You are an Audit Manager at a firm called Clarke Auditors. You have been assigned

to the audit of Dona $($Pty$)$ Ltd $($Dona$).$ You are currently finalising the February $2023$

audit.

Background information of Dona

Dona is situated in the Eastern Cape. Dona imports and distributes motor spare parts

and offers high$-$quality parts at excellent prices. Dona has large warehouses that can

facilitate the inventory and delivery turnover of the motor spare parts. Their fleet of

delivery vans is busy five days a week, while contracted courier companies deliver

long$-$distance orders to over $3000$ customers. Donna and the contracted couriers offer

overnight deliveries.

The final materiality for Dona is set at R$6\mathrm{.}5$ million. The annual general meeting is

planned for $17$ May $2023$ and the annual financial statements $($AFS$)$ will be circulated

in April $2023.$

The following is Dona$$s abridged Statement of Financial Position as of $28$ February

$2023.$

R$000$

Property, plant and equipment $60000$

Accounts Receivable $35000$

Inventory $25780$

TOTAL ASSETS $120780$

Share Capital $12750$

Accumulated Loss $(15520)$

Shareholders Loan $16550$

Accounts Payable $75000$

Bank Overdraft $32000$

TOTAL EQUITY AND LIABILITIES $120780$

$6$ HAUD$332-1-$Jan$-$Jun$2023-$SA$1-$MS$-$V$4-09052023$

The following additional information relating to Dona is available:

$1.$ During the current financial year one of the founding members passed away. He

was the CEO of the company. Dona is a family owned company and the role of

CEO now rests on his son who is a third$-$year student at university and is not very

excited to take over as the CEO yet.

$2.$ Dona is in the process of extending the entity$$s overdraft facility.

$3.$ During the financial year, certain motor spare parts could not be imported due to

sanctions. One of Dona$$s biggest customers, MotoGP $($Pty$)$ Ltd$,$ is in need of these

motor spare parts. MotoGP $($Pty$)$ Ltd represents $25\%$ of Dona$$s annual sales and

plans to cancel their orders due to Dona not being able delivering the orders.

MotoGP $($Pty$)$ Ltd also plans to sue Dona for loss of sales.

$4.$ The board of directors of Dona is planning to expand the variety of motor spare

parts the entity imports. Based on Dona$$s income projections, the entity should be

able to make a substantial profit from these additional products.

$5.$ The accounts receivables regressed and are currently at five months even though

Dona$$s policy is $60$ days. Dona$$s accounts payable have also increased in the

current financial year and the CFO negotiated with Dona$$s two largest account

payables, which represent $45\%$ of the accounts payable, to extend the payment

term from $30$ to $60$ days.

Extract from an article on News $24$: $4$ May $2023$

Walmer $($Pty$)$ Ltd$$s liquidation process was officially finalised this morning.

When you read this newspaper article you immediately remembered that Walmer $($Pty$)$

Ltd $($Walmer$)$ is Dona$$s largest accounts receivable, since you reviewed the audit

procedures for accounts receivable. You immediately phoned the Financial Manager,

Mr$.$ Ceasar. He informed you that Dona has already received official documentation

regarding this matter prior to Dona$$s financial yearend. According to the

documentation, the indication is that unsecured creditors will receive insignificant

payments. Management already had a discussion on this matter and intends no

additional adjustments to the financial statements. Walmer$$s balance in the accounting

records of Dona amounted to R$12\mathrm{.}5$ million as at $28$ February $2023.$

$7$ HAUD$332-1-$Jan$-$Jun$2023-$SA$1-$MS$-$V$4-09052023$

Unresolved audit matter

At a board meeting held on $2$ February $2023,$ the board of directors approved an

incentive payment of R$7\mathrm{.}6$ million to the Financial Director $($FD$)$ for his work on the

BEE verification of Dona. The FD was required to provide the BEE auditor with

documentation, calculations, and a file with all the supporting evidence. The incentive

payment is payable in April $2023.$

The minutes for this board of directors$$ meeting were only circulated by Dona$$s

secretary on $21$ March $2023$ as she was awaiting some final corrections. The Financial

Manager is of the opinion that the date of the minutes falls outside the $2023$ financial

yearend and therefore no provision for this payment should be recorded.

$8$ HAUD$332-1-$Jan$-$Jun$2023-$SA$1-$MS$-$V$4-09052023$

REQUIRED:

$2\mathrm{.}1$ Evaluate the appropriateness of the going concern assumption for Dona $($Pty$)$

Ltd for the $2023$ financial yearend. For purposes of answering this requirement,

ignore the information under the headings $\text{'}\text{'}$Extract from an article on News $24$:

$4$ May $2023"$ and "Unresolved audit matter".

$(10$ marks$)$

$2\mathrm{.}2$ Formulate the additional substantive audit procedures in respect of the going

concern assumption that you as Audit Manager would perform during the $2023$

financial yearend audit.

Note: Please only write procedures applicable to the additional

information provided.

$(10$ marks$)$

$2\mathrm{.}3$ Discuss the audit considerations of Clark Auditors in relation to the News $2$