AUE202M/103/3/2009

DEPARTMENT OF AUDITING
FIRST AND SECOND SEMESTER
AUDITING - MODULE AUE202M: INTRODUCTION TO THE PERFORMING
OF THE AUDIT PROCESS

TUTORIAL LETTER 103/3/2009 -

FEEDBACK ON SUPPLEMENTARY DO QUESTIONS

Dear Student
In this tutorial letter we provide you with suggested solutions to the questions in tutorial letter
102. Please note the references provided where the answers to the questions can be found in
your prescribed study material.
Regards
Lecturer: AUE202M

FEEDBACK ON SUPPLEMENTARY DO QUESTIONS

Topic 2

The audit of financial statements

Study unit 2.1:

Feedback on supplementary Do questions on topic 2

2.1.1 Assertions and audit objectives

(a)

12 marks

Audit objective with regard to the following assertions

Reference:

Jackson & Stent (2007:1/15)

(i) completeness To obtain satisfaction that all assets, liabilities, transactions or events, which
should have been recorded, have been recorded.
(1)

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AUE202M/103/3/2009

(ii) Accuracy To obtain satisfaction that amounts and other data relating to recorded
transactions and events have been recorded appropriately.
(1)
(iii) Classification To obtain satisfaction that transactions and events have been recorded in the
proper accounts.
(1)
(b)

Assertions referred to by the audit objectives

Reference:

Jackson & Stent (2007:1/15)

(i) occurrence
(ii) rights and obligations
(iii) valuation and allocation
(c)

Audit objectives for the information on source documents

Reference:

Jackson & Stent (2007:1/15)

(i) To obtain satisfaction that a transaction or event which has been recorded, took
place and pertains to the entity. (Occurrence)
(1)
(ii) To obtain satisfaction that transactions and events have been recorded in the
correct accounting period. (Cut-off)
(1)
(iii) To obtain satisfaction that amounts and other data relating to recorded
transactions and events have been recorded appropriately. (Accuracy) (1)
(Mark as indicated)

Topic 3

Control activities
Study unit 3.1:

Feedback on supplementary Do questions on topic 3

3.1.1 Characteristics of good internal control

15 marks

Reference: Jackson & Stent (2007:5/7-5/9)

1.

Control environment
The control environment provides the company with the necessary discipline and
structure for all aspects of risk management and control.

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A good control environment will be characterised by:

Integrity and ethical values throughout the organisation

Competence of staff

A positive influence generated by those charged with governance

A philosophy and operating style which encompasses leadership, sound

judgement, ethical behaviour

Proper planning, execution control and review

Assignment of authority, responsibility and reporting relationships

Sound human resource policies

2.

Competent, trustworthy personnel

Personnel involved in the internal control system must be competent to fulfil their
functions honestly and reliably.
This is achieved through the implementation of proper recruitment, personnel and
training policies.

3.

Segregation of duties
Good segregation of duties start by dividing the entitys cycles, and then further
segregation of duties within the function.

4.

Isolation of responsibility
The people involved in the control system must be fully aware of their responsibilities
and must be accountable for their performance. Employees must acknowledge in
writing that they have performed a task. This is usually done by signing.

5.

Access / custody controls

Access / custody controls are designed to:

Prevent damage to, and deterioration of, physical assets

Prevent deterioration of certain book assets (e.g. debtors)

Prevent unauthorised use, theft or loss of physical assets

Prevent unauthorised use, theft or loss of book assets (e.g. limiting

authorisation to transfer cash)

6.

Source document design

Documents must have the following features to promote the accuracy and
completeness of recording transactions:

Pre-printed

Pre-numbered

Multi-copied, carbonised and designed for multiple use

Logical and simple to complete

Blank blocks or grids for authorising or approving

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Comparison and reconciliation

Comparison and reconciliation should be frequent and timeous and should be
independent of the functions and records which are being compared and
reconciled. It should be reviewed by senior personnel and thoroughly followed up.
Please note that aspects of internal control are dealt with in more detail in your
study guide.

3.1.2 Internal controls

21 marks

Please note that there are additional procedures in a fully computerised system to those
provided below. For examination purposes you are also required to apply these
procedures to various computerised systems. For these procedures please refer to your
textbook Jackson & Stent (2007:8/6-8/39)
(a)

Invalid transactions being executed and recorded

Reference:

12 marks

Jackson & Stent (2007: 8/6-8/9)

1.

A person should be appointed to authorise, by signature, the transactions

being executed (isolation of responsibility).

2.

Segregation of duties should be implemented between the functions of

authorisation, execution and recording of transactions (segregation of duties).

3.

Reliable and adequately trained people should be appointed to the posts they
will occupy (competent, trustworthy personnel).

4.

The system must provide for the use of prenumbered document numbers or
control over used and unused prenumbered stationery should be exercised by
an authorised person (source document design).

5.

Multiple copies of pre-printed source documents numbered in sequence should

be used to ensure accurate completion and recording (source document
design).

6.

The accuracy of the information on source documents should be checked and

initialled as proof that the procedure was carried out by a person who was not
involved with the preparation of the documents (source document design).

7.

A complete transaction trail should be kept by the system with the linking of
account balances and transaction detail (source document design).

8. Efficient programmed input controls should be built into the system or the
accuracy of recording of transactions should be checked by an independent
person to ensure that the information has been accurately recorded from the
source documents (input control).

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9. Managerial supervision within the enterprise should be improved, by reviewing

management reports and exception reports especially where adequate
segregation of duties is not possible (comparison and reconciliation).
(1 marks for each appropriate internal control with a maximum of 12 marks)
(b)

Transactions being recorded at incorrect rand values

Reference:

6 marks

Jackson & Stent (2007:8/6-8/9)

1. Source documents should be checked and initialled as proof that the procedure
was carried out by a person who was not concerned with the preparation of the
documents (segregation of duties).
2. The person recoding the transactions must be competent and not prone to
making regular errors when recoding transactions (competent, trustworthy
staff).
3. The accuracy of recording of transactions should be checked by an
independent person to ensure that the information has been accurately
recorded from the source documents (comparison and reconciliation).
4. Regular reconciliations of ledger balances with possible external evidence
should be carried out and checked by an independent person. It should be
reviewed and exceptions thoroughly followed up. (comparison and
reconciliation).
(c)

Recording of transactions in the incorrect accounting period

3 marks

Reference: Jackson & Stent (2007:8/6-8/39)

1.

The accuracy of recording of transactions should be checked by an

independent person to ensure that the information has been accurately
recorded from the source documents documents (comparison and
reconciliation).
(1)

2.

Adequately trained people should be appointed to the posts they will occupy
(competent, trustworthy staff)
(1)

-6Study unit 3.2:

AUE202M/103/3/2009

Feedback on supplementary Do questions on control

activities (internal control principles)

3.2.1 Internal controls in a computerised environment

(a)

System development controls

Reference:
(1)

(2)

(3)

(4)

60 marks
30 marks

Jackson & Stent (2007:8/14-8/16)

Standards
(a)

System development to be carried out in accordance with pre-defined

standards (e.g. ISO 9000 standards).
(1)

(b)

Compliance with standards strictly monitored and followed up by

management.
(1)

Project approval
(a)

A feasibility study should be carried out, including a cost / benefit study

putting a money value to the development.
(1)

(b)

A steering committee should give its approval prior to commencement of

the project.
(1)

Project management
(a)

A project team must be formed by the steering committee and should

include IT and user staff members.
(1)

(b)

Responsibility for each task must be allocated.

(c)

Progress should be monitored and progress reports submitted to the

steering committee.
(1)

(1)

User requirements
(a)

Business analysts should determine and document all user requirements.

(1)

(b)

Consult both internal and external auditors as to their recommendations

concerning internal controls.
(1)

(5) Systems specifications and programming

(a)

Program specifications should be clearly documented

(1)

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(b) Development should be carried out in a development environment and

not a live environment.
(1)
(6)

Testing
(a) Programme coding of individual programs should be tested using
programme tests and string tests.
(1)
(b) The system as a whole should be tested to ensure proper integration.
(1)
(c) The system should be tested on an output level by management, users
and auditors.
(1)

(7)

Final approval
(a) Testing results should be reviewed and errors corrected.

