RAA Auditors Inc. had been the auditors of the Cars Ltd group since $2010.$ They resigned as auditors in the prior year as they felt that the audit was too complex for them and they lacked the resources to perform the audit. They also did not have an amicable relationship with the financial director as they uncovered fraudulent activities that he was involved in$.$

The group has a tight reporting deadline and has set a precedent to release its audited annual financial statements two months after year end.

Your audit firm accepted the engagement as the new auditors for the $31$ December $2021$ financial year of the Cars Ltd group at the AGM held in March $2021.$ Your audit firm is a medium sized audit firm located in Gauteng and specialises in small to medium sized entities.

Your firm has begun doing the planning procedures for the current year's audit.

Below is a working paper from the current years audit file:

Client: Cars Limited Group

Year end: $31$ December $2021$

Prepared by: T$.$ Rainee

Date prepared: Date: $31$ October $2021$

Reviewed by: B Dlamini

Subject: Working paper A$101-$Obtain an understanding of the group and its environment

Background:

The Cars Ltd Group was listed on the Johannesburg Stock Exchange $($JSE$)$ in $2008$ and on the New York Stock Exchange $($NYSE$)$ in June $2020.$ It consists of a group of companies which operate in South Africa and the USA. They have multiple manufacturing plants and outlets throughout South Africa and the USA.

The group started off in $2005$ as a manufacturing company, BigCars $($Pty$)$ Ltd$,$ which manufactured major components for certain top brands of cars in South Africa. Due to the initial high demand for their products, their operations expanded exponentially and many different manufacturing outlets were opened to form the group.

The group expanded its operations to include trading in the USA in $2019.$ The group has a December year end.

In prior years, FRD Auditors were responsible for the audit of the US subsidiary companies.

The company introduced a new integrated internal control system in the prior year. Management and the internal audit department have assessed the internal controls and have found that they have been operating effectively throughout the year.

The Group Structure has been attached as Appendix A$.$

The following information relates to the companies within the Cars Ltd Group:

$$BigCars $($Pty$)$ Ltd and BigCars USA LLC are manufacturers of major car components and small parts.

$$TyresRus $($Pty$)$ Ltd is a manufacturer of tyres and various rubber products.

$$Glassworks $($Pty$)$ Ltd and Glassworks USA LLC are manufacturers of windscreens, windows and other glass products. $$Carbrands $($Pty$)$ Ltd is a marketing company that markets the products and liaises

with different car manufacturers and other clients. $$BigCars USA LLC and Glassworks USA LLC were incorporated in the USA. $$ All other companies within the group were incorporated in South Africa.

Information systems and processing:

The group uses a highly complex centralized system located at a service centre at their head offices in Durban.

All back$-$ups are stored in the financial director's office in a safe. The company uses a computer bureau to assist them with their payroll application.

Corporate Governance and staffing:

The group's board of directors consists of $9$ directors. They have an audit committee but they are in the process of forming a social and ethics committee which is a requirement in terms of Regulation $43$ of the Companies Act of $2008.$ One of the audit recommendations in the prior year was that the company needed to employ a company secretary who was knowledgeable about the laws and regulations that govern South Africa and the USA and they need to adhere to these laws.

In prior years, the group was not complying with certain provisions in the Companies Act of $2008,$ the King code on corporate governance or the Sarbanes$-$Oxley Act $2002.$

The financial director and the managing director resigned in the current year.

The group has a risk$-$based internal audit department. The internal audit department is thorough and performs their duties effectively.

Group performance:

The group has performed well in the past with profits increasing year on year however, due to new trade restrictions implemented in January $2021$ between the USA and South Africa and the high US dollar$-$ SA Rand exchange rate increasing during $2021,$ the costs involved in transporting the stock and importing goods has increased exponentially which has rendered some of the products too expensive. Sales prices have had to increase to compensate for the increased costs of production and the costs of importing in foreign goods from the USA. This has resulted in sales decreasing substantially in $2021$ and the company incurred an operating loss after tax of R $2,000,000(2020$ profit after tax of R $3,200,000).$ The group is currently considering opening another company to start locally manufacturing

the parts that they import from the USA to try and bring down their costs.

Directors are paid performance bonuses based on sales targets.

The share price has decreased significantly during the year on both the JSE and the NYSE.

Matters which occurred during the year:

$1)$ The financial director and the managing director were both involved in a fraudulent activity during the prior year and due to the new internal controls implemented during the prior year they were caught out. The company implemented a new internal control system in the prior year based upon the recommendations from the audit committee and the external auditors. The initial internal control system was ineffective and there were multiple control weaknesses which were identified by internal audit and the external auditors. The group employed forensic auditors to come in and evaluate the extent and materiality of the fraud and they found that the company suffered losses of R $3,000,000$ which is considered to be material in terms of the planning materiality computed for the group.

$2)$ BigCars $($Pty$)$ Ltd has a contract with MoneyBank that has certain conditions for their long$-$term loans. If they do not meet certain financial ratios, the bank can recall their loan within $3$ months.