1) You are an audit partner in a medium sized audit firm. An old family friend of yours, Elwyn Soames, who is a director of Mobile Limited, has approached you to accept appointment as auditors of the company. At an initial meeting with Elwyn, he explains that the company is expanding rapidly and suggests the appointment would be good for the development of your audit practice. You ascertain the following information during your meeting: Mobile is in the cellphone business and is a new licensee in the market. There have been three licences granted to date and the government telecommunications is also privatising. Whilst establishing its own network coverage, Mobile has been granted access to existing networks of the national telecommunications provider and has negotiated the sharing of cellphone towers with the two other existing cellphone service providers for a period of 3 years. Mobile's management team is attempting to increase market share as the network licence is only one year old, and their employment contracts with Mobile will be renewed only if it can increase profits by at least 25% from the previous year. Mobile is marketing special packages to corporate customers where it offers to supply all staff of any company with Mobile network cellphones and offers to allocate cellphone numbers that are the same as the office phone extension numbers of individual staff. Their prices are highly competitive and packages are much in demand. The Mobile directors are currently trying to head hunt technical IT skills from other cellphone service providers as they lack resources in this area. The cellphones are imported from Asia to satisfy different quality and markets. Mobile has to order and carry high levels of inventory due to the nature of the business. Mobile takes out forward cover to minimize the risk of currency fluctuations from its imports. There are three directors in the company and are the beneficial owners of 40% of the issued share capital. One of the directors also represents the 60% interest of the foreign majority shareholder, a large international telecommunications company with its head office in Dubai, which is providing substantial funding for the establishment of Mobile and its infrastructure. Mobile has 10 outlets countrywide and each of these has a manager. The managers report to the directors monthly. The main concern the directors have is that inventory controls at the outlets is not very strong. Another concern at the branches is that branch staff usually comprises the branch manager and 2 assistants and consequently there is very little segregation of duties possible. The directors have offered to give you and your audit team free cellphones if you are willing to take on the audit. This is to show their appreciation to you for accepting the audit and to facilitate prompt communication with your audit staff on the audit of Mobile and other clients. The audit for the previous financial year was performed by one of the big four firms. Mobile's directors feel the audit fees are too high and were not Page 3 of 3 satisfied with the level of personal attention from the audit staff and consequently have decided to change auditors. Mobile's head office is located in a building in London and has an extremely high rental due to the locality. There is a three-year operating lease in place. As your offices are also located in London, Elwyn has indicated that this will make the job very convenient for your firm.

REQUIRED:

a)Assuming you decide to accept Mobile Limited as an audit client, from the information provided by Elwyn during your meeting: Identify the key external and internal business risks faced by Mobile Limited, The potential risk of significant misstatement (audit risk),