Question Tag: Auditor Independence

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  • 10 Marks

AAA – Nov 2024 – L3 – Q1a – Ethical Issues in Audit Engagements

Ethical issues and professional conduct in an audit engagement involving conflict of interest.

You are the Audit Partner of a mid-sized audit firm, Amoah Sonko and Associates. One of your major clients, Kudi LTD (Kudi), has approached you for a significant audit engagement. Kudi has been experiencing rapid growth and plans to get listed on the Ghana Alternative Market within the next year. During preliminary discussions, the Managing Director of Kudi, a friend, promised you a bonus if the audit report is completed quickly and is favourable, highlighting the company’s strengths.

In the course of the audit of Kudi, you came across a series of unusual financial transactions. These included large intercompany loans with its sister companies, other significant related-party transactions with the directors, and an unusually high volume of sales recorded a few days before the end of the financial year. Upon further investigation, your team found discrepancies in inventory records and evidence of potential non-compliance with revenue recognition standards. The Finance Manager insists these transactions are legitimate and necessary for the company’s rapid growth.

Additionally, you noticed that Kudi was involved in a high-profile legal battle with a major competitor, which was not fully disclosed in the financial statements. The lawyer for Kudi insists that you omit this information from the audit report, arguing it would damage the company’s reputation and its plans to get listed on the Ghana Alternative Market.

Required:
i) Identify TWO potential ethical issues in the scenario and explain the potential impact on your professional conduct.                      ii) Identify the steps you should take to address the conflict of interest presented by the Managing Director’s offer. 
iii) Discuss the potential sanctions for accepting the Managing Director’s offer and providing a favourable audit report without proper verification. 
iv) Evaluate the impact of the undisclosed legal battle on Kudi LTD’s financial statements and the upcoming initial public offer.

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  • 1 Marks

AAA – Nov 2013 – L3 – AII – Q20 – Ethical Issues in Auditing

Define the situation where an auditor's role as a rival to the client impairs objectivity.

A situation which puts the auditor as opponent or rival of the client and which may impair his objectivity is termed…………………….

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  • 20 Marks

AAA – Nov 2016 – L3 – Q2 – Ethical Issues in Auditing

Discuss ethical and legal obligations of auditors regarding independence, confidentiality, money laundering, and client competition safeguards.

As an Audit Manager in a big audit firm in Nigeria, you were opportuned to attend a conference on Professional Ethics and Anti-Money Laundering in New York. On your return, one of the audit seniors went through the presentations and asked questions on some of the statements she noted in the presentations.

You are required to explain the following statements to her:

a. A good Auditor is an independent auditor. (5 Marks)
b. The Accountant’s normal professional duty of confidentiality to clients is not an adequate defence where money laundering is involved. (5 Marks)
c. Specific obligations for detecting and reporting suspicions of money laundering are placed on professional firms. (5 Marks)
d. A firm might act for two clients that are in direct competition with each other where there are acceptable safeguards. (5 Marks)

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  • 20 Marks

AAA – Nov 2021 – L3 – Q2 – Advanced Audit Planning and Strategy

Evaluate internal and external business risks and outline pre-engagement activities for Sunsit Manufacturers Ltd.

The auditors of Sunsit Manufacturers Limited had disagreements with the company on various issues. This came to a climax with the withholding of a part of the payment of the last audit fees. The auditors had also been disenchanted with the undue pressures of management and have decided that, as a result of this and the withheld fees, they would disengage from the client.

The company’s chairman, in consideration of past issues, has considered the size of the audit firm as being partly responsible for its inability to manage adequately the pressures from the company’s accounting and management team. He has subsequently approached your firm for a change, and the partners have accepted the engagement despite the predecessor auditor’s declaration of the forfeiture of the firm’s outstanding fees and no further involvement with the client and issues relating to the company.

Required:

a. Following the background to the client and the engagement, evaluate the internal and external business risks that need to be considered with respect to the client. (10 Marks)

b. Discuss the pre-engagement activities to be carried on the client. (10 Marks)

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  • 1 Marks

AAA – Nov 2011 – L3 – SA – Q6 – Ethical Issues in Auditing

Identifies a service inappropriate for an audit firm to provide due to independence and ethical concerns.

