QUESTION 1 (40 Marks) You have recently been appointed as the partner for the 2011 financial year audit of NIWA (Pty) Ltd, a new client for your firm. NIWA's financial year end is 30 September. As a result of a difference in opinion, the previous auditors decided to resign as auditors. You obtained the following information from your recent planning meeting with the financial manager of the company: NIWA (Pty) Ltd is a manufacturer of a specific homeopathic eardrop that can only be sold to homeopaths. NIWA (Pty) Ltd has standing contracts with most of the registered homeopaths in South Africa. The homeopathic eardrops are manufactured with machines specifically designed for this purpose and can only be serviced by the technicians of the manufacturer in Hungary. These eardrops were patented in South Africa during 1995. NIWA (Pty) Ltd sells their homeopathic eardrops on normal credit terms to all registered homeopaths. The only exclusion is sales to the Health Forum that is supplied on a consignment basis. The management director of NIWA (Pty) Ltd, Mr Steph Kotze was appointed on1 January 2008 after the retirement of the previous management director. Steph worked as a purchase manager from 1995 to 2000 at a homeopathic company. From 2001 to 2007 he coached the Proteas, the South African Senior Cricket team. You received a copy of the monthly management accounts to date during the planning meeting. The audit senior has subsequently vouched the completeness, accuracy and reliability of the information in the management accounts and has come to the conclusion that you can rely on these accounts. Based on these management accounts, the audit senior compiled the following analytics: Forecast Actual Actual Actual 30/9/11 28/2/11 30/9/10 30/9/09 R'000 R'000 R'000 R'000 Sales 40,000 18,000 56,000 67,000 Gross Profit 4,000 1,800 5,600 6,700 Net Profit (56) 14 1,367 3,091 Current Assets: Current Liabilities 1:1 1:1.2 1:0.75 1:0.65 Share capital and reserves 400 400 400 400 Average salary 4,690 4,259 4,011 3,678 You have performed preliminary tests of controls on the sales and receivables cycle and have come to the conclusion that you can rely on the internal controls. The client has informed you that the financial statements are required by 15 November 2011 as the company's borrowing facility is reviewed on an annual basis and that the bank requires the audited financial statements for this purpose. REQUIRED: Describe which matters you will consider in the development of your overall audit plan for the year ended 30 September 2011. Your answer should amongst others include audit risks affecting the audit as well as an evaluation of the planning materiality. (40)