Governance Auditing and Assurance II

Final Exam - November 2021

(ACC3022H)

TIME: 180 MINUTES (3 Hours) MARKS: 120

This reading document comprises of thirteen (13) numbered pages, including this cover sheet.
1. This is a limited open book exam. All SAICA accredited handbooks may be utilised during this test.
No other materials may be utilised. Students are required to adhere to the SAICA Open Book Policy.
2. You are required to answer all questions.
3. Answer questions on BOTH SIDES of the pages of answer books.
4. Ensure that your name, question number and number of books submitted is on the cover of each
book used.
5. Whilst there is no explicit reading time, the duration of the assessment includes appropriate reading
time
6. No questions may be asked during the examination, make assumptions if you are uncertain
regarding the interpretation of the scenario.
7. All answers must be in black or blue ink. DO NOT write in pencil or use correction fluid (tipex) in
your answer booklets. Answers in pencil or where correction fluid has been used will not be
marked.
8. Uploading:
• You must upload your attempt to the Assignments tab on the ACC3022H 2021 Vula site in a
single PDF file.
• It is your responsibility to ensure that after conversion, your submission is legible so it may be
marked appropriately
• Your file name must be your student number ie “ABCXYZ001”.

Page 1 of 13
SCENARIO

Introduction
The Plumbing Making Entity (PME) Group manufactures and sells plumbing equipment.
Poole Inc has recently been appointed as the auditors of the PME group and individual entities
within the group for the financial year ended 31 October 2021.
As an audit trainee at Poole Inc, you are currently engaged in planning the audit and the
following working papers have been prepared by your audit team:

Working Paper Working Paper Title

Reference
A1/1 – A1/3 Understanding the entity
B15/1 Sale and distribution of plumbing equipment within the PME
Group
C1/1 Sale of Investment Property
D20/1 PME manufacturing going concern issues
E25/1 Audit differences identified for PME Manufacturing

Page 2 of 13
 Client Name: PME Group Prepared by: Bee Si Date: 4 November 2021
A1/1
Year-end: 31 October 2021

Subject: Understanding the entity

1) Group structure and shareholding:

The PME Group consists of the following entities at 31 October 2021:
• PME Investments (Pty) Ltd (PME Investments)
• PME Manufacturing Company (Pty) Ltd (PME Manufacturing)
• PME Retail Company (Pty) Ltd (PME Retail)

PME Investments
Shareholders:
20% James Tap
20% Lyle Pipe
5% Ordinary National Bank
55% German Investment Company

PME Manufacturing PME Retail

Shareholders: Shareholders:
100% PME Investments 100% PME Investments

2) Understanding the entities within the PME Group

PME Investments
PME Investments was established in 1990 by two cousins, James Tap and Lyle Pipe, who are
passionate about the plumbing industry. In 2017, James and Lyle were made a lucrative offer
by a German Investment Company for a controlling interest in PME Holdings. After much
consideration, James and Lyle decided to accept the offer.
PME Investments has 100% shareholding of PME Manufacturing and PME Retail. The board of
directors and relevant sub-committees for PME investments oversee the activities of all other
entities within the PME Group
PME Investments provides administrative services (such as payroll preparation and book-
keeping services) to PME Manufacturing and PME Retail for a service fee. The administrative
services do not include the preparation of financial statements as Ordinary National Bank has
requested that Poole Inc prepare the financial statements for all entities in the PME group,
which Poole Inc has agreed to.

Page 3 of 13
Client Name: PME Group Prepared by: Bee Si Date: 4 November 2021
A1/2
Year-end: 31 October 2021

Subject: Understanding the entity

2) Understanding the entities within the PME Group (continued)

PME Manufacturing
PME Manufacturing manufactures plumbing equipment, which comprises of taps,
showerheads, pipes and other plumbing related fittings. PME Manufacturing purchases raw
materials from various suppliers, both locally and internationally.
The raw materials are used to manufacture plumbing equipment in a factory in the Western
Cape. The manufacturing process is labour intensive with the entity employing 510 employees
for various roles within the factory and warehouse, which includes the use of heavy machinery.
All manufactured items are transferred solely to PME Retail at a 15% mark-up on cost. Cash
payment is received from PME Retail before delivery takes place. Inventory at year end is
therefore limited as items are made to order and delivered as soon as possible to the various
retail outlets.

