reviewing the register of directors’ shareholdings. As a result, Mr Viljoen’s interest in the
related party contract should be detected. (1)

6. Mr Viljoen’s son is a related party to him (son and managing director) and accordingly in
terms of the Companies Act, Harry is conflicted and should have declared his interest
and not have voted on the matter (1)

7. The contract with Bestpack represents a significant contract for Medmanage as it is

material to Medmanage. (1)

8. The auditor should inspect the contract and the parties thereto, which would disclose
Adrian Viljoen’s interest in the company and relationship to his son. (1)

9. The auditor should investigate and consider that this could possibly be seen as onerous
contract in terms of IAS 37, due to Adrian Viljoen’s interest in the contract and him voting
at the board meeting. (1)
Communication skills – clarity of expression (1)
Available 10
Maximum 6

(d) Determine whether a reportable irregularity exists in terms of the Auditing Profession
Act with regards to Medmanage (Pty) Ltd’s board decision to award the procurement of
packaging materials contract to Bestpack

1. Whether an unlawful act or omission has occurred: (1)

2. Adrian Viljoen contravened section 75 of the Companies Act by not declaring his interest
in and voting on the contract with Bestpack. (1)

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3. Whether the unlawful act has been committed by someone responsible for management
of the entity: (1)

4. The unlawful act was committed by Adrian Viljoen, the marketing director of Medmanage.
(1)

5. Whether the unlawful act could result in a material financial loss to any partner, member,
shareholder, creditor or investor: (1)

6. The contract is void as Adrian Viljoen did not comply with the requirements of section 75
(section 75(7) and unless ratified by the shareholders or the court, (1)

7. could result in penalties to Medmanage levied by Bestpack if the contract is declared

void; or (1)

8. financial loss to Bestpack if the contract is cancelled. (1)

9. However, the shareholders of Medmanage would probably ratify the contract as it

appears very beneficial for Medmanage (good quality at affordable prices, including
lucrative discounts) and would most probably not result in financial loss to any party. (1)

10. Whether it relates to fraud or theft: (1)

11. The unlawful act does not seem to relate to fraud or theft as it may not be intentional, and
the contract terms are fair and beneficial to Medmanage. (1)
OR

12. Adrian Viljoen might have intentionally, fraudulently not declared his interest in order to
win a contract for his son. (1)

13. Whether the unlawful act constitutes a material breach of fiduciary duty: (1)

14. Non-compliance with section 75 is a significant breach of the companies act, which would
be considered a material breach of a director’s duty of care, skill and diligence (1)

15. If the agreement was indeed the best available option for Medmanage (e.g. good quality
at affordable prices, including lucrative discounts), it could be argued that this does not
amount to a material breach of his fiduciary duty as Adrian Viljoen acted in the best
interest of the company. (1)

OR

16. based on the above, a reportable irregularity exists.

Conclusion: Based on the above, if a RI exists, the auditor will need to report a reportable
irregularity to the IRBA. (1)
Communication skills – clarity of expression (1)
Available 18
Maximum 13

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(e) Given the uncertainties surrounding the future roll-out of the Covid-19 vaccine and the
potential financial effect thereof, describe the auditor’s responsibilities with regard to
any facts which become known to the auditor after the statutory annual financial
statements have been issued.

1. Events that became known to the auditor after the financial statements have been issued,
falls within the definition of subsequent events according to ISA 560, par 5(e).

2. There is no obligation on the auditor to perform additional audit procedures after the
statutory financial statements of the Med Group have been issued. (1)

3. The auditor has certain responsibilities if he/she becomes aware of events after the
statutory financial statements have been issued, that would have resulted in an
adjustment to the financial statements or amendment of the audit report, had it been
known at the date of the audit report. (1)

4. The auditor of Med Group must discuss the matter with the management of the group of
companies; (1)

5. The auditor must determine whether the financial statements of the Med Group must be
adjusted with the events. (1)

6. If so, the auditor must inquire how management of the Med Group intends to address the
matter in the financial statements. (1)

7. If the financial statements of Med Group are amended, the auditor must perform audit
procedures in respect of the amendment and review the steps taken by management
to ensure that users of the financial statements and audit report are notified of the
changes. (2)

8. The auditor should extend the audit procedures to the date of the new auditor’s report
and date the new auditor’s report no earlier than the date of approval of the amended
financial statements) (2)

9. The auditor should provide a new auditor’s report on the amended financial statements of
Med Group. (1)

10. The auditor should include an emphasis of matter or other matters paragraph in the new
audit report of Med Group if the matter is not included as a key audit matter (1)

11. The auditor must notify those charged with governance that the auditor will seek to
prevent future reliance on the auditor’s report, should management not have informed
users of the financial statements about the identified matter, amendments to the financial
statements and audit report. (1)
Available 12
Maximum 8

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QUESTION 2

(a) With reference to the background information and the information in working paper
AA100, discuss any corporate governance concerns in terms of King IV Code on
Corporate Governance.

KING IV Marks
The information below set out the corporate governance concerns in terms of King IV.
1 Disclosures
1.1 The following should be disclosed in relation to each committee of the governing body
(principle 8 and recommend practice 50): 1
• The member’s experiences. 1
• Any external advisers or invitees who regularly attend committee meetings 1
• The number of meetings held during the reporting period and attendance at
those meetings 1
Max 1
1.2 In terms of principle 8 and recommend practice 50; the following was not disclosed in
the audit committee report: 1
• Member’s experiences were not disclosed in the audit committee report 1
• Any external advisers or invitees who regularly attended committee meetings 1
• The number of meetings held during the reporting period and attendance at
those meetings 1
1.3 In addition to required statutory disclosure and the disclosure recommended in
paragraph 50, the following should be disclosed in relation to the audit committee
(principle 8 recommend practice 59): 1
• The tenure of the external audit firm. 1
• The rotation of the designated external audit partner. 1
• Significant changes in management of the organisation during the external audit.
• Significant matters that the audit committee has considered in relation to the
annual financial statements and how these were addressed by the audit 1
committee. 1
• The audit committee’s views on the quality of the external audit.
• The audit committee’s views on the effectiveness of the chief audit executive. 1
• The audit committee’s views on the effectiveness of the CFO and the finance
function. 1
• The arrangements in place for combined assurance and the committee’s views
on it’s effectiveness. 1
Max 4