(1)

(b) Final approval from management, users, internal audit and IT personnel.
(1)
(8)

Training
(a) A formal programme should set out personnel to be trained, dates and
times and responsibilities for training.
(1)
(b) User procedure manuals and job descriptions should be used in the
training.
(1)

(9)

Conversion
(a) The conversion should be considered as a project on its own.

(1)

(b) Data to be converted must be checked and discrepancies resolved prior

to conversion.
(1)
(c) The conversion method must be selected (parallel processing, immediate
shut-down of old system, or phasing in).
(1)
(d) Controls over preparation and entry of data should include the use of a
data control group.
(1)
(10)

Post-implementation review
(a) Users, IT personnel and auditors should review the system several
months after implementation.
(Mark as indicated with a maximum of 30 marks)

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Data processing application controls

Reference:
(1)

(2)

30 marks

Jackson & Stent (2007:8/30-8/38)

Validity
(a)

Range checks detect when a field falls outside the allowable set
(programme controls).
(1)

(b)

Reasonableness checks on data fields (programme controls). (1)

(c)

Data approval checks of input against preset conditions (programme

controls).
(1)

(d)

Internal label checks for loaded file name correctness (programme

controls).
(1)

(e)

Retention date checks to detect file retention date expiries (programme

controls).
(1)

(f)

Audit trails which provide listings and summaries of transactions,

tables or factors (logs and reports).
(1)

(g)

Override reports of computer controls overridden (logs and reports).

(1)

(h)

Exception reports (logs and reports).

(1)

(i)

Activity reports for a particular resource (logs and reports).

(1)

Accuracy
(a)

Arithmetic accuracy check (programme controls).

(1)

(b)

Limit test to identify amounts outside a predetermined limit

(programme controls).
(1)

(c)

Cross casts of amounts allocated to columns (programme controls).

(1)

(d)

Audit trails which provide listings and summaries of transactions,

tables or factors (logs and reports).
(1)

(e)

Run-to-run balancing reports between the opening balance and closing

balance (logs and reports).
(1)

(f)

Exception reports (logs and reports).

(1)

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(3)

Topic 4

AUE202M/103/3/2009

(g)

Control clerk reviews activity reports (reconciliation and review). (1)

(h)

Control clerk compares control totals from processing (reconciliation

and review).
(1)

(i)

User department reviews output for reasonableness (reconciliation and

review).
(1)

Completeness
(a)

Sequence tests to detect gaps or duplications (programme controls).

(1)

(b)

Cross casts (programme controls).

(c)

Audit trails which provide listings and summaries of transactions,

tables or factors (logs and reports).
(1)

(d)

Exception reports (logs and reports).

(1)

(e)

Computer generated transaction listings (logs and reports) .

(1)

(f)

Control clerk reviews activity reports (reconciliation and review). (1)

(g)

User department reviews output for reasonableness (reconciliation and

review).
(1)

(h)

User department reconciles manually generated totals with totals

generated by processing (reconciliation and review).
(1)
(Mark as indicated with a maximum of 30 marks)

(1)

The overall audit plan

Study unit 4.1: Feedback on supplementary Do questions on the overall

audit plan
4.1.1 Audit of transactions and balances
(a)

21 marks

Audit objectives for the audit of stationery purchase transactions 6 marks

Reference:

Jackson & Stent (2007: 1/15; 11/24 11/25)

1. To obtain satisfaction that all stationery purchase transactions which should

have been recorded, have been recorded. (Completeness)
(1)
2. To obtain satisfaction that stationery purchase transactions have been

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recorded in the correct accounting period. (Cut-off)

(1)

3. To obtain satisfaction that the stationery purchase transactions which have

been recorded, took place and pertains to the entity.. (Occurrence)
(1)
4. To obtain satisfaction that amounts and other data relating to the stationery
purchase transactions have been recorded appropriately. (Accuracy) (1)
(b)

Steps to audit the payment transaction of R 1 050

Reference:

6 marks

Jackson & Stent (2007: 11/24 11/25)

1. Investigate if the transaction was properly authorised. The transaction will be

authorised by way of a signature of the responsible official on the order/
requisition.
(1)
2. Compare the details on the source documents to the information that appears
on different source documents. Documents pertaining to this transaction are
the order/requisition, purchase invoice and cheque.
(1)
3. Compare information in source documents to the entry in the cash payments
journal.
(1)
4. Inspect the posting of the transaction from the cash payments journal to the
stationery account in the general ledger.
(1)
(c)

Audit objectives for the audit of the stationery balance

3 marks

Reference: Study guide (2007: 115)

1. To obtain satisfaction that all stationery purchase transactions which should
have been recorded, have been recorded. (Completeness)
(1)
2. To obtain satisfaction that the stationery account balance has been correctly
disclosed, classified and described in the financial statements. (Presentation)
(1)
3. To obtain satisfaction that the stationery account balance is included in the
financial statements at appropriate amounts. (Valuation)
(1)
(d)

Steps to audit the stationery account balance of R 3550

Reference:

6 marks

Jackson & Stent (2007: 11/24 11/25

1.

Recalculate the arithmetical correctness of the stationery ledger balance.(1)

2.

Inspect the date on the purchase invoice and cashed/paid cheque to ensure
that it is reflected in the correct accounting period.
(1)

3.

Inspect that the stationery account balance of R3 550 has been included in the

-11trial balance and income statement of the company.

4.

Topic 5

(1)

Select a sample of transactions that make up the balance and agree the details
of the transaction to the original order to ensure the transaction pertain to the
entity.
(1)

Revenue

Study unit 5.1, 5.2 and 5.3:

5.1.1 (a)

AUE202M/103/3/2009

Feedback on supplementary Do questions for the

audit of revenue transactions and balances

Audit of bad debts

Reference:

12 marks

Jackson & Stent (2007:10/33)

1.

Obtain an aged list of trade receivables that divides the balances on a monthly
basis, and use computer assisted auditing techniques (CAATS) to cast and
cross cast the schedule and agree the total to the general ledger control
account for trade receivables.

2.

Examine the journal information for doubtful debts written off and note the
authorisation and compliance with the policy.

3.

Follow the long outstanding trade receivables through to the list of bad debts
written off.

4.

Examine the attorneys file regarding collections, reminders and claims

correspondence with trade receivables and other sources of information, as
well as official notifications of insolvencies.

5.

Discuss with management the adequacy of the bad debts written off and the
provision for doubtful debts. Review managements calculation of the provision
for the current year for consistency.

6.

Follow up trade receivables payments for as long as possible in the new

accounting period.

7.

Complete the trade receivables circularisation procedures and come to a

conclusion regarding the recovery of the trade receivables.

8. Perform ratio analysis to ensure the overall reasonableness of the doubtful

debts written off.
9. Obtain the customary trade receivables certificate from management.
(1 marks for each appropriate substantive procedure with maximum of 12 marks)

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AUE202M/103/3/2009

Possible reasons for the increase in the trade receivables collection period
6 marks
Reference:

Jackson & Stent (2007:10/33 - 10/34)

1.

Lapping of cash/cheques from trade receivables.

2.

Theft of receipts that has not been disguised.

3.

Slackening of credit control.

4.

Changing the credit policy.

5.

Clerical errors.

6.

Economic conditions.
(1 mark each)

5.1.2 (a)

Audit programme containing the substantive procedures required to audit the

transactions from the cash receipts journal
15 marks
References: -

Study guide (2007:5.3.2)

Jackson & Stent (2007: 10/23 10/24)

1.

Inspect the receipt and make certain that the receipt is correctly completed and
that the person who received the money signed the receipt. (Occurrence and
accuracy)

2.

Follow the receipt through to the applicable deposit slip and check the
arithmetical accuracy of the deposit slip. (Accuracy)

3.

Follow the deposit slip total through to the bank statement and ensure that the
amount per the deposit slip agrees with the amount actually deposited.
(Accuracy)

4.

Compare the entry in the receipts journal with the information on the receipt,
direct deposit, interest received and transfers from the bank statements, and
make certain that the allocation is accurate, taking into account the nature of
the transaction. (Classification)

5.

Inspect that the dates on receipts fall within the financial period under audit
review. (Cut-off)

6.

