Question Tag: Conflict of Interest

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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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PSAF – Nov 2024 – L2 – Q2b – Related Party Transactions and Disclosures

Explains related party transactions and their implications under IPSAS 20.

You are the Director of Finance at the Ghana Water Development Authority, an entity under the Ministry of Forestry and Water. The Authority has a five-member Board chaired by the daughter of the Sector Minister. The Chief Executive Officer of the Authority has just been appointed by Government for an initial term of four years.

The Chairperson of the board runs boutique services. The Authority buys a lot of presents from this boutique whenever they are confronted with the need to give out presents to any high-profile person. The Chairperson has made a request to the Authority to finance her boutique services with an amount of GH¢546,000 to enable her business to pay some urgent bills. No terms or conditions were provided in the request. Such an assistance from a financial institution would attract the current prevailing bank interest on loans at a rate of 35% per annum. Recently, another member of the Board contracted a loan from the Bank for her child’s university entrance fees at that rate.

Management of the Authority indicated that the amount was not significant to the Authority and has been approved by the Head of the entity and the Chief Director. The approved document has been handed over to you for payment. Considering the PFM Laws and IPSAS, you engaged the Chief Director about the request, but you were directed to go ahead and pay and use the appropriate accounting treatment in such circumstances. You accordingly raised the necessary documentation and effected the payment.

Required:

In relation to IPSAS 20: Related Party Disclosures:

i) Explain the implications of this transaction on the Authority and state how you would account for this transaction in the financial statements of the entity.

ii) State SIX situations where related party transactions may lead to disclosures by a reporting entity.

iii) Explain TWO reasons for disclosing related party transactions/relations.

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FM – Nov 2014 – L3 – SC – Q6b – Financing Decisions and Capital Markets

Examine reasons for conflict of interest between shareholders and bondholders.

Discuss any FIVE reasons why conflict of interest may exist between shareholders and bondholders. (5 Marks)

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AAA – Nov 2013 – L3 – SB – Q1 – Ethical Issues in Auditing

Evaluate whether to comply with a former executive’s request for audit services while addressing confidentiality in auditor-client relationships.

Your firm acts as the auditors and advisers to Naija Seven Limited, and to its four directors. The company is owned 50% by Praise Caro, 25% by his wife Madame, and 10% by James Patrick. Braima is the Chief Executive, and Julius is the Finance Director. Julius’ sister, Mabel Mama, recently resigned from the executive board following a disagreement with Praise. Mabel Mama formed her own company, Nigeri Heaven, in competition with Naija Seven.

Currently, Mabel is negotiating with her former co-executives on the profit-related remuneration due to her and the sale of her 15% holding of shares in Naija Seven to one or all of them.

Mabel Mama has contacted you to find out Praise Caro’s current remuneration package since he refused to disclose it to her. She has also requested that your firm should continue to act as her personal adviser, financial adviser, and auditor to Nigeri Heaven.

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CR – May 2023 – L3 – Q6b – Ethical Issues in Corporate Reporting

Discuss the ethical implications and possible actions for alleged unethical behavior in a corporate takeover.

On your first day at Omoge Nigeria Plc as the Chief Financial Officer (CFO) of the company, you were sitting in the staff canteen where you overheard a conversation between two Admin Officers. They were gossiping about Mr. Adamu Salisu, the Finance Director.

According to their conversation, Mr. Adamu Salisu may have been involved in unethical activities related to Omoge Nigeria Plc’s takeover of Bobo Limited.

Key details include:

  • Mr. Salisu’s wife, Mrs. Salisu, was a director at Bobo Limited prior to the takeover and owned 30% of its shares.
  • It is alleged that Mr. Salisu substantially overpaid for Bobo Limited and facilitated the overpayment to benefit his wife.
  • The alleged unethical act involved colluding with his wife to falsify records submitted to the accountant conducting due diligence for the takeover.
  • Mr. Salisu is reportedly not well-liked by staff, who consider him intimidating and appear pleased at the prospect of him losing his job.

Required:

Discuss the ethical implications of the above and the possible actions that may arise from the incident. (5 Marks)

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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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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)

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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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FM – May 2024 – L3 – SC – Q7 – Mergers and Acquisitions

Discuss manager-shareholder conflicts with examples and reasons for synergy in mergers and acquisitions.

