AUE3761

Oct/Nov 2023
SUGGESTED SOLUTION

General comments:

- Remember that this memorandum is only a guideline. Read each answer provided
by the student carefully.
- If the student described it in a different manner, but it relates to a point provided in
the memorandum, please award the marks.

Required 1: Describe the risks of material misstatement at the financial statement MARKS
level for RAPS for the year ended 30 September 2023.
References: Tutorial letter 102; Lesson 3.3; ISA 315 (Revised 2019)
INHERENT RISKS

1. The AFS might be materially misstated due to error as the company may not comply 
with the additional JSE reporting requirements and disclosures. (1)
(Note for explanation: Even though the company has been listed for a while and there
are no new requirements and they have complied with the requirements in the past,
it is argued that the risk should still be identified. It will however be assessed as low
based on this reasoning.)

2. The AFS may be materially misstated due to fraud as management may be involved

in fraudulent financial reporting and manipulation of financial information in
order to comply with the JSE listing requirements and to satisfy the public or
shareholders. (1)

3. The AFS might be materially misstated due to error as the financial results prepared 
by RAPS (client) might be incomplete due to time pressure. (1)
(Note: it must be clear that it is the client/management’s mistake and not the auditor,
otherwise it relates to detection risk.)

4. The AFS might be materially misstated due to error based on the going concern 
assumption being applied when it is not applicable, (1) due to indicators of the loss
in turnover due to system issues, loadshedding, rising costs, high interest rates,
competition, bad publicity, fines in terms of the Health and Safety Act (1 for any
indicator listed).

5. The AFS might be materially misstated due to fraud as there are overwhelming 
evidence of going concern risk factors which might place management under
threat of manipulating figures. (1)

Open Rubric
Required 1: Describe the risks of material misstatement at the financial statement MARKS
level for RAPS for the year ended 30 September 2023.
6. The AFS might be materially misstated due to fraud as management (Sarah 
specifically) might manipulate figures because she lacks integrity due to her stealing
her colleagues’ ideas. (1)

Bonus mark as the issue is explained later in the paper: The AFS might be 
materially misstated due to fraud as management seem to lack integrity as they
agreed to transgress Acts and do not want to disclose it in the AFS (what else are
they hiding). (1)

CONTROL RISKS

7. The AFS might be materially misstated, as errors might be occurring in the 

preparation of financial records due to a lack of experienced accounting
personnel, specifically in relation to year end procedures and provisions
related to RAPS as senior staff in the accounting department only joined the
company in the past few months. (1) (this risk affects both inherent and control
risk – students are only awarded the mark once and it does not matter where it is
presented)

8. The AFS might be materially misstated due to errors, as Sarah, a senior staff member 
in the accounting department only have experience in the Banking and Mining
sectors and Jessica has limited post articles experience. (1) (this risk affects
both inherent and control risk – students are only awarded the mark once and it does
not matter where it is presented)

9. The AFS might be materially misstated due to error as the financial data might not 
be properly transferred and/or tested after the installation and upgrade was
made to the software which affects the accounting thereof. (1) (Note: No marks for
indicating the internal controls might not work effectively – Impact on AFS not clear)

10. The AFS might be materially misstated due to error as staff might not be familiar 
with the accounting software after the upgrade (even though they have access
to online support, they might not make use of it). (1)

Available (12 x 1) 12
Maximum 12
Communication skills – Clarity of expression (well-structured sentences, appropriate 1
use of vocabulary)

Notes:

Marks for the decentralisation are not awarded as the distribution centres are not individually managed.
Marks for the new line of business (expansion) are not awarded as it will only take place in the next year.

2
Required 2: Discuss any ethical concerns that arise form Sarah’s conduct based on
the SAICA Code of Professional Conduct.
MARKS
Note that you are not required to suggest safeguards that should be put in place.

References: Tutorial letter 102; Lesson 1.2; SAICA CPC

1. Sarah Ncombe is a CA(SA) and is therefore bound to comply with the SAICA Code 
of Professional Conduct (CPC). (1)

2. From the auditor’s perspective (BNG), a familiarity threat (1) to objectivity 

(independence) (1) exists as Sarah 
- completed her training contract (articles) and was a manager at the firm very
recently and is still connected with staff at BNG (1) 

3. Sarah’s actions of claiming Jessica’s ideas as her own raises the following:

3.1 Creates a self-interest threat (1) to integrity (1) by taking Jessica’s ideas and 
claiming it as her own is dishonest and untruthful/ Sarah is not being 
straightforward in her interactions due to non-disclosure) (1) 

3.2 It also breaches the fundamental principle of professional behaviour (1) as


- She is stealing a fellow CA(SA)s ideas without acknowledgement (not being

honest and truthful) and her actions may bring the profession into disrepute.
(1) (Note: the correct terminology should be used in line with the CPC. Thus, no
marks for indicating Sarah is unprofessional.)