PME Retail
PME Retail purchases the plumbing equipment solely from PME Manufacturing. PME Retail then
sells these to customers at various store locations across South Africa, on a cash only basis. Cash
and card payments are accepted at the stores. Many customers make payments with physical
cash and PME Retail is aware of the risks related to cash being prone to theft and are trying to
strengthen controls in this area.

3) Board of directors of PME Investments

The board of directors of PME Investments as at 31 October 2021 comprises of:

Name Position
Liza Noshee Chief Executive Officer (CEO)
Kacie Rope CA(SA) Chief Financial Officer (CFO)
Lara Crawley Operations Director
Jessica Nathan Marketing Director
Kumar Katz Human Resources Director
James Tap CA(SA) Non-executive Director & Chair of the Board
Lyle Pipe CA (SA) Non-executive Director
June Septor Non-executive Director

Page 4 of 13
Client Name: PME Group Prepared by: Bee Si Date: 4 November 2021
A1/3
Year-end: 31 October 2021

Subject: Understanding the entity

Additional information on the board of directors

• James Tap and Lyle Pipe were appointed as non-executive directors by James and Lyle
together exercising a 40% shareholding to pass a shareholder’s resolution.
• Kumar Katz and Jessica Nathan were appointed via a board resolution following
recommendations from James Tap and Lyle Pipe.
• June Septor, the CFO of Ordinary National Bank, was nominated and appointed by
Ordinary National Bank via a shareholder agreement.

4) Sub-committees and other information

• PME has an audit committee, remuneration committee, risk committee, social & ethics
committee, and nominations committee.
• The audit committee comprises of Lyle, June and Kacie. Kacie is the chair of the audit
committee.
• The remuneration committee comprises of James and June. James is the chair of the
remuneration committee.
• The position of company secretary of PME Investments is currently vacant.

Page 5 of 13
Client Name: PME Group Prepared by: Bee Si Date: 4 November 2021
B15/1
Year-end: 31 October 2021

Subject: Sale and distribution of plumbing equipment within the PME Group

1. Ordering
Each PME Retail store has the following employees:
- 1 Store manager
- 1 to 2 Store supervisors (depending on the size of the store)
- 2 to 5 Sales assistants (depending on the size of the store)

All orders are made by PME Retail stores on the PME Inventory System (‘The system’). The
system is sophisticated and monitors minimum re-order levels. The store manager is alerted via
an e-mail when the quantity of certain plumbing equipment falls below the minimum amount
pre-programmed on the system. The store manager is required to log into the system using a
unique username and password before placing an order. The store manager completes an
electronic pre-numbered order form by manually entering the relevant item code and quantity
to be ordered. The store manager then submits the order form, which is sent to PME
Manufacturing (who have read only access to the ordering module on the system).

2. Payment and recording

PME Retail then transfers the cash from the bank account of PME Retail to the bank account of
PME Manufacturing.

A copy of the order form is sent from the system to the PME Investments (who have read only
access to the ordering module) along with proof of payment, which is then used by the
bookkeeper of PME Investments to record the transaction as “Deferred Revenue” in the general
journal of PME Manufacturing and “Prepayments - Inventory” in the general journal of PME
Retail.

3. Delivery
Goods are usually delivered by PME Manufacturing within 5 to 7 days of the order being placed.
When goods ordered are received by the store supervisor at PME Retail, a physical pre-
numbered three-part goods received note (GRN) is prepared (the reference number matches
that of the order form):
- One copy of the GRN is retained by the store supervisor and filed for inventory record
keeping purposes of the store.
- The second copy of the GRN is sent to PME Investments to process the necessary
accounting adjustments for the delivery of stock.
- The third copy of the GRN is returned to PME Manufacturing as evidence of receipt of
the goods and to assist in the follow up of queries.