(a) Discuss conflict of interest that may exist between managers and shareholders and give examples. (8 Marks)

(b) Explain why synergy might exist when one company merges with or takes over another company. (7 Marks)

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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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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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PSAF – Nov 2024 – L2 – Q2b – Related Party Transactions and Disclosures

Explains related party transactions and their implications under IPSAS 20.

You are the Director of Finance at the Ghana Water Development Authority, an entity under the Ministry of Forestry and Water. The Authority has a five-member Board chaired by the daughter of the Sector Minister. The Chief Executive Officer of the Authority has just been appointed by Government for an initial term of four years.

The Chairperson of the board runs boutique services. The Authority buys a lot of presents from this boutique whenever they are confronted with the need to give out presents to any high-profile person. The Chairperson has made a request to the Authority to finance her boutique services with an amount of GH¢546,000 to enable her business to pay some urgent bills. No terms or conditions were provided in the request. Such an assistance from a financial institution would attract the current prevailing bank interest on loans at a rate of 35% per annum. Recently, another member of the Board contracted a loan from the Bank for her child’s university entrance fees at that rate.

Management of the Authority indicated that the amount was not significant to the Authority and has been approved by the Head of the entity and the Chief Director. The approved document has been handed over to you for payment. Considering the PFM Laws and IPSAS, you engaged the Chief Director about the request, but you were directed to go ahead and pay and use the appropriate accounting treatment in such circumstances. You accordingly raised the necessary documentation and effected the payment.

Required:

In relation to IPSAS 20: Related Party Disclosures:

i) Explain the implications of this transaction on the Authority and state how you would account for this transaction in the financial statements of the entity.

ii) State SIX situations where related party transactions may lead to disclosures by a reporting entity.

iii) Explain TWO reasons for disclosing related party transactions/relations.

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FM – Nov 2014 – L3 – SC – Q6b – Financing Decisions and Capital Markets

Examine reasons for conflict of interest between shareholders and bondholders.

Discuss any FIVE reasons why conflict of interest may exist between shareholders and bondholders. (5 Marks)

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AAA – Nov 2013 – L3 – SB – Q1 – Ethical Issues in Auditing

Evaluate whether to comply with a former executive’s request for audit services while addressing confidentiality in auditor-client relationships.

Your firm acts as the auditors and advisers to Naija Seven Limited, and to its four directors. The company is owned 50% by Praise Caro, 25% by his wife Madame, and 10% by James Patrick. Braima is the Chief Executive, and Julius is the Finance Director. Julius’ sister, Mabel Mama, recently resigned from the executive board following a disagreement with Praise. Mabel Mama formed her own company, Nigeri Heaven, in competition with Naija Seven.

Currently, Mabel is negotiating with her former co-executives on the profit-related remuneration due to her and the sale of her 15% holding of shares in Naija Seven to one or all of them.

Mabel Mama has contacted you to find out Praise Caro’s current remuneration package since he refused to disclose it to her. She has also requested that your firm should continue to act as her personal adviser, financial adviser, and auditor to Nigeri Heaven.

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CR – May 2023 – L3 – Q6b – Ethical Issues in Corporate Reporting

Discuss the ethical implications and possible actions for alleged unethical behavior in a corporate takeover.

On your first day at Omoge Nigeria Plc as the Chief Financial Officer (CFO) of the company, you were sitting in the staff canteen where you overheard a conversation between two Admin Officers. They were gossiping about Mr. Adamu Salisu, the Finance Director.

According to their conversation, Mr. Adamu Salisu may have been involved in unethical activities related to Omoge Nigeria Plc’s takeover of Bobo Limited.

Key details include:

  • Mr. Salisu’s wife, Mrs. Salisu, was a director at Bobo Limited prior to the takeover and owned 30% of its shares.
  • It is alleged that Mr. Salisu substantially overpaid for Bobo Limited and facilitated the overpayment to benefit his wife.
  • The alleged unethical act involved colluding with his wife to falsify records submitted to the accountant conducting due diligence for the takeover.
  • Mr. Salisu is reportedly not well-liked by staff, who consider him intimidating and appear pleased at the prospect of him losing his job.

Required:

Discuss the ethical implications of the above and the possible actions that may arise from the incident. (5 Marks)

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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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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)

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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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FM – May 2024 – L3 – SC – Q7 – Mergers and Acquisitions

Discuss manager-shareholder conflicts with examples and reasons for synergy in mergers and acquisitions.

(a) Discuss conflict of interest that may exist between managers and shareholders and give examples. (8 Marks)

(b) Explain why synergy might exist when one company merges with or takes over another company. (7 Marks)

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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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