CAS3701 Assignment 4 (DETAILED ANSWERS) 2025 - DISTINCTION GUARANTEED

CAS3701 Assignment 4 (DETAILED ANSWERS) 2025 - DISTINCTION GUARANTEED - DISTINCTION GUARANTEED - DISTINCTION GUARANTEED Answers, guidelines, workings and references ,... . Background ElectroMart Limited (ElectroMart) is a well-known South African retailer, specialising in consumer electronics, home appliances, and office supplies. The company operates nationwide and has recently expanded its operations into neighbouring countries. ElectroMart serves a broad customer base, ranging from individual consumers to large corporations. The company's sales team comprises 30 sales representatives, divided equally into three key provincial areas: Western Cape, Gauteng, and KwaZulu-Natal. These representatives are Identify and explain four key business risks arising from ElectroMart’s current sales recording process. For each risk identified, discuss the potential impact on the business if the risk is not effectively managed. 6. After introducing the revised compensation plan, what Key Performance Indicators (KPIs) should ElectroMart’s management monitor to identify early signs of poor performance or potential risk in the plan? For each KPI, explain what it measures and how it can help management take corrective action. responsible for managing customer relationships and promoting ElectroMart’s products in their areas. What would you do if you were John? Would you report the sale accurately, or would you misclassify it to meet the quota? Discuss the possible implications for John and How could the revised commission structure increase the risk of material misstatement in Revenue? Discuss the risk as well as its impact. 6. Assume you are the auditor of ElectroMart. What substantive audit procedures would you perform to verify that commission expenses are accurately and completely recorded for the year ended 31 December 2024 ElectroMart. 4. What manual and computer controls could ElectroMart implement to ensure that the sales representatives do not record fictitious new sales? Although the sales team works in different provinces, ElectroMart ensures that all operations follow the same standards and provide the same level of customer service, ensuring that customers have a consistent experience across all provinces. ElectroMart has a 31 December year-end. 2. Salary and commission ElectroMart’s sales team, made up of the 30 provincial sales representatives, has historically What does the KPI measure? earned a base salary plus commission, with the commission rate set at 2.5% of all sales. Approximately 70% of a sales representative’s total compensation comes from their base salary and the remaining 30% from commissions. However, the company has faced challenges in generating new business in the past two years. Despite having an established customer base, ElectroMart has noticed a decline in cold calling1 and sourcing new customers, with 80% of all commissions now earned from repeat sales to existing customers. Several external factors may also be contributing to this trend, including reduced consumer spending, rising interest rates, and job losses in South Africa. This has prompted management to consider revising the current commission structure to better motivate sales representatives and improve long–term sales performance. To address these concerns, Tom Driver, the sales manager, proposed a revised compensation and performance evaluation plan, which was approved by the company’s CFO, Mr Lethabo Dlamini. The new plan aims to motivate the sales team and expand the customer How the KPI helps management take corrective action base. The revised plan became effective on 1 January 2024. Details of the new compensation and performance evaluation plan are as follows: 1 Cold calling means to make an unsolicited visit or phone call to someone, in an attempt to sell goods or services. a) Changes in commission structure ● A new sales commission rate of 4% will apply to sales made to new customers, valid for the first two years after the customer begins purchasing from ElectroMart. ● The commission for existing customers will be reduced from 2.5% to 2%. ● Base salaries will continue to be paid, but they will no longer be adjusted based on performance reviews. ● Instead of performance-based salary increases, a bonus system will reward sales representatives who achieve or exceed their sales targets. b) Performance-based sales targets ● Sales quotas will be set for both new and existing customers. ● Sales representatives will be reviewed and ranked based on their annual sales (to new and existing customers) performance. Performance rankings will be used to determine bonus allocations. Bonuses will be calculated and paid annually, following the completion of year-end performance reviews. c) Cold calling requirement ● Each salesperson will be required to make at least 15 cold calls per month. While cold calling remains important, ElectroMart is also considering alternative ways to reach potential customers, including digital marketing initiatives and referral programmes. Nine months after the new system was implemented, the sales manager observed mixed outcomes: 1. An increase of 10% in sales to new customers. 2. A decline of 20% in sales to existing customers. 3. A significant drop in customer satisfaction scores, from 95% to 80%, with increased complaints about poor customer service. 4. Low morale among the sales team, especially senior sales representatives. 5. The resignation of 3 of the most experienced sales representatives. Mr Lethabo Dlamini is increasingly concerned about the growing challenges and is struggling to understand why the new compensation and evaluation plan is not delivering the expected results. 