Background information You are a registered candidate auditor at Bongo, Viljoen and Smith (BVS), a Polokwane-based audit firm. Farmers Organics (Pty) Ltd (Farmers Organics) produces high-quality citrus fruit for the international market and has been an audit client of BVS for three years. Healthy Foods (Pty) Ltd (Healthy Foods), a subsidiary of Farmers Organics, also wishes to engage BVS to review its financial statements for the year ended 31 May 2023. Internal controls In his working paper, the first-year audit trainee documented the following internal controls regarding the payroll accounting cycle implemented by Farmers Organics: C1: Debtors age analysis is reviewed monthly by the financial manager to identify long outstanding debt to be followed up on. C2: Farmers Organic's directors promote a culture of honesty and integrity and do not tolerate any dishonesty or transgressions on the part of employees. C3: Any changes to an employees banking details are processed by the accountant and reviewed and signed off by the payroll manager after the change was made. Identifying and assessing the risk of material misstatement The audit team identified the following risks regarding the client and its operations: R1: The directors of Farmers Organics announced that all employees would receive an additional bonus payment at the end of the financial year if the revenue earned for the year increased by 10% compared with the previous financial year. The employees are all very excited about this announcement. R2: The newly improved internal control system was implemented during the financial year. The control system did not work effectively prior to this implementation. Materiality The materiality of the financial statements as a whole and performance materiality were calculated by the audit senior to be R1 250 000 and R1 000 000, respectively. The audit team documented that the revenue account disclosed in the financial statements was overstated by R1 050 000. The total of other misstatements identified by the audit team amounted to R200 000. None of the misstatements was found to be pervasive. Management refused to correct any of the misstatements identified. Audit evidence and procedures You were tasked with obtaining sufficient and appropriate audit evidence over certain financial statement account balances. The following audit procedures (AP) were suggested to you by your senior: AP1: Compare the monthly revenue balances for the financial year ended 31 May 2023 with those of the previous year and investigate and obtain explanations for material fluctuations. AP2: Select a sample of property, plant and equipment items from the fixed asset register and physically inspect the items to identify any impairments. AP3: Inspect the bank reconciliation for a selection of months during the financial year. Agree the bank statement and general ledger balances to the respective bank statements and the general ledger and test reconciling items against supporting documentation. In addition, inspect proof that the bank reconciliations prepared were appropriately reviewed and signed off by senior management. REQUIRED: 1. With reference to the background information: 1.1 describe the preconditions for an audit that should be met before an audit client can be accepted. (4 marks) 1.2 describe what factors BVS will consider before accepting Healthy Foods as an audit client. You may assume that the preconditions for the audit have been met. (4 marks) 1.3 describe the type of assurance engagement a review of historical financial statements constitutes, and list the three specific matters that a practitioner needs to perform procedures on in such an engagement. (4 marks) 2. With reference to the information under internal controls: 2.1 indicate the component of the system of internal control that is applicable to control aspects C1 and C2 implemented by Farmers Organics. (2 marks) 2.2 For the control aspects C1 and C3 implemented by Farmers Organics: 2.2.1 describe the objective of the control implemented (3 marks) 2.2.2 indicate whether the control constitutes a preventive, detective or corrective control (3 marks) 3. With reference to the information under identifying and assessing the risk of material misstatement: 3.1 identify and describe the three components of audit risk. (6 marks) 3.2 For each of the audit risk factors identified by the audit senior: 3.2.1 explain why these factors increase audit risk. (3 marks) 3.2.2 state the nature of each audit risk factor (i.e. inherent, control or detection risk). (3 marks) 3.2.3 state whether it is a risk at the financial statement level or a risk at the assertion level. (3 marks) Structure your answer according to the following format: (2 marks)

3.2.1 Risk	3.2.2. Nature	3.2.3 Risk at financial statement level/assertion level
maximum 3 (2 1)	maximum 3 (2 1)	maximum 3 (2 1)

4. With reference to the information under materiality: 4.1 explain the difference between planning materiality and performance materiality. (4 marks) 4.2 explain what type of audit opinion the engagement partner will issue for the audit of the financial statements of Farmers Organics for the year ended 31 May 2023, considering the misstatements identified. (4 marks) 5. With reference to the information under audit evidence and procedures: 5.1 For each of the audit procedures AP1AP3, state 5.1.1 the account balance being tested by the procedure. (4 marks) 5.1.2 whether the audit procedure is a substantive analytical procedure, a test of control or a substantive test of detail. (4 marks) 5.1.3 the management assertion that each audit procedure is intended to address. (4 marks) Structure your answer as follows: (1 marks)

Audit procedure	5.1.1 Account balance	5.1.2 Type of audit procedure	5.1.3 Management assertion
AP1AP3	maximum 4 (3 1)	maximum 4 (3 1)	maximum 4 (3 1)