3 (28 MARKS) You are a Senior Audit Clerk at Wolmarans Auditors and are in the process of finalising the audit of Barnyard Traders ("Barnyard") for the December 2021 financial year-end. Barnard operates in the Western Cape with its head office being in Cape Town. They have 8 branches across South Africa. Barnyard sells fast-moving consumables which the entity purchases in bulk from big wholesalers. A portion of their inventory is also exported. During the 2021 financial year, revenue has declined due to the Covid-19 pandemic, however, management is positive and has indicated that there are plans to turn the entity's financial situation around. These plans include the raising of additional funds and the acquiring of another business. Management increased their overdraft facility to R3 million which is the current limit for Barnyard. Management has indicated that they need the audit to be finalised by the end of March 2022 as they need to submit documentation to the bank in order to secure a higher overdraft facility. The final materiality for the financial year ended December 2021 was set at R1.5 million. The annual financial statements for the financial year ended December 2021 were prepared on a going concern basis. Two unresolved audit findings at financial year-end Audit finding 1 On the 19th of January 2022, a letter was received by Barnyard from a foreign customer. The letter came from the customer's lawyers for a lawsuit of R2 million. The customer sued Barnyard for the late delivery of the goods they ordered in July 2021. The late delivery caused the foreign customer to lose income as they could not supply products to one of their customers. Management indicated that their legal advisors are of the opinion that it is probable that the amount payable for the late delivery of goods will not exceed R2 million. No accounting provision was made for the lawsuit. HAUD232 1-Jul-Dec2022-FA1-MS-V4-22022022 Audit finding 2 On the 14th of February 2022, a fire broke out at one of the Cape Town branches. Inventory with a cost price of R850 000 was destroyed during the fire. You discovered an error in the allocation of costs to inventory resulting in other inventory (other than inventory lost in the fire) being overstated by R 1.65 million. Reliance on information produced by a Production Engineer During a meeting, the board of directors discussed the possibility of starting to manufacture some of the products in-house instead of buying it from wholesalers. Barnyard wants to employ a registered Production Engineer, Mr. Henn, on a contractual basis. Mr. Henn was previously employed by Barnyard on a permanent basis. Mr. Henn will be responsible for a production plan and cost pricing. Your team of auditors has set the risk of material misstatement of inventory at an acceptable level. Required: 3.1 3.2 Based on the information provided under the section: Two unresolved audit findings at financial year-end, discuss, separately for each finding, the impact that the two unresolved audit findings will have on the audit opinion to be expressed in the audit report of Barnyard for the financial year ended 31 December 2021. (16 Marks) With reference to information provided at section: Reliance on information produced by a Production Engineer, describe the aspects that you will consider in determining the nature, timing, and extent of the audit procedures when relying on the work performed by the engineer, Mr. Henn. (12 Marks)