QUESTION 1 (50 marks)

You are an Audit Senior at HP Incorporate. You were assigned to the audit of Meltdown (Pty) Ltd (“Meltdown”). Meltdown is a repairs and maintenance company for a group of apartments in the Western Cape.

Meltdown stores most of its inventory and machinery needed for repairs at a warehouse in Cape Town, which Meltdown owns. Meltdown has a December 2023 financial year-end.

You are currently busy with the finalisation and completion of the 2023 financial year- end audit, and the Auditor’s Report date is 15 May 2024.

Outstanding audit issues:

Final materiality: R 6 000 000

Issue 1: Trade payables

The trade payables balance amounting to R25 300 000 in the final trial balance was understated by R9 500 000. You have discussed the matter with Meltdown’s management. However, management at Meltdown refuses to adjust the 2023 annual financial statements to correct the understatement of R9 500 000.

Issue 2: Inventory

On 15 February 2024, the warehouse in Cape Town had an electric issue that created a spark that ignited a fire, and most of the inventory used for repairs was destroyed to the value of R7 230 000. Management at Meltdown stated that this should not be in the 2023 annual financial statements and Meltdown has no insurance to cover the damaged inventory.

Main Supplier

The CEO of Meltdown is Mr. L Smith, and he founded Meltdown upon incorporation in

2005. During the 2023 financial year, the board of directors decided by voting that the main supplier of machinery and repair equipment would be Supply 4 U (Pty) Ltd. While you were on LinkedIn, you came across the Supply 4 U (Pty) Ltd profile and from the profile, you noted that Mr. L Smith is a 65% shareholder in Supply 4 U (Pty) Ltd.

Internal Audit

Meltdown has an internal audit department. In order to keep the external audit expenses minimal for the upcoming audits (2023 financial year), the Audit Partner in charge of Meltdown’s audit and Meltdown’s audit committee has recommended relying more on the internal auditors’ work performed. This means they want to use the work done by Meltdown’s internal audit team to a greater extent during the external audit process, which can help save external audit fees.

REQUIRED:

1.1 With reference to issue 1, discuss, with reasons, the impact the outstanding audit issue will have on the audit opinion.

(10 marks)

1.2 With reference to issue 2, discuss, with reasons, the impact the issue will have on the annual financial statements as of 31 December 2023 in terms of ISA 560 subsequent events.

(15 marks)

1.3 With reference to the main supplier information, describe the audit procedures you will perform with respect to ISA 550 related parties. Structure your response with the following headings:
• Directors’ interest in the contract. (2 marks)

• Related parties. (13 marks)

1.4 With reference to internal audit, describe aspects you need to consider when determining the nature and extent of work of the internal auditors that can be used.

(10 marks)

QUESTION 2 (25 marks)

You are a Senior Audit Trainee at a medium-sized auditing firm called Roland Auditors. Roland Auditors is in the process of auditing Sapitec Bank Ltd (“Sapitec”) for the June
2023 financial year end.

Background information:

Sapitec is an investment bank specialising in unsecured lending. Sapitec Bank Ltd is listed on the Johannesburg Stock Exchange (JSE). Sapitec has made headlines in newspaper articles in the 2023 financial year for all the wrong reasons, including excessive spending as well as alleged reckless lending practices.
Sapitec is one of South Africa’s (SA) best-known lenders by targeting low-income borrowers with high credit scores since the low-income households are usually turned away by the traditional banks within SA.

Legal claim

Sapetic has been providing loans to low-income households without proper credit checks performed. The decision not to have proper credit checks performed was approved by the Chief Financial Officer, Leon Low. Due to this, many borrowers could not repay their loans. As a result of the borrowers’ inability to pay their loans, they have sued Sapitec for hardship suffered by the borrowers due to them experiencing financial difficulty when their loans became payable. They claim that Sapitec was too lenient in granting the loans by not considering whether the lenders can afford the monthly instalments when the loan becomes due to be paid back (as per the National Credit Act).

You consulted Sapitec’s legal department on this matter. They believe that the probability of the claim to succeed is extremely high due to Sapitec’s reckless trading. The legal team also considers the amount of R65 000 000 to be a fair estimate of the eventual settlement amount, and the current materiality is set at R20 000 000.

REQUIRED:

Discuss, in detail, the auditor’s responsibilities with regard to reckless lending

practices.

Use the below mark allocation:

• Identifying that the matter is a reportable irregularity. (10 marks)

• Auditors’ responsibility to report the reportable irregularity. (15 marks)

QUESTION 3 (25 marks)

You are an Audit Manager at Coma (Pty) Ltd. You have been assigned to audit a gaming company called Games (Pty) Ltd (“Games”) for the December 2023 financial year-end.

Games have many stores across South Africa (SA) that sell hard-copy games for different gaming consoles; however, with technological advancements, many gamers can obtain games digitally at a much lower cost.

Going concern discussions held with management

During the 2023 financial year end audit, Games’s main supplier from America retracted all of the contracts with the gaming industry in SA that supplies the most sought-after games. This resulted in a loss of revenue for Games, and most of the Games stores had to be closed. Initially, they had 150 stores in SA, which was reduced to Games having 60 remaining stores. The contract with the American supplier represented 45% of the revenue for the 2023 financial year.

Games still owes the American supplier a material amount of R2 500 000, and Games needs the funding to pay the American supplier. Games will take out a loan from the bank to pay the American supplier.

During your discussions with the directors, the auditors expressed serious concern regarding the loss of business. Games’s management indicated that they are investing in creating an online store and partnering with a gaming company in China as Games’s new supplier to recover from the contract loss they had with their American supplier and the closure of many of their branches in SA.

Management believes that the 2023 annual financial statements can be applied with the going concern assumption since they have plans to get the company in a positive financial position, and they refuse to provide you with their going concern assumption assessment statement.

The following financial information has been provided to you for the year ending 31 December 2023:

REQUIRED:

3.1 Discuss the appropriateness of the going concern assumption for the financial statements of Games (Pty) Ltd for the financial year ending 31
December 2023.

Structure your answer as follows:

• Negative aspects that increase the going concern risk. (7 marks)

• Positive aspects that decrease the going concern. (2 marks)

• Conclude. (1 mark)

3.2 Discuss the possible influence of the going concern issue on the audit report of Games (Pty) Ltd for the year ending 31 December 2023.(7 marks)

3.3 Provide an extract of the audit report showing the audit opinion in the audit report based on an adverse opinion for going concern and assuming Games (Pty) Ltd is considering liquidating.
Structure your response with the following headings:

• Included in the adverse opinion section within the audit report. (3 marks)

• Basis for the adverse opinion section. (5 marks)

Answers to Above Questions on Auditing

Answer 1: In issue one it is observed that there is an understatement of trade payables in the books of accounts, and it therefore affects the completeness and accuracy of the financial reporting. As a result of this, the audit opinion based on such financial statements will also be adversely affected and will not give the true picture of the financial position of the company.