ITC 2023 SUGGESTED SOLUTION

PAPER 1 QUESTION 2

Part (a)
(i) Identify and describe the risks of material misstatement related
to the completeness and accuracy, valuation and allocation of
the creditors balance of M4M as at 31 December 2022; and
(ii) For each of the risks identified, indicate to which assertion the Marks
relevant risk relates.

• Present your answer in a table format.

Completeness and Accuracy, valuation and allocation assertions related to the

creditors’ balance
(i) Risk of Material Misstatement Marks (ii) Assertion Marks
1 Category 2 products’ prices change 1 Accuracy, valuation and 1
continuously and therefore there is a allocation
risk that creditors could be recorded at
the incorrect amount.
2 Packaging materials are imported 1 Accuracy, valuation and 1
from China. Therefore, there are allocation
foreign creditors that need to be
revalued at year end, taking the spot
rate at year end into account.
Therefore, there could be mistakes in
the final valuation of the creditors
balance.
3 Packaging materials are imported 1 Accuracy, valuation and 1
from China. Import duties and allocation
complex VAT calculations need to be
considered when recording foreign
creditors and therefore there is a risk
that mistakes could be made when
recording creditors.
4 There is a risk that the transport cost 1 Completeness 1
is omitted from the creditors balance
owed to Pack as the transport cost and
shipping fee are owed to a third party
and not the courier company directly.
5 As we receive the invoice directly from 1 Accuracy, valuation and 1
the Pack, there is a risk that the 10% allocation
service fee is calculated incorrectly
and the incorrect amount is added to
the creditors balance.

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6 There is no segregation of duties / no
supervision / inexperienced / part-time
student, there is therefore a risk that
Zama could:

easily delete or omit to record 1 Completeness 1

and/or
record incorrectly invoices and 1 Accuracy, valuation and 1
suppliers’ statements received via allocation
the dedicated inbox, which could
impact the creditors.
7 There is a risk that reconciling items 1 Completeness 1
(between supplier statements and the OR
balance per the creditors ledger) are Accuracy, valuation and
not being removed once resolved, allocation
or never being resolved and thus
causing an error in the ledger as the
creditor will never adjust if not followed
up with.
8 There is a risk that there are goods in 1 Completeness 1
transit (packaging material imported)
at year end (where ownership has
already passed to M4M) that have not
been accounted for resulting in
understatement of creditors.
9 The is a risk that the invoices are not 1 Accuracy, valuation and 1
matched to the GRN/order before allocation
posting to the creditor’s account.
Available 10 Available 10
Maximum 6 Maximum 6
Communication skills – clarity of expression 1
Total for part (a) 13

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Part (b) With reference to the placing of orders and delivery of goods from
category 2 and 3 suppliers, as documented in workpaper P001 –
(i) identify and discuss the internal controls present in the
systems description of M4M that you would rely on; and
(ii) formulate the tests of control(s) the auditor should perform
to assess the relevant internal controls for each control
identified in (b)(i).

• Present your answer in the following table format:

(i) Internal control (ii) Test of control Marks

identified
Internal control 1… Test of control related to
internal control 1…
Etc... Etc…

• Assume that CFW will follow a combined audit approach.

• Do not include the following in your answer:
o Changes to the list of approved suppliers and approved price list;
and
o Segregation of duties between irreconcilable functions.
(i) Internal control identified Marks (ii) Test of control Marks
1 The ordering function on 1 Obtain an access table/matrix of 1
AccProf is password usernames that have access to the
protected, and only the two ordering module in AccProf and
purchasing clerks, Victor and ensure through inspection that it
Prudence, have access to only relates to Victor and
this module. Prudence.

Inspect access logs to confirm 1

only Victor and Prudence
obtained access.

Request the clerks to type in 1

incorrect passwords / no
passwords to check that the
system will not allow access to
the ordering function on AccProf if
they do (Or the auditor can attempt
to login).
2 The username and 1 Request the purchasing clerks 1
passwords consisting of at to input their passwords
least eight characters are together with their usernames and
used to place an order by the ensure that the passwords are at
purchasing clerk responsible least eight characters long;
for the relevant order type
(being Victor or Prudence). Using valid test account (test
data), attempt to create/change 1
the password and confirm that
the system does not allow a
password of less than 8
characters.
3 Only supplier codes obtained 1 With assistance of the purchasing 1
from the list of approved clerks, create fictitious purchase

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 suppliers are used when orders with valid and invalid
placing orders. supplier codes (the valid supplier
codes should be obtained from the
list of approved suppliers) to
ensure that only valid supplier
codes are accepted and that
order forms cannot be completed
for invalid suppliers.

