You are currently preparing for your next audit of a new client with a 28 February 2021 year-end. You have been promoted from Assistant Audit Manager to Senior Audit Manager because of your ability to lead a team effectively towards the same goals. All your work done is up to standard and re-performable. Your current audit client is Krige Limited. The company was established on the 7th of January 1998 and listed on the Johannesburg Stock Exchange main board in 2016. The nature of Krige’s activities demands a huge investment in fixed assets. The company imports parts and then constructs wind turbines. The parts are imported from suppliers in Dubai. Once these parts arrive per ship it gets stored and constructed at the premises in Cape Town and then distributed or sold to clients either per train or truck. During your interim visit to the client you had a meeting with the Chief Financial Officer and the Financial Manager.

You made the notes below for the audit which is scheduled to start in May 2021:

1. Opening balances Since this is the first time that your firm is performing the audit, permission was obtained from the client to contact the previous auditors to obtain more information regarding the opening balances. The previously appointed auditor simply informed you that he was pressed for time and had to rush the 2020 audit. He is therefore reluctant to allow you to review the 2020 audit working papers. This has immediately made you doubt the reliability of the opening balances and why the auditor issued an unmodified audit report.

2. Inventory While visiting the central warehouse, you established that perpetual inventory records are maintained. Goods received notes and invoices are used to capture inventory movements. While discussing the date and time to perform the physical annual inventory count, the store manager informed you that the previous auditor never attended the inventory count. 4 HAUD332-1-Jul-Dec2021-SA1-MS-V3-28062021

3. Relying on information produced by a management’s expert Krige Limited constructs various wind turbines whereby raw materials are converted into a finished product with fixed and variable overheads. It is a complex process to assemble the turbines; and the process cannot be easily understood by observing the production process. Krige Limited employs a registered production engineer, Mr. Derrick, on a contractual basis. Mr. Derrick has been a contract worker for five years and is responsible for certifying and calculating cost pricing of the work in progress. The auditors have set the risk of material misstatement of inventory at an acceptable level.

4. Using the work of Internal Auditors Krige Limited has an internal audit department. In an attempt to keep the audit fee for upcoming audits at an acceptable level, the partner who is responsible for the audit of Krige Limited and the audit committee of Krige Limited suggested that the auditors place more reliance on the internal auditors.

Required:

1.1 Formulate the substantive procedures to audit the opening balances of inventory. Refer to the information under notes 1 and 2. 

1.2 With reference to note 3, describe the aspects you will consider in determining the nature, timing and extent of the audit procedures when relying on the work of the engineer, Mr. Derrick. 

1.3 With reference to note 4, describe aspects you need to consider when determining the nature, and extent of work of the internal auditors that can be used.

Answer rating: 100% (QA)

Auditing Standard No 13 The Auditors Responses to the Risks of Material Misstatement Effective Date For audits of fiscal years beginning on or after Dec 15 2010 This standard establishes requirements ... View the full answer