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Exam (elaborations) AUE3702 - Substantive Procedures And Finalising An Audit
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Exam (elaborations) AUE3702 - Substantive Procedures And Finalising An Audit
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AUE3702 2013 S1 – QUESTION (UNISA)You are the audit manager for the 2013 audit of Tiger Trailers (Pty) Limited, a manufacturer of standard light
duty trailers. Their financial year end is 28 February and they have been your client for four years. The
manufacturing process of trailers is not a complex process and can be easily understood by observing the
production process. The audit plan indicated no unusual risk of misstating inventory at the assertion level.
You attended the client’s annual inventory count and are satisfied with the counting procedures. You have a
copy of the final stock count sheets and you are satisfied that the descriptions and quantities provide a true
reflection of the inventory count at year end. The stock count sheets are computerised and reflect the following
information: product code with a description, quantity, cost price and selling price. The cost accountant
provided you with the costing records. Every trailer model has a blueprint with the exact specifications
(diagrams), product codes of raw materials used in the manufacturing process and costing. From this blueprint
the cost price of a trailer is determined and used on the inventory sheets.
Tiger Trailers (Pty) Limited employs a registered production engineer, Mike Evans, on a contractual basis. Evans
has been a contract worker for five years and is responsible for ensuring the accuracy of the blueprints and he
also certifies the stage of the work in progress. The cost accountant is responsible for costing the items.
Cost is determined on the first-in-first out (FIFO) basis. Direct costs of manufacturing and a proportion of
manufacturing overheads, based on normal operating capacity, are included in the cost of manufactured goods
Inventories at cost on 28 February 2013 R’000 2012 R’000
Finished goods 4 280 3 845
Work-in-progress (70% complete) 1 190 1 084
Raw materials 995 799
Journal entry: Credit Note Policy
Tiger Trailers (Pty) Limited accepts returns of goods sold and has a policy that makes provision relating to sales
before year-end. It is company policy to provide for 2% of the February sales.
The journal entry for this provision is:
28/2/1 Sales (Dr) R59 500.24
3 Provision for credit notes (Cr) R59 500.24
February sales credit note provision per policy document R2
975 012 x 2%
Subsequent events
On reviewing the previous year’s audit programme for subsequent events you noticed that the audit
procedures were either poorly formulated or incomplete. You plan to reformulate them so that the audit
trainee is able to understand exactly what he has to do when executing them. In preparing the audit trainee to
perform the subsequent events procedures you explained the accounting principles of subsequent events to
him.
Audit reporting issues
On completion of the audit the audit partner gave you the following schedule of issues that could affect the
audit report. He requested you to complete the following schedule:
© Edge Business School
,Issue Conclusion in audit file Nature of the Effect of Effect on
matter that misstatement report/
gave rise to the on financial Type of
modification (if statements audit
applicable) opinion
E.g. No cash records Insufficient Fundamental Disclaimer
appropriate
evidence –
scope limitation
1 The provision in respect of the credit note policy 6.1 6.2 6.3
was understated by a material amount.
2 The ability of Tiger Trailers to continue as a going 6.4 6.5 6.6
concern in the foreseeable future depends on
negotiations which will be finalised after the
annual financial statements (AFSs) are issued.
Disclosure of this fact has been made in the AFSs.
3 Various transactions took place during the year 6.7 6.8 6.9
between the audit client and a related party.
These transactions took place well below the
market price. No disclosures of the related party
transactions have been made in the AFSs. This
has a major affect on the AFSs and as a result
causes the AFSs to be misleading as a whole.
REQUIRED:
1. Describe the substantive procedures that you will perform to ensure that finished goods are (30)
correctly valued at year end.
2. Describe the aspects that you will consider before relying on the work of the engineer, Mike (15)
Evans.
3. Describe the audit procedures that you will perform to audit the journal entry providing for (18)
credit notes.
4. Explain the two types of subsequent events identified by ISA 560 Subsequent events and the (6)
respective accounting treatment thereof.
