Mabaso Ltd, a JSE-listed manufacturing company, has recently expanded operations into renewable energy. The company’s board has requested an external audit for the financial year ended 30 June 2024. During the audit planning phase, the auditors identified the following issues: 1. 2. 3. 4. 5. The company’s internal audit function is under-resourced and reports directly to the CFO, raising concerns about independence. Sales revenue grew by 60% in the last year, but there are inconsistencies between reported revenue and actual cash receipts. The company recently implemented a new ERP system, but staff training was inadequate, leading to frequent errors. The CEO has a dominant personality and often overrides controls in procurement and contract approvals. A whistle-blower reported that suppliers related to board members are being awarded tenders without competitive bidding. As part of governance, Mabaso Ltd applies the King IV Report principles, but some board members have expressed concerns about the effectiveness of its governance structures. Required Question 1 Discuss the audit objectives of an external audit in the context of Mabaso Ltd, highlighting how these objectives apply to the above scenario. Question 2 Identify and analyse the audit risks present in the scenario. For each risk, explain its implication for the audit approach.

Question 1: Discuss the audit objectives of an external audit in the context of Mabaso Ltd, highlighting how these objectives apply to the above scenario.

The audit objectives for Mabaso Ltd include ensuring the accuracy of financial statements, assessing compliance with laws and regulations, evaluating the effectiveness of internal controls, and providing assurance on the reliability of reported information; in this scenario, issues such as under-resourced internal audit, revenue inconsistencies, inadequate ERP training, procurement overrides, and governance concerns directly impact these objectives by increasing the risk of material misstatements and non-compliance.

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Question 2: Identify and analyse the audit risks present in the scenario. For each risk, explain its implication for the audit approach.

The audit risks include: 1) Independence of Internal Audit: This raises concerns about objectivity, necessitating increased scrutiny of internal controls. 2) Revenue Recognition Issues: Inconsistencies between reported revenue and cash receipts may indicate fraud or errors, requiring detailed testing of revenue transactions. 3) ERP System Errors: Inadequate training can lead to data inaccuracies, prompting a need for substantive testing of transactions processed through the ERP system. 4) Override of Controls: The CEO's dominance in procurement may lead to unauthorized transactions, necessitating a focus on procurement processes and approvals. 5) Tendering Concerns: Whistle-blower reports of non-competitive bidding require investigation into procurement practices, increasing the need for compliance testing and evaluation of related party transactions.