Labadi Leisure

You are the senior audit manager for a medium-sized firm of accountants. Your firm has just lost two clients which have gone into receivership and has now been invited to tender for the audit of Labadi Leisure. The audit fees have been initially estimated at ¢20,000.

Labadi Leisure is a medium-sized manufacturing organisation which has existed for 35 years and has generally made consistent profits. However, in the last two years, profits have fallen by approximately 10% in each year, although the market sector in which Labadi Leisure operates is expanding. The company has also stated that they would like some consultancy support regarding business strategy in order to try and reverse the current profit downturn and have set aside ¢80,000 for this.

You have ascertained the following from a brief discussion with the managing director:

• There has been no investment in non-current assets in the last 10 years. The company was intending to start a program of investment two years ago, but this was cancelled due to the reduced profits, and maintenance and repair costs have increased significantly over the last year.

• Staff wages have been frozen, and there has been some discussion with unions as staff morale is very low and several staff have already left. So far, industrial action has been avoided.

• The financial director was dismissed three months ago, and hasn’t been replaced. He is currently suing Labadi Leisure for unfair dismissal.

• The managing director is due to retire next year; a replacement has not yet been considered.

• There is an outstanding litigation case as an employee is suing Labadi Leisure due to an accident whilst in the workplace, and the authorities have written a detailed report about the case.

• Your firm’s total fee income last year was ¢700,000, including ¢50,000 from the lost clients.

Required:

(a) Prepare a document for discussion with the partners covering the following: The advantages and disadvantages of tendering for the audit of Labadi Leisure, highlighting any key risks to your firm

(b) Although the initial estimate of the audit fee was ¢20,000, further work needs to be done before a figure could be included in the tender document. List the factors which should be taken into account when calculating this fee.

(c) An outline of the matters which should be included in the tender document if the firm does decide to tender.