Vodacom VoWiFi 08:33 Done HAUD332-1-Jul-Dec2021-Su... QUESTION 1 45 MARKS You are a senior audit clerk at ABC Incorporated. You are currently finalising the audit of Horizon Traders ("Horizon") for the March 2021 year end. Horizon operates in the Western Cape with their head office being in Cape Town. They have 13 branches across South Africa. Horizon sells fast movable consumables which they purchase in bulk from big wholesalers. A portion of their stock is also exported. During the 2021 financial year revenue has declined due to the Covid-19 pandemic, however management is positive and has indicated that there are plans to turn the company around. These plans include the raising of additional funds and to acquire another business. Management increased their overdraft facility to R5 million which is the limit for Horizon. Management has indicated that they need the audit to be finalised by the end of May 2021 as they need to submit documentation to the bank in order to secure a higher overdraft facility. Final materiality for the year ended March 2021 was set at R2 million. The annual financial statements for the year ended March 2021 were prepared on the going concern basis. The below audit differences were picked up during the audit: Audit Finding 1 During the 2021 financial year end, Horizon opened another branch in Durban. They leased the premises from 18 March 2021 and paid a deposit of R3 million. The deposit was recognised as rental expenses in the financial statements for 2021. 3 HAUD332-1-Jul-Dec2021-SA1-Supp-MS-V3-29062021 Vodacom VoWiFi 08:33 Done HAUD332-1-Jul-Dec2021-Su... Audit Finding 2 Taxation - while performing risk assessment procedures, it was revealed that Horizon owes the South African Reference Services (SARS) an amount of R12.5 million for income tax payments that were not made in the 2018 and 2019 periods. This amount does not include any penalties and interest that may be raised against Horizon for non-payment. The amount has not been accounted for in the financial statements. Audit Finding 3 The 2021 financial statements have been prepared on the going concern basis. It is management's responsibility to consider whether the entity will be a going concern in the foreseeable future, however the management of Horizon has not and is not willing to perform an assessment to determine whether or not Horizon will be able to continue as a going concern in the foreseeable future. Management refused to provide the audit team with any of the requested information to enable them to perform the going concern assessment. Audit Finding 4 The CEO confirmed that during the year the bank reached a settlement agreement for a loan that was taken out 5 years ago. The original capital amount of the loan was R2.5 million and used to carry out repairs at 3 of the branches. During the year the outstanding balance was R1.85 million. It was agreed that management will settle the capital portion of R1 million in full. The accounting treatment of the outstanding balance was discussed during a board meeting. It was decided that no amount will be recognised as income in the financial statements. The board is not willing to make any adjustments to the annual financial statements and tax calculations. HAUD332-1-Jul-Dec2021-SA1-Supp-MS-V3-29062021 Vodacom VoWiFi 08:33 Done HAUD332-1-Jul-Dec2021-Su... Required: 1.1 Individually discuss whether audit findings 1-3 identified are material misstatements and describe the amendments you would request management to make to correct the annual financial statements. (20 marks) 1.2 Evaluate the impact on the audit opinion if management refuses to amend the financial statements for the misstatements identified in question 1.1 (10 marks) 1.3 Discuss, in detail, the auditor's responsibility with regards to audit finding 4 in terms of the Auditing Profession Act. 5 (15 marks) SAICA Competency No IV-2.6 IV-2.9 IV-2.10 SAICA Competency Name Designs effective and efficient procedures based on the engagement's scope and the assessed risks the need to make use of others (experts, internal auditors, other auditors) or the need to use computer assisted audit techniques to gather evidence Evaluates the evidence and draws conclusions Evaluates the sufficiency and significance of the evidence and/or results of analysis Analyses and decides on the reasonableness of the conclusions on the subject matter, based on an understanding of the nature of the business and its operations for the period and on the outcome of assurance procedures Analyses the impact of unresolved uncorrected misstatements / scope limitations in the context of materiality, and decides on the need to gather additional evidence or to extend the scope of procedures Evaluates the reasonableness/fair presentation of the subject matter Drafts the report upon completion of the engagement Develops an appropriate report in accordance with the terms of the engagement, and the applicable statutory, regulatory or professional requirements Identifies and considers the impact of subsequent events on the report Considers the impact of other information in documents containing assurance reports on the report HAUD332-1-Jul-Dec2021-SA1-Supp-MS-V3-29062021