QUESTION 5 (8 marks)

You are starting your third year as trainee accountant. The senior manager has selected you to plan the current year's audit of the Silver Group (Pty) Ltd (Silver Group). The company has a December financial year-end. You obtained the following information while preparing your planning working papers.

Inspection of the prior year audit file

The company was incorporated eight years ago and owns a large number of retail stores in South Africa.

The company's stores are located in and around shopping malls across South Africa.

The Group is made up of different companies that has different stores specialising in different types of products including high-end clothing for young professionals, bridal wear for engaged couples, sporting ware and urban clothing.

Customers can acquire products from any of the stores in the group by paying cash or buying on credit when using their Silver customer card that has a predetermined credit limit on it.

Customers who buy on credit are charged interest on the outstanding amount.

If a customer defaults on a monthly payment, penalty interest is charged using the maximum interest rate allowed in terms of the National Credit Act.

Customers qualify for a loyalty programme discounts when they buy certain products.

Customers are permitted to return products up to 60 days after acquiring them. All returns must be accompanied by an original receipt and are subject to a quality control check.

The chief financial officer estimates that 10% of the products purchased will be returned and it is the company's policy to recognise only 90% of the sale until 60 days has passed by.

Products sold by the stores within the Silver Group are acquired from local suppliers and foreign suppliers in the Far East.

Discussion with Chief Financial Officer

The Group recognises its success is due to having built up relationships with good suppliers in the Far East. The Group hedges 50% of its foreign purchases as the transactions are mostly in US dollars.

The company's primary focus is the sale of clothing to the South African public, but it recently acquired the Home Specialist Store, a private company with 10 stores around the country, that specialises in supplying kitchen and bedroom related products.

The company obtained a R15 million loan from the Industrial Development Corporation in October of the current year to acquire the Home Specialist Store. The loan is repayable over the loan term of seven years with interest charged at prime +2% payable on a monthly basis.

You are required to:

5.1 List the factors that increase the risk of material misstatement at account and assertion level.