Required 1 (a)

With reference to the information provided:

Identify and discuss the risks of material misstatement at the financial statement level for
the year ended 30 April 2022.

1 The annual financial statements (AFS) may be materially misstated due to 1

error, as Gere-Gere imports bicycles and the accounting treatment for
importing and hedging is complex or might be incorrect.
2 The AFS maybe materially misstated due to fraud as the Gere-Gere is JSE
listed:
 Management may manipulate the AFS in order to achieve listing 1
status
 Management may manipulate the AFS in order to improve the share 1
price/attract investors

3 The AFS may be materially misstated due to error, as the internal controls 1
in the various locations might not be operating effectively due to
decentralisation (30 outlets) of the business.
4 The AFS may be materially misstated due to error as Gere-Gere is a new 1
audit client and the opening balances might be incorrect since the audit
firm was not the auditors in the prior years.
5 The AFS may be materially misstated due to error, as the financial data 1
might not be properly transferred and/or tested from the old accounting
system to the new accounting system.
Errors could also occur as a result of the staff being inexperienced 1
with the new system/not having training
6 The AFS may be materially misstated due to error, as AuditTech, the 1
specialised computer system auditors (third party) might not be
objective, competent and appropriately qualified to perform the work
required to collect audit evidence.
7 The AFS may be materially misstated as the entity might be liable for legal 1
damages in terms of the ongoing litigation resulting in negative publicity
for the entity which will impact their revenue or they might have to pay a
significant amount of damages. This might lead to the going concern
issues and the AFS may not be prepared on the appropriate basis..
8 The AFS may be materially misstated due to accounting on an 1
inappropriate accounting basis, as the going concern assumption might
not be properly accounted for and/or disclosed as the company did not
achieve the budget due to a decrease in sales.
9 The AFS may be materially misstated as one of the executive directors 1
has been dismissed due to involvement in fraudulent transactions in the
finance department.
Available 11
Max 8
Communication – logical argument 2
Required 1 (b)
With reference to the information provided:

Identify and describe the aspects that the auditor should consider when developing the audit
strategy for Gere-Gere Limited. Your answer should focus on the scope, timing and direction
of the audit strategy.

Scope
1 First time that Bean Counter is providing audit services to Gere-Gere: 1
 The auditors of Gere-Gere will have to conduct audit procedures
on opening balances.
2 Gere-Gere’s systems are automated (computerised). 1
 Computer-assisted audit techniques could be used whenever
possible, therefore the auditor has to be familiar with the use of
CAATs or should appoint an expert to assist them.

