Clark Lewis $($Clark$)$ is a newly promoted Senior Audit Manager on the audit of Donna Care Fashion $($Pty$)$ Ltd $($Donna$).$ Donna has been selling fashionable clothing to the public since the nineties in all nine provinces. Donna has been audited for the last five years, and it has been confirmed that Donna should be audited for the period $31$ March $2023.$

Clark is currently busy evaluating misstatements identified on the audit and has now approached the Audit Partner, James Newlands, to discuss the materiality and the effects of the misstatements on the Audit. Clark needs guidance on whether the client must correct the misstatement.

The Final Materiality level for Donna is R$2500000.$ It is assumed that all errors must be evaluated against the Final Materiality level of R$2500000.$

Issue number one

A few errors were found with the valuation of Inventory. The actual error found is the obsolete stock of R$300000$ included in Inventory, however, the error has been projected to be R$2600000$ for the year.

Issue number two

Cut$-$off error $$ Two sales invoices amounting to a total of R$800000$ relating to April $2023$ have been included in sales for $31$ March $2023.$

Issue number three

There is a difference of R$250000$ due to offsetting between accounts payable and accounts receivable. This relates to accounts payable, which was overstated by R$3200000,$ as well as accounts receivable, which was overstated by R$3450000.$

Issue number four

There was an error with the salary amount for one of the Directors. The $10\%$ increase in the Director$$s salary was not accounted for. On investigation, this is only R$500000$ and resulted in the overstatement of salaries. There was also a general

$11$ HAUD$230-1-$Jan$-$Jun$2024-$SA$1-$MK$-$V$2-09112023$

understatement of salaries for other staff members of R$450000,$ which means that the overstatement is only R$50000.$

REQUIRED

$4\mathrm{.}1$ Discuss the concept of Materiality and describe the two ISAs in the context of the

audit of financial statements.

$(5$ marks$)$

$4\mathrm{.}2$ Discuss the nature of materiality.

$(7$ marks$)$

$4\mathrm{.}3$ Evaluate the uncorrected misstatements above and discuss what factor$/$s you

would consider.

Indicate whether you would ask the client to adjust the account balance.

E$.$g$.,$ Rent paid understated by R$500000.$

You may use the following table to populate your answers.

$(24$ marks$)$

Number of issue identified

Material $($yes$/$no$)$

If material $($Quantitative$/$ Qualitative

$/$N$/$A$)$

Factors considered

Client to adjust $($yes$/$no$)$

E$.$g$.$

No

N$/$A

Qualitative factors as well as quantitative factors. Factual error.

If not material when aggregated no need for the client to adjust.

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Competency Framework References: F$2\mathrm{.}2$ Perform an audit of historic financial information

a$)$

By applying F$1,$ follow the stages involved in performing an audit:

$($viii$)$ Formulate appropriate further audit procedures based on the identified risks of material misstatement