QUESTION 1 61 MARKS
Background information
Comedic Ltd (hereafter referred to as Comedic) is a JSE listed manufacturer and is
one of the largest suppliers of industrial rubber based products (i.e. Rubber extrusions,
flocking profiles, co-extruded rubber profiles, mouldings, rubber and seal kits).
When Comedic was formed, their main focus was on the automotive industry but grew
over the years and ventured into various aspects of the rubber industry. This has
resulted in significant growth and Comedic has reported profits for the past three years
as a result. Comedic has branches in all nine South African provinces.
Comedic’s board of directors approached your audit firm, Thee-Best-of-The-Lot
Auditors Inc. (hereafter referred to as TBoTL Auditors) with an assurance engagement
proposal (audit). TBoTL Auditors is a medium audit firm, with clients who mainly
operate in the agricultural sector. The firm has 3 audit partners, 15 audit managers
and 5 trainees. Two of the three audit partners are already busy with other audit clients
and will therefore not have time to assist on this audit. You are a second year trainee
auditor and have been assigned as part of the audit team of Comedic for the 2018
financial year.
The board of directors of Comedic requested TBoTL Auditors to take over the audit of
their financial statements for the year ended 31 March 2018 from Potgietersrus
Mureen and Gerald Auditors (PMGA).
PMGA resigned as the auditors of Comedic after a newspaper article was published
in February 2018. (Refer to News24 Article)
When communicating with the previous auditors, it came to your attention that the
audit fees for the past three years have not been paid. Management claimed that
PMGA charged high audit fees, and the company could not pay because it was facing
cash flow problems.
The following documents have been made available to you:
NEWS24 Article
ACS: Summary of what transpired at the audit committee meeting – 22 February
2018
Trevor Noah celebrates in style
2018-02-05 18:27
Pretoria – Businessman and CFO of Comedic Ltd
recently celebrated his 45th birthday in style over the
weekend in Sun City. It was a lavish affair with the
who’s who of the entertainment industry attending.
The handsome businessman looked dapper in a
Valentino suit flanked by his wife who wore a red silk
gown.
Some of the big names in attendance were, Amanda
Black, Lady Zamar, Khaya Mthethwa, Cyril
Ramaphosa and Pravin Gordhan. TV and radio
personality Somizi Mhlongo was the MC.
Comedic Ltd contributed R3,500,000 towards the cost of the event. Comedic’s
spokesperson commented “We are very happy for Trevor on this milestone. It is an
honour to be able to celebrate with the leadership of the company. We take pride in
our people and that’s why we budget for such “operating and admin” expenses in our
company. Because how else will we show our executives that we appreciate them”.
Client : Comedic Ltd Prepared by: YOU Reviewed:
ACS
Year end 31 March 2018 Date: 26 March 2018
Subject Summary of what transpired at Audit Committee meeting – 22
February 2018 (Thee-Best-of-The-Lot Auditors Inc. was
invited)
a) All the members of the audit committee were in attendance. The following people
were also invited: Audit partner - Tumi Morake, Audit manager - Loyiso Gola, newly
appointed financial manager – Nic Rabinowitz and CEO – Trevor Noah.
b) The CFO – John Vlismas was not invited due to the fact he is Tumi Morake’s brother
in law. The audit committee felt that it was best to not invite him in order to keep the
proceedings as independent as possible.
c) Tumi Morake highlighted the fact that Comedic was a very important client of theirs
and would ensure that they received the best trainees and overall service.
d) The Audit Committee chair – Barry Hilton, stated that he was aware that Tumi
Morake was also the audit partner of Rubbery (Pty) Ltd, a competitor that Comedic
is planning to take over in 2019. He joked by saying that Tumi Morake needs to
provide inside information on the operations of Rubbery (Pty) Ltd.
e) The Audit Committee requested that the audit firm complete and file tax returns on
Comedic’s behalf.
f) The Audit committee extended an invitation to the entire audit team to attend the
global rubber conference in Sihanoukville, Cambodia during the first week of April
2018. This was done to help the audit team understand the kind of challenges
Comedic faces in their industry. All costs will be settled by Comedic.
g) At the request of the auditors, Barry Hilton agreed to take the audit firm’s pamphlets
to the RubberTech exhibition in Johannesburg so that other rubber companies could
benefit from their services. The pamphlets indicate that any rubber company will
receive a 15% discount on their audit fees.
h) The auditors were requested to provide internal audit services by reviewing,
monitoring and recommending improvements to all internal controls over financial
reporting. Barry Hilton told the auditors to report straight to the board on behalf of
management.
i) The Audit Committee is satisfied with the auditors’ independence.
YOU ARE REQUIRED TO: MARKS
a. With reference to the background information and the News24 12
Article, discuss the factors that Thee-Best-of-The-Lot Auditors
should consider prior to accepting Comedic Ltd as an audit client.
b. With reference to the background information and the News24 19
Article, evaluate the audit risk at the overall financial statement
level in the 2018 annual financial statements of Comedic Limited.
Communication: Layout and clarity of expression 1