Your firm has recently been appointed external auditor of Eastern Waste Management Ltd. (Eastern) for the year ended 31 December 2019. The previous auditors, from whom your firm has obtained professional clearance, were not re-appointed because the Managing Director of Eastern, Arif Chowdhury, who is also the majority shareholder of the company, believes that your firm has the appropriate expertise to assist with his plan to expand the business. The expansion plan involves the acquisition of small companies in the same industry sector and Arif Chowdhury would like your firm to undertake Due Diligence investigations over the next five years on the target companies. The Due Diligence work will include, among other procedures, a review of the financial statements of the target companies. Your firm has a number of other clients operating in the same industry sector. Eastern’s principal activity is the provision of waste management services which include the collection, transfer, recycling and disposal of waste materials. The company’s activities are overseen by a regulatory body which issues licenses to companies operating waste management services. The regulatory body has the power to modify, suspend or revoke the licenses which are granted for periods up to ten years. The licenses set out the operational criteria and the working practices to be adopted to meet those criteria. Eastern’s customers include industrial and retail companies and government bodies. The majority of work is undertaken under renewable contracts covering periods up to ten years. Payment terms vary from contract to contract, with some customers paying for services in advance whilst others pay after Eastern has provided the services. Eastern’s largest contract expires in July 2020. This contract currently represents 35% of Eastern’s revenue. Eastern, along with other companies, has been invited to tender for the new contract. Eastern is entitled to claim a subsidy from the government based on the volume of waste recycled. The company is required to submit quarterly returns detailing the volume of waste recycled and the subsidy is paid 30 days following the end of 1 the period covered by the return. Eastern’s procedures and records are subject to periodic inspections by a government auditor to ensure that the claims for the subsidy are valid. The company has experienced rapid growth due to an increase in demand for its services. During the year ended 31 December 2019, the company commissioned a number of capital projects including state-of-art sorting lines at all of its recycling centres and digestion plant. The digestion plant is to be used in Eastern’s new venture which will involve the conversion of waste material into biofuel. The sorting lines were assembled from specialist components sourced from an overseas supplier using a combination of own and sub-contract labour. Those were completed in December 2018 and came into operation in February 2019. The digestion plant, which is sited on land purchased from a land development company, Ashulia Lands Ltd. owned by Arif Chowdhury and his wife, was still in the course of construction. The digestion plant is being built by a construction company under a fixed-price contract which requires stage payments based on the value of work certified by a surveyor. The capital projects are funded by a loan repayable in quarterly installments over ten years. In addition to the loan, the company has negotiated an increase in its overdraft facility in order to meet its working capital requirements which have increased due to the expansion of the business. The accounting function is centralized at head office. However, the processing of payroll is outsourced to an HR Consulting firm, ZN Consultants, which provides Eastern with monthly payroll information. Eastern uses this information to pay the wages and salaries directly into its employees’ bank accounts and the relevant payroll taxes to NBR. 

Requirements:

Explain the self-interest and self-review threats arising from the provision of due diligence services to Eastern and describe how your firm should deal with them.

Answer rating: 100% (QA)

Section 2008 A6 describes selfinterest threat as The threat that a member could benefit financially ... View the full answer