Smart$-$Pack is registered for value$-$added tax $($VAT$)$ as a category C vendor.

The previous auditor resigned on $16$ November $2018$ with immediate effect, due to irreconcilable differences between the engagement partner and the Smart$-$Pack Board. This related to the audit fees that were charged. Accordingly, Decker and Young Inc. $($Decker and Young$)$ was appointed as the new independent external auditor on $30$ November $2018,$ for the $31$ December $2018$ year$-$end audit. Decker and Young is a medium$-$sized auditing, tax and advisory firm. The previous auditors did make prior year working papers available to Decker and Young and based thereon the new engagement partner is satisfied that reliance can be placed on all opening balances for the current financial year audit.

Smart$-$Pack is currently experiencing cash flow difficulties and is operating at the limit of its overdraft facilities. Therefore, Alicia requested that the signed audited financial statements be available by $4$ February $2019,$ as Smart$-$Pack wants to apply for increased bank overdraft facilities from Invest Bank. Invest Bank requires audited financial statements that comply with International Financial Reporting Standards $($IFRSs$).$ The company$$s poor cash flow position is largely due to poor working capital management. The poor working capital management was first noticed in the South African operations but has been worsened by the increased production needs to service the new Lesotho and Botswana business liNES

Documentation reference Description

Memo B Planning notes on trade receivables and related items

Christine Tlaka is the senior sales and trade receivables accountant with extensive relevant experience. She is not a chartered accountant but has a Bachelor$$s Degree in Accounting Sciences. She is assisted by John Mzini, a part$-$time, third$-$year accounting student.

All Smart$-$Pack$$s sales transactions are on $30$ days$$ credit from date of invoice and subject to terms and conditions. Smart$-$Pack currently does not have written sales agreements with their customers. All invoices are accompanied by delivery notes, which are signed by the relevant customer upon delivery.

When customers place orders $($usually telephonically$),$ Christine issues invoices with reference to the price list that Peter approves on a monthly basis. Smart$-$Pack$$s expansion of its business into Lesotho and Botswana has been a great success. There is potential for significant growth in both these countries, as well as other African countries. As a result, Smart$-$Pack sales have grown significantly compared to the prior year. Sales to customers in Lesotho and Botswana are invoiced in the applicable foreign currency and delivered directly to the customers.

Smart$-$Pack currently does not perform reconciliations on any of their customer accounts, but does send monthly statements to all customers via email. Payments received from a specific customer are allocated to that customer$$s longest outstanding invoice first.

Notes $20182017$

R R

Sales in South Africa $2563000032000000$

Sales in Lesotho $17440000-$

Sales in Botswana $18400000-$

Total sales $6147000032000000$

Cost of sales B$1(48258500)(22500000)$

Gross profit $132115009500000$

Net profit $/($loss$)(47750)(1425450)$

Note

B$1$ The R$2800000-$facilitation fee paid to P&P to ensure preferential procurement is included in FY$2018$s cost of sales figure.

Description Notes $20182017$

R R

Total trade receivables $146121005752000$

Customers from South Africa $54601005752000$

Customers from Lesotho $4352000-$

Customers from Botswana $4800000-$

Allowance for credit losses B$2(1513452)(1162800)$

Net trade receivables $130986484589200$

Total inventory $76125003170000$

Trade payables B$3(7785671)(3432860)$

Bank overdraft $(5650700)(2838600)$

Total other non$-$current liabilities $(14286094)(12994946)$

Total other non$-$current assets $66709897565280$

Shareholders$$ equity and reserves $28268762779126$

Notes

B$2$ The detailed calculation for the allowance for credit losses is available from Peter. Trade receivables contain no significant financing component. Smart$-$Pack uses the provision matrix as the practical expedient as suggested by IFRS $9,$ Financial Instruments.

B$3$ All purchases of raw materials used for manufacturing are on credit, payable within $30$ days from date of invoice.

Question $1(15$ Marks$)$

Discuss the factors that you would consider when assessing the risk of material misstatement relating to the inappropriate use of the going concern basis of accounting in the $2018$ annual financial statements of Smart$-$Pack.

Question $2(15$ Marks$)$

Formulate the substantive audit procedures that should be performed to respond to the assessed risk of material misstatement.