Q 1 The following situations have arisen in your audit firm:

(1) The directors of Hilal plc have approached your firm and requested that it tender for the audit of Hilal plc. The directors hinted that in future also they will hire for additional consultancy work which is likely to be on-going.

(2) The directors of Gamal Ltd, an existing audit client, have requested that an employee of your firm, who has been involved in the audit of Gamal Ltd in previous years, is seconded to the company to assist with the preparation of the monthly management accounts and the annual financial statements while the companys accountant is on maternity leave.

REQUIRED

Identify the potential threats to independence and suggest how the firm might deal with them.

Q 2 Basam Ltd, assembles of computers from bought-in components, has experienced problems with the quality and specification of components. It was also discovered that one of the suppliers, who was related to an employee in the buying department, was overcharging the company.

The managing director, Mr Waleed Al Hashmi, is considering whether the auditors were negligent in not uncovering these errors and irregularities. He has requested that your firm undertakes a detailed independent review of Basam Ltds procurement processes in order to establish any shortcomings in its policies and procedures, so that they can be improved. wants a system which will guarantee that the errors and irregularities, will not happen again and has asked your firm to recommend improvements which will assure him of this.

2 REQUIRED

Write a letter to Mr Waleed Al Hashmi which:

(a). explain the responsibilities of management and auditors in relation to the design and operation of systems and controls; and (b). explains why your firm cannot provide absolute assurance that a system of internal control will be effective in preventing all errors and irregularities.