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Marks
1.4 Due to the fact that the information disclosed in the audit and risk committee report is
the only information disclosed with regards to the audit committee, the omission of the
below information indicates that the information was not disclosed: 1
• The tenure of the external audit firm was not disclosed. 1
• The rotation of the designated external audit partner was not disclosed.
• Significant changes in management of the organisation during the external audit 1
was not disclosed.
• Significant matters that the audit committee has considered in relation to the
annual financial statements and how these were addressed by the audit 1
committee was not disclosed.
• The audit committee’s views on the quality of the external audit was not 1
disclosed.
• The audit committee’s views on the effectiveness of the chief audit executive was 1
not disclosed.
• The audit committee’s views on the effectiveness of the CFO and the finance 1
function was not disclosed.
• The arrangements in place for combined assurance and the committee’s views 1
on it’s effectiveness was not disclosed.
Composition
1.5 The chair of the governing body should not be a member of the audit committee
(Principle 7 recommend practice 36): 1
• Mr Vusi Trust is the chairperson of the board of the directors and is also a
member of the audit committee 1
1.6 Each committee should have a minimum of three members (Principle 8 recommend
practice 46) 1
• The audit committee only consists of 2 members 1
Communication skills: logical argument 1
Available 22
Maximum 14

(b) With reference to the background information and working paper BB100, provide
substantive procedures that should be performed to confirm the legality of the
transactions.

Issue of shares Marks

1.1 Inspect the minutes of the board meetings on 25 June for
• A majority decision from the board of directors 1
• To issue 60 000 shares to Jack Trade 1
• For an amount of R20 1
1.2 Inspect the Memorandum of incorporation to confirm the authorised capital 1
1.3 Inspect the minutes of the shareholders meeting and confirm that:
• A quorum of 25% shareholders or their proxy’s was present; 1
• The company has already issued 760 000 of the 800 000 authorised shares, as
such need an additional 20 000 authorised shares to issue 60 000 shares to
Jack Trade. 1

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Marks
• The special resolutions to increase the authorised shares with 20 000 and to
change the Memorandum of Incorporation (MOI) has been approved by 75% of
the shareholders present 1
• the special resolution to approve the issue of shares to a director was approved
by 75% of the shareholders present. 1
1.4 Inspect the notice to the shareholders to confirm that:
• The notice was sent within 15 business days 1
• The notice includes detail on the special resolution that need to be taken to
change the MOI to increase the authorised shares by 20 000 1
• The notice includes an indication that there will be a share issue to a director
(Jack Trade) and that a special resolution is needed to approve this issue. 1
• The date, time and venue of the meeting is included on the notice 1
• A quorum of 25% of shareholders are needed 1
• The requirement that 75% of the shareholders present is needed to approve the
special resolution 1

1.5 Inspect the share certificates after the issue of the shares to confirm the 60 000 1
shares have been issued to Jack Trade
OR
Inspect the share registers to confirm that Jack Trade has been included in the share
register. 1
1.6 Inspect the minutes of the board meetings on which the decision was taken to issue
shares and buy the holiday home of Jack Trade:
• Jack Trade disclosed the interest and its general nature before the matter was
considered at the meeting (Section 75 (5)(a)). 1
• Jack Trade did form part of the quorum of 25% of the directors (Section 75 (5) (f)
(i). 1
• Jack Trade left the room after his presentation. 1
• Inspect the register for interest in contracts to ensure that Jack Trade’s interest
in issue shares and buy the holiday home of Jack Trade. 1
• Inspect the agreement/contract signed with issue shares and buy the holiday
home of Jack Trade to ensure that Jack Trade was not involved in executing the
paperwork. 1

1.7 Inspect the notice filed at the Registrar’s office to confirm:

• The date on the notice was after the date of the shareholders meeting 1
• The changes to the MOI in terms of the increase in the authorised shares with
20 000 shares 1
• The effective date of the changes to the MOI 1
Financial assistance (mark for identifying financial assistance)
1.6 Inspect the minutes of the board meeting held on 25 June 2021 and confirm:
• A majority decision was taken to buy Jack Trade’s holiday house for R1 500 000. 1
• The board considered the liquidity and solvency of Lehumo. 1
• The board is satisfied that Lehumo is solvent and liquid, before and after the
transaction; 1
• The board considered the purchase price in return for the shares as reasonable
compensation or market related. 1

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Marks
1.7 Inspect the minutes of the shareholders meeting and confirm that:
• Marks given under point 1.4.
• The special resolutions to purchase the holiday apartment for more than its
market value was approved by 75% of the shareholder present 1
Communication skills: clarity of expression 1
Available 30
Maximum 22

(c) With reference to the SAICA Code of Professional Conduct, discuss your concerns and
possible safeguards on the matters discussed in the email from Thato Mohanoe in terms
of the background information and Annexure A.

My concerns with regards to attending the Gala dinner and given the background information is
as follows:

1. Long association with an audit client Marks

1.1 Mr Thabang Mokoena, the audit engagement partner, is a CA(SA) and currently
employed to perform assurance services on historical financial information and
should therefore comply with Part 1, 3 and 4A the SAICA Code of Professional
Conduct. 1
Long association
1.2 Mr Thabang Mokoena has been the engagement partner responsible for the Lehumo 1
audit since 2008 (13 years). There is therefore a long association with Lehumo.
This may can create the following threats to objectivity (independence): 1
1.3
Self-interest
1.4 Mr Thabang might overlook certain material finding to keep the long-standing client’s
business. 1

Familiarity
1.5 Due to the long relationship with the client, Mr Thabang might become sympathetic
with the client. 1
1.6 Furthermore, the Mr Thabang is not complying with Section 92 of the Companies Act
and therefore not complying with laws and regulations (NOCLAR/Section 360) 1
1.7 The threat is significant as Mr Thabang Mokoena has been the engagement partner,
which is a significant role in the audit, for almost 13 years. 1
1.8 Lehumo is a public interest entity because they are listed and therefore Section
R540.5 is applicable. 1

1.9 In terms of Section R540.5 an individual shall not act as an engagement partner for a
period of more than seven cumulative years. 1

The safeguard that should be put in place is that:

Mr Thabang should be removed from the audit of Lehumo to ensure the threat is at
an acceptable level. 1

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Marks
2. Black and White Gala Dinner
1.10 Mr Thabang Mokoena is the engagement auditor of Lehumo and must appear as
independent in mind and appearance. 1

1.11 Attendance to the gala dinner might indicate to an informed third party that the
engagement partner’s objectivity and professional scepticism is compromised.
Especially since Mr Thabang Mokoena is the guest speaker at the event. 1
1.12 Attendance at the event by the auditors may create threats to objectivity 1
(independence):

1.13 Self-interest
The event costs R5 000 and Mr Thabang has been offered to attend the event for 1
free. Therefore, an amount of R5 000 has been received as a gift and hospitality from
the client.

