i) Ethical dilemmas faced by the Audit Team

Self-interest threat. The audit team is faced with a self-interest threat. This is because the company is its biggest audit client in terms of audit fees. Losing the client may mean significant loss in revenue for the audit firm.

Intimidation threats the intention of management to discontinue any future engagement with the audit firm presents intimidation threat as well. The auditor’s independence may be compromised, as quite naturally, the auditor may not want to lose a high fee-paying client.

Threat to Professional Competence and Due Care  Nature of the dilemma: The CFO is demanding that the auditors conclude the audit without performing the additional procedures required after the materiality revision.  Why it’s a dilemma: The audit team knows that failing to perform the required work would breach ISA 320 (Materiality) and ISA 450 (Evaluation of Misstatements) but complying would delay reporting and risk losing the client.  Ethical principles affected:

Professional competence and due care – Auditors must apply due diligence and comply with auditing standards.

Integrity – They must not issue an opinion without sufficient appropriate audit evidence.

ii) Recommended Safeguards to Address the Ethical Dilemmas

Strengthen Firm-level and Engagement-level Quality Controls  Consult with the Engagement Quality Control Reviewer (EQCR) or ethics partner for independent guidance.

 Involve senior partners to ensure the audit team’s technical and ethical decisions are supported at firm level, reducing the risk of individual auditors bowing to client pressure.

 Ensure all audit work complies with ISQC 1/ISQM 1 (quality management standards).

Communicate Firmly and Transparently with Those Charged with Governance  Communicate the impact of the investee company’s downgrade and explain that auditing standards require a reassessment of materiality and additional procedures.

 Document management’s resistance and communicate it to the Audit Committee or Board of Directors, emphasizing that the auditor’s independence and opinion must comply with the law and professional standards.

Apply Safeguards Against Self-interest Threat  If commercial dependence is significant, consider whether the client relationship creates a self-interest threat too large to manage.  The firm may consider rotation of the engagement partner or, in extreme cases, withdrawal from the engagement if ethical standards cannot be maintained.

Maintain Professional Ethics and Documentation  Remind the audit team of their duty under the Code of Ethics for Professional Accountants (IESBA / ICAG Code) to act with integrity, objectivity, and due care.  Document all communications, judgments, and decisions regarding the re-evaluation of materiality and the need for extra work.

iii) Audit report impact

The inability to perform additional audit procedures creates a scope limitation. Depending on how pervasive the missing evidence is, the audit team may need to issue one of the following: • Qualified Opinion: If the team concludes that the inability to obtain sufficient appropriate evidence is material but not pervasive, they may issue a qualified opinion. Wording example, except for the possible effects of the matter described in the basis of qualified opinion, the financial statements present fairly, in all material respects, the financial position of Drobex Plc on 30 June 2025, and its financial performance and its cash flows for year then ended in accordance with applicable financial reporting framework. • Disclaimer of Opinion. If the audit team concludes that the inability to obtain the additional evidence is material and pervasive, meaning the audit team cannot form an opinion at all, they must issue a disclaimer of opinion. Wording example, we do not express an opinion on the accompanying financial statements of Drobex Plc because of the significance of the matter described in the Basis for Disclaimer of Opinion section of our report.

b) Key components of an internal audit report

Title Page • Name of the organization • Name of the report (e.g., Internal Audit Report on Procurement Processes) • Date of the report • Name/position of the addressee

Executive Summary • Brief overview of the audit’s purpose, scope, and key findings • High-level recommendations and conclusions Introduction • Background information about the area/process audited • Audit objectives and scope • Period covered by the audit • Audit criteria/standards used

Methodology • Approach and techniques used (e.g., interviews, document reviews, sampling) • Description of the audit procedures performed

Findings • Detailed observations (organized by theme, risk area, or process step) • Evidence supporting each finding • Risk rating or significance (e.g., High/Medium/Low)

Conclusions • Summary assessment of the adequacy and effectiveness of controls • Link to audit objectives

Recommendations • Specific, actionable steps to address each finding • Suggested timelines for implementation • Responsible parties for action

Management Response • Comments from management on the findings and recommendations • Agreed actions and deadlines

Auditor’s Signature and Date • Name, designation, and signature of the internal auditor or head of internal audit • Date of issue

Appendices (if needed) • Detailed data, charts, process flow diagrams or supporting documents • Audit checklist or work programmed summary