QUESTIONS

SYSTEMS TEST OF CONTROLS

(PART 2)
Question Subject Notes
Bank and cash (including relevant sections of other cycles)
V1.1 General, audit of bank reconciliation & calculate
cash shortage
V1.2 Bank & Cash: bank reconciliation & calculate
cash shortage & stock take: weaknesses
Inventory
V1.3 Internal control objectives & design a system:
production cycle
V1.4 Design a system, Stock take: weaknesses &
consequences
V1.5 Stock take: Audit procedures & audit objectives
V1.6 Bank & Cash: Weaknesses & Cash shortage Progress question
V1.7 Inventory count procedures, bank reconciliation Class question

Solutions to progress and class questions will be placed on SunLearn after the respective
class or week.

Please note: Given the nature of auditing some elements in the bank reconciliation,
and the inventory count, some questions in this pack refer to audit procedures, which
include both test of controls, as well as substantive procedures. The principles when
designing either test of controls or substantive procedures however remain.

1-1
V1.1 35 marks

You confirmed by enquiring and through observation that LCD Limited uses a
cashier. The duties of the cashier entail recording all cash transactions in the cash
books, preparing bank deposits and compiling the monthly bank reconciliation.

□ The cashier submits the following bank reconciliation to you:

Bank reconciliation for June 2010 R

Credit balance per cash book (30/6/2010) 56 704,86
EFT receipts not recorded: 1 328,37
numbers 4310 572,13
4311 620,40
4316 435,84
Outstanding deposit (11 383,23)
Debit balance per bank statement 46 650,00

□ The following entries appear on the cut-off bank statement:

EFT receipts: numbers 3250 R348,75

3563 R450,00
3908 R759,75
4310 R572,13
4311 R620,40
4316 R435,84
Deposit R11 383,23
Bank statement balance (1/7/2010) R46 650,00 (debit on bank statement)

LCD Limited does not have a strong system of internal control for any of the
transaction cycles. Planning materiality is set at R200,000.

REQUIRED

1 Explain, properly motivated, what the audit approach regarding the bank and
cash cycles of LCD Limited should be. (8)

2 Explain what a cut-off bank statement and a bank confirmation letter respectively
are and what the purpose of each is in the course of the audit. (8)

3 Formulate the audit procedures necessary to audit the bank reconciliation as at

30 June 2010. (11)

4 Calculate, properly motivated, whether LCD Limited has any cash shortage at
year end. (6)

Language usage, exposition and style (2)

1-2
V1.2 26 marks

The auditing firm where you are employed is the external auditor of BSB Proprietary
Limited (BSB) for the year ending 31 May 2008. BSB was founded by Mr Angler, a
legend in the sport of fishing. BSB manufactures fishing rods and artificial bait and
is one of the most well-known names in the supply of fishing equipment in the
Western Cape.

Mr Angler spends more time on fishing expeditions than he is involved in the day to
day operation of BSB. This year you commenced earlier with the audit than before,
in order to properly prepare for the audit. During your first meeting with Mr Angler
the following matters came to your attention:

Bank & Cash

BSB is currently experiencing problems with their monthly bank reconciliations. Mr

Angler indicated that he knows that it is an important control, but neither he, nor his
accountant, Tannie Koekie, knows how to prepare it properly. You, as auditor,
indicated that you will prepare the bank reconciliation as at 30 April 2011 and
Tannie Koekie could learn how to prepare it.

Mr Angler also brought to your attention the possibility that some of the cash on
hand has been stolen from the premises. As they do not know how much cash on
hand there should be, they have not yet performed a cash count. He asked you to
conduct a cash count to determine the shortage once the bank reconciliation had
been prepared.

The following information in connection with the company’s cash and equivalents is
known to you:

□ The monthly petty cash advance is R1,750.

□ Reconciling items on the bank reconciliation as at 31 March 2011 is as

follows:
R

▫ EFTs: proof of payment received, no payment in bank statement 5,732

▫ Outstanding deposits 3,742
▫ Bank charges 391
▫ Interest paid 53

1-3
□ Amounts appearing in the cash book and on the bank statement:
`
Bank
Cashbook
statement

R R
▫ Balance - 1 April 41,785 31,867
▫ Deposits - April 5,738 5,738
▫ Deposits - 1 May to 20 May 8,082 2,711
▫ Electronic payments - April 39,475 47,280
▫ Electronic receipts - April 30,000 44,000
▫ Bank charges - April 0 374
▫ Interest received - April 0
▫ Bank charges – 1 May to 20 May 0
▫ Interest received – 1 May to 20 May 0

□ A surprise cash count performed on 20 May 2011 had the following results:
R
▫ Notes and coins in the cash registers 3,760
▫ Cash in the petty cash tin 1,231
▫ Petty cash slips in the petty cash tin 621

Inventory

During the meeting, Mr Angler also handed you the annual inventory count
instructions as well as the theoretical inventory figure as at 30 April 2011. Mr Angler
mentioned in the meeting that he will not be attending the inventory count on
31 May 2011, as he will be at a fishing competition that day. He arranged with his
brother, Mr Thys Angler, Tannie Koekie’s husband to attend the inventory count on
31 May 2011.

