Candy Limited Planning by Reviewed Performed by Final review 11.

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Inherent risk assessment

Description Risk
Industry, regulatory and other external factors
1. Industry conditions. Consider: 1. The entity has a factory in Centurion and offices in Woodmead, JHB. They
- Market and competition. only sell nationally and are well established in the market.
11.60
- Cyclical / seasonal activity. Candy Limited has a significant competitor, Sweet Treats, who is suing them
for "stealing a recipe."
- Product technology.
- Energy supply and cost. Based on the information obtained, we identified a risk for the incorrect
provision raised for competitor litigation. Refer to 11.60 where the risk has
been identified and discussed.
2. Sector overview. Consider: 2. Refer to the factors discussed under point 1 above.
- Economic factors: global,
national and local.
- Likely future developments.
- Competition factors: mergers,
new entrants, etc.
- Other factors affecting the
business sector generally.

3. Group structure. Consider: 3. Investments in Associates:

- A list of each company in the
group and how it is related to
the client.
- What the likely transactions
with the client would be.
- PowerCarz 25% shareholding
- Creamy-licious 20% shareholding
No related party transactions with these 2 parties are expected at this stage.
This is purely seen as investments to diversify the company's portfolio.

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Candy Limited Planning by Reviewed Performed by Final review 11.20
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Inherent risk assessment

Description Risk
4. Directors, Management and 4. Those charged with governance (TCWG)
staff. Consider:
- Names. - Chris Jenkins 11.60
Chris has been a director since 1982. He is not a member of the audit
- Roles. committee and has been with the business since conception and has built the
business.
- Qualifications.
Bruce Harris
Bruce has been a director since 2012. He is not a member of the audit
committee and is a qualified CA (SA) with over 20 years of financial and
business experience.
- Sarah Long
Sarah has been a director since 2013. She is not a member of the audit
committee and has an Honours degree in Marketing, with over 15 years of
industry specific experience.
- Sizwe Mkize
Sizwe has been a director since 2010. He is a member of the audit committee
and is a qualified CA (SA). He is a non-executive director with over 10 years of
experience in manufacturing environments.
- Jimmy Pillay
Jimmy has been a director since 2000. He is a member of the audit committee
and holds an Honours degree in economics. He is a non-executive director.
- Porshe Nkosi
Porshe has been a director since 2013. He is a member of the audit committee
and holds an Honours degree in management. He is a non-executive director.

Key personnel

- Chris Jenkins (CEO and in charge overall)

- Bruce Harris (Finance Director)
- Sarah Long (Sales director)
- Rhonda Rhodes (Human Resources)
- Mark McCann (Production)

There are 100 wages employees, who are paid weekly. There are 47 waged
employees and 6 directors who are paid monthly. A new sales incentive
bonus has been implemented. Bonusses are a set amount for wage
employees depending on the factory's performance. Salaried employees
generally get a 13th cheque.Candy Limited treat their staff well and they have a
low staff turnover. There has been no history of unrest.

Based on the information obtained, a risk was identified in terms of the

incentive bonus. Refer to 11.60 where this risk has been identified and
discussed.
5. Environmental issues. 5. Refer to 10.31 where the relevant laws and regulations were discussed with
Consider: Chris Jenkins.
- Attitude to environmental
issues.
- Internal policies / procedures.
- Track record.
- Specific laws or regulations.
- Known problem areas.
- Adverse publicity.
- Anticipated future problems.

6. Other external factors. 6. Drinking chocolate, as it is seen as unhealthy and sales have decreased
Consider: and therefore production has decreased as well. Candy Limited thus decided
- General level of economic to sell the drinking chocolate machine.
activity.
- Interest rates.
- Inflation.

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Candy Limited Planning by Reviewed Performed by Final review 11.20
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Inherent risk assessment

Description Risk
7. Risk that the company may be 7. No factors are in place that would heighten the risk of non-compliance for
used for money-laundering or Candy Limited.
terrorist financing.
- Geographic location of the
business, clients, financing,
etc.
- High level of transactions in
cash or readily transferable
assets that can be used to
obscure illegitimate funds.
- Large international receipts or
payments.
- Clients who have a bad
reputation in the business
community.
- Difficulties in establishing the
ownership of clients.
- Otherwise suspicious and
unusual transactions.

Nature of the entity

8. Organisational structure. 8. Structure
Consider:
- Whether the entity has a The company has a simple structure, with no subsidiaries.
complex structure, for
example with subsidiaries or Ownership
other components in multiple
locations. The CEO, Chris Jenkins, is the majority shareholder (40% shareholding) and
there are about 100 shareholders in total. All directors are shareholders too.
- The ownership, and relations
between owners and other
people or entities.

