QUESTION 2 (50 marks)

You are an audit trainee at a medium size audit firm in South Africa, AuditMatters (Pty) Ltd. One of your clients is GoGreen (Pty) Ltd, a South African resident company that is a market leader in the manufacturing and distribution of decomposable shopping bags.

GoGreen (Pty) Ltd has a financial year and year of assessment that ended 31 December 2023. The company is a registered Category B vendor for VAT purposes, makes 85% taxable supplies and has an annual turnover of approximately R16 million.

You have made the following notes on key matters for further investigation in your workings papers:

Credit sales to customers The Covid-19 pandemic had a negative impact on GoGreen (Pty) Ltds sales. The management of GoGreen (Pty) Ltd therefore decided to offer customers the option to purchase large volumes of shopping bags on credit. Offering a credit option to customers positively impacted sale volumes, but to avoid potential bad debt write-offs, credit risk controls had to be put in place.

Customers will either receive a 5% discount when they purchase on cash or a 3.5% discount when they settle their credit account within 30 days.

VAT balance You already performed the following audit procedures on the VAT balance in the statement of financial position of GoGreen (Pty) Ltd for the 2023 financial year: Agreed the opening balance to prior year working papers and financial statements. Obtained schedules reflecting the computation of the VAT balance at 31 December 2023. Re-performed the calculations on the VAT schedules.

Agreed the totals to the balances in the general ledger, trial balance and the finan- cial statements.

New manufacturing machine GoGreen (Pty) Ltd is an advocate when it comes to the use of environmentally friendly manufacturing processes. The company, therefore, uses the latest available equipment in its manufacturing process to reduce its carbon footprint. The manufacture of decomposable shopping bags is accepted as a process of manufacture for tax purposes.

On 3 December 2023, GoGreen (Pty) Ltd ordered a new manufacturing machine from a local supplier, who is a VAT vendor, for R281 750 to replace an old machine. The new machine was transported by road at a cost of R21 630 and was delivered to GoGreen (Pty) Ltds premises on 17 January 2024. The supplier issued the invoice for the transport costs and machine on 18 January 2024 and GoGreen (Pty) Ltd paid the outstanding amount on 21 January 2024. The machine was ready and brought into use on 29 January 2024. The accountant of GoGreen (Pty) Ltd included the input tax on the machine in the VAT return for the tax period which ended on 31 December 2023 by using the order form received from the supplier.

Assume that all amounts include value-added tax (VAT) where applicable unless stated otherwise.

Donation On 16 November 2023 GoGreen (Pty) Ltd donated R50 000 cash to SavingOurPlanet, a registered Public Benefit Organisation in South Africa. You noted that the junior accountant recorded this donation as follows in GoGreen (Pty) Ltds general journal for the 2023 year of assessment:

DR Donation to PBO R38 000 DR Donations tax (R50 000 @ 20%) R12 000 CR Bank/Cash R50 000

Advertisement GoGreen (Pty) Ltd approached Recycled, a popular newspaper, to advertise the companys decomposable shopping bags. A contract was signed with Recycled and GoGreen (Pty) Ltd incurred a total of R84 000 for a full-page advert which will be published each month for one year from 1 June 2023 until 31 May 2024.

Outstanding audit issue GoGreen (Pty) Ltds trade receivables balance of R9 700 000 in the final trial balance of the 2023 financial year was overstated by R6 300 000. You discussed this matter with GoGreen (Pty) Ltds management, but they refused to adjust the financial statements to rectify the overstatement of R6 300 000. GoGreen (Pty) Ltds final materiality figure for its 2023 financial year is R6 000 000.

REQUIRED:

2.1) With reference to the Credit sales to customers, identify five business risks relating to the granting of credit to GoGreen (Pty) Ltds customers. For each risk identified, state one relevant control to mitigate the identified risk.

Provide your answer in the following table format: Number (1 - 5) Risk Control

(10 marks)

2.2) With reference to the VAT balance, formulate the additional substantive audit procedures you would perform on the VAT balance in the statement of financial position as at 31 December 2023.

(12 marks)

2.3) With reference to the New manufacturing machine, discuss whether GoGreen (Pty) Ltd applied the correct VAT treatment for the acquisition of the new manufacturing machine for the two-month VAT period that ended on 31 December 2023.

(5 marks)

2.4) With reference to the Donation, advise the junior accountant on whether the tax treatment of the donation is accurate or not. Support your answer with references to the Income Tax Act.

(6 marks)

2.5) With reference to the Advertisement, discuss the deductibility of the R84 000 in GoGreen (Pty) Ltds taxable income for the 2023 year of assessment. Support your answer with references to the Income Tax Act.

(8 marks)

2.6) With reference to the Outstanding audit issue, discuss with reasons, the impact of the outstanding audit issue on the audit opinion. (9 marks)