Your firm has five offices all over Tanzania and it specializes in the provision of audit and tax advisory services to clients in the entertainment and media industries. The Finance Director of Nguvu Ltd (Nguvu) has recently requested your firm to accept appointment as external auditor for the year ended 30th September 2018.
Nguvu’s previous auditors have not been reappointed. Nguvu is a music events company that has its head office in Dar es Salaam. It organizes and perform seven live-music events held in the same seven locations in Tanzania each year. Music events are large-scale events, held outdoors, where a variety of musicians perform live on an open-air stage. The musicians performance vary between locations from year to year. Each event is held over a weekend (Saturday and Sunday) between June and August.
Tickets can be purchased online in advance from Nguvu’s website or on the day of the event at the entrance gate. Online tickets are available for the following year’s event one week after the current year’s events have been completely performed. The online Tickets bought are paid for by credit card. Tickets purchased at the entrance gate can be paid for by credit card or by cash. Cash collected at the entrance gate is periodically transferred to the on-site cash office during the day.
Customers who purchase their tickets online are required to present their booking confirmation at the ‘wristband exchange’ where they receive a wristband to wear during the event. Wristbands are color-coded according to the day of the event for which the ticket has been purchased. Customers who purchase their tickets on the day of the event receive their wristband at the entrance gate. No customers are permitted to enter the event venue without the correct wristband.
Nguvu arranges musicians to perform at the events through the musician’s agent. Fees to well known musicians are usually agreed and paid in advance, either in Tanzanian shillings or in the musician’s local currency. Some musicians ask for a portion of their fee to be paid in cash (Tanzanian shillings) on the day of their performance. Less well-known musicians are fully paid in cash (Tanzania shillings) at the end of their performance. Cash fees are collected by musicians, or their agents, at the on-site cash office.
Nguvu recruits a number of stewards for the duration of each event whose role is to provide information and directions to customers. Other temporary staff are employed to work at the entrance gate or in the wristband exchange. Stewards and temporary staff are paid in cash at the on-site cash office at the end of each event.
Permission to hold each event has to be obtained annually from both the local police authority and the local council that is governing the local area where the event is taking place. The local council determines the maximum number of tickets that may be sold for each day of an event.
The Finance Director of Nguvu has provided you with the following information:
- At one of the events in August 2018, a customer was seriously injured after he gained access through the lighting pole and tried to climb it for a better view of the stage. He fell down and got injured. He was unable to work since the accident event. Nguvu is currently being sued for damages after a national newspaper started a campaign on behalf of the injured customer. There were no signs warning customers against climbing the lighting poles and no steward was present near the pole to guide the customers.
- During 2018, the weaker economic climate and unpredictable cold weather resulted in a decline in ticket sales. This, coupled with increasing costs from the suppliers, has led to Nguvu’s decision to investigate the possibility of expansion of its business to overseas. Negotiations are underway to purchase the right to organize and perform an event in Kitwe town of Zambia. The purchase is to be funded by a bank loan currently being considered by Nguvu’s bankers. As part of the loan negotiation the bank will require a copy of the audited financial statements.
The Finance Director has requested that the audit be completed and audit report signed by 3rd April 2019 so that the bank loan could be granted and the purchase of the rights to perform the event in Kitwe be finalised by 10th April 2019. In addition to carrying out the statutory audit, the Finance Director has requested your firm to carry out a review of the controls at each event, in particular, the controls over cash and the wristband exchange process.
In the forthcoming year, he would like you to undertake a review of controls in two events. The remaining five events should be reviewed in subsequent years, with two events being reviewed in 2020, other two events in 2021 and the final event in 2022. He has requested you to attend the Nguvu board meeting after each review so as to discuss your firm’s findings and present your recommendations.
(i) Explain the matters that you would consider and the procedures that you would perform in order to decide whether to accept the appointment as external auditors of Nguvu.
(ii) Explain the matters that you would consider and the procedure that you would perform in order to decide whether to accept the additional work on controls proposed by the Finance Director.
(iii) Identify, from the information provided in the scenario, the principal audit risks in respect of the financial statements of Nguvu for the year ended 30th September 2018. For each risk, list the factors which lead to it identification and outline the procedures that should be included in the audit plan in order to address it.