QUESTION 3 (35 MARKS) You recently completed your studies and started with your auditing articles at Pink Ladies Auditors (Pty) Ltd Pink. You will be the First-Year Trainee on the audit of Body-wise (Pty) Ltd Body-wise. This is also the first year that Pink performs the audit of Body-wise.

Background Information Body-wise has a year-end of 28 February 2022 and is listed on the Johannesburg Stock Exchange (JSE). Body-wise sells fast-moving consumable goods (specifically relating to healthy living products) and has recently started selling via an online platform. The firms operations are decentralized as they have 10 warehouses across South Africa with the Head Office located in Cape Town.

Body-wise buys their products locally, but often import products as well depending on the exchange rate, cost price, and bulk discounts offered by the supplier.

Revenue also comprises of sales made to both local and foreign customers. Foreign customers are invoiced in their respective currencies. During the year, Body-wise entered into a forward exchange contract for the goods Body-wise sold to one of their once-off foreign customers to protect itself against foreign currency fluctuations.

Normal credit terms are 45 days after the invoice date and Body-wise provides for doubtful debts at 5% of the trade receivables balance. Management of Body-wise receives bonuses based on the profit for the year. At year-end, trade receivables were factored to a third party to provide Body-wise with the initial cash flow that was required for body-building product exports. To further finance expansions into Africa, Body-wise applied for a bank loan. Approval of the loan is pending, subject to the completion of the audited 2022 financial statements.

Information relating to the Audit Management of Body-wise requested from Pink to complete the audit as soon as possible as the approval of the loan is vital for further expansions.

The previous auditor resigned after unresolved issues with the management of Body- wise. The Financial Manager of Body-wise explained to Pink that the previous auditor requested unreasonable adjustments to be made to the 2021 annual financial statements that would have negatively affected the profit figure of Body-wise. Management of Body-wise did not make the changes requested by the previous auditor. The Auditing Partner of Pink had a discussion with the previous auditor, which revealed that there were continuous disagreements over the interpretation of accounting standards with the management of Body-wise. The previous auditor is of the opinion that management misinterprets accounting standards to manipulate profits.

It is evident from a review of the Statement of Profit or Loss and Other Comprehensive Income and Statement of Financial Position that Body-wise has experienced some financial difficulties in 2021 because of its high gearing and incurred losses. These losses are attributed to increased competition and the overall decline in economic activity in the FMCG (Fast-Moving Consumer Goods) industry.

Required: For questions 3.1 and 3.2, use the following format to answer the questions: 3.1 Risk 3.2 Risk response 3.1 Based on the above information, describe the risks of material misstatement at the overall financial statement level of Body-wise (Pty) Ltd. (15 marks) 3.2 For the risks identified in 3.1, discuss what would be your most appropriate responses to mitigate the risks. (15 marks) 3.3 Describe, in general, and not specific to the scenario, the responsibilities of the 1) auditor and the 2) management of an organization in terms of fraud (5 marks