Summary:

In 1999, Black Joe starts a business in Chile manufacturing and retailing customised chairs. Joe calls his business Black Chairs. Joe borrows from the bank to start the business, using his house as security, and over the years he works very hard to establish a profitable niche in the highly competitive furniture market. Joe is able to repay the bank in 2003. As he watches interest rates soar above 20 per cent, he vows to never borrow again.

As the business grows, Joes wife and three adult children start to work for him, with responsibility for administration, marketing and sales, production and distribution. By the early 2000s, Joes business employs 20 people full time, most of whom work in production. There are also several casual employees and part-time staff in the retail outlet, particularly during busy periods.

In February 2006, Joe receives a call from Hippo Basher, the senior vice-president of Cloud Co. Inc. Hippo expresses an interest in buying Black Chairs. Joe is getting tired, and his children are starting to fight amongst themselves about who is going to take over from their father.

Joe has had enough, but he does not want Hippo to know that. He asks if Hippo is ready to

talk about the price. Hippo said he is, but first he needs to see the audited financial reports for Black Chairs.

Joe asks for some time. He tells Hippo that he needs to talk to his family and will get back to him. When Joe puts the phone down he immediately rings his friend Marleen Jens, who is a chartered accountant. For years, Marleen has been quietly suggesting to Joe that his business affairs need attention. Joe is good at making deals and working hard, but he has never bothered with sophisticated financial arrangements. He is still running his business as a sole trader (not a company), and his wife does all the accounting. Joe is in a panic he wants to sell Black Chairs, but what is he going to do about Hippos request for audited financial reports?

Brief points from Joes conversation with Marleen include the following:

- There are different assurance services provided by auditors.

- While statutory audits are mandatory for listed companies, sole traders should also have their statements audited.

- All statements must be prepared as per the accounting standards even if they are not listed.

- Depending on the agreement with the client, auditors may provide different levels of assurance, such as: no assurance services, reviews, reasonable assurance, and limited assurance.

- Black Chairs is responsible for preparing the financial statements of the company, while the auditors responsibility is to assess those statements and be skeptical.

- Marleen suggests that getting an audit is also a way of taking insurance against a possible loss by creating the opportunity for investors to recover their investment from the auditor.

Marleen is concerned that Joe may forget their conversation and has asked you to prepare a summary of the issues listed below.

REQUIRED:

(1) What are the main differences between a financial report audit and an efficiency audit?