Recalculate the arithmetical accuracy of the receipts journal. (Accuracy)

7. If the receipt has been cancelled inspect the physical original receipt to see
that it has been cancelled. (Occurrence/accuracy)

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8. Examine the postings from the receipts journal to the general ledger and trade
receivables ledger. (Classification)
9.

(b)

Inspect the numerical sequence of all the receipts in the receipts journal for
completeness and obtain explanations for any missing receipt numbers.
(Completeness)
(1 mark for each appropriate substantive procedure)

An example of an audit working paper proving that the substantive

procedures were performed on the selected items
12 marks
Reference: -

Study guide (2007:4.1.5)

Jackson & Stent (2007: 10/31 10/37)

-14-

Cash & Kie Limited

Cash receipts journal Transaction audit
Period: 1 March 20xx-28 February 20xx
Compiled by:.............(Name)
1:

AUE202M/103/3/2009

Reference:........................
Date prepared:...............
Checked by:................
Date checked:..............

Receipts:
Rec no Received from whom

Date

Amount

197

H Yssel

15/03

2 314.50 gl 321

268

H Theron

30/03

5 485.65 gl 520

339

B Groenewald

16/04

685.31 gl 342

410

ABC Equipment

20/04

12 891.56 gl 20

481

D&E Retail

26/05

50 684.27 gl 800

..

...

.......

..

...

.......

..

...

.......

29

2185

PCY

02/02

30

2256

X General Dealer

26/02

689.58

Allocation 1 2 3 4 5 6 7 8 9

gl 321

69 581.50 gl 800

Note: -

The information provided is only for explanation purposes as to how the information
should appear on the audit working paper. In practice it would be the actual information
recorded in the clients records.
- Allocation - gl refers to the clients ledger account numbers used to do the postings.
- 1-9 - refers to the procedure numbers contained in the audit programme given in the
above question 5.1.2(a) which should be marked off for every item after the specific
procedure has been performed successfully on the selected items.

2: Direct deposits/interest received and transfers

Bank
statement
nr

Receipts/
Description

Date

Amount

Allocation

bs234

Transfer receipt

30/03

53 281.56

gl800

bs237

Direct deposit/
B Groenewald

15/04

6 598.62

gl50

bs239

Direct deposit/PCY

26/05

561.24

gl356

..

....

.......

..

.....

.......

..

....

......

11

bs241

Interest received

26/01

121.58

gl357

12

bs243

Transfer from investment

03/02

1 365.89

gl323

-155.1.3 Trade Receivables circularisation

AUE202M/103/3/2009
18 marks

Reference: - Jackson & Stent (2007:10/31 10/32)

- Study guide (2007:5.3.2)
1.

Reperform calculations to check the additions of the list of trade receivables

accounts in the trade receivables' ledger and trade receivables' control account in
the general ledger.

2.

Agree the total of the trade receivables' list with the amount in to the trade
receivables' control account.

3.

Compare the information that appears on the statements of account with the
information in the trade receivables' ledger and the list of trade receivables e.g.
name and amount.

4.

Examine some of the trade receivables' information e.g. name and a cc address to
recent correspondence from the customer or, alternatively, to the information in a
telephone directory.

5.

Inspect the monthly statements for every trade receivable balance by comparing the
statements with the list of trade receivables.

6.

Reach an agreement with management concerning those trade receivables that

should not be circularised, e.g. trade receivables handed over to attorneys for
collection.

7.

Use CAATS to select the sample required for positive confirmation or negative
confirmation and agree the customers details, including the name and address
appearing on the monthly statement with the customer master file details.

8.

Attach the audit stickers which bear the request to contact the auditor directly, to the
statements.

9.

Place all the statements in envelopes that have the auditor's name and address on
the reverse side of the envelope, to ensure the return of all undelivered mail to the
auditor's office, as well as a stamped envelope in the case of positive circularisation.

10. The auditor's office must actually mail the envelopes, so that there is no opportunity
for an employee of the auditee to remove any statements and substitute others.
11. Prepare a working paper detailing all the trade receivables' names and extend the
amount into the relevant column signifying the type of circularisation. Leave space
in sufficient columns in which to subsequently record agreements, complaints,
further audit procedures and conclusions.
12. Follow up all queries and complaints raised by customers in relating to their monthly
statements, and ensure that all the necessary steps have been taken to rectify any
errors revealed in this way.

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13. Follow up trade receivables' statements returned by the post office as undelivered.
Obtain the proper addresses and repost them.
If no other address is known, report the matter to management and ascertain
whether provision should possibly be made for such debts as irrecoverable.
Consider the possibility of a fictitious account.
14. In the case of a positive circularisation, where no reply has been received recircularise and, should there still be no reply, examine the relevant trade receivables
account. If it has been subsequently paid vouch the receipt, and if it is still unpaid
ascertain whether the debt was in fact correctly recorded by examining the relevant
order forms, delivery notes and invoices.
5.1.4 Audit of cash sales

21 marks

Reference: - Jackson & Stent (2007:10/31)

- Study guide (2007: 5.3.2)
1. Based on judgements of the materiality level and the relevant audit risk, select a
representative sample of cash sales transactions (tally roll totals) to be tested.
2. For the selected cash sales, inspect that the signature of the cashier and the
accountant appear on the tally roll as evidence of the total being agreed with the cash
in the cash register.
3. Compare the selected cash register tally roll totals with entries in the cash sales
register.
4. Test check the additions of entries in the cash sales register by reperforming
calculations.
5. For the selected cash sales compare the total of cash sales in the cash sales register
with the corresponding entry in the payments and receipts journal (cashbook) and with
the bank deposit slip.
6. On a test basis, follow total sales in the payments and receipts journal through to
deposits on the bank statement.
7. Scrutinise the bank reconciliation for outstanding deposits at year-end. Follow these
outstanding deposits through to bank statements subsequent to year-end. Obtain
explanations for deposits not cleared.
8. Scrutinise the cash sales register for omissions, surpluses and shortages, and discuss
material amounts with management.
9. Test check postings of cash sales from the payments and receipts journal to the
appropriate sales account in the general ledger.

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10. Compare the totals of the cash count performed at year-end to the tally roll totals
taking the cash float of each cash register into account.
11. Discuss with management any surpluses or shortages found during the cash count.
12. Compare monthly totals of cash sales to those of previous months and to prior
periods, and obtain explanations from management for material deviations.
13. Compute the gross profit percentage on sales and compare it with that of prior
periods. Obtain explanations from management for material deviations.
14. Trace the inclusion of the balance for cash sales per the general ledger to the trial
balance, and to the amount disclosed in the income statement.
15. Inspect that revenue is correctly disclosed in the income statement and notes thereto.
(1 for each appropriate substantive procedure with a maximum of 21 marks)

Topic 6

Expenditure

Study units 6.1, 6.2 and 6.3:

Feedback on supplementary Do questions on

topic 6

6.1.1 Planning and audit of trade payables

8 marks

(a) Audit objectives for trade payables

References: - Study guide (2007:6.1.2)
- Jackson & Stent (2007: 11/26 11/28)
1. To obtain satisfaction that all trade payable transactions which should have been
recorded, have been recorded. (Completeness)
2. To obtain satisfaction that the trade payables exist at a given date (existence).
3. To obtain satisfaction that the trade payables are the obligations of the entity
(obligations).
4. To obtain satisfaction that trade payables are included in the financial statements at
appropriate amounts and any valuation or allocation adjustments are appropriately
recorded (valuation).
5. To obtain satisfaction that trade payables have been disclosed, classified and
described in accordance with legal requirements and gaap (disclosure).
(1 mark each)

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(b) Implication of a high assessment of inherent and control risk

Reference: Jackson & Stent (2007: 11/22)
The higher the auditors assessment of inherent and control risk is, the more
substantive procedures must be performed, (1) in order to reduce the detection risk
for the relevant assertions, to an acceptable level.
(1)
6.1.2 (a) Internal controls regarding credit purchases

12 marks

Reference: Jackson & Stent (2007:11/3)

1.

The authority to purchase should be vested only in certain specified employees or

a purchasing department.

2.

Orders should be numbered consecutively and control should be exercised so

that all orders are duly accounted for.

3.

