Question

Zaheer Co has been an audit client of Mohsin & Co for the last eight years, preparing financial statements to 31 March each year. Throughout this period, the managing partner at your firm, Frances Stein, has taken personal responsibility for the audit and has increased the total fee income from the client to the level where it represented 16·2% of Mohsin & Co’s total fee income in 2015 (15·4%: 2014). In addition to performing the annual audit, Mohsin & Co also provides accounting and bookkeeping services for Zaheer Co. The accounting and bookkeeping services include the preparation of the monthly payroll for the client and maintaining all of the financial records of a small, immaterial division of the company.

The managing director of Zaheer Co, Ahsan Ali, has asked your firm for assistance in the preparation of the share prospectus document which will be used to support the company’s flotation. The contents of the prospectus document will include the following elements:

– Key historical financial information prepared to 31 August 2015;

– Profit forecasts;

– A summary of the key risks relating to the client’s business; and

– A business plan outlining the future prospects of the company and recommending the shares to investors.

Ahsan Ali has asked if Mohsin & Co can also provide an accountant’s report which will be included in the prospectus and which will cover each of these elements. Zaheer Co is also currently reviewing the audit appointment and is looking for an audit firm which is capable of taking it through the listing process and providing a full range of services in the future.

Required:

Comment on the ethical and professional issues arising as a result of Zaheer Co’s planned listing and the services which it has requested from Mohsin & Co.

Answer 1

The ethical issues in the given situation are as follows,

• It is said that, Zaheer co is requested to provide an accountants certificate to support Mohsin and co in flotation, it this is so, Zaheer co being a dependent accountant firm may give the certificate with more profit forecasts and will no include any valid risks in the report which is an unethical situation.

The professional issues are as follows,

• An accountant who is the independent auditor of any company should not provide any other major services to that company. In the given case Zaheer co almost does every professional and financial works (accounting, book keeping, certificates, listing) in Mohsin and co which is usually not allowed and Zaheer co is disqualified to be appointed as an auditor in Mohsin and co.