PRE-ENGAGEMENT ACTIVITIES CLASS EXERCISE

All amounts exclude VAT unless otherwise stated

Blue Limited (hereafter “Blue") is a technology company incorporated in terms of the

Companies and Other Business Entities Act in Zimbabwe. It sets out to comply with all
regulations passed by the government and its main regulatory body is the Securities and
Exchange Commission (SEC). It was initially formed by Mr. Blue, who is still the majority
shareholder, to establish and operate a central securities depository (CSD) for the Zimbabwe
securities industry and has been doing so since its inception in 2009.

A CSD is a specialised financial organisation holding securities like shares in either certified or
uncertified forms and operates an electronic book entry system to record and maintain
securities and to register their transfer. They allow ownership of securities to be easily
transferred in the book-entry form as opposed to physically just like how money is kept in the
form of electronic credits in any bank account. In a CSD system, ownership will be changed as
soon as securities move from one investor account to another. The system is purely a
settlement vehicle for transactions that have been traded on a registered securities exchange.
Blue then charges a fee for holding the securities and for each transfer done. The Blue CSD is
currently used on both the Zimbabwe Stock Exchange (ZSE) and Victoria Falls Stock Exchange
(VFEX).

Though the current Zimbabwe economic climate has become turbulent with an incessant rise
in inflation, people have resorted to alternate investment platforms which have seen the
growing demand for Blue’s products. With the lucrative nature of the securities industry, more
companies have been formed that offer similar services. Though the companies are small, and
Blue has an established market share, the threat of competition is believed to be high as their
projected growth in 2022 has been stalled. From preliminary assessments that have been
made Blue’s projected growth in 2022 has stalled because of the growth in competition.

To combat the threat, Blue is in the process of obtaining a loan to boost its cash reserves and
make capital investments to improve the speed and efficiency of its product sales across the
country. Blue would want to adopt their current Vision application this a trading platform
which will be able to allow users and CSD holders to be able to trade on the application
instantly. They would also want to accommodate the new derivatives and forwards

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introduced on the ZSE. Management of Blue is eager to get the ball rolling with the project
and has appointed a small audit firm called Batista Chartered Accountants (BCA) to perform
their audit so they can complete their loan application.

BCA is headed by the sole and lead partner Mr. Batista, Chartered Accountant Zimbabwe
(CA(Z)). It was formed 3 years ago, and Mr. Batista has been using his industry experience to
gain access to clients he once worked with before. He had once been the senior accountant at
one of the companies owned by Mr. Blue, Top Freezers which is outside the Blue group of
companies. You are a supervisor at BCA and have worked at the firm since its inception after
successfully passing your Certificate in the Theory of Accounting. The following information
has been documented for you to begin your audit for the 30 June 2022 year-end.

1. Understanding the business and Operating Environment of Blue

To access the loan, Blue is required to produce audited financial statements. Blue had last been
audited in 2020. The last auditors of Blue were Rendall Keagan Owen Chartered Accountants
(RKO) and they had audited Blue from its inception. RKO had been told to stop the audit in the
mid-2020 year of assessment as new management in the form of theappointed Chief Executive
Officer (CEO), Ms Nyarai Blue (daughter of the majority shareholderof Blue) had said there was
no benefit from an audit. Ms Nyarai had just finished her master’sdegree in Communication
Studies when she was appointed to the helm of the company. Newspaper reports have
revealed some shareholders disputed the move but were outmuscledby Mr. Blue’s influence.
Blue has thus requested BCA auditors to be their auditors and to auditjust the 2022 year of
assessment results. Blue management has stressed the importance of completing the audit in
3 weeks as they would want to get their loan as soon as possible and meet deadlines for
payments for the goods they had paid a deposit for.

