Question 4 (20 marks)

You are the audit manager in charge of the audit of Gourmet Limited, a leader in the market for top quality convenience foods. The summarised trading results and the financial position of Gourmet Limited for the previous financial year, as well as the budget for the current financial year, which was drawn up in support of the share issue described below and which you audited, are as follows:

Actual: Budgeted:

Year ended Year ended

28 February 2017 29 February 2018

N$ million N$ million

Turnover 934 1 214

Profit before interest and taxation 103 134

Profit before taxation 84 67

Profit after taxation 51 110

Ordinary shareholders' funds 332 352

Total assets 447 480

You are currently planning the audit of Gourmet Limited for the year ended 29 February 2018. You became aware of the following matters at a meeting with the financial director of Gourmet Limited held on 4 June 2017:

1.The previous managing director of Gourmet Limited resigned on 23 April 2017, after holding that position for six months. He left the company on 30 April 2017.

2. Gourmet Limited imported all the beef which was used in its manufacturing processes from a single supplier in Britain. Purchase contracts for a year's supply of beef were signed with this supplier on 1 March annually. On 15 April 2017 the South African government placed a total ban on the importation of beef from Britain. This followed on renewed global reports a viral infection which is fatal to humans is present in British cattle. Fear exists that this virus may be transmitted to humans who consume the meat of infected cattle. The local price of beef has increased by thirty percent since the importation of beef from Britain was banned. The company had no choice but to find alternative suppliers of beef. The company signed a purchase contract for beef with a local supplier on 3 June 2017. All manufacturing of products which contain beef was stopped for the period 15 April 2017 to 1 June 2006. On 15 April 2017 the company withdrew all their unsold products which contained beef from the market.

3. Gourmet Limited issued a further 50 000 ordinary shares on 15 March 2017. The share issue was announced on 15 February 2017 and was supported by a profit forecast for the following financial year.

YOU ARE REQUIRED TO:

(a) Calculate the planning materiality figure which you will use for the 2017 audit of Gourmet Limited. Take all the information provided in the question into account. Motivate why you would use the materiality basis selected by you. (8)

(b) Indicate the factors which will influence your decision on the extent to which the results of your planning analytical procedures may be relied upon. (3)

(c) List the audit procedures which you would perform when identifying the inherent risks which would influence the 2018 audit. Detailed audit procedures are not required. Your answer should merely list the matters which your audit steps would follow, e.g. recomputation. (3)

(d) Indicate the factors which you would consider when evaluating the inherent limitations of your client's internal control system. (3)

(e) Indicate, giving reasons, the account balances in the company's trial balance which will need special audit attention due to the matters detailed in the question. (3)