Available (9 x 1 = 9) 9
Maximum 7

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Required 3: Formulate the tests of controls that you will perform to test the internal
controls when placing orders and delivering goods. If you make use of test data to test MARKS
the automated controls, limit your answer to invalid test data.

References: Tutorial letter 102, Lesson 7

1. Attempt to access the ordering function by entering a fictitious username and 
password and confirm that it is rejected. (1)

2. Obtain a log of access obtained to inspect that only authorised users have access to 
specific functions (least-privilege function (user profile functions). (1)

(For example, only purchasing clerks have access to the ordering system and only
receiving clerks have access to the receiving component.
Staff members can also be requested to log in, to confirm their access to specific
modules/components.)
3. Attempt to enter a supplier code which is not on the list of approved suppliers and 
confirm that it is rejected. (1) (incorrect supplier code)

4. When entering a valid supplier code, compare the details that appear on the order 
form with the details that appear on the approved supplier list to confirm that the
details are accurate. (1) (It is not sufficient to mention “Observe that the systems are
linked”. It needs to be tested as in point 4 and 6 in the memo.)

5. When completing the order form attempt to:

5.1 Override the predictive text function and add your own description of items
(1) 
5.2 Attempt to enter an invalid character in the quantity field (1) (for example, 
include signs or alphabetic characters) 

5.3 Leave out one of the required fields (1) (quantity or do not select a
description)
5.4 Attempt to override the automatic completion of the price by entering your
own price. (1)

6. When selecting a description of an item from the predictive text function, compare 
the price with the details on the latest approved standard price list to confirm the
details are accurate. (1) (It is not sufficient to mention “Observe that the systems are
linked”. It needs to be tested as in point 4 and 6 in the memo.)

7. Reperform the calculation on the order done by the system (1) by multiplying the 
quantity with the price to ensure that it is accurate.

8. Observe a delivery taking place and test:

8.1 that it is in a dedicated receiving area. (1) 
8.2 that there are two receiving clerks present. (1) 
8.3 that the receiving clerks compares the physical products with the quantity
and description on the delivery note and the order. (1) 
8.4 that the receiving clerks inspect the quality of the products. (1) (Note:

Students might mention “Inspect the GRN for a discrepancy and then follow it

4
Required 3: Formulate the tests of controls that you will perform to test the internal
controls when placing orders and delivering goods. If you make use of test data to test MARKS
the automated controls, limit your answer to invalid test data.

through to the official inventory”. This however might not be applicable because
the TOC won’t necessarily be performed at that point of time.)

9. Inspect a sample of GRNs for the electronic signature of both receiving clerks. (1) 

Available (15 x 1) 15
Maximum 15

Note: No marks are awarded for comparing GRNs with orders as it was not part of the required.

5
Required 4: Formulate the additional substantive procedures that you will perform on
the creditors reconciliation of Selati as at 30 September 2023, to test whether the MARKS
reconciliation is relevant and reliable as audit evidence.

References: Tutorial letter 104, ISA500

Opening balance:
1. Obtain and inspect the creditors statement of Selati on 25 September 2023 and 
confirm the outstanding balance amounts to R2 400 000. (1)

For the payment which was not recorded:

2. Inspect the September/October bank statement and confirm that the payment was 
made on 30 September 2023, to Selati, and for the amount of R2 000 000. (1)

For the items that were sent back (received in poor quality):
3. Obtain order 3100, GRN 3200, the delivery note and invoice, and
3.1 Inspect that the order, delivery note and invoice was for 200 000 bags of sugar
(1) and inspect the date to confirm that it falls between the 25th and 30th of 
September (1) 
3.2 That the GRN noted the discrepancy and that only 180 000 bags of sugar were
received in good quality (1) (20 000 sent back) (Answers related to the physical
inspection of this by the auditor is not accepted as it had to be observed and the 
auditor was not there)
3.3 That the GRN was signed by the two receiving clerks (1) 
3.4 The deliverer signed the delivery note to acknowledge the discrepancy. (1) 
3.5 Inspect the order or invoice to determine the price per unit of the sugar is R40 
(R800 000/20 000). (1)
3.6 Reperform the calculation of the amount being 20 000 x R40 (R800 000). (1) 
3.7 Inspect the creditor’s statement and the relevant invoice to confirm that the 20
000 bags of sugar (R800 000) was included in the invoice of the original order 
of 200 000 bags of sugar (being 200 000 bags and not just 180 000). (1)
3.8 Subsequent to year end, inspect the credit note that was issued for the 20 000 
bags of sugar (R800 000). (1) (Alternative – inspect October 2023 creditors
statement for credit note to the amount of R800 000.)

