COLLEGE OF ACCOUNTING SCIENCES

DEPARTMENT OF AUDITING

TEST 3: 29 JULY 2024

AUE3761

THE AUDIT PROCESS

(40 marks)

Two hours (including 15 minutes download and 30 minutes upload time)

THIS PAPER CONSISTS OF EIGHT PAGES.

IMPORTANT INSTRUCTIONS

1. Text 3 is a closed-book test.

2. This question paper consists of four questions relating to a case study.
3. All questions must be answered.
4. Start each question on a new (separate) page.

Honesty declaration

By submitting my solution to the test, I declare that

• I know what plagiarism is, that plagiarism is wrong and that disciplinary steps can be taken
against me if I am found guilty of plagiarism
• this solution, submitted by myself, is my own work
• I have not assisted any other student in any manner and I have not obtained the assistance
of any other person in completing this test
• I will not assist any other student in any manner and I will not obtain the assistance of any
other person in completing this test
• I know that if I am found to be in violation of this declaration, I will receive 0% for this test
Please note: You do not have to sign the declaration. By submitting your solution, you
automatically declare that you adhere to all of the above statements with regard to this specific
assessment.

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FURTHER INSTRUCTIONS

1. Test 3 is an online assessment. Please ensure that you have all the necessary resources (e.g.,
internet connectivity and a PDF converter/scanner app [Microsoft Office lens is preferred]) to
ensure minimal disruptions during the test. Only PDF documents will be allowed, and all
Word/Excel documents must be saved as one PDF file before they can be submitted.

2. Refer to the student guides in the folder “Important test instructions and student guides” on the
welcome page for AUE3761-24-Y on myUnisa and myExams.

3. IRIS Invigilation will be used during Test 3 for AUE3761, and no e-mailed submissions will be
accepted.

4. Make sure that the IRIS Invigilation proctoring tool is installed and working before the
assessment sitting.

5. You can download the Test 3 question paper from the cas.myexams.unisa.ac.za platform
(https://cas.myexams.unisa.ac.za). AUE3761 will be listed as AUE3761-24-Y under the
myExams tab. Under the applicable module you will find a tab to access the question paper for
Test 3 (which will be visible when the time for the test starts).

6. Once the question paper is accessed and opened, the IRIS Invigilation tool will be activated.

7. Once IRIS is activated, you must lift your laptop/computer camera to record the material that is
on, or close to, your desk.

8. Note that IRIS Invigilation does not accept answer scripts.

9. IRIS Invigilation is time-bound and only starts once you open the assessment site and stops
when your answer script uploading time ends. Please keep to the stipulated schedule.

10. Once the answer script uploading time ends, the IRIS Invigilation results will be automatically
uploaded when you click on the Finished recording button. Should you experience technical
challenges in uploading your answer script, you will have 24 hours to ensure that the IRIS
Invigilation results are uploaded.

11. If you finish uploading your answer script and IRIS has not stopped recording, click on Stop
sharing and then click on Finished recording.

12. The question paper will be available at the start of the session, that is, 14:00.

13. The test will be written from 14:00 to 16:00. This time period includes 15 minutes to download
and read the test paper and 30 minutes to upload your answer script.

14. You must start the upload process promptly at 15:30. The system will close after the allowed
upload time (16:00), and no late submissions will be accepted.

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15. Do not continue preparing your answers during the additional upload time. It was clear from
previous exam/test sessions that students battled with the submission link since myUnisa is very
busy during upload times.

TEST SESSION 14:00–14:15 Download and reading time

14:15–15:30 Writing time

15:30–16:00 Submission time

16. Challenges/issues that are beyond Unisa’s control include the following:
a. Personal network or service provider issues
b. Load-shedding or limited backup power on computer
c. Limited space on personal computer
d. Crashed computer
e. Using a work computer that blocks access to myExams (work firewall challenges)
f. Unlicensed software (e.g., licence expires during test)

17. Once the assessment session ends, you must submit the scanned answer script on the
cas.myexams.unisa.ac.za platform. Note that you will do your submission in the same Test 3
folder from which you downloaded the test – you will find a grey button to submit your answer
script at the bottom of the page.

18. It is very important to note that the contingency link will not be available for submissions.
It is vitally important that you start with the submission process promptly at 15:30. If you
encounter any problems with the cas.myexams.unisa.ac.za portal, remember to provide proof
that you struggled (in the form of screenshots with visible timestamps) before 16:00.
19. You must provide proof in the form of screenshots with timestamps if you encountered any
problems. Your screenshots must clearly show that you tried to submit your answer script via the
cas.myexams.unisa.ac.za platform before 16:00.