A stationery register should be maintained by an independent person to exercise

control over the issue of unused order books and goods received books.

4.

Segregation of duties between personnel responsible for:

- Ordering of goods.
- Inspection and storage of goods received.
- Checking of invoices against orders, delivery notes and goods received notes.

5.

A record of goods received should be maintained, or prenumbered goods

received notes must be completed when goods are received.

6.

Invoices should be checked against appropriate delivery notes, goods received

notes and orders, and must be stamped and initialled as having been checked by
the responsible person before the transaction is entered in the purchases journal.

7.

Proper record must be kept of invoices in dispute and of goods returned to

suppliers.

NOTE: The above internal controls are relevant for a manual system. If a
computerised system is used for processing of data, the internal controls in Jackson
& Stent (2007:8/1-8/26) will be applicable.
(1 marks for each appropriate internal control with a maximum of 12 marks)

-19(b) Audit of payments to trade payables

AUE202M/103/3/2009
12 marks

Reference: Jackson & Stent (2007:11/22-11/29)

1.

Perform tests of control on the relevant part of the system of internal control, in
order to determine the extent of substantive procedures.

2.

Compare the entries in the payments journal (cash book) with the details on the
relevant paid cheque and other relevant documentation, e.g. orders, delivery
notes, goods received notes, invoices and the trade payables statement.

3.

Compare the amounts of the discounts received as shown in the payments

journal (cash book) with those shown on the trade payables statements and/or
relevant receipts.

4.

Test check the calculations of discount as shown on the statements and

determine if they agree with the discount terms negotiated with the supplier.

5.

Inspect that there is sufficient authority for the payment e.g. a signature of an
authorised person or two signatures of authorised cheque signatories on the paid
cheque.

6.

Inspect that the relevant documentation relating to each recorded payment has
been cancelled by the cheque signatory e.g. by a paid stamp.

7.

Inspect that the amount in the payments journal (cash book) is correctly allocated
to the trade payables column.

8.

Examine the correctness of the postings to the relevant trade payables accounts
in the trade payables ledger, and in total to the trade payables control account in
the general ledger.

Ascertain the last cheque number drawn at the year-end and examine that no
later cheques have been recorded as current period transactions. Trace the
payments to subsequent bank statements to ascertain that they have been paid
within a reasonable period after year-end.
(1 marks for each appropriate substantive procedure with a maximum
of 12 marks)

6.1.3 Control of cheques

Reference:

18 marks

Jackson & Stent (2007:11/11)

1. A register of cheque books received and issued should be kept and control of
unissued cheque books should be in the hands of a senior official.

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2. All cancelled cheques should be clearly marked as such and attached to the relevant
cheque counterfoil, or separately filed.
3. All paid cheques returned by the bank should be filed in numerical order.
4. Cheque forms can be printed with the crossing 'Not Transferable and made out to
order.
5. No changes or alterations on cheque forms are allowed.
6. Drawn cheques should be presented to the person(s) authorised to sign, together with
the appropriate supporting documents.
7. Persons responsible for the signing of cheques should examine the supporting
documents to ensure:
- that amounts shown on the cheques are indeed due to be paid, and that any
discount due has been taken.
- that the correct names of the payees appear on the cheques.
8. Supporting documentation should be initialled or cancelled in some way as having
been paid.
9. All cheques above a certain amount should require the signatures of two senior
officials.
10. Cheques needing only one signature for authorisation can be overprinted with the
maximum amount of the clerks authority - for example R200.
11. Where computer equipment is used for generating and signing of cheques, the
cheques should still be signed electronically or otherwise by the authorised
signatory(ies).
12. A separate bank account for payments to trade payables can be used.
(1 for each appropriate internal control with a maximum of 18 marks)

-21Topic 7

AUE202M/103/3/2009

Inventory

Study units 7.1, 7.2 and 7.3:

Feedback on supplementary Do questions on

topic 7

7.1.1 Internal controls during an inventory count

Reference:

18 marks

Jackson & Stent (2007:12/7-12/10)

1. The inventory must be neatly stacked, like items brought together and the aisles kept
clear.
2. Inventory count forms must be pre-numbered.
3. A register must be used to record all the issued and returned pre-numbered inventory
count forms. All inventory count forms must be accounted for.
4. Persons receiving and returning the inventory count forms must sign the register for
such receipts and returns.
5. Segregation of duties must be maintained between the counting, recording and
controlling functions and the person in control of the inventory count forms. Reliable
personnel must be used to perform the inventory count.
6. The inventory count must be executed according to the inventory count instructions to
the counters, recorders and supervisors, and the inventory count forms must be
signed by all of them. There must be proper supervision during the inventory count.
7. If differences arise during the recounts by counters these must be reported to the
supervisors and such differences must be resolved by them.
8. The supervisors must conduct test counts and if differences occur they must be
rectified.
9. There must be no movement or minimum movement of inventory, during the inventory
count.
10. Slow-moving, obsolete and damaged inventory must be identified, and must be
recorded as such.
11. All the counted inventory must be tagged according to the inventory count instructions.
12. The latest document numbers of purchases and sales must be recorded to control the
inventory that will be included or excluded from the inventory at year-end.

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13. Inventory in transit and inventory held on consignment at other premises must be
identified and must be taken into consideration.
1 marks for each applicable internal control with a maximum of 18 marks)
7.1.2 Auditing the value of inventory
Reference:

15 marks

Jackson & Stent (2007:12/19-12/24)

1. Agree the prices on the final inventory sheets to those shown on the relevant invoices
towards the close of the financial year.
2. Reperform the calculation of the value of a number of representative inventory items
as they appear on the inventory sheets.
3. Examine the basis used for the calculation of the inventory (FIFO) and ensure that it is
consistently applied in relation to previous years.
4. Inspect that obsolete, slow-moving and damaged inventory is valued at the lower of
cost or net realisable value.
5. Test a representative sample of items for the valuation of inventory at the lower of cost
price or net realisable value.
6. Compare the value of the main categories of inventory with the previous year,
investigate and obtain explanations for material differences.
7. Calculate the gross profit percentage and inventory turnover rate and compare them
with the previous years budgets, industrial averages, etc. Obtain explanations and
examine material deviations.
8. Obtain a certificate from management regarding the value of inventory, basis of
valuation, main categories of inventory, encumbrance of inventory, etc.
9. Compare the value of inventory according to the inventory count with the value of
inventory in the financial statements, taking into consideration possible alterations.
(1 marks for each appropriate and its procedure with a maximum of 15 marks)
7.1.3 Auditing the existence and ownership of inventory
Reference:

21 marks

Jackson & Stent (2007:12/19-12/24)

(a) Procedures before the inventory count is performed

1.

Evaluate the auditees inventory count plan prior to the date of the actual count.

2.

Recommend improvements where necessary.

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3.

Determine the dates and venues of the actual count.

4.

Identify the audit team needed during the count, make the necessary
arrangements with them.

5.

Inform the audit team properly about the procedures.

(1 marks for each valid substantive procedure with a maximum of 6 marks)

(b) Procedures during the performance of the inventory count
1.

Observe that the inventory is neatly stacked, with similar items together.

2.

Observe that the counting and recording procedures as set out in the auditees
inventory count plan are strictly followed by the auditees employees.

3.

Inspect the sequence of the inventory sheets to ensure that all are accounted for
after the inventory count.

4.

Obtain a rough plan of the premises and note on the plan where the high value
items, obsolete inventory and slow moving inventory are situated. Ensure that
these items are covered in test counts.

5.

Conduct test counts to check the reliability of the inventory sheets.

6.

Walk through the premises and observe that all inventory have been tagged.

7.

Examine that cut-off procedures (control over inventory movements and

establishment of cut-off points for documents) are implemented and executed.

8.

Obtain copies of the final inventory sheets to discourage later alterations.

9.

Settle all queries arising from the inventory count with the appropriate executive in
charge.

10. Report to management any weaknesses.

11. Examine inventory in transit and inventory located at other premises.
(1 marks for each appropriate substantive procedure with a maximum of 15 marks)

-24-

AUE202M/103/3/2009

7.1.4 Substantive procedures to completely verify the companys trading inventory at

year-end
20 marks
References: - Study guide (2007:7.3.2)
- Jackson & Stent (2007:12/19-12/24)
1.

