CIRCUMSTANCE 1. Inadequate inventory records 2. Completion of contract method inappropriately applied 3. Inventory stated at cost less anticipated selling costs for a highly profitable product. 4. Going concern depends on negotiations to be finalized after AFS are issued, disclosure has been made. 5. Unable to substantiate cash transactions. 6. Failure to comply with the 4th schedule. Page 18 of 20 MATERIAL/PERVASIVE OPINION Material and pervasive Material Material and pervasive Material FACULTY OF COMMERCE, MANAGEMENT AND LAW 7. Goodwill shown in balance sheet no longer justified. 8. Pending litigation not disclosed. Disclaimer Adverse Except for Except for YOU ARE REQUIRED TO: State in your answer book, per circumstance whether the matter is material or pervasive, as well as what type of opinion would be issued. List the matter 1. -8. And indicate whether it is material and pervasive or just material and what type of opinion is issued. Consider each circumstance separately and give reasons. FACULTY OF COMMERCE, MANAGEMENT AND LAW QUESTION 3 (20 marks) You are the managing partner in Johnsons & Sons Audit Firm. You have been assigned to the Quality Control Committee responsible for reviewing existing or new client relationships with the audit firm. The following represents a list presented to you with some background information: a. i. Mercado Segredo (Pty) Ltd, a company that operates mainly in Angola producing coca plants used in food production. The company has a reputation that indicates that these plantations are a cover-up for growing plants to produce the illegal drug cocaine. ii. Red-Fox Ltd, a company listed on the JSE Exchange, who reportedly had continuous disagreements with their auditors in the last 2 years, in both occasions resulting in the resignation of the auditors. C. iii. Sleaze (Pty) Ltd, a chain of retail shops which sells pornographic materials and runs escort agencies. iv. Nyrstar Mining Conglomerate, a multinational with a multi-billion US dollar Turnover. The company operates in the Mining sector. Your audit firm specializes in localized entities and primarily in the financial services and manufacturing sector. YOU ARE REQUIRED TO: Indicate per entity whether or not you would approve the acceptance of the client relationship, and further explain your answer giving reasons for each. (8) b. You are the audit partner in Jason & Associates. Jason & Associates have accepted a recent engagement for a retail company called, Food Co-op. You have obtained the Annual Financial Statements of Food Co-op and studied the opening balances. As part of the audit plan you have decided to place reliance on the work of the prior auditors. YOU ARE REQUIRED TO: Explain what are the main procedures you would have to perform to place reliance on the work of the prior auditors, i.e. in this case the opening balances? (4) (8) CIRCUMSTANCE 1. Inadequate inventory records 2. Completion of contract method inappropriately applied 3. Inventory stated at cost less anticipated selling costs for a highly profitable product. 4. Going concern depends on negotiations to be finalized after AFS are issued, disclosure has been made. 5. Unable to substantiate cash transactions. 6. Failure to comply with the 4th schedule. Page 18 of 20 MATERIAL/PERVASIVE Material and pervasive Material 7. Goodwill shown in balance sheet no longer justified. 8. Pending litigation not disclosed.. Material and pervasive Material FACULTY OF COMMERCE, MANAGEMENT AND LAW OPINION Disclaimer Adverse Except for Except for YOU ARE REQUIRED TO: State in your answer book, per circumstance whether the matter is material or pervasive, as well as what type of opinion would be issued. List the matter 1.-8. And indicate whether it is material and pervasive or just material and what type of opinion is issued. Consider each circumstance separately and give reasons.