The inventory count instructions are as follows:

1. The inventory count at the shop in Durbanville will commence at 09:00.

2. All the inventory items will be counted twice and will be clearly marked
with a black highlighter pen, once they have been counted.
3. The counting teams consist of two individuals: one the counter and the
other responsible for the recording of the count.
4. All the inventory items will be clearly identified and marked the day before
the inventory count.
5. All the inventory lists, on which the inventory count will be recorded, have
been pre-numbered.
6. All blank spaces on inventory lists will be cancelled at the end of the
inventory count.

The month of May is a very busy month for BSB as they have a big sale after the
summer months. BSB generates cash from the sale in order to purchase new

1-4
ranges of fishing rods and artificial bait. The majority of sales take place on
Saturdays.

REQUIRED

Prepare a memorandum addressed to Mr Angler in which you present the following:

(2)

a) The bank reconciliation for the company as at 30 April 2011. All calculations
must be shown clearly. (10)

b) Your calculation of any cash shortage for the company at 20 May 2011. All
calculations must be shown clearly. (4)

c) Concerns and questions you have regarding the preparation and planning of
the inventory count. (10)

1-5
V1.3 32 marks

You are the audit partner on the external audit of Smoke It Proprietary Limited and
your firm has been handling the audit of the company for the past 25 years. You
are currently busy planning the audit for the year ended 31 May 2011.

Smoke It Proprietary Limited’s only product is “Super Lights”, which is a high quality
cigarette. “Super Lights” is popular under smokers in the age group 20 to 35 years
and the success of the product can be attributed to the use of Virginia tobacco,
which is directly imported from the USA. Other raw materials used in the
production process are sourced locally.

In the past Smoke It Proprietary Limited used a local manufacturer to manufacture

“Super Lights”. Due to an increase in costs from the manufacturer it was decided
during the current year to manufacture “Super Lights” in-house from
1 January 2011. The financial director of Smoke It Proprietary Limited approached
you for advice over the internal controls that Smoke It Proprietary Limited should
implement in the production process.

The following information was provided to you:

 The demand for the company’s product is constant throughout the year, with a
slight increase in sales during June and November each year. The increase can
be attributed to the writing of examinations by the users of “Super Lights”, which
leads to more cigarettes being smoked during these periods.

 At the beginning of each month the marketing manager determines the amount
of cigarettes which will be required for the following month. Smoke It Proprietary
Limited always keeps at least two month’s sales in inventory.

 The production process is capital intensive and only two employees are required
to supervise the production process. The quality of the finished goods is
automatically monitored during the production process.

 Due to the nature of the production process there is now work-in-progress at the
end of each day.

 Smoke It Proprietary Limited’s accounting policy regarding inventory is as

follows:

 Raw materials: Costs are measured on the first-in-first-out basis.

 Finished goods: The cost of each item of manufactured inventory is

measured at standard cost. The standard cost of each

1-6
 product consists out of the raw materials used in the
production process, plus an allocation of labour costs
and overheads.

 The employees involved in the production process of Smoke It Proprietary

Limited is as follows:

 Raw materials head storeman

 Two storemen in raw materials store
 Production manager
 Two production assistants
 Finished goods head storeman
 Two storemen in finished goods store

 Other relevant employees of Smoke It Proprietary Limited is as follows:

 Marketing manager
 Financial manager
 Two accounting clerks

 The following pre-designed and pre-numbered documents are used by

Smoke It Proprietary Limited:

 Production order
 Raw materials requisition
 Issue note
 Internal goods received note (is used to transfer finished goods to the
finished goods store)

REQUIRED

1. Formulate the internal control objective, for transactions occurring within the
production process of Smoke It Proprietary Limited. (5)

2. Design a suitable system of internal control for the production cycle of

Smoke It Proprietary Limited.

Your answer should not address the following aspects:

 Purchasing, ordering and receipt of raw materials;

 Allocation of labour and overheads to products manufactured;
 Inventory count procedures; and
 Recording of transactions by the accounting department. (27)

1-7
V1.4. 35 marks

You are the auditor of Builders Proprietary Limited. The company is a wholesaler of
hardware and other building materials and keeps perpetual inventory records.

The company has recently implemented a new system that provides for retailers to
now buy inventory on credit from Builders Proprietary Limited. More than 80% of
the retailers to whom inventory is sold utilise this “new” payment option. Previously
all sales were made strictly on a cash-basis.

The parties involved in the credit sales system of the company, as well as their
respective responsibilities, are as follows:

▫ Sales representatives Regularly visit clients and take orders, of which

▫ Store manager
▫ 2 Storemen
▫ Transport company
▫ Security guards
▫ Invoicing clerks
▫ Debtors’ manager
▫ Debtors’ clerk
▫ Accountant
a copy is sent through to the company.
Is in control of the inventory store and keeps
the perpetual inventory records.
Pack inventory received on the shelves in the
inventory store and are responsible for the
preparation of deliveries.
Uses lorries to transport and deliver inventory
to retailers.
Is on duty at the gate, which is the company’s
only entrance and exit.
Responsible for invoicing clients.
Performs debtors reconciliations and handles
complaints from clients.
Prepares the sales journal and debtors ledger.
All other accounting functions.

As management is uncertain about the effective control of inventory since

implementing their new credit sales system, the company is planning an interim
physical stock take for Wednesday 30 June 2011. On this day the company will be
closed for business. All retailers have already been informed of this matter and they
are encouraged to place orders for inventory needed during this period well in
advance.

It was organised that all the persons who will be involved in the interim stock take,
attend the stock take planning meeting to be held on Monday 14 June 2011. A copy
of the stock take instructions that will apply during the stock take, and which will be

1-8
discussed and explained at the mentioned meeting, was sent to you and is attached
as Appendix A.

