You have been the auditor of Global TV Solutions (Pty) Limited for several years. The company manufactures electronic components that are used in the assembling of television sets. The managing director and majority shareholder is Gert Maree, who was also the founding member of the company.

During the audit of a new client, Sanaponic Limited, during February 2017, you notice that Sanaponic purchases large quantities of spare parts from Global TV Solutions. Despite your close involvement with Global TV Solutions, you were not aware of the fact that the company acts as supplier to Sanaponic. Closer investigation of the purchases journal and corroborative documentation from Sanaponic showed that the average monthly purchases amount to R100 000. These transactions were recorded on standard invoices and were written out in the handwriting of Gert Maree. You have also found that the payment by Sanaponic in respect of such purchases was deposited into a bank account that does not appear in the accounting records of Global TV Solutions.

This discovery is particularly alarming since you had recently completed the audit of Global TV Solutions for the year ended 31 December 2016. You issued an unqualified report on the financial statements on 11 February 2017, since Gert Maree urgently requested the audited statements for negotiations with the bankers of Global TV Solutions in connection with financing. In addition, you have already completed the tax return on behalf of Global TV Solutions for 2016 and lodged it with SARS. During the recent audit you had noticed that the company had suffered inventory losses, but you were convinced by both Gert Maree and the production manager that it was attributable to losses that had arisen during the development of a new production line, and that there was no effect on the financial statements.

REQUIRED: With reference to the Auditing Profession Act and the ethical guidelines of the South African Institute of Chartered Accountants:

(a) Discuss the factors that you will consider; and .

b) The action you will take as auditor in respect of the above circumstances. (30)