Attend the year-end inventory count and

- satisfy yourself regarding the efficiency of the inventory count plan.
- satisfy yourself that all the control measures were effectively applied in carrying
out the inventory count.
- make copies of all count sheets.
- compare the quantity counted with the perpetual inventory records and follow up
any differences.

2.

Compare the total value of inventory with the total of inventory according to the
perpetual inventory records and investigate material differences.

3.

Compare the prices on the perpetual inventory records with relevant invoices
towards the close of the financial year.

4.

Test check the calculation of the value of a number of representative inventory items
as these appear on the inventory sheets.

5.

Examine the basis used for the calculation of the inventory (FIFO) and ensure that it
is consistently applied in relation to previous years.

6.

Inspect that obsolete, slow-moving and damaged inventory is valued at the lower of
cost or net realisable value.

7.

Enquire from management and test a representative sample of items for the
valuation of inventory at the lower of cost price or net realisable value.

8.

Compare the value of the main categories of inventory with the previous year and
investigate and obtain explanations for material differences.

9.

Compare goods received and issued with the purchases and sales invoices prior to
and after the year-end to ensure the correct cut-off procedures.

10. Calculate the gross profit percentage and inventory turnover rate and compare these
with the previous years budgets, industrial averages, etc. Obtain explanations and
examine material deviations.
11. Obtain a certificate from management regarding the value of inventory, basis of
valuation, main categories of inventory, encumbrance of inventory, etc.
12. Compare the value of inventory according to the inventory count and the perpetual
inventory records with the value of inventory in the financial statements, taking into
consideration possible alterations.

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AUE202M/103/3/2009

13. Examine the disclosure of inventory in the financial statements:

- Classification of inventory according to the main categories of inventory.
- Disclosure of the accounting policy concerning:
- the basis of valuation according to the lower of cost price or the net realisable
value,
- the method of the inventory valuation (FIFO),
- its consistency with the previous year

-26-

AUE202M/103/3/2009

ANSWERS FOR THE SUPPLEMENTARY MULTIPLE CHOICE DO QUESTIONS

1.

Study guide 3.1.2

14.

Study guide 3.2.2

2.

Study guide 4.1.2

15.

Study guide 8.1.4

3.

Study guide 3.1

16.

Study guide 8.1

4.

Study guide 4.1.5

17.

Study guide 8.1.4

5.

Study guide 6.1

18.

6.

Study guide 7.3

19.

Study guide 6.3

7.

Study guide 5.3

20.

Study guide 7.3

8.

Study guide 5.3

21.

Study guide 7.3

9.

Study guide 5.2 and 5.3

22.

Study guide 7.3

10.

Study guide 5.2 and 5.3

23.

Study guide 7.3

11.

Study guide 7.3

24.

Study guide - all the cycles

12.

Study guide 2.1.1 and 4.1.1

25.

Study guide 7.3

13.

Study guide 4.1.1

Study guide 8.1.4

COMMENTS ON MULTIPLE CHOICE QUESTIONS

These questions covered Topics 1 to 8 of the study guide as well as the relevant prescribed
sections in your textbook.
Question 1 Not an internal control for authorisation
You were required to identify the internal control which is not appropriate with regard to
authorisation. Alternatives A, B and D all deal with activities involving authorisation whereas
alternative C deals with the information processing controls. Therefore alternative C is the
correct alternative.
Question 2 Not an activity during a transaction audit
Understanding the transaction audit and audit of balances in the financial statements will
enable you to answer this question. If you are uncertain about the meaning of these concepts,
refer to the references given in this tutorial letter. You will realise from this that alternatives A, B
and D all refer to transaction audit activities. Alternative C, on the other hand, is the first step
for the audit of balances in the financial statements.

-27Question 3

AUE202M/103/3/2009

Assertions related to an audit objective

The assertion that ensures that all transactions are recorded in the correct accounting records
refers to completeness and cut off, which makes alternative D the correct answer. The
assertion completeness and occurrence (alternative A) refers to the validity of the transaction
and not to the correctness thereof.
Question 4

General review of audit working papers

Alternative B is the correct answer as it is not usually required of audit assistants to finalise an
audit.
Question 5

Existence of trade payables

Procedures for the assertion of existence include the physical inspection of an item as in the
case of property, plant, equipment and inventory, and/or the inspection of source documents
such as invoices, delivery notes, etc to ensure that a transaction actually exists on a certain
date. By gathering external evidence, achieving the assertion is strengthened even more.
Therefore alternative A is the correct alternative because balances are compared to monthly
statements which are received from an external source. Alternatives B, C and D are related to
the measurement and valuation assertions, because they refer to the information processing of
a transaction in the correct period.
Question 6 Analytical review of inventory
The question refers to identifying the analytical review procedure that does not relate to
inventory. It is absolutely necessary to analyse the given ratios, so that the one that does not
include inventory in its calculation, is identified. Therefore alternative B is the correct one
because inventory is not included in the acid test ratio.
Question 7

Under valuation of credit sales

Under valuation of credit sales can occur when sales are not recorded or sales are recorded
with incorrect rand values.
Alternative A:

The tracing of a sample of sales invoices through to the sales journal will
determine if all the selected invoices are accurately recorded. Alternative A is
therefore correct.

Alternative B:

A trade receivables age analysis indicates long outstanding trade receivables

balances and by checking the age analysis the auditor can decide if the trade
receivables balances must either be provided for as part of the provision for
doubtful debts or be written off.

Alternative C:

Is a method to be used to check the value of trade receivables but is not the
most effective method to be used for the under valuation of sales. Trade
receivables will only reply if the balances differ.

-28Alternative D:

Question 8

AUE202M/103/3/2009

The tracing of the recorded invoices to the original documents will not give the
assurance that all the sales invoices are recorded because the sample was
selected from recorded invoices.
Best internal control to ensure validity of credit sales

Occurrence of transactions means that transactions are executed only if they have been duly
authorised and the issuance of source documents serves as evidence that the transaction
actually took place and pertain to the entity.
Alternative A:

Relates to the physical control of merchandise and the activity took place after
the transaction was authorised and executed.

Alternative B:

The authorisation of transactions ensures the occurrence thereof. Alternative

B is therefore correct.

Alternative C:

The pre-numbered documentation is used for the issuance of source

documents after the transaction was authorised and is used to exercise control
over the completeness of the documentation.

Alternative D:

The checking of the information on the invoices took place after the transaction
was authorised and executed and is used to exercise control over the accurate
recording of transactions.

Question 9

Verification of trade receivables balances where certain trade receivables

failed to return the positive circularisation letters

No further comments.
Question 10

Trade receivables age analysis

A trade receivables age analysis indicates long outstanding trade receivables balances and by
checking the age analysis the auditor can decide if the trade receivables balances must either
be provided for as part of the provision for doubtful debts or be written off. Therefore alternative
B is correct.
Question 11

Discovery of damaged merchandise in the clients inventory

Alternative A:

Its a method that can be used to discover damaged inventory but is

not the most suitable method.

Alternative B:

Is the most suitable and effective method to discover damaged

inventory. Alternative B is therefore correct.

Alternatives C and D

Are analytical procedures and will not necessarily reveal the existence
of damaged inventory.

-29Question 12:

AUE202M/103/3/2009

Substantive procedures main purpose

Alternative D is the correct alternative as the main purpose of substantive procedures is to

gather evidence regarding fairness of the assertions in the financial statements.
Question 13:

Inclusion in audit programme

An audit plan is documented by way of an audit programme which sets out the planned
substantive procedures in detail. Alternative A is therefore the correct alternative.
Question 14:

Not control related to safeguarding

The question requires you to identify the control that is not related to safeguarding computer
equipment, programmes and data files. Alternatives A, C and D all relate to physical controls i.e.
safeguarding computer equipment whereas alternative B relates to the internal control principle
of segregation of duties. Therefore alternative B is the correct alternative.
Question 15

Control risk at maximum level

If an auditor assesses the control risk of wages to be at a maximum, it means that controls are
insufficient to prevent or timeously detect errors. Increasing or reducing the number of tests of
control will not therefore reveal inadequacies in the actual performance of the clients internal
control. Alternatives A, B and D are therefore not correct but alternative C is because no tests
of control are performed when control risk is assessed at a maximum level.
Question 16

Audit risk that relates to the correct recording of wages

Alternative A:

Relates to the audit objective of establishing that recorded wages are valid.