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Candy Limited
Year end: Saturday, 31 December 20X4
Inherent risk assessment
9. Business operations. Consider:
- Nature of revenue sources,
products or services, and
markets, including
involvement in e-commerce.
- Conduct of operations.
- Alliances, joint ventures, and
outsourcing activities.
- Geographic dispersion and
industry segmentation.
- Location of production
facilities, warehouses, and
offices, and location and
quantities of inventories.
- Key customers and important
suppliers of goods and
services.
- Employment arrangements.
- Research and development
activities and expenditures.
- Transactions with related
parties.
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Description Risk
9. Brief outline of how the entity operates:
The entity has a factory in Centurion and offices in Woodmead, JHB. They 11.60
only sell nationally and are well established in the market.
Ownership
The CEO, Chris Jenkins, is the majority shareholder (40% shareholding) and
there are about 100 shareholders in total. All directors are shareholders too.
Those charged with governance (TCWG)
- Chris Jenkins
Chris has been a director since 1982. He is not a member of the audit
committee and has been with the business since conception and has built the
business.
Bruce Harris
Bruce has been a director since 2012. He is not a member of the audit
committee and is a qualified CA (SA) with over 20 years of financial and
business experience.
- Sarah Long
Sarah has been a director since 2013. She is not a member of the audit
committee and has an Honours degree in Marketing, with over 15 years of
industry specific experience.
- Sizwe Mkize
Sizwe has been a director since 2010. He is a member of the audit committee
and is a qualified CA (SA). He is a non-executive director with over 10 years of
experience in manufacturing environments.
- Jimmy Pillay
Jimmy has been a director since 2000. He is a member of the audit committee
and holds an Honours degree in economics. He is a non-executive director.
- Porshe Nkosi
Porshe has been a director since 2013. He is a member of the audit committee
and holds an Honours degree in management. He is a non-executive director.
Key personnel
- Chris Jenkins (CEO and in charge overall)
- Bruce Harris (Finance Director)
- Sarah Long (Sales director)
- Rhonda Rhodes (Human Resources)
- Mark McCann (Production)
There are 100 wages employees, who are paid weekly. There are 47 waged
employees and 6 directors who are paid monthly. A new sales incentive
bonus has been implemented. Bonusses are a set amount for wage
employees depending on the factory's performance. Salaried employees
generally get a 13th cheque.
Candy Limited treat their staff well and they have a low staff turnover. There
has been no history of unrest.
Based on the information obtained, a risk was identified in terms of the
incentive bonus. Refer to 11.60 where this risk has been identified and
discussed.
Management operating style
Originally a small family-owned business, they have grown substantially over
the years and recognised the need to employ experts and develop and grow
their business. Mr Jenkins is consultative, but sometimes defers to being the
owner and creator of the business, making occasional decisions which aren't
supported by the majority.
Non-routine events
- Sale of 1 drinking chocolate machine due to the fact that drinking chocolate
is seen as unhealthy and sales have decreased and therefore production has
decreased as well.
- Purchase of investment in an associate, as Candy Limited decided to expand
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Candy Limited Planning by Reviewed Performed by Final review 11.20
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Inherent risk assessment

Description Risk
and support their business.

Key advisors to the entity

- Legal advice is obtained from Mr Knowit from Law Office.

-Banking advice is obtained from Mrs Bandit from Diamond Bank.

Related parties

The entity have a process in place to ensure that related party transactions are
identified and the terms are disclosed. Flavour Pallet is a related party of
Candy Limited, as the CEO for Flavour Pallet is Chris Jenkins' brother. Candy
Limited treats them at arm's length.

Apart from the risks identified in terms of the bonus provision (discussed
above), no additional risks have been identified in terms of the nature of the
entity.
10. Measurement and review of 10. Performance of the company is measured and reviewed by management
financial performance. on a monthly basis.
Consider:
- Key performance indicators
(financial and non-financial)
and key ratios, trends and
operating statistics.
- Period-on-period financial
performance analyses.
- Budgets, forecasts, variance
analyses, segment
information and divisional,
departmental or other level
performance reports.
- Employee performance
measures and incentive
compensation policies.
- Comparisons of an entity's
performance with that of
competitors.

11. Investments and investment 11. Two investments were made in Associates. Refer to section 3.
activities. Consider:
- Planned or recently executed
acquisitions or divestitures.
- Investments and dispositions
of securities and loans.
- Capital investment activities.
- Investments in non-
consolidated entities,
including partnerships, joint
ventures and special-purpose
entities.

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Inherent risk assessment

Description Risk
12. Financing and financing 12. The entity obtained a loan from Chris Jenkins (CEO) to finance the
activities. Consider: investments in the 2 associates, discussed under point 3 above.
- Major subsidiaries and
associated entities, including
consolidated and non-
consolidated structures.
- Debt structure and related
terms, including off-balance-
sheet financing arrangements
and leasing arrangements.
- Beneficial owners (local,
foreign, business reputation
and experience) and related
parties.
- Use of derivative financial
instruments.