1.14 Alternative:
Mr Thabang is the guest speaker and the R5 000 can be considered as a fee for the
speech.

Familiarity
Mr Thabang Mokoena attending the gala function might lead to a close relationship
and might lead to him being too sympathetic with the Lehumo. 1
1.15 In terms of Section R420.3 an audit team member shall not accept gifts and hospitality
from an audit client, unless the value is trivial and inconsequential. 1

1.16 The ticket costs R5 000 and therefore such that a reasonable and informed third party 1
would NOT consider these to be trivial and inconsequential.

1.17 The threat is therefore significant as Mr Thabang Mokoena is the engagement partner
of the audit and has significant influence over the audit. 1
1.18
The safeguard that should be put in place is:
The only way to that is for Mr Thabang Mokoena to refuse the free ticket and any
attendance of the gala dinner. 1

Mr Thabang Mokoena should consider also consider reporting the matter to the ethics
officer for noting. 1
Available 21
Maximum 14

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CASE STUDY 5 100 marks

CASE STUDY 5 CONSISTS OF 2 UNRELATED QUESTIONS

YOU HAVE 30 MINUTES TO READ QUESTION 1 AND QUESTION 2

QUESTION 1 50 marks

Introduction

You are an assistant audit manager at Alphabeta Incorporated (Alphabeta), a new small-sized audit
firm. During July 2020, Alphabeta accepted the appointment as the external auditor of a Johannesburg
Stock Exchange (JSE) listed company, Greys Ltd (Greys), for the financial year ended
30 September 2020. Greys contributes approximately 90% of Alphabeta’s revenue and no
engagement letter was drafted, as Greys convinced Alphabeta that there is no need for one. The
appointment of Alphabeta as the auditors of Greys was a direct result of the previous auditors filing a
notice of resignation after enjoying a long association with the client. The previous auditors resigned
because they were of the opinion that they did not have adequate resources to service Greys.
Alphabeta was denied permission from Greys to contact the previous auditors. It is Alphabeta’s first
time auditing a company in the manufacturing industry and the audit team comprises of four members,
being the audit partner, an audit manager, one trainee accountant and yourself.

Background information

Greys was established in 1985 and has a good reputation in the manufacturing industry. Greys
operations are widespread throughout South Africa, with their head office based in Johannesburg.
Due to the African continent’s lack of reliable and constant electricity supply, Greys decided to limit its
product range and solely manufacture a range of solar powered silent generators that can be used to
generate electricity during electrical downtimes. A solar powered silent generator is propelled by one
or more motors, using solar energy obtained from the sun. Benefits of solar powered silent generators
over conventional type generators is the internal combustion that solar powered generators generate,
resulting in a significant reduction in air pollution, as well as less dependence on oil. The dependency
on oil is a cause of concern in several countries, due to the volatility of the oil price and supply
disruption. Widespread adoption of solar powered silent generators faces several hurdles and
limitations, including higher costs, lack of infrastructure and range anxiety (the user's concern that the
generator will not be able to supply electricity for the full duration of electrical downtime). Greys has
experienced tremendous growth and financial performance for the past 10 years.

Mr Meredith, the audit partner, raised concerns, as the employee contract of both Mr Izzie, the
chief executive officer (CEO), and Mr Alex, the chief operating officer (COO), ended on 30 July 2020
without renewal. Both Mr Izzie and Mr Alex have been employed by Greys for more than 10 years and
they are mainly to be credited for the financial success of Greys over the years. These two positions
require individuals with the necessary skills, knowledge and experience and are therefore still vacant.
In the meantime, Mrs Webber, the chief financial officer (CFO) (who is also the sister of Mr Meredith),
is acting as both the CEO and COO. Mrs Webber has informed Alphabeta that the shareholders
require the audited financial statements of Greys within one month after the financial year end to
determine if the company may need to be steered into a different direction. Over and above this
possibility, Mrs Webber is also concerned about several of Greys’ complex transactions that have
never been audited by Alphabeta. Greys has also been charged with penalties relating to certain
illegal contracts during the 2019 yearend.

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The following working paper is available for the audit of Greys:

Working paper Reference Description

WP-100 Extracts of notes from the annual financial statements

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Company name: Greys Ltd Year end: 30 September 2020

WP reference
Prepared by: D Shepherd Date: 06 October 2020
WP-100
Reviewed by: A Montgomery Date: 07 October 2020 1 of 2
Audit section: Extracts of notes from the annual financial statements
The following notes in Greys’ annual financial statements are still under consideration:

1. Revenue

Revenue comprises of local and foreign credit sales of different types of solar powered silent
generators which have unique prices as evident from the sales price list. Export sales are
shipped free on board (FOB) and all shipping documentation is maintained at the head office.
Greys’ functional currency is the South African Rand and all customers are required to make
payments in South African Rands. Customers can only return products if they are returned
immediately with an unsigned delivery note, containing a note that the goods were damaged.
Customers receive a 5% discount if payment is made within 30 days from the date of invoice.
All sales and discounts are recorded in the sales journal.

2. Intangible assets

The increase in intangible assets relates to the addition of an intangible asset that comprises of
various overhead costs incurred during the current financial year in developing a new refining
technique for assembling solar panels. These overhead costs are complex in nature based on
the categorisation of the research and development costs that are recorded on technical
documentation. Greys’ accounting policy states that the intangible assets are to be written off
over a period of five years and that the operating effectiveness should be tested annually.