5. List the audit procedures to identify subsequent events. (18)
6. Complete the audit reporting schedule of issues that could affect the audit report. Number (13)
your answer in accordance with the schedule – 6.1, 6.2, etc.
© Edge Business School
,AUE3702 2013 S2 – (QUESTION)
QUESTION 1
The audit firm where you are a trainee accountant has been appointed as the new auditor of
Agrichem Ltd, a wholesaler of agricultural chemicals and pesticides. The period under review, for
which you are responsible, covers the year ended 31 August 2013. The company has one central
warehouse and sells its products to distributors and large fanning operations throughout the
country. Inventory is a material figure on the trial balance.
Opening balances
Since this is the first time that your firm is performing the audit, permission was obtained from the
client to contact the previous auditors to obtain more information regarding the opening balances.
The previously appointed auditor simply informed you that he was pressed for time and had to rush
the 2012 audit. He is therefore reluctant to allow you review the 2012 audit working papers. This
immediately made you wonder how reliable the opening balances are and why the auditor has
issued an unmodified audit report.
Inventory
While visiting the central warehouse at Agrichem Ltd you established that perpetual inventory
records are maintained. Goods received notes and invoices are used to capture inventory
movements. While discussing the date and time to perform the physical annual inventory count, the
store manager informed you that the previous auditor has never attended the inventory count. You
also noticed that the warehouse appeared somewhat untidy and it was extremely hot in the
warehouse. You wondered about the effect of extreme temperatures on the shelf life of the
chemicals. You immediately made a note that damaged and obsolete inventory should be identified
during the count and that the value of inventory could possibly be overstated. The assistance of an
expert may therefore be justified to determine the effect of heat on the chemicals.
During your attendance of the physical inventory count at year end, the technical product manager
also assisted with the counting. During informal conversations held with him, he informed you that a
lawsuit has been filed against Agrichem Ltd because of a specific chemical sold to a farmer that
destroyed his entire crop. Apparently the product is not registered for that particular weed and the
sales person therefore sold the incorrect product to this customer. The value of the failed crops was
substantial - R44 000 000.
Trade payables
As part of the verification procedures for purchases you decided to satisfy yourself as to the validity
of the reconciling items appearing on the trade payable's reconciliation of Adhoc Chem
Manufacturers Ltd at 31 August 2013. Agrichem's policies require that all purchases must be
accompanied by an authorised order and goods received note.
The following trade payable's reconciliation for Adhoc Chem Manufacturers Ltd was prepared by the
accountant:
© Edge Business School
, Balance per supplier's statement 25/08/2013 3 650 115
Add: Invoice 1402, dated 26/08/2013 1 511 612
Less: Payment 27/08/2013 (3 715 004)
Balance per trade payables ledger 31/08/2013 1 446 723
Finalising the audit
On completion of the audit, the following items are still outstanding on the working papers and
management was not prepared to make adjustments to the financial statements.
1 The previous year's inventory count was not attended by the previous auditor. The book value of
opening Inventory is material and amounted to R44 546 125. Other audit procedures performed
with regard to the opening balance of inventory did not provide sufficient evidence.
2 Legal counsel indicated that the possibility that the customer will succeed with the litigation is very
good. The value of the claim is R44 000 000.
3 Agrichem Ltd's insurance does not cover the legal claim and this will negatively affect its cash flow
Agrichem Ltd is busy negotiating for finance but the outcome is uncertain.
Required Marks
1. Discuss your concerns and the potential effects associated with the work performed by 15
the predecessor auditor on the current audit.
2. Formulate the substantive procedures to audit the opening balances for inventory. 15
3. Describe the substantive procedures to identify damaged and obsolete inventory. 23
4. Describe the substantive procedures to obtain audit assurance regarding Adhoc Chem 17
Manufacturers' trade payable's reconciliation.
5. Describe the substantive procedures to identify subsequent events. 18
6. Describe the possible effect of Matter 1 detailed under the heading, "Finalising the 12
audit" on the audit report. Set out your argument logically, but do not write the report.
© Edge Business School
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