• 20 Marks

AAA – Nov 2020 – L3 – Q6 – Ethical Issues in Auditing

Preparation of briefing notes on audit tendering, ICAN requirements for advertising, fees, and assessment of client suitability.

Nash Investigations Limited specializes in conducting investigations for corporate clients. It employs ex-police officers, security consultants, IT, and fraud specialists. Nash Investigations recently dropped its firm of auditors and has approached your firm to participate in a tender process for selecting the new auditor. You are a manager in the audit firm and will be working with a senior auditor on this assignment. The senior auditor has never been involved in a tender process or appointment of a new auditor. You have been provided with the following information:

  1. Nash Investigations is a major service provider to your firm, particularly in the provision of IT and fraud consultancy.
  2. Nash Investigations has acrimoniously dropped their previous auditors and is withholding fees, pending the resolution of a number of issues, particularly accusations concerning the auditors’ competence.
  3. Nash Investigations is currently facing a hostile takeover bid from Technical Investigations Group, a company also audited by your firm.
  4. Media reports of a fraud allegation have been leveled against one of the directors of Nash Investigations.
  5. One of the partners in the audit firm is also a director of Nash Investigations.

Required:

Prepare briefing notes to explain the following matters to the audit senior:

a. The audit tendering process in terms of the stages that the audit firm will go through should it decide to participate in the tender.
(5 Marks)

b. The requirements of the ICAN Code of Conduct on advertising and publicity.
(5 Marks)

c. The requirements of the ICAN Code of Conduct on fees.
(5 Marks)

d. The impact of each additional piece of information provided above and how this information would influence your decision to participate in the audit tender for Nash Investigations.
(5 Marks)

a. The Audit Tendering Process

  1. Pre-qualification: Determine if the firm has the expertise and resources to perform the audit.
  2. Background Information Collection: Gather detailed information about Nash Investigations to assess any potential risks.
  3. Scope of Work Definition: Define the audit scope based on the client’s specific needs and requirements.
  4. Preliminary Risk Assessment: Conduct an initial risk assessment to identify major areas of audit focus.
  5. Fee Estimation: Calculate an appropriate fee based on the projected workload.
  6. Proposal Submission: Submit a proposal document outlining the firm’s qualifications, audit plan, and fee.
  7. Presentation to Client: If requested, present the audit approach and address client queries.

(5 Marks)

b. ICAN Code of Conduct on Advertising and Publicity

  1. Advertisements should be honest and not discredit other firms or exaggerate qualifications.
  2. Must not bring the profession or ICAN into disrepute.
  3. Avoid fee discussions or comparisons in advertisements.
  4. Follow local advertising standards and seek ICAN advice if uncertain.
  5. Must be truthful and avoid misleading clients about capabilities.

(5 Marks)

c. ICAN Code of Conduct on Fees

  1. Fees should align with ICAN’s minimum standards to prevent undercutting.
  2. Clients should be informed in writing about the fee calculation basis.
  3. Avoid setting fees lower than an outgoing auditor’s unless justified.
  4. Fees should reflect the audit’s complexity and required resources.
  5. Ensure that work performed adheres to standards despite the fee.

(5 Marks)

d. Impact of Provided Information on the Decision to Participate in the Tender

  1. Client Relationship: Nash’s significant IT and fraud consultancy services to our firm may present an independence threat.
  2. Conflict with Prior Auditors: Withholding fees and unresolved issues with previous auditors could indicate a contentious client.
  3. Hostile Takeover: Auditing both Nash and the bidder (Technical Investigations Group) may create a conflict of interest.
  4. Fraud Allegations: Public fraud accusations against a director raise reputation and risk concerns.
  5. Partner Conflict of Interest: Having a partner as Nash’s director conflicts with independence requirements, potentially requiring the partner’s resignation if we pursue the audit.
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