CHINHOYI UNIVERSITY OF TECHNOLOGY
School of business science & management
KAROMBA FLORENCE C1111595C
CHIZA NYASHA E C1111329N
MACHINGURA PATRICK C1111690F
MATICHA PHILLIPAH C1111026J
PADZINZA SALLY L C1111966F
SIMANGO NATSAI I C1110965S
MUDONHI VANESSA T C1111258L
CHIRAIRO PATIENCE C1111900J
DUBE ALICE C1111355R
JIMA PAULINE C1112130J
AUDITING PRINCIPLES & PRACTICE
GROUP PRESENTATION
LEVEL 2; 1
a) Explain the risks you would consider in deciding whether or not the appointment should continue.
Admission to the Stock Exchange
Slimited has been expanding rapidly and is proposing to offer its shares to the general public through the stock exchange. As an audit firm there is a risk of a reduction in the proposed limit on the gross practice income because it is 10% for public limited companies. Inherent risk might be increased if S limited changes to be a listed public limited company because more financial investors will have to rely on the audited financial statements.
Impairment of objectivity
The partner’s offer to have S limited team’s Europe travel expenses put on his credit card may appear to be an attempt of unethical practice by the audit company. Since the offer is to be kept a secret form the employees, it may suggest some personal relationships between the partner, our client S limited and the audit company if the secret is known by the employees, thereby increasing audit risk.
Reimbursement of travel expenses
S Limited’s use of the partner’s credit card secretly may threaten the independence of the auditor. The travel expenses are significant expenses which must be presented in the financial statements, but they cannot be disclosed since they are to be kept a secret from employees. All this results in the impairment of the auditor’s objectivity and independence
Fees income
The threshold of gross practice income for private companies is 15% and for public limited companies is 10%.The proposal of S limited’s admission to the Zimbabwe Stock Exchange will result in the reduction of the gross income to 10%, which might not be able to cover the company’s audit expenses. In addition to the risk of reduction in gross practice income, the 17% expected for the current year may imply undue dependency on S limited, thus impairing objectivity.
Rapid expansion may increase inherent risk
The rapid expansion of S limited attracts the interest or stakeholders. In the future years, if the company continues to expand especially if the European expansion becomes successful, this would increase the audit company’s inherent risk.
b) Briefly describe the safeguards available.
Safeguards are measures taken to prevent or protect something.
The audit should involve an independent qualified employee (manager).
The client should be reviewed annually by a partner who is not involved in the acquisition assignments.
The auditor should clearly acknowledge in an engagement letter,all the client’s responsibility for other services provided inclusive of other necessary requirements of an engagement letter.
To ensure objective audit opinions it is advisable for engagement partners to engage in rotation.
Senior members of the audit team should also rotate to ensure an objective approach to the conduct of the audit.
The partner’s offer of financial assistance should be withdrawn immediately to ensure the feasibility study without compromising audit independence.
Audit tests should be conducted appropriately even in respect of financial information renewed during the course of investigations.
c) Come to a conclusion on whether you that the appointment should continue.
Assuming that appropriate safeguards are available (e.g the client should be renewed annually by an independent partner), the audit appointment could continue. If the recurring fees exceed 10% of gross income, it may be necessary to decline the special investigative work.