BCA made a 6-member team comprising of two 1st year trainees, a 2nd-year supervisor,
yourself, 1 manager, Ms Lola CA(Z) and the partner of BCA, Mr. Batista CA(Z). For the 2
trainees, this will be their first audit as they recently joined the firm after completing their
undergraduate studies at a local university. Mr. Batista was excited about the coming in of
Blue to his portfolio as he was also an investor on the ZSE and VFEX. The inside information he
would likely get from being able to see the inner workings of the company would get him

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access to privileged information he could use on his trades. Mr. Batista had instructed Ms Lola
to sign the engagement letter and complete the rest of the client acceptance process as he
was occupied with the finalisation of their previous client. Ms Lola expressed her reservations
about starting the audit when everything was not in order, but Mr. Batista explicitly stated
that there was a reason he was a partner and her still a manager.

The current recruitment strategy for Blue is to tie employees into long-term contracts when
they are still students. Students will sign binding contracts which stipulate that they will have
to work for Blue 5 years post graduating. This is mostly done for coders and finance graduates
that work within Blue. The employees also have a restraint of trade which limits their
movement to work for other companies immediately after completing their 5-year terms. They
are paid below market average salaries and work excessive hours so that Blue can boost its
bottom line and shareholder value with ease.

In an emergency board meeting held in July 2022 it was discovered that the security patch
from the firewall for the Blue database had been compromised. The board had last met to
discuss information technology (IT) related issues in 2020. The Blue database stores all client
information. The IT department proposed two solutions to the board:

1. One which was capital intensive and would lead to an instant fix of the breach, or

2. A series of patches that would be done over the coming year and would gradually
close the breach.
The patches solution would be safe if there was no advanced hacker to the system.

Additionally, as part of the IT policy, all physical computer hardware of the company is
collected and destroyed and burnt at a landfill to confirm all data is adequately erased and no
one can reuse it.

2. Proposed Auditors Compensation

The audit of Blue would be ZWL2.5 billion. For the year-to-date BCA had already made ZWL11
billion from other engagements and was not looking to work on any other clients for the rest
of the year due to resource constraints. On top of the ZWL2.5 billion payable to BCA, they

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would also get 0.5% of the loan amount as a bonus provided the audited financials grant Blue
the loan.

The contract with Blue also granted BCA, the job/assignment to perform the IFRS 16 and IFRS
9 updates for Blue. This would be done by a separate two-man team within BCA. The partners
and the audit team would also be granted an all-expense paid trip to Kingdom Hotel in Victoria
Falls at the end of the audit which is the same week of the annual general meeting at Blue so
that the partner would have an excuse for not attending the annual general meeting.

In a bid to build the expertise of their employees, BCA also struck an irrevocable deal that
would grant the firm audit status until the end of the 8 years and that Blue would second some
of their staff to BCA so they will become more well-versed with preparing for an audit. Batista
was very happy with the secondment option as it would help increase the resources, he has
access to.

3. Directors Loans
Ms Becky the Vision business unit managing director was granted a loan by Blue to go to the
Bahamas for an all-expense paid trip with her family. She had cited that she needed to refresh
so she could work at her best ability. The loan was granted at a meeting held on the 1st of July
2021 during a golf tournament where the Blue finance director Mr. Dolph CA(Z) and blue
operations director Mr. Lashley were present. It was granted in July 2021 and is still payable
at year-end.

At the same tournament, Mr. Lashley discussed his intentions to purchase additional shares
within Blue, but he lacked the funding. Mr. Dolph made the loan to Mr. Lashley using Blue
funds in March 2022. The loan is still unpaid, and no paperwork has been drawn up.

4. The Vision Business Unit

To utilise synergies within different industries and to grow the company Blue has also
purchased several subsidiaries. Blue also established an app development Strategic Business
Unit (SBU) that creates a mobile app. The flagship application is called Vision which facilitates

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cryptocurrency1 trades for Zimbabweans and allows them access to the diverse and growing
cryptocurrency market. Zimbabweans deposit their money into their account and the Vision
would link the buyer to a seller of cryptocurrency with ease. The Vision app also allows money
transfer within Zimbabwe where users can collect transferred money with any registered
supermarket in Zimbabwe as they have a standing agreement and have invested in collection
booths across the country.

