Unit: Advanced Auditing & Assurance
10 Questions
In a separate matter, one of your audit clients, Tangaza Holdings Ltd., a family-owned telecommunications company has offered your audit team all-expenses-paid trips to Dubai as a gesture of appreciation for their work during the audit. However, you are aware that Tangaza Holdings Ltd.’s recent press reports have raised concerns about possible regulatory violations in the company’s mobile money operations.
Required:
(i) Evaluate THREE ethical implications of the firm's advertising campaign, with reference to the International Ethics Standards Board for Accountants (IESBA) Code of Ethics and Institute of Public Accountants of Kenya (ICPAK) guidelines on advertising and publicity.
(ii) Summarise THREE ethical threats arising from the client’s gift offer.
(iii) Recommend THREE appropriate safeguards as a response to the threats identified in (a) (ii) above.
| 1 | Termination of a major client contract Two weeks after the reporting date, Mawega Ltd.’s largest client (which represents 40% of the company’s annual revenue) terminated its contract. The client cited significant data protection concerns as the primary reason for the termination. This client had been a critical source of revenue and the loss could have a material impact on the company’s financial performance going forward. Management's position The company has expressed confidence that the company will recover from this setback by securing new clients. However, the company has not yet signed any replacement contracts or secured any new business in the short term. |
| 2 | Short-term loan for payroll obligations After the reporting date, the company obtained a short-term loan of Sh.50 million from a local financial institution. The loan was intended to meet payroll obligations for the next two months due to cash flow difficulties. This loan is a temporary measure and the company has expressed that it demonstrates financial resilience, reinforcing their belief that the company is a going concern. Management’s position Management is confident that the loan reflects a temporary challenge and that the company will be able to stabilize its financial position shortly. However, the company has not presented a detailed plan on how they intend to address the underlying cash flow issues or repay the loan. |
| 3 | Related party transaction During the audit, a related party transaction was noted where the Chief Executive Officer’s (CEO) private company leased equipment to Mawega Ltd. at above-market rates. The nature of the related party relationship was not disclosed in the financial statements and the lease payments appear to be significantly higher than industry standards for similar equipment. Management’s position Management has not provided an explanation for the discrepancy in lease terms and has not made any disclosures regarding the related party relationship in the financial statements, asserting that the lease arrangement was made based on mutual agreement with no intention of evading compliance. |
| Required: | |
| (i) | For each of the matters above, evaluate the implications of the post-reporting date events for the auditor’s assessment of the going concern assumption. |
| (ii) | Determine whether these events require adjustment or disclosure under International Accounting Standards (IAS) 10, “Events After the Reporting Period”. |
(i) Audit quality.
(ii) Fraud risks.
(iii) Remote auditing.
(iv) Role of technology.
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