QUESTION TWO

$[20]$

You are currently in an Engagement manager at Farrok Inc.one of the big $6$ auditfirm. Your firm has accepted the appointment as the auditors for the year ended $31$ August $2022$ of Riviera Tech $($Pty$)$ Ltd $($Riviera$)$ an oil processing entity. Riviera has a public interest score of $400$ and is part of a national Petroleum conglomerate Oil Processors Ltd$,$ which is based in KwaZulu Natal and is listed on the JSE. Oil Processors Ltd owns $100\%$ of the shares in Riviera.

Riviera is managed locally by Dr S Botha $($Managing director$)$ and has a diverse team of experienced staff. Each department has a director and there is complete segregation of duties. There are $12$ directors on the board of Riviera.

Performance bonuses for all staff are dependent on a number of factors such as health and safety issues, compliance with food standards however the major emphasis has always been achieving revenue targets. Riviera has incorporated the Oil Processors Ltd$.\text{'}$s code of conduct and has implemented all the group policies and procedures.

Riviera has its Oil processing plant and distribution Centre located in Mount Edgecombe and wholesales locally to large South African Petroleum retail outlets such as Enren, Tatal, Susal as well as some smaller independent retailers. Riviera its own delivery fleet, making deliveries to their customers across the country. All goods are sold on credit. Credit limits$,$ credit terms together with discount policies vary from customer to customer.

During the preliminary engagement activities, the $2021$ audited financial statements were reviewed and compared to the management accounts for the period ended $31$ January $2022$ as well as the budget for the year ended $31$ August $2021.$ The following is an extract of the results:

$\backslash$table$[[$Detail$,$Budget $2022,\backslash$table$[[$Actual $-],[31$ January $2022]],\backslash$table$[[$Audited results$],[31$ August $2021]]],[$Revenue$,$R $100$ million,R $50$ million,R $85$ million$],[$Profit before tax,R $40$ million,R $20$ million,R $34$ million$],[$Gross profit $\%,46\%,44\mathrm{.}5\%,45\%$