ITC JUNE 2022 SUGGESTED SOLUTION PAPER 2 QUESTION 1 8 © SAICA 2022

Part (b) Criticise the audit workpaper B135-0 in terms of International Standards on Auditing (ISA) 230 Audit Documentation

Answer

Part (b): Criticism of Workpaper B135-0 (6 marks)

The inventory workpaper violates ISA 230 by lacking key documentation details. It fails to identify the reviewer, was not completed on a timely basis, and lacks clear identifying characteristics. The workpaper is incomplete, as it only shows five out of the ten required sample items. Furthermore, it contains significant findings (quantity differences and damaged inventory) without explanation, discussion with management, or a conclusion. The procedures also fail to address the valuation objective of the audit.

Part (c): Non-compliance with ISA 240 (12 marks)

The auditors failed to comply with ISA 240 on fraud by:

• Lacking Professional Skepticism: Thuli assumed management was "honourable" without evidence.

• No Fraud Risk Discussion: She failed to hold a mandatory fraud discussion with the audit team.

• Restricting Inquiries: She restricted communication with management, which is essential for identifying fraud risks.

• Ignoring Override Risk: She did not treat the risk of management override of controls as a significant risk, despite red flags like related-party transactions and a new acquisition.

• Failing to Plan Procedures: She inappropriately concluded that no fraud procedures were necessary.

Part (d): Risk Assessment from Workpaper C300-0 (14 marks)

This section classifies risks from the workpaper and provides a mitigation procedure for each.

Risk no.	Risk Level	Affected Assertions	Mitigation Procedure
A, B, C, D	Financial Statement	N/A	Test controls over the new inventory system and manual data entry; perform substantive procedures like a physical count; test IT general controls.
E	Assertion	Valuation and allocation	Compare cost to net realizable value for damaged items.
F	Assertion	Existence, Rights & Obligations	Obtain and review the consignment agreement to confirm ownership.
G	Assertion	Valuation & Allocation, Completeness	Vouch inventory costs to waybills to ensure all freight costs are capitalized correctly.