Auditing

MAJAN UNIVERSITY COLLEGE

FACULTY OF BUSINESS MANAGEMENT

Module Name and Level : AUDITING

Module Code                    : AC34-3

Individual report

You are an audit  senior of Brahim and Co and have been allocated to the audit of Mazoon Finance Co. Mazoon Finance Co ( Mazoon)  is  a  listed company whichspecialises in providing a range of financial services including loans. The company’s year end is 30 September 2017.  Mazoon Finance Co has been an audit client for the past eight years and Abdullah Al Harthy was the previous audit engagement partner for Brahim and Co.  Abdullah has completed eight years as the audit engagement partner and so  has recently been rotated off the audit engagement. The current audit partner, Omar Zahran, has suggested that in order to continue and maintain the close relationship with MazoonCo , Abdullah should be entrusted with  the role of an independent review partner  for his financial year. In addition, Mazoon Co has also requested that Abdullah assist them by attending their audit committee meetings and contribute by using his knowledge of Mazoon’s internal control system.

The total fees received by Brahim and Co for last year equated to 20% of the firm’s total fee income. The current year’s audit fee has not yet been confirmed. Brahims’s taxation department also provides txservices to Mazoon. They have been approached by Mazoon Co to represent them in negotiations to resolve some outstanding legal issues with their vendors, for which the fees quoted are substantial. Along with taxation and other possible non-audit fees the total income from Brahim and Co this year could be greater than the fees for last year. Last year’s audit fee was being paid monthly by Mazoon Co but no payments have been received for the last three months. Theaudit manager in charge of audit of Mazoon Co has just announced that he is leaving Brahim and Co to join Mazoon Co as their financial controller.

At the end of August, Mazoon Co’s Chief Accountant left and the new replacement is not due to start until approximately two months after the year end. The finance director, who is the sister-in-law of the current auditengagement partner, Omar Zahran, has asked if a member of the audit team could be seconded to Mazoon Co for three months to take on the role of a temporary Chief Accountant. A number of the audit team members currently bank with Mazoon Co and two team members have significant loans owing to the company.

The finance director has informed the audit engagement partner that when the audit is complete, she  would like to invite the entire audit team along with their families to spend a day at the Company farmhouse  followed by a luxury dinner catered from her favorite  high end restaurant in town.

The listing rules of the Capital market authority of Oman require compliance with corporate governance principles, and the directors are unsure whether they are following best practice in this relation. They have asked Omar Zahran, the audit engagement partner for his view in this matter.

Mazoon’s board is comprised of six executive directors, a non-executive chairman and three other non-executive directors. Mazoon Co has also asked Brahim and Co to help them in recruiting a new non-executive director.  The chairman and one of the non-executive director is a former executive director of Mazoon and on reaching retirement age was asked to take on a non-executive role.

The company has established an audit committee, and all non-executive directors are members including the chairman who chairs the committee. All four members of the audit committee were previously involved in sales or production related roles. All of the directors have been members of the board for at least five years. As the chairman does not have an executive role, he has sole responsibility for liaising with the shareholders and answering any of their questions. The company has not established an internal audit function to monitor internal controls.

Required:

Using the information above:

(i)          Identify and explain ethical threats which may affect the independence of Brahim and Co’s audit of Mazoon Finance Co.

(ii)      For each threat, explain how it might be reduced to an acceptable level.

(iii)    Suggest other areas that could potentially pose ethical threats which may affect the auditor’s independence.

(iv)   Identify and explain the corporate governance weaknesses faced by Mazoon Finance Co.

(v)  Provide a recommendation to address each weakness to ensure compliance with corporate governance principles.

(vi)  Discuss those areas of corporate governance report that an auditor needs to confirm compliance with as promulgated by the Capital market authority of Oman’s Code of corporate governance.

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