The store supervisor who receives the stock at PME Retail signs the GRN after completing the
actions below:
- Agree the physical quantity received to the order form
- Agree the physical quantity received to the delivery note

Page 6 of 13
Client Name: PME Investments Prepared by: Bee Si Date: 4 November 2021
C1/1
Year-end: 31 October 2021

Subject: Sale of Investment Property

The working paper below provides a description of the audit work performed related to the sale
of investment property, which was owned by PME Investments.
The investment property comprises of a small office building which is being leased to tenants.
This building was previously used as PME’s office building, but was reclassified to investment
property when PME relocated to a larger office building in 2018.
In order to generate some cash flow, management took it upon themselves to sell the
investment property during the current year, on 31 October 2021.
You have been provided with the following calculation related to the sale of investment
property:

Cash Proceeds
Less: Carrying amount at 31 October 2021
Carrying amount at 31 October 2021 is calculated as follows:
Carrying amount at 1 November 2020 plus fair value gains for the
period
Equals: Profit on disposal

This was the only investment property held by PME Investments.

Poole Inc engaged the services of a property valuation expert to determine the market value of
the investment property as at 31 October 2021.
No audit work has yet been performed on investment property for the year ended 31 October
2021.

Page 7 of 13
Client Name: PME Group Prepared by: Bee Si Date: 4 November 2021
D20/1
Year-end: 31 October 2021

Subject: PME Manufacturing going concern issues

There are concerns around the ability of PME Manufacturing to operate as a going concern
based on the following:
- Significant drop in market-share due to international competitors who are able to
manufacture plumbing equipment cheaper and faster.
- As a result of the above drop in market share, a decrease in orders from PME Retail has
resulted in significant cash flow difficulties.

During the enquiries held with management, the above was discussed and management shared
the following responses about their future plans:

• PME Retail have entered into a lucrative contract with Northern Star Development,
effective 1 February 2022 to 31 October 2022. Northern Star Development will be doing
major redevelopment at a nationwide hotel group and have entered into a contract with
PME Retail to be their preferred supplier for all plumbing equipment. Management
performed a profitability assessment and deemed the contract to be profitable.
Management also believe that the increase in orders from PME Retail will improve the
cash flow issues experienced by PME Manufacturing.

• PME Manufacturing plans to undergo a restructuring to achieve cost savings. the

restructuring will entail staff retrenchments. The legal proceedings surrounding the
retrenchments are being handled by the law firm, Halt Attorneys Inc.

• The German Investment Company will provide PME Manufacturing with a loan that will
be used for the acquisition of machinery, which should hopefully increase productivity
and decrease costs.
The German Company is listed and its latest AFS are readily available to the public

In light of the above, you have already performed audit procedures on the appropriateness
of the use of the going concern assumption by PME Investments and PME Retail and you are
satisfied that they will be able to continue to operate for at least 12 months after 31 October
2021.

Page 8 of 13
Client Name: PME Manufacturing Prepared by: Bee Si Date: 4 November 2021
E25/1
Year-end: 31 October 2021

Subject: Audit differences identified for PME Manufacturing

After performing your audit work for PME Manufacturing, you have identified the following
misstatements:
1) An employee is in the process of suing PME Manufacturing for unfair dismissal.
Management have recognised a provision of R320 000 but you have estimated that an
amount of R500 000 is more appropriate.

2) Showerheads with a cost price of R110 000 were damaged at the end of the
manufacturing process due to a faulty conveyer belt on the production machine. You
have determined that these goods cannot be resold. Management have not processed
any journal entries for the write-down of the damaged showerheads.

