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.

Candy Lane $($Pty$)$ Ltd$,$ is a manutacturer and distributor of luxurious chocolates and sweets.

The company sels malnly to middle $-$ and upper $-$ class indlwiduals and has bullt up a good

reputation in the market.

The company's head offce 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 shoppling mals throughout South Africa.

The company specializes In Beiglan and Swiss chocolate. Other sweets are purchased

locally, however the Belglan and Swlss chocolates are Imported from nelghboring 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 flnanclal year, have however

decreased substantlally.

$10$ January $2024$

Mr T$.$ Smith, the company's managing director Informed you that the audited annual financlal

statements must be avallable by no later than $18$ Aprll $2024$ as the financlal statements are

urgently required by the company's bankers, NABSA. The bank is concemed about the slze

of the overdratt.

Identifying and assessing risks of Material misstatement:

The board of directors on $6$ June $2023$ approved in principle the acqulsition of software to

replace the exlsting Book Keeper software which could barely cope with the large volume of

Inventory Items, and had become hadequate for their needs.

The company employed an information technology $($IT$)$ manager and two IT administrators

at the beginning of the financlal year. They were all hired because of their competent it

sklls and to attend to looming problems with the Book Keeper sottware belng used.

We were not involved with the change$-$over to the new system which took place before our

appointment. The converslon was handed 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 $[34]$

$1\mathrm{.}1.$

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. $(6)$

$1\mathrm{.}2.$

List the preliminary engagement procedures which should have been performed to gather information about the prospective client, before the audit engagement was accepted? $(8)$

$1\mathrm{.}3.$

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.