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Your firm has recently been appointed as auditors of Regents (PTY) Ltd, a distributor of paint….

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Your firm has recently been appointed as auditors of Regents (PTY) Ltd, a distributor
of paint. Prior to becoming a private company, Regents had been a close
corporation, but had decided to convert from a close corporation to a company. The
conversion took place on 1 April 2020. Despite having a public interest score of less
than 100, the company, in terms of its memorandum of incorporation (MOI), is
required to have an annual external audit. When it Was a CC, Regents underwent
neither an audit nor a review.

The following information, inter alia, was obtained when conducting procedures, to
identify and assess the risk of material misstatement through understanding the
company and its environment:
1. Accounting systems at Regents (Pty) Ltd (although computerised) were not
well maintained and internal controls were generally poor.
2. Although the directors realised that attention needed to be given to the
systems, little was done to resolve the problems until the latter part of the
3. On 1 March 2021 (a month before year-end), Cherry Checkitt joined the
company as internal auditor. This was a new position. Her first responsibility
was to evaluate and improve systems at Regents (Pty) Ltd and to this end

she, inter alia, obtained approval for the appointment of a credit controller
from 1 April 2021.
4. Shortly after it was announced (in early February 2021) that Cherry Checkitt

would be joining the company as internal auditor, the company’s debtors man-
ager, Adam Brown, resigned suddenly requesting that he be allowed to leave

within a week as he intended emigrating He had been with Regents for 5
years during which time he had been solely responsible for all aspects of
accounting for sales and debtors, for example recording payments, passing
adjusting entries, credit control, maintaining ledgers, etc. His responsibilities
were taken over by Gunston Smith, the senior debtor’s clerk, who quickly
discovered that Adam Brown had “done things his way”. There were
numerous long outstanding debts, unexplained adjusting entries to debtors, a
lack of audit trail (documentary as well as little evidence of regular
reconciliations and problem resolution. Other than obtaining approval for the
appointment of a credit controller (see pt. 3), Cherry Checkitt was not able to
spend much time on receipts cycle prior to year-end. For the purposes of the
vear end balance, Gunston Smith produced a reconciliation of the debtor’s
ledger and the debtors control account and produced an aged list debtors.
5. The debtor’s balance has increased steadily over the years and there are, at
year- end, some 1 400 debtors in the debtors master file ranging from nil
balances to thousands of rand. The debtors balance at year-end is material.
6. The company has a substantial overdraft facility which the directors wish to
retain, although, ultimately, they would like to reduce it. The bank is pleased
that the company will be presenting audited financial statements to support its
request to retain the overdraft facility, but have indicated that they are hoping
to see a “healthy set of figures”.
7. There is no specific audit deadline particularly because this is the first audit of
the company.

(a) Indicate whether the fact that this is an audit required by the company’s MOI and
not by virtue of the company’s public interest score, will have any effect on your
assessment of
(i) the risk of misstatement in the financial statements;
(ii) the audit strategy and audit plan. Justify. (4)

(b) Based on the information given above, evaluate the risk of material misstatement
in the trade debtors (accounts receivable) account balance at 31 Mar 2021. (12)

(c) Discuss the nature of testing you will incorporate into your audit plan for the 31
March year-end audit of debtors (accounts receivable). (8)

(d) Explain why your audit team will have difficulty in testing the completeness of
sales at Regents (Pty) Ltd. (4)
(e) Describe how you would perform subsequent receipts testing and comment on
whether subsequent receipts testing will identify fictitious debtors. (6)

(f) Describe the procedures you will carry out in respect of the allowance for bad
debts. (11)

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