QUESTION TWO a. Your audit firm, Oliver Twist& Co. has just taken on a new client, Abuakwa Ltd (Abuakwa), a very successful health club that provides gym and fitness services. The Company operates a chain of fitness centers with wide range of workout equipment, solarium rooms, fitness sessions, nutritional planning, changing rooms, and locker facilities. You have just been informed that your firm has received an invitation to tender for the audit of the company that owns Gyms Ltd., a major competitor of Abuakwa. The Managing Director of Abuakwa, Virgil, is an old college friend of your audit manager and it was through her connection that your firm was able to tender for its audit. You have been assigned as senior auditor for Abuakwa. On a recent visit to your office, Virgil stated that she would like to extend an offer that all staff of Oliver Twist & Co. would be eligible for a special membership rate, which is 50% of standard membership rates and that entitles the member to 75% off special classes. She proposed that you sit on the board of directors at Abuakwa as a non-executive director. Additionally, she proposed that your firm confirm, as part of the audit, the figures on an insurance claim to be submitted in respect of damage caused by a burst water pipe. The pipe burst during a spell of cold weather in the main gym area prior to the year end. Required: In the context of the above scenario: Evaluate FIVE (5) ethical threats (real or perceived) which may affect the independence of your firms audit of Abuakwa; (15 marks) b. An Auditor should obtain sufficient appropriate audit evidence to be able to draw reasonable conclusion on which to base the audit opinion. In gathering such evidence, Auditor should exercise Professional Skepticism, defined in ISA 200. Required: i. What is professional Skepticism? 2 marks ii. At what stage of the audit is professional skepticism necessary? 2 marks iii. What effect will 'exercising professional Skepticism' have on the following 1. Obtaining Sufficient Audit Evidence 4 marks 2. Obtaining Appropriate Audit Evidence 4 marks iv. What can a firm do to enhance awareness of professional Skepticism to help obtain sufficient appropriate audit evidence? 3 marks (Total marks: 30 marks)