3. Inventories

3.1 Raw materials

Raw materials amount to R25 000 000 and consists of local and imported electrical
components and generator parts. Transport costs and insurance costs are incurred in
respect of all purchases.

3.2 Work in progress and finished goods

The work in progress (WIP) amounts to R50 000 000 and finished goods (FG) amounts to
R30 000 000. WIP and FG include all direct costs, labour costs and manufacturing
overhead costs. Greys allocates labour and manufacturing overheads to products using
machine hours, based on normal capacity. In documenting the stage of completion of the
inventories, Greys uses a specialised and technical manufacturing process that is based
on a standard costing model. Abnormal losses occur during the manufacturing process.

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Company name: Greys Ltd Year end: 30 September 2020

WP reference
Prepared by: D Shepherd Date: 06 October 2020
WP-100
Reviewed by: A Montgomery Date: 07 October 2020 2 of 2
Audit section: Extracts of notes from the annual financial statements
3.3 Other
Inventories are recognised at the lower of cost and net realisable value using the first-in-
first-out (FIFO) costing basis. During the year, management discovered theft of certain
inventory items.

4. Financial liabilities

Greys takes out foreign exchange contracts (FECs) prior to purchasing of raw materials
internationally in order to protect the company against adverse foreign currency fluctuations.

5. Trade receivables

Greys has provided for the allowance for credit losses at 8,7% of the trade receivables balance.
The same percentage was used in the previous year. In determining this amount, management
does not consider the change in customer profiles.

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QUESTION 2 50 marks

Background information

You are an audit trainee at Meyer, Abed and Ditaole Auditors Incorporated (MAD Auditors).
MAD Auditors was recently appointed as the external auditors of Eezee Bookings Pty (Ltd)
(Eezee Bookings), an online booking office for the various South African National Parks (SANParks)
accommodation options available throughout South Africa. Eezee Bookings is just one of numerous
online booking offices for SANParks, making this a particularly competitive environment. Other online
booking offices making bookings for SANParks include Trip Specialists, Next Safari, Safe Travels and
Wild Travels.

Eezee bookings, a fairly new company, created a website on the internet, available at
www.eezeebookings.co.za., where online bookings can be made. The website contains details of all
the SANParks, the lodges and campsites within these parks, as well as the wildlife that can be found
in the parks. It assists tourists in planning trips to the parks, which include self-drive safaris, game
viewing, accommodation tariffs and adventure activities. The website also provides details on guided
walks, hiking, birdwatching, 4x4 trails, sight-seeing, cultural and historical experiences, mountain
biking, golf, canoeing and swimming activities. The website allows a user to search for destinations,
activities, available dates and other information through links provided on its home screen. These links
include:

1. A link to explore provinces and destinations – When a user clicks on this link, a map of
South Africa is provided with the provinces presented in different colours. When clicking on a
specific province, a quick overview of that particular province is given with all the SANParks in
that particular province. The user can then proceed by clicking on a particular park in a
province, which will then provide more detail on that park, the camps within that park and the
wildlife within the park.

2. A link to explore activities (adventure and other) – When a user clicks on this link, a list of 20
activities appear on the screen. Each activity has a drop-down menu. When the user clicks on
a specific activity, the drop-down list provides a quick overview of that particular activity, as well
as the parks and camps that provide these activities.

3. A link to make a booking for accommodation in a lodge or campsite within SANParks. This link
takes the user to the SANPark online booking page where the following screen appears:

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SANParks online booking:

Should you wish to make an online booking for accommodation in a lodge or campsite within
SANPark, please complete the Eezee Bookings SANParks online booking form.

In which SANPark do you wish to stay?

Which type of accommodation lodge or campsite?

Your name and surname

Nationality

Identity number

E-mail

Contact Number

Date arriving

Date departing

Number of Nights

Number of Adults

Number of Children

Username (If this is your first booking, please choose a username)

Password (If this is your first booking, please choose a password)

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Message
Type message here

I am not a robot

Submit

A username and password should be chosen by the user when the first booking is made. Thereafter
this username and password should be entered for every additional booking. Users also have the
option of sending an e-mail enquiry to Eezee bookings or phoning the office number of
Eezee Bookings provided on the website, should they wish to speak to an agent directly.

Should the requested dates be available, the user will receive an e-mail and sms to confirm that the
booking was successful, with a booking reference number. The user then has 48 hours to pay a
deposit of 50% into the bank account provided in the e-mail and the sms, through Electronic Funds
Transfer (EFT) or credit card payment, using the booking reference number. The remainder of the
balance has to be settled one week before arrival. Should the requested dates not be available, the
user will receive an e-mail and sms informing the user that the booking was not successful.

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CASE STUDY 5
REQUIRED

YOU NOW HAVE 150 MINUTES TO ANSWER QUESTION 1 AND

QUESTION 2

QUESTION 1

Marks
(k) With reference to the introduction and the background information:

Discuss the matters and concerns that should have been considered by Alphabeta
Incorporated prior to accepting Greys Ltd as an audit client for the year ended
30 September 2020. 13

Communication skills: clarity of expression 1

(l) With reference to the introduction, background information and working paper
WP-100:

(i) Describe the risks of material misstatement at the assertion level for Greys Ltd
for the year ended 30 September 2020. 17

(ii) For each risk identified in b(i) above, describe the audit response(s) to ensure
that the risk of material misstatement in the financial statements are reduced to
an acceptable level. 18
Your answer should be structured in a table as follows:

(i) Risks of material misstatement (ii) Response(s) to risks identified in (i)

at the assertion level

Note:
• Exclude any risk relating to presentation and disclosure.
• Assume Alphabeta has accepted Greys as an audit client

Communication skills: presentation 1

Total 50

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QUESTION 2

Marks
(a) Describe the programmed (automated) application controls that should be
present in the SANParks online booking process to ensure that all online bookings
(the input of data and transactions) are valid, accurate and complete. 27

Note: Link the programmed (automated) application controls to the given scenario
by providing relevant examples.