3. Recording of New Sales at ElectroMart Sales transactions are recorded through ElectroMart’s Sales Management System (SMS), which records all the necessary customer and sales information. When a sale is made, the sales representative manually enters the customer details into the system, including the customer’s full name, contact information, VAT number, company registration number (if applicable), and billing address. The system then automatically generates a unique customer ID, which is used for internal tracking and linking sales to commission calculations. When entering a sales transaction into the SMS, the sales representative is required to determine whether the customer is ‘new’ or ‘existing.’ This classification is selected manually using a dropdown field in the SMS during the transaction entry process. The SMS automatically checks for duplicate or matching information using key identifiers such as VAT number, company registration number, email, and phone number. If a match is found in the existing customer database, the system will auto-link the transaction to an existing customer profile. The sales representative must then confirm the match or reject it. If no match is found, the sales representative must manually select ‘New Customer’ in the SMS. To validate this classification, the sales representative must upload supporting documentation: ● A customer registration form (completed and signed) ● A signed sales contract or purchase order and ● Proof of first-time transaction, such as the first invoice or order confirmation. The SMS will flag entries with incomplete documentation, and such transactions will not be processed for commission until resolved. Uploaded documents are saved within the customer’s SMS profile and are reviewed by the Provincial Sales Managers on a sample basis to confirm compliance and reduce the risk of misclassification. At the end of each month, the Senior Accountant from the Finance Department extracts a detailed sales summary from the SMS, broken down by customer type and sales representative. Each sales representative is required to: ● Review their individual sales summary. ● Compare system data with personal sales logs, customer emails, and signed contracts. ● Confirm the accuracy of customer details, including the correct classification and sales value. If any errors or discrepancies are identified, such as duplicate entries, missing transactions, or incorrect customer classifications, the sales representatives must complete and submit a Sales Correction Form. This form must be supported by relevant documentation such as: a revised or updated customer registration form, email correspondence with the client, signed contract amendments, or corrected invoices. These correction requests are reviewed and approved by the Provincial Sales Manager, who forwards approved changes to the Senior Accountant in the Finance Department for adjustment in the SMS. Senior Accountants also analyse monthly reports for unusual patterns or trends that may indicate potential classification errors or manipulation. Any anomalies are escalated to the Finance Manager for investigation. The monthly sales summary forms the basis for the calculation of commission expenses. 4. Recording of Commission Expense Commission expenses at ElectroMart are calculated using validated sales data extracted from the Sales Management System (SMS). The system automatically applies the appropriate commission rate based on the customer classification recorded during the sales entry process: - 4% commission on sales to new customers or - 2% commission on sales to existing customers. The commission rates are embedded within the SMS and are automatically applied at the transaction level based on the customer classification selected by the sales representative. Once the sales verification process is complete (refer to Recording of New Sales at ElectroMart above), the Senior Accountant extracts a monthly commission report from the SMS. The report aggregates commission amounts for each sales representative and categorises them by customer type. He reviews the system-generated commission calculations. The total commission expense for the period ending 31 December 2024 consists of: ● 4% commission on new customer sales (within the first two years), ● 2% commission on existing customer sales, ● Manual adjustments for customer misclassifications; and ● Reversals for cancelled or invalid sales. The following is an example of how the commission expense is recorded in the general ledger for the year ended 31 December 2024: Commission expense Debit Credit R R Commission on new customers (4% of new customer sales) 120 000 Reversals for cancelled/invalid sales 10 000 Commission on existing customers (2% of existing customer sales) 80 000 Balance 195 000 Manual adjustments 5 000 The total commission expense for the period is recorded in the accounting records by the Management accountant, who prepares a monthly commission journal entry for accrual. The entry is made up of the system-calculated commissions and any approved manual adjustments. It is reviewed by the Finance Manager and, once approved, is posted to the general ledger. This journal forms the primary link between the commission report and the financial statements. Transfer to the payroll system and final payment processing Once the journal is approved and posted, the finalised commission schedule is exported from the accounting system. The schedule includes employee IDs, commission amounts, and supporting references to verified sales data. This schedule is electronically submitted to the payroll department through a secure finance-payroll portal. Upon receipt, the payroll officer uploads the commission data into the payroll system and assigns amounts to the relevant individual employee profiles. The payroll manager performs a reconciliation between the uploaded data and the finance-approved schedule. Only after successful reconciliation are commissions included in the next payroll cycle. 