You are the audit manager in KK and Associates an audit firm that specialises in the audit of retailers. The firm currently audits
Mida Food Co. (MF) a food retailer. MF’s main competitor, Rupa Foods Ltd. (RFL) has approached KK and Associates audit
firm to act as its auditors. MF is concerned that if KK and Associates audits both companies, then confidential information
could pass to RFL.
Ann Muli has been the audit engagement partner for MF for the last eight years. Her daughter Rachel Njoki has just accepted
a job offer from MF as a manager. Rachel’s employment contract states that if a bonus is to be paid it will be awarded as shares
in MF rather than cash.
MF has also offered KK and Associates a 5% bonus on top of the audit fee if this year’s audit can be completed three weeks
earlier than last year. This is to reduce the demands on the finance director’s time as he is busy working on other projects.
Required:
(a) Describe safeguards that KK and Associates could apply to manage the conflict of interest that might arise if
the firm accepts the appointment by RFL as their external auditors.
(b) Evaluate potential risks to independence in respect of the audit of MF and in each case state the type of threat
arising from the risk.
(c) You are the audit senior in charge of the audit of Deni Ltd. Your audit manager has informed you that during the year,
a fraud occurred in the wages department of Deni Ltd. A payroll clerk set up fictitious employee accounts and the
wages were paid into the clerk's own bank account. This clerk has subsequently left the company, but the audit
manager is concerned that additional fraud could have taken place in the wages department.
Required:
Describe procedures which you could undertake during the audit of the wages department as a result of the
audit manager’s assessment of the increased risk of fraud.
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