Which ONE of these services may not be appropriate for an audit firm?

  • A. Advising clients on corporate structures, recruitment, and other human capital needs
  • B. Giving necessary legal advice on tax returns including negotiation with the tax authorities
  • C. Acting as a receiver of the company’s operations on behalf of debenture holders and creditors of the company
  • D. Making detailed enquiries and gathering all necessary information to meet the clients’ specific needs
  • E. Advising clients on how best the business can be run and controlled including issues of accountability and management

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  • 20 Marks

AA – Nov 2023 – L2 – Q3 – Professional Ethics and Code of Conduct for Auditors (IESBA Code)

Evaluate ethical threats due to auditor relationships and actions, and recommend mitigations for compliance.

The following scenarios may threaten compliance with fundamental principles in auditing:

i. The audit supervisor is married to the daughter of the Managing Director of the client company;

ii. The audit firm’s Senior Partner holds shares in the client company;

iii. The assurance firm also provides valuation services, internal audit services, and taxation services to an assurance client;

iv. The assurance firm earns more than 50% of its annual revenue from one assurance client; and

v. The firm obtained motor vehicle financing from a client bank for its staff.

Required:

a. Explain why compliance with fundamental principles in auditing may be threatened in each of the above FIVE circumstances. (10 Marks)

b. Explain FIVE ethical requirements that would reduce or mitigate the threats to compliance with the fundamental principles in the above FIVE circumstances. (10 Marks)

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  • 30 Marks

MGE – Nov 2014 – L2 – Q1 – Corporate Governance

Ethical and governance issues in appointing auditors with familial ties to company management.

ROC Company Plc. manufactures aluminium (stainless) household equipment. Its plant is located by Alobe river, which is the source of water for the community. The company currently has the largest share of the market on the West African Coast and plans to expand its operations to East African and South African markets.

At the 26th Annual General Meeting (AGM), shareholders approved the appointment of Adeola & Partners as External Auditors to the company. The Managing Partner of Adeola & Partners, Sir Segun Adeola, is a nephew of the Managing Director of ROC Company Plc. The appointment of Adeola & Partners as External Auditors to ROC Company was facilitated by the Managing Director, who did not disclose his relationship with Sir Segun Adeola to the company’s board.

At a recent board meeting, the Managing Director of ROC expressed concern that so much resources were expended towards satisfying the interest of the community at the expense of the company’s shareholders. According to him, shareholders are the primary stakeholders of the company, and their interest should be given the highest priority. He further opined that although other stakeholders are important to the company but only to the extent that ROC needs them. Consequently, the board resolved that henceforth, the company should not spend more than 0.5% of its Profit After Tax (PAT) on other stakeholders.

At the peak of the company’s production cycle, one of its underground waste tanks ruptured, and a large quantity of chemical waste leaked into Alobe river. This led to the destruction of aquatic life and contamination of neighbouring farmlands. This catastrophic event devastated the community as many farmers and fishermen lost their sources of livelihood. The community’s major source of drinking water was also contaminated.

The leadership of Alobe River Community Association approached the management of ROC Company Plc. and requested them to pay huge sums as compensation to the affected people and also to construct ten bore holes for the community. The management, however, informed the community leaders that based on the resolution of their board, expenditure on the issue would be limited to only 0.5% of profit after tax at the end of the year, which was projected to be far less than the amount of compensation demanded by the community. As a result, all discussions with the leadership of the community broke down.

The youths of the community responded with a sit-in protest, leading to a blockade of the company’s gate and disruption of its operations. The board of the company is now seeking immediate and amicable resolution of this problem.

While this was going on, the company suffered a major fire outbreak in its second factory, destroying its main furnace, machines and a large quantity of its finished goods. Some of the workers were severely burnt while attempting to put out the fire at the factory’s major warehouse. This event culminated in production shutdown at the second factory and temporary disengagement of several skilled workers as well as some casual staff. Fortunately, the company is covered by comprehensive fire and workers compensation insurance policies with Nagode Risk and Life Assurance Plc.

