BACKGROUND INFORMATION You are a trainee accountant at SBG Incorporated (SBG) in Gauteng, a registered firm of auditors. SBG has offices all over the country and is responsible for the audit of BuyRite Holdings Limited (BRH) and its subsidiaries financial statements for the financial year ended 28 February 2023. BRH is an investment holdings company listed on the Johannesburg Stock Exchange (JSE Limited) in the food retailers and wholesalers sector and it has been a client of SBG for the past five financial years. The following are the subsidiaries in the BRH Group, all of which trade with one another at normal market prices: BuyRite Retail (Pty) Ltd (BR Retail). It offers a broad range of retail products to customers in supermarkets in South Africa. BuyRite Retail Non-RSA (Pty) Ltd. It offers a broad range of retail products to customers in supermarkets outside of South Africa. BRH and its subsidiaries prepare their financial statements in South African rand, in accordance with International Financial Reporting Standards (IFRS), on the basis that it will continue as a going concern for the foreseeable future. Stores that form part of each subsidiary are not franchised and therefore not individually managed; they must comply with all decisions, internal controls and quality requirements as set out by management. You are part of the audit team responsible for the audit of BR Retail at their head office in Gauteng. Mr Marole oversees the audit and he has been the engagement partner on BR Retails audit since SBG was appointed as their auditors. Mrs Martin, who is also a CA(SA), has recently joined SBG as a partner and has shown some interest in being appointed as the engagement partner on BR Retails audit. She will be useful on the audit as she has valuable practical knowledge and experience since she was the chief financial officer (CFO) of BR Retail until four years ago. Both Mr Marole and Mrs Martin are independent from BR Retail. There are different audit teams within SBG that are responsible for the audits of the companies in the BRH group; therefore, various planning, execution and completion discussions will be held between them. In line with the previous years audit, materiality is calculated as 5% of profit before income tax, and all the companies within the group will be audited following the same audit approach. During a meeting with the engagement team and management of BR Retail, the following results were highlighted, indicating a challenging but successful 2023 financial year:CONFIDENTIAL Page 5 of 7 AUE3761 Test 1 - April 2023 [TURN OVER] Results highlights for BR Retail: Sale of merchandise increased by 17.2%, mainly due to the increase in market share. The increase in market share was mainly attributable to the savings rewards programme, which saved customers over R5 billion during the year, and the on-demand one-hour delivery service offered to customers. The delivery service is outsourced to Bingo (Pty) Ltd, which is in a joint venture with BRH. Gross profit margin levels were maintained at 24.5%, even though there were cost inflation pressures. This was achieved by pricing and promotions through the rewards programme, advertisements, allowances and rebates offered through the supply chain when certain quantities are purchased, as well as investment in procurement capabilities leading to improved stock levels. Profit before tax and net profit for the year are indicated as R8 billion and R6 billion, respectively. There was a 12% increase in advertising costs. Additional spending on diesel generators to trade uninterrupted during loadshedding Stages 5 and 6 in September to December 2022 amounted to R560 million. A huge capital investment financed through debt was made to open 120 new supermarkets during the year, expanding the companys footprint to 1 600 stores country-wide. A total of 4 300 new jobs were created. There was a 19% increase in inventory raising it to R21 billion at year end. The increase in inventory was mainly due to the increase in strategic buy-in to curb inflationary pressures and to make provision for global supply constraints. More storage space was leased to make provision for storage of additional stock. For the past three years, inventory has been recorded in the companys accounting records using a sophisticated inventory management software package. SUBSEQUENT EVENTS On 31 March 2023, at the first board meeting of BR Retail for the 2024 financial year, the following issues were discussed at length: Customer momentum across all the supermarkets in South Africa continued in line with the projected sales growth. Stats SA (South Africas national statistical service) reported that South Africas GDP declined by 1.3% in the fourth quarter of 2022, with economists anticipating similar numbers for the first quarter of 2023, putting the country on the brink of a technical recession. The decline was mainly attributable to loadshedding, which is projected to continue at least for the rest of the year, with the expectation of even higher stages being implemented in the coming months. Investment in solar products were considered to save on diesel expenses and an in- depth report on this issue would be presented at the next board meeting. After the first board meeting, the CFO of BR Retail sent the following e-mail to all the board members:CONFIDENTIAL Page 6 of 7 AUE3761 Test 1 - April 2023 [TURN OVER] To: All board members From: A Wilson Date: 31 March 2023 Subject: Procurement oversight Dear colleagues I recently discovered that the procurement section was involved in the illegal import of all imported products during the 2023 financial year to save on import taxes. The products that were imported are quite popular with customers and the procurement manager, Mr Pillay, indicated that he had only acted in the interest of the customers to try and save them money. This happened twice, and even though I should have been more diligent in my duties to have identified this earlier, I can assure you that Mr Pillay deeply regrets his actions and I doubt he will make the same mistake again, especially as we are now aware of the situation. As only 5% of all products being sold in our supermarkets are imported, I would like us to put this matter behind us and rather focus on the current issues that we discussed at the board meeting this morning. Please keep this e-mail confidential. Let us not dwell on the past. Have a good evening. Regards A Wilson CA(SA) CFO of BR Retail [REQUIRED SECTION FOLLOWS ON THE NEXT PAGE.]CONFIDENTIAL Page 7 of 7 AUE3761 Test 1 - April 2023 REQUIRED Marks With reference to the information provided in the case study: 1. Discuss whether the appointment of the new engagement partner would meet statutory requirements. (6) 2. Describe and assess the inherent risks of material misstatement at the financial statement level for BR Retail for the year ended 28 February 2023. As part of your answer, you should (a) describe the inherent risks of material misstatement at the financial statement level, which arise because of complexity and change, and (b) assess each inherent risk according to its magnitude and likelihood, citing reasons for your assessment, and state where on the spectrum of inherent risk the identified risk is assessed. Present your answer as follows: (a) Description of inherent risks of material misstatement, which arise because of complexity and change (1 marks each) (b) Assessment of each inherent risk, citing reasons for your assessment, according to its magnitude (1 marks) likelihood (1 marks) and placement on the spectrum of inherent risk (1 marks) 1.............................................. 1................................................... Communication skills layout (10) (1) 3. Describe the inherent risks of material misstatement at the assertion level, as related to the possible overstatement of inventory, and state the assertions to which they relate. Communication skills appropriate style (6) (1) 4. Identify and describe the aspects that the auditor should consider when developing the audit strategy, specifically as related to inventory of BR Retail. Communication skills logical argument (9) (1) 5. Discuss the ethical concerns related to the CFO of BR Retail. Ignore King IV in your answer. Your answer should exclude discussing the implications and should not provide steps to address the issue. (6) UNISA 2023