Alternative B:

Relates to the audit objective of ascertaining that wages are recorded in the
correct accounting period.

Alternative C:

Is the correct alternative because it relates to the audit objective of ensuring

that the correct amounts will be paid. It will be checked by checking the hours
clocked in and the tariffs that will be used and to do the recalculations of the
wages.

Alternative D:

Relates to the audit objective of ensuring that wages are properly processed by
the accounting system.

Question 17

Payment of wages and inherent risk

Cash has a very high inherent risk, because it is easy to embezzle or to steal. The inherent and
control risk will therefore increase with regard to wages. Alternative B is therefore correct.
Alternatives A, C and D are good internal control measures and will serve to reduce the control
risk.

-30Question 18

AUE202M/103/3/2009

Internal control to ensure that wages are paid to the proper person

No further comments.
Question 19

Substantive procedures to check the validity of credit purchases

Alternatives A, B and D relate to the accuracy and completeness of credit purchase

transactions.
Alternative C is correct because the goods that are received are checked and inspected and the
goods received note is signed by the responsible person for evidence that the activity was
performed. It will ensure that the transaction occurred and that the goods were actually
received.
Question 20

Analytical procedures for inventory

Analytical procedures analyse significant ratios and trends on the reasonableness of figures that
lead to the year end financial statements. Therefore alternative B is the correct alternative
because analytical procedures assess the overall reasonableness of inventory and purchases in
the financial statements. Tests of transactions and balances and tests of control will best
complete alternatives A, C and D.
Question 21

Most important aspect regarding valuation of closing inventory

The question specifically mentions that perpetual inventory records are not maintained therefore
the only way to value closing inventory of such a company is to perform an efficient inventory
count at year end. Therefore alternative C is the correct alternative.
Question 22

Agreeing the details of the test count to the final inventory sheets

Agreeing the items counted by the auditor to the final inventory sheets of the client will ensure
that the items counted by the auditor are included in the final inventory sheets (alternative B). It
would not identify obsolete inventory, ownership or slowing moving inventory as mentioned by
alternatives A, C and D.
Question 23

Detection risk with regard to inventory

Alternative A:

Relates to the inherent risk and not to the detection risk.

Alternative B:

Relates to the control risk pertaining to inventory.

Alternative C:

Detection risk relates to the substantive procedures that the auditor should
perform. Alternative C is therefore correct.

Alternative D:

Relates to the inherent risk pertaining to inventory.

-31Question 24

AUE202M/103/3/2009

Most important general ledger account that affects several business

processes

No further comments.
Question 25

Inventory valuation assertion

No further comments.

Topic 8

Human resources/payroll

Study units 8.1, 8.2 and 8.3: Feedback on supplementary Do questions on

topic 8
8.1.1 Internal controls for wages
(a)

Internal controls to achieve objectives

References:
1.

17 marks
9 marks

Jackson & Stent (2007:13/8-13/12)

There has been due attendance by the relevant employees

Time registers or clock cards must be used.
Entry and exit points to work area to be:
limited
protected by a turnstile type mechanism
supervised during clocking periods.

2.

(1)

The wage rate used for each specific employee is correct

Maintenance of personnel records.
Wage rates should be checked by an independent person.
Clock cards to be prepared by the personnel department, strictly in terms of the
authorised employee list rate.
(1)

3.

The amounts calculated as payable to each person are correct.

The section administration clerk should complete a batch control sheet by
entering:

batch identification

control totals

signature acknowledge responsibility.

-32-

AUE202M/103/3/2009

The section head should:

check calculations

authorise overtime

check and sign the batch control sheet.

4.

(1)

The amount paid to a person, corresponds with the amount calculated

A payslip is issued to enable an employee to check the amount being paid to
him.
(1)

5.

Payments are made to the proper persons

Identification e.g. official staff card, of workers before disbursing wages.
Disbursements to take place in the presence of an authorised official e.g. an
independent paymaster.
Disbursements should be done by persons who have taken no part in
preparing wage records.
(1)

6.

There is evidence that payments are being made to the correct person
Employees should sign the record as evidence of having received their wages.
The disbursing clerk should mark the appropriate items in the wage record as
having been paid.
Regular independent reconciliations of unclaimed pay-packets on hand and the
unclaimed wages register should be performed.
(1)
(1 mark for a relevant control that matches the objective)

(b)

Controls for unclaimed wages

References:

8 marks

Jackson & Stent (2007:13/5; 13/11)

1.

Unclaimed wage envelopes should be returned to the cashier or paymaster,

who should record it in an unclaimed wages register and safeguard it. (1)

2.

The cashier or paymaster should sign the payroll record to acknowledge

receipt of the unclaimed wages identified.
(1)

3.

The pay-packets may not be released to other parties, e.g. a family member,
unless the employee has given written permission.
(1)

4.

Wages still unclaimed at the close of the following week should be deposited in
the bank.
(1)

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5.

When unclaimed wages are subsequently paid, proper identification of the

employee should be established. Employees should sign the unclaimed wages
record to acknowledge receipt of their wages.
(1)

6.

The unclaimed wages register should be scrutinised periodically by a senior

independent person and long outstanding unclaimed wages should be
investigated and redeposited.
(1)
(Mark as indicated with a maximum of 8 marks)

8.1.2 Internal controls for wage payout

References

10 marks

Jackson & Stent (2007:13/11)

1.

Physical security must exist over cash for disbursement as wages.

(1)

2.

The amount due to each employee should be recorded on a payslip, which should
be handed to the employee together with the sealed wage envelope.
(1)

3.

Each worker should be properly identified before the particular wage is paid
out,(official staff card).
(1)

4.

Disbursement should proceed in the presence of an authorised official, who

supervises the proper distribution of wage envelopes.
(1)

5.

The disbursing clerk should mark off in the wage records all wages that are paid out.
(1)

5. Employees should sign the wage record as evidence of having received their wages.
(1)
6. Wage envelopes not disbursed should be marked as unclaimed, (1) and the
disbursing clerk and an authorised official should check the unclaimed wages to the
wage record (1) and should sign the wage record as evidence of having done so.
(Mark as indicated with a maximum of 10 marks)

-34Topic 9

AUE202M/103/3/2009

Investing and financing

Study units 9.1, 9.2 and 9.3: Feedback on supplementary Do questions on

topic 9
9.1.1 Control and audit of a share issue
(a)

Control aspects relating to a share issue

References:

25 marks
15 marks

Jackson & Stent (2007:14/8-14/9)

1.

Authorisation for the issue of the shares.

2.

Compliance with the necessary statutory requirements.

3.

Opening a bank account and shareholders' cashbook specifically for the share
issue.

4.

Accounting for all applications in the application register.

5.

Authorisation and recording of allotments in the allotment register.

6.

Recording of all cash received in the shareholders' cash book.

7.

Recording of repayments in respect of applications not taken up in the

shareholders' cash book.

8.

Agreement of net cash receipts with the total allotments.

9.

Issue of share certificates only for shares allotted.

10. Correct accounting treatment and disclosure in the accounting records and the
correct recording of the allotments.
(1 mark for each control aspect)
(b)

Substantive procedures to vouch the shareholders' cash book

10 marks

References: Jackson & Stent (2007:14/26-14/28)

1.

Compare the cash received with the copies of the receipts issued.

2.

Test the composition of the deposits with regard to applications received, and
compare the total with the deposit slips.

3.

Inspect that repayments in respect of applications for which no allotment, or an

allotment of fewer shares than were applied for, has been made against the
paid cheques.

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AUE202M/103/3/2009

4.

Compare the deposits with the bank statements.

5.

Compare the cheques with the bank statements.

6.

Reperform calculations to test the additions, cross additions and the balance of
the cash book.

7.

Reconcile the cash book balance with the balance per the bank statement.
(1 marks for each substantive procedure with a maximum of 10 marks)

9.1.2 Audit of an interest bearing borrowing

(a)

Particulars in loan agreement

References:

(b)

18 marks
9 marks

Jackson & Stent (2007:14/28-14/30)

1.

