Question 1 [40]

You have been appointed as the audit manager at Accounts Incorporated. Mr. Petersen is the managing partner of Accounts Incorporated and the engagement partner on the Foreign Trade Ltd audit. Accounts Incorporated has four partners, seven qualified staff members and specialises in auditing the credit management industry.

Your audit team is responsible for the regulatory audit of the financial statements of Foreign Trade Ltd for the financial year ended 31 December 2022. Foreign Trade Ltd is a listed public company on the JSE. It is a specialised pharmaceutical company converting materials into COVID injections. The industry is highly regulated by legislation, governing bodies and the World Health Organisation. Foreign Trade Ltd develops and sells their COVID injections to healthcare practitioners and hospitals throughout the world.

Accounts Incorporated was appointed as the external auditors of Foreign Ltd in response to an open tender process when the prior audit firm unexpectedly resigned, and a deciding factor was the close relationship between the CEO of Foreign Trade Ltd to Mr Petersen. Mr Petersen instructs you to exercise due care in the execution of this regulatory audit as he is also a significant shareholder in the company. The CEO indicates that the previous auditors resigned because of an accounting treatment of revenue and the related taxation disagreement with management. This contract regulates the manufacturing and supplying of the COVID medication for a ten-year period. The sensitivity of the disagreement resulted in managements refusal to share additional information on the disagreement accompanied by a decline in allowing the previous auditors to share their findings and workings with your audit team. Before your appointment as the audit firm, a local newspaper reported that Foreign Trade Ltd might be fined with severe penalties and risk losing their licenses as evidence of manufacturing by the Medicinal Council could not be provided.

Because of the international interest and demand for the COVID injections, the directors of Foreign Trade Ltd requested that the regulatory audit be finalised withing three weeks of the end of the financial year. Management is also eager to finalise the audit as senior employees and the directors receive profit-based incentives.

Required

1.1 Describe the financial statement risk indicators on the audit of Foreign Trade Ltd and the related audit risk to each financial statement risk. [20]

1.2 Describe the sources of information that should be used in the planning activities of understanding the client and the environment.