On 18 June 2022, the Reserve Bank of Zimbabwe released an overnight announcement stating
that they had with immediate effect banned the use of cryptocurrency in the country as they
posed major risks to the Zimbabwean populace and the global prices of the currency were on
an unstoppable downfall reducing Zimbabweans investments to nothing. It was unregulated
and unsafe. The following information was availed concerning the Vision business unit.

The Vision business unit consists of the following assets and liabilities which represent the
smallest group of assets that generate cash flows independently from other assets. The Vision
has 3 assets and 1 liability listed below as of 18 June 2022:

Vision Application

The Vision application was internally generated and had cost Blue ZWL800 million in the
research of the project and ZWL1.2 billion to develop. This was done and completed on 30
June 2020 and the asset was estimated to have a useful life of 10 years. Technology is
disruptive and this estimate of 10 years was revised to 8 years on 30 June 2021.

Goodwill

Goodwill arose from a business combination where Blue acquired 100% of Stone-Cold
Developers for ZWL10 billion which resulted in goodwill of ZWL250 million. Management has
determined that the Vision is attributable to 58% of the said goodwill.

1
Cryptocurrency is a digital currency designed to work as a medium of exchange through a computer network
that is not reliant on any central authority, such as a government or bank, to uphold or maintain it

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Servers

The Servers were bought on 10 January 2018 for ZWL460 million from Wanda Technology. The
special nature of the servers’ batteries requires them to be recycled to avoid damage to the
environment as stated in the Zimbabwe National Policy for Information and Communications
Technology. The recycling will cost Blue ZWL47 million in 2030.

Trade Payables

These constitute chip suppliers and other small goods suppliers worth ZWL220 million.

Below are the different computations for the recoverable amount of the Vision CGU that have
been done. The recoverable amounts do not include the effects of any liabilities that have
been recognised.

Pre-tax discount rate Risk-adjusted Cash flows Risk-adjusted Cash flows

including future excluding future
enhancements to Vision enhancements to Vision
11% - factoring risk ZWL 1.6 billion ZWL1.79 billion
adjustment
9% - excluding risk ZWL1.8 billion ZWL1.95 billion
adjustment

5. Email extract from junior auditor just before the year-end

After the company’s year-end but before the financial statements were authorised for
issue Mr. Dolph CA(Z) was presented with the urgent findings from the Blue Monitoring
Committee. It was uncovered through an anonymous tip that the Committee found
that Mr. Lashley had been making payments to Mr. Taker a compliance officer of the
SEC. The payments were being made to a company named Shellax which was found to
be wholly owned by Mr. Taker. Blue had been making payments to Shellax Limited for
several years and the payment requisitions made weredescribed as computer chips that
are now outdated in Blue’s operations. The paymentsappear to be for Blue’s license
renewal as this was one of the key

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responsibilities of Mr. Lashley’s office. Mr. Lashley had in prior years been awarded
bonuses for how he always ensured Blue’s operations always received their license well
in time. The Committee verified the information in the tip-off and has brought theissue
to your office for assistance.

Additional information

• All companies account for Property Plant and Equipment and Intangible Assets using
the cost model of IAS 16 and IAS 38 respectively.
• Income tax is levied as per the Income tax Act at 24.72%. Capital Gains tax is levied as
per the CGT Act and the Finance Act. Value added tax is levied as per the VAT Act.
• Assume a pre-tax discount rate of 10% if it is not specifically stated.

Marks
REQUIRED Sub-
Total
total
A. Describe the factors that need to be considered by BCA before
accepting Blue as an audit client. 14

• Exclude information from the audit compensation section.

Communication Skills – Clarity of expression 1 15

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