Communication skills: clarity of expression 1

(b) Describe the risks and possible implications associated with those risks that Eezee
Bookings are faced with when trading over the internet. 21

Note: Present your answer in tabular format as follows:

Nr Risk Possible implication(s)

Communication skills: layout and structure 1

Total 50

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CASE STUDY 5
SUGGESTED SOLUTION

QUESTION 1

(a) With reference to the introduction and the background information:

Discuss the matters and concerns that should have been considered by Alphabeta
Incorporated prior to accepting Greys Ltd as an audit client for the year ended
30 September 2020.

Description Marks
Competence, capabilities and resources
1 Alphabeta should have considered whether it has the necessary and sufficient
competencies and resources (skills, resources and time) to render a service to Greys
as they are a new small-sized audit firm. 1
2 There is a concern about the number of people (i.e. only 4) assigned to the audit in
that they do not have sufficient resources to perform the audit of Greys that operates
in geographically spread areas. 1
3 The deadline for the audit work seems tight (audit finalised one month after year
end), consequently, Alphabeta might not have adequate time to complete the audit. 1
4 Alphabeta was only appointed during October 2019 and there might not be adequate
time to perform an interim audit or to gain an understanding of the business. 1
5 Alphabeta should consider engaging an expert for the audit of complex transactions
relating to manufacturing as this is the first time Alphabeta is auditing a company in
the manufacturing industry. 1
6 Alphabeta should have considered whether it has sufficient knowledge of and
experience in the legal and regulatory environment of the company. 1
Independence
7 Alphabeta should have considered the independence of the audit partner as the
Greys contributes towards 90% of ALPHABETA’s revenue. 1
8 Alphabeta should have considered the independence of the audit firm as Greys
contributes towards 90% of ALPHABETA’s revenue. 1
9 Alphabeta should have considered the independence of the audit partner as the CFO
and audit partner are siblings (brother and sister). 1
Integrity of the client’s principal owners, key management and those charged with
governance.
10 There appears to be concerns about the integrity of the client, as Greys is involved in
certain illegal contracts during the 2019 year. 1
11 However, it should be considered that the previous auditors resigned due to their
lack of resources and not because they had concerns about management’s integrity. 1
12 It is a concern that Greys denied us the right to contact the previous auditors. 1
13 Greys seems capable of paying the audit fee based on its growth and financial
performance in the previous 10 years. (A candidate may be awarded the mark if
stated that the client may not be able to pay for the audit fee and appropriately 1
justifies it)

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Description Marks
Other significant matters
14 Determine whether there are any reasons for the firm not to establish a professional
relationship with the client. Certain factors suggest that such a relationship would in
fact be desirable, namely:
• Greys has a good reputation in the industry. 1
• The previous auditors enjoyed a long association with Greys. 1
16 Determine whether there is a legal vacancy. The fact that the previous auditors
resigned could possibly indicate that there is a legal vacancy in terms of section 91
of the Companies Act. 1
17 Establish the professional and legal responsibilities in terms of sections 45 and 46 of
the Auditing Profession Act due to possible reportable irregularities resulting from
certain illegal contracts during the year operations by Greys. 2
18 Any other valid matter/concern 1
Terms of the engagement
19 There is no engagement letter detailing the terms of the engagement that are agreed
on, highlighting the responsibility of the auditors and that of management. 1
20 With no engagement letter, it is of concern that there is no emphasis on the auditors'
responsibility to report reportable irregularities. 1
Communication skills: clarity of expression 1
Available 22
Maximum 14

(b) With reference to the introduction, background information and working paper WP-100:

(i) Describe the risks of material misstatement at the assertion level for Greys Ltd for
the year ended 30 September 2020.
(ii) For each risk identified in b(i) above, describe the audit responses to ensure that
the risk of material misstatement in the financial statements is reduced to an
acceptable level.

Your answer should be structured in the following table:

(i) Risks of material misstatement at (ii) Response to risks identified in

the assertion level (i)
Revenue
1 Revenue might be recognised inclusive Inspect the sales journal to confirm
of discounts (accuracy). 1 that sales have been recorded net of
5% discount where appropriate. 1
2 Revenue might not be accurate due to For a sample of discount transactions,
incorrect calculation discount (accuracy). 1 recalculate the discount. 1
3 Revenue might include solar powered Trace a sample of transactions from
silent generators not accepted by the sales journal to the signed delivery
customers due to damage (occurrence). 1 notes, paying attention to any
comments made by the customer. (For
each sale recognised there should be
a signed delivery note). 1
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(i) Risks of material misstatement at (ii) Response to risks identified in

the assertion level (i)
4 Revenue might be overstated due to Trace a sample of transactions from
fictitious sales recorded to reflect better the sales journal to the invoice and the
financial results (accuracy/occurrence). 1 signed delivery note / Perform more
substantive testing (test of detail) on
sale transactions. 1
5 Revenue might be overstated due to Perform detailed cut-off procedures at
sales from the incorrect period might be year end. 1
included in the current financial year (cut- 1
off).
6 Revenue might be recognised inclusive Inspect the sales journal to confirm
of VAT (accuracy). 1 that sales have been recorded net of
VAT where appropriate. 1
7 Revenue relating to exports might be Inspect the sales journal for revenue
recognised when it leaves the stock from exports, agree the transaction
warehouse before it is shipped FOB dates to shipping documentation. 1
(completeness). 1
8 Revenue might not be accounted for For a sample of sales transactions,
accurately as Greys sells different types agree the amounts invoiced to the
of solar powered silent generators that price list. 1
have unique prices (accuracy). 1
Intangible asset
9 The development of the new refining The complexity of valuing the costs will
technique for assembling solar panels need the input of an auditor’s expert.
which are complex in nature could 1
possibly result in incorrect measurement
Assess the independence and
of capitalised costs within intangible
competence of the expert. 1
assets (accuracy, valuation and
allocation) 1
Review the experts work to determine
whether reliance can be placed
thereon. 1

(The three marks for the detail of

ISA 620 requirements may only be
awarded once.)
10 Failure to separate costs between Obtain schedules of the amounts
research and development (accuracy, capitalised and expensed and trace
valuation and allocation/classification). 1 significant amounts to supporting
documentation. 1
Perform more substantive detailed
testing on transactions that was
capitalised. 1
11 Incorrect measurement of intangible Enquire and inspect technical
asset cost by including costs unrelated documentation concerning the nature
to a specific product (valuation and of materials used and work done. 1
allocation)/ (existence). 1
Conclude whether or not this is
development and relates to this 1
project.

