Question $1$

$(25$

marks$)$

You are the senior in charge of the recently completed $28$ February $2021$ audit of Mayhem $($Pty$)$ Ltd$,$

a medium$-$sized company involved in the heating and cooling industry. The company does not have

an internal audit section or an audit committee. The company supplies electric$/$gas heaters, air

conditioning, etc. During the audit, you had found the senior financial staff to be slightly

uncooperative, but you had put this down to the fact that the company had not had a particularly good

business year. You also got the impression that the financial director was in a rush to get the audit

completed and the financial statements and audit report signed and sent to the company$$s

shareholders, loan finance providers and the bank.

Besides this strange atmosphere which you sensed$,$ you were able to carry out the procedures you

deemed necessary and all outstanding audit matters were resolved. The financial statements and audit

report were signed off by the financial director, the chief executive officer and the engagement

partner on $15$ April $2021$ and distributed to users that afternoon.

The week after the financial statements were signed, you returned to Mayhem $($Pty$)$ Ltd to finish off

one or two things and were very surprised to be approached by the financial manager who indicated

that he needed to discuss an audit matter with you in private. He informed you that there had been

some deliberate manipulation of the financial statements which he wanted you to know about, as it

had been $$done with good intentions and nobody got hurt$.$ He went on to explain that one of the

company$$s loan finance providers had clauses in its loan agreement with Mayhem $($Pty$)$ Ltd which

enabled the finance provider to elect to have its loan repaid immediately if the audited annual

financial statements did not reflect certain ratios and percentages. Unfortunately, because the

company had not had a particularly good trading year, the specified ratios and percentages would not

have been achieved unless the financial statements were manipulated.

At this point you asked him how the financial statements had been manipulated and he responded as

follows:

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FACULTY OF COMMERCE, MANAGEMENT AND LAW

OLD CURRICULUM MODULES

$$We overstated sales and debtors by manipulating cut$-$off at year$-$end to include some sales made in

March in the February sales and debtors figures, as well as creating a few fictitious sales to related

parties. We also overstated inventory and didn$$t record some of the amounts owed to trade creditors

at year$-$end. Having been auditors ourselves, we had a reasonable idea of what procedures you and

your team would be carrying out and what you would be looking for. Although the financial

statements are probably materially misstated overall, we made sure that individual account headings

were individually not materially misstated. You may have noticed that we were all a little tense.

Anyway, we are expecting a good profitable year this year $($an assumption which your going concern

procedures support$),$ so there is no likelihood of this happening again or the investor suffering any

loss. As you know, the audited financial statements have been sent to all the interested parties and

we hope the matter can rest.

The financial director is aware that I have spoken to you and we hope that you will keep it

confidential. We won$$t be conveying this information to your manager or engagement partner, or

anyone else for that matter, so you and your audit team will not have anything to answer for regarding

your audit.$$

YOU ARE REQUIRED TO:

$($a$)$ Explain giving reasons, whether you would $$keep this matter confidential$$ or whether you would

notify your manager and$/$or the engagement partner.

$(5)$

$($b$)$ Discuss whether you and your team could justifiably be accused of failing to carry out risk

assessment and further audit procedures properly.

$(5)$

$($c$)$ Discuss whether the audit manager could justifiably be accused of failing to conduct the

evaluation and concluding procedures properly.

$(4)$

$($d$)$ Discuss whether the manipulation of the financial statements constitutes a reportable irregularity.

$(6)$

$($e$)$ Discuss whether the annual financial statements at $28$ February $2021$ should be revised, and

explain the action which your firm will take should the directors refuse to revise them, which is what

your engagement partner believes will happen.

$(5)$

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marks$)$

FACULTY OF COMMERCE, MANAGEMENT AND LAW

OLD CURRICULUM MODULES

Question $2$

$(25$

You are a manager in the computer audit section of Arthur & Anderson, a large auditing firm. You

are currently concerned with the audit of Wangezi $($Pty$)$ Ltd$,$ a distributor of computer components,

software and accessories. Wangezi $($Pty$)$ Ltd uses EDI $($Electronic Data Interchange$)$ to conduct

business with a few of its trading partners. All EDI commun