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- 10 Marks
Question
You are a Senior manager in Bintu & Associates, a firm of Chartered Accountants which offers a range of assurance services. You are responsible for the audit of Mmatan Ltd, a company which provides approximately 10% of your firm’s practice income each year. The Finance Director of Mmatan Ltd has recently contacted you to provide information about another company, Kita Ltd, which is looking to appoint a provider of assurance services.
An extract from an email received from the Finance Director of Mmatan Ltd to you is stated below:
“One of my friends, Mr. Preprah, is the Managing Director of Kita Ltd, a small company which is seeking to expand in the next few years. I know that Mr. Preprah has approached the company’s bankers for GH¢6 million to finance the expansion. To support this loan application, Mr. Preprah will need to present its audited Financial Statements, hence the need for an Auditor immediately. Mr. Preprah is also in need of a firm to provide tax planning advice and also to prepare both the company’s and his personal tax computations for submission to the tax authorities. In this regard, I have asked Mr. Preprah to contact you, and I hope that Bintu & Associates will be able to provide these services to Kita Ltd for a low fee. If the fee you suggest is too high, and unacceptable to Mr. Preprah, then I will recommend that Mr. Preprah approaches Kwateng & Associates instead. Should the arrangement with Kita Ltd not go through, then Mmatan Ltd would also advise itself.”
Kwateng & Associates is a firm of Chartered Accountants which has an office in the same town as Bintu & Associates. The company is owner-managed, with Mr. Preprah’s family owning 90% of the share capital. Mr. Preprah is a director and majority shareholder of three other companies. An article in a newspaper from several years ago about Mr. Preprah indicated that one of his companies was once fined for a breach of employment law and that he had used money from one of the company’s pension funds to set up a business abroad, appointing his son as the Managing Director of that business.
Required:
Discuss the ethical issues and other matters which should be considered in relation to Bintu & Associates’s potential acceptance of Kita Ltd as its client. (10 marks)
Answer
Ethical and other matters to be considered before accepting Kita Ltd as a client of the firm:
- Competence and Resources:
- Bintu & Associates must assess whether it has the competence to perform the engagement, which involves the audit of historical financial statements and providing tax planning advice.
- The pressure to perform the audit for a low fee may impact the firm’s ability to perform a high-quality audit, potentially affecting the resources allocated to the engagement.
- Ethical Issues:
- Intimidation Threat: Mmatan Ltd is pressuring Bintu & Associates by suggesting that if the firm does not accept the engagement for Kita Ltd at a low fee, Mmatan Ltd may seek another audit firm. This presents an intimidation threat as Mmatan Ltd contributes 10% of the firm’s income.
- Self-interest Threat: Accepting Kita Ltd as a client may also create a self-interest threat as the firm has a financial incentive to maintain a good relationship with Mmatan Ltd.
- Self-review Threat: Providing both audit and tax planning services to Kita Ltd may create a self-review threat, as Bintu & Associates could be involved in preparing the financial figures that are later audited.
- Client Integrity:
- Reputation and Past Conduct: The integrity of Mr. Preprah, the Managing Director of Kita Ltd, should be carefully evaluated. Past incidents, such as a breach of employment law and the misuse of pension funds, raise concerns about the ethical standing of the client.
- Legal and Ethical Compliance: There are concerns regarding Mr. Preprah’s previous business practices, which could indicate potential ethical issues or even illegal activities. These concerns must be thoroughly investigated before deciding to accept Kita Ltd as a client.
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Safeguards:
- If Bintu & Associates decides to accept Kita Ltd as a client, safeguards should be implemented to address the identified ethical threats, such as using separate teams for audit and tax services or having an independent second partner review the work performed.
- If adequate safeguards cannot be implemented to reduce the threats to an acceptable level, Bintu & Associates should consider declining the engagement. (10 marks)
- Tags: Audit and Assurance, Client Acceptance, Ethical considerations, ICAG
- Level: Level 3
- Topic: Professional responsibility and liability, The audit approach
- Series: MAR 2023
- Uploader: Dotse