ITC SEPTEMBER 2021PAPER 4 QUESTION 2SUGGESTED SOLUTIONPart (a) Discuss the factors that increase the risk of materialmisstatement for the existence, completeness and accuracy, andvaluation and allocation assertions for the cash and cashequivalents balance reflected in the statement of financialposition of GreatSave at 31 December 2020.General factors that could impact the risk of material misstatement1.1The size of the ‘cash and cash equivalents’ balance with reference tothe total assets is a factor that many of the below possiblemisstatements identified are likely to result in material misstatements.1.2At year-end there is R150 000 cash on hand for cash register float (for6 cash registers) which translates to R25 000 worth of change that mustbe kept in the cash registers. Furthermore R100 000 is kept as Pettycash for “incidental expenses”. This does not seem logical /reasonableand will increase the risk for fraud/errors.1.3This would be the first time the audit is performed and thereforemanagement (Zach and Susan) have an opportunity to misstate thecash and cash equivalent balance.1.4Given that BigRetail wishes to invest in GreatSave and Mr GaryTurner is excited about this possible expansion, the shareholders /directors have an incentive to overstate the assets, including ‘cash andcash equivalents’.1.5GreatSave is a small company (directors are working at and controllingthe company) and must pay income tax. There is an inherent risk tounderstate cash and cash equivalents in an effort to pay lesstaxation.1.6Due to the significant growth / increase in the volume oftransactions, Zach and Susan realised that the cash managementsystem had to be enhanced with stronger controls and therefore withouta commensurate improvement in the accounting and internal controlsystem, there is an increased risk that errors can be made andmisstatements arise as a result.POS system2.1Zach implemented a new integrated POS system called the Autosalesystem to record all transactions processed by the POS systemelectronically and without testing the General controls (includingMasterfile amendments), this will result in consistent errors in thetransaction listings journalised if the system is not functioningeffectively. The transfer of the data from the POS system (terminals) tothe Autosale system may be incorrect which will result in errorsin the transaction listing (and the subsequent journal written toCash and cash equivalents)2.2If the customer pays in cash, the cashier could capture the wrong cashamount received (manual process) and/or count the wrong amount ofchange, which will result in errors.2.3The card payments machine system is connected to the internet andhence there is a risk that the POS system may be hacked or infectedwith a virus. The risk is further increased as no backups of the accountinginformation is made or stored in a location separate fromSusan’s computer, evident in the fact that Susan avoids cloudcomputing solutions due to concerns over security.Recording1Marks11111111111 SAICA 2021

ITC SEPTEMBER 2021PAPER 4 QUESTION SOLUTIONThere are 6 cashiers who generates transaction listings and Susandownloads these that shows all the transactions for the day (to berecorded). If there are no controls over ensuring that all transactionsare on the list / all 6 listings are recorded, there will be errors in theaccounting records.GreatSave’s bank charges a service fee of 2% on the transactionvalue on all card payments and these transactions may not beaccounted for in the bank journals processed. (due to the possible lackof bank reconciliations)Card payments take 3 business days to process, but the journal isalready processed on the day of the transaction, there could be adifference (error) between the amount recorded and the amount in thebank account OR GreatSave might not receive the money at all. (dueto the possible lack of bank reconciliations)As there are no reconciliations done between cash and transactionlistings there is a risk that management will not detect errors whichoccurred and might not correct these. Bank reconciliations are not done and consequently thebalance according to the accounting records and the bankaccount will possibly not be correct.11111Cash4.1Cashiers, the security company and other staff (petty cash) have directaccess to the cash (petty cash / float) and without proper controls,cash can be stolen. Due to the nature and susceptibility of being cash(in its various forms), there is a risk that the cash can be stolen.4.2GreatSave is a small business with a limited number of employeeswhich do not provide for effective monitoring/supervision. Susan is responsible for incompatible duties / with limitedsegregation of duties where she is responsible for variousfunctions. If she has the right incentive, she can override thecontrols and understate / overstate Bank and cash. No one reviews Susan’s work / no independent reviews aredone and therefore there could be errors in the cash and cashequivalents balance. The only other person available for reviews seem to be Zachbut as he is Susan’s husband, independent reviews will notbe possible / overriding of controls possible. Furthermore, it is apparent that Susan is making errors in thejournals being written and this could indicate that other errorsmay also be present within Cash and cash equivalents.4.3Susan records 100% of the card/cash received to ‘Bank – currentaccount’ but then she retains a portion of the cash collected for thecash float / Petty cash which may not be recorded / possibly no proof.4.4Susan holds petty cash which is used for incidental expenses andthese transactions may not be accounted for (cash received) and mightnot reflect the actual flow of cash.Short-term deposit – money market5.1Due to the nature of short-term deposits not having manytransactions (not following the normal control activities in thecompany), there is a risk that this account is not reconciled and thetransactions on the account are not accounted for in the accountingrecords.AvailableMaximum2111111112417 SAICA 2021