13. Financial reporting (including 13. There are no specific accounting principles or industry specific practices.
adequate disclosure of such Revenue is recognised when the significant risks and rewards of ownership
issues in the financial have passed. Foreign transactions and liabilites are accounted for interms of
statements). IFRS.
Consider:
- Accounting principles and
industry-specific practices,
including industry-specific
significant categories.
- Revenue recognition
practices.
- Accounting for fair values.
- Foreign currency assets,
liabilities and transactions.
- Accounting for unusual or
complex transactions
including those in
controversial or emerging
areas.
- ISA240.32 requires that the
auditor review accounting
estimates for biases and
evaluate whether the
circumstances producing the
bias represent a risk of
material misstatement due to
fraud. If such an instance is
identified, record a significant
risk. Click on risk button to
record a risk.
- Required disclosures due to
laws and regulations.

14. Information obtained from our 14. None noted.

engagement evaluation
procedures and from other
engagements performed for the
client that may be relevant in
assessing risks of material
misstatement. (1)
The impact on the audit work. Not applicable.

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Inherent risk assessment

Description Risk
Accounting policies and disclosures
15. Selection and application of 15. Accounting policies have been consistently applied from the prior year.
accounting policies. Consider:
- The methods the client uses
to account for significant and
unusual transactions.
- The effect of significant
accounting policies in
controversial or emerging
areas for which there is a lack
of authoritative guidance or
consensus.
- Changes in accounting
policies, including significant
new or revised disclosures.
- Financial reporting standards
and laws and regulations that
are new to the client and
when and how the client will
adopt such requirements.

Objectives and strategies

16. Objectives, strategies and
related business risks that may
result in a risk of material
misstatement of the financial
statements. Consider:
- Industry developments.
- New products and services.
- Expansion of the business.
- New accounting
requirements.
- Regulatory requirements.
- Current and prospective
financing requirements.
16. Business planning
Through discussion it was confirmed that:
- The entity has a documented business plan that sets out objectives and 11.20
strategy,
- The entity identifies and assesses related risks.
These risks are discussed and assessed in management meetings, as
confirmed in the control risk assessment done in 11.30.
The entity does not have formal business plans in place and the following was
identified as the entity's objectives / strategies:
- 20X5 Look at purchasing a transport company to save on delivery costs
- 20X5/20X6 Foreign investment to hedge against currency risk.
Based on the information obtained, we identified a source risk relating to cash
flow constraints / going concern.

- Use of IT. Significant contracts

No significant contracts were entered into during the year.
- The effects of implementing a
strategy, particularly any
Entity's position in the business life cycle
effects that will lead to new
accounting requirements.
The entity is in the Mature stage of the business life cycle, which means that
they have:
- a need for new capital or ideas
- a declining need for services provided
- a more bureaucratic than entrepreneurial style
- lack on innovation or new ideas.

Apart from the risk identified in terms of business planning (point 16 above),
no additional risks have been identified in terms of the company's objectives,
strategies and related business risks.
Identified risks
Source Risk Implication Significant
risk
11.20 Cash flow constraints / Going concern The business does not have a large amount of
cash, so these initiatives would have to be
financed and may take the focus away from the
business' core operations.

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Inherent risk assessment

Source(s) from which information was obtained during gaining an understanding of the entity (2)
The information in this section was discussed with Chris Jenkins, the CEO of Candy Limited. Also inspected the 10.31
financial statements and working papers of the prior year.

Conclusion
Risk of material misstatement resulting from industry, regulatory and other external factors: Low
Risk of material misstatement resulting from the nature of the entity: Low
Risk of material misstatement resulting from the client's selection and application of accounting policies and related business Low
risks:
Risk of material misstatement from the clients response to business risks: Low
Do any of the risks identified, during the risk assessment process, represent risks that you would have expected management No
to identify, but they failed to do so?
Overall inherent risk assessment: Low

Instructions
(1) ISA315.9: If we plan to use information obtained from previous experience we must determine if there were any changes.
(2) ISA315.32(b): Requires you to document the sources of information from which the understanding was obtained.
(3) ISA 315.26(a) Examples of disclosures that will have qualitative aspects and that may be relevant when assessing the risks of material
misstatement include:
(a) Liquidity and debt covenants of an enity in financial distress.
(b) Events or circumstances that have led to the recognition of impairment loss.
(c) Key sources of estimation uncertainty.
(d) The nature and change in accounting policy.
(e) Share-based payment arrangements.
(f) Related parties, and related party transactions, and
(g) Sensitivity analysis.

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