PAPER 2 ITC NOVEMBER 2020

PART II SUGGESTED SOLUTION

Part (e) Discuss the nature, timing and extent of the further audit
procedures that the audit team should follow to obtain sufficient
appropriate audit evidence about the appropriateness of the use of Marks
the going concern basis of accounting in the preparation of
Simunye’s 2020 annual financial statements.
Nature of testing to be performed
Based on the information provided there is no expectation that there are any
controls that are operating effectively over the process of execution of a going
concern assessment or the control environment. (This is substantiated by 1
uncertainties with regard to the assumptions used, accuracy and completeness of
the SMS going concern forecast – that ultimately needs to be consolidated into the
group's financial information later on)
For one of the subsidiaries, SMS, some control over going concern assessment
exist, i.e. the FM prepares the forecasts and the directors review the forecasts
to assess whether there are sufficient resources to continue operations in the near
future. (it is unclear whether this is done for all subsidiaries and the parent)
However, even though the person performing the assessment might be competent,
the inherent risk associated with the forecast, casts uncertainty on
appropriateness of the assessment and it may still contain various misstatements. 1
The following risk indicators also substantiate the risk that the going concern
basis of accounting might not be used appropriately in the preparation of the 2020
financial statements, and suggest the risk is significantly increased:
 Decreases in the profitability over the past two years (as well as the 12-month
forecast), including a decline in profits of subsidiaries (i.e. SMS).
 Prolonged strikes reducing the production capacity of the gold mining
operations significantly.
 Lawsuits facing the company (occupational health pay-outs).
 Drop in commodity prices that resulted in a decline in the share price.
 Simunye has failed to generate any cash internally and could only generate Max 3
cash through external funding and selling investments and excessively relies on
short-term credit facilities.

The following factor mitigate the going concern risk of uncertainty of the
company’s ability to continue as a going concern:
 Simunye is still compliant with debt covenants of a net debt to EBITDA ratio
of 3.5 (i.e. 2.5:1 as at year-end) or less and an interest coverage ratio of at least
2 (i.e. 4.9 as at year-end)
The doubt of the company’s ability to continue as a going concern should be
addressed as a significant risk (high risk acceptable) in the selection of an audit
approach for the following reasons: 1
 ISA 315 state that a significant risk arises when there is a degree of
subjectivity in the measurement of financial information related to the risk,
especially when it involves a wide range of uncertainty, which is the case with
a going concern assessment. 1
 A fraud risk factor exists in the event of pressures relating to financial stability,
profitability and operating conditions; hence management may be under
significant pressure for Simunye to appear to be a going concern. 1
The audit evidence obtained through the audit procedures should allow the auditor
to identify/make an assessment of whether material uncertainties exist. 1
A substantive approach will therefore be followed where substantive tests of
details and analytical procedures will be performed, with no test of controls. 1
Since going concern considerations are considered to be material in nature to users
of financial statements, substantive tests need to be executed regardless of the
level of risk of material misstatement. 1

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 Substantive test of details would be appropriate to assess the evaluation of

management’s assessment of Simunye’s ability to continue as a going concern,
and 1
 Substantive analytical procedures on the profitability, liquidity, gearing and
solvency ratios. 1
Attention should be focussed on the going concern assessment performed by
management:
 Specific consideration has to be given to the period over which management
performed the assessment (is it in line with the conceptual framework – at least
12 months per ISA). 1
 Enquiries should be made of management as to whether any consideration
was given to events that will occur post the forecast period. 1
 Consideration should be given to the mitigation strategies to be implemented
by management – will the outcome of the strategies improve the operations
sufficiently to continue as a going concern (effectiveness), and 1

 Is management capable of implementing the strategies (feasibility). 1

 Consider the adequacy of the company’s borrowing facilities and the state of
the company’s relationship with financial institutions (can the credit facility be
refinanced again in the future if necessary). 1
 Specific attention should be given to the covenant renegotiations – events
after year end have to be considered to determine whether management
was/is able to negotiate the ‘covenant holiday’. 1
 The forecasts provided by management should be tested in detail:
o As far as possible the data used in the assessment should be agreed to
underlying sources (current year actuals agreed the AFS, royalties to
relevant legislation). 1
o Assumptions should be tested through for example investigation of past
growth trends, industry forecasts and production capacity, to determine if
the growth rate is reasonable. 1
o Reperform the calculations of the forecasts and solvency and liquidity
ratios. 1
Timing of testing
The timing of the testing on the going concern assumptions should occur during
the final audit at year end. 1

Furthermore, events after year end should be considered as evidence to support

the going concern assumption. 1
Extent of testing
The extent of testing is directly linked to the results of the risk assessment and will
directly vary in correlation with the uncertainty of the company’s ability to continue
as a going concern. 1
Due to the significant risk identified, increased substantive testing should be
performed to obtain sufficient appropriate evidence on the appropriateness of
assumptions and mitigation strategies implemented by management. 1
The audit team should consider whether materiality levels should be
decreased in testing the going concern assessment, due to the significant risk. 1
Material uncertainty assessment
If material uncertainty exists relating to going concern, the adequacy of the
disclosures of the events and circumstances in the financial statements should be
tested in detail. 1

