You are a Senior Audit Clerk at Finley Auditors and are currently finalising the audit of Rexel Traders ("Rexel") for the December 2022 financial year-end. Rexel manufactures clothing and operates in the Western Cape, with its Head Office in Belville. The entity's factory is located in Blackheath (Cape Town) and has four retail shops where all sales take place. A big portion of their clothing is also exported. During the finalisation of the audit, the audit team identified the following: The final materiality for the financial year ended December 2022 was set at R8 million. The annual financial statements ("AFS") for the financial year ended December 2022 were prepared on a going concern basis. Three unresolved audit findings at financial year-end: Audit finding 1 During the audit and, especially when conducting procedures on inventory, these procedures revealed that inventory was overstated by R12500000. The overstatement was calculated by the audit team. This was due to the calculation of obsolete inventory. Management estimates and calculations led to a disagreement with the audit team. When the audit team discussed it with management, management was adamant that their estimate was correct and would not correct/adjust the AFS. Audit finding 2 The First Year Clerk noted that accounts receivable are overstated by R11 500000. While conducting substantive audit procedures on the provision for doubtful debt, they concluded that the calculation as well as the assumptions were utterly wrong. The calculation(incorrect) by the accountant of Rexel was based on the Opening Balance of Accounts Receivables. Accounts receivable almost doubled during the 2022 financial year based on the preliminary financial statements. This matter was brought to your attention, and you discussed it with the Financial Manager. He responded that management does not want to make any changes to Accounts receivable. Audit Finding 3 During the month of August 2022, Cape Town experienced severe rainfalls. The rain seeped into the Head Office and damaged some of the carpets, computers, and the server room. A ruptured water pipe and the leaking clamp of the air conditioning system led to quick flooding in the data centre. As a result, a lot of supporting information and documentation of Rexel were lost and could not be provided to the audit team for audit purposes. REQUIRED: 2.1 With regards to audit finding 1, describe the steps an auditor should take when identifying and evaluating the effect of audit finding 1 . Also, describe the aspects (relating to audit finding 1) you, as an auditor, would consider in forming an appropriate audit opinion and the matters you need to highlight in your audit report. (15 marks) 2.2 Evaluate the materiality, separately for audit findings 2 and 3 , that you can detect of Rexel Traders for the financial year ended 31 December 2022 . (20 marks)