3) Other payables to the value of R320 000 is understated and has not been recognised.
50% of the R320 000 expense relates to the year ended 31 October 2021. The other 50%
relates to the prior financial year

The schedule of unadjusted differences was started but not completed as outlined
below:
Final Materiality = R150 000
R’000
#
Description of misstatement Assets Liabilities Equity Net Profit
1
2
3
Total

Audit Key:
() = CR

Page 9 of 13
REQUIRED:

• This required comprises of 5 Parts (Parts A to E).

• You DO NOT have to answer each Part in a Separate Book.
• Your answers must be submitted in a single PDF file on Vula.

Part A Marks

1. With reference to working papers A1/1 – A1/3:

Identify and explain any corporate governance concerns based on the 28

information provided.

Do not make any reference to concerns related to the Auditing Profession

Act, 2005.

1.Presentation and communication 1

2.Total 29

Please turn over for remainder of required

Page 10 of 13
 Part B Marks

2. With reference to the Introduction and working papers A1/2: 20

a) Identify and explain ten (10) risks of material misstatement (RoMM) at

the assertion level for the audits of PME Manufacturing and PME
Retail for the year ended 31 October 2021.

Do not deal with any matters relating to presentation and disclosure

and aggregation of financial records as part of your answer.

b) For each risk mentioned, identify one (1) assertion which is most
directly affected.
• Where the RoMM threatens all assertions related to a transaction
or balance, state “all” as the relevant assertion e.g. All assertions
related to trade receivables.
• No marks will be awarded where assertions have not been linked
to a particular balance or transaction.

Present your solution using the table below:

Risk of material misstatement Assertion
1 mark per RoMM 1 mark per assertion

3. With reference to working papers B15/1: 6

a) Identify three (3) key controls on which you intend to place

reliance.

b) For each control identified in (a) above, describe one (1)

appropriate test of control to test the operating effectiveness of
the controls.

Present your solution using the table below:

Key Control Tests of control
(1 mark each) (1 mark each)
1. 1.

Presentation and communication 2

Total 28

Please turn over for remainder of required

Page 11 of 13
 PART C: Marks

4. With reference to working paper B15/1: 10

a) Identify five (5) risks relating to the integrity of the financial

information which have not been mitigated by controls.

b) For each risk identified in (a) above, recommend one (1) control
to mitigate the risk.

Present your solution using the table below:

Risk Recommended Control
(1 mark each) (1 mark for each control)
1. 1.

5. With reference to working paper C1/1:

Describe the tests of detail you would perform to gather sufficient and
appropriate audit evidence that the transaction related to the sale of
investment property is not materially misstated at year end. 9

Do not deal with procedures related to the use of an expert.

3.Presentation and communication 1

4.Total 20

Part D Marks

6. In terms of ISA 570, list four (4) operating factors which may cast doubt 4
on the entity’s ability to continue as a going concern.

You are not required to apply your answer to the scenario.

7. With reference to working paper D20/1: 16

Describe the audit procedures you would perform in order to obtain

sufficient and appropriate evidence that PME Manufacturing is able to
continue to operate as a going concern.

Do not deal with the sale of investment property

Presentation and communication 1

Total 21
Please turn over for remainder of required

Page 12 of 13
 PART E: Marks
8. With reference to working paper C1/1:
5
Describe the procedures you would perform in order to assess the
competence, capabilities and objectivity of the property valuation expert
and evaluate the adequacy of the property valuation expert’s work in
light of the requirements of ISA 620 and any applicable IFRS.

9. With reference to working paper E25/1: 16

Describe, with reasons, the audit opinion you would express for PME
Manufacturing if management have refused to correct any of the
misstatements identified.

Ignore taxation.

You may assume that management have made adequate disclosure of the
material uncertainties regarding the use of the going concern assumption.

You are not required to draft the audit opinion as part of your answer.

Use a () to denote a credit entry on schedule of unadjusted audit

differences.

Presentation and communication 1

Total 22

End of required

Page 13 of 13