Winston Black was an audit partner in the firm of Henson, Davis & Company. He was in the process of reviewing the audit files for the audit of a new client, McMullan Resources. McMullan was in the business of heavy construction. Black was conducting his first review after the field work was substantially complete. Normally, he would have done an initial review during the planning phase as required by his firm$$s policies; however, he had been over$-$whelmed by an emergency with his largest and most important client. He rationalized not reviewing audit plaining information because $(1)$ the audit was being overseen by Sarah Beale, a manager in whom he had confidence, and $(2)$ he could "recover" from any problems during his end$-$of$-$audit review.

Now, Black found that he was confronted with a couple of problems. First, he found that the firm may have accepted McMullan without complying with its new$-$client acceptance procedures. McMullan came to Henson, Davis on a recommendation from a friend of Black's. Black got "credit$$ for the new business, which was important to him because it would affect his compensation from the firm. Because Black was busy, he told Beale to conduct a new$-$client acceptance review and let him know if there were any problems. He never heard from Beale and assumed everything was okay. In reviewing Beale's preaudit planning documentation, he saw a check mark in the box $$Contact prior auditors$$ but found no details indicating what was done. When he asked Beale about this, she responded with the following:

I called Gardner Smith $[$the responsible partner with McMullan's prior audit firm$]$ and left a phone mail message for him. He never returned my call. I talked to Ted McMullan about the change, and he told me that he informed Gardner about the change and that Gadner said, $$Fine$,$ I'll help in any way I can."Ted said Gardner sent over copies of analyses of fixed assets and equity accounts, which Ted gave to me$.$ I asked Ted why they replaced Gardner$$s firm, and he told me it was over the tax contingency issue and the size of their fee. Other than that, Ted said the relationship was fine.

The tax contingency issue that Beale referred to was a situation in which McMullan had entered into litigation with a bank from which it had received a loan. The result of the litigation was that the bank forgave serval hundred$-$thousand dollars in debt. This was a windfall to MacMullan and they recorded it as a gain, taking the position that it was non$-$taxable. The prior auditors disputed this position and insisted that a contingent tax liability existed that required disclosure. This upset McMullan, but the company agreed in order to receive an unqualified opinion. Before hiring their Henson Davis as their new auditors, McMullan requested that Henson, Davis review the situation. Henson, Davis believed the contingency was remote and agreed to the elimination of the disclosure.

The second problem involved a long$-$term contract with a customer in Accra. Under IFRS, McMullan was required to recognize income on this contract using the percentage$-$of$-$completion method. The contract was partially completed as of year$-$end and had a material effect on the financial statements. When Black went to review the copy of the contract in the audit files, he found three things. First, there was a contract summary that set out its major features. Second, there was a copy of the contract written in $$Ga$.$ Third, there was a signed confirmation confirming the terms and status of the contract. The space requesting information about any contract disputes was left blank, indicating no such problems

Black's concern about the contract was that to recognize income in accordance with IFRS, the contract had to be enforceable. Often contract contain a cancellation clause that might mitigate enforceability. Because he was not able to read $$Ga$,$ Black couldn't tell whether the contract contained such a clause. When he asked Beale about this, she responded that she had asked the company's vice president for the Accra division about the contract, and he told her that it was their standard contract. The company$$s standard contract did have a cancellation clause in it$,$ but it required mutual agreement and could not be cancelled unilaterally by the buyer.

Required

a$.$ Evaluate and discuss whether Henson, Davis & Company complied International Standards on Auditing in their acceptance of McMullan Resources as a new client. What can they do at this point in the engagement to resolve deficiencies if they exist?

b$.$ Evaluate and discuss whether sufficient audit work has been done with regard to McMullan's Accra$$s contract. If not, what more should be done?

c$.$ Evaluate and discuss whether Black and Beale conducted themselves in accordance with International Standards on Auditing.