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(i) Risks of material misstatement at (iii) Response to risks identified in

the assertion level (i)
12 Incorrect measurement of intangible Re-perform the computation of costs,
assets due to incorrect computation or including labour and overhead costs. 1
allocation of the labour and overhead
components expensed through 1
profit/loss (accuracy, valuation and
allocation).
13 Incorrect measurement of intangible Inspect the accounting policy and
assets due to the use of incorrect confirm the correct write-off period. 1
amortisation period (accuracy, valuation 1
and allocation).
14 Incorrect measurement of intangible Re-perform the computation of
assets due to the incorrect computation amortisation. 1
of amortisation (accuracy, valuation and 1
allocation).
15 The intangible asset might not have been Inspect the minutes of meetings for
tested for impairment at year end 1 any discussions relating to the
(accuracy, valuation and allocation). impairment of the intangible asset. 1
Enquire from management regarding
the value of the intangible asset. 1
Inventories
16 Imported materials might not be Inspect bank documentation and
accounted for at the incorrect exchange financial press for the relevant rates of
rate (accuracy, valuation and allocation). 1 exchange at transaction dates. 1
Recalculate the purchase price using
the correct exchange rate. 1
17 Risk that all cost directly attributable to Reperform the computation of the
the inventory is not accounted for as part costs of inventories, taking into
of the cost price. (e.g. purchase price, account all costs related at the
insurance and transport costs) (accuracy, transaction date etc., and excluding 1
valuation and allocation). 1 VAT.
Agree costs to supporting
documentation. 1
18 Risk that raw material in transit at year Inspect courier documents and terms
end is not accounted for (completeness) of contract to ascertain the dates that
or accounted for twice (existence). 1 risks, and rewards passed and ensure
that all imports are included in the
correct accounting period. 1
19 Incorrect measurement of the cost of Inspect the nature of labour and
manufactured inventories owing to overheads included in inventory
incorrect computation and allocation of valuation to ensure that only relevant
the labour and overhead components overheads are included, and all
(accuracy, valuation and allocation). 1 relevant overheads are included. 1

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(i) Risks of material misstatement at (iii) Response to risks identified in

the assertion level (i)
20 Risk that labour and overheads are Review production records and
allocated to inventory using an incorrect enquire of technical personnel to
allocation basis (machine hours should establish the reasonableness of the
be used) (accuracy, valuation and 1 client’s estimate of normal capacity. 1
allocation).
Recalculate labour and overheads
allocated to inventories by applying
normal production 1
21 Incorrect measurement of the cost of Agree a sample of raw material costs
manufactured inventories owing to in the inventory account to invoices. 1
incorrect application of, or failure to
apply, the FIFO method (accuracy, 1
valuation and allocation).
22 Risk that inventory might be misstated Compare all inventory cost to the list of
due to the incorrect use of standard standard costing. 1
costing or the use of outdated standard 1
Recalculate the closing stock using
costs (accuracy, valuation and
standard costing. 1
allocation).
23 Abnormal losses/spillage might be Agree a sample of raw material costs
incorrectly recognised in the inventory in the inventory account to invoices. 1
balance (accuracy, valuation and 1
allocation).
24 Risk that inventory might not be recorded For a sample of purchase
net of VAT (accuracy, valuation and 1 transactions, trace the transaction to
allocation). the invoice to ensure that it is recorded
at a price net of VAT. 1
25 The risk that inventory might not be Compare the net realisable value and
recognized at the lowest of cost and net cost of the inventory. 1
realisable value (IAS2) (accuracy, 1
Engage an expert in determining the
valuation and allocation).
net realisable value of inventory. (only
awarded once under inventory) 1
26 The risk that not all inventory exists due Attend stock take, taking note of stock
to the theft that had taken place 1 that does not exist (accuracy,
(existence). valuation and allocation/existence).
1
27 Inventory may be overstated due to the The complexity of valuing the costs will
specialised and technical manufacturing need the input of an auditor’s expert.
process and stage of completion of work 1
in progress is subject to estimates
Assess the independence and
(accuracy, valuation and allocation). 1
competence of the expert. 1
Review the experts work to determine
whether reliance can be placed
thereon. 1

(The 3 marks for the detail of ISA

620 requirements may only be
awarded once)

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(i) Risks of material misstatement at (ii) Response to risks identified in

the assertion level (i)
Financial liabilities
28 The risk that not all forward exchange Evaluate the controls over recording
contracts has been recorded financial instruments to obtain
(completeness). 1 assurance that all FEC contracts are
identified and recorded in the system. 1
29 Risk that the forward exchange contract Obtain all relevant exchange rates for
liabilities are not measured at fair value at the calculations of the fair values. 1
the spot rate at year end (accuracy,
Reperform the computation of fair
valuation and allocation). 1
values of financial instruments
(FEC’s) at year end. 1
Allowance for credit losses
30 The allowance for credit losses might be Obtain written representation/ Enquire
misstated due to management not taking from management reasons for their
the change in the individual customer’s estimation of 8.7% and other
profiles into account of the calculation judgments applied with the
(accuracy, valuation and allocation). 1 calculation. 1
31 Risk that the credit losses are not Re-perform the calculation of
accurately calculated in terms of IFRS allowance for credit losses and agree
and that incorrect percentages are used 1 all amounts to supporting
in calculating each debtor’s credit losses. documentation. 1
Agree that the calculations for the
credit losses are correct in terms of
IRFS. 1
32 Any other valid risk 1 Any other valid response to risk 1
Communication skills: presentation (1)
Available 32 Available 47
Maximum 17 Maximum 19

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QUESTION 2

(a) Describe the programmed (automated) application controls that should be present in the
SANParks online booking process to ensure that all online bookings (the input of data
and transactions) are valid, accurate and complete.

