Question

QUESTION 2         

During the “understanding the entity and its environment” stage of planning for the audit of Novex (Pty) Ltd you obtain the following information, inter alia, about the company. 1. The company imports large quantities of inventory. 2. Some of the products which Novex (Pty) Ltd sells have expiry dates, after which they are not useable. 3. The company sells, inter alia, chemicals. 4. Inventory is stored in several warehouses around Namibia. 5. 40% of the company’s sales are for cash. 6. During the year under audit, credit terms and policies were made less stringent to boost sales. 7. The company’s manufacturing division leases some of its assets. 8. Obtaining spares for some of the manufacturing assets which the company owns, is extremely difficult which has resulted in a number of machines standing idle.
9. The work force at Novex (Pty) Ltd fluctuates quite significantly from month to month. Casual labour is brought in frequently for short periods.

YOU ARE REQUIRED TO identify the financial statement assertions which will be affected by the above information. Provide reasons.

Answer 1

financial statement assertions are

1. existence or occurance

2. completeness

3. accuracy

4.valuation

5.rights and obligations

6. presentation and disclosure

financial statement assertions which will be affected bt the above information are as follows

1. existence or occurance

• inventory exist at the balance sheet date
• the imports are additions during the year
• the company sells, interalia, chemicals

2. completeness

• inventory account balances includes all relevant transactions that have been taken place during the period

3. rights and obligations

• novex (pty) ltd has the ownership rights for the assets as on the balancesheet date

4.valuation and accuracy

• the recorded balances for inventory and cash sales reflect the balances in accordance with GAAP

5.presentation and disclosure

• inventory balance is reflected in balance sheet in curent assets section
• the disclosure for non movings items and leases are adequate