QUESTION 1

1 Background and overview of operations

Beeprop Ltd (‘Beeprop’) is a property development company that is listed on the

Johannesburg Stock Exchange. The end of the current reporting period of Beeprop is
31 December 2021 (FY2021). Beeprop is a VAT vendor and is registered in terms of Category
C for VAT purposes. Beeprop prepares its financial statements in accordance with
International Financial Reporting Standards (IFRS). JZKhize Auditors Inc. (‘JZK Auditors’) is
the Registered Auditor of Beeprop for FY2021 and is currently busy with the FY2021 audit
engagement.

Beeprop’s diverse investment property portfolio, located across South Africa, consists of the
following:

Office buildings 40%

Regional shopping malls 30%
Residential property 20%
Manufacturing buildings 10%

Beeprop’s business model is to derive income from these investment properties through rental
income. The majority of the investment properties in the portfolio was developed and is owned
by Beeprop. However, it also has one new investment property that is held in terms of a lease
agreement, which Beeprop is sub-leasing. Beeprop does not provide additional services such
as cleaning, security, etc., at the various properties it manages.

The office buildings in the investment portfolio have been hit the hardest by the Covid-19
challenges, as many tenants have vacated the buildings because they adopted a work-from-
home model. While the situation has improved slightly, with a decline in vacant office spaces
from 13,2% to 11,8%, there are still several vacant office buildings.

The financial director of Beeprop, Delien Castelyn CA(SA), confirmed at a recent board
meeting that she believes that the property market is on the road to recovery. Beeprop’s focus
this year is to protect its resources, strengthen its financial position and manage costs, in order
to gain the maximum advantage from this upwards trend. As a result, Beeprop embarked on
an aggressive strategy to market all vacant office buildings by means of a variety of marketing
platforms. Some of the offices that became vacant during the current financial year, are being
occupied by Beeprop’s administrative employees while it is seeking tenants for the buildings.
Delien believes that occupancy rates in the property market will recover, regardless of the
views of some critics that a characteristic of the ‘new normal’ will be a lower demand for office
space. She also believes that the return in demand for office space should be reflected in the
valuation of Beeprop’s investment property.

Beeprop is also investigating the implementation of a computerised system to manage the

costs incurred while developing properties. Currently, the controls around the accumulation of
costs are weak, resulting in inefficiencies and the inability to manage budgeted vs actual costs
incurred.

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 2 Accounting policies

The following are extracts from Beeprop’s accounting policies:

• Lease payments from operating leases are recognised as income on a straight-line

basis.
• Investment properties are measured at fair value. Gains or losses arising from changes
in the fair value of investment properties are included in profit or loss during the period
in which they arise.
• Other properties, classified as property, plant and equipment, are carried at cost less
any accumulated depreciation (except for items of land) and any accumulated
impairment losses.
• Major sources of estimation uncertainty: The directors believe there are no uncertainties
in measuring the fair value of the investment properties, as the valuation of all properties
is done by a firm of independent professional valuers.

3 Notes to the draft financial statements

The following are relevant extracts from the notes to the draft financial statements:

Extract from note on investment properties

Additional FY2021
information R’000
Investment properties at the beginning of the year at fair
value 161 000
Changes in investment properties during the year
Construction cost incurred, at cost 4.1 27 869
Replacement of components (correct in all aspects,
including the items in para. 6.2 (see page 4))* (6 200)
Right-of-use office building capitalised, at cost 4.2 12 498
Change in fair value 7 833
Investment properties at the end of the year at fair value 4.3 203 000
Owned properties
Office buildings 67 169
Shopping malls 61 950
Residential properties 40 182
Manufacturing buildings 20 168
Office in terms of lease agreement
Right-of-use office building 4.2 13 531
* The replacement components are capitalised as part of construction costs incurred.

Beeprop uses the services of an independent registered firm of valuers, Expert Property
Valuers (Pty) Ltd (‘EPV’). This is a leading real estate appraisal firm that has been in business
in South Africa for 33 years. Beeprop is proud to be associated with the firm, as the chief
executive officer of Beeprop serves on the governing board of EPV. EPV’s valuers hold
professional qualifications and have up-to-date experience on the location and category of the
properties being valued. Furthermore, its reports, known as the EPV report on the SA property
market, is regarded as an authoritative reference source by many role players in the real estate
and property market as well as among valuers.