Required:
a. As a Strategic Risk Consultant of ROC Company Plc. you are to evaluate the adequacy of the risk management processes, including its information and communication systems. (8 Marks)

b. Evaluate the company’s residual risks in contrast to the management’s risk appetite. (7 Marks)

c. Using the stakeholders theory, evaluate the Managing Director’s position. Are there other stakeholders important to the company? (9 Marks)

d. Identify and discuss the ethical issues involved in the scenario described above. (6 Marks)

Answer:

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  • 15 Marks

AA – Nov 2014 – L2 – Q5 – Professional Ethics and Code of Conduct for Auditors

Explain threats to auditor independence and provide examples of each.

The ICAN Professional Code of Conduct and Guide for Members gives a list of threats to auditors’ independence, which may impair integrity, objectivity, or the good reputation of the profession.

Required:

Explain the following threats and give TWO examples each of circumstances that may lead to the threats:

a. Self-Interest (3 Marks)

b. Self-Review (3 Marks)

c. Advocacy (3 Marks)

d. Familiarity (3 Marks)

e. Intimidation (3 Marks)

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  • 20 Marks

AA – May 2021 – L2 – Q6 – Professional Ethics and Code of Conduct for Auditors (IESBA Code)

Explanation of auditor independence threats, including fees, financial interest, contingent fees, and personal relationships.

Wakaso Nigeria Limited has experienced serious labour turnover which has affected the business of the company in the last twelve months. The most frustrating issue was the resignation of a well-tested Financial Controller of the company close to year-end. Wakaso management is noted for timely financial reporting and rendering of tax returns due to the efficiency and effectiveness of the Financial Controller who was also involved in the preparation of tax computations. The company has been finding it difficult to quickly recruit a new Financial Controller that will match the technical ability of the former accountant. The Managing Director of the company has invited the company’s external auditors to a meeting, intimating them of the plan to employ their services to complete the write-up of the books of accounts and management account pending when they employ a good chartered accountant to handle the financial operations of the company.

The company’s management, in order to ensure timely reporting, has also informed the auditors that to save time and meet cost of operations, the firm’s staff will be accommodated in a five-star hotel with a mouth-watering offer of payment in lieu of feeding as recommended by the audit partner. In addition, the previous year’s audit fee will be doubled and an additional twenty percent payment made if the management accounts and audit work could be completed within three weeks.

The partner of the firm has rejected the offers on the grounds of possible threat to independence. The Managing Director complained to you, as his brother, lamenting that accountants are not good businessmen and uncooperative.

Required:

Discuss the following:

a. Meaning of threats to independence (2 Marks)
b. In relation to independence of auditors:
i. Fees and pricing (4 Marks)
ii. Financial interest (4 Marks)
iii. Contingent fees (2 Marks)
iv. Family and personal relationship (4 Marks)
c. The reasons why the preparation of accounting records and management accounts constitutes a threat to the independence of the auditors. (4 Marks)

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  • 40 Marks

AA – May 2021 – L2 – Q1 – Regulatory Framework for Auditing

Analysis of audit risks and control objectives in a joint audit and compliance scenario.

Chukwuemeka & Co. (Chartered Accountants) has been auditors to GED Manufacturing Nigeria Plc. There have been some regulatory and compliance issues for which the company was sanctioned and paid penalties to the Financial Reporting Council of Nigeria.

At the board of directors meeting to consider the last annual report audited by the firm, some of the previous problems caused by the auditors were raised and discussed. Following the reoccurrence of such issues, it was proposed that another audit firm be engaged in addition to the present firm.

To achieve their objective, a bigger firm that has international affiliation was considered to take a leading role in a joint audit arrangement and to ensure appropriate compliance. Your firm has been approached for the appointment. A meeting was scheduled between your firm, Chukwuemeka & Co., and the executive management of GED Manufacturing Nigeria Plc.

After the meeting, your firm was subsequently appointed, and the necessary formalities were properly followed. Your partner has directed that you liaise with Chukwuemeka & Co. to obtain the necessary materials for the preparation of the audit and that you review the prior year working papers to understand the issues. Your assessment of the documents obtained from the other auditor revealed the following, amongst others:

(i) The work done on the process of dispatch of goods and invoicing was not considered sufficient and appropriate.

(ii) The IT operations of the company had weak controls such that it was possible for some staff to override some of the existing controls.

