QUESTION 2 50 MARKS

Upon completion of your Honors in Accounting you started your articles at Wolmarans Auditors (Pty) Ltd 3 years ago and were promoted to Audit Senior at the beginning of the year. Wolmarans Auditors (Pty) Ltd has been the auditor of Fix IT for the past 6 years. Fix IT has a February year end. Fix IT is a repair service company that is used by insurance companies. They have a service division where they service all vehicles based on bookings made by customers. Fix IT has 3 branches situated around the Western Cape. They import most of their inventory as well as the machinery needed to perform repairs services. You have been assigned to the audit of Fix IT. You are currently busy with the finalisation of the 2021 audit. You were provided with excerpts from Fix ITs draft financial statements for the financial year ended 28 February 2021. These appear in Annexure A, together with comparative figures from the audited financial statements of the previous year and explanatory notes.

Note 1.

Legal claims The draft financial statements for 2021 contain no reference to provisions for legal claims. As part of your routine audit procedures, you enquired from Mr. Vernon Henn, the Managing Director, if there are any existing or pending legal claims against Fix IT. He answered that no legal claims have ever been instituted against Fix IT and you therefore recorded this in your working papers. You performed no additional audit procedures in this regard as your assessment was that the risk of material misstatement of legal claims are low. Last night, however, you read a newspaper article online on problems encountered by clients of repair services in South Africa. Four clients of Fix IT indicated that they have been involved in lawsuits with Fix IT for the past five months already. The claims result from financial damages to clients. The total of the four claims amounts to approximately R750 000. 7 HAUD332-1-Jul-Dec2021-SA1-MS-V3-28062021

Note 2.

Unresolved matters picked up during the audit. During the audit the following three audit differences where identified:

2.1 Fixed assets

Fix IT bought another building during the current 2021 year for R 1 250 000. As their business is expanding and needed more space. The building purchased was budgeted and planned for in the 2022 capital budget. The transaction was consequently not recorded in the draft financial statements for the current 2021 year since management rather want to include it in the 2022 annual financial statements.

2.2 Debtors

The debtors manager calculated the allowance for credit losses incorrectly. The debtors figure was consequently overstated with R95 000.

2.3 Accrued expenses

Your audit work indicated that accrued expenses were understated due to a specific invoice for February 2021. The amount totals to R750 000.

Your Schedule of Audit differences, before consideration of the three audit differences above, shows the following amounts that were carried over from the previous years:

Fixed assets: Accumulated depreciation was erroneously overstated with R90 000 in 2020.

You calculated final materiality, based on equity, at R3.5 million and regard all amounts smaller than 0.05% of income as clearly trivial. Considering, inter alia, the industry and the financing structure of Fix IT, you determined a final materiality figure of R890 000 on the fixed assets year-end balance.

Annexure A

Fix IT (Pty) Ltd

Excerpts from the draft financial statements for the year ended 28 February 2021.

Income Statement

Additional Information 2021 -R 2020 - R

Income 1 5 445 872 4 967 590

Cost of sales (3 962 110) (4 250 692)

Gross Profit 1 483 762 716 898

Expenses (851 195) (695 139)

Profit before tax 632 567 217 590

Balance Sheet

Additional Information 2021 - R 2020 - R

Non-current assets 950 356 728 798

Current assets 120 536 105 854

1 070 892 834 652

Share capital 75 000 75 000

Accumulated income 494 173 341 902

Non-current liabilities 2 175 863 46 259

Current liabilities 325 856 220 643

1 070 892 834 652

Additional Information:

1. The Income/Turnover decreased due to the Covid-19 pandemic as well as because of a loss of market share to a new competitor in the 2021 year.

2. The long-term loan was received in the 2019 year of assessment and equipment was provided as security.

Required

2.1 Evaluate the qualitative and quantitative materiality of each audit difference you detected during the 2021 audit, as per note 2. Then, reach a conclusion and discuss the impact your conclusion will have on your audit opinion. (20 marks)

2.2 Discuss what you as the auditor will consider as well as the additional audit procedures you will perform during the 2021-year end audit in reaction to the newspaper article you read as per note 1. (20 marks)

2.3 Discuss the appropriateness of the going concern assumption to the financial statements of Fix IT (Pty) Ltd based on the above information. (10 marks)