Name of the borrower, which should be the clients name.

2.

Name of the lender - ABC Bank.

3.

Amount of the loan.

4.

Rate of interest.

5.

Basis of calculation of interest.

6.

Terms of payment of interest and repayment of capital.

(1 marks for each particular)

Audit of the loan balance at year-end

References:

9 marks

Jackson & Stent (2007:14/28-14/30)

1.

Obtain a certificate directly from ABC Bank for the amount outstanding in
respect of the capital sum, accrued interest and particulars of the security
provided.

2.

Agree the particulars of the certificate with the original contract, general ledger
account and financial statements.

3.

Re-perform interest calculations in conformity with the contract agreement and

ensure that accrued interest is accounted for in the appropriate accounting
period.

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AUE202M/103/3/2009

4.

Inspect the endorsement on the transfer deed at the Deeds Office for
registration of the mortgage bond.

5.

Examine that particulars pertaining to the mortgage bond on the certificate

received from ABC-Bank agree with the general ledger account, and with the
note relating to security on the balance sheet.

6.

Ensure proper disclosure in the financial statements of:

- Capital sum outstanding under non-current liabilities, accrued interest and
capital repayable within one year under current liabilities.
- Rate of interest, respective dates of repayment and amounts of instalments.
(1 marks for each applicable substantive procedure with a maximum of 9 marks)
9.1.3 Audit of a vehicle sold
(a)

14 marks

Profit/loss on sale of delivery vehicle

Cost price
Accumulated depreciation
Book value 28/02/x1
Depreciation (13500x20%x10/12)
Book value 1/1/x2
Selling price
Profit on sale

(b) Auditing the sale of the delivery vehicle

References:

5 marks
R
42 650
29 150
----------13 500
2 250
----------11 250
14 500
---------3 250
=====

(1)
(1)
(1)
(1)
(1)

9 marks

Jackson & Stent (2007:14/19-14/26)

1.

Inspect the directors minute authorising the sale of the particular delivery vehicle.
(1)

2.

Inspect the contract entered into between the company and the scrap yard and
confirm the selling price of R14 500.
(1)

3.

Agree the amount of R14 500 recorded in the cash receipts journal to the relevant
receipt and bank deposit slip and ensure that the particular deposit appears on
the companys bank statements.
(1)

4.

Examine the correctness of the journal entries for the correct recording of the
profit on sale of the vehicle. The following journals should be effected:

-37-

9.1.4

Depreciation
Accumulated Depreciation

AUE202M/103/3/2009

(1)

Dr
Cr

2 250
2 250

(1)

Accumulated Depreciation
Realisation Account

(1)
(1)

Dr 31 400
Cr 31 400

(1)
(1)

Realisation Account
Vehicle

(1)
(1)

Dr 42 650
Cr 42 650

(1)
(1)

Bank
Realisation Account

(1)
(1)

Dr 14 500
Cr 14 500

(1)
(1)

5.

Inspect the posting of the entries in the cash receipts journal and general journal
to the appropriate general ledger accounts.
(1)

6.

Inspect the non-current assets register and ensure that the particular delivery
vehicle is indicated as having been sold.
(1)
(Mark as indicated with a maximum of 9 marks)

Internal control questions for non current assets

Reference:

12 marks

Study Guide (2007:9.1.4)

Jackson & Stent (2007:14/3; 14/19-14/26)

1.

Whether adequate authorisations for capital expenditure are properly recorded

e.g. minuted by the board of directors or capital expenditure committee, etc.

2.

Whether non-current assets registers are maintained and balanced regularly with
the respective accounts in the general ledger.

3.

The frequency of the clients physical inspections of fixed assets and agreement
of inventories with fixed asset register.

4.

Whether sales, retirements and scrapings of non current assets are properly
authorised and proceeds of sales are accounted for and recorded.

5.

Whether equipment not in use is subject to adequate control.

6.

Whether there is a properly formulated policy with regard to insurance of non

current assets, including breakdown and loss of income insurance.

7.

Whether the client has appropriate policies for maintenance and replacement.

8.

Whether maintenance, replacement and depreciation programmes are applied in

such a way as to prevent, as far as possible, distortions of profit from year to year.
(1 marks for each applicable enquiry with a maximum of 12 marks)

- 38 9.1.5

AUE202-M/103

Audit of property

22 marks

References: Jackson & Stent (2007:14/19-14/26)

1.

Obtain directly from XYZ Bank Limited (who will normally be in possession of the
title deed in respect of the property) a certificate, (1) in which all important
particulars pertaining to the title deed to the property and encumbrances thereon
are certified by the bank, (1) for the purpose of your audit for the financial year
ended 28 February 20xx.

2.

In addition a certificate may be obtained from the Registrar of Deeds, setting out
details of the registration of the property and of any encumbrances registered
against the title.
(1)

3.

Examine the certificates obtained in 1 and 2 above, or where it is possible to do

so, inspect the title deed documents, and satisfy yourself that
(1)
(a)

the land is registered in the name of Magic Carpets (Proprietary) Limited;

(1)

(b)

the description of the land is in accordance with the information recorded in

the auditees records;
(1)

(c)

the details of the mortgage registered in favour of XYZ Bank Limited agree
with the information in the books and the financial statements of the client;
and
(1)

(d)

the details of any servitudes or other encumbrances registered in respect of

the land agree with the information in the books and financial statements of
the auditee.
(1)

4.

Agree the rand value of the land and the buildings in the financial statements at
cost to the balances of the relevant non current asset accounts in the general
ledger.
(1

5.

Where any amounts have been capitalised to the cost of land and buildings in the
current financial year (e.g. the cost of improvements to the buildings),
(1)

6.

(a)

obtain evidence and authority for the amounts capitalised; and

(1)

(b)

consider the appropriateness of the accounting treatment thereof in the

books of account.
(1)

Visit the auditees business premises, in order to physically inspect the buildings,
i.e. the warehouse erected on the property and to verify its existence.
(1)

- 39 7.

8.

AUE202-M/103

(a)

Assess the open market value of the property, in order to ascertain whether
there has possibly been any permanent diminution in the value of the
property, which would necessitate a write-down thereof to market value in
the books of account. (From the information given in the question, this
appears to be unlikely).
(1)

(b)

Obtain amongst other things, the municipal valuation certificate for the
property and check the details thereon with the clients records and with all
other audit evidence, to confirm the reasonableness of the directors'
valuation.
(1)

Examine that the land and buildings are properly disclosed in the balance sheet
and in the notes thereto, in accordance with generally accepted accounting
practice, (1) and with the requirements of Schedule 4 of the Companies Act, as
follows:
(1)
Non current assets

20x2
R

20x1
R

Property at cost price

Land
- purchased 1 March 20xx
XXX XXX
Buildings
- erected
20xx
XXX XXX
- improvements
20xxXXX XXX XXX XXX
XXX XXX

(1)
XXX XXX

(1)

XXX XXX
(1)
XXX XXX

(1)

The land comprises of stand XXX .... (description) with a warehouse erected
thereon.
(1)
This property is encumbered by a first mortgage bond in favour of XYZ Bank
Limited.
(1)
(Mark as indicated with a maximum of 22 Marks)
9.1.6 Audit of machinery

25 marks

(a) Substantive procedures to vouch the purchase of the new bulldozer 7marks
Reference:

Jackson & Stent (2007:14/19-14/26)

1.

Examine the minuted authorisation of the purchase of the new bulldozer.(1)

2.

Compare the particulars of the entry in the payments cash book (cash
payments journal) (1) with the supporting documentation such as the purchase
invoice, delivery note, registration documentation, etc.
(1)

- 40 -

AUE202-M/103

3.

Examine the relevant paid cheque, and ensure that it is made out to the seller
and that the amount is correct.
(1)

4.

Follow the cheque payment through to the relevant bank statement.

5.

Check the posting of the transaction, and ensure that it is shown in the
machinery asset account (1) in the general ledger and is recorded in the
machinery non current asset register.
(1)
(Mark as indicated)

(1)

(b) Substantive procedures for the verification of machinery at year-end18marks

References:

Jackson & Stent (2007:14/19-14/26)

1.