ITC SEPTEMBER 2021PAPER 4 QUESTION 2SUGGESTED SOLUTIONCommunication skills – layout and structureTotal for part (a)Part (b) Describe additional controls that should be implemented atGreatSave to prevent or detect the risks of materialmisstatement in the existence and completeness of the cashand cash equivalents balance.1.General / IT1.1The POS system / Autosale should be linked directly to theaccounting system in order to automatically record the transactionjournals in order to avoid errors that can occur with manual recordingof journals.1.2Based on the system description Susan is performing incompatibleduties and more segregation of duties is encouraged. If it is costeffective, an independent person should be appointed / anaccounting firm to perform certain checks/reviews on a monthly basis.1.3The data/software on Susan’s computer should be backed upregularly and the back-up copy should be stored off-site / in the cloud.1.4An appropriate anti-virus software program / firewalls etc. shouldbe installed for the POS software, to reduce the risk of a viruscorrupting the data, or hacking because it is linked to the bank via theinternet/external network.1.5The POS terminals should only be accessed through the input of avalid username and password by the cashier and transactions shouldbe recorded per cashier by shift.1.6The cashier should not leave the cash register unattended and The system should shut down after a few seconds of inactivity/ unsuccessful attempts Cashiers can only scan and Supervisor should be limited toauthorising transactions but cannot scan and obtain access tothe cash (Least privilege / user profiles).1.7A strong ethical and visible policy on ethics, and zero tolerance offraud and theft (whistle blow procedures in place and visible tocustomers) should be implemented / Policies and enforcement ofrecruitment process for cashiers / persons to work with cash (nocriminal records).2.Cashiers2.1There should be limited exit points (preferably one) at the store.2.2The six cash registers should be strategically positioned and securedto limit the risk of theft.2.3The cashiers should be monitored by a store manager or Zach, or aCCTV camera system should be installed in the store to monitor thecashiers to ensure that they are performing their duties as required andare not misappropriating cash.2.4There should be a security guard that inspects customers’ receiptsagainst the goods they have in their possession (or vice versa) as theyleave the store to ensure that all transactions are processed throughthe POS system / Signage (visible to customers) should encouragecustomers to request a receipt and inspect the receipt and changereceived.2.5Cashiers should check and sign for the float they receive at the startof each shift.3118Marks11111111111111 SAICA 2021

ITC SEPTEMBER 2021PAPER 4 QUESTION STED SOLUTIONAll credit and debit card proof of payment slips (from the cardmachine) should be issued in duplicate and sequentially numbered.One should be given to the customer, and one should be kept by thecashier, OR A card payments listing should be generated (by thecard machine) at the end of the shift (for record of payment methodsto be used for reconciliation purposes).Cashing upAll cashiers should ‘cash up’ (count the money in the till) at the endof their shift (can be done more frequently if necessary) under thesupervision of Susan (she must review). There should be 2 individuals involved/present at all times(Susan and the cashier) and one of the 2 should never be leftalone with the cash until the cashing up is completed anddocumented.The cash (after deducting the cash float received at the beginning ofeach cashier’s shift) and the proof of payments slips in the till/ cardpayments listing extracted from the card machine should bereconciled to the transaction listing extracted from the POS systemand documented on a cash-up sheet.The cashier and Susan should sign a ‘cashing-up sheet’ toacknowledge the procedures that took place during the cashing up andthat the two parties agree.Any surpluses or shortages (large/frequent differences) in cashshould be explained and indicated clearly on the ‘cashing-up sheet”and acted upon in terms of a company policy (disciplinary actions).After the reconciliation of the cash received compared with thetransaction listing / shortages, the float must be accounted for on thecash-up sheet for the next day.Recording of transactionsA sequential number should be allocated to all transactions by theAutosale system: Susan should on a daily basis inspect the sequence oftransactions on the POS transaction listing to determinewhether any transactions are missing / duplicated. (Asequence check can also be executed by the Autosale systemand generate exception reports)Susan should also inspect the POS transaction listing to determinewhether the first transaction number of the day follows on the lasttransaction number of the previous day to ensure that there are noduplicate / missing transactions.Banking / Security companyThe contract with the security company should stipulate that thesecurity company is liable for any cash collected for depositing at thebank that is not deposited.The security company should sign a register / document etc. as proofthat they took custody of the cash (the container is secured, and it willnot be cost-effective to count).Cash for collection by the security company should be stored in adrop safe until collected by the security company, and only the securitycompany should have the keys to that safe.Follow up afterwardsA bank reconciliation should be prepared on a monthly basis: To agree the cash handed over to the security company withthe receipt (cash deposit slip) from the bank to ensure that all4111111111111111 SAICA 2021

