You have been appointed senior in charge of the audit of PortaPotti (Pty) Ltd, a company...

 

  

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You have been appointed senior in charge of the audit of PortaPotti (Pty) Ltd, a company which rents out portable toilets for the financial year end 30 April 2022 and are currently gaining an understanding of the business and its environment to enable you to assess the risk of material misstatement in the 30 April 2022 financial statements. You have gathered the following information: 1. The company rents or leases its toilets to a very diverse range of customers. Short term rentals are made to entities which organise events such as music concerts, marathons and rallies, as well as other entities which require temporary toilet facilities, e.g. roadwork camps, minor building sites etc, short term rentals make up 55% of the company's business. Long term leases are entered into with companies requiring long term but temporary toilet facilities such as large construction sites, as well as with local authorities which lease toilets for use in informal settlements. Long term leases, many of which are for substantial amounts, can be for the duration of the useful life of the toilets. The number of toilets rented or leased to a single customer can vary from one to sveral hundred. 2. PortaPotti (Pty) Ltd is responsible for setting up the toilets and collecting them at the conclusion of the rental/lease period. For short term rentals the entity renting the toilets is required to pay seventy five percent of the rental charge in cash (no cheques accepted) before PortaPotti (Pty) Ltd will deliver the toilets. The balance of the rental charge must be paid when the toilets are collected. Any form of payments is accepted on collection of the toilets e.g. cash, cheques etc. 3. PortaPotti (Pty) Ltd financial records reveal that the company owns approximately 15 000 portable toilets. Each toilet can be identified by a number painted on the side of the unit. There are twenty depots situated around the country out of which business in the surrounding region is conducted. All depots are situations on land owned by PortaPotti (Pty) Ltd and each consists of a storage and maintenance facility for the toilet units as well as a small administration office. Each depot has a depot supervisor. 4. The company's accounting function is centralized at the head office which is attached to the depot in Bloemfontein. The depot supervisors are responsible for the running of the depot, some very minor accounting functions, including the invoicing of short term rentals and the collection (see point 2 above) and banking of cash into the company's bank account. All the long term leases (longer than three months) are negotiated by head office and payments are paid directly into the company's bank account. When the long term lease is negotiated, fifty percent of the total lease fee must be paid directly into the company's bank account before delivery takes place. All toilets are serviced every two weeks by PortaPotti (Pty) Ltd regardless of whether they are on short term rental or long term lease. The charge for this service is built into the rental/lease payments. 5. During the previous financial year the company imported 500 portable toilets from Japan at a cost of R1 500 000. These toilets, for use on short term rentals only, work very effectively but make use of a particular chemical which is supplied by the manufacturer. During the current financial year PortPotti (Pty) Ltd placed an order for additional quantities of the chemical. However, on trying to clear the chemicals through customs the company was informed that the specific required could not, under any circumstances, be imported into the company because it is regarded as a health hazard. As the toilets cannot operate effectively without this chemical and cannot be adapted, the company attempted to return the toilets to the manufacturer in Japan. Whilst the manufacturer accepted the return of the chemical consignment, they were not prepared to take back 500 toilets. The toilets are currently stored at the Bloemfontein depot. 6. PortPotti (Pty) Ltd is the defendant in a substantial legal claim brought against the company by a marathon runner. This resulted from an accident where another runner, unaware that the toilet was occupied, had leaned against it whilst stretching his claves. This had caused the toilet to fall over as it had allegedly not been properly secured when it was set up y PortaPotti (Pty) Ltd's staff. The marathon runner in the toilet suffered a severe neck injury. The company's lawyers regard the matter as serious but are not prepared to comment on the likely outcome of the case. Required: 3.1. Identify the factors given in the information above which will increase audit risk in respect of the 2022 year end audit. (8) For each factor identified in (a) above state which financial statement assertion will be affected and explain your answer. (20) 3.2. You have been appointed