The fair values of Beeprop’s investment property are determined at the end of each financial
period by EPV, using the discounted income method. This valuation technique has been

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applied consistently over the past few years for the owned properties. The reasonableness is
considered with reference to the open market value, if available.

The fair value hierarchy of investment properties is assessed as level 2 because the fair values
are observable from the independent valuation reports.

Extract from note on the lease liability

Additional FY2021
information R’000
Lease liability at the beginning of the year 0
Changes in liability during the year
New lease 4.2 14 373
Immediate payment made 4.2 (1 875)
12 498
Effective interest accrued 992
Payments made (1 200)
Lease liability at the end of the year, presented under
non-current liabilities 4.2 12 290

4 Additional information on the notes to the draft financial statements

Delien provided the following additional information:

4.1 The construction costs include all the material, labour and directly attributable
expenditure regarding the construction of properties. The relevant items in para. 6.2 and
6.3 (see pages 4 and 5) were correctly capitalised at cost, where applicable.

During FY2021, the Covid-19 pandemic caused extensive and unexpected delays at
various intervals, leading to abnormal material and labour costs. These abnormal costs
amounted to R5,78 million and were included in the costs capitalised to the properties.

4.2 The right-of-use asset represents the right to use an office building acquired in terms of
a lease agreement (the head lease) during FY2021. Beeprop is sub-leasing the office
building to various tenants in terms of operating lease agreements. The asset was
capitalised at the present value of the lease payments payable under the head lease,
discounted using the interest rate implicit in the lease. The lease payments are payable
monthly in arrears. The carrying amount of the lease liability on 31 December 2021 was
correctly calculated as R12,29 million.

The fair value of the right-of-use investment property as at 31 December 2021 was
correctly determined as R13,531 million, with the help of EPV. The fair value calculation
took into consideration the future expected lease payments from subleasing the
property, expected inflation, future expected discount rates, vacancy levels, etc.

4.3 The fair value (as obtained from EPV) represents the present value of expected lease
payments receivable. The balance of Beeprop’s accrued lease income (resulting from
the straight-lining of the lease income) on 31 December 2021 amounted to R4 million.

The fair value of the investment properties that are leased fully furnished include the fair
value of the furniture. The furniture is not recognised as a separate asset. The correct
discount rate was used to fair value the investment properties, where relevant, and all
the fair values obtained from EPV were correctly determined in terms of IFRS 13 Fair
Value Measurement.

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 5 Matters relating to lease liability disclosure

The audit manager at JZK Auditors, John Eslo, sent the following email to the audit partner,
Richard Kyrgios:

From: John Eslo

Sent: 28 February 2022 @ 8:10am
To: Richard Kyrgios
Subject: Lease liability disclosure
! High Importance
Dear Richard

I discussed the proposed amounts to be disclosed in the financial statements for the lease
liability with Delien. She stated that she was not going to make amendments, and the full
amount outstanding will be disclosed as non-current liabilities. The amount that is payable
within the next 12 months is R343 574.

Delien is of the opinion that this amount is below the materiality level because it is below
our materiality level of R4,2 million. During our conversation Delien acknowledged that the
working capital ratio (amongst other ratios) is an important measure of financial health
since creditors consider it a measure of a company's ability to pay off its debts within a
year.

Is this something that we need to discuss?

John Eslo
Audit manager: JZK Auditors

6 Other important information regarding the properties

6.1 Development of a residential townhouse complex

Beeprop completed the development of a townhouse complex at the end of FY2020. The
townhouse complex is situated close to the OR Tambo International Airport. These
townhouses are fully furnished and are targeted at millennials that need lock-up-and-go
residential properties. Unfortunately, many of these townhouses are not currently let.

Delien’s husband has a hunting business, Exquisite Safari Hunters (‘ES Hunters’), that takes
international guests on hunting trips to Limpopo on a regular basis. These guests usually arrive
at OR Tambo International Airport on Sunday evenings. Delien gave permission that the
guests may stay in the vacant townhouses. Delien’s husband pays for the cleaning of these
townhouses himself. Delien decided that no costs should be charged to ES Hunters as these
townhouses are in any case vacant.