3 Use of specialised computer system auditors (third party) 1

 The fact that the board members decided to appoint specialised
computer system auditors to audit the computer system should be
taken into account to determine whether reliance can be placed on
the expert.
4 Compliance with laws and regulations. 1
 Compliance with laws and regulations- Seeing that Gere-Gere
allegedly contravened the Labour Law (dismall of Mr Pedal), the
auditors need to confirm whether they complied with all the other
applicable acts, such as the Companies Act.
5 Listed on the JSE 1
 The company is listed on the JSE and thus there are additional
reporting obligations to adhere to with which the auditors should be
familiar with.
6 Multiple locations/decentralisation of the business (or 30 outlets) 1
 May result in the use of other auditors in the major cities, for
simultaneous inventory counts.
Timing
1 Inventory counts 1
 As the company is spread out across the country careful planning
must be done in terms of the inventory counts that need to take place
at year end. Resources (time and number of staff) should therefore
be considered to make sure that inventory counts are attended.
2 Multiple locations/decentralisation of the business: 1
 As the company is spread out across the country audit procedures
should be planned taking into account that the auditors might
need to visit some of the offices and therefore sufficient time for
visits should be planned, or if the auditors decide to make use of
other auditors at other locations that will be necessary to schedule
meetings with these auditors.
3 Audit committee and internal auditors 1
 As Gere-Gere is listed, they are required to have an audit committee
and internal auditors with whom we are obliged to hold a meeting
with within four weeks of the issuing of the audit report. This and
other meetings will have to be scheduled timeously.
4 Subsequent events in terms of litigation 1
 Auditors should plan sufficient time after year end to follow up on
litigation issues which should be updated in the financial statements.
5 Overall timing of audit procedures 1
 As Gere-Gere is listed, an interim audit was conducted. There is also
no imposed audit deadline, but as it is a listed company, the audit
should be completed as soon as possible. Early verification just
prior to year-end and roll forward at year- end should therefore be
considered.
6 Report of third party on the specialised computer systems 1
 The auditor should consider the timing of the availability of the
report or confirm the timing of the report to ensure the impact will
be taken into account on the audit approach and in ensuring the
management expert work can be relied upon by for example
arranging for an audit expert internal or external to assess the
work of management expert.
7 Use of CAATS 1
 The auditors should make arrangements to ensure the data and
information is available timeously to ensure the results and the
impact of the CAATS is properly considered during the audit.
Direction
1 Budgets and decline in sales 1
 The fact that Gere-Gere did not achieve its budgets will affect the
direction of the audit because attention should be given to the
occurrence of turnover (overstatement) and completeness of
expenses (understatement) as the financial position might be
manipulated to satisfy investors.
2 Going concern 1
 The ongoing litigation and fact that budgets were not achieved
will affect the direction of the audit because the going concern risk is
raised for which a careful going concern evaluation should be
carried out.
3 Materiality of inventory 1
 Inventory is a material balance in the financial statements and
therefore focus should be placed on inventory, specifically as it is
also spread out over different locations.
4 Import of inventory 1
 All the inventory is imported and therefore attention must be
given to the company’s compliance with import regulations,
foreign exchange transactions and the adoption of appropriate
accounting policies for valuation of inventory.
5 Compliance with laws and regulations and JSE requirements 1
 As the entity is listed on the JSE and there is an indication of non-
compliance the potential non-compliance should be tested.
6 Subsequent events 1
 As the entity is involved in a material legal/litigation process special
focus should be on the evaluation of the impact on the recognition of
expenses and/or accruals and/or contingent liabilities disclosure.
7 Dismissal of director/investigation of fraud 1
 Gain understanding of the occurrence of fraud through discussions
with management and consider the possibility of reporting or
disclosure to an appropriate authority.
8 Visits to operational sites 1
  As the entity operates in different locations it may be
necessary to visit a selection of sites which will be determined
after a detailed understanding of the functions/responsibilities at the
locations has been obtained.
Available 21
Max 15

Required 1 (c)
With reference to the Email from the Chief Financial officer:

Prepare a memorandum in which you respond to each of the questions raised by the CFO
of Gere-Gere Limited. Your responses should be set out in a table as shown below:

Question Response
1,2,3 etc

MEMORANDUM

To: The board of directors of Gere-Gere

From: Bean Counter Audit Partner
Date: 6 May 2022
Re: Response to email questions

This memorandum serves to provide responses to each of the questions raised by

the board of directors in relation to the audit.

Question Response
1 The final audit fee cannot be determined prior to the completion 1
of the audit and therefore cannot be included in the audit
engagement letter.
The audit fee will be based upon the time spent on the audit 1
and the level of skills and experience of the members involved
on the audit.
2 An audit does not provide absolute assurance but only 1
reasonable assurance that the financial statements are free of
material misstatements. Due to sample testing, the auditor will 1
not be able to detect all misstatements.
3 Auditors do not certify that the financial statements are fairly 1
presented but only express an opinion on whether the financial
statements are prepared, in all material respects, in accordance 1
with the applicable financial reporting framework .
4 The board members should not negotiate with the auditor on how 1
an audit is conducted and therefore we cannot accept this
restriction on our audit procedures. 1
To fulfil our audit function we need unrestricted access to
information and will exercise the highest levels of confidentiality. 1
Required 1 (d) (i)
With reference to the Process notes: Acquisition of Bicycles:

Describe the application controls that should be in place regarding the amendment of
approved suppliers from France, India and China. Ignore all edit check related controls.

1 All amendments to be recorded on hardcopy masterfile amendment forms 1

(MAFs) (no verbal instructions).
2 MAFs to be pre-printed, sequenced. 1
3 The MAFs should be
 signed by two reasonably senior personnel (e.g. Mrs Helmet, inventory 1
controller and CFO) after they have agreed the details of the amendment
to the supporting documentation. 1
 cross referenced to the supporting documentation.
4 Restrict write access to a specific member of the acquisitions section by the use 1
of user ID and passwords.
5 All Masterfile amendments should be automatically logged by the computer on 1
sequenced logs.
There should be no write access to the logs. 1
6 The logs should be reviewed regularly by a senior staff member. 1
7 The sequence of the logs themselves should be checked (for any missing logs). 1
8 Each logged amendment should be checked to confirm that it is supported by a 1
properly authorised MAF.
That the details, e.g. supplier code, name, etc, are correct. 1
9 The MAFs themselves should be sequence checked against the log to confirm 1
that all MAFs were entered.
Available 12
Max 9
Access to sensitive information might be restricted to senior 1
members of the audit and can be agreed upon as such.
Otherwise, if we do not have access to all information, we
might need to issue a modified audit opinion/or reject the
engagement.
5 This is the first audit, and imposing a deadline by promising 1
sign-off of the annual financial statements on 30 April 2022 is
inappropriate.
Available 11
Max 6
Communication: Presentation and layout 2
Required 1 (d) (ii)
With reference to the Process notes: Acquisition of Bicycles:

Describe the access controls that should be in place over company equipment and
software when employees are working remotely.

