You are the managing partner of MAKUKS and Associates a renowned auditing firm in Ghana. You have just completed a detailed analysis of a potential client Mojito Ltd. The company owns a significant amount of land rights along former railway lines. The land rights have been leased to pipeline and communication companies for transporting natural gas and laying of fiber-optic cables.

In preparing the following outline report, the current auditors and some members of management were interviewed;

1. The company is controlled by Naana Agyekum. Ms Agyekum acquired the company through a leveraged buyout (LBO where a buyer of a company takes on a significant amount of debt as part of the purchase).
2. Ms Agyekum has a reputation for coming into a company, slashing expenses and making the company profitable. At the end of three to five years she often takes the company back to being listed. Although most of this is commendable, it should be noted that Ms Agyekum has been aggressive in using the flexibility in accounting principles to achieve profitability objectives.
3. The LBO has yielded a large amount of recorded goodwill (representing 43% of total assets). Mojito Ltd recently acquired a small communications company that is providing local phone service in one part of the Greater Accra region covered by Mojito. This small company has older technology and lagging behind in the industry in developing computerized billing system. Its billing is all computerized but appears to be more prone to errors than some of its competitors judging by the number of phone calls to the customer service department.
4. The company has been subject to the lands commission investigations and has constantly pushed the limit in acquiring and marketing additional right of way. The lands commissions complaints have often focused on environmental issues and non-compliance with land-use approvals for new developments.
5. The previous auditor had no significant problems with the company under the old management. Ms Agyekum believes the previous audit firm was not large enough to render the services needed; she wants an auditor who acts like a business partner and will not be reluctant to offer constructive suggestions. She further indicates that she will look to the new audit firm to do a substantial amount of consulting works.

You are required to

1. Explain the pertinent risks the audit partner should consider in determining whether to make a proposal to become the auditor for Mojito Ltd.
2. Explain how the existence or non-existence of a good risk management process by an organisation affects the planning of an audit engagement.
3. Discuss the major limitations of the audit risk model