You are Charlie Banks, an audit manager in Mitchell & Co, a firm of Chartered Certified Accountants.

Gavin Jones is an audit partner in your firm who has recently returned to practice after working for some years in industry. Medix Co has invited your firm to be appointed as auditor for the forthcoming year end.

You have been provided with the following exhibits:

1. Notes from a meeting held on 1 June 20X8 between Gavin Jones and Rebecca Feller, the finance Director of Medix Co

2. Extract of email from Mick Evans, current audit engagement partner of Medix Co who is resigning as auditor of Medix Co

3. Extract from local newspaper-business section, 2 June 20X8

Exhibit 1: Notes from a meeting held on 1 June 20X8 between Gavin Jones and Rebecca Feller, the finance Director of Medix Co

Medix Co is a provider of specialised surgical instruments used in medical procedures. The company is owner-managed and has a financial year ending 30 June 20X8.

The audit is not going out to tender. Rebecca Feller has been with the company since January 20X8, following the departure of the previous finance director, who is currently taking legal action against Medix Co for unfair dismissal.

The company's manufacturing facility is located in another country, where operating costs are significantly lower.

The facility is under the control of a local manager who visits the head office of Medix Co annually for a meeting with senior management. Products are imported via air freight. The overseas plant and equipment is owned by the company and was constructed 12 years ago specifically for the manufacture of metal surgical instruments.

The company has a bank overdraft facility and makes use of the facility most months. A significant bank loan, which will carry a variable interest rate, is currently being negotiated. The terms of the loan will be finalised once the audited financial statements have been viewed by the bank.

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MAA765-Advanced Audit and Assurance Trimester One, 2020 Take home test

Question 2 continued

Rebecca has requested that a certain audit senior, Kia Nelson, be assigned to the audit team. On further investigation it transpired that Kia Nelson is the sister of Medix Co's financial controller and has not worked on any similarly- sized clients before.

Exhibit 2: Extract of email from Mick Evans, current audit engagement partner who is resigning as auditor of Medix Co

'Medix Co has been an audit client for three years. We took over from the previous auditors following a disagreement between them and the directors of Medix Co over fees. As we are a small practice with low overheads we could offer lower fees than our predecessors. We could also do the audit very quickly, which pleased the client, as they like to keep costs as low as possible.

'During our audits we have found the internal systems and controls to be quite weak. Despite our recommendations, there always seemed to be a lack of interest in making improvements to the accounting systems, as this was seen to be a "waste of money". There have been two investigations by the tax authorities, which we did not deal with, as we are not tax experts. In the end the directors sorted it all out, and I believe that the tax matter is now resolved. We never had a problem getting access to accounting books and records. However, the managing director, Joni Tate, once gave us what she described as "the wrong cash book" by mistake, and replaced it with the "proper version" later in the day. We never found out why she was keeping two cash books, but cash was an immaterial asset so we didn't worry about it too much.

'We are resigning as auditors because the work load is too much for our small practice, and as Medix Co is our only audit client we have decided to focus on providing non-audit services in the future.'

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MAA765-Advanced Audit and Assurance Trimester One, 2020 Take home test

Question 2 continued

Exhibit 3: Extract from local newspaper-business section, 2 June 20X8

'It appears that local company Medix Co has breached local planning regulations by building an extension to its research and development building for which no local authority approval has been given. The land on which the premises is situated has protected status as a "greenfield" site which means approval by the local authority is necessary for any modification to commercial buildings.

'A representative of the local planning office stated today: "We feel that this is a serious breach of regulations and it is not the first time that Medix Co has deliberately ignored planning rules. The company was successfully sued in 20X3 for constructing an access road without receiving planning permission, and we are considering taking legal action in respect of this further breach of planning regulations. We are taking steps to ensure that these premises should be shut down within a month. A similar breach of regulations by a different company last year resulted in the demolition of the building."'

Required

Evaluate the professional, ethical and other issues to be considered in deciding whether to proceed with the appointment as auditor of Medix Co

(15 marks)