1 There should be appropriate tone at the top and leadership examples 1

demonstrating clear expectations of acceptable and unacceptable
behaviours. This should be frequently communicated either in writing by 1
means of e-mails or meetings through video chat.
2 Security policies should be documented and employees should be reminded 1
of these policies by acknowledging policies electronically:
 Physical access controls over company equipment should remain in 1
place where appropriate, for example, if equipment is not in use, it
should be safely locked away to ensure limited access.
 Use of company equipment should be restricted to employees only. 1
 Passwords or information should not be shared with others. 1
 Sensitive documentation that are printed should be disposed of
responsibly, for example shredded. 1
 Transmission of sensitive information via email should be encrypted
and the password provided to the intended recipient only. 1
3 Appropriate virus protection/firewalls software should be installed on the 1
computer equipment to prevent unauthorised access.
4 Employees should only be given access to functions which are necessary for 1
them to perform their duties (lease privilege/user profile functions).
5 Access to equipment and/or programmes should be controlled by using unique 1
usernames and passwords.
6 Password controls should be implemented and may include the following:
- Consist of specified characters. 1
- Should be changed on a regular basis. 1
- The system should switch off after three unsuccessful access attempts.
1
- Use of biometrics to access laptops.
1
7 Computer time out facilities should be in place so that the computer shuts down 1
if not in use for a specific time.
8 An expectation should be set for digital signatures. Mere typing of names or 1
initials should not be accepted. For example, employees should be required
to enter credentials prior to signing so that signatures can be created and time
stamped which will enhance the integrity of signatures.
9 Further verification procedures should be performed over digital signatures to 1
ensure that the approval provided through the signature is valid (e.g. phoning
the signatory to confirm that the signatory actually provided the authorisation.
10 All exceptions should be logged and followed up by the ICT department. 1
Available 19
Max 10
Required 1 (d) (iii)
With reference to the Process notes: Acquisition of Bicycles:
Describe the application controls that you would expect to find that would ensure that the
recording of bicycle orders are valid, accurate and complete.
Name
1 Minimum keying in of
information.
2 Alpha numeric check
3 Field size check
3 Shading of fields
4 Shading of fields
5 Alpha numeric check
6 Valid character and sign
check.
7 Screen formatting/screen
aid
8 Mandatory fields
9 Screen dialogue and
prompts
10 Accuracy test
11 Sequence checks
12 Reasonableness check
13 Limit check
14 Validation checks
15 Data approval/dependency
check
Description
1 Approved suppliers should be chosen 1
from a drop down list.
1 The inventory item code should only 1
consist of six numerical digits. It should be
impossible to enter letters.
1 The inventory item code should consist of 1
6 digits. If more/less digits are entered, the
system should prevent processing.
1 The description of inventory items 1
should be greyed out and impossible to
edit as this field is automatically populated
based on the inventory item code entered.
The supplier code and price per bicycle 1
should be greyed out once it automatically
extracted from the supplier price list based
on the inventory code entered.
1 The quantity field should only allow for 1
numbers to be entered.
1 The quantity field should not allow for 1
negative amounts.
1 The inventory system should bring up a 1
screen that only displays the relevant
inventory details.
1 Placing of an order is not possible if the 1
quantity filed is not entered.
1 Error messages appear when fields are not 1
captured correctly.
1 The system automatically calculates the 1
total price.
1 Sequentially numbered purchase order 1
should be checked for gaps or duplications
1 Orders must fall within reasonable limits 1
based on previous order averages. If not, a
message should appear to request the
user to confirm the ordered quantity. 1
1 Order quantities should not exceed 1
amounts to be re-ordered in terms of
the specified re-order levels
1 Inventory code when entered should be 1
automatically matched against the
inventory Masterfile.
1 Processing of ordering of inventory should 1
only be permitted if the correct re-order
levels have been reached.
Available 29
Max 26
Communication – Clarity of expression 2