QUESTION 2 (40 marks) You are an Audit Manager at an audit firm called Clarke Incorporated and have been working at this firm for more than ten years. You are currently busy finalising the audit of Grace Valley Ltd \"Grace\" for the 2022 financial year-end. Background of Grace: Grace has been Clarke Incorporated's client since its inception. Grace has a January financial year-end and has been listed on the JSE for more than eight years now. The Head Office of Grace is in Belville, with all the Head Office staff and managers located at this office. Grace also has various warehouses throughout South Africa where production takes place. Grace manufactures and distributes a variety of instant foods. The shelf life of these products are twelve months. Inventory is the largest balance on the company's Statement of Financial Position and consists of raw materials, work in progress and finished goods. Raw materials are purchased from both local and foreign suppliers. After production, Grace distributes finished goods from their warehouses across South Africa to their customers in bulk. Grace also recently commenced with selling finished products online in smaller quantities to the general public. The audit: The materiality for this audit has been set at R 3.5 million. During the audit, and while conducting risk assessment procedures, the following five unadjusted audit differences were identified ( \\( \\mathrm{a} \\) - e below). a) The prior year's unadjusted misstatement relates to delivery expenses of R385 000 for the 2021 financial year that were not accounted for. b) Audit work performed by the Audit Senior revealed that Grace's authorisation for the purchase of a machine of R1 050000 was inadequate. In terms of company policy, the purchase order should be signed by the Financial Manager and not the Warehouse Manager as he can only approve capital expenditure up to R750 000. 4 HAUD332-1-Jan-Jun2023-SuppSA1-MS-V3-14062023 c) During the year, one of Grace's clients terminated their contract with Grace. This client purchases Grace's products, which they in return supply to the local government. They claim that some of Grace's products caused a lot of patients to get food poisoning. Although the shelf life of the products is twelve months from the production date, these products were still within six months of the production date. On 23 June 2022, the management of Grace received a letter from the client's lawyers for a lawsuit of \\( \\mathrm{R} 7.65 \\) million. No accounting provision was made for the lawsuit. d) A cut-off test in respect of a sample of invoices recorded after year-end during the test of control test revealed that a number of these invoices were not recorded for at year-end. These items were purchased before year-end but only recorded after year-end because the goods were in transit. These invoices relate mainly to inventory in transit. The total amount of the unrecorded creditors amounted to R1.42 million. e) During the testing of the salary expense, substantive procedures showed that the director's remuneration amounting to \\( \\mathrm{R} 1.85 \\) million was not disclosed in the notes to the financial statements. The Financial Director is of the opinion that it is not necessary to disclose all of the directors' remuneration because it will only result in unrest amongst the lower level of employees. 2.1 Discuss, in detail, the materiality of each of the unadjusted misstatements (ae) and make suggestions as to which of these misstatements have to be adjusted to enable Clarke Incorporated to express an unmodified opinion. Formulate your answer by separately for (a-e) clearly stating if the audit opinion will be impacted, discuss the reasons why/why not and make suggestions. (30 marks) 2.2 Discuss the impact on the audit opinion if management refuses to adjust the financial statements for the misstatements identified in part 2.1. Structure your answer as follow: - Discussions for each individual difference, - Discuss the aggregate conclusion