Question One

You are a Manager in the Audit Firm of Mwalusaka & Co; and this is the first time you are working on one (1) of the firms established clients, Investec Ltd. The main business activity of Investec Ltd is the provision of investment advice to individuals on saving for retirement, purchase of shares and securities and investing in tax efficient saving schemes. Investec Ltd is regulated by the Securities and Exchange Commission (SEC). Investec Ltd has been operating for fifteen (15) years and has recently listed its shares on the Lusaka Securities Exchange (LuSE). The company maintains a small internal audit department. The Directors feel that the team needs to increase in size and specialist skills are required, but they are not sure whether to recruit more internal auditors, or to outsource the whole function to their external auditors, Mwalusaka & co. Investec Ltd is required to comply with corporate governance principles if it has to maintain its listed status; hence the Director of Finance, Jessie Mole, has undertaken a review of whether or not the company complies with the corporate governance principles. Jan Mumbu is the Chairman of Investec Ltd and was the Chief Executive Officer (CEO) until last year. Jan Mumbu is unsure if his company needs more Non-Executive Directors (NEDS) as there are three (3) NEDS out of the eight (8) board members. He is considering appointing one of his close friends, who is a retired Chief Executive Officer (CEO) of a Construction company, as a NED. Jessie Mole decides on the remuneration of each director. All directors remuneration is performance based in the form of an annual bonus based on profits. Jessie Mole is considering setting up an Audit Committee, but has not done this yet. A new Director of Sales and Marketing was appointed eight (8) months ago. He is yet to undertake his board training as this is normally provided by the Chief Executive Officer (CEO) and this position is currently vacant. There are many shareholders and therefore the directors believe that it is impractical and too costly to hold an Annual General Meeting (AGM). Instead, the Board of Directors has suggested sending out the financial statements and any voting would be through email. You are about to start the planning for this audit. Paul Nyirenda has been the Engagement Partner for Investec Ltd, for the previous nine (9) years and he has excellent knowledge of the client. Paul Nyirenda has informed you he would like his daughter Zangi who is studying for her first set of application level papers of the CA Zambia qualification to be part of the audit team this year. Paul Nyirenda also informs you that Fulani, the Audit Senior, received investment advice from Investec Ltd during the year and intends to do the same next year. In an initial meeting with Jessie Mole, you learn that the audit team will not be entertained on Investec Ltd.s luxurious taxis for a holiday on the Samfya Beach this year as this could appear to be an attempt to influence the opinion of the audit. Instead, she has arranged a flight with a local aviation company known as Makumbi Air costing less than one-tenth of the expense of using the luxurious taxis and hopes this will be acceptable. Jessie Mole states that the fee for taxation services this year should be calculated on the basis of a percentage of tax saved and trusts that your firm accepts a fixed fee for representing Investec Ltd in a dispute with the taxation authorities regarding the amount of VAT payable. Jessie Mole has also hinted to you that she might request your firm to undertake a non-audit assurance engagement later in the year. She has informed you that she has read about review engagements. However, she is unsure how these engagements differ from an external audit and how much assurance would be gained from this type of engagement.

Required

Identify and explain corporate governance weaknesses and provide a recommendation to address each weakness. 25 mark