Management requested you to examine the instructions beforehand, as they want

to perform a proper stock take.

REQUIRED

1 Design an appropriate system of internal control for the Receipt of orders- and
Despatch sections of the credit sales system of Builders Proprietary Limited.

Take note of the following:

□ You do not have to address any internal control measures in your answer
that are evidently already present.
□ Management does not want to employ any additional employees or make
changes to the basic functioning of the credit sales system as provided
above. (13)

2 Identify the weaknesses, as well as the consequences thereof for Builders

Proprietary Limited, if the interim stock take planned for 30 June 2011 takes
place as set out in Appendix A. (22)

…/ Appendix A

1-9
 APPENDIX A
STOCK TAKE INSTRUCTIONS

The instructions below will apply during the interim stock take that will take
place on 30 June 2011. The stock take will start at 8h00 sharp and will
continue until all inventory have been counted.

Responsibilities of persons that will be involved during the count:

□ Store manager Coordinator of stock take
□ 2 Storemen Supervisors during count
□ Counters 10 teams of 2 persons each, which are not
involved in the daily inventory activities

All counts will be recorded on numbered counting sheets. The coordinator of

the count will keep a stack of blank counting sheets to be collected by the
counters as necessary. He will write a number in the corner of each counting
sheet as the counting sheets are collected.

Inventory shelves will be numbered and marked before the count and be
assigned to specific counting teams. This plan will be distributed to the
persons involved before the count commences. Teams must count
systematically and record all counts in ink on the counting sheets. Members of
teams must rotate regularly, so that one person counts while the other
records, and vice versa. The contents of all sealed containers must also be
checked.

A second team of counters, as assigned, will check all counts. Changes to

counting sheets may only be made by the supervisor of the count. Each team
must ensure that they did in fact count all the inventory shelves assigned to
them. All counters must sign the counting sheets and return it to the
supervisor after the count.

The coordinator will reconcile the counts with the perpetual inventory records
and make adjustments as necessary.

Thanks in advance to each person whose involvement will contribute to the

success of this stock take.

1-10
V1.5. 24 marks

You are an audit clerk working at Jonty & Associates, a medium sized accounting
firm. You are on the audit team Tent & Camp Limited ("T & C") a wholesaler of
camping equipment. Your responsibility will be the audit of inventory. You have the
following extract from the minutes of a meeting held between the received financial
manager of T & C and the audit manager Jonty & Associates:

Tent & Camp Limited

Extract from minutes of inventory count planning meeting held on March

25, 2017:
1. The company sells a wide variety of camping equipment, including kitchen
appliances and freezers.
2. The company's financial year end is 30 April 2017.
3. The company operates from a warehouse in Montague Gardens, Cape Town.
4. The warehouse where the inventory is held, is adjacent to the shop.
5. Perpetual inventory records are maintained on a computer. (You are satisfied that
there is adequate control over the inventory.)
6. The warehouse is packed neatly with similar inventory items kept together.
7. The year-end inventory count will take place at 16h00 on 30 April 2017.
8. Instructions for the inventory count are provided to counters beforehand (on
April 17).
9. The inventory will be counted as follows:
a. The warehouse will be divided into five areas.
b. Count teams of 2 persons each will conduct the inventory count.
c. Prenumbered count sheets will be printed from the computer. The count sheets
will only contain the description of the item, the inventory number and the
location thereof in the warehouse. No quantities will be shown on it.
d. Once an inventory item is counted, the first member of the count team will mark
the item with a yellow sticker. The second member of the team will record the
amount on the count sheet.
e. Once the count is completed, the count sheets will be handed to Peter Nakaba,
the warehouse manager, who will be in charge of the count.
f. While count teams take a break, the inventory count sheets will be compared with
the computer system and a list of differences will be printed. The count teams
will recount items where there are differences. Errors in the count sheets, it will

1-11
 be corrected by Peter Nakaba at the end of the count, if he is satisfied that the
count sheets represent the physical inventory on hand.

10. After completion of the counting errors will be investigated on the inventory
records on the computer system, and corrected where necessary. Once completed,
final inventory listings printed with the quantity and value of each item as it
appears on the computer system.

REQUIRED

1. Describe the audit procedures that you would perform before the year-end
inventory count of Tent & Camp Limited. (8)

2. Describe the audit procedures that you will perform during and after the
year-end count of Tent & Camp Limited to confirm the quantities of inventory.
(11)

3. Formulate the audit objectives for the audit of the inventory account in the
statement of financial position at 30 April 2017. (4)

Ignore any computer controls

Communication skills: bullet presentation and headings (1)

1-12
V1.6 PROGRESS QUESTION 23 marks

You are the auditor of Bankers Limited. The company was incorporated about a
year ago and is currently being audited for the first time, for the financial year ended
31 May 2011. The information below relates to the transaction cycle supporting the
Bank and Cash-balance in the annual financial statements of the company:

□ The debtors collection cycle of the company currently functions as follows:

▫ Martie Smit (accountant) allocates all EFT payments received by debtors

to the cash book once the payment has been cleared in the bank
account.

▫ On a monthly basis, Martie posts the cash book entries to the debtors
ledger and general ledger respectively. She performs a monthly
reconciliation of the individual debtors’ accounts in the debtors ledger to
the debtors control account in the general ledger, where after she sends
out monthly statements to the debtors.