A standard order form 1 When entering a valid supplier

appears on the computer code, compare the details that 1
screen once the supplier code appear on the order form (the
is entered into the system, contact details, credit terms, etc.)
which includes standard with the list of approved
details like the supplier’s e- suppliers to ensure that the
mail address, business phone correct details are included in the
number, physical address and automated order form.
credit terms negotiated with
the particular supplier.

The purchasing clerk then 1 Enquire from the purchasing clerk 1

compares these details to what the procedures entail when
the same details included on the details on the system do not
the list of approved suppliers. match the approved suppliers.

4 A pre-populated drop-down 1 With assistance of the purchasing 1

menu is used to complete clerks, create fictitious purchase
the description of the items to orders (using test data) with valid
be ordered on the order form. description of items by selecting
items from the drop-down menu
The purchasing clerk then 1 and ensure that -
compares these particulars • a product code and price 1
to the most recently updated appears; and
standard price list. • compare the product code and 1
price to the most recently
updated standard price list to
confirm the accuracy thereof.

With assistance of the purchasing 1

clerks, create fictitious purchase
orders (using test data) and
attempt to type in a description of
items that does not appear on the
drop-down menu to ensure that it
will not be allowed.

Enquire from the purchasing clerk 1

what the procedures entail when
the details on the system do not
match the approved price lists.
5 The total amount of the order 1 Select a sample from the 1
is calculated automatically purchases records, trace through
by the system. to the electronic order and then re-
perform the calculation done

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 automatically of the quantity
multiplied by the price of the
products entered into the order
form to ensure the accuracy of the
calculations.

The total value of the order is 1 Request an expert to review the 1

recalculated by the programming to test whether the
purchasing clerk before the program calculates the total
order is placed with the amounts correctly.
supplier. OR
Run a fictitious/dummy order
through the system and see that
the total is calculated
automatically.
6 Victor pulls a report from 1 With assistance of Victor, pull a 1
AccProf (on a weekly basis) of report indicating all unmatched
all orders with no matching orders and inspect if there are any
goods received notes and then orders with no matching GRNs.
follows up on any Follow up on these to confirm
outstanding orders that Victor did follow up on
discovered by the matching them.
exercise described above.

Inspect supporting evidence 1

identified by Victor (e.g. emails
correspondence).
OR
Enquire from Victor how and
when he would follow up on
outstanding orders and inspect or
observe whether he does this to
determine whether the control is
implemented.
7 All items are delivered in a 1 Observe a delivery being made 1
dedicated receiving area. and ensure that deliveries take
place in a dedicated receiving
area.

Enquire from delivery personnel 1

what is the procedures followed if
deliveries are not made to the
dedicated receiving bay or if
there is no access on a particular
time to this dedicated delivery
area.
8 When goods are delivered by 1 Observe a delivery being made 1
suppliers, the quantity and and ensure that the two receiving
description of the physical clerks compare the quantity and
products are compared to description of the physical
the delivery note received products with the delivery note
from the supplier and the received from the supplier and the
original order form by the two original order form.
receiving clerks.

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 For products received (at 1
delivery), compare the goods
with the delivery note and
original order to form to ensure
that the quantity and
descriptions do agree.
9 The two receiving clerks who 1 Observe a delivery being made 1
receive the goods delivered by and ensure that the two receiving
the suppliers, check the clerks check the quality of the
quality of the products. products.
10 One of the receiving clerks 1 Inspect a sample of goods 1
completes a goods received received notes completed by the
note on AccProf, indicating the receiving clerks for the electronic
quantity and description of the signatures of both receiving
goods received, and both clerks.
clerks sign the form
electronically. Compare the quantity and 1
description on the goods
received note to the actual
quantity and description of the
goods received (while observing
the receiving clerks receiving the
delivery).

Extract an exception report of 1

goods received notes completed
without two electronic
signatures and follow up with
management.
Available 14 Available 25
Maximum 12 Maximum 12
Communication skills – presentation 1
Total for part (b) 25

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Part (c) Formulate the substantive procedures that the audit team should
perform to obtain sufficient appropriate evidence with regard to the
completeness of the creditors balance of M4M at
31 December 2022.

• Do not address the following in your answer:

