CAUA3751 - CLASS TEST 2 – 19 APRIL 2017- MEMORANDUM

QUESTION 1 (10 MARKS)

Assertions Applied
Completeness  All inventory items on hand have been included in the balance 
Existence  No fictitious inventory items have been included to overstate the balance.

Valuation  The amount of 432 087 represents the amount that can reasonably be
expected to be collected from inventory sales after making a suitable write
down for items which have decreased in value. 
Rights  Suits (Pty) Ltd has the right of ownership of all the inventory items, e.g. the
inventory have not been ceded to a Bank as security. 
Presentation & The inventory balance, and all information relating thereto has been
Disclosure  appropriately presented and described and clearly expressed. 

QUESTION 2 (16 MARKS)

1. Control activities
Comparison and reconciliation:
This amounts to a comparison of actual research costs incurred against budgeted research
costs to identify any overspends, investigate the causes and resolve any weaknesses giving
rise to the overspend (prevent any similar overspends from occurring). Underspends will also
be followed up where they have occurred unexpectedly.
Performance review:
This also amounts to a review by the directors of the performance of the research department
in controlling costs.
Note: The direct involvement of two important directors is also part of creating a sound
control environment.

2. Control activity
Custody control:
This control is designed to protect the company’s assets (intellectual property), e.g. research
data, formulae for medications, etc. from theft/misuse by research personnel.

3. Control activity 
Comparison and reconciliation
The three-monthly inventory counts amount to a comparison of physical quantities of
inventory on hand with the theoretical quantities of inventory per the inventory records
Inventory counts may also be regarded as (detective) custody controls as they are designed
to identify any weaknesses in the custody of the company’s inventory. A discrepancy
identified between actual and theoretical quantities must be investigated and resolved to
minimise the risk of similar discrepancies recurring.
4. Control activity
Custody control – physical:
This is a control designed to prevent the physical deterioration of one of the company’s assets,
i.e. inventory.

5. Control environment
Participation by those charged with governance and communication and enforcement of
ethical values: The board (including the chairman) is actively involved in developing a strong
sense of ethics in the company. The board sets the conditions of the ethical code
communicates the contents and consequences of breaking the code to employees (full
attendance of the board demonstrates the importance of ethical behaviour) investigates all
alleged violations of the code.

6. Control environment
• Following up on employee references is a sound human resource policy as it increases
the chances that only honest, trustworthy and competent people are employed
• Equally the two week introductory period demonstrates that the company is
committed to train employees and improve their overall competence in terms of their
specific functions
• Treating employees with respect and remunerating fairly are also aspects of good
human resource practice.

(Max: 16 from possible 19 marks above)