Malanje Milling Plc. was recently listed on the Dar es salaam Stock Exchange ( D SE )

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Question:

Malanje Milling Plc. was recently listed on the Dar es salaamStock Exchange (DSE) after acquisition by an international company in the food manufacturing industry. The parentcompany has retained a majority of 70% of the shares with the remaining shares subscribed by institutional shareholders and individual shareholders.

Before the listing, the financial statements of Malanje Milling Plc. was audited by Zena Chartered Accountants, a small one partner firm. The company is in the process of raising additional capital and the parent company is committed to inject US$20million in the company. The company recently obtained a loan of US$10 million from an investment bank secured on plant and equipment. The loan is repayable in dollars at a floating interest rate of 3%. The company wishes to diversify and go into the manufacturing of animal feed. The exchange rate between the local currency and the dollar has risen from an average of TZS2200/1US$ in the past to TZS2000/1 US$ in the last six (6) months.

The following resolutions were made by the board of directors of the parent company on the activities of Malanje Milling Plc:

1. A change in senior management resulting in the contracts of five (5) senior managers not being renewed including that of the Finance Director, Mayu.

2. The contract with the existing auditors was terminated and the audit services were put to tender by inviting audit firms to bid for offering the services.

3. Being a transition year, the board resolved that a review of the financial statements rather than a full audit be conducted in the current year because it is a cheaperalternative for a company experiencing cash flow problems. Further, due to thetermination of the contract for Mayu, the Finance Director, the Board proposed that a senior person from the firm that will be appointed auditor should be seconded to Malanje Milling Plc. for a period of three (3) months to participate in the finalization of the preparation of the current year financial statements.

4. A new board of directors was put in place comprising executive and non-executive members. Clive who is a partner in Clive & Associates Chartered Accountants is one of the non- executive directors of the board.

The following information relates to the operations of Malanje Milling Plc.:

1. Malanje Milling Plc. buys maize, the major input to production, largely from small scale farmers and five (5) commercial farmers with whom the company has contracts to buy their maize failure to which the company will be required to pay the farmers the difference between the selling price to third parties and the agreed contract price.The agreement allows for legal action by the farmers in the event that some of their maize remains unsold. Three (3) years ago the company decided to maintain an inventory level of two (2) years requirements of maize and this policy will continue. In the last three (3) years the company lost 1% of its closing inventory due to the maize going bad. The bad maize has a very low realizable value and as such at each year end a provision is made in the financial statements for maize going to waste.

2. The government passed legislation in the current year requiring that the Bureau of Standards should carry out random inspections of the major players in this industry to ensure that they adhere to the regulations with regards to the use of disinfectants in the preservation of maize so that prohibited substances are not used.

3. Malanje Milling Plc. sells the bulk of its products through agents based in the provincial centers. Each of the agents pays a refundable deposit equivalent to one month’sinventory to Malanje Milling Plc. and is given one (1) month credit for all the purchases. Due to general economic difficulties being faced in the country the receivables days have increased to 45 days resulting in most of the agents getting supplies exceeding the deposit held by Malanje Milling Plc.

In an effort to control and manage the prices of mealie-meal, the Government set up milling companies through co-operatives to be managed by youths and women all around the country. The government guaranteed that it will sell maize to the co-operatives at prices determined by the Food Reserve Agency (FRA) which are much lower than the prices of maize in the open market. In this way it is hoped that the price of meal meal from cooperatives willbe determined and controlled by Government.

You work for Clive & Associates Chartered Accountants as Audit Manager. Your firm has offices in four (4) provinces and the existing staff are busy on other assignments. Your firmsubmitted a bid for offering audit services to Malanje Milling Plc. Your partner has requested you to prepare a presentation that will be made to the audit committee of Malanje Milling. The partner has informed you that he has been talking to Mayuthe former Finance Director of Malanje Milling Plc. with a view to give him a job as Audit Manager and assign him on the auditof Malanje Milling Plc.

If your firm is appointed auditor of Malanje Milling Plc., it will also be required to provide legal services to Malanje Milling Plc. The fee for the two (2) services will significantly increase the fee income from Malanje Milling to 18% of your firm’s total income.

Required:

a) Explain the concept of audit and assurance in the context of the audit of Malanje MillingPlc.

b) Explain the meaning of reasonable assurance in an audit of financial statements and distinguish it from limited assurance.

c) Explain four (4) matters that should be included in the presentation to the audit committee of Malanje Milling Plc. by your firm.

d) Identify and explain six (6) audit risks in the audit of Malanje Milling Plc. and for each risk suggest a suitable audit response.

e) Identify and explain five (5) ethical issues that must be considered in accepting appointment as auditor of MalanjeMilling Plc. and in each case suggest a suitable safeguard that should be taken.