1. The Eezee Bookings SANParks online booking screen should have the following screen
aids and related features built into the application software and reflected on the screen
to ensure that all online bookings (the input of data and transactions) are valid, accurate
and complete:

1.1 Minimum keying in of information. The less information that has to be keyed in by the
user, the less chances of errors, for example:
1.1.1 The “date arriving” and “date departing” field should be in the form of a calendar
that appears when the user clicks on each of these respective fields. The user
then simply selects the date from the calendar without having to type the actual
dates. (1)
1.1.2 The number of nights field should be automatically calculated by the application
software (based on the date arriving and date departing fields) and reflected on
the screen. (1)
1.1.3 When a second or further booking is made (not the first booking), the user should
enter his/her chosen username and password (which would be stored in the
database). The application software should then automatically retrieve all the
user’s standing data (e.g. name, surname, nationality, contact number etc.) so
that these fields do not have to be completed for further bookings. (1)
1.1.4 Drop-down menus can be used to minimise the capturing of information. The
following fields could, for example, be formatted as drop-down menus:
1.1.4.1 “In which SANPark do you wish to stay?” A drop-down menu with all the
available SANParks should appear to enable the user to merely choose
the preferred park from a predetermined list. (1)
1.1.4.2 “Which type of accommodation lodge or campsite?” Based on the
SANPark selected, a drop-down menu with all the available
accommodation lodges and campsites within that specific park should
appear to enable the user to merely choose the preferred lodge or
campsite from a predetermined list. (1)
1.1.4.3 “Nationality” A list of nationalities should be provided to the user upon
clicking on this field from which the user merely selects the appropriate
nationality. (1)
1.1.4.4 The “Number of adults” and “Number of children” fields. The user should
be presented with a drop-down menu to enable the user to merely select
the appropriate number of persons from a list of numbers. This list of
numbers should already be limited to the maximum number of persons
allowed. (1)

1.2 The Eezee Bookings SANParks online booking screen should be formatted to receive
essential data and information in the format/order in which it is required.
1.2.1 The “Identity number field” should be in a certain format so that it picks up on
invalid ID numbers, e.g. 8005…. (year, month, day, etc.) (1)
1.2.2 The “E-mail” field should be formatted so that invalid e-mail addresses can be
identified by the application. E-mails generally end with .co.za; .ac.za.; or .com.(1)
1.2.3 The “Contact number” field should be formatted to identify invalid contact
numbers (numbers generally start with e. g. 072, 082,083 or +270 or 012, 011
etc.) (1)
1.2.4 The “date arriving” field and “date departing” field should, for example, be
formatted to receive the date in the correct format (YYYY/MM/DD). (1)

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1.2.5 The date departing cannot be a date before the date arriving. The program should
be formatted to pick up on this. (1)
1.2.6 The “Username” and “Password” fields should be formatted to allow only a limited
number of numeric and alpha-numeric characters in certain formats (see
password controls below). (1)

1.3 The Eezee Bookings SANParks online booking screen should communicate with the user
via screen dialogue and prompts, for example:
1.3.1 If any errors occur during the capturing by the user (such as mandatory fields not
completed, missing data is identified, departing date is before arrival date, errors
on limit, size or alpha numeric checks etc.) the user should be alerted through
screen dialogue and prompts or error messages. (1)
1.3.2 When the “I am not a robot” field is not ticked and confirmed, the application
software should communicate this with the user through a message on the screen
and prompt the user to tick the field. (1)

1.4 The Eezee Bookings SANParks online booking screen should contain mandatory fields
where the keying in of data and information cannot continue if certain fields have not
been completed.
1.4.1 These fields should be indicated with an asterix or a star (*) to indicate to the user
that they have to be completed. The user should not be allowed to submit a
booking with mandatory fields outstanding. (1)
1.4.2 Fields such as: “In which SANPark do you wish to stay?”, “In which
accommodation lodge or campsite do you wish to stay?”, “Your name and
surname”, “E-mail”, “Contact number”, “Date arriving”, “Date departing”, “Number
of nights”, “Number of adults”, “Number of children”, “Submit” etc. should be
mandatory fields. (1)

1.5 Certain fields should be shaded so that the user is not allowed to click on these fields or
enter any data. When, for example, a second or further booking is made (not the first
booking), the user should enter his/her username and password where after the
application software should automatically retrieve all the user’s standing data (e.g. name,
surname, nationality etc.) so that these fields do not have to be completed for further
bookings. These fields should then be shaded fields. (1)

2. The Eezee Bookings SANParks online booking screen should have the following
programme controls for input built into the application software with the intention of
validating/editing information and data which is entered:

2.1 Programme checks for input, for example:

2.1.1 Existence/validity checks:

2.1.1.1 Validation checks should be performed by the application to validate data
keyed in by the user. For example, the user should tick the “I am not a
robot” field to confirm that he/she is a valid user. Further validation checks
will also be performed to match the allocated booking reference number to
user profile on the masterfile. (1)
2.1.1.2 Matching checks should be performed by the application to match certain
data to that which is already in the database. For example, the username
and password should be matched to that which is in the database (existing
user) and should also be matched with the correct user profile in the
masterfile (existing user). (1)

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2.1.1.3 Data approval/authorisation checks should be performed by the

application to test the input against certain pre-set conditions. For
example, bookings can only be placed by users older than a certain age
(not by children). The age of the user can be picked up from the “Identity
number” field where a data approval/authorisation check can be built in to
not allow users to continue with the booking unless they are 18 or older. (1)

2.1.2 Reasonableness checks:

2.1.2.1 Reasonableness checks should be performed by the application to

ensure that the data entered falls within a certain range and reasonable
limit. For example, it might not be reasonable to book for a period of 6
months or it might not be reasonable to book for 100 adults. These
reasonable ranges should be determined and entered into these fields. (1)

2.1.3 Dependency checks:

2.1.3.1 Dependency checks should be performed by the application where an
entry in a certain field will only be accepted depending on what has been
entered in another field. For example, a dependency check could be
performed on the “Number of nights” field where the entry in that field is
dependent on what is entered in the “Data arriving” and “Date departing”
fields. (1)

