The risks to be considered in relation to accepting this particular client is as follows:

• The client appears more focused on our role as business advisors than auditors. The managing director refers to us as “auditor cum advisor”. The risk here is that the client does not appreciate the nature of assurance services and sees them as a mere extension of our advisory roles. This could lead to confusion and even conflict later.

• The client’s financial position appears precarious. Although I do not yet have access to very detailed financial information about the client, there is a suggestion of a loan being, in the client’s own words, “technically in default”. Clients whose financial position is unsound present a much greater risk for several reasons. One reason is that their management teams tend to be under pressure rendering them more susceptible to unethical conduct or even outright fraud. Another reason is that accounting practices are more often pursued through the courts when clients have failed financially.

• A third point concerning this appointment is that the fees appear to have been fixed by the client in advance. A fee of GH¢16,000 has been agreed as the audit fee. It seems imprudent to have fixed such a fee in advance of really understanding the client or fully appreciating what is involved with the audit. This is an ethical risk because personnel performing the audit may feed under psychological pressure to reduce the time spent on the audit commensurate with the fee.

• Also, a fee has been agreed in relation to our advice and support in relation to the client’s application for some sort of “roll-over” of the bank financing. This would appear to create an advocacy threat to our independence. There is also an offer on a rolling fee of GH¢3,400 per month for general business, strategic and financial advice. It is commendable that this income will be received monthly by the practice but we need to be assured that we have the resources to invest in this on a continuous basis. It also gives rise to a familiarity threat so we will need to ensure the existence of robust information and communication barriers (so-called “Chinese Walls”) between the audit team and others working for the client.

• It would appear that there were difficulties with audits in two of the three previous years. It appears that the audit reports for the years ended 30 June 2016 and 2017 were both subject to qualification. Although the 2017 report was not so qualified, the fact that there were difficulties in two of the three previous years is still a cause of concern. At this point, there appears to be insufficient detail of what lead to the qualifications but there must be a risk that these issues are still relevant notwithstanding the unmodified report in year to 30 June 2018.                                                             (5 points well explained @ 2 marks each = 10 marks)

Matters that should be considered in making acceptance decision
Objectivity
The proposed assurance engagement represents a non-audit service. IFAC’s Code of Ethics for Professional Accountants adopted by Institute of Chartered Accountants– Ghana does not prohibit the provision of additional assurance services to an audit client, however, the audit firm must carefully consider whether the provision of the additional service creates a threat to objectivity and independence of the firm or members of the audit team. For example, when the total fees generated by a client represent a large proportion of a firm’s total fees, the perceived dependence on the client for fee income creates a self-interest threat. Due to the nature of the proposed engagement, self-review and advocacy threats may also be created, as the Sustainability Report is published with the audited financial statements, and the audit firm could be perceived to be promoting the interests of its client by providing an assurance report on the key performance indicators (KPI)s.

Sustainability Ghana should only accept the invitation to provide the assurance engagement after careful consideration of objectivity, and a review as to whether safeguards can reduce any threat to objectivity to an acceptable level. As EnvironmentalCare Ghana is a ‘major client’, the fee level from providing both the audit and the assurance services could breach the permitted level of recurring fees allowed from one client. The fact that the company is listed means that the assessment of objectivity is particularly important, and a second partner review of the objectivity of the situation may be considered necessary.

The fact that a separate team, with no involvement with the audit, will be working on the KPIs strengthens the objectivity of the assignment.
EnvironmentalCare Ghana’s requirements
Assurance engagements can vary in terms of the level of work that is expected, and the level of assurance that is required. This will clearly impact on the scale of the assignment. For example, EnvironmentalCare Ghana may require specific procedures to be performed on certain KPIs to provide a high level of assurance, whereas a lower level of assurance may be acceptable for other KPIs. Sustainability Ghana should also clarify the expected form and content and expected wording of the assurance report itself, and whether any specific third party will be using the Sustainability Report for a particular purpose, as this may create risk exposure for the firm.
Competence
The audit firm’s sustainability reporting assurance team has only been recently established, and the firm may not have sufficient experienced staff to perform the assurance engagement. The fundamental principle of professional competence and due care requires that members of an engagement team should possess sufficient skill and knowledge to be able to perform the assignment, and be able to apply their skill and knowledge appropriately in the circumstances of the engagement.
Some of EnvironmentalCare Ghana’s KPIs appear quite specialised – verification of CO2 emissions for example, may require specialist knowledge and expertise. Sustainability Ghana could bring in experts to perform this work, if necessary, but this would have cost implications and would reduce the recoverability of the assignment.
Scale of the engagement
The Sustainability Report contains 75 KPIs, and presumably a lot of written content in addition. All of these KPIs will need to be verified, and the written content of the report reviewed for accuracy and consistency, meaning that this is a relatively large engagement. Sustainability Ghana should consider whether the newly established sustainability reporting assurance team has enough resources to perform the engagement within the required time scale, bearing in mind the time pressure which is further discussed below.
Time pressure
Given that the financial statements are scheduled to be published in four weeks, it is doubtful whether the assurance assignment could be completed, and a report issued, in time for it to be included in the annual report, particularly given the global nature of the assignment. Sustainability Ghana may wish to clarify with EnvironmentalCare Ghana’s management whether they intend to publish the assurance report within the annual report, as they have done previously, or whether a separate report will be issued at a later point in time, which would allow more time for the assurance engagement to be conducted.
Fee level and profitability
Such a potentially large scale assignment should attract a large fee. Costs will have to be carefully managed to ensure the profitability of the engagement, especially considering that overseas travel will be involved, as presumably much of the field work will be performed at EnvironmentalCare Ghana’s Sustainability Department in Fartown. The fee level would need to be negotiated bearing in mind the specialist nature of the work, and the urgency of the assignment, both of which mean that a high fee could be commanded.
Global engagement
The firm’s sustainability reporting team is situated in a different country to EnvironmentalCare Ghana’s Sustainability Department. Although this does not on its own mean that the assignment should not be taken on, it makes the assignment logistically difficult. Members of the assurance department must be willing to travel overseas to conduct at least some of their work, as it would be difficult to perform the engagement without visiting the department responsible for providing the KPIs. Other locations may also need to be visited. There are also cost implications of the travel, which will need to be built into the proposed fee for the engagement. Language may also present a barrier to accepting the engagement, depending on the language used in Fartown’s location.
Risk
EnvironmentalCare Ghana is a large company with a global presence. It is listed on several stock exchanges, and so it appears to have a high public profile. In addition, pressure groups are keen to see the added credibility of an assurance report issued in relation to the KPIs disclosed. For all of these reasons, there will be scrutiny of the Sustainability Report and the assurance report. Sustainability Ghana should bear in mind that this creates a risk exposure for the firm. If the assignment were taken, the firm would have to carefully manage this risk exposure through thorough planning of the engagement and applying strong quality control measures. The firm would also need to ensure that the fee is commensurate with the level of risk exposure. Given the inconsistency that has come to light regarding one of the draft KPIs, which appears to overstate charitable donations made by the company, we may need to consider that management are trying to show the company’s KPIs in a favourable way, which adds to the risk of the engagement.
Commercial consideration
If Sustainability Ghana does not accept the assurance engagement, the firm risks losing the audit client in future years to another firm that would be willing to provide both services. As EnvironmentalCare Ghana is a prestigious client, this commercial consideration will be important, but should not override any ethical considerations.
(Any 7 points well explained points @ 2 marks each = 14 marks)