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[17 marks] You are an audit manager at Lbw Auditors. The information below relates to two unrelated audit clients of yours. The audit senior requested
[17 marks] You are an audit manager at Lbw Auditors. The information below relates to two unrelated audit clients of yours. The audit senior requested your assistance. Company 1 - Terminator Pest Control (Pty) Ltd Terminator Pest Control (Pty) Ltd (Terminator Pest Control) is currently involved in discussions to have its controlling interest acquired by Diverse Investments (Pty) Ltd (Diverse Investments). Terminator Pest Control is the largest pest control company in the Western Cape and was incorporated 15 years ago. It has a December year-end. Diverse Investments indicated that it would be relying on the financial statements when making its decision. Ms Turner, the chief operating officer of Terminator Pest Control, has indicated that she would like to submit the financial statements to Diverse Investments on 28 January so that they can finalise the acquisition by the middle of February. As another matter, Mr Warner, the company's chief executive officer, resigned on 29 January. He indicated that his decision was based on his wanting to spend more quality time with his family and that he would complete his four weeks' notice. Mr Warner is entitled to receive two months' worth of untaken leave, which equates to R200 000, when he officially leaves the company. You were informed of Mr Warner's resignation on 30 January. The final materiality figure for the audit is R150000. Company 2 - Electro Frames (Pty) Ltd Electro Frames (Pty) Ltd (Electro Frames) assembles and distributes digital photo frames from the warehouse located in Epping and has a December year-end. The company sold a large portion of its inventory at below the inventory's cost during the month of January. A second-year audit trainee enquired of the chief financial officer on 1 February if this was an indication that inventory was valued at an amount above the net realisable value at year-end. The chief financial officer responded by saying that such a question was a clear indication that we did not know what we were doing and that he would ensure that we were not reappointed as the company's auditors in the following year. The audit trainee has indicated that she believes that inventory is overstated by R650 000 at year-end. The final materiality figure for the audit is R600000. REQUIRED Discuss the impact of the information noted above on the financial statements of each of your clients for their respective financial years under review. [17]
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