AO5: Auditing 300 / Intermediate Auditing

_________________________________________________________________________________

FACULTY/COLLEGE College of Business and Economics

SCHOOL School of Accounting
DEPARTMENT Department of Accountancy
MODULE NAME Auditing 300 / Intermediate Auditing
MODULE CODE AUD 300 / S3BCTQ1

ASSESSMENT DATE 2 October 2019

ASSESSOR(S) Ms Karlien Dempsey
Ms Pranisha Rama
MODERATOR(S) Prof Ben Marx
DURATION: 180 minutes
Reading time 30 minutes Writing time 150 minutes
TOTAL MARKS 100 marks

NUMBER OF PAGES OF QUESTION PAPER

10
(scenario: 6 pages, required 4 pages)

INFORMATION/INSTRUCTIONS:
_________________________________________________________________________
1. Calculate the reading time that you should spend on each question by multiplying the
number of marks for each question by 0,3 to determine the time, in minutes, available for
each question. You may make notes on your question paper during the reading time, but
may not write in your answer booklet.
2. Calculate the writing time that you should spend on each question by multiplying the
number of marks for each question by 1,5 to determine the time, in minutes, available for
each question.
3. Delete all (even single open lines) open spaces on your answer sheets with pen. Pages
on your answer sheets that contain open spaces will be marked as such and those pages
will not be eligible for a remark.
4. No tippex or pencil may be used on your answer sheets. Pages on your answer sheets
that contain pencil or tippex will be marked as such and will not be eligible for a remark.
5. All the examination regulations of UJ and the policy document for students of the
Department of Accounting will apply during this assessment.
6. Keep this paper for your record purposes.
7. The neatness, disclosure and presentation of your answers will be taken into account
when marking your paper.
8. Answer all the questions
9. This is an OPEN book assessment
_________________________________________________________________________

_________________________________________________________________________________
Page 1
AO5: Auditing 300 / Intermediate Auditing
_________________________________________________________________________________

QUESTION 1 [10 MARKS]

Kosirah Ltd is a Johannesburg based company structural steel company involved in the
Medupi (new dry-cooled coal-fired power station being built by Eskom near Lephalale in
Limpopo province, South Africa. When completed, the power station is to have six boilers each
powering an 800 MW turbine, producing 4800 MW of power) and Kusile (new coal fired power
station being built by Eskom in the Nkangala District in Mpumalanga) power plants
respectively.

Structural steel is steel construction material, a profile, formed with a specific shape or cross
section and certain standards of chemical composition and mechanical properties. Structural
steel shape, size, composition, strength, storage, etc., is regulated in most industrialized
countries.

Kosirah is part of the FirstTek Ltd group of companies that is was widely seen as South
Africa’s biggest listed company.

The group stated that it had to unravel a number of “complex and intricate financial
transactions”, including the Kosirah deal, and that a preliminary investigation had revealed
that its existing cash flow and funding were not sufficient to allow the group to trade profitably.

In their quest to include the auditors in this investigation, it was noted that the UK-based
auditors, Indigo Chartered Accountants, have gone to ground, failing to respond to any
communications. It was also noted that no audit committee had been appointed for FirstTek.
The investigation is ongoing.

_________________________________________________________________________________
Page 2
AO5: Auditing 300 / Intermediate Auditing
_________________________________________________________________________________

QUESTION 2 [35 MARKS]

Pro’s on Print Ltd (hereafter “POP”) is the leading importer of printers in South Africa. POP
sources printers from around the world to ensure the best quality and price. POP prides
themselves in that they sell printers for litho printing, digital printing, large printing and
packaging printing. Digital printing is mainly used for flyers, posters, magazines, notepads,
banners, billboards and fridge magnets. During 2019, POP also started to import 3D printers.
3D printers prints a three-dimensional object. 3D printing is considered to be “an essential
ingredient” in Industry 4.0. There aren’t many roleplayers in South Africa yet and POP is one
of the first in South Africa to enter the 3D printing market.

POP has 1 000 000 authorized class A shares of which 990 000 are in issue. All issued shares
are uncertified and all details are kept by STRATE.

