(a): Advantages, Disadvantages, and Key Risks of Tendering

Advantages:

1. Revenue Generation:
   • The audit fee, though modest, would help compensate for the loss of the two clients.
2. Consultancy Opportunities:
   • The company’s interest in consultancy services worth ₦1m presents additional income.
3. Market Expansion:
   • Lagos Leisure Ltd operates in a growing sector, creating potential for long-term client growth.
4. Enhancing Reputation:
   • Being associated with an established company (35 years in operation) could boost the firm’s credibility.

Disadvantages:

1. High Risk of Default:
   • With falling profits and increased liabilities, there’s a risk Lagos Leisure Ltd may face financial challenges, affecting audit fees or consultancy payments.
2. Increased Litigation Risk:
   • Ongoing legal disputes, including workplace accidents and unfair dismissal claims, could lead to disputes with auditors over liability and reporting.
3. Staff Instability:
   • Low morale and potential industrial action could disrupt audit work and create challenges in obtaining accurate information.
4. Management Uncertainty:
   • The upcoming retirement of the Managing Director and lack of succession planning indicate leadership instability, complicating audit processes.

Key Risks to the Firm:

1. Audit Independence Risk:
   • Performing both audit and consultancy services may create a self-review threat.
2. Litigation Risk:
   • Association with ongoing legal disputes increases the auditor’s exposure to lawsuits.
3. Fee Recovery Risk:
   • The company’s financial instability may delay fee payments.

(b): Factors to Consider When Calculating the Audit Fee

1. Company Size and Complexity:
   • The size of Lagos Leisure Ltd and the manufacturing industry’s operational complexity.
2. Risk Assessment:
   • Increased audit risks due to falling profits, leadership instability, and litigation.
3. Time and Resources:
   • The estimated time required for audit planning, fieldwork, and reporting, considering the lack of a Financial Director.
4. Additional Costs:
   • Potential costs for addressing unique risks (e.g., litigation) and required specialist expertise.
5. Market Rates:
   • Benchmarking against audit fees for similar-sized clients in the same industry.
6. Client’s Financial Stability:
   • Ability of Lagos Leisure Ltd to pay the fees on time.

(c): Matters to Include in the Tender Document

1. Introduction and Background:
   • Overview of the audit firm, its experience, and understanding of Lagos Leisure Ltd’s business and sector.
2. Scope of Services:
   • Details of the audit and any agreed consultancy services.
3. Fee Proposal:
   • Transparent breakdown of the proposed audit fee, highlighting any contingencies.
4. Team Composition:
   • Profiles of the audit team, their qualifications, and relevant experience.
5. Audit Approach:
   • Outline of the methodology and risk-based approach to address identified challenges.
6. Independence and Compliance:
   • Confirmation of adherence to ethical standards and safeguards against threats to independence.
7. Timeline:
   • Proposed schedule for completing the audit and consultancy deliverables.