Melboury (Pty) Ltd (Melboury) is a Namibian incorporated company involved in the manufacturing and sale of niche computer equipment, was formed five years ago by its current chief executive officer (CEO), Nathan Nicks. Melboury is not listed on any exchange.

 

Melboury also has investments in subsidiary companies involved in the sales and distribution of ammunition and nuclear weapons in North Korea. These subsidiaries are not audited by Del Touch. The company currently has 10 branches in Namibia. Due to the increasing demand of niche computer equipment, Melboury has decided to expand its footprint by opening 10 new branches in South Africa and another 10 in Nigeria. Del Touch, a small audit firm with a staff complement comprising 2 audit partners, 2 audit managers and 3 audit trainees has been the auditor of Melboury since its incorporation. Del Touch does not have sister offices in South Africa, Botswana and Nigeria.

 

At the last AGM, the shareholders of Melboury approved the reappointment of Del Touch as the auditors. The current designated partner, Mr Donovan Del, has been the designated auditor for the last 5 years and therefore can no longer serve as the designated auditor and is required to rotate with Ms Tangi Touch. Ms Tangi Touch and Mr Nathan Nicks the CEO of Melboury, have been close friends since high school and frequently invite each other to braais at their homes.  In addition, Ms Tangi Touch does not have prior experience auditing clients operating in the technology industry.

 

While auditing the prior year financial statements of Melboury, Mr Del, uncovered a series of complex related party transactions which he believed were designed to conceal a fraud perpetrated by Mr Nathan Nicks and the rest of management and directors resulting in the qualification of the prior year audit report. Mr Nathan Nicks, in particular, was very unhappy with the qualified opinion issued by Del Touch as he argued that the related party transaction were in any case going to be eliminated at consolidation and therefore the auditors “should not have wasted time  auditing these balance which are causing the audit fee to be so high”. Mr Nicks also added that no information regarding related parties will be given to the auditors as it only results in audit procedures that add little to no value. Mr Nicks is therefore refusing to settle the outstanding audit fee of N$ 200 000.  In terms of revenue earned from audit clients, Melboury is one of 2 major clients of Del Touch.

 

The board of directors have indicated that the audit should be completed one month after the financial year end.

Required:

 

1. In terms of ISA 210 , the objective of the auditor is to accept or continue and audit engagement only when the basis upon  which it is to be performed has been agreed through:

• Establishing whether the preconditions for an audit are present
• Confirming that there is a common understanding between the auditor and management and those charged with governance of the terms of the audit engagement.

 

You are required to name the preconditions that are required to be present.                                                                                                                      (5 marks)

Discuss the issues Del Touch should consider prior to accepting the reappointment as auditors of Melboury (Pty) Ltd.