For the goods received after the creditors statement date:

4. Obtain GRN 3278, the order, delivery note and invoice and
4.1 Inspect the invoice to confirm the amount (R750 000), that the GRN relates to
the correct description of goods and that the amount was calculated correctly. (1) 
4.2 Inspect the date (27 September 2023) when the items were received on the
GRN and delivery note. (1) 
4.3 Inspect the creditor’s statement for September 2023 to confirm that the invoice

was not included. (1)
4.4 Inspect the inventory records to confirm that the items were included in the 
inventory balance at year end. (1)
4.5 Enquire that there were no other deliveries received for the unmatched GRN 
and that no invoice was received. (1)
4.6 Inspect the creditors statement for October 2023 that the goods were included 
after 25 September 2023. (1)

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Required 4: Formulate the additional substantive procedures that you will perform on
the creditors reconciliation of Selati as at 30 September 2023, to test whether the MARKS
reconciliation is relevant and reliable as audit evidence.

Available (17 x 1) 17
Maximum 14
Communication mark – appropriate style (formal language used, appropriate 1
statements)

Notes:
Students had to focus on substantive procedures (not test of controls) and only on the creditor’s reconciliation. For
example, inspecting a signature for the approval of the reconciliation is a TOC.
Students should not perform procedures already included in the work paper.

7
Required 5.1: Consider whether the matter regarding the investigation of the claims
submitted in relation to the contaminated chicken vienna sausages is a subsequent
event in terms of ISA 560 and discuss how the matter regarding the investigation of the
MARKS
claims should be accounted for in the 2023 financial statements.

Your answer should include consideration in terms of ISA 560 Subsequent events and
IAS 37 Provisions, contingent liabilities and contingent assets.
References: Tutorial letter 105, IAS37, ISA560
5.1.1 The issue relating to the additional claims received for consuming contaminated 
chicken vienna sausages is a subsequent event (1) 
as it became known after the date of the financial statements but before 
releasing the independent auditor’s report (1).
This is based on the directors discussing the matter at the board of directors
meeting (1).

5.1.2 The event that is under investigation (the contaminated chicken vienna sausages 
which has been consumed), occurred before year end (during the financial 
year). (1)
This is indicative of conditions that existed at the reporting date and is therefore
an adjusting event. (1)

5.1.3 As a result of
5.1.3.1 a past event which is the sale of contaminated chicken Vienna
sausages and the settlement of R200 000 to one customer (1); and 
5.1.3.2 the expected outflow from the entity of resources embodying economic
benefits as per the lawyers opinion (1); 
5.1.3.3 the fact that the amount cannot be measured reliably and the timing
thereof is unknown as it depends on future investigations (1) (timing and 
value unknown);
5.1.3.4 a present obligation seems to exist (possible obligation) (1); however 
5.1.3.5 a provision cannot be recognised (due to the uncertainty of the amount
and timing) (1); 

5.1.3.6 a contingent liability therefore needs to be recognised (1).

For explanation purposes (no marks awarded – application is awarded in the point above):
A contingent liability is a
5.1.4.1 possible obligation that arises from a past event and whose existence will
be confirmed only by the occurrence or non-occurrence of one or more uncertain
future events not wholly within the control of the entity; or
5.1.4.2 present obligation that arises from past events but is not recognised
because
• It is not probable that an outflow of resources ambodying economic
benefits will be required to settle the obligation; or
• The amount of the obligation cannot be measured with sufficient reliability.

5.1.4 The following information should therefore be disclosed in the 2023 financial 
statements (1):

8
Required 5.1: Consider whether the matter regarding the investigation of the claims
submitted in relation to the contaminated chicken vienna sausages is a subsequent
event in terms of ISA 560 and discuss how the matter regarding the investigation of the
MARKS
claims should be accounted for in the 2023 financial statements.

Your answer should include consideration in terms of ISA 560 Subsequent events and
IAS 37 Provisions, contingent liabilities and contingent assets.
5.1.5
5.1.5.1 Nature of the event (description) (1) and if possible a 
5.1.5.2 estimate of the financial effect (1) 
5.1.5.3 an indication of the uncertainties relating the amount (1) 

5.1.5.4 the possibility of any reimbursement (1)

Available (16 x 1) 16
Maximum for question 5.1 13
Communication mark: Logical argument (use of technical vocabulary and logical 1
structure of ideas)

Note to students: The required specified that students had to focus on the additional claims
received and not on the first claim which was settled before year end.