ITC SEPTEMBER 2021PAPER 4 QUESTION SOLUTIONcash has been banked; and to agree the deposit slips (cashdeposits) with the bank statement to ensure that all cash hasbeen accounted by the bank; and To agree card payments on the POS transaction listing andthe bank statement on a daily / weekly basis to ensure all cardpayments are received in the bank.Petty cashPetty cash should be the sole responsibility of one person (only thisperson should have access to the keys).Cash should only be advanced from petty cash on production of a preauthorised expense voucher. The voucher should be authorised by an independent person/ second person.The petty cash vouchers should be pre-numbered sequentiallyAll petty cash vouchers should have an original invoice / supportingdocument attached.Cash received in the Petty cash must be limited to a specificmaximum amount and the “top-up” amount must be exactly theamount of expenses from the previous “top-up”.Susan (or Zach) should regularly count the petty cash and thesupporting invoices should be checked regularly and Agreed to the balance reflected in the financial records todetermine that no cash has been stolen/missing OR Perform aReconciliation to the financial records.Short-term deposit - Money marketSusan should obtain monthly statements from the bank for the shortterm deposit in the money market account and agree it to the balancereflected in the financial records, and ensure that any withdrawals /deposits / transactions are accounted for (bank reconciliation) in theaccounting records.Susan should follow up with the bank in the event where the bank hasomitted interest or deposits / withdrawals.AvailableMaximumCommunication skills – clarity of expressionTotal for part (b)5111111111114014115 SAICA 2021

ITC 2021PAPER 4 QUESTION 2SUGGESTED SOLUTIONPart (c) Discuss, with reference to the information provided, thematters that N&G should consider before accepting theengagement to audit the FY2020 financial statements ofGreatSave. MarksExclude any recommendations for safeguards thatN&G should implement.CLIENT CONSIDERATIONSIndependence considerations - COPCRelationships1There is a possible familiarity threat to independence because: Zach and Phyllis are family friends which leads to Phyllismight be too sympathetic to Zach’s concern of expanding thebusiness whilst performing the audit (COPC 521).1.1There is also a possible intimidation / self-interest threat toindependence because: Phyllis might not want to upset Zach by pointing out errors inthe financial records/weaknesses in the business.1.2The level of the threat will not be at an acceptable level as the partiesinvolved are family friends and they are the Engagement partnerand the shareholder and director of the company (roles on auditteam, position of client and nature of the relationship).Dependency on audit fees2There is a possible self-interest threat to independence because: N&G is currently experiencing financial difficulties, and thiswill create concerns of receiving all the fees to address thesedifficulties in which they hold an interest; and2.1There is also a possible intimidation threat to independencebecause: the client (Zach) is aware that the auditors are strugglingfinancially, and this may use this information for his ownbenefit.2.2With limited information available it should be considered what thelevel of the threat will is depending on the current financial positionof the audit firm and how severe the financial difficulties are andwhat the value of the fees (size) will be in comparison to the totalfees / Material to the auditors.Non-assurance services3.1GreatSave is not classified as a public interest entity becauseGreatSave is not a listed entity; and GreatSave would also not be considered a public interestentity because this is not an entity that would havesignificant public relevance (due to not having a largenumber and wide range of stakeholders due to its size /nature).3.2Tax calculations (consulting):There is a possible self-review threat to independence because: N&G will be biased when auditing the tax calculationpreviously performed by themselves.0.510.5110.510.511110.5116 SAICA 2021