6.2 Conversion of buildings to increase occupancy rates

In view of the changes in the property market, Beeprop’s management is considering the
conversion of some of its unused office buildings to residential accommodation units.
However, Delien is of the opinion that there will be negative VAT consequences and requested
an investigation into these before such conversions are undertaken.

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During FY2021 Beeprop followed another conversion option, namely the upgrade of one of its
manufacturing buildings in Midrand to an environmentally friendly ‘green building’. The
building was originally constructed in FY2015. Beeprop had incurred the following costs by
31 October 2021:

Conversion costs R’000

1 Air conditioning and heating system (to replace the current inefficient
system, although it was still in a working condition) 624
2 Solar panels generating electricity from photo-voltaic solar energy not
exceeding one megawatt (to reduce electricity bought from Eskom) 1 750
3 Water-saving system (to replace old, leaking water system and ensure
the maximum conservation of water) 2 500
4 Re-orientation of doors and windows (to ensure optimal use of natural
light) 3 000
5 Installation of an energy-efficient lighting system (to replace the current
system which, while still in a working condition, was wasteful) 450
6 Installation of insulation material in ceilings (to reduce heat convection
and radiation) 250
Total costs 8 574

Except for the air conditioning, heating system and solar panels, none of the alterations is
removable. The upgrade was done to ensure that the building is more marketable, and as an
additional benefit, the alterations improved the industrial capacity of the building. After the
upgrade was completed, it was leased in terms of an operating lease agreement for 20 years
from 1 November 2021. The lessee intends to use the building in a process of manufacture,
recognised by the Commissioner of the South African Revenue Service (SARS) as such.

These expenditures were correctly accounted for in the financial statements. Although an
IFRS expert confirmed that this was the correct accounting treatment, Delien asked the
financial manager to deduct the entire amount of R8,574 million as repairs incurred in the
production of income during the current year of assessment when determining taxable income.
SARS allows a write-off period of six years on air conditioning and heating systems in terms
of the Binding General Ruling No. 7.

Because of its success in upgrading the manufacturing building, management now also plans
to upgrade an office building into a green building. Management asked the tax experts to
investigate the income tax consequences of the upgrade costs related to a building if it were
used for commercial purposes other than manufacturing.

6.3 Tenant installation allowance paid by the lessor

Beeprop has signed a five-year operating lease agreement in respect of an existing office
building in Sandton with Callme (Pty) Ltd (‘Callme’), a company that operates a call centre.
This lease commenced on 1 February 2021. Callme is a VAT vendor making only taxable
supplies and is registered in terms of Category C for VAT purposes. The end of the reporting
period of Callme is 31 December 2021. The lease agreement provides for a monthly lease
payment of R200 000 payable by Callme to Beeprop before the seventh day of every month
from February 2021.

The building needs considerable improvements to serve the lessee’s needs. Because
Beeprop was desperate to find a tenant, it agreed to pay a once-off tenant installation
allowance. This was paid directly to Callme as part of its lease agreement. One of the terms
of the lease agreement was that Callme must use these funds to effect improvements to the
property.

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Callme obtained the services of a contractor that understood the specialised nature of the call
centre industry. The contractor commenced with the improvements on 1 February 2021, the
same date the lease agreement was signed. Beeprop paid the tenant installation allowance of
R3,45 million (inclusive of VAT) into Callme’s bank account on 10 February 2021.

Beeprop’s management was satisfied that the value of the building would be enhanced by the
improvements Callme was making but was not prepared to pay an additional allowance if the
expenditure amount exceeded the tenant installation allowance. The total improvements to
the office building amounted to R4,6 million (inclusive of VAT). Callme paid the amount of
R4,6 million on 1 June 2021, the date of completion of improvements and receipt of the
contractor’s invoice. Callme started trading on the same day. The details of the improvements
were specified in the lease agreement, and Callme had to carry the cost of the difference
between the R4,6 million spent and the R3,45 million installation allowance received.