9
Required 5.2: With reference to 5.1, explain the type of audit opinion BNG should MARKS
express and whether the matter is a key audit matter.
You are not required to draft any sections of the audit report.

References: Tutorial letter 105, ISA700, ISA701

5.2.1 The issue that the contingent liability has not been recognised, is a misstatement 
(1) because it is a difference between the amount, classification, presentation, or 
disclosure (1) of a reported financial statement item and the amount, classification,
presentation, or disclosure that is required for the item to be in accordance with
the applicable financial reporting framework (IAS 37).

5.2.1 In terms of materiality: 

5.2.1.1 The matter is not quantitively material (1) as it does not exceed final materiality, 
63 x R200 000 = R12.6 million, which is less than R200 million or the amount 

cannot be determined (unknown) and therefore measured against materiality. (1)
5.2.1.2 The matter is however qualitatively material (1) as its non-disclosure in the AFS
might influence the users decisions (1) (constitutes directors breaching their
fiduciary duty as the entire board was aware that the Consumer Protection
Act No 68 of 2008 and Foodstuffs, cosmetics and disinfectants Act No 54
of 1972 were transgressed).

5.2.2 The matter represents a disagreement with management (1) as they are 
refusing to disclose it the 2023 financial statements.

5.2.3 The misstatement is not pervasive (1) as it only affects one element of the 
financial statements, (contingent liability / liabilities / claims disclosure note). (1). 

5.2.4 The misstatement will result in a qualified audit opinion (1). An “except for” audit 
opinion should be included. (1) 
(No marks for adverse audit opinion.)

5.2.5 For explanation purposes (no marks awarded for theory): Key Audit matters are
those matters that, in the auditor’s professional judgement were of most
significance in the audit of the financial statements of the current period.
Key Audit Matters are selected from matters communicated with those charged
with governance.

This matter 
5.2.5.1 does not represent a Key audit matter (1) 
5.2.5.2 as there is no significant judgement involved (1) (the audit won’t
spend a lot of time to audit the matter).

(Note that Key audit matters won’t be examinable in future as it is excluded from the
revised SAICA competency framework.)

Available (13 x 1) 13
Maximum for question 5.2 10

10
Required 5.3: Discuss the concerns that you may have in terms of the Companies Act MARKS
regarding the directors’ actions taken in relation to the contaminated chicken vienna
sausages.

References: Tutorial letter 105, Companies Act

5.3.1 Section 29 states that a company providing financial statements to any person
must satisfy the financial reporting standards, be presented fairly and may not be
false, misleading or incomplete in any material aspect. Anyone who is part of the
preparation, approval, dissemination or publication may be guilty of an offence.
(Theory – no marks)

5.3.1.1 The board of directors is refusing to disclose the matter in the financial
statements and therefore the financial statements are incomplete / 
misleading. (1)
5.3.1.2 Even though the matter is not material in value (quantitively) (1) it is

material in nature as it seems as if the board is hiding something and might 
hide something else as well (threat to integrity). (1)

5.3.2 Section 76 states that a director of a company should exercise his powers and
functions as a director in good faith and for proper purpose, in the best interest of
the company and with the degree of care, skill and diligence reasonably expected
of a director. (Theory – no marks)

5.3.2.1 The directors did not behave in the best interest of the company / acted
with a degree of care, skill and diligence when they permitted that the
chicken vienna sausages should still be sold to the customers knowing
that it does not comply with regulations. (1) 
5.3.2.2 The decision not to comply with Health and Safety regulations could lead
to fines/penalties or lawsuit settlements which can cost the company a lot

of money or even lead to closure of the business. (1)

5.3.3 Section 214 states that a person is guilty of an offense if a party to the preparation,
approval, dissemination or publication of financial statements, knowing that it does
not comply with financial reporting standards. (Theory – no marks)

5.3.3.1 If the directors approve the financial statements knowing that it is

incomplete (do not disclose the contingent liability), they might be found 
guilty of an offense. (1)

5.3.4 Section 77 states that director may be held personally liable for any loss, damage
or costs that result from a breach of a fiduciary duty. (Theory – no marks).

5.3.4.1 As the directors have breached their fiduciary duties, they may be liable in

their personal capacity for the fines/penalties and other costs incurred as
a result of this breach in fiduciary duty. (1)

11
 Available (7 x 1) 7
Maximum for question 5.3 6
Total marks for Question 5 30

Required 6: Describe the substantive procedures that you will perform as part of your
going concern assessment to obtain audit evidence about RAPS’s ability to continue
as a going concern for the foreseeable future. MARKS
As indicated, exclude substantive procedures to audit the forecast as it has already been
completed.