o The extent and timing of procedures; and
o Any procedures related to tax.
• Do not perform the following general substantive procedures:
o Obtaining a creditors schedule and recalculating the
mathematical accuracy of the schedule; Marks
o Comparing the total creditors according to the creditors schedule
with the creditors balance included in the trial balance and
general ledger, the balance of the creditors control account and
the creditors balance in the financial statements;
o Comparing the opening balance of creditors with the closing
balance of the previous year’s audited financial statements;
o Inspecting the creditors’ accounts in the general ledger for any
unusual journal entries and following up on any unusual entries
identified; and
o Requesting a management representation letter to confirm the
completeness of creditors
Please note, the completeness of the creditors balance includes verifying the
validity of payments to creditors.
1 Select a sample of orders/GRN from AccProf and follow them through to the 1
relevant invoices and purchase journal entries captured in the general
ledger/creditors ledger to ensure completeness of creditors.
2 Select a sample of debit journal entries in the creditor’s account in the 1
general ledger, reflecting payments made to suppliers, and compare the
cashbook journal entries with the proof of payment / the entry on the
bank statement to ensure that the payment was indeed made to the relevant
supplier (validity of debit entry translates to completeness of creditors’
balance).
3 Inspect the cash book / bank statement after year end for any large 1
payments to suppliers. For these, inspect the GRN and delivery note to
confirm that if the payment relates to goods received prior to year-end,
the corresponding entries were made in the creditor’s account.
4 Select a sample of purchases from the January 2023 purchase journal 1
(purchases subsequent to year-end) and trace it back to the applicable GRN
to confirm that the GRN number is greater than the GRN cut-off number
and/or the dates on the GRN and delivery note is after the financial year-
end.
5 Select a sample of creditors’ reconciliations at year-end and test it as
follows:
5.1 Compare the balance per the reconciliation to the balance per the creditor’s 1
statement received from the supplier by means of e-mail, related to the
corresponding date, to ensure that the amounts agree and accrual is
complete.
5.2 After getting permission from M4M, obtain external confirmation of the 1
balances per the reconciliation with the individual creditors themselves 1
(especially for creditors where there is no statements, nil balances, major
creditors and creditors whose balances is much lower than the prior financial
year) to ensure that amounts agree and accrual is complete.

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5.3 Compare the balance on the reconciliation for a specific creditor’s 1
account to the creditor’s balance of that same creditor on AccProf for the
relevant date to ensure that the amounts agree and accrual is complete.
5.4 Test the logic of the reconciliation by means of recalculation (to ensure 1
that the reconciling items make up the difference between the balance
according to the creditor’s statement and the balance according to AccProf
and identify any possible missing/incorrect reconciling items).
5.5 Compare a sample of reconciling items to the supporting invoices, GRNs 1
and debit notes to identify any instances of reconciling items that result in
an understatement of creditors.
5.6 For a sample of corrections made by Zama, compare the correcting 1
journal entry to the difference noted on the reconciliation and the
supporting documentation to ensure that the correcting journal entry was
posted correctly and that the ultimate creditors’ balance is complete.
6 Obtain exception reports (or use data CAATs to extract) from the system to
identify the following, and follow up any exceptions with management:
6.1 Invoice with no corresponding journal entries (incomplete credit entries); 1
6.2 Creditors on the approved supplier list for which there have been no 1
entries in the control account/creditor’s ledger for a period of time
(completeness of creditors);
6.3 GRN with no corresponding invoice and/or purchase journal entry 1
(incomplete credit entries);
6.4 Creditors with zero / debit balances (completeness of creditors). 1
7 For both the 2021 and 2022 financial years, calculate:
7.1 Each creditor as a percentage of the total creditors’ balance. For 1
creditors that make up a significantly smaller percentage of the total
creditors’ balance, enquire from management why this is the case.
7.2 The trade creditors as a percentage of current liabilities. For a significant 1
change in this ratio (smaller % in 2022), enquire from management why this
is the case.
8 Obtain the creditors list of the 2022 and 2021 financial years and compare
the creditors on the lists to identify:
8.1 Creditors on the 2021 list who are no longer on the 2022 list and follow 1
up any differences through enquiry from management why this is the case;
and
8.2 Creditors whose balances indicate a significant decrease in value and 1
follow up any differences through enquiry from management why this is the
case.
8.3 Obtain corroborating evidence (e.g. through inspection of email 1
correspondence with creditors, changes to contracts in place, minutes of
meetings for decisions taken, direct confirmation from creditors, etc) for the
above differences to substantiate management’s explanations.
9 Obtain the 2022 financial year-end inventory valuation list and identify 1
inventory items that are possibly indicated as negative, which could indicate
that the purchase was never accounted for / indicators at the inventory
count where the physical inventory materially exceeded recorded inventory.
10 Inspect creditors’ correspondence for indicators of disputes and 1
amounts that should be included.
11 Inspect the general ledger for 12 payments for periodic expenses to 1
confirm that all accruals has been raised.
12 Perform a sequence test for the 2022 financial year on all the GRNs and 1
identify any missing GRNs to inspect of there has been a recording in the
purchases journal and creditor raised to the relevant creditor’s account for
each GRN.

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13 Enquire from the two purchasing clerks (Victor Mashishi and Prudance 1
Dlamini) on whether any purchases have been done from suppliers that
are not on the approved suppliers list and inspect if these creditors are
included in the creditors list.
Available 25
Maximum 12
Total for part (c) 12
TOTAL FOR THE QUESTION 50

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