You are a manager in Baba & Co, a firm of Chartered Certified Accountants, and you have taken on the responsibility for providing support and guidance to new members of the firm. Baba & Co has recently recruited a new audit junior, Sam Makafui, who has come across several issues in his first few months at the firm which he would like your guidance on. Sam’s comments and questions are shown below:

(a) I know that auditors are required to assess risks of material misstatement by developing an understanding of the business risks of an audit client, but I am not clear on the relationship between business risk and risk of material misstatement. Can you explain the two types of risk, and how identifying business risk relates to risk of material misstatement? (3 marks)

(b) I worked on the interim audit of Cocoa Growers Co, a manufacturing company which outsources its payroll function. I know that for Cocoa Growers Co payroll is material. How does the outsourcing of payroll affect our audit planning? (3 marks)

(c) Cocoa Growers Co is tendering for an important contract to supply Choco Co. I know that Choco Co is also an audit client of our firm, and I have heard that Cocoa Growers Co’s management has requested our firm to provide advice on the tender it is preparing. What matters should our firm consider in deciding whether to provide advice to Cocoa Growers Co on the tender? (4 marks)

(d) I also worked on the audit of Kwabena Co, where I heard the managing director, Frimpong Kwabena, discussing a potential new business opportunity with the audit engagement partner. Kwabena Co is an event organiser, and is planning to run a programme of nationwide events for accountants, at which speakers will discuss technical updates to financial reporting, tax and audit regulations. Frimpong proposed that our firm could invest some cash in the business opportunity, supply the speakers, market the events to our audit clients, and that any profit made would be shared between Baba & Co and Kwabena Co. What would be the implications of our firm considering this business opportunity? (5 marks)

Required:

For each of the issues raised, respond to the audit junior, explaining the ethical and professional matters arising from the audit junior’s comments.

Answer rating: 100% (QA)

a Business risk is the risk that a business may not achieve its objectives due to external events or internal decisions This is distinct from risk of ... View the full answer