References: Tutorial letters 104 and 105, ISA570, ISA500

Procedures relating to the management’s expert (business analyst) and the
business plan
1. Evaluate the competence and integrity of the business analyst who prepared the
business plan by
1.1 inspecting his/her qualifications (CV / certificates / membership with 
professional bodies) (1) 
1.2 inspecting their CV and enquire about his/her relevant experience in
preparing such information from previous clients (1)
(Students need to explain how competence and integrity is measured by including
points 1.1 or 1.2. No marks awarded for only mentioning that competence will be
evaluated)
2. Evaluate the objectivity of the business analyst who prepared the business plan
through enquires with management of RAPS and the business analyst to determine
if there are any existing relationships threatening independence of the business 
analyst. (1)

3. To address the scope of the report:

3.1 Inspect the engagement letter of the business analyst setting out the nature, 
scope and objectives of his/her work. (1)
3.2 Through enquiries, obtain an understanding of the process followed to prepare 
the business plan and the approval thereof. (1)

4. Assess the reasonableness of the business plan by:(1) 

4.1 With permission of management, obtain a second opinion by appointing an
auditor’s own expert (for example an economic expert), relating to the market
research to confirm viability thereof (especially considering the competitive
market). (1) 
4.2 Assess the reasonableness of the growth rate of 10% in revenue by referring
to the marketing strategies and supporting documentation thereof (or obtain

an opinion from the expert). (1) (Assessing the growth rate of 10% cannot earn

12
Required 6: Describe the substantive procedures that you will perform as part of your
going concern assessment to obtain audit evidence about RAPS’s ability to continue
as a going concern for the foreseeable future. MARKS
As indicated, exclude substantive procedures to audit the forecast as it has already been
completed.

marks if not compared with a measurable. Note that they also cannot compare
it with actuals as it is not available as yet as the project only starts in Dec.) 
4.3 Recalculate calculations in the financial projections. (1)

Procedures relating to the business contract

5. Obtain the contract between RAPS and Bingo to obtain assurance that the company
will implement the new platform and: 
5.1 Inspect the legality of the contract and that it has been signed by both parties.
5.2 Inspect the duration of the contract and that it is effective from 1 December 
2023.

5.3 Inspect the terms of the contract for example, whether it makes provision for it
to be renewed or cancelled, penalties involved etc.
5.4 Inspect the contract for the agreement of payments, monthly fee, etc.

Note: Maximum of 3 marks awarded for this section.

Note that students cannot just enquire about the contract with lawyers, they need
to specify what (full SP).

General procedures
6. Obtain a written representation which indicates whether or not the company is able 
to continue as a going concern. (1)

7. Through enquiry, obtain an understanding of the process that management uses 

to assess RAPS as a going concern (and management’s assessment). (1)

8. Enquire whether there have been any other additional factors that became 
available after management’s going concern assessment. (1)
(Or review it yourself by referring to events and transactions after year end /
assessment which might mitigate or aggravate conditions affecting the going concern
/ contact the lawyers to confirm if there are any issues that will influence the going
concern / contact the bank.)

9. Inspect the minutes of meetings to identify whether there is any reference related 
to financial difficulty / approval of budgets / forecasts which was not considered by
management. (1)
13
Required 6: Describe the substantive procedures that you will perform as part of your
going concern assessment to obtain audit evidence about RAPS’s ability to continue
as a going concern for the foreseeable future. MARKS
As indicated, exclude substantive procedures to audit the forecast as it has already been
completed.

10. Bonus mark: Students had to focus on the information and documentation that were 
made available to them. However, an additional mark can be awarded if they
considered the other risk indicators identified in the risk assessment (the assessment
of these indicators will anyway form part of management’s assessment). For
example:

Enquire from management how the other risk indicators that were identified as part
of the risk assessment will be handled to ensure that it does not influence the going
concern especially seeing that the losses exceeds materiality (loss in turnover due to
system issues, loadshedding, rising costs, high interest rates, competition, bad
publicity, fines in terms of the Consumer Protection Act No 68 of 2008 and Foodstuffs,
cosmetics and disinfectants Act No 54 of 1972). (1)

Available (18 x 1) 18
Maximum 18
Communication marks: 2
layout and structure (appropriate headings/paragraphs, numbering of questions)
Appropriate style (formal language used, appropriate statements)

Total 20

14