Compare the opening balance of the machinery asset register and asset
account in the general ledger to the previous year's balance sheet and working
papers (Completeness/Existence/Rights/Value)
(1)

2.

Reperform calculations to test the additions and calculations of the

- machinery asset register
(1)
- machinery account in the general ledger
(1)
- accumulated depreciation of machinery account in the general ledger
(Completeness/Value)
(1)

3.

Compare entries in the machinery asset register with supporting documentation

such as invoices, lease and hire purchase contracts (If not previously done).
(Rights/Value)
(1)

4.

Ensure that the particulars of the new bulldozer purchased during the year are
correctly recorded in the machinery asset register. (Value)
(1)

5.

Check that the rate used to calculate depreciation for machinery is consistent
with previous years, and that depreciation is calculated on the new bulldozer
from the date of acquisition. (Value)
(1)

6.

Agree the totals of the machinery asset register for cost price and accumulated
depreciation to the machinery account and the account for accumulated
depreciation of machinery in the general ledger. (Completeness /Value)(1)

7.

Perform a physical inspection of the machinery, and ensure that the items do in
fact exist by checking the asset numbers per the machinery asset register.
(Existence)
(1)

8.

Examine insurance policies in terms of which machinery is insured, and also the
repairs and maintenance records for machinery to ensure that all bulldozers are
accounted for and that their values are reasonable. (Value/Completeness)
(1)

- 41 9.

AUE202-M/103

Obtain an engineer's valuation certificate for each bulldozer, and compare this
value to the book value of each bulldozer in the machinery asset register.
(Value)
(1)

10. Obtain a certificate from management to the effect that all machinery, as
disclosed in the accounting records, exists and is the property of the company.
(Completeness/Rights/Existence/Value)
(1)
11. Examine that machinery is disclosed as a separate component under non
current assets in the company's balance sheet stating
- total cost price of machinery
(1)
- value of assets purchased or disposed of(1)
- depreciation for the year
(1)
- total accumulated depreciation provided or written off since the date of
acquisition.
(1)
(Classification)
12. Check that the accounting policy according to which machinery is depreciated is
disclosed as part of the accounting policy of the company. (Classification)
(1)
(Mark as indicated with a maximum of 18 marks)

Topic 10 Investment and cash

Study units 10.1 and 10.2:

Feedback on supplementary Do questions on to

10.1.1 Controls over cheque forms and signing of cheques

References:

18 marks

Jackson & Stent (2007:10/4; 10/38-10/40)

1. A register of cheque books received and issued should be kept and control of
unissued cheque books should be in the hands of a senior official.
2. All cancelled cheques should be clearly marked as such and attached to the relevant
cheque counterfoil, or separately filed.
3. All paid cheques returned by the bank should be filed in numerical order.
4. Cheque form can be printed with the crossing 'Not Negotiable and made out to
order.
5. Change of the crossing on cheque forms and to whom payable may only be effected
by the person responsible for the signing of cheques.
6. Drawn cheques should be presented to the person(s) authorized to sign, together
with the appropriate supporting documents.

- 42 -

AUE202-M/103

7. Persons responsible for the signing of cheques should examine the supporting
documents for:
- Amounts shown on the cheques are indeed due to be paid, and any discount due
has been taken.
- Correct names of the payees.
8.

Supporting documentation should be initialled or cancelled in some way as having

been paid.

9.

All cheques above a certain amount should require the signatures of two senior
officials.

10.

Cheques needing only one signature can be overprinted with the maximum
amount of the clerks authority - for example R1 000.

11.

Computerized systems may be used for the printing of cheques with the manual
or electronic signature of the authorised cheque signatory.

12.

Use of a separate bank account for example payments to creditors.

(1 marks for each control with a maximum of 18 marks)

10.1.2 Additional internal control measures for cash registers and for the use thereof
8 marks
Reference:

Jackson & Stent (2007:10/4;10/40)

1.

Cash registers should display the amount of a sale or print a ticket so that the
customer can check the amount charged.

2.

Cash registers should keep a cumulative cash register total, for which the amount
of individual sales and of total sales can be printed onto a tally roll.

3.

Only the accountant may have a cash register key that permits access to the cash
register's total.

4.

When taking the daily cash register reading the accountant should resent the
accumulative mechanism to zero, so that each day's total sales may easily be
agreed to the cash on hand.

5.

The accountant should lock each cash register after the reading has been taken.

6.

Each cashier should only be responsible for a specific cash register and should
not operate another cashier's cash register (segregation of duties).

7.

Each cash register should have a cash float, and the cashier and the accountant
respectively should sign a float register for the receipt and the return of the floats.

- 43 8.

AUE202-M/103

The cash drawers of cash registers should have locking facilities, and should be
unlocked and locked each day by the accountant in the presence of the cashier.
(1 marks for each control with a maximum of 8 marks)

10.1.3 Audit of investments

15 marks

Reference: Jackson & Stent (2007:14/19 - 14/32)

Fixed deposit
1.

Inspect the fixed deposit receipt and note that it is in the name of the company.

2.

Agree the amount on the receipt with the records. (R1 000 000)

3.

Recalculate the accrued interest on the deposit and ensure that it is provided for.

4.

Obtain a certificate direct from the bank containing details of the fixed deposit and
the accrued interest.

5.

Agree this information with the accounting records.

6.

Ensure that the fixed deposit is properly disclosed in the financial statements.

7.

Obtain a mamagement representation letter regarding the existence of the fixed

deposit.

Savings account
1.

Obtain the savings book/bank statements and check entries, including interest
received, to the relevant ledger accounts.

2.

Obtain a certificate direct from the bank, confirming the following:

- interest received during the year.
- accrued interest.
- balance of the savings account as at year end.

3. Agree the above-mentioned details with the recordings in the general ledger
accounts.
4. Examine that the savings account is properly disclosed in the financial statements as
current assets.
5. Obtain a management representation letter regarding the existence of the savings
account.
(1 mark for each suitable substantive procedure with a maximum of 15 marks)

- 44 -

AUE202-M/103

10.1.4 Bank reconciliation

References:

18 marks

Jackson & Stent (2007: 10/38 10/39)

1.

Agree the opening balances per the cash book (receipts and payments journal)
and the bank statement with the closing balances of the previous bank
reconciliation.

2.

Ensure that all bank statements are accounted for, by inspecting the sequence of
the page numbers and the totals carried forward from one bank statement to the
next.

3.

Agree the bank balance according to the bank reconciliation with the balance per the
bank statement as at 28 February 20xx.

4.

Agree the totals of receipts and payments per the bank reconciliation with the cash
receipts and payments journals respectively as at 28 February 20xx.

5.

Examine whether all cheques, deposits and sundry debits, (bank charges, bank
interest, R/D cheques, etc.) that appear in the cash book have been ticked off
against the details on the bank statements.

6.

Inspect the bank reconciliation for outstanding cheques and follow the outstanding
cheques through to the bank statements subsequent to year end.

7.

Follow the outstanding deposits on the bank reconciliation through to the bank
statements subsequent to year end.

8. Inspect the bank reconciliation for any abnormal reconciliation items.

9. Enquire about outstanding cheque 3456, the number of which is out of sequence or
may indicate a stale cheque.
10. Recalculate the arithmetical accuracy of the bank reconciliation, the cash book and
the outstanding lists.
11. Scrutinise the bank statements subsequent to year end for cheque numbers
preceding cheque number 7691 that may be deliberately omitted from the bank
reconciliation.
12. Obtain directly from the bank a certificate of balance as at 28 February 20xx.
13. Agree the balance on the bank certificate with that shown on the bank statement and
the bank reconciliation.
(1 marks for each appropriate substantive procedure with a maximum of 18 marks)

- 45 Topic 11

AUE202-M/103

Overall review

Study unit 11.1: Feedback on supplementary Do questions on overall review

11.1.1 Overall review of financial statements

6 marks

References: Jackson & Stent (2007: 6/13 6/14)

Aspects pertaining to accounting policies
Determine whether the financial information has been prepared using accounting policies
which are:
1. in accordance with generally accepted accounting practice.
2. consistent with those applied previously.
3. appropriate for the entitys business.
4. properly disclosed in the financial statements.
(1 marks each)

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