SECTION A

Read the scenario below and answer the questions that follow. You are the senior partner in a small-to-medium sized audit firm. Your audit firm has recently been appointed as the auditors of Blueberry SA Limited Grey Pty (Ltd), a recently listed company on the JSE Securities Exchange. The year-end of Grey Pty (LTd) is 01 January 2022. Grey Pty (Ltd) specialises in manufacturing and marketing mobile communication, media devices as well as personal computers. The company caters for both South African and overseas customers. Grey Pty (Ltd) accepts foreign currency from overseas customers, and although it is not widely publicised, prefers to receive cash from local customers, rather than credit card payments or electronic transfers. The head office of the company is situated in Durban, and it has branches situated in Port Elizabeth, East London and Cape Town. Grey Pty (Ltd) is doing extremely well, and has recently shown a steady increase in turnover. The growth from previous years is mainly due to the fact that the company has implemented a new bonus system for the management staff of the company. The bonus system states that if turnover exceeds the budgeted turnover by more than 25%, a percentage of the excess turnover will be paid out to management. Management is extremely excited about this incentive. Due to the recent significant growth in the company, the previous manual accounting system became inadequate for the company, and it was decided during the year ended 01 January 2022, to change over to a computerised system. The computerised accounting package is an off the shelf package. None of the staff were familiar with the package, so it was decided to employ an IT manager to oversee the processing of the accounting records, as well as monitoring the accuracy of the system. The newly appointed IT managers previous job, was as a marketing agent who advertised technology products for various companies. Grey Pty (Ltd) suffered a substantial loss in the previous year as a result of a legal claim against the company. Big Bang Limited Ltd sued Grey Pty (Ltd) for patent infringement. They claim that Grey Pty (Ltd) had relied on its patents related to software, video coding, chipsets, display and antenna for many years. Grey Pty (Ltd) was eventually taken to court where they lost the lawsuit and were forced to pay damages. The payment of damages also resulted in Grey Pty (Ltd) facing a severe liquidity crisis. Upon discussions with management, you discovered that the previous auditor resigned as a result of a disagreement with management. Management of Grey Pty (Ltd) refused to give your firm permission to contact the previous auditor.

Question 1 (30 Marks)

You are required to describe the factors that you as the auditor should consider and the procedures you should perform prior to acceptance as auditor of Grey Pty (Ltd) Ltd, these will be the pre-engagement activities that need to be conducted. (N.B your answer should be in relation to the case study that is provided and not generic steps that are involved in the pre-engagement activities).

Question 2 (20 Marks)

Based on the scenario presented in question 1 you are required to decide whether the risk of material misstatement at the financial statement level should be assessed as low, medium or high. Give reasons for your decision by providing the factors that will contribute to you risk level. NB: This should be in relation to the case study.