During the recent board meeting held on 18 September 2019, the directors decided that since
POP is changing its strategic focus to 3D printers, the additional risk taken by directors is
significant and they should be remunerated for this as part of their salary package. As the
directors are expecting the 3D printing market to boom, they will issue shares to themselves
in POP rather than receiving an annual salary increase and this way it will not be disclosed in
the annual financial statements. Between all the directors they are issuing an additional
15 000 shares to themselves proportionally according to their current salaries. In addition to
the 15 000 shares, POP will also lend money to the directors to purchase 2 000 shares each.

_________________________________________________________________________________
Page 3
AO5: Auditing 300 / Intermediate Auditing
_________________________________________________________________________________

QUESTION 3 [50 MARKS]

You are the audit supervisor at Maphutha and Mokoena Incorporate a medium sized firm with
offices in Johannesburg, Tshwane, Cape Town and Durban. You are busy finalizing the audit
of Aeroplanes Are Us Ltd (hereafter “AAU”) for the year ended 31 August 2019. AAU services
and reconditions small aeroplanes engines. AAU operates from Lanseria where they can test
flight all engines before they are sent to the clients. All AAU’s planes have a maximum
capacity of 16 passengers including the pilot and flight attendants. AAU operates out of a
large warehouse that is secured with high end security to ensure the all inventory is secure.

As part of the audit you received the following work papers:

Work paper reference Description Page

INV002 Inventory 5

COMP004 Schedule of overs and unders 6

_________________________________________________________________________________
Page 4
AO5: Auditing 300 / Intermediate Auditing
_________________________________________________________________________________

Client: Aeroplanes Are Us Ltd Period end: 31 August 2019

Prepared by: 3rd year trainee Date: 31 September 2019 INV002

Reviewed by: Date:

Inventory

Extract from draft financial statements regarding inventory:

31 August 2019 31 August 2018

Inventory consists of:
Parts 10 000 000 12 000 000
Work in progress 12 000 000 14 000 000
Finished goods 6 000 000 4 000 000

Provision for obsolete stock (8 000 000) (5 000 000)

20 000 000 25 000 000

Meeting notes with David Thwala (newly appointed Chief Financial Officer):
• David was appointed on 31 January 2019. He previously worked as a consultant for
Mergers and Acquisitions and has limited experience with inventory.
• Jenni Evans, the warehouse manager, has been with the company for 15 years and
has an in-depth understanding of the inventory.
• Inventory consists of parts, work in progress and finished goods.
• Parts are imported from the United States of America and are mostly high value. All
parts are stored in the ‘Parts Storeroom’.
• Some of the parts include computerized systems for navigation. David is concerned
that these might be old, as it seems they were at the back of the storeroom and
‘forgotten’ and new ones were ordered.
• As soon as parts are selected, it is moved to the factory floor where it is used to service
or recondition engines.
• Completed engines are tested before they are moved to a section in the factory that is
designated for finished goods that are ready for shipping.

_________________________________________________________________________________
Page 5
AO5: Auditing 300 / Intermediate Auditing
_________________________________________________________________________________

Client: Aeroplanes Are Us Ltd Period end: 31 August 2019

Prepared by: 1st year trainee Date: 31 September 2019 COMP004

Reviewed by: Date:
Schedule of overs and unders

Final materiality: R10 000 0000

Schedule of overs and unders:

Retained
Matter Asset Liabilities Equity
Income
(5 000 000) 5 000 000
1. Dispute with invoice
3 000 000 (3 000 000)

2. PAYE ? ?

3. Share buy back (750 000) 750 000

Notes per matter

1. L&L, one of AAU’s largest customers are disputing an amount of R5 000 000 included
on their August debtors statement. The amount relates to an engine that was custom
built with high tech specifications. The engine took 8 months to complete and was
shipped on 5 August 2019. The engine was transported by rail to the Durban harbour
from where it was transported by ship to Beijing. L&L received the engine on
10 September 2019. L&L is not disputing the R5 000 000 as that was agreed per
contract but feels as it was only received in September it shouldn’t be included. The
debtors clerk is willing to provide any additional documentation.

2. The Salaries Tax Clerk is not willing to provide the PAYE calculations as she is very
busy and feels providing information to SARS is more important.

3. AAU bought back 4% of their shares as part of the long term strategy to re-establish
control over the company. The directors indicated they are not going to account for
this as it might give investors the wrong impression but they are willing to
provide all documentation required.

_________________________________________________________________________________
Page 6