READ THE CASE STUDY BELOW AND ANSWER THE QUESTIONS THAT FOLLOW: Your firm has recently been appointed as auditor of Candy Lane (Pty) Ltd. The previous auditor resigned from the engagement and emigrated to London. Your firm is a medium sized firm based in Cape Town with three other offices in Johannesburg, Durban and Port Elizabeth. You performed your preliminary audit procedures before accepting the engagement. The financial year-end date is 31 March 2024. Extracts from relevant working papers follow. CLIENT CANDY LANE (Pty) Ltd Year End 31/03/2024 WP Ref PREPARED A. Apple Date 17/12/2023 A 03 BY REVIEWED C. Carrot BY Date 18/12/2023 SUBJECT Background Information regarding new client Candy Lane (Pty) Ltd, is a manufacturer and distributor of luxurious chocolates and sweets. The company sells mainly to middle - and upper-class individuals and has built up a good reputation in the market. The company's head office and factory are situated in Stellenbosch. The factory manufactures the sweets and chocolates. The company also has a number of sales outlets in the major shopping malls throughout South Africa. The company specializes in Belgian and Swiss chocolate. Other sweets are purchased locally, however the Belgian and Swiss chocolates are 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 2024 Mr T. Smith, the company's managing director informed you that the audited annual financial statements must be available by no later than 18 April 2024 as the financial statements are urgently required by the company's bankers, NABSA. The bank is concerned about the size of the overdraft. CLIENT CANDY LANE (Pty) Ltd Year End 31/03/2024 WP Ref PREPARED A. Apple Date 11/02/2024 F 07 BY REVIEWED C. Carrot BY Date 15/02/2024 SUBJECT The information system - General Ledger Identifying and assessing risks of Material misstatement: The board of directors on 6 June 2023 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. QUESTION ONE [34] 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 Candy Lane (Pty) Ltd, to comply with the Quality Control standards. (20) QUESTION TWO [30] Using the information from the case study provided, list the matters that should be included in the engagement letter. QUESTION THREE [20] Define audit risk and discuss the audit risks that exist in respect of the current year's audit of Candy Lane (Pty) Ltd. based on all the information given in the question. QUESTION THREE [16] Referring to the case study, list the key issues management should have considered before making the final decision to acquire the accounting software. 1/3 2/3