Study the scenario and complete the question(s) that follow.

Geotrack Limited

You are a partner in a medium-sized audit firm, KLMP Registered Auditors, and were approached by the board of directors of Geotrack Limited (Geotrack), to inform you of an audit vacancy. They requested that you accept the engagement as auditors and submit a quote. During the course of your meeting with the board, the following information was obtained.

Geotrack, a company listed on the Johannesburg Stock Exchange (JSE), specialises in vehicle tracking and fleet management products. The company is regarded as one of the market leaders in South Africa in terms of product range and offers unsurpassed business solutions. An average of 1 100 tracking and monitoring systems are installed per month, through a network of 34 fitment centres throughout the country.

Although Geotrack has a history of strong financial results, the COVID-19 pandemic has affected the company badly. This, together with a number of large capital-intensive projects and bad acquisitions, has resulted in the company incurring huge losses in the last two years and wiping out virtually its entire capital and reserves. Creditors have also not been paid regularly recently and the company's bankers have threatened closure on the company's overdraft facilities.

The listing of Geotrack was suspended by the JSE in March 2022 following an investigation into certain breaches of listing requirements by management. Rumours also surfaced that management have manipulated the financial statements in recent years and overstated asset values. The board is working hard to resolve all of these issues and has replaced certain managers. The new managers have since made significant progress in cleaning up the business.

The board has however lost confidence in the current auditors, Brits Accountants & Auditors Incorporated (Brits Inc), feels that Brits Inc should have uncovered the corrupt management practices and deceitful financial reporting practices of the previous management:

 

Correspondence from previous auditors

From: L Brits (Partner in charge)

Date: 30 June 2022 

To: KLMP Registered Auditors

Dear Partners

Following your correspondence by email (dated 28 June 2022), that your firm has been approached to accept the appointment as auditors of Geotrack Limited, I would wish to advise you as follows:

1. Our firm has no intention of resigning as auditors of Geotrack Limited. We have been actively involved with the client since our appointment as auditors 10 years ago and I have acted as engagement partner for the past nine years.
2. We have been assisting management in the past in preparing the financial   statements, and I doubt that they can do it without our assistance.
3. The fee from Geotrack Limited's audit comprises a significant part of our firm's total audit fees and we have no intention of giving this up.
4. I also own significant number of Geotrack Limited's shares and intend to do everything possible to protect my share value.

I trust that this correspondence makes it clear that we have no intention of resigning as auditors.

 

Source: Daniels, J. C, 2022.

 

 

Explain why you might decide not to accept Geotrack Limited as an audit client. (15marks)

Answer rating: 100% (QA)

There are several reasons why I might decide not to accept Geotrack Limited as an audit client 1 Eth... View the full answer