Required:

a. Explain the risks inherent in the dispatch of goods and invoicing. (10 Marks)

b. Discuss the control objectives and principal controls that are relevant to the process of dispatch of goods and invoicing. (10 Marks)

c. Explain the limitations of a joint audit. (5 Marks)

d. Discuss the benefits of audit carried out by an internationally affiliated audit firm. (10 Marks)

e. Explain briefly the importance of audit working papers. (5 Marks)

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  • 12 Marks

AAA – Nov 2017 – L3 – Q5a – Practice Management, Professional Responsibility and Liability

Identify the causes of failure in a microfinance company and recommend actions to prevent recurrence.

You are an Audit Manager in the firm Taiplan Chartered Accountants, a firm in public practice registered with the Institute of Chartered Accountants (Ghana) (ICAG). Bank of Ghana (BOG) has appointed your firm to investigate reasons for the failure of DC Microfinance Limited (DCM) and your investigation has revealed the following as some of the reasons for the failure:

i) The board of directors of the company is made up only of Mr. and Mrs. David Commodore;

ii) The failure of the Bank of Ghana to examine or detect the non-submission of the fidelity returns submitted to it by the company and monitor the company adequately;

iii) The auditors have been the auditors of the company since its incorporation over ten years ago;

iv) The failure of the auditors of the company to spot and question some dubious accounting treatments adopted by the company. This is partly due to the fact that the consulting arm of the audit firm has been performing all the consultancy work needed by the company since its incorporation and particularly at the time of its application for the microfinance operating permit from BOG.

Required:
For points (i) to (iv) above, state for each point, and show what would contribute to the failure of the company and make ONE recommendation to ensure that this would not re-occur in DCM or any other microfinance company in Ghana. (12 marks)

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  • 10 Marks

AAA – May 2020 – L3 – Q1a -Rules of professional conduct, Professional responsibility and liability

Discuss five ethical issues arising for auditors when performing an audit engagement.

You are an audit manager at Abdulai Afriyie & Co., a firm of Chartered Accountants. You are currently preparing the audit of Adoma Mining & Jewelleries Ltd for the year ended 28 February 2019. Adoma Mining & Jewelleries Ltd is a small Mining and Minerals Company which offers an extensive range of services that covers exploration, jewellery production, industrial applications, decommissioning and closure. You reviewed the previous years’ files for this client and noted the following:

i) The previous financial statements were prepared by the Consulting Division of Abdulai Afriyie & Co. and there is nothing in any of the files to suggest any particular difficulty with the assignment.

ii) In the course of the review of the files, it was observed there is a note explaining that on the completion of the assignment, each member of the consulting team with whom the client had come into contact, was given a gift of “presentation box” of the client’s Jewelleries. These presentation boxes contain samples of each of the different jewelleries produced by the client. These boxes are not available for sale but are sometimes given as gifts (for example, at Christmas) to loyal customers and others such as school principals who are seen to bring business to the client. Since this was a non-assurance assignment, the gifts were automatically and gratefully accepted.

iii) In early January 2019, the company received correspondence from the Ghana Revenue Authority (GRA) claiming that the company has failed to pay certain mineral royalties which are usually charged on the jewellery manufactured. Normally, these levies are automatically deducted when miners or mining companies sell minerals to dealers. In this case, all of the minerals extracted were used to make jewels and ornaments by the company itself; and so the company never considered the possibility that such royalties might apply to it. The Chief Executive Officer (CEO) of Adoma Mining & Jewelleries Ltd tells you that he has done some research into the issue. It is his view that an argument can be made that the royalties do not apply in this case. However, should they apply, the amounts outstanding could be material since a number of years of non-payment might be involved. The CEO is aware that Abdulai Afriyie & Co. has a lot of Jewelleries based clients and has asked if Abdulai Afriyie & Co. would handle this matter as a separate assignment in addition to the audit.

Required:
Discuss FIVE (5) ethical issues that may arise for Abdulai Afriyie & Co. in relation to the audit of Adoma Mining & Jewelleries Ltd. (10 marks)

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  • 10 Marks

AAA – May 2018 – L3 – Q2a – Rules of professional conduct, Professional responsibility and liability

Comment on the ethical and professional issues in two cases related to audit client engagements.

