[15 marks] You are the manager on the 28 February 20X1 audit, currently in its finalising phase, of Musicon (Pty) Ltd (Musicon), a national retailer of music CDs and DVDs. The following misstatements in the financial statements have not been corrected by management: 1. Musicon purchased a large number of CDs featuring the music of an international artist, Frightening Freddy, who was due for a concert tour of the country in March 20X1. However, the tour was cancelled after Freddy became embroiled in a scandal involving him locking his girlfriend in a closet for almost a whole day after a domestic altercation. A public outcry followed, with even ardent fans boycotting Freddy's music. Audit evidence suggests that Musicon's inventory consisting of Freddy's music CDs at 28 February 20X1 should be valued at 2500000 at year-end, instead of the recorded value of R750 000 . This is based on calculations by Musicon's sales department which show that the CDs will not trade if they are not sold below cost. 2. In February 20X1, Musicon was sued by a customer for R500 000 in damages when the facility that allows customers to preview music malfunctioned: the volume of the music automatically rose so high that the customer experienced a degree of hearing loss. The company's legal representative indicated to the audit team that at year-end it was highly likely that the aggrieved customer would be successful in his lawsuit. The management of Musicon has not recorded any compensatory amount or made any disclosure in its 20X1 financial statements, in relation to the lawsuit. 3. Inspection of the bank statement for April 20X1 revealed a payment of R150 000 made by Musicon to a supplier for inventory recorded as assets (and a related trade creditor raised) at 28 February 201. Further investigation revealed, however, that the GRN generated for said inventory was signed and dated 3 March 201. The final materiality for Musicon's 20X1 audit is R350 000. REQUIRED Discuss the materiality and the nature of the above misstatements, both separately and on aggregate. Ignore any VAT implications. Assuming that management will correct misstatements 1 and 3, but not misstatement 2, discuss the effect that misstatement 2 will have on the audit report to be issued for the 20X1 financial statements of Musicon