Question

In: Accounting

Tiyumba Co is a new client of Anwaar and Co, an audit firm. Tiyumba Co runs...

Tiyumba Co is a new client of Anwaar and Co, an audit firm. Tiyumba Co runs a spa, trading as Tiyumba.
The spa is open to non-members and members. Members pay an annual membership fee that entitles them
to 50% off spa rates for individual treatments and sessions. The spa employs lifeguards, masseuses, beauty
therapists and nursery nurses for its crèche facilities. In addition, there is also administrative staff,
including a finance controller, who reports to the managing director, Ibrahim Osman (who is also the
major shareholder).
The spa has been in business five years, but this is the first time it has required an audit. Its major local
competitor is Doobia, a large members-only spa, which started business two years ago. Anwaar and Co
has just been invited to tender for the audit of the company which owns Doobia.
The finance controller at Tiyumba is Mma Fatima. She was employed 18 months ago, since then she has:
• Instituted control procedures outlined in a controls manual;
• Formalised a budgeting system so that budgets are now prepared and approved annually; and
• Identified the need for an audit to Ibrahim Osman.
Mma Fatima introduced Anwaar and Co to Ibrahim through her husband, Anthony Davidson, who is a
manager at Anwaar and Co. The audit engagement partner assigned to Tiyumba is Carol Lamb. Since
agreeing audit terms with Anwaar and Co, Ibrahim has:
• Invited Carol to advertise to employees of Anwaar and Co a staff membership rate, which is 50%
of standard membership rates and then entitles the member to 75% off spa rates
• Asked Carol if she will sit on the board of directors at Tiyumba Co as a non-executive director
• Asked Carol if the firm will confirm the figures on an insurance claim to be submitted in respect of
a fire in the treatment centre just prior to the year end
Required:
(a) (i) Explain the ethical threats which may affect the independence of Anwaar and Co’s audit of
Tiyumba Co; and
(ii) For each threat explain how it might be avoided.
(b) Explain five procedures you would carry out to obtain an understanding of Tiyumba Co in order to
conduct the first year audit.
(c) Explain the benefits of a company having an audit committee.

Solutions

Expert Solution

a. i) Ethical Threats which may affect the independence of Anwaar and Co –

a. Anthony Davidson is the husband of Mma Fatima and also an employee in Anwaar and Co. Through him the firm is getting the work of Tiyumba Co. There is a threat if Anthony will work on the client then he may not highlight the mistake of her wife who is the finance controller of Tiyumba Co.

b. Secondly, Ibrahim is offering the a discounted membership to employees of Anwaar and Co. This is another ethical threat since it may hinder the independence of staff members.

c. Ibrahim also asked Carol (audit engagement partner) to sit on the board of directors at Tiyumba Co as a non-executive director. This will also pose as a great threat on the independence of engagement partner since she then her audit opinion on the books of accounts of Tiyumba Co will not be an independent one.

ii) Mitigating measures for the threats –

a. It can be avoided if Anthony is not involved in the audit of Tiyumba co directly or indirectly.

b. Carol should decline the offer of reduced membership rate to her firm’s employees.

c. Carol should not accept to be on boarded as a director in Tiyumba Co.

b. i. Obtain the understanding of the business of client.

ii. Obtain previous year financial statements.

iii. Obtain previous year audit reports.

iv. Obtain the controls manual to understand the Instituted control procedure.

v. Assess the level of controls established on the company.

c. Benefits of having an audit committee –

i. Oversee the internal controls implemented by the management.

ii. Oversee the internal and statutory audit of the company.

iii. Adheres to the regulatory requirement of having an audit committee.

iv. Keeps an oversight over the management’s actions.


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