20. The final submission of your answer script will be on the cas.myexams.unisa.ac.za platform.

21. The honesty declaration is online, and you need to self-declare. As part of the declaration, you
have to type in the two separate words “I AGREE”.

22. The university takes unethical and dishonest behaviour by students very seriously. Such
behaviour not only tarnishes the reputation that Unisa has strived to uphold over its long legacy
but also undermines the sincere efforts of other students who desist from such practices. We
held student disciplinary hearings for plagiarism cases investigated in previous years. Some
students who had contravened the examination procedures/who had been found guilty of
plagiarism were suspended from the course. Please take care that you submit your own work as
per the honesty declaration.

23. No late or e-mailed submissions will be allowed.

24. If you experience technical difficulties of any kind, and no file is uploaded by the cut-off time on
the day of the test, you will be marked as absent. No other arrangements can be made.
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25. Please make sure you keep records, along with the necessary timestamps, if you experience
any challenges or technical difficulties. We cannot assist you without this proof.

This question paper deals with the following main topics:

PROPOSED SCHEDULE FOR ANSWERING THE QUESTIONS

(Try not to deviate from this schedule.)

Time
Question Topic Marks
estimated
in minutes
Test paper download time and reading 15
1. Ethical concerns (SAICA CPC) 8 15
2. Substantive audit procedures – trade creditors 11 21
3. Internal controls: access controls 9 17
4. Substantive audit procedures and audit evidence: wages 12 22
paid
Time taken to complete the test 40 75
Answer file upload time (in minutes) 30
Total time 120

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CASE STUDY 40 marks

READ THE "REQUIRED" PART ON PAGE 8 BEFORE YOU CONTINUE.

BACKGROUND INFORMATION

You are a trainee accountant at ABC Inc and have been engaged in the audit of Chique-Spa
(Pty) Ltd (CS) for the prior two years, with the engagement partner accepting the audit for the
financial year-end 30 April 2024.

Business operations

CS is a well-established beauty salon with service offerings that include beauty and wellness
treatments. CS is located in the upmarket suburb of Hyde Park, Johannesburg. CS is family
owned and managed by two sisters, Becky Sibeko and Nkululeko Sibeko CA(SA). Becky
performs duties as the operational director and Nkululeko serves as the financial director and
oversees the financial functions, including the compilation of annual financial statements and
the authorisation of business expenditure. Nkululeko is also permanently employed as an
auditor at a small audit firm (the audit firm is unrelated to CS).

During May 2023 (previous financial year), the two directors resolved to expand their flagship
product range through the addition of Hydro-bar, which is a specialised service offering
originating in ancient Japan. It focuses on hydration and skincare products using advanced
technologies and high-quality products. Using social media platforms, Becky marketed the
Hydro-bar treatments as the most luxurious and hydrating treatments for which organic and
world-renowned Polaplex hydro-therapy products are used. These products have been proven
to provide immediate results for both skin and hair. The Hydro-bar adverts were shared and
trended on social media platforms. Initial offerings of the Hydro-bar treatments were well
received by the market, and many customers opted for CS as the preferred Hydro-bar spa
solely on the basis of it use of Polaplex hydro-therapy products.

Inventory count and hydro-therapy products

During the inventory count procedures on 30 April 2024 you identified the inclusion of Kerahair
generic products in the inventory count sheets. Upon further enquiry, the beauty therapist
indicated that a consignment from Japan, which included the designated Polaplex hydro-
therapy products, had been delayed at the port of entry and, consequently, Nkululeko had
procured a generic version from a local supplier. The therapist further indicated that Nkululeko
had requested her not to inform anyone else since this was only a once-off event and the
original Polaplex products were received after two weeks. You have identified that the generic
products were significantly cheaper than the Polaplex products. However, hydro-therapy
treatments during that time were billed at the full price, and the use of the generic products was
not communicated to the customers. You have also ascertained that the generic products had
not been subjected to any quality assurance processes.

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Trade creditors

In June and October 2023, orders #010 and #015 were placed with a Japanese supplier
(documented as the preferred supplier in the payables master file) to acquire hydro-beds and
Polaplex hydro-therapy products. Full payment was made.