Dzinpa & Associate, a firm of Chartered Accountants, in which you are a partner, has the following issues emerged in relation to two of its clients:

i) Good Life Insurance Company Limited is a major client and is listed on the Ghana Stock Exchange. The audit of this client has just started with an audit team of six members, of which Sally is the most junior. Sally has invested in a personal pension plan in a company whose investment portfolio is in all the listed companies on the Ghana Stock Exchange.

ii) You are the head of a team carrying out due diligence on Dumsor Ltd., a limited liability company which your client, Solar Electricals, is considering taking over. David, your second in command on the team, has confided in you that in the course of his work he has met the daughter of the Finance Director of Dumsor Ltd., and he intends to invite her on a date.

Required:
Comment on the ethical and other professional issues raised in the above matters.
(Note: Your answer should outline the threat arising, the significance of the threat, any factors you have taken into account, and if relevant, any safeguards you could apply to eliminate or mitigate the threat.) (10 marks)

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  • 10 Marks

AAA – April 2022 – L3 – Q5a – Professional responsibility and liability

Discuss non-audit services that could lead to a conflict of interest or impair the independence of an auditor.

Companies Act, 2019 (Act 992) section 143 (2) states among others that a company, person, or firm that carries out duties of an auditor should ensure that the personal judgment of the auditor is not impaired by reason of any relationship with a client that will result in a conflict of interest.

Some governance experts consider the provision of non-audit services to audit clients as an example of conflict of interest and could impair the firm’s independence.

Required: In reference to the above concern, discuss FOUR (4) non-audit services that could lead to conflict of interest or impair the independence of an Auditor. (10 marks)

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  • 6 Marks

AAA – April 2022 – L3 – Q1b – Professional responsibility and liability

Explain parties not allowed to own financial interest in a client and identify relevant safeguards.

Where an audit firm owns shares or is a trustee of a trust that holds shares in a client, there is said to be a financial interest in the client’s affairs. According to the IESBA, some selected parties are not allowed to own direct or indirect material financial interest in a client.

Required: i) Explain THREE (3) parties that are not allowed to own direct or indirect financial interest in a client. (3 marks)

ii) Identify THREE (3) safeguards that may be relevant in relation to direct or indirect financial interest in a client. (3 marks)

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  • 20 Marks

AAA – Nov 2015 – L3 – Q2 – Internal audit and outsourcing

Considerations for appointing an internal auditor, expected briefing issues, and comparing assurance and consulting activities.

The Afigya Sekyere District Assembly has appointed Ms. Afi Kakrabah as the Internal Auditor. She was appointed by the District Chief Executive (DCE) after he attended a seminar at GIMPA for newly appointed DCEs, where the importance of pre-auditing of all payments by Internal Auditors for expenditures incurred by all Government Ministries, Departments, Municipal, and District Assemblies (MMDAs) was stressed.

Ms. Kakrabah has just completed National Service at the Internal Audit Agency, holds an HND in Accounting, and is a native of the same village as the DCE of Afigya Sekyere District.

Ms. Kakrabah will report to the District Finance Officer.

At the first meeting after the appointment of the DCE, the District Assembly had set up its standing committees, and one of them was the Audit and Finance Sub-Committee. The first meeting of the sub-committee requested Ms. Kakrabah to prepare briefing notes to show her vision and approach to the Internal Audit function at the District Assembly and to discuss how she will maintain her independence as well as her knowledge and understanding of Internal Audit Practices recommended by the Institute of Internal Auditors (IIA) as in the IIA’s International Professional Practices Framework (IPPF).

You are an Auditor in Public Practice, and the Auditor General of Ghana has appointed you to perform the statutory audit of the Afigya Sekyere District Assembly. The Audit and Finance Sub-Committee of the District Assembly has requested that you attend the meeting at which the Internal Auditor will brief them and help them in assessing the Internal Auditor’s briefing.

Required:

a) Comment on the matters that you will consider on the appointment of Ms. Kakrabah and her reporting lines as discussed above. (5 marks)

b) State the issues that you should expect Ms. Kakrabah to discuss in her briefing to the Audit and Finance Sub-Committee of the District Assembly. (10 marks)

c) The IIA’s definition of Internal Auditing states, among others, that:
“Internal Auditing is an independent, objective assurance and consulting activity….”
Compare and contrast an Assurance and a Consulting Audit activity.

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