FLIP SESSION SOLUTION

Flatco SUGGESTED SOLUTION

Part a – Assertions relating to revenue

1. Occurrence (½)
This assertion goes to the whether the rental income is valid i.e. has actually happened
and is not fictitious. (1)

2. Accuracy (½)
This assertion goes to whether the rental income transactions have been calculated
correctly and are recorded at the correct amounts. (1)

3. Completeness (½)
This assertion goes to whether all rental income transactions that should have been
recorded are recorded. (1)

4. Cut-Off (½)
This assertion goes to whether the rental transactions are recorded in the correct financial
period. (1)

5. Classification (½)
This assertion goes to whether the transactions recorded as rental transactions are in fact
rental transactions and whether rental transactions are properly identified as such. (1)

Available (7½)
Maximum (5)

Part b – Likelihood of revenue being over/under stated

1. There is a likelihood of rental income being overstated for the following reasons: (1)

1.1. Rental income in 2015 has increased by 17% when expected increases are only 8%.
There were no apparent increases in the available units for rental to explain this
additional increase. (2)

1.2. Mr House has incentive to overstate revenue due to having to meet “certain profit
margins” to prevent the loan becoming immediately repayable. (1)

1.3. It would be very easy for deposits received to be recorded as rental income rather
than as a liability, especially taking into account the unexpected percentage increase
taken above. (1)

1.4. The fact that receipts for rental are received in advance could result in rental income
being recorded a month too early which could result in an overstatement of
revenue. (1)

1.5. There appears to be no incentive whatsoever for any risk to unrecorded revenue
based on the findings above. (1)

Available (7)
Maximum (4)
 FLIP SESSION SOLUTION

Part c - Analytical procedures

1. For monthly revenue:

1.1. Determine the expectation for the monthly revenue by recalculating R3 100 x number
of flats per building x 3 buildings; (2)
1.2. And compare each of the monthly revenue figures as recorded in the general ledger
to the monthly expectation calculated. (1)

2. For annual revenue:

2.1. Determine an expectation for the annual revenue by recalculating the above monthly
figure x 12 months; (1)
2.2. Determine another expectation by recalculating last year’s revenue plus 8% (1)
2.3. And compare the annual revenue figure of R7, 254 million as recorded in the
statement of profit and loss to the annual expectations calculated. (1)

3. Make enquiries from Mr House as to the reasons why, the calculated revenue for the year
is so much less than the actual revenue as reflected in the annual financial statements
and why the percentage increase as per the annual financial statements is 17% which is
more than the expected 8% and (1)
Inspect supporting documentation to corroborate management’s explanations. (1)

4. Review all the entries in the sales journal for rental income for any single entry that
exceeds R3 100. (1)

(Markers Note: Where no application to the scenario is given only half marks will be
awarded)
Available (9)
Maximum (4)

Part d - Occurrence and accuracy of rental revenue - Tests of details

1. Agree the amounts of R7, 254 million as reflected in the annual financial statements at 30
November 2015 to the amount as reflected in the general ledger at this date. (1)

2. Cast the transactions in the general ledger revenue accounts and the sales journals. (1)

3. Select a sample of invoices from the rental income sales journal and for the (1)
sample selected, inspect the invoice to ensure that (1)
3.1. The amount reflected on the invoice is R3 100 (1)
3.2. The amount reflected or selected from the sales journal only reflects the monthly rental
amount and not any amounts relating to a deposit. (2)
3.3. Reperform the casts and extensions (1)
3.4. The date of the invoice is within the financial year under audit. (1)

4. Inspect the corresponding rental contract for each tenant selected, in the sample in 3
above for: (1)
4.1. The date / period which is covered by the contract and it is for the financial year being
audited; (1)
 FLIP SESSION SOLUTION

4.2. The name of the student renting the unit (matches that on the invoice); (1)
4.3. The address of the accommodation (must be one of the buildings owned by Flatco
(Pty) Ltd ; (1)
4.4. The signature of the student; (½)
4.5. The signature of the guarantor; (½)
4.6. The price in the contract is for R3 100 per month; (1)
4.7. The terms and conditions of the contract for any unusual clauses that may affect
revenue recognition. (1)
{Maximum 4 for Point 4.}

5. Follow the selected invoice through to the receipt of payment by the student tenant as
reflected by the EFT/direct deposit on the bank statement. Inspection may have to occur
through the debtor’s subsidiary ledger to ensure that the receipt for the invoice being
inspected does in fact relate to that invoice and not another months invoice, particularly as
rentals are due in advance. (2)

6. Include reference to the appropriate assertions in the written representation letter to be

signed by management. (1)

Available (16)
Maximum (7)