During March 2024, due to increasing demand from customers and a need for additional beds
and Polaplex hydro-therapy products, Becky instructed the creditors clerk to place an order
with Limpopo Manufacturers Ltd, an alternative supplier from South Africa. This was because
the preferred Japanese supplier could not expedite the order due to backlogs in orders. Order
#1209 was created by the creditors clerk and approved by Becky. An amount of R3 925 000
was billed and recorded in the creditors ledger and correctly allocated to trade creditors on 25
April 2024. At year end, the total trade creditors amount reflecting in the annual financial
statements was R7 500 000 (2023: R4 750 000). The balance owing to Limpopo Manufacturers
Ltd represented a significant line item in the 2024 annual financial statements. You were
satisfied with the opening balances included in the FYE2024 AFS. Upon verbal discussions
with Nkululeko, you noted that credit note #CR007 had been issued on 30 April 2024 and it
related to one of the beds in order #1209 that was defective. This credit note was only reflected
on the May 2024 creditor statement. The amount has been included in the creditors
reconciliation and correspondence file.

Limpopo Manufacturers Ltd

Credit note
Document number: #CR007 Customer ID: I-2025
Prepared for: Chique-Spa? (Pty) Ltd Date: 30 April 2024
VAT number: 10201909
Item Quantity Discount
Amount Total amount
description
Hydro-bed 1 R1 668 125 - R1 668 125
VAT (294 375)
Total credit R1 962 500

Operating, payroll and financial systems

The payroll function has always been manually compiled and captured onto the accounting
system by Nkululeko. However, during 2024, Becky expressed concern over the possibility of
errors and payments to fictitious ad-hoc beauty therapists and/or fictitious days and hours
worked due to inadequate controls regarding timekeeping and the payment of wages.

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As a result, both directors agreed that there is a need for a more streamlined and automated
process for weekly wages paid to beauty therapists that is also integrated with the accounting
system. During the early part of the 2024 financial year, the directors purchased a basic off-
the-shelf clocking system and payroll application that automatically syncs to the accounting and
banking systems. CS also uses spa management software that includes dates, times, customer
names and therapist names and that integrates with the other systems. Nkululeko, Becky and
an independent bookkeeper have access to all these integrated applications on their laptop
devices in their own offices. These applications are compatible with your audit firm’s audit
software.

Wages paid to beauty therapists and audit evidence

Beauty therapists comprise the largest number of employees at CS. Their details are captured
by the bookkeeper onto the wages master file (including hiring, dismissal and other changes).
The beauty therapists have to provide their certified personal details (including name, surname,
ID number, cell number and residence), bank account details and tax registration forms to
create an employee file with a unique wage earner number. Wages are paid on a weekly basis
to permanent and ad-hoc beaty therapists using the automated systems for the calculation of
normal and overtime multiplied by the applicable rates of pay. Deductions (UIF and PAYE) are
also deducted prior to payment and paid over to the relevant authorities.

A junior staff member on the audit team has requested and obtained the documents listed
below but requested your assistance and advice regarding additional audit evidence and audit
procedures to address Becky’s concerns regarding fictitious employees.

Audit evidence already requested:

1. Trial Balance/General Ledger/draft AFS as at 30 April 2024
2. Wages general ledger account
3. Weekly reports of dates and amounts paid to beauty therapists
4. Process flow chart relating to timekeeping, payroll preparation, and payment preparation
and payout to beauty therapists
5. Manual compilations and accounting records before the implementation of the new system

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REQUIRED Marks

1. With reference to the background information and business operations:

Describe the ethical concerns of Nkululeko regarding the use of the Kerahair (8)
generic hydro-therapy products. Your answer should be based on the SAICA
Code of Professional Conduct (CPC) and address the threats and
consequences linked to fundamental principles (SAICA adapted).

2. With reference to the background information, business operations and

trade creditors:

Provide the substantive audit procedures that should be performed to address (9)
the accuracy, valuation and allocation and completeness of the amount
owing to Limpopo Manufacturers as at 30 April 2024. You can assume the
transactions listed above represent the balance owing.
Communication skills: appropriate style (2)

3. With reference to the operating, payroll and financial systems and wages
paid to beauty therapists and audit evidence:

Describe the access controls required for the payroll application within the (8)
accounting software that facilitates occurrence and authorisation. Your
suggested access controls should make specific reference to the personnel
and processes in the scenario.
Communication mark: layout and structure (1)

4. With reference to the operating, payroll and financial systems and wages
paid to beauty therapists and audit evidence:

4.1 Describe additional audit evidence that is sufficient and appropriate to be (6)
requested from management to support wages paid to beauty therapists for
the year ended 30 April 2024.

4.2 Describe the substantive audit procedures that should be performed to (6)
ensure that beauty therapists paid are not fictious as at 30 April 2024. Your
procedures should also include the use of Computer Assisted Audit
Procedures (CAATs).

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