CAUA040/CAUDE080

TUTORIAL QUESTION – MODULE 1

Background information
GEAR Auditors Incorporated (hereafter referred to as “GEAR Auditors”) is a medium-
size audit firm that provides assurance services to its clients situated across all South
African provinces. Abigail Monash is an engagement partner at GEAR Auditors. She is
a Registered Auditor who mostly performs audits of clients in the retail sector.

On 1 October 2022, Abigail successfully secured the external audit of Karoo Energy
Limited (hereafter referred to as “Karoo Energy”), a company listed on the
Johannesburg Stock Exchange (JSE). Karoo Energy supplies “green energy” to the
South African market through its solar plants and is a category A vat vendor. Abigail
was introduced to Sebata, the Chief Executive Officer (CEO) of Karoo Energy by her
father-in-law, who is also the chairperson of the audit committee and thus an
independent non-executive director of Karoo Energy.

On 31 October 2022, Sebata terminated the services of ACC Incorporated (hereafter

referred to as “ACC”), the previous auditor of Karoo Energy with immediate effect. He
terminated ACC’s services because ACC indicated during their interim visit that they
intend to follow a substantive based audit approach because they cannot rely on the
internal controls of the company. ACC indicated that this would result in a significant
increase of audit fees which was unacceptable to Sebata as the company is
experiencing a severe cash flow shortage.

In response to this, Abigail promised that her audit team will evaluate the controls to
ensure a combined audit approach will be followed. Abigail further assured Sebata that
the audit fee will not exceed that of the prior year that was charged by ACC. Sebata
specifically indicated that Abigail is not allowed to contact ACC, as he will provide the
audit team with the 2021 signed-off financial statements. Sebata further told Abigail that
ACC in any case did not understand a complex industry like “green energy” which are
subjected to numerous environmental laws and regulations.

The year-end of Karoo Energy is the 30 th of November 2022, a time that is relatively
quiet for GEAR Auditors. Sufficient audit staff will be available to perform the audit of
Karoo Energy.
Karoo Energy received some negative publicity in the media during June 2022. The
company was implicated in the third report of the Zondo Commission of Enquiry into
State Capture. It is alleged that Karoo Energy bribed several Excom officials to obtain
lucrative contracts. These allegations were vigorously denied by Karoo Energy’s
management.

REQUIRED:
With reference to the information under “Background information”:

Discuss any concerns you might have about how Karoo Energy Limited was
accepted as an audit client. 18

Communication: clarity of expression

1