▫ Debtors’ queries are directed to Martie, who investigates the queries and
if any adjustments are required, passes the necessary entries.

▫ Every six months Martie reviews the debtors age analysis with a view to
decide which debtors to hand over to the lawyers for collection and which
to write off. She makes the corresponding adjustments to the accounting
records.

□ Cash counted by you during a surprise cash count performed today (7 June
2011):

▫ Notes and coins R1 485

▫ Cash slips of payments made R1 075

□ Item appearing on the bank reconciliation at year end as prepared by Martie:

▫ Cash at 31/5/2011 (favourable balance as per bank statement) 53 819

▫ Cash at 31/5/2011 (debit balance per general ledger) 50 440

▫ EFT erroneously paid to Bankers Limited’s account by the bank which

increased the account balance on 16 May 2011. (Corrected on bank
statement of 5 June 2011.) 1 150

▫ Bank charges according to May 2011 bank statement 67

▫ Interest received according to May 2011 bank statement 8

1-13
□ Money received for period 1 to 7 June 2011, according to cash book 11 700

□ Deposits for period 1 to 7 June 2011, according to bank statement 10 593

During the performance of your procedures on the aforementioned transaction cycle

you became aware of the following:

a) Receipts slips amounting to R1 900, dated 2 June 2011, were found in the
drawer of Martie’s desk. You could not find these amounts in the accounting
records or on the bank statements of the company.

b) On 4 June 2011, R1 800 was received from a debtor. The following journal
entry was passed:

Debit: Provision for bad debts 1 800

Credit: Debtors 1 800

c) EFTs amounting to R1 400 were received from debtors during the period 1 to
7 June 2011, but not entered into the accounting records.

d) According to the debtors age analysis as at 31 May 2011 a debtor, M Dowell,

owes R3 460. The amount due relates to purchases made during July 2010
which were never paid for. No payment has since been received from the
debtor. The management of the company agrees that this amount has to be
written off.

REQUIRED

1 Identify the weaknesses in the internal control measures evident from the
above system of Bankers Limited. (12)

Grammar, style and presentation (1)

2 Calculate any cash shortage as at 31 May 2011. Show all your calculations.
(4)

3 Calculate the cash shortage that originated between 31 May 2011 and today
(7 June 2011). Assume that there were no outstanding deposits or EFTs at 31
May 2011. Show all your calculations. (6)

1-14
V1.7 CLASS QUESTION 30 marks

PART A 14 marks

You are working at the auditing firm Purple and Partners. One of the firm’s clients is
Barney Coffee Company Proprietary Limited (‘BCC’), a manufacturer of coffee
machines. The company launched a new coffee machine, Barney Coffee-Wi-Fi
during the current year. This coffee machine is connected to a Wi-Fi-network and
in the morning the BCC alarm clock application (“app”) goes off, grinds fresh coffee
beans and brews a cup of coffee. The coffee machine works together with the BCC
sleep app which measures the quality of sleep. If the sleep app detects that the
client did not have a good night’s rest, it brews a stronger cup of coffee. When you
get home from work the Barney Coffee-Wi-Fi also asks you if you would like coffee
and then grinds and brews your coffee for you.

BCC’s accountant was injured when a heater fell on her foot and she could
therefore not calculate the bank balance or compile the bank reconciliation for the
month of April. You were approached to assist her. You are not part of the audit
team on the audit of BCC.

The accountant drafted the following bank reconciliation as on 31 March 2018 and
you can assume that it is correct:

Balance according to bank statement (favourable) R10 934

Less: EFT receipts not recorded No. 201 R418

218 R194
226 R624
228 R186 (R1 422)
R9 512
Plus: Outstanding deposit R2 098
Plus: Debit order erroneous shown on bank statement R198
Balance according to bank account (favourable) R11 808

Additional information:
1. The bank statement for April 2018 showed a favourable balance of R12 188 on
30 April 2018.
2. The bank corrected all their errors of April 2018 during April 2018.
3. The totals of the bank columns in the journals, as shown, were as follows on
30 April 2018:
- Cash receipts journal: R90 273
- Cash payments journal: R93 288

1-15
4. With the exception of EFT receipts 201 and 226, all the EFT receipts
outstanding on 31 March 2018, as well as the outstanding deposit, appeared in
the cashbook for April 2018.
5. The following proof of payments were received from clients during April 2018
and recorded in the accounting records, but the amounts have not been
received at the bank by 30 April 2018:
- No. 266 R248
- No. 274 R522
- No. 275 R194
6. The bank statement for April 2018 shows the following items that do not appear
in the entity’s accounting records.
- Commission and banking fees levied: R94
- Interest levied on debit balance: R24
- Stop order: R32
- Interest on credit balances: R34
7. EFT payment 241, to the amount of R64, appears incorrectly as R46 on the
bank statement.
8. EFT payment 263, to the amount of R49, appears incorrectly as R94 in the
ledger account.
9. EFT payment 273, to the amount of R1 490, appears as a credit on the bank
statement.
10. The bank statement does not show the deposit of R1 286 which was made on
30 April 2018.
11. There was a direct deposit, to the amount of R2 300, in the bank account in
respect of Coffee-In, a debtor of BCC.

