Question

Question 2 [40 Marks]
Angela have recently been appointed as senior-in-charge of the audit of Signs (Pty) Ltd. The company is a subsidiary of Boards Ltd and all companies in the group are required to have their annual financial statements externally audited. The company produces a wide selection of signs and signboards, ranging from small signs used on doors etc. to large freestanding road signs. Traffic and road signs form the major portion of the company’s sales. Signs (Pty) Ltd only supplies signs; it does not attach or construct them.
Your firm, which is located in Tsandi, has held the appointment of auditor for some years but you have not worked on the audit before. Early in April your audit manager forwarded a letter to you from the external auditors of Boards Ltd which indicated that they (the external auditors) require the “audit pack”, consisting of the audited financial statements, various schedules and questionnaires for the 30 June 2019 financial year end audit of Signs (Pty) Ltd, to be in their offices by 15 July 2019. This development has taken your firm by surprise as in prior years no such instruction had been given. No work on the 2019 audit has taken place.
Your audit manager also attached a note to the letter suggesting that you get started on the engagement immediately by attending the monthly meeting between Rouche Roux and Rachel Wetu, the financial controller and internal audit manager respectively, of Signs (Pty) Ltd, which was scheduled for the next day. You arranged to attend, and despite your lack of knowledge of Signs (Pty) Ltd, you were able to take note of the following:
1. The company’s year-end inventory count has been scheduled for 30 June 2019.
Inventory consists of:
1.1 raw materials for manufacture
1.2 work-in-progress (the manufacturing process is quite complex)
1.3 finished goods in the form of standard signs manufactured by Signs (Pty) Ltd;
1.4 custom-made signs for specific customers awaiting invoicing and delivery.
Inventory is held at all of the company’s four manufacturing facilities located in Tsumeb, Swakopmund, Oshakati and Ongwediva.

2. The company has numerous debtors, and accounts receivable has always been a material amount. The financial controller mentioned that the company was experiencing difficulty in recovering a number of material amounts owed by certain provincial and national road authorities.
This has arisen out of disputes over road signs which Signs (Pty) Ltd has manufactured and invoiced, but which bear the names of towns and streets which have had their names changed during, or subsequent to, the manufacture of the signs.
The authorities concerned have refused to accept these signs, claiming that Signs (Pty) Ltd should have been aware of the names changes as they are published in the Government Gazette. Signs (Pty) Ltd have countered that they manufactured the signs “per the order”.
Rouche Roux indicated that the failure to recover the amounts owed has placed serious strain on cash flow, and could affect future dealings with these customers. Signs (Pty) Ltd’s lawyers are very undecided about what the outcome of a court case would be.
3. As a matter of course, Signs (Pty) Ltd’s internal auditors perform ongoing reviews and tests of control on the company’s accounting systems. Having attended the meeting between Rouche Roux and Rachel Wetu you decided to commence with planning your audit right away as suggested by your audit manager.
REQUIRED:
2.1 Discuss, giving reasons, your assessment of the risk of material misstatement in respect of the 30 June 2019 audit of Signs (Pty) Ltd based on the information given above.

NB Please show seperately risk at oerall financial statement level and risk at assertion level. THIS IS AUDITING

Answer 1

Materiality Assesment is the process of identifying, Assesing and refining numerous potential environment, social and government issue.

As per the given case the following point was noted to access the materiality level.

The company has numerous debtors and hence internal control of all the receivable is a mandate,

As a matter of course, Signs (Pty) Ltd’s internal auditors perform ongoing reviews and tests of control on the company’s accounting systems, hence can be said the internal control is apt.

In the financial statement level the cost of raw material should be appropriate and on regular basis.

At assertion level The authorities concerned have refused to accept these signs, claiming that Signs (Pty) Ltd should have been aware of the names changes as they are published in the Government Gazette. Signs (Pty), is not enough it should be taken care.

Everything else looks good.