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Other procedures (not a direct response to risk assessment, rather ISA

compliance)
Written representations should be obtained from management regarding the
appropriate use of the going concern assumption. 1
Available 29
Maximum 10
Total for part (e) 10

Part (f) Based on your review of workpapers J-102 and L-106 criticise the
appropriateness and completeness of the proposed audit Marks
procedures in L-106.
Maintenance of mine workers master file
 The direction of testing/source from which sample was selected for point
number 1 (‘For a sample of 15 MAF’s…’) is questionable as it would be
preferable to select a sample for testing from the masterfile and agree to the MAF
and supporting documentation. 1
 There is no explanation as to why 15 MAFs have been chosen / how was the
sample for the test calculated. 1
 Also, no mention is made as to how the sample was selected (sampling
strategy), for example random, haphazard, representative sample. 1
 Test of control number 3 (‘Using Data CAAT’s extract a list of duplicate
employees names / ID numbers of mine workers at Simunye’) is not a test of
control but rather a substantive procedure and should not have been included
on the working paper. 1
Missing procedures include:
 Using CAAT’s, identify all amendments in the employee masterfile for the 2020
financial year, select a sample of changes and: 1
o Agree the amendments per the MAFs to the employee master file to
ensure that it has been correctly updated on the system. 1
 Inspect the access profiles of staff to confirm that only authorised members of
Simunye’s HR department have access to the master file and to the access logs
to confirm that access has been gained only by authorised staff. 1
 Inspect the masterfile amendments logs for any discrepancies and the
signature of the Financial Director to confirm that these have been
appropriately reviewed. 1
 Enquire from the Financial Director as to the procedure(s) he/she executes
when any discrepancies on the Masterfile amendments log had been identified
(missing MAF numbers). 1
 Select a sample of MAFs and trace these to the masterfile amendments log in
order to confirm that all MAFs have been accounted for/entered. 1
Mine worker identification and time-keeping of hours worked
 For test 1 (‘observe that upon exit they are required to walk through an x-ray
scanning machine’), this test does not relate to the payroll / wages cycle
(rather to inventory) and should not be tested / included in this working paper. 1
 For test 2 (observing Simunye’s security staff at the mine):
o First, the fact that they know that they are being observed (i.e. it was not done
on an unannounced basis) may affect how they perform the control during
the observation process and thus this test will yield evidence of limited
reliability. 1
o Secondly, it only provides evidence limited to the points in time at which
the observation took place and thus does not provide sufficient evidence
about the operating effectiveness of the control for the entire 2020 financial
year. 1

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Missing procedures include:

 Attempt to gain access to a mine shaft area with an unauthorised (auditor)
thumb print and confirm that access via the turnstile is denied. 1
 Enquire from security guards what procedures they follow when there is an
attempt of unauthorised entry (confirm that the security guards cannot let these
individuals in with their own biometrics) or suspicious activity. 1
 In order to verify that the correct thumb print is stored for the correct
employee on the MyPay system - for a sample of employees, capture thumb
prints (if practical) and verify them against that recorded per employee masterfile
records. 1
 Obtain Simunye’s permission to use test data and –
o using system CAATs, log test hours of valid employees on Simunye’s
system and verify by inspection that the payroll expenses and related
deductions sent to MyPay include these amounts; and 1
o using system CAATs, log test hours of employees that are not part of
Simunye’s employee listing (i.e. fictitious ‘employees’) and observe
whether Simunye’s system detects the fictitious transaction. 1
 For a sample of employees, reperform the casting of the hours (normal and
overtime) worked by obtaining the times logged by the employee on the ‘Exit
and entry’ log and to confirm that it was correctly calculated by the MyPay
system. 1
Review of mine workers attendance and approval of hours logged
 For test 3 (iii) – the test only describes having inspected the signature on the
‘Total hours worked’ schedule, which is not sufficient to test this control. 1
 Evidence of the actual control implemented needs to be obtained, such as
reasons noted / follow up procedures performed by the shaft manager for the
overtime hours not pre-approved. 1
 For test 1 (‘enquiring from the shaft manager the process that he follows….’):
o This is rather a risk assessment procedure aimed at clarifying the auditor’s
understanding of the process, since no follow-up / test was performed
based on information obtained from the enquiry (not sufficient to test control). 1
o The reliability of audit evidence gathered from enquiry as an audit
procedure is low, as the mine managers may respond according to what they
know they should be doing, but not as they actually do. 1
 For test 2 and 3 – again no mention is made of how the sample will be selected
(see points under masterfile). 1
Missing procedures include:
 Agree employees listed on the total hours worked schedule to the list of
authorised employees to ensure that only authorised employees are
remunerated. 1
 For overtime worked, inspect the total hours worked schedule for the signature
of the relevant shaft manager as evidence that the overtime hours have been
pre-authorised. 1
 Enquire of the shaft manager what process is followed to review the schedule
and confirm the accuracy thereof by observation / inspection. 1
General criticisms
 The formulated tests of controls are not complete – there are additional controls
listed in the system description not included by the trainee. 1
Available 28
Maximum 15
Communication skills – appropriate style 1
Total for part (f) 16