senior in charge of the audit of PortaPotti (Pty) Ltd, a company which rents out portable toilets for the financial year end 30 April 2022 and are currently gaining an understanding of the business and its environment to enable you to assess the risk of material misstatement in the 30 April 2022 financial statements. You have gathered the following information: 1. The company rents or leases its toilets to a very diverse range of customers. Short term rentals are made to entities which organise events such as music concerts, marathons and rallies, as well as other entities which require temporary toilet facilities, e.g. roadwork camps, minor building sites etc, short term rentals make up 55% of the company's business. Long term leases are entered into with companies requiring long term but temporary toilet facilities such as large construction sites, as well as with local authorities which lease toilets for use in informal settlements. Long term leases, many of which are for substantial amounts, can be for the duration of the useful life of the toilets. The number of toilets rented or leased to a single customer can vary from one to sveral hundred. 2. PortaPotti (Pty) Ltd is responsible for setting up the toilets and collecting them at the conclusion of the rental/lease period. For short term rentals the entity renting the toilets is required to pay seventy five percent of the rental charge in cash (no cheques accepted) before PortaPotti (Pty) Ltd will deliver the toilets. The balance of the rental charge must be paid when the toilets are collected. Any form of payments is accepted on collection of the toilets e.g. cash, cheques etc. 3. PortaPotti (Pty) Ltd financial records reveal that the company owns approximately 15 000 portable toilets. Each toilet can be identified by a number painted on the side of the unit. There are twenty depots situated around the country out of which business in the surrounding region is conducted. All depots are situations on land owned by PortaPotti (Pty) Ltd and each consists of a storage and maintenance facility for the toilet units as well as a small administration office. Each depot has a depot supervisor. 4. The company's accounting function is centralized at the head office which is attached to the depot in Bloemfontein. The depot supervisors are responsible for the running of the depot, some very minor accounting functions, including the invoicing of short term rentals and the collection (see point 2 above) and banking of cash into the company's bank account. All the long term leases (longer than three months) are negotiated by head office and payments are paid directly into the company's bank account. When the long term lease is negotiated, fifty percent of the total lease fee must be paid directly into the company's bank account before delivery takes place. All toilets are serviced every two weeks by PortaPotti (Pty) Ltd regardless of whether they are on short term rental or long term lease. The charge for this service is built into the rental/lease payments. 5. During the previous financial year the company imported 500 portable toilets from Japan at a cost of R1 500 000. These toilets, for use on short term rentals only, work very effectively but make use of a particular chemical which is supplied by the manufacturer. During the current financial year PortPotti (Pty) Ltd placed an order for additional quantities of the chemical. However, on trying to clear the chemicals through customs the company was informed that the specific required could not, under any circumstances, be imported into the company because it is regarded as a health hazard. As the toilets cannot operate effectively without this chemical and cannot be adapted, the company attempted to return the toilets to the manufacturer in Japan. Whilst the manufacturer accepted the return of the chemical consignment, they were not prepared to take back 500 toilets. The toilets are currently stored at the Bloemfontein depot. 6. PortPotti (Pty) Ltd is the defendant in a substantial legal claim brought against the company by a marathon runner. This resulted from an accident where another runner, unaware that the toilet was occupied, had leaned against it whilst stretching his claves. This had caused the toilet to fall over as it had allegedly not been properly secured when it was set up y PortaPotti (Pty) Ltd's staff. The marathon runner in the toilet suffered a severe neck injury. The company's lawyers regard the matter as serious but are not prepared to comment on the likely outcome of the case. Required: 3.1. Identify the factors given in the information above which will increase audit risk in respect of the 2022 year end audit. (8) For each factor identified in (a) above state which financial statement assertion will be affected and explain your answer. (20) 3.2.

Answer rating: 100% (QA)

3 1 Ident ify the factors given in the information above which will increase audit risk in respect of the 2022 year end aud it 8 ANS WER The factors w... View the full answer