Question1
READ THE CASE STUDY BELOW AND ANSWER THE QUESTIONS THAT FOLLOW: Your firm has recently been appointed as auditor of Wasachi (Pty) Ltd. The previous auditor resigned from the engagement and emigrated to somewhere in India. Your firm is a medium sized firm based in Durban with three other offices in Johannesburg, Cape Town and Port Elizabeth. You performed your preliminary audit procedures before accepting the engagement. The financial year-end date is 31 March 2019. Extracts from relevant working papers follow. CLIENT PREPARED BY REVIEWED BY Wasachi (Pty) Ltd Year End 31/03/2019 WP Ref E Ring Date 17/12/2018 A 03 I Checked Date 18/12/2018 Background Information regarding new client SUBJECT Wasachi (Pty) Ltd, is a manufacturer and distributor of costume jewelry and accessories. The company sells mainly to middle - and upper-class fashionable women and men and has built up a good reputation in the market. The company's head office, design studio and factory are situated in Pinetown. The factory manufactures jewelry and leather products. The company also has a number of sales outlets in the major shopping malls throughout South Africa. The company specializes in diamonds, cubic zirconia and crystal jewelry. All the cubic zirconia's and gold are purchased locally, with most of the leather, diamond, crystal and some rare stones being imported from neighboring countries or overseas. The company has been in operation for the past ten years and sales have generally been good in the previous years. Sales during the current financial year, have however decreased substantially. 10 January 2019 Mr Shiny Stone, the company's managing director informed you that the audited annual financial statements must be available by no later than 18 April 2019 as the financial statements are urgently required by the company's bankers, Medbank. The bank is concerned about the size of the overdraft. CLIENT PREPARED BY REVIEWED BY SUBJECT Wasachi (Pty) Ltd Year End E Ring Date I Checked Date The information system - General Ledger 31/03/2019 WP Ref 11/02/2019 F 07 15/02/2019 Identifying and assessing risks of Material misstatement: The board of directors on 6 June 2018 approved in principle the acquisition of software to replace the existing Book Keeper software which could barely cope with the large volume of inventory items, and had become inadequate for their needs. The company employed an information technology (IT) manager and two IT administrators at the beginning of the financial year. They were all hired because of their competent IT skills and to attend to looming problems with the Book Keeper software being used. We were not involved with the change-over to the new system which took place before our appointment. The conversion was handled in-house, and the new system was in operation within record time. Problems are being experienced with the accounting of certain transactions, and the accounting department is searching for and correcting errors in the accounts on a full-time basis. 1.1. Describe the first condition for acceptance that the firm needed to consider when the audit firm was approached to accept the audit engagement, before establishing whether there is a common understanding of the terms of the audit. (6) 1.2. List the preliminary engagement procedures which should have been performed to gather information about the prospective client, before the audit engagement was accepted? (8) 1.3. List the matters which the engagement partner should have considered prior to accepting the appointment as auditors of Wasachi (Pty) Ltd, to comply with the Quality Control standards. (20)