2.1.4 Format checks:

2.1.4.1 Alpha-numeric checks should be performed by the application to
prevent/detect numeric fields which have been entered as alphabetic and
vice versa. For example:
2.1.4.1.1 “In which SANPark do you wish to stay”, “In which
accommodation lodge or campsite do you wish to stay?”, “Your
name and surname” and “Nationality” fields have to be
alphabetic and not numeric. (1)
2.1.4.1.2 “Identity number”, “Contact number”, “Date arriving”, “Date
departing”, “Number of nights”, “Number of adults” and “Number
of children” fields have to be numeric and not alphabetic. (1)
2.1.4.1.3 Fields such as “E-mail address”, “Username” and “Password”
can contain both numbers and letters. (1)
2.1.4.2 Limit and field size checks should be performed by the application
to detect when fields do not conform to pre-set size limits. For
example:
2.1.4.2.1 The “Identity number’ field should have a field size of
13 digits. Any numbers exceeding this limit, will not be
considered a valid ID. (1)
2.1.4.2.2 “Number of nights”. A limit can be set for the number of
nights. If the number goes over this limit, an error
message could appear. (1)
2.1.4.2.3 The “Contact number” field should have a limit of a certain
number of digits. Any number exceeding this limit will not
be considered valid. (1)
2.1.4.3 Sign checks should be performed by the application to detect
invalid characters. Certain fields, for example, “Number of nights”,
“Number of adults”, “Number or children” etc. cannot have a minus
(-) sign. (1)
2.1.4.4 Check digits can be used for example on the booking reference where a
redundant character is added to the booking reference number to match to
the booking number provided by the user on any further enquiries. (1)

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2.1.4.5 Sequential checks: Booking references should preferably be sequentially

numbered so that any missing bookings can be identified.
. (1)

3. Appropriate controls over user passwords should be implemented and communicated to

the user upon selecting and changing a password: (max 3 marks)

3.1 Passwords should be unique to each individual (1)

3.2 Passwords should consist of at least six characters, be random and not obvious, a
mixture of numbers and letters, upper and lower case and symbols. (1)

3.3 Passwords should be changed regularly, and users should be forced by the system to
change their passwords on a regular basis (e.g. monthly). (1)

3.4 The system should only allow a user a minimum number of attempts at entering an
incorrect password. After this, access will not be granted until a new password has been
selected and the user authenticated. (1)

3.5 Password files should be encrypted. (1)

3.6 Passwords should not be obvious, e.g. birthdays, names, common words etc. (1)

4. The Eezee Bookings SANParks online booking page should have a help-function
available should the customer have difficulty using the application. (1)
Communication skills: Clarity of expression (1)
Available 37
Maximum 28

(b) Describe the risks and possible implications associated with those risks that Eezee
Bookings are faced with when trading over the internet.

Nr Risk Possible Implication(s)

1. Eezee Bookings faces the risk of not Failure to comply with these acts and laws
complying with all the relevant acts and (designed to protect customers) could result in
laws governing personal information and legal action, fines, liabilities and reputational
internet trading such as South Africa’s damage for Eezee Bookings. (2)
Protection of Personal Information Act or
the Electronic, Communications and
Transactions Act. (1)
2. By creating a website on the internet, This could lead to service disruption, virus
Eezee Bookings creates a channel or link attacks, data destruction or corruption and loss
to the outside world. (1) of confidential customer (user) information. (2)
This could present risks associated with
unauthorised access to its computer
systems. (1)
Bookings could be made at lodges and Eezee Bookings might be liable to the
campsites where no or only partial SANParks lodges and campsites for bookings
payment is received from the customer made where payment from customers (users)
(user). The customer might not be were not received. (1)
creditworthy. (1)

HJB
 125
AUE4862/106
NAU4862/106
ZAU4862/106

Nr Risk Possible Implication(s)

There is a risk that the Eezee Bookings Information provided by the user might be
website and the online booking process is invalid, inaccurate or incomplete. This may
not user-friendly with inadequate result in incorrect bookings leaving users
application controls. (1) dissatisfied and could lead to sales losses for
Eezee Bookings. (2)
3. There is a risk of unauthorised disclosure Contravention of South Africa’s Protection of
of confidential customer (user) information Personal Information Act, legal action from
through hacking or eavesdropping and/or customers against Eezee Bookings, fines,
loss of data integrity where data might be reputational damage, financial losses. (2)
altered in some way. (1)
4. There is a risk customer might think that Loss of customers to other competitors in the
the website of Eezee Bookings contains industry, loss of sales, financial loss,
malicious code or content and that the reputational damage. (2)
company is not legitimate. (1)
5. There is a risk that Eezee Bookings does Any lack of availability on the part of Eezee
not have the capacity, time and staff to Bookings or functioning of the site could result
trade over the internet which is available for in loss of sales, loss of customers, financial
bookings 24 hours, 7 days a week and 365 losses and reputational damage. (2)
days a year. (1)
6. There is a risk that Eezee Bookings provide Incorrect pricing could result in financial losses
the incorrect prices on their bookings either for Eezee Bookings. (1)
on website or on the final booking
confirmation. (1)
Eezee Bookings is just one of numerous Eezee Bookings might experience a loss of
online booking offices for SANParks, sales and customers to other online booking
making this a particularly competitive offices, they might face financial difficulties and
environment. There is a risk that the prices eventually might not be a going concern. (2)
offered by Eezee Bookings is not
competitive enough with these other online
booking offices. (1)
There is a risk of an inadequate audit trail The customer might deny making a booking or
in terms of bookings, payments etc. as may claim to have made a booking which was
almost all documents and information is in actual fact never made. Eezee bookings
being transmitted/communicated might lose the ability to defend itself against
electronically. (1) legitimate or false claims made by customers.
Bookings might be lost, or double booking
made when transmitted electronically. This
also increases the risks for the auditors as
there is not visible audit trail. (2)
There is a risk that the Eezee Bookings Customers might lose confidence in Eezee
website might be down due to a system Booking’s ability to make bookings which could
failure/system crash (incorrect lead to loss of sales and customers. They
implementation or conversion etc.). (1) could experience financial losses and could
also experience reputational damage from both
customers and SANParks. If there are no
effective back-ups in place, data could be lost
during these downtimes. (2)
Communication skills: Layout and structure (1)
Available 33
Maximum 22

HJB