QUESTION 3 (25 Marks)

You are currently engaged in the audit of Lungile (Pty) Ltd, a company that offers its services to companies that import goods from overseas. Lungile (Pty) Ltd, which is located at the Durban harbour, takes responsibility for clearing the imported goods through the harbour and customs. They also arrange to warehouse of cleared goods awaiting transportation to the purchasers.

Lungile (Pty) Ltd have a reputation for "getting things done". Whilst conducting some tests of detail on a sample of payments you came across a payment to an entity named Lungile Pty Ltd that was not supported by any documentation at all. A quick search through the payment records revealed a number of these payments, none of which was supported by any documentation. You traced the payments to the company's bank statements and were surprised to find that, on the bank statements, the amounts were recorded as cash withdrawals.

Now somewhat suspicious you raised the matter with Siyanda Zulu, the chief financial officer, who responded as follows: "About a year ago we started experiencing difficulties in getting our clients' goods cleared through customs promptly. Customs officials were uncooperative and petty queries kept delaying things. After delays on a number of containers had occurred, we were approached by an official who indicated that for the payment of a fee, he could see to it that our "delays and petty queries" went away.

As we were starting to feel some client dissatisfaction and as we have a reputation for "getting things done, we decided to pay the fee, which in comparison to the value of the imported goods is not material. Once we started to pay the fee, always in cash, things returned to normal, and in fact, improved. When asked why the payments were recorded as being paid to Lungile Pty Ltd, Siyanda Zulu responded saying that: "The financial director suggested that we do this as he wanted us to pass on the cost of these payments to the client whose imports were the subject of the fee. He feels that if we include on our invoice "Import charges paid to Lungile Pty Ltd" clients are unlikely to query it."

YOU ARE REQUIRED TO discuss fully whether the above situation would constitute a reportable irregularity in terms of the Auditing Profession Act 2005