May 2020 Q1 b.
Mobilefone Ltd (Mobilefone) is a large communication group which operates from several locations around the world. It has recently announced plans to expand its operations where it will offer a range of mobile communication facilities and provide internet services such as access, navigation and internet related software and services.
You are an Audit Manager of Kasim Hamza & Co. and you have been assigned with the planning work for the audit of Mobilefone and this will be the second year in which your firm has provided its audit services.
You have just met with the Finance Director (FD) of Mobilefone prior to agreeing the engagement letter for this year. The FD has informed you that Mobilefone has continued to grow quickly, with financial accounting systems changing rapidly and appropriate control systems being difficult to maintain. Additional services in terms of review and implementation of control systems have been requested. An internal audit department has recently been established within Mobilefone and the controller wants you to ensure that external audit work is limited by using this department.
You have also learnt that Mobilefone is to market a new type of mobile telephone, which is able to intercept messages from the emergency services. The legal status of this telephone is unclear at present and development is not being publicised. The granting of the franchise to market the mobile telephone is dependent on the financial stability of Mobilefone. The FD has indicated that Kasim Hamza & Co. may be asked to provide a report to the mobile telephone franchiser regarding Mobilefone’s cashflow forecast for the year ending 31 March 2019, to support the franchise application.
Required:
As part of risk assessment procedures for the audit of Mobilefone for the year ending 31 March 2019, analyse FIVE (5) specific issues pertinent to this particular audit. (10 marks)
View Solution
Provide the range of services required
Mobilefone Ltd. requires an enhanced range of services this year including review of and implementation of additional control systems. This service provides the following risks:
• Skills necessary
Kasim Hamza & Co must check whether they can provide these services. Kasim Hamza & Co is only a seven partner firm and so the company must ensure it has the necessary staff and skills to undertake this work.
• Self-review threat
There is a self-review threat. If Kasim Hamza & Co are to implement new control systems then they may also be auditing those systems as part of the statutory audit. Kasim Hamza & Co must ensure different staff implement and audit the systems. Preferably different departments in the firm should undertake the work. If insufficient staff are available then Kasim Hamza & Co must refuse the additional systems work.
• Acceptance of non-audit work
There is a possibility that Kasim Hamza & Co will be breaching ethical or statutory guidelines by accepting the work. Kasim Hamza & Co will need to ensure that the firm follows guidance in the Ethical Standards to limit any self-review threat.
• Fee income
Acceptance of additional work will result in additional fee income for Kasim Hamza & Co. IFAC Code of Ethics and Conduct states that the amount of fee income derived from any one client should not exceed 15% for non-listed audit clients. Kasim Hamza & Co will need to ensure that total fee income from Mobilefone Ltd. does not breach these guidelines.
• Client growth
Mobilefone Ltd is growing quickly. The company has poor internal controls providing high risk of financial misstatement. Kasim Hamza & Co will need to ensure sufficient staff of appropriate experience are available and that enough time is allocated to the audit to complete all audit procedures.
• Internal audit
Client expectations regarding the use of internal audit may be difficult to meet. As a new department, it will take time for the internal auditors to understand the systems at Mobilefone Ltd and produce any useful reports. Expectation of reduced fee will have to be managed carefully and checks made to ensure the auditor does not limit work because of fee pressure.
• Association threat
Mobilefone Ltd are producing a new mobile telephone. The legal status of the telephone is currently uncertain; it may be illegal. Kasim Hamza & Co need to determine the likelihood that the telephone is illegal. The audit firm may not wish to be associated with a company producing illegal products.
• Report on cash flow
The mobile telephone application also requires a report on Mobilefone Ltd’s cash flow forecast. This will be a separate engagement, with risk to Kasim Hamza & Co because Mobilefone Ltd may attempt to show an unrealistic cash position in the forecast. Mobilefone Ltd must determine exactly what type of report is required (positive or negative) and ensure they have the time and staff with the necessary skills to provide the service.
• Possible going concern
It is not clear whether failure to obtain the new mobile telephone licence will result in Mobilefone Ltd no longer being a going concern. Kasim Hamza & Co will need to review the cash flow forecasts closely to determine the company’s status in the future.
(Any 5 points well explained @ 2 marks each = 10 marks)