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3.1 GAAP CONCEPTS Match the GAAP concepts listed in COLUMN A with an explanation provided in COLUMN B - NSC Accounting - Question 3 - 2016 - Paper 1
Question 3
3.1 GAAP CONCEPTS Match the GAAP concepts listed in COLUMN A with an explanation provided in COLUMN B. Write the letter (A–E) only next to each number (3.1.1–3.1.4) ... show full transcript
Worked Solution & Example Answer:3.1 GAAP CONCEPTS Match the GAAP concepts listed in COLUMN A with an explanation provided in COLUMN B - NSC Accounting - Question 3 - 2016 - Paper 1
Step 1
Explain the role of the independent auditor.
Answer
The independent auditor plays a crucial role in providing an unbiased evaluation of the financial statements of a company. Their primary responsibility is to examine these statements, assess their accuracy, and ensure that they are compliant with accounting standards and regulations. An independent auditor must also identify any misstatements or discrepancies and issue an opinion on the fairness of the financial representations.
Step 2
Did Gunuz Ltd receive a qualified, unqualified or a disclaimer audit report? Explain your choice.
Answer
Gunuz Ltd received a qualified audit report. This is indicated by the statement in the audit opinion that, while the financial statements fairly represent the financial position of the company, there was an exception regarding the marketing expense, which could not be verified due to lack of documentation. This limitation leads to a qualification in the audit opinion.
Step 3
Briefly explain why the independent auditor was not willing to agree to CEO's request.
Answer
The independent auditor was not willing to agree to the CEO's request as doing so would compromise their independence and the integrity of the financial statements. Accepting such a request would contradict their professional obligation to maintain objectivity and perform an accurate audit. It is crucial for auditors to produce a true representation of the financial health of the company.
Step 4
Provide TWO consequences for the auditor if she agreed to this request.
Answer
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Legal Liability: If the auditor agreed to include the marketing expense despite the lack of documentation, they could face legal repercussions if the financial statements were later found to be misleading, potentially resulting in lawsuits from stakeholders or regulatory bodies.
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Loss of Credibility: By compromising their integrity, the auditor risks damaging their reputation and credibility in the industry. Future clients may doubt the auditor's objectivity, leading to a loss of business and trust from shareholders and the public.
Step 5
Prepare the Income Statement for the year ended 29 February 2016.
Answer
The Income Statement for Bheem Ltd for the year ending 29 February 2016 should be prepared as follows:
Income Statement
Sales:
- Total Sales: R5,207,600
Cost of Sales:
- Opening Stock: R132,650
- Add: Purchases: R3,169,500
- Less: Closing Stock: (R131,400 + R4,100)
Gross Profit:
- (Sales - Cost of Sales)
Expenses:
- Salaries and Wages: R432,390
- Rent Income: R78,600
- Directors' Fees: R329,000
- Audit Fees: R16,160
- Sundry Expenses: R72,800
Net Profit:
- (Gross Profit - Total Expenses)
Note:
Further adjustments based on additional information such as the provision for bad debts, depreciation, and interest on loan will need to be accounted for to finalize the net profit.