REQUIRED
1. Calculate the correct balance of the bank account according to the general
ledger for the month ended 30 April 2018. Show all calculations. (8)

2. Compile the bank reconciliation as on 30 April 2018 by starting with the

balance according to the bank statement. (6)

1-16
PART B 16 marks

The audit senior was ill just before BCC’s year-end and you were necessitated to
put the less experienced audit clerk, Ariana Goosen, in charge of the execution of
the audit procedures regarding the inventory count.

Information on the inventory count is as follows:

1. Inventory is held in a warehouse located in Cape Town.

2. The inventory is divided into three types: raw materials, work-in-progress and
finished products
3. Inventory was counted on the 29th and 30th of April 2018.
4. The inventory count was performed by six staff members who normally
prepare the goods for consignment. It worked well because they know the
type of inventory well and know where everything goes.
5. Pre-numbered inventory lists were printed by Sophia Dhlamini (the
administrative officer who works in the warehouse). She gave the counting
lists to each counter, who checked off the quantities on the inventory
counting lists.
6. If errors were found, the quantity was highlighted and the correct quantity
recorded.
7. At the end of the second day the counting lists were given to Sophia
Dhlamini, who identified the highlighter inventory and made adjustments on
the inventory system.

The audit procedures performed are included in Appendix A.

1-17
Appendix A

Barney Coffee Company Proprietary Limited

April 2018 Schedule: B2
Prepared by: AG Subject: Inventory Count

Procedures performed regarding the year-end inventory count:

Prior to count
1. Prior to the count, confirmed with financial manager that the year-end inventory
count will be attended. He confirmed the dates with me.

During the count

2. The inventory count was attended by Zola Bambeni and myself.
3. Supervision of all counters during the inventory count for a short period.
4. Allocated the three divisions between the audit clerks and selected items from
the inventory lists and physically counted the items.
5. Recorded the total quantity inventory counted by the client on the working
paper.

At the end of the count

6. Check that Sophia Dhlamini adjusted the quantities on the perpetual inventory
records where differences were found.
7. Initialled each inventory counting list and gave this to Sophia Dhlamini to keep
safe.

REQUIRED

Discuss, properly motivated, whether you are satisfied with the procedures
performed by the audit clerks prior, during and after the year-end inventory count
(contained in Appendix A) of Barney Company Proprietary Limited. Also indicate
which necessary procedures were not performed or performed incorrectly. (16)

Communication skills: formulation of audit procedures (1)

1-18
 SOLUTIONS
V1.1. 35 marks

1 AUDIT APPROACH REGARDING BANK AND CASH

□ As a result of the fact that there is a high risk of fraud and theft within any bank
and cash cycle, inherent risk for LCD Limited’s bank cycle is estimated as
high. (2)

□ As the bank and cash cycles are results of other transaction cycles and the
fact that internal control within all transaction cycles of LCD Limited have
already been rated as poor, as well as the fact that there are problems with
insufficient segregation of duties, control risk for the bank and cash cycle is
also rated as high. (2)

□ Allowing for the above-mentioned, a lower level of detection risk must be

maintained to procure an acceptable audit risk level in total. (2)

□ Another aspect to bear in mind is the fact that, although the Bank balance, as
it appears in the company’s financial statements (R56,705), is not quantitively
material (planning materiality has been fixed at R200,000), bank and cash and
the fact that, although the closing balance will be small, the amounts and
volume transactions that flow in and out the bank account, are larger than for
many other cycles, will naturally be regarded as material. (2)

□ Therefore, an extended substantive approach will be followed regarding the

audit of the bank and cash cycle of LCD Limited. (1)

Mark allocation: as indicated maximum 8

2 CUT-OFF BANK STATEMENT AND BANK CONFIRMATION LETTER

□ Both documents provide audit evidences to the auditor to be used during the
audit of the bank and cash cycle of a client, for the substantiation of
information appearing in the financial statements of the company. It provides
the auditor with independent confirmation of information that has already been
given to the auditor by the client. (2)

Cut-off bank statement:

□ A cut-off bank statement is a bank statement requested by the auditor. It is
sent directly to the auditor and reflects the transactions as per ordinary bank
statement, but for a period directly following the company’s year-end, normally
up to approximately 7 to 10 days after year-end. (2)

□ It is used by the auditor to confirm transactions, such as outstanding EFT’s

and deposits appearing on the client’s bank reconciliation. (1)

1-19
Bank confirmation letter:
□ A bank confirmation letter is a letter in which the auditor requests certain
information concerning the client’s bank matters from the bank, with the
consent of the client and in accordance with stated standards. (2)

□ Typical examples of information requested by a bank confirmation letter:

Balances of deposit, savings, loan and other accounts (favourable balances
for the client and the bank), full details of accounts closed during the year,
authorised signatories of the client’s name and signatures, details of overdraft
facilities, securities held by the bank, etc. (2)

Mark allocation: as indicated maximum 8

3 AUDIT PROCEDURES REGARDING THE BANK RECONCILIATION ON 30

JUNE

□ Test the mathematical accuracy of the bank reconciliation by reperforming all

additions. (1)

□ Compare the “Balance according to cash book” on the bank reconciliation with
the actual cash book balance and the bank account in the general ledger. (2)

□ Compare the closing balance of the bank reconciliation (“Bank statement

balance”) with the balance on the cut-off bank statement and the balance
according to the bank confirmation letter. (2)

□ Confirm the mathematical accuracy of the cash book balance by checking all
additions and cross-castings. (1)

