CPC

QUESTION ONE (42 MARKS: 63 MINUTES)

Background

J&D Chartered Accountants Incorporated (J&D) is a medium sized audit firm, which was
established by Mr Harry Smith twelve (12) years ago and is currently still managed by Mr
Smith. Since the firm was established, Mr Smith has been the sole director and shareholder
of the firm.

J&D have been the designated auditor of Pharmatech Ltd (Pharmatech), a company that
manufactures and produces medical supplies for both public and private health care facilities
across South Africa, for the past nine (9) years. The company has a 30 September year end.

Pharmatech has an audit committee; whose composition is in compliance with the

requirements of King IV. The audit committee meets on a quarterly basis and last met on 28
September 2020.

On 29 October 2020, just before signing off their audit report for the 2020 year under review,
J&D was requested by Pharmatech’s management to resign with immediate effect as it had
come to light that the manager in charge of the audit of Pharmatech, Ms Melissa Graham
CA(SA), had discussed some information, regarding Pharmatech, with a friend of hers who
works for Alphacare Ltd, Pharmatech’s biggest competitor. J&D resigned as auditors, effective
1 November 2020.

Management of Pharmatech subsequently approached RJS Incorporated (RJS), to be

appointed without delay, to complete the audit for the 2020 financial year end. RJS is a small
to medium-sized firm of registered auditors, with three directors who are all registered auditors.
RJS currently has 10 trainees employed and have budgeted for their audit division to generate
revenue of R4 million in the coming financial year.

Upon further discussions between RJS and Pharmatech, it was established that J&D had
proposed a total audit fee of R1 million for the 2020 financial year end audit, based on an
expected 900 hours being required to complete the audit. The audit fee would therefore be
significant to RJS.

Pharmatech has indicated that they wish the audit fee to remain the same as the fee that J&D
had proposed. They have further requested that RJS start and complete the audit by no later
than 15 December 2020, so as not to impact on their company’s annual shutdown for the
festive season.

RJS performed pre-engagement procedures and accepted the appointment as auditors,

effective 10 November 2020. As part of the pre-engagement activities conducted by RJS, the
following documents have been placed on file, relating to the 2020 audit of Pharmatech Ltd:

Reference Description
B210 Extract of pre-engagement questionnaire
B220 Extract of letter from the previous auditor
A1 Extract of the engagement letter

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Entity name: Pharmatech Year end: 30 September 2020
Ltd
Prepared by: A Trainee Date: 8 November 2020 B210
Reviewed by: Date:
Audit section: Extract of pre-engagement questionnaire
Questions Yes/No Description
1) Is this RJS’s first audit of Yes This is a new engagement
the entity?

2) Does RJS provide any Yes RJS will receive the accounts up to trial
services other than balance level, which will then be used to
reasonable assurance prepare the financial statements.
services to the client?
RJS will complete the February 2020
tax return from information supplied by
the client.
Conclusion
Is there any reason why we should not accept the engagement? Yes

The previous auditor has brought matters, which we should still consider,
to our attention. Refer to working paper B220.

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Entity name: Pharmatech Year end: 30 September 2020
Ltd
Prepared by: A Trainee Date: 8 November 2020 B220
Reviewed by: Date:
Audit section: Extract of the letter from the previous auditor

Our ref: A Auditor

Date: 6 November 2020

To: RJS Inc.

Dear Sir/Madam

PHARMA AUDIT ENGAGEMENT

We have received your letter, together with the client authorisation to contact us, requesting
us to supply you with any professional reasons why your firm should not accept the
appointment as auditors of Pharmatech Ltd.

We would like to respond as follows:

 During our audit, conducted for the 2020 year under review, it came to our attention
that Pharmatech Ltd had been awarded the tender for the supply of medical
equipment linked to the fight against COVID-19. The sales revenue, and therefore
output VAT thereon, was not noted as having been recorded in the VAT 201 returns
that Pharmatech Ltd submitted to SARS. This matter has subsequently been
reported to the Independent Regulatory Board for Auditors (IRBA), and no further
action has yet been taken by J&D.
 We have drawn up a draft audit report relating to our audit of the 2020 financial
statements, which includes a qualification paragraph with regard to the above
matter, which had been provided to management on 25 October 2020.

Except for the matters stated above, we are unaware of any reason why your firm should
not accept the appointment.

Yours faithfully

Mr H. Smith
Director

J&D Chartered Accountants Incorporated

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 Document reference A1: Extract of Engagement Letter

10 November 2020

Dear Sirs

We have been engaged to audit and report on Pharmatech Ltd's annual financial statements
that will be presented to the shareholders. Accordingly, in terms of the Companies Act of
South Africa, we have to conduct our audit free of any restrictions. Although we will be
pleased to advise and assist, the maintenance of proper accounting records and the
preparation of the financial statements are the responsibility of management. Your
responsibilities as management include the fair presentation, in all material aspects, of the
financial position, financial performance, and cash flows of the company, in compliance with
International Financial Reporting Standards and in the manner required by the Companies
Act of South Africa. Our responsibility is to express an opinion on these financial statements.

1. Responsibilities of the directors

You will retain responsibility and accountability for:

a) management, conduct and operation of your business and affairs;

b) any representations made by you or the entity to third parties, including published
information;
c) maintenance of the accounting records that fairly represent the state of affairs and
business of the entity; the establishment and maintenance of an internal control
structure, necessary to provide reasonable assurance, confirming that adopted
policies and prescribed procedures are adhered to for the prevention of errors and
irregularities, including fraud and illegal acts; and
d) the preparation of the annual financial statements that fairly represent the financial
position, results of operations and cash flows of the entity, including adequate
disclosure in accordance with International Financial Reporting Standards and the
Companies Act of South Africa.

Yours faithfully

RJS Incorporated

Note: From discussions held with the directors of Pharmatech Ltd, it was evident that
management would only sign the engagement letter if management’s responsibility relating to
the fair presentation of the financial statements in the first paragraph and paragraph (d), under
point 1 of the proposed engagement letter, were removed.

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 Marks
QUESTION 1 – REQUIRED Sub-
Total
total
(a) Discuss fully any corporate governance, statutory and ethical
concerns related to both J&D, RJS and their employees and their
relationship with Pharmatech Ltd. 40

Include in your discussion considerations relating to King IV, the

Companies Act, the Auditing Professions Act and the SAICA
Code of Professional Conduct.

Communication: Clarity of expression 2 42

Total for Question 1 42

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