QUESTION 1 (35 MARKS 63 MINUTES) You are a trainee accountant in the audit firm of Oculus Chartered Accountants and Registered Auditors. You have recently been assigned to perform for the 31 May 2023 year-end audit of Forever Yena (Pty) Ltd. Upon visiting the premises of Forever Yena (Pty) Ltd, you were given the companys marketing brochure, an extract of which is reproduced below for your attention. Company history Early in 2019 Mr. Chosen decided to introduce the real Italian cuisine to Richards Bay by opening the first Forever Yena fast food pizza outlet. The success of this operation exceeded all expectations and further pizza outlets were opened in subsequent years. The success of the chain is due in no small part to the secret ingredients (purchased from Mr. Chosens grandmother in Italy) which give Forever Yena pizzas their distinctive taste. In order to empower the community, it was decided early in 2021 to sell franchises to select individuals (who would enhance the Forever Yena brand name). At the end of 2022, fifteen highly successful owned pizza outlets and five franchised outlets were operating in King Cetshwayo District area and in some parts of KwaZulu-Natal province. The success of the Forever Yena chain resulted in the decision being taken during 2022 June to incorporate a company, Forever Yena (Pty) Ltd, with a 31 May financial year end. Financial performance at owned outlets. The average annual financial performance for each of the outlets owned by Forever Yena (Pty) Ltd for the 2022 financial year is summarized below:

Item Amount (R000)

Sales. 1,200 Cost of Sales. 800 Gross Profit. . 400 Operating Expenses 240 Profit before Tax. . 160 Enquiries Should you be interested in purchasing one or more fast food outlet franchises, please contact Forever Yena (Pty) Ltd.s managing director, Mr. Chosen at 035 902 6120

Further information that was obtained from discussions with staff of Forever Yena (Pty) Ltd: Forever Yena (Pty) Ltd earns its revenue from two sources: (1) The sales from owned outlets and (2) the franchise fees earned from franchised outlets. In addition to start-up franchise fees, payable when the franchise is granted, franchise holders must pay Forever Yena (Pty) Ltd a 3% royalty fee in respect of all sales.

Mr. Chosen believes that it is important to maintain a hands on approach (a manager who's highly involved in the day-to-day activities and decisions of the company) to managing the owned outlets. Accordingly, Mr. Chosen or his wife Khethiwe, collect and bank the daily takings from each of the owned outlets. Khethiwe is responsible for maintaining the accounting records for Forever Yena (Pty) Ltd.

Forever Yena franchises purchase all ingredients needed from suppliers approved by Forever Yena (Pty) Ltd, except for the secret ingredients (which make up about 10% of the final cost of producing a pizza) that must be purchased directly from Forever Yena (Pty) Ltd. It is not Forever Yena (Pty) Ltd.s policy to make a profit on the secret ingredients sold to franchises. In fact, the operations manager explained that recently to compete with a new international pizza chain, certain ingredients were sold to franchisees at a 10% discount on the cost price.

There are likely to be minimal levels of inventory on hand at year-end.

Franchisees have recently complained that they have found it difficult to achieve a gross profit percentage greater than 20% even though their cost structure, apart from the royalty payments, is very similar to that of owned outlets.

While Mr. Chosen wishes to remain the majority shareholder of Forever Yena (Pty) Ltd. He is eager to increase the outside shareholding in the company to raise the much-needed working capital. Just before finalising the audit plan, you read in a Sunday newspaper that Forever Yena (Pty) Ltd pizzas contain a substance called Sudan Orange. The article quotes a medical expert who indicated that the substance could be dangerous to a persons health if consumed in large quantities.

QUESTION 1

REQUIRED

a. Indicate, giving brief reasons, whether the information documented above is sufficient to perform risk assessment for the 2023-year end audit of Forever Yena (Pty) Ltd

5 5 b. Discuss the impact of the information provided on the audit risks of Forever Yena (Pty) Ltd.s 2023 annual financial statements.

c. Discuss the nature, timing, and extent (audit planning) of further audit procedures you would use to obtain sufficient appropriate audit evidence about the sales from own outlets.