□ Inspect the cash book and bank account in the general ledger for any unusual
transactions and/or amounts. Such items must be investigated specifically and
confirmed by valid supporting documentation. (2)

□ Follow the unrecorded EFT receipts according to the bank reconciliation

through to the cut-off bank statement. (1)

□ Test EFT receipts appearing on the cut-off bank statement, but not on the
bank reconciliation as follows:

▫ Confirm by inspection of the receipts cash book on which date these

EFTs have been received;
(1)

▫ If received before year-end, enquire at management why these EFTs do

not appear on the bank reconciliation as outstanding.
(1)

□ Follow the outstanding deposit according to the bank reconciliation through to

the cut-off bank statement. (1)

1-20
□ Discuss all abnormalities with management and request that the necessary
corrections be made. (1)

maximum 11

4 CALCULATING CASH SHORTAGE

□ Addition error on bank reconciliation – see list of outstanding EFTs: (1)

Assumption 300.00 (½)

□ EFTs appearing on cut-off bank statement, but not on bank reconciliation

(referring to EFT numbers, they must have been issued before year-end): (2)

Number 3250 348.75 (½)

3565 450.00 (½)
3908 759.75 (½)

TOTAL CASH DEFICIT 1,858.50 (1)

Mark allocation: as indicated maximum 6
Language, style and explanation maximum 2

1-21
V1.2. 267 marks

To: Mr Angler
From: Auditor
Date: 24 May
Re: Audit issues: BSB Proprietary Limited
(1/2 mark each - total 2)

(a) BANK RECONCILIATION AS ON 30 APRIL

Calculation R

Balance according to bank statement 1 34,001

Plus: EFTs with delayed receipt 2 5,732

Plus: Outstanding deposits 3 3,742

Total 43,475

Cash-book balance 4 37,604

Less: Reconciling items 5 324

Less: Unrecorded Electronic payments 6 7,805

Plus: Unrecorded Electronic receipts 7 14,000

Total 43,475

Calculations:

1. 31,867+ 5,738 – 47,280 + 44,000– 374 + 50 (3)

2. 5,732 (½)
3. 3,742 (½)
4. 41,785 + 5,738 + 30,000 – 39,475 – 391 - 53 (3)
5. 374 - 50 (1)

[Alternatively could pay April’s bank charges and interest, included in the cash-book
balance Calc 4; 41,785 + 5,738 + 30,000 – 39,475 – 391 – 53 - 374 + 50]

Cash-book balance 37,280

6. 47,280 – 39,475 (1)

7. 44,000 – 30,000 (1)

Total (10)

1-22
(b) CALCULATION OF CASH SHORTAGE

□ Physical cash:

▫ Notes and coins in cash registers 3,760 (½)

▫ Cash in petty cash 1,231 (½)
▫ Petty cash slips 621 (½)
5,621

□ How much cash there should be:

▫ Money received 8,082 (½)

▫ Money banked (2,711) (½)
▫ Petty cash advance 1,750 (½)
7,121

Cash shortage (7,121 – 5,621) 1,500 (1)

Total (4)

1-23
(c) We have received your inventory count instructions and a copy of the
inventory list as on 30 April from BSB Proprietary Limited.

We have the following questions and concerns we would like to discuss with you:

1.
Do you have a periodical or a perpetual inventory system? (1)
2.
If it is a perpetual system, when was the last inventory count and what
were the results of the count? (1)
3. Do you have any consignment inventories and if so acquire approval from
client to confirm with third parties. (1)
4. With the high potential turnover of inventories on 31 May (Saturday) and
the fact that Mr Angler would also like to attend the inventory count it
might be more practical to have the inventory count on 1 June when the
shop is closed and Mr Angler can be present. (Movement of inventories is
then limited.) (2)
5. The inventory count instructions do not indicate any other shops or
warehouses in Cape Town. As BSB is one of the most well-known names
in supplying fishing equipment in the Western Cape it can be expected
that there would be other shops and warehouses carrying inventories.
We must enquire whether there are any other warehouses or shops that
should be included in the inventory count. (1)
6. The instructions of the inventory count are inadequate.
 No reference has been made as to who acts as supervisor of the
inventory count, (1)
 How differences should be solved, (1)
 How to identify damaged/obsolete inventories. (1)
7. Are there enough counting teams to count all inventories on the day of
the count? (1)
8. There must be no blank spaces on shelves and inventories have to be
packed neatly. (1)
Total (11)
Maximum (10)

Total (a+b+c) (24)

Presentation (See memo heading) (2)
Total (a+b+c) (26)

1-24
V1.3. 32 marks

1. Internal control objectives

NB: Internal control objectives must be formulated and written in complete

sentences. No marks are awarded for merely mentioning/listing the objectives.
Objectives with regard to classification and summary and transfer of entries not
required.

Only ½ mark if objective is not fully described. The underlined sections below have
been left out by various students in their formulation of the internal control
objectives.