5. Misclassification of sales to meet targets One of the sales representatives, John, has struggled to meet his monthly new sales target and is under significant pressure to perform. He recently received a large order from a loyal client who has placed multiple repeat orders in the past. Realising that he would earn a higher commission if this order were categorised as a “new sale,” John decides to classify this repeat customer order as a ‘new sale’ even though he knows that it is not technically a new customer. John justifies his decision by telling himself that he needs to meet his sales target to earn the bonus and avoid falling behind his colleagues.1. Background ElectroMart Limited (ElectroMart) is a well-known South African retailer, specialising in consumer electronics, home appliances, and office supplies. The company operates nationwide and has recently expanded its operations into neighbouring countries. ElectroMart serves a broad customer base, ranging from individual consumers to large corporations. The company's sales team comprises 30 sales representatives, divided equally into three key provincial areas: Western Cape, Gauteng, and KwaZulu-Natal. These representatives are responsible for managing customer relationships and promoting ElectroMart’s products in their areas. Although the sales team works in different provinces, ElectroMart ensures that all operations follow the same standards and provide the same level of customer service, ensuring that customers have a consistent experience across all provinces. ElectroMart has a 31 December year-end. 2. Salary and commission ElectroMart’s sales team, made up of the 30 provincial sales representatives, has historically earned a base salary plus commission, with the commission rate set at 2.5% of all sales. Approximately 70% of a sales representative’s total compensation comes from their base salary and the remaining 30% from commissions. However, the company has faced challenges in generating new business in the past two years. Despite having an established customer base, ElectroMart has noticed a decline in cold calling1 and sourcing new customers, with 80% of all commissions now earned from repeat sales to existing customers. Several external factors may also be contributing to this trend, including reduced consumer spending, rising interest rates, and job losses in South Africa. This has prompted management to consider revising the current commission structure to better motivate sales representatives and improve long–term sales performance. To address these concerns, Tom Driver, the sales manager, proposed a revised compensation and performance evaluation plan, which was approved by the company’s CFO, Mr Lethabo Dlamini. The new plan aims to motivate the sales team and expand the customer base. The revised plan became effective on 1 January 2024. Details of the new compensation and performance evaluation plan are as follows: 1 Cold calling means to make an unsolicited visit or phone call to someone, in an attempt to sell goods or services. a) Changes in commission structure ● A new sales commission rate of 4% will apply to sales made to new customers, valid for the first two years after the customer begins purchasing from ElectroMart. ● The commission for existing customers will be reduced from 2.5% to 2%. ● Base salaries will continue to be paid, but they will no longer be adjusted based on performance reviews. ● Instead of performance-based salary increases, a bonus system will reward sales representatives who achieve or exceed their sales targets. b) Performance-based sales targets ● Sales quotas will be set for both new and existing customers. ● Sales representatives will be reviewed and ranked based on their annual sales (to new and existing customers) performance. Performance rankings will be used to determine bonus allocations. Bonuses will be calculated and paid annually, following the completion of year-end performance reviews. c) Cold calling requirement ● Each salesperson will be required to make at least 15 cold calls per month. While cold calling remains important, ElectroMart is also considering alternative ways to reach potential customers, including digital marketing initiatives and referral programmes. Nine months after the new system was implemented, the sales manager observed mixed outcomes: 1. An increase of 10% in sales to new customers. 2. A decline of 20% in sales to existing customers. 3. A significant drop in customer satisfaction scores, from 95% to 80%, with increased complaints about poor customer service. 4. Low morale among the sales team, especially senior sales representatives. 5. The resignation of 3 of the most experienced sales representatives. Mr Lethabo Dlamini is increasingly concerned about the growing challenges and is struggling to understand why the new compensation and evaluation plan is not delivering the expected results. 3. Recording of New Sales at ElectroMart Sales transactions are recorded through ElectroMart’s Sales Management System (SMS), which records all the necessary customer and sales information. When a sale is made, the sales representative manually enters the customer details into the system, including the customer’s full name, contact information, VAT number, company registration number (if applicable), and billing address. The system then automatically generates a unique customer ID, which is used for internal tracking and linking sales to commission calculations. When entering a sales transaction into the SMS, the sales representative is required to determine whether the customer is ‘new’ or ‘existing.’ This classification is selected manually using a dropdown field in the SMS during the transaction entry process. The SMS automatically checks for duplicate or matching information using key identifiers such as VAT number, company registration number, email, and phone number. If a match is found in the existing customer database, the system will auto-link the transaction to an existing customer profile. The sales representative must then confirm the match or reject it. If no match is found, the sales representative must manually select ‘New Customer’ in the SMS. To validate this classification, the sales representative must upload supporting documentation: ● A customer registration form (completed and signed) ● A signed sales contract or purchase order and ● Proof of first-time transaction, such as the first invoice or order confirmation. The SMS will flag entries with incomplete documentation, and such transactions will not be processed for commission until resolved. Uploaded documents are saved within the customer’s SMS profile and are reviewed by the Provincial Sales Managers on a sample basis to confirm compliance and reduce the risk of misclassification. At the end of each month, the Senior Accountant from the Finance Department extracts a detailed sales summary from the SMS, broken down by customer type and sales representative. Each sales representative is required to: ● Review their individual sales summary. ● Compare system data with personal sales logs, customer emails, and signed contracts. ● Confirm the accuracy of customer details, including the correct classification and sales value. If any errors or discrepancies are identified, such as duplicate entries, missing transactions, or incorrect customer classifications, the sales representatives must complete and submit a Sales Correction Form. This form must be supported by relevant documentation such as: a revised or updated customer registration form, email correspondence with the client, signed contract amendments, or corrected invoices. These correction requests are reviewed and approved by the Provincial Sales Manager, who forwards approved changes to the Senior Accountant in the Finance Department for adjustment in the SMS. Senior Accountants also analyse monthly reports for unusual patterns or trends that may indicate potential classification errors or manipulation. Any anomalies are escalated to the Finance Manager for investigation. The monthly sales summary forms the basis for the calculation of commission expenses. 4. Recording of Commission Expense Commission expenses at ElectroMart are calculated using validated sales data extracted from the Sales Management System (SMS). The system automatically applies the appropriate commission rate based on the customer classification recorded during the sales entry process: - 4% commission on sales to new customers or - 2% commission on sales to existing customers. The commission rates are embedded within the SMS and are automatically applied at the transaction level based on the customer classification selected by the sales representative. Once the sales verification process is complete (refer to Recording of New Sales at ElectroMart above), the Senior Accountant extracts a monthly commission report from the SMS. The report aggregates commission amounts for each sales representative and categorises them by customer type. He reviews the system-generated commission calculations. The total commission expense for the period ending 31 December 2024 consists of: ● 4% commission on new customer sales (within the first two years), ● 2% commission on existing customer sales, ● Manual adjustments for customer misclassifications; and ● Reversals for cancelled or invalid sales. The following is an example of how the commission expense is recorded in the general ledger for the year ended 31 December 2024: Commission expense Debit Credit R R Commission on new customers (4% of new customer sales) 120 000 Reversals for cancelled/invalid salesBased on the results observed after the new compensation structure was introduced, discuss the possible reasons for outcomes 1 to 5 as reported above. 2. Identify and explain what possible alternatives ElectroMart could have considered to boost new sales whilst still focusing on retaining current customers. Present your answer in the following table format. 10 000 Commission on existing customers (2% of existing customer sales) 80 000 Balance 195 000 Manual adjustments 5 000 The total commission expense for the period is recorded in the accounting records by the Management accountant, who prepares a monthly commission journal entry for accrual. The entry is made up of the system-calculated commissions and any approved manual adjustments. It is reviewed by the Finance Manager and, once approved, is posted to the general ledger. This journal forms the primary link between the commission report and the financial statements. Transfer to the payroll system and final payment processing Once the journal is approved and posted, the finalised commission schedule is exported from the accounting system. The schedule includes employee IDs, commission amounts, and supporting references to verified sales data. This schedule is electronically submitted to the payroll department through a secure finance-payroll portal. Upon receipt, the payroll officer uploads the commission data into the payroll system and assigns amounts to the relevant individual employee profiles. The payroll manager performs a reconciliation between the uploaded data and the finance-approved schedule. Only after successful reconciliation are commissions included in the next payroll cycle.Based on the results observed after the new compensation structure was introduced, discuss the possible reasons for outcomes 1 to 5 as reported above. 2. Identify and explain what possible alternatives ElectroMart could have considered to boost new sales whilst still focusing on retaining current customers. Present your answer in the following table format. 5. Misclassification of sales to meet targets One of the sales representatives, John, has struggled to meet his monthly new sales target and is under significant pressure to perform. He recently received a large order from a loyal client who has placed multiple repeat orders in the past. Realising that he would earn a higher commission if this order were categorised as a “new sale,” John decides to classify this repeat customer order as a ‘new sale’ even though he knows that it is not technically a new customer. John justifies his decision by telling himself that he needs to meet his sales target to earn the bonus and avoid falling behind his colleagues.