6.4 Development of new office complex for which zoning has not yet been obtained

Beeprop planned to commence with the development of property on a piece of land for which
final zoning approval had not yet been obtained from the local municipality. Delien felt that
obtaining the correct zoning was just a matter of time, and she granted approval for the building
teams to commence with the building work on 10 January 2022.

Question 2

You are a third-year audit trainee working at the audit firm, CFW Inc. (‘CFW’). In May 2022,
CFW was appointed as the external auditor of Meals 4 Me (Pty) Ltd (‘M4M’). M4M has a
31 December year end.

M4M was incorporated in 2017 by two brothers, Steven and Michael Peters. M4M started off
as a small business delivering frozen home-made meals. After the national lockdown
regulations were implemented from March 2020, the demand for frozen meals grew
significantly. M4M subsequently expanded its range of frozen meals and now has distribution
centers nationwide. All operations of M4M take place from their facilities in Bloemfontein.
Meals are distributed from the central kitchen to the distribution centers, and from the
distribution centers to customers, via a third-party courier company.

M4M asked CFW to complete the financial audit by 28 February 2023. You are currently busy
with the planning phase of the audit, which includes obtaining system descriptions for the
various business cycles. These have been documented in the following audit workpapers:

Workpaper reference Subject of the workpaper

A001 Accounting systems and internal controls
P001 Purchases cycle

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CFW Auditors Inc. Workpaper reference: A001
Client: Meals 4 Me (Pty) Ltd Prepared by: A. Clark
Date: 20 January 2023
Year end: 31 December 2022 Reviewed by: S. Mzamane
Date: 24 January 2023
Subject: Accounting systems and internal controls

M4M uses an off-the-shelf accounting package, AccProf. AccProf processes value-

added tax, has a built-in inventory management system, and offers the user a choice
between the perpetual and periodic inventory systems. M4M makes use of the periodic
inventory system. Free support is provided by the supplier of AccProf for five hours per
month and changes to the system can only be made by the software supplier.

The finance function consists of the following individuals:

• Financial controller, Sarah Calitz CA(SA)
• Senior accountant, Themba Sisulu CA(SA)
• Accountant responsible for sales and tax, Aamira Abbasi CA(SA)
• Zama Cele, a second-year part-time student in chartered accountancy. She
was appointed in August 2021 to assist with managing the purchasing
process and
creditors.

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 CFW Auditors Inc. Workpaper reference: P001
Client: Meals 4 Me (Pty) Ltd Prepared by: T. Naidoo
Date: 24 January 2023
Year end: 31 December 2022 Reviewed by: S. Mzamane
Date: 24 January 2023
Subject: Purchases cycle
The purchasing and receiving team consists of the following staff members:
• Head of purchasing – Lekwa Mabaso
• Ten buyers
• Two purchasing clerks: Victor Mashishi and Prudence Dlamini
• Four receiving clerks: Grace Symmons, Kagiso Nkosi, Themba Bhele and Nabeelah
Bashir

Important master documents

• List of approved suppliers
• Standard price list

When a new supplier is considered, Lekwa presents the supplier’s details to Steven and
Michael. The approved supplier and standard price lists are updated once she receives approval
from them.

M4M makes use of three categories of suppliers

• Category 1: Fresh fruit and vegetables: The ten buyers visit and negotiate with local
farmers twice per week to ensure better prices and optimal quality of seasonal produce. If
the required items are not available from the local farmers, it is sourced from retail stores
at significantly higher prices. All fresh fruit and vegetables are paid for in cash.
• Category 2: Meat, grains, spices, sauces, dairy, and other ingredients: M4M has fixed
contracts with suppliers. M4M negotiates the prices of products with its suppliers every
month and standard price lists are updated as soon as negotiations have been completed.
• Category 3: Packaging and logistics: All packaging materials are imported from Beijing
Pack Ltd (‘Pack’), a supplier based in China. In terms of the contract, Pack pays the
shipping costs on behalf of M4M when handing the goods to the courier and then adds the
transport cost, plus a 10% service fee, to its invoice to M4M.

Placing of orders

The ordering function on AccProf is password protected, and only Victor and Prudence have
access to this module. To initiate an order, the purchasing clerk responsible for placing the
relevant order (either Victor or Prudence), enters their username and password, consisting of at
least eight characters. The same purchasing clerk then enters the supplier code, which is
obtained from the list of approved suppliers.