□ Validity – All recorded production transactions are valid and are supported by
supporting documentation. (1)

□ Validity – All production transactions and adjustments are authorized in

accordance with company policy. (1)

□ Validity – Access to stores must be restricted to authorized staff (prevents

theft or unauthorized use of inventory). (1)

□ Completeness – All valid production transactions that have occurred, are

recorded and nothing is left out (issuing of raw materials and recording of
finished products). (1)

□ Accuracy – All production transactions are recorded accurately at the correct

quantity and amount. (1)

□ Completeness – All production transactions are recorded as soon as possible

in the correct financial period. (1)

TOTAL 6
MAXIMUM 5

2. Design system – production cycle

General control measures

 Access to all stores (raw material and finished-product stores) must be

controlled and restricted to employees working in the stores. (1)

 All unused stationery must be locked up and the responsibility for the control
over the stationery must be assigned to one employee. (1)

 Unused stationery must be recorded in a stationery register, employees must

sign for all issuances and all unused books must be returned. (2)

1-25
 Management control must be exercised over controls and management must
monitor the financial results and the control accounts regularly and investigate
any unusual trends and relationships. (1)

 Staff must be forced to take annual leave and/or their duties must be rotated. (1)

 There must be proper separation of duties between the various functions (e.g.
safe keeping of raw materials, issuance of raw materials, authorization of
requisitions etc.) (1)

Identification of finished products required

 At the beginning of each month the marketing manager prepares a

prenumbered production order in duplicate and forwards the production order to
the production division. (2)

 The production manager compares the production orders with the company's
standard and normal production before signing and dating as proof of
authorization. (1)

 Unusual orders are first discussed with the marketing manager before they are
approved. (1)

Issuance of raw materials to production division

 A production assistant prepares a prenumbered raw-material requisition based

on raw materials needed in the production process. (1)

 The production manager approves the raw-material requisition after he has

compared the details with the production order. (1)

 The following copies (of the raw-material requisition) should be generated:

[Only ½ point if no reasons are given why copies are generated.]

 one: accounting division (attach production order for allocation of costs); (1)
 two: to raw-material store’s chief storeman (to prepare raw material); (1)
 three: own records (place in suspense file). (1)

 The raw-material store’s chief storeman files all raw-material requisitions in

numerical order and all missing or duplicated numbers are immediately followed
up. (1)

 The raw-material store’s store clerk prepares a prenumbered issuance note that
is distributed as follows:

 one: production division (accompanies the raw material); (1)

 two: own records (place in suspense file). (1)

1-26
 The raw-material store’s chief storeman compares the details of the issuance
note with the raw-material requisition before he signs it. (1)

Receipt of raw materials by the production division

 The two production assistants compare the quality and quantities of the raw
materials with the raw-material requisition before initialling the issuance note as
proof of receipt. (2)

Transfer of finished products

 Finished products are transferred to the finished product store daily. A

prenumbered internal goods received note containing a description of the
quantity of finished products manufactured for the day, is completed by the
production manager in duplicate for each batch production and distributed as
follows: (2)

[Only ½ point if no reasons are given why copies are generated.]

 one: finished-product store (accompanies finished products); (1)

 two: accounting division (updating of accounting records); (1)
 three: own records (as proof of transferring finished products). (1)

 When the warehouse manager receives finished products, he compares the

quantity and the description of the physical inventory with the details on the
internal goods received note. (1)

 Any differences between the internal goods-received receipt and the physical
inventory is investigated immediately and rectified on the relevant internal goods
received note. _(1)
(29)

MAXIMUM 25
PRESENTATION AND LANGUAGE USAGE 2

1-27
V1.4. SUGGESTED SOLUTION 35 marks

1 SYSTEM OF INTERNAL CONTROL – CREDIT SALES: RECEIPT OF

ORDERS AND DISPATCH

(Please note: Attention must only be paid to internal control measures with regard
to the receipts of orders and dispatch that do not seem to be contained in the
system. Some internal control measures already present in the system are
mentioned below but do NOT earn marks.)

General

□ Stationery control: Sales orders and delivery notes must be pre-printed and
prenumbered. Unused stationery must be kept safely. A stationery register, in
which people must sign for the issue of stationery, must be used. (2)

Receipt of orders

□ Sales orders are prepared by sales representatives and copies are forwarded
to the company's debtors' division.

□ The credit history and the references of each retailer are investigated before
they are allowed to effect credit purchases. In terms hereof a credit limit must
be determined for each retailer and authorized by the debtors' manager. (2)

□ When orders are received from representatives, it must be ascertained

whether the retailer concerned has enough credit available before an order
can be executed. (1)

Dispatching

□ Based on the authorized order the storemen prepare the inventory for
dispatch.

□ The number sequence of the sales orders received from the sales
representatives must be checked and missing numbers must be followed up.
(1)
□ The warehouse manager must maintain and update a list of outstanding
orders (ordered but not yet dispatched). (1)

□ The storemen must prepare a delivery note/dispatch note in quadruplicate and

distribute the copies as follows: (1)

▫ one copy remains in the store to use for updating the list of outstanding
orders and the inventory records; (1)
▫ one copy goes to the invoice clerks to prepare invoices for retailers; (1)
▫ two copies go to the retailer, of which he keeps one and signs the
second as proof of receipt and returns it to the company. (1)

1-28
□ Before the inventory leaves the store, the warehouse manager must check
that delivery notes accompany all consignments. He must agree inventory
being dispatched with that indicated on both the delivery note and the sales
order, and initial the delivery note as proof that the above control has been
performed. (3)

□ The inventory is loaded into/onto the trucks. At the exit of the site, the security
guards check the inventory against the delivery note. It must be ensured that a
delivery note initialled by the warehouse manager accompanies each
consignment (see mark above). (1)

