You are senior manager in Dedza & Co, a firm of Chartered Certified Accountants. Recently, you have been assigned specific responsibility for undertaking annual reviews of existing clients. The following situations have arisen in connection with three clients:

(i) Dedza was appointed auditor and tax advisor to Kora Co last year and has recently issued an unmodified opinion on the financial statements for the year ended 31 March 2006. To your surprise, the tax authority has just launched an investigation into the affairs of Kora on suspicion of underdeclaring income. (7 marks)

(ii) The chief executive of Xalam Co, an exporter of specialist equipment, has asked for advice on the accounting treatment and disclosure of payments being made for security consultancy services. The payments, which aim to ensure that consignments are not impounded in the destination country of a major customer, may be material to the financial statements for the year ending 31 December 2006. Xalam does not treat these payments as tax deductible. (4 marks)

(iii) Your firm has provided financial advice to the Pholey family for many years and this has sometimes involved your firm in carrying out transactions on their behalf. The eldest son, Esau, is to take up a position as a senior government official to a foreign country next month. (4 marks)

Required:

Identify and comment on the ethical and other professional issues raised by each of these matters and state what action, if any, Dedza & Co should now take. (15 marks)

Note: The mark allocation is shown against each of the three situations.