- 30 Marks
Question
Nigeria Water Resources Limited (NWR) is a limited liability company floated by the
Federal Government to control water related activities and resources. Its operations
cover surface and under water activities. The company is about three years old. As is the practice with entities having government interest, NWR wanted to change the company‟s auditors. It therefore, invited tenders for the audit assignment through a national newspaper. In order to score an advantage over other bidders, the firm of John Ibrahim and Co. (Chartered Accountants) decided to quote a seemingly unrealistic fee level in order to get the job. The Managing Director (MD) of the company did not see anything wrong with the low professional fee level since it will save costs for the company, especially that despite the clean audit report of the previous years, fraud and financial misdemeanour went undetected. The MD believed the annual statutory audit is just to “fulfil all righteousness”. John Ibrahim and Co. has been rated high since this firm
has as its client, another company in the same line of trade.
If the firm, John Ibrahim & Co., wins the bid to audit Nigeria Water Resources Limited (NWR):
a. Explain the ethical matters the firm should consider before client acceptance, at the point of engagement acceptance, and after accepting the appointment. (12 Marks)
b. Assess the remarks of the MD of NWR from the point of the expectation of the public as regards audit assignments. (8 Marks)
c. Explain the procedures the audit firm should undertake to avoid conflict of interests that could affect the judgment of the firm since John Ibrahim & Co. audits another client that is in direct competition with NWR. (6 Marks)
d. Explain the guidelines of the Institute’s Code with respect to advertisement by members. (4 Marks)
Answer
a. Ethical Matters the Firm Should Consider:
i. Before Client Acceptance:
- Evaluate if any threats to compliance with fundamental principles exist and assess their significance. Decline the client if threats cannot be mitigated to an acceptable level.
- Assess potential integrity or professional behavior threats related to the client’s owners, management, and activities.
- Communicate with the current auditors (if any) to check if there are matters of concern.
ii. At the Point of Engagement Acceptance:
- Assure competence for services offered.
- Ensure that any threats are reduced or mitigated to an acceptable level. Decline the engagement if threats cannot be managed.
- Evaluate reliance on any experts, ensuring it is warranted based on the expert’s qualifications and adherence to professional standards.
iii. After Accepting the Appointment:
- Confirm resignation of the current auditors.
- Validate the appointment’s legality and document it properly.
- Issue an engagement letter to the client’s board.
b. Remarks of the MD and Public Expectation:
The MD’s remarks highlight an expectation gap in audit services, implying a misunderstanding of the auditor’s role. The MD expects auditors to detect fraud, which is primarily a responsibility of management and governance. While auditors aim to identify risks of material misstatements due to fraud, the primary audit objective is not fraud detection but rather ensuring accurate financial reporting.
c. Procedures to Avoid Conflict of Interest:
- Carefully assess the feasibility of accepting both clients.
- Use separate teams and engagement partners for each client.
- Disclose conflicts to both clients.
- Establish information barriers (“Chinese Walls”) and enforce confidentiality agreements.
- Regularly review safeguards to ensure effectiveness.
- Advise either client to seek additional independent guidance if needed.
d. Guidelines on Advertisement According to the Institute’s Code:
- Advertisements must not discredit other services.
- Must not be misleading and should comply with local regulations.
- Avoid any form of disparaging references or unsubstantiated comparisons.
- Claims must be truthful, without exaggerations.
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