You are an Audit Manager at an audit firm called Kate Incorporated and have been working at this firm for more than ten years. You are currently busy finalising the audit of Shift Lock Ltd “Shift” for the June 2022 financial year-end. Shift has been a client of Kate Incorporated since its inception. Shift has a June financial year-end and has been listed on the JSE for more than five years now.

Shift is a manufacturing and distribution company that produces a variety of instant foods. The shelf life of these products is twelve months. Inventory is the largest balance on the company’s statement of financial position and consists of raw materials, work in progress, and finished goods. Raw materials are purchased from both local and foreign suppliers. They distribute all their products, sell in bulk, and also sell from their warehouses across South Africa. They also recently started selling online in smaller quantities to the general public; and since then, the online platform has really grown the company and specifically the sales figure. The head office is located in Cape Town, with all the head office staff and managers located in this office.

The materiality is set at R 4 million for this audit.

During the audit, and while conducting risk assessment procedures, the following unadjusted audit differences were identified.

1) The prior year’s unadjusted misstatement relates to packaging material expenses of the 2021 financial year that were not accounted for. This represented an amount of R 225 000. 2) A cost of R 4.5 million spent to upgrade two of the warehouses in Gauteng was capitalised as property, plant, and equipment. Upon investigation of the detailed costbreakdown, it was discovered that R 2.25 million of this amount relates to repairs and maintenance as it did not meet the definition of an asset.

3) Due to the inventory being the largest account balance, Kate Incorporated decided to attend to all the inventory counts. While performing the inventory count, doing reconciliations, and inspecting supporting documentation, it was discovered that inventory to the value of R 6 million was stolen. These inventories were still accounted for in the inventory records as at 30 June 2022.

4) During the year, one of Shift’s clients terminated their contract with Shift for the supply of products. The client had a tender with the local government hospital. They claim that some of Shift’s products caused a lot of patients to get food poisoning. Although the shelf life of the products is twelve months from the production date, these products were still within six months of the production date. On 23 July 2022, the management of Shift received a letter from the client’s lawyers for a lawsuit of R 8 million. No accounting provision was made for the lawsuit.

5) During the testing of the salary expense, procedures showed that the director’s remuneration amounting to R 1.2 million was not disclosed in the notes to the financial statement. The Financial Director is of the opinion that it is not necessary to disclose all of the directors’ remuneration because it will only result in unrest amongst the lower level of employees.

Required:

Discuss the materiality of each of the unadjusted misstatements 1 – 5, clearly state whether or not an adjustment is required, and make suggestions as to how these misstatements have to be adjusted (where applicable) to enable Kate Incorporated to express an unmodified opinion (25 marks)

Answer rating: 100% (QA)

1 Unadjusted misstatement Packaging material expenses of the 2021 financial year not accounted for amounting to R 225000 Materiality assessment The materiality threshold for this audit has been set at ... View the full answer