SDA QUESTION – 2023 (20 marks)

You are a manager at Young and Ernest Auditors Inc. (“YE Auditors”) a medium
sized audit firm with offices in Johannesburg, Pretoria, and Cape Town. YE Auditors
is currently considering whether to accept the appointment as external auditor of
Green Limited (“Green”) for the financial year ending 28 February 2024. This is
because of Mr Apples, chief executive officer, asked Jade Brown at a family braai
during the December holidays to have YE Auditors as external auditor of Green.
Jade Brown is a trainee accountant at YE Auditors and the nephew of Mr Apples. Mr
Apples also requested that YE Auditors perform some secretarial and taxation
services for Green Limited.

Green is an entity manufacturing chutney and was formed in the early 1980s. The
company had a turbulent period during the first decade of operation, but profitability
has increased steadily. Currently, the entity is highly profitable. Green owns
approximately 35% of the chutney product market of South Africa and faces only one
noteworthy competitor, Molls Proprietary Limited. Green’s manufacturing plant is in
Johannesburg, and its head office is in Pretoria.

The entity imports all product ingredients from various countries around the world in
order to ensure high quality of its final product. Management has always promoted a
strong internal control environment, and therefore, all import transactions are
hedged. Management also strives to fully comply with the requirements of King IV
and communicates ethical codes to all levels of employees at Green. The deadline
for completion of the financial statements is strictly adhered to in accordance with the
Companies Act.

Most of YE Auditors’ clients’ year-ends are between the end of December and the
end of February each year, and its clients’ type of industries range vastly, from retail
to manufacturing to investments. The previous auditors of Green resigned due to a
staff shortage around the time of Green’s audit but are willing to meet YE Auditors
with Green’s permission, to provide YE Auditors with relevant information and prior
year working papers.

TUTORIAL 1 MARKS
Discuss whether Young and Ernest Auditors Inc. should accept the
audit engagement of Green Limited for its 28 February 2024 financial 19
year.
1 20
Communication marks: structure of discussion
TOTAL 20
TUTORIAL 1 – SOLUTION

The client: management’s integrity (QUESTION 2)

Green Ltd’s management seems to have good integrity: (1)
a) Management promotes a strong internal control environment. (1)
b) Management strives to comply fully with King IVTM. (1)
c) Management communicates ethical codes to all levels of employees. (1)
The client: ability to pay the audit fee (QUESTION 2)
The entity is very profitable (35% market share and not many competitors) (1)
and therefore Green Ltd would most likely be able to pay the audit fee. (1)

The client: sufficient resources, expertise, and knowledge (QUESTION 3)

a) The time available and number of staff members of YE Auditors may be
restricted during the time of Green Ltd’s year-end (1) due to most of YE Auditors
clients having a year-end of between December and February. (1)
b) However, Green Ltd only needs its financial statements by the end of August (six
months after year-end) (1) and therefore YE Auditors should be able to perform
the audit after its ‘busy period’. (1)
c) YE Auditors seems to have sufficient knowledge, skills, and experience for
Green Ltd’s industry (manufacturing entity) as the firm services a wide portfolio,
including manufacturing entities. (1)
d) YE Auditors has offices in the cities where Green Ltd have its head office and its
manufacturing plant which is conducive to an effective audit. (1)
e) Therefore, it seems as though YE Auditors have sufficient resources, expertise,
and knowledge to perform the audit. (1)

The auditor: previous auditor (QUESTION 4)

a) The previous auditor is willing to communicate with YE Auditors. (1)
b) The reason for the previous auditor’s resignation gives no indication of concern:
they resigned due to a staff shortage and not because of a client-imposed
restriction. (1)

The auditor: independence (QUESTION 4)

a) Mr Apples and Jade Brown are nephews, creating a familiarity threat to
independence for YE Auditors. (1)
b) Also, performing secretarial and taxation services to Green Ltd will result in a
self-review threat to independence. (1)
c) YE Auditors may still accept the engagement (1), as long as:
i. Jade Brown is not on the engagement team. (1)
ii. the secretarial and taxation services are either not accepted or performed by
another department within YE Auditors. (Note: ‘secretarial services’ in this
context does not involve acting as company secretary, which will not be
allowed.) (1)
Terms of engagement (TERMS)
Due to management’s integrity and attitude, it is deduced that Green Ltd will be
willing to agree to the terms of the engagement. (1)

Conclusion
YE Auditors can accept the audit engagement of Green Ltd, if the threats to
independence are addressed as suggested in point 5. (1)

Available (23 marks); Maximum (19 marks)

Communication skills: 1 mark (Note: Student can only obtain 1 mark if a

mark was obtained in the question)