CONTEXT You are the Audit Manager of Messrs. Z & C Partners Chartered Accountants. Your firm has just been appointed auditors of Overdrive Car Hire Ltd. Your Audit Engagement Partner has sent you an email below: To: Audit Manager From: Audit Engagement Partner RE: AUDIT PLANNING FOR OVERDRIVE CAR HIRE LIMITED _____________________________________________________________________ Hello! Please refer to above captioned matter. As you may be aware, we are due to hold an audit planning meeting for Overdrive Car Hire Ltd next week. In preparing for this meeting, I am requesting you to URGENTLY draft for me some briefing notes that assess the audit risk, and recommend the audit approach we should take to address those risks pertaining to the audit engagement of Overdrive Car Hire Ltd for year ended 31st December 2020. This will be shared with the audit team. Thanks, A.E. Partner A.E. Partner --------------------------------------------------------------------------------------------------------------------- Overdrive Car Hire Limited (OCHL) has a large fleet of cars for hire to local and international customers. The company also provides driver training to individuals and corporate clients. It has branches in all the ten provinces of Zambia. It offers car hire services on credit payment terms to corporate customers and cash to individuals On 31st October, 2019 OCHL entered into a 5 year lease agreement with Dash Motor Dealers Ltd for a fleet of 500 safari vehicles valued at K1.2 Million each. These vehicles were received by OCHL, but have not been included on the companys asset register on understanding that this is off-balance sheet financing and that on expiry of the lease, they will be returned to the vender as ownership had not passed to OCHL. The only available evidence on the lease, is the lease contract signed by both parties and copy bank statements indicating the monthly rental payments to Dash as up to 31st December, 2020 totaling K12 Million. OCHL received a grant of K500 Million on 1st January, 2020 from Ministry of Youth and Sports to train 1,600 youth drivers in each province as youth empowerment, for a period of 3 years. Where OCHL fails to meet this target number, part or all of the funds for the respective province shall be returned to the ministry. OCHL has debited the receipt of the funds to its cash book and credited the whole amount to its comprehensive income for financial year ended 31st December, 2020. OCHL has been operating in rented depots owned by local businessmen in all, but Lusaka Province. In an effort to reduce on the cost of rentals, the company embarked on a project of constructing its own garages with modern auto fitment equipment in each province. In order to achieve this undertaking, OCHL obtained a loan of K2 billion from Standard Investment Bank PLC at the rate of 15% interest on 1st January 2018 specifically for building its infrastructure. Construction works commenced on 1st May 2018 and were scheduled to be completed at the end of May 2022. However, due to the COVID-19 pandemic, works on the project had stalled from 20th January, 2020 and resumed on 5th October, 2020. Interest accrued on the loan has been debited to statement of comprehensive income from 1st May 2018 to date. OCHL maintains a highly integrated ERP system that captures information on revenue, expenses and vehicle fleet from all the branches. Motor vehicles are fitted with GPSs to track their movements and fuel consumption. All the motor vehicles are comprehensively underwritten by Car Crash General Insurance Zambia Ltd. On 17th November, 2019 a fire gutted the Muchinga Branch Garage leaving 50 vehicles into ashes. A claim was launched with Car Crash General Insurance for a replacement of the damaged fleet but the claim has been disputed by Car Crash General, due to a clause in the policy stating that no recourse will be made to claimant where vehicle damage happens at a garage that is not insured. OCHL has however, included the estimated value of the claimed amount into its position statement as other receivables. A record of the damaged vehicles has also been made to the general ledger by crediting PPE Motor Vehicles and debiting disposal account. OCHL adopted International Financial Reporting Standards (IFRS) on 20th February 2015 and has been preparing its financial statements on this basis. They have always included a disclosure note to their financial statements indicating that they have not departed from this framework since. Required: Respond to the email from the Engagement Partner (20 Marks)