You are one of the trainee accountants on the audit of Goldrush (Pty) Limited (Goldrush). Your audit senior has presented you with the following information on Goldrush: Business background of Goldrush Goldrush was established by Chere Naidoo in 1981 in South Africa. Goldrush started as a small company managed from Chere Naidoos residence and has since developed into one of the largest jewellery manufacturers in South Africa. Its core business is the manufacturing and selling of gold and silver jewellery to most of the leading jewellery retailers in the country. Goldrushs manufacturing operations are conducted on the Witwatersrand. Chere Naidoo is the owner and the Chief Executive Officer (CEO) of Goldrush. She is assisted by Dan Brown as the Chief Operations Officer (COO) and Thabo Mabula as the Chief Financial Officer (CFO). For the financial year ended 28 February 2020 the profit of Goldrush has decreased by more than 40%. Chere Naidoo has requested Dan Brown to provide her with information on what might have caused the decrease in profit during the financial year. Dan Brown responded to her request via e-mail as follows: Chere Naidoo From: Dan Brown Sent: 21 March 2020 15:25 To: Chere Naidoo Subject: Contributors to the decrease in the profit for the year ended 28 February 2020 Dear Chere I refer to your request regarding information of the reasons that might have contributed to the decrease in Goldrushs profit during the past financial year. I hereby include the following comments: During the past three to four years the rising gold price had a huge impact on the manufacturing of gold jewellery. During the 2019 financial year the gold price increased by 25%. Due to the increase in the gold price it became unaffordable to most consumers to purchase gold jewellery, which ultimately led to a decrease in the number of manufacturers in the jewellery business sector Goldrushs most popular sales item used to be small gold earrings and Goldrush used to produce a large volume of these small gold earrings in a year. As a result of the increase in the 3 gold price over the years, the manufacturing volumes of small gold earrings have dropped by about 66%. The decision was made to put the manufacturing of these small gold earrings on hold from July 2019 as it was not profitable to continue with the manufacturing thereof. Furthermore, because of the rising gold price, the fee charged to manufacture a piece of gold jewellery could not be increased accordingly as this would have made gold jewellery even more unaffordable. This resulted in a decrease in profits during the past financial year. Not only has Goldrush suffered from a decrease in profits during the past financial year, but because jewellery retailers work on a percentage mark-up, many jewellery retailers have been resistant to purchase gold jewellery from Goldrush because of the increase in its selling prices. Due to the increase in Goldrushs selling prices and because of the recession, a large number of Goldrushs clients had to close their doors as it became difficult to trade in the jewellery industry. According to Thabo Mabula, the increase in Goldrushs outstanding debtors balance and allowance for credit losses (previously known as allowance for bad debts) at year end might also be an indication of retailers who are unable to pay existing debt. Thabo provided me with the following information on debtors at year end: Description 28 February 2020 28 February 2019 Outstanding balance as at year end R1 342 000 R940 500 Allowance for credit losses R114 200 R70 538 Days outstanding 95 65 Another factor that had an impact on the business operations of Goldrush was the implementation of the Consumer Protection Act. Goldrush did not implement the Consumer Protection Act correctly during the financial year and this resulted in a fine that has to be paid by Goldrush. The fine is calculated based on the turnover of Goldrush for the year ended 28 February 2019. To enable Goldrush to increase its profit in the next financial year, Goldrush has to put a plan into action to reinvent it selves by focussing on fashion jewellery made of other metals. To be able to do so, 60% of the shares of Butterfly Jewellers (Pty) Limited were acquired in September 2019. Butterfly Jewellers specialises in the design and manufacturing of fashion jewellery and will hopefully assist Goldrush to expand its business. 4 Lastly, during the financial year Goldrush had to pay a service bureau a material amount of money. The reason for this being that Goldrush had lost all of its accounting data on 1 January 2020. As there was no backup made of the accounting data during the financial year, a service bureau was contracted to process all of the accounting records from the hard copies again in order for Goldrush to prepare financial statements at year end. As this was an unforeseen circumstance, Goldrush had not budgeted for this additional cost and this therefore resulted in a decrease of actual profits. If you have any further queries, do not hesitate to contact me. Regards Dan Brown With reference to the business background of Goldrush: 2.1. Identify the risk indicators at the overall financial statement level. (10) 2.2. For each identified risk indicator, describe the risks of material misstatement at the overall financial statement level present in the financial statements of the Goldrush group for the 28 February 2020. (15) 2.3. Describe the risks of material misstatement at the assertion level for the accuracy of the allowance for credit losses (previously known as allowance for bad debts) in the financial statements of Goldrush for the 28 February 2020 year end. (5)