QUESTION 3 (15 MARKS)

The audit firm you are currently working for has recently been appointed to audit Pixel Clothing. You are a senior trainee accountant and have been assigned to the audit of Pixel Clothing. Pixel Clothing is a clothing manufacturing company with a February financial year end. Pixel Clothing has an online website where customers can order clothing as well as send designs for specific clothing items they wish to have custom made. Pixel Clothings online sales have increased over the past 2 years and they wish to expand operations across South Africa.

During the 2021 year the CEO of Pixel Clothing attended a conference held by SAICA in the United Kingdom. The conference covered various topics, such as accounting updates, ethics and technology. The company was interested in the online trading section of the conference and this was the reason why the board approved the expenditure for future website development. The amount incurred for this conference was R550 000.This amount was capitalised to research and development costs in the statement of financial position as overseas research.

The final materiality was calculated as R1.3 million for the financial year ended 28 February 2021 and the following audit procedures were performed for the February 2021 financial year end:

1. Enquiries of those charged with governance

You had a few discussions with the CFO. He revealed that amounts were incurred by the CEO while attending a research conference in the UK and claimed under the research and development expense. The CFO indicated that the CEO paid for all expenses himself (including his familys holiday expenses) and claimed back an amount of R750 000 upon his return to South Africa. He completed a company claim form and attached all supporting documentation which included the invoices for the conference, flight tickets, hotel accommodation, and other miscellaneous items. The CFO authorised the full claim of R750 000. These forms are standardised at Pixel Clothing for all business-related matters.

2. Enquiries of other staff members within the entity

During the audit at the premises of Pixel whilst you were on lunch, you overheard a staff member mentioning that she wants to join the research and development unit as one can go overseas for holidays with family that is fully paid for by the company. Upon further inquiry, the staff member indicated that the CEO had a fully paid overseas holiday with family. The staff member indicated that the CEO travelled to the UK with his family for 10 days all expenses paid by the company. The CEO only attended the conference for 3 days so that the company could pay for the whole trip. This claim was corroborated through discussions with the CEO who confirmed that he indeed stayed on in the UK with his family after the conference and the company reimbursed him for the full amount (business and private expenses) including those expenses of his family members, as he was on a business trip over the holiday. He confirmed that the CFO appropriately authorised this claim for him to attend the conference.

We inspected the claim form submitted by the CEO and noted that it was correctly authorised by the CFO.

Required:

3.1) Discuss the impact the above will have on the audit opinion and the auditors consideration and responsibility. (15 marks)