Once the supplier code has been entered into the system, a standard order form appears on the
screen. The form includes standard details such as the supplier’s e-mail address, business
phone number, physical address and credit terms negotiated with the supplier. The relevant
purchasing clerk compares these details with the list of approved suppliers. The purchasing clerk
next selects the description of the items to be ordered from a pre- populated drop-down menu
and types in the quantity of items to be ordered. The product
code and price of the items are displayed automatically after the relevant item has been selected
from the list.

The responsible purchasing clerk then compares these particulars with the most recently
updated standard price list. The total amount of the order is calculated automatically by the
system and the purchasing clerk re-performs the calculation to determine the total value of the
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order before releasing the order to the supplier by clicking the ‘confirm order’ button.

Victor pulls a report, listing all orders with no matching goods received notes (GRNs) from
AccProf on a weekly basis, and follows up on any outstanding orders.

Delivery of goods

All items are delivered to a dedicated receiving area. When receiving category 2 and 3 items,
two of the four receiving clerks compare the quantity and description of the physical products
with the delivery note received from the supplier and the original order form. The same
receiving clerk checks the quality of the products, after which one of them completes a GRN
on AccProf, indicating the quantity and description of the goods received. Both receiving
clerks sign the form electronically by each clicking the ‘signature’ button. The receiving clerks
then move the products into the storage area.

Recording of purchases

All category 2 and 3 suppliers send their invoices directly to a dedicated M4M e-mail address.
Zama monitors this inbox and captures these invoices on AccProf as they are received. Once
the suppliers’ invoices are captured, purchase journal entries are automatically posted to the
creditor’s account in the creditors ledger. The creditors control account in the general ledger is
then updated to reflect the total amount owed to each individual creditor.

AccProf automatically matches the invoice captured with the relevant GRN and order form on
the system. Once these documents have been matched, the system flags it as ready to be
paid.

Payment of creditors

Monthly supplier statements are e-mailed to the same e-mail address, and these statements are
used to make payments to suppliers.

Zama prepares monthly creditors’ reconciliations for all category 2 and 3 suppliers for this
purpose, by comparing the balance payable according to the suppliers’ statements received
with the outstanding balance according to the creditors ledger, as reflected on AccProf. If
Zama detects a difference, she investigates the matter and makes the appropriate
adjustments to correct the creditor’s balance on AccProf. She also adds a note next to the
reconciling item explaining how the difference was resolved. Themba reviews the
reconciliation and queries unresolved differences with the suppliers.

On the last business day of every month, Sarah prepares electronic payments on M4M’s
banking website and Steven releases the payments after reviewing the supplier statements
and creditors’ reconciliations. After payments have been made, cashbook journal entries are
automatically posted to the creditor’s account in the creditors ledger and the cashbook
balance in the general ledger.

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Question 3

The marketing director, Charles Ursh, was in favour of using an influencer on social media to
increase Sibahle’s sales. With the growing popularity of unfiltered content and ‘everyday’
influencers, companies are looking to build relationships with satisfied customers who can
advertise for them. Influencer campaigns are a popular and cost-effective way of marketing.

Charles identified AllOut Entertainment (Pty) Ltd (‘AllOut’), a company owned by Colleen
Hunks, as a suitable marketing partner. AllOut has a 30 June year end.

Colleen is the founder and sole shareholder of AllOut and is a well-known South African singer,
comedian and digital content creator who receives more than three million views on Instagram
per post. Colleen has won several music awards, and one of her albums is a certified gold
album seller and has also won the people’s choice awards for the influencer of the year, for
three years running. She is a close friend of Charles and he was sure he could get her to
agree to act as Sibahle’s influencer on favourable terms.

AllOut has two permanent employees. They are unrelated to Colleen. The income that AllOut
would earn from the agreement with Sibahle is not expected to be material in relation to the
income earned from its existing clients.

Sibahle’s management team suggested an agreement with AllOut for Colleen to become its
brand influencer for a two-year period. In terms of the proposed agreement (see appendix A
for extracts of the proposed agreement), AllOut would be responsible for managing the content
of Colleen’s posts on Instagram. On average, 1% of Colleen’s followers are expected to follow
the links she posts and thus purchase Sibahle’s products.