AVAILABLE 15
MAXIMUM MARKS 13

2 WEAKNESSES IN STOCK TAKE INSTRUCTIONS AND CONSEQUENCES

WEAKNESSES CONSEQUENCES

1. Incompatible duties:

- Persons involved in the daily Manipulation of counting

activities in the inventory cycle (the sheets (by storemen) and
storemen and the warehouse inventory records (by
manager) take part in the counting warehouse manager) to hide
respectively as supervisors and theft of stock.
coordinator. (1) (1)
- The storemen (supervisors) may
make changes to the counting
sheets. (1)
- The warehouse manager
(coordinator), who also keeps the
inventory records, reconciles the
results of the counting with the
inventory records and makes
adjustments as necessary. (1)

2. Counting sheets are not pre-printed, but Counting sheets may not be
blank. completed in full. (1)

1-29
 WEAKNESSES CONSEQUENCES

3. Control over counting sheets

- Counting sheets are not No control over counting

prenumbered. (1) sheets distributed and
- No register of counting sheets in received – counting sheets
which distribution and receipt can be may go missing or not be
controlled. (1) returned, resulting in
- Counting sheets distributed and incomplete totals of stock
received are not reconciled. (1) take.
(2)

4. Items are not clearly marked once they Items can be counted twice or
have been counted. (1) excluded from the count. (1)

5. No indication of access control during Unauthorized persons may

the count. (1) enter the store and steal
inventory. (1)

6. No indication that the inventory in the Untidy store/shelves hinder

store is packed neatly and per type the counting process and
before the count. (1) increase the possibility of
mistakes during the counting
– inventory can be counted
twice or be excluded from the
count. (1)

7. Damaged or obsolete stock is not As this type of inventory will

identified separately before the count.(2) have been valued lower or
will have to be written off, the
inventory figure in the
statements will be incorrect.
(1)

8. Inventory held on behalf of third parties Inventory already sold (and

is not identified separately before the no longer the property of the
counting. (1) company) or consignment
stock can erroneously be
included in the count. (1)

9. There are no procedures to ensure that Incomplete stock take. (1)

all shelves/items are included in the
count – the completeness of the count is
not checked. (1)

AVAILABLE 24
MAXIMUM 21

1-30
 FORMULATION 1

1-31
V1.5 SUGGESTED SOLUTION

1. Procedures to perform the count:

 Enquiry from management and confirm that the count will take place at
16h00 on 30 April 2017. (1)
 Enquiry from management to confirm that the inventory counted is kept
in one place. (1)
 Review the copy of the counting instructions before it is given to counter
in order to ensure that proper counting takes place. (1)
 Review the previous year’s working papers and ensure:
o Whether there were any problems with the inventory counted in order
to envisage potential problems with this year's inventory count. (1)
o The audit approach followed, e.g. sample sizes, to determine whether
the same approach can be followed this year. (1)
 Visit T&C before the count and:
o Inspect the inventory warehouse and check whether the warehouse
is neatly organised. (1)
o Enquire from management whether there is any inventory that must
not be included in the count, such as inventory sold just before year-
end and consignment inventory that does not belong to T&C. (1)
o Enquire at management about how damaged and obsolete inventory
was identified. (1)
o Enquire at management on whether any consignment inventory is
kept in other locations. (1)
o Enquire at management about who will be part of the count teams. (1)
o Enquire at management how access will be limited during the count.
(1)
TOTAL 11
MAX 8
2. Audit procedures during and after the count
 Observe the count of inventory items in order to determine whether it
corresponds with the prescribed instructions. (1)
 Perform a few test counts in both directions in all areas.
o From the inventory list to physical inventory (existence) (1)
o From the physical inventory to the inventory list (completeness) (1)
 Confirm that proper cut-off procedures were followed to ensure that there
was no inventory movement after the cut-off point. (1)
 Walk through the warehouse and be on the look-out for inventory with no
yellow sticker and inspect on the counting lists whether this inventory
was counted. (1)
 Obtain a copy of the differences between the inventory counting lists and
the recorded inventory and follow up by:

1-32
 o Performing recounts with the client's counting teams (1)
o Confirm that changes made on the recorded inventory are correct
and were approved by Pieter Nkaba. (1)
 Acquire copies of all inventory count lists. Add the totals per item and
compare with the total recorded on the perpetual inventory records. Ask
about any differences. (2)
 Reperform the number sequence of the count sheet and follow-up on
any differences. (1)
 Evaluate the inventory in transit by following up on its consignment and
receipt. (1)
 Record the last number of documents issued before the count (e.g.
delivery note, GRN) in the audit working papers. (1)
TOTAL 12
MAX 11
Communication skills: bullet presentation and headings (1)

PART 3: AUDIT OBJECTIVES FOR THE AUDIT OF THE INVENTORY

ACCOUNT

Existence
 To test that inventory included in the inventory balance relate to inventory
that actually exists. (1)

Completeness
 To test that inventory as at year end includes ALL inventory owned by the
company. (1)

Rights
 To test that all inventory as at year end, is the company’s property and that it
owns the rights to it. (1)

Accuracy, Valuation and Allocation

 To test that all gross inventory at year end was correctly/accurately valued
and all costs have been correctly allocated to the value of the inventory. (1)
 The inventory obsolescence allowance is a reasonable and takes into
account the future expected economic benefits of inventory. (1)

Classification
 To test that all inventory was classified correctly as inventory. (1)

Presentation
 To test that inventory has been appropriately disclosed in a relevant and
understandable OR comprehensible manner. (1)
AVAILABLE: 7
Maximum: 6

1-33