- 20 Marks
Question
Joe Adams was the engagement partner to Maikai Airlines Limited from 2012 to 2014. He retired from the firm of the Chartered Accountants and intends to join Maikai Airlines Limited as Finance Director. It is the policy of the firm to pay all partners in full when they disengage.
Required: a. Identify and explain FOUR ethical matters worthy of consideration as Joe Adams joins Maikai Airlines Limited. (8 Marks) b. Discuss the THREE threats that could arise should Joe Adams join Maikai Airlines Limited. (6 Marks) c. Explain THREE matters specified by the Code of Ethics as safeguards in relation to this matter. (6 Marks)
Answer
- Ethical Matters:
- Past Role as Engagement Partner: Joe Adams’ seniority as an engagement partner at Maikai Airlines presents a higher risk to independence, especially due to the recent audit history.
- New Role in Management: By becoming Finance Director, Joe Adams would be responsible for the preparation of financial statements, raising concerns about actual and perceived independence.
- Involvement with the Audit Team: As a member of the client’s management team, there is a risk that Joe’s involvement may affect the audit team’s impartiality.
- Time Lapse Since Last Audit: The shorter the time since Joe’s departure from the firm, the higher the threat to independence.
- Threats to Independence:
- Self-Interest Threat: The audit team may avoid giving an unfavorable opinion to avoid discrediting their former partner.
- Familiarity Threat: Familiarity with Joe Adams, as a former partner, might lead the audit team to be more lenient or biased in their judgments.
- Intimidation Threat: Joe’s knowledge and past seniority could cause the audit team to accept his views without adequate scrutiny.
- Safeguards by the Code of Ethics:
- No Benefits or Payments: Joe must not receive any material payments or benefits from his former audit firm, except those that are predetermined.
- Non-Involvement in the Firm’s Business: Joe should not participate in any decision-making at the audit firm after disengagement.
- Time Gap Requirement: There should be at least a two-year gap between Joe’s last involvement as a key audit partner and his new role at the client to mitigate independence risks.
- Tags: Auditor Independence, Ethical Issues, Safeguards, Threats to Independence
- Level: Level 2
- Topic: Professional Ethics and Code of Conduct for Auditors
- Series: MAY 2018
- Uploader: Kofi