Reference no: EM132732930

ASSIGNMENT TASK: AE1.1 - Engagement Ethical_Legal Issues Worksheet (supporting schedule) - to critically analyse the key ethical and legal issues associated with MKGW accepting the SPG audit engagement and make recommendations for how/if these issues can be resolved.

Objective: Determine the key ethical and legal issues the audit engagement partner (AEP) must consider and resolve for the SPG FY2020 Audit to be accepted by MKGW.

WORKPAPER OBJECTIVES: Client meeting to discuss 2020 Audit between AEP (Graham Kelly) and Audit Manager (Michael Brooks) and SPG CEO/Board Chair (Terry Hehir) and SPG CFO (Charles Sinclair (Owen's son & Terry's nephew)).

SPG is an unlisted company which is large under the reporting regime and the Board has adopted the ASX Corporate Governance Guidelines for it governance operations. With only five (5) Board members, they have been in the practice of holding the Audit Committee quarterly instead of a board meeting in November, February, April and August. The CEO/Chair would like some governance advice and wondered if the Business Process Improvements staff could be engaged as part of the audit.

All holdings are managed separately except for the Windorah and Clermont properties. Windorah is managed from the Cloncurry holding and Clermont is managed from the Western Downs property (170 klm south west of Mackay). Each property is fully equipped with advanced computerisation for inventory (biological assets) management and stock movement as well as fully operational office equipment including immediate interface to the centralised system at the Head Office in Toowoomba for payroll, payments and purchases, sales and invoicing.

The management letter from the acquired audit firm for the FY2019 audit, identified weaknesses in accounting for biological assests. Even though there are advanced computerisation for the biological assets, the CFO advised that he and the finance team had worked hard at improving the processes. He thought that they were just about ready to be able to apply the relevant accounting standards but was not sure which one applied. He had not been able to engage any staff in the last twelve months who knew (or were able to acquire the knowledge in) the relevant accounting standard/s but was keen to have Graham and his team work with him on the financial statements and recognition of the biological assets for this year's report.

The CEO has requested that MKGW honour the acquired firm's guarantee for a bank loan as SPG have approached the bank to extend the loan from $10 m to $100 m for improvements in the production facility. The bank has agreed to the guarantee being assigned and the CEO has said that there is no need for new papers to be drawn up - the existing agreement can be 'rolled over'.

When COVID hit, SPG had some issues with being able to maintain exports with increased regulation and quarantine rules by governments for overseas customers. This coupled with a number of long term sales staff retiring at the end of June 2020, meant that Scott Francis and Tony Hehir (board members) have taken on executive positions in the Sales team to try to boost revenue to pre-COVID budgeted targets.

In the past twelve (12) months (prior to COVID-19), the Chief Operating Officer (COO) and the Chief Financial Officer (CFO) have been working closely with the CEO on the family succession plan to take over the role of the CEO. No decision has been made about who will take over the role and both have requested separate further meetings with the AEP on his opinion.

Even though the Board and the AC are the same members, the board member (Patrick Bennett) who is an FCPA is the independent chair of the those meetings and a summare of issues goes to the Board's next formal meeting.

OBJECTIVE(S) Fraud Questionnaire and Answers provided by Management (CFO & COO) & FCPA Board member on behalf of Audit Committee (AC). Note Patrick Bennett is the FCPA non-executive, non-family board member who is the independent Chair for the AC meetings.

Fraud Questions
Do you have any knowledge of any fraud perpetrated, alleged or suspected that could result in a material misstatement of the entity's financial statements?
Do you have any knowledge of any other perpetrated, alleged or suspected fraud (regardless of value)?
Have you received any communications from employees, former employees or others concerning allegations of fraud?
What incentives and pressures do you perceive to be on management and how are the related fraud risks managed?
What process do you undertake to assess the risk of fraud in the entity?
What is your understanding about the risks of fraud in the entity, including any specific fraud risks the entity has identified or any account balances or classes of transactions for which a risk of fraud may be more likely to exist, and why?
What controls are in place to ensure that management has implemented the necessary programs and controls to mitigate specific fraud risks, or to help prevent, deter and detect fraud?
Describe any general policies or procedures in place to discourage fraudulent activities and encourage whistle blowing?
How do you communicate your views on business practices and ethical behaviour?
Has management reported to Those Charged With Governance (TCWG) on the entity's internal control and how management believes internal control serves to prevent, deter, or detect material misstatements due to fraud?

Summarise the key recommendations to the audit engagement partner (AEP) in relation to the acceptance of the SPG audit.

Attachment:- audit and assurance.rar