ITC 2021PAPER 4 QUESTION 2SUGGESTED SOLUTION The materiality of the tax calculation will have an impact onthe level of the threat and who performed / was responsiblefor the calculation.3.3Tax Returns (consulting):In terms of COPC 604, assisting clients with drafting of tax returnsdoes not usually create a threat.3.4Accounting services (payroll)Providing payroll services to the audit client will result in a selfreview threat to independence because: N&G will be biased when auditing the payroll calculationpreviously performed by themselves. The level of threat will depend on whether the services areroutine (we do not take on management responsibilities) andwho performed the serviced payroll services initially and asthe payroll calculations are performed based on theinformation provided by the GreatSave accounting softwarepackage, the service can be considered to be of a routine /mechanical nature (COPC 601.4 A1) (and can beaccepted).Independence considerations – Companies Act4.1N&G would have to consider the possible independencerequirements in terms of section 90 of the Companies Act, butbecause this is a voluntary audit this does not apply.Management integrity considerations5.1It should be considered whether Zach’s statement about audit feesassisting the firm indicate that Zach might potentially attempt tounduly influence Phyllis later or whether this was truthful due tothem being friends.5.2Management has an incentive to manipulate the AFS since they willbe presenting the AFS to a potential investor.Financial Responsibility6.1It appears that the client is willing to pay the audit fee because theystate the money will assist the audit firm with their financial positionand able to settle the audit fee because they have a very healthycash flow position.AUDITOR’s CONSIDERATIONS7.1Industry knowledge / understanding:N&G has been providing various non-assurance services toGreatSave in the past and has a good understanding of the smallretail industry.7.3Resources / enough staff members:It could be argued that because the audit firm is small with only2 partners, there is a possibility that they may not have enough staffmembers to complete the audit on time.7.4Time/Audit deadline: It could be argued that there is a tight audit deadlinebecause it is currently 20 January 2021 according to the emailand the transaction need to be finalised by 28 February 2021and therefore we do not have enough time to complete theadditional audit in this time frame (with our other work plannedfor this period) and710.51111111111 SAICA 2021

ITC 2021PAPER 4 QUESTION 2SUGGESTED SOLUTION Apart from the 2020 audit the audit firm will need to performadditional audit procedures in terms of ISA510 on theopening balances and therefore they might struggle to meetthe audit deadline, although Auditing one small retail company, with one store, with arelatively simple accounting process could be reason toaccept this engagement as one can easily meet this auditdeadline if staff is available.7.2Potential need for an auditor’s expert:Since the input, processing and output occurs through barcodesbeing scanned (no input documents) and processing that happens inthe Autosale system, the auditors need to be able to rely on thesystem to obtain sufficient appropriate audit evidence and thereforethe auditor will possibly need the assistance of an IT expert to auditthe POS system OR Software to perform CAATS.7.5Legal liability:There may be a risk of legal claims resulting from accepting theengagement, especially as Big Retail will be using the auditedfinancial statements to make an investment decision. (Sec 46 APA).TERMS OF ENGAGEMENT8.1Zach is requesting that the audit procedures start before theengagement letter is signed. This is in contravention of ISA 210 andthe engagement letter must be signed beforehand. The firm would first need to determine whether the preconditions are present, which include that the relevantfinancial reporting framework is appropriate; and Zach expects the audit to be a quick process since he is ofthe view that N&G already understands the business. Thisillustrates that he does not understand the full audit process,and should be explained in the engagement letter to set outeach parties’ responsibilities.8.2It is recommended that the audit fee must be agreed with the clientbeforehand because it seem that the client is under the impressionthat an audit can be performed quickly and possibly won’t costthat much based on other work performed and because additionalaudit procedures (ISA510) also will need to be performed.8.3The appointment date is already 20 January 2021 and year-end was31 December 2020 and therefore certain audit procedures likeinventory counts, cash counts etc. should have been performed atyear-end / alternative procedures must be considered but there arevarious weaknesses in the new system, there could be a possiblelimitation of scope in terms of ISA210.7 and consequently thisengagement should not be accepted.AvailableMaximumCommunication skills – logical argumentTotal for part (c)81111111113316117 SAICA 2021

ITC SEPTEMBER 2021 PAPER 4 QUESTION 2 SUGGESTED SOLUTION . 2.3 The card payments machine system is connected to the internet and hence there is a risk that the POS system may be hacked or infected with a virus. . 4.3 Susan records 100% of the card/cash received to .