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You are the director at Dello Inc., which has been appointed as auditors of Diestel $($Pty$)$ Ltd

$($Diestel$),$ a cold beverage wholesale supplier servicing the Gauteng area. You were as a

designated auditor.

Diestel buys its products directly from various beverage manufacturers, and then resells them

to independent shops and retail chains. Diestel currently owns a fleet of $12$ delivery vehicles,

with which it makes its deliveries to its customers.

During your review of the audit file, you could find no substantive documentation for an amount

of R$400,000$ claimed as a deduction when the second provisional tax return was completed

by the financial manager and signed off by the financial director, Mrs$.$ Botha. Further

investigations revealed that this amount was the total of all traffic fines issued during the

financial year to the company$$s delivery vehicle drivers.

Subsequently, you set up a meeting with Mrs$.$ Botha and were stunned by her response: she

believed traffic fines received by delivery vehicle drivers for speeding, illegal parking and so

on could be claimed as a deduction from taxable income. She reasoned that the fines had

been issued in the production of income. She argued that the faster the deliveries were made,

the more profitable the company would be$.$ Mrs Botha insisted that these deductions be made,

as the South African Revenue Service would not pick them up$.$

Required

$1.$ Discuss whether Mrs$.$ Botha$$s treatment of the traffic fines constitutes a reportable

irregularity in terms of the Auditing profession Act $26$ of $2005.(14$ marks$)$

$2.$ Discuss the actions that should be taken by the auditor in terms of the Auditing

Profession Act $26$ of $2006,$ if you have concluded that Mrs$.$ Botha$$s treatment of the

traffic fines constituted a reportable irregularity. $(6$ marks$)$