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Part (g) Provide the substantive audit procedures that should be performed
to obtain sufficient and appropriate evidence regarding the
occupational health obligation in the 2020 consolidated annual
financial statements of Simunye, with reference to workpaper D-103
Marks
Do not include group audit procedures in terms of ISA 600 Using
the Work of Another Auditor (Including the Work of Component
Auditors).
Obtain authorisation/permission from management in order to communicate
with the actuary and Simunye’s external legal representatives. 1
Initial recognition of a provision (reliability and probability)
 Evaluate the company’s procedures to identify provisions and inspect the
supporting documentation that management provides in respect of the obligation
to confirm that the amount recognised meets the definition of a provision is in
accordance with IAS 37. 1
 Inspect the minutes of board meetings where the recognition of a provision
was considered and approved by the board. 1
 Inspect legal correspondence from Simunye’s legal representatives to
confirm that it is now probable that the obligation will result in an outflow of
economic benefits/expected outcome of the lawsuit (obligating event exists,
and company cannot “walk away” from responsibility). 1
Actuary/Legal representative – use of management expert
 In order to determine whether reliance can be placed on the work of the
actuary –
o evaluate the competence and capabilities of the actuary through inspection
of his/her qualifications, CV, etc.; 1
o evaluate the independence of the actuary through inquiries with
management and the actuary as to any instances that could cause breaches
in independence; 1
o Inspect the contract between management and the expert in order to
determine whether the scope of their engagement is in line with the audit
evidence to be obtained to provide appropriate audit evidence. 1
Method, Assumptions, Data
Enquire from the actuary/management how the provision was calculated,
including the assumptions made and methods used, and corroborate through
agreeing assumptions to the calculation schedule. 1
Obtain an understanding of the work performed by the actuary through
inspection of the report for assumptions made, methodology used, data collected,
etc., as well as discussions with the actuary on the process followed to make
estimates and determine the appropriateness of the work performed. 1
Procedures to verify assumptions and data
 Inspect legal correspondences from the legal team representing the mine
workers/auditors own legal expert, to compare their estimates to that used
by management in order to verify the number of employees and value of
benefits. 1
 Consider the outcomes of similar past class action lawsuits/cases in order to
compare the settlement values to the provision’s estimate. 1
 Inspect legal correspondence from Simunye’s external legal
representatives / enquire from them or obtain a written confirmation as to
the expected outcome of the law suit, expected values of the benefits awarded
to the plaintiffs and if available the possible timing of the settlement. 1

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 Inspect the calculation for the risk-free rate used and agree the rate to the
current government bond yield for a similar period to the provision as obtained
from the treasury website. 1
 Enquire from the actuary why the use of a risk-free rate will be applicable to
this type of provision and why no risk adjustments are deemed necessary. 1
 Request a sensitivity analysis from management and evaluate the effect of a
change in key variables/assumptions on the calculation of the obligation. 1
 Enquire from management as to the factors that lead to a change in provision
estimate at year end and corroborate facts with the actuary’s report. 1
 Consider/evaluate any events after year end that may affect the assumptions
made and the data used in estimating the provision amount. 1
Provision valuation (estimate)
 Using all the data and assumptions verified, calculate the auditors own
estimate of the obligation independently to determine a point estimate for
comparison to actuary’s calculation. 1
 Reperform the calculation of the interest, using the original inputs on the day
of recognition of the occupational healthcare obligation. (For disclosure
purposes). 1
 Reperform the calculation of the change in estimate, to confirm that the
amount is correct. (For disclosure purposes). 1
 Include any differences in the schedule of unadjusted audit differences and
discuss these with management (as this is a Judgemental misstatement) and
consider whether there is a need to adjust the AFS. 1
Presentation and disclosure
 Inspect the draft disclosures in Simunye’s 2020 financial statements as provided
by management to determine if it is in line with the requirements of IAS 37. 1
 Inspect Simunye’s 2020 financial statements to confirm that the provision has
been accounted as separate line item (if material) on the Statement of
Financial Position. 1
 Inspect Simynye’s 2020 financial statements to confirm that the change in
estimate, and related information, had been appropriately disclosed in
accordance with IAS 8. 1
Other procedures
 Inspect all assumptions made by management in the provision calculation for
any indication of management bias (for example, assumptions all leading to a
decrease in the provision to be raised – completeness risk). 1
Available 25
Maximum 10
Communication skills – appropriate style 1
Total for part (g) 11
TOTAL FOR PART II 37

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