A complication to this option relates to Colleen’s involvement in a robbery at the home of a

well-known comedian, who was also rumoured to be dating Colleen at the time of the robbery.
Charles discovered that Colleen has been charged and is being prosecuted for masterminding
the robbery. There are also allegations that she tampered with the crime scene and defeated
the ends of justice. Charles is concerned that the pending court case, and her conviction,
could result in Colleen no longer being a suitable influencer. Because Charles would like to
help Colleen, he would do everything in his power to get Sibahle to choose this option. He is
sure he could then convince them to invest in providing the best legal expertise possible to
make the case ‘disappear’ and protect Colleen’s reputation.

Charles sent Colleen the following voice note:

Hi dearest, I know this trial is taking up most of your valuable time and I have an offer you won’t be able to resist. If my
company chooses you as an influencer, I am sure I could convince them to pay a consulting fee of R1,5 million to Judge
Mlulameleni, who’s an old friend of mine and a presiding judge in your court case. He has agreed to accept this lump
sum as a once-off and final payment. All you have to do is to promise me that you will dedicate your time to making sure
you fly our flag high. The more publicity we get, the more money we make, which means more money in your pocket
and ours. This matter doesn’t have to go through your company as it is a direct incentive to you.

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AllOut issued an official statement that it intends to honour all its business obligations despite
the pending court case. It assured its clients that Colleen would honour all the prior
engagements in between court appearances. The statement was made in response to the
rumours and comments that if Colleen were convicted, she would receive a jail sentence.
 Marks
Question 1 Sub-
Total
total
(a) Discuss, based only on the information provided in section 1, the factors
that increase the risk of material misstatement at the assertion level for
investment properties in the financial statements of Beeprop for FY2021. 8 8
(b) Describe the additional substantive procedures that should be performed
by the JZK Auditors audit team to obtain sufficient and appropriate audit
evidence regarding the right-of-use asset with reference to only the
following assertions:
(i) For the recognition and initial measurement of this transaction:
existence, classification, accuracy, and valuation and allocation; 8
and
(ii) For the subsequent measurement: accuracy, and valuation and
allocation. 10

• The following procedures had already been performed by the audit

team:
o Obtaining a management representation letter for all assertions
relating to the right of use asset;
o Agreeing, where applicable, all amounts in the schedules,
reports and calculations to the general ledger, trial balance and
annual financial statements; and
o Casting of all totals and subtotals.

Communication skills – clarity of expression 1 19

(c) Discuss the impact on the auditor’s report if no changes were made to the
classification of the full outstanding amount of the lease liability as non-
current liabilities in the FY2021 financial statements (see sections 3 and 5). 4 4
(d) Discuss five ethical concerns you many have in terms of SAICA’s Code of
Professional Conduct with regard to the actions of Delien. 10

• Do not discuss any safeguards.

Communication skills – appropriate style 1 11

Question 2

(e) (i) Identify and describe the risks of material misstatement related to the
completeness, accuracy, and valuation and allocation of the
creditors balance of M4M as at 31 December 2022; and 6
(ii) For each of the risks identified, indicate to which assertion the
relevant risk relates. 6

• Present your answer in a table format. 1

Communication skills – clarity of expression 13

(f) With reference to the placing of orders and delivery of goods from
category 2 and 3 suppliers, as documented in workpaper P001 –
(i) identify and discuss the internal controls present in the systems
description of M4M that you would rely on; and 12
 (ii) formulate the tests of control(s) the auditor should perform to assess
the relevant internal controls for each control identified in (b)(i).
12
• Present your answer in the following table format:
• Assume that CFW will follow a combined audit approach.
• Do not include the following in your answer:
o Changes to the list of approved suppliers and approved
price list; and
o Segregation of duties between irreconcilable functions.

Communication skills – presentation 1 25

Question 3

(g) Discuss any ethical concerns you may have with regard to the voice note
sent by Charles to Colleen and how these can be mitigated. 1 20
ITC 2022 and 2023 adjusted

Total for part 100