- 10 Marks
Question
You are an audit manager of Afari & Partners and have been assigned to the audit of Jericho Plant Company Ltd (Jericho Plant), which has been an audit client for 6 years and specialises in manufacturing fertilizers in Ghana.
The company was introduced to the firm by Mr. Lartey 6 years ago when he was a Commissioner at the Ghana Revenue Authority (GRA). Mr. Lartey is not a member of the Institute of Chartered Accountants, Ghana. However, since his retirement from GRA, last year, he joined the firm as a tax partner to provide tax consultancy services. He has good relations with the client as his daughter is married to the son of the CEO for Jericho Plant.
Mr. Andani, who has been the audit engagement partner for Jericho Plant for the past 6 years, has recently been rotated off the audit engagement. The current audit partner, Mr. Nti, has suggested that in order to maintain a close relationship with Jericho Plant, Mr. Lartey should undertake the role of an engagement quality reviewer this year. In addition, Jericho Plant has requested that Mr. Andani assist them by attending their audit committee meetings, as a non-executive director has recently left the company.
Jericho Plant has also asked Mr. Lartey and the other partners at Afari & Partners to help them in recruiting a new non-executive director.
Fees paid by Jericho Plant form 35% of the firm’s total fee income (both audit and non-audit fees) and the partners have anticipated that the fees for this year would be greater than last year. Since joining as a tax partner, Mr. Lartey has been aggressive in generating revenue for the tax department and does not keep records of his work. He argues that the most important issue is for the firm to generate revenue, which he does. Some of the clients have complained about the cash collected by Mr. Lartey as part of his consultancy services.
The audit manager for Jericho Plant last year has just announced that he is leaving Afari & Partners to join Jericho Plant as the financial controller.
Required:
Using the information above
i) Evaluate FOUR (4) ethical threats which may affect the independence of Afari & Partners. (6 marks)
ii) For each threat, advise on how it might be mitigated to an acceptable level. (4 marks)
Answer
i) Ethical Threats
- Familiarity Threat of independent review partner: The proposed engagement quality reviewer’s daughter is married to the son of the CEO for Jericho Plant. Also, he has a long-standing relationship with the company.
- Attending Audit Committee Meeting: The company has requested that Mr. Andani assist them by attending their audit committee meetings, as a non-executive director. This exposes the firm to self-interest threat as the firm may be perceived as performing management roles of the company and also threatens the objectivity of the firm.
- Assistance to Recruiting a Non-Executive Director: This represents a self-interest threat as the audit firm cannot undertake the recruitment of senior management, especially non-executive directors who have a key responsibility of appointing the audit firm.
- Fees (35% of total income): This exposes the firm to self-interest threat as the fees from the company make up a significant portion of the firm’s income.
- Professional Behaviour: Mr. Lartey has been aggressive in generating revenue for the tax department and does not document his work. The approach adopted has led to complaints from some clients. A professional accountant shall comply with the principle of professional behaviour, which requires an accountant to comply with relevant laws and regulations and avoid any conduct that the accountant knows or should know might discredit the profession. A professional accountant shall not knowingly engage in any business, occupation or activity that impairs or might impair the integrity, objectivity or good reputation of the profession, and as a result would be incompatible with the fundamental principles. His approach might discredit the accounting profession.
- Professional Competence: Mr. Lartey has been recommended as the engagement quality reviewer. An engagement quality reviewer must have competence, independence, integrity, and objectivity. He is not a member of ICAG. Although the question does not state his qualification, not being a professional accountant indicates that his level of competence may be below that which is required for an engagement quality reviewer.
- The Audit Manager is Leaving the firm to become the financial controller at Jericho Plant. This represents a self-interest and familiarity threat as the audit manager is familiar with the audit plan which is to be adopted at the firm, and he may also have commenced work on this year’s audit.
(Any 4 points @ 1.5 marks each = 6 marks)
Managing the Risk of the Threat
- Mr. Lartey should not serve as the engagement quality reviewer. Similarly, Mr. Andani cannot serve as the engagement quality reviewer because he is too familiar with the client. The firm can consult a professional outside the firm to serve in the position.
- Mr. Lartey should be trained on the ethical principles of the auditing profession and admonished to follow ethical principles in raising revenue for the firm.
- The firm can assist the client to undertake roles such as reviewing a shortlist of candidates. However, they must ensure that they are not seen to undertake management decisions and so must not make the final decision on who is appointed.
- Â A new audit manager should be appointed to Jericho Plant Company Limited, and any work already undertaken by the previous manager should be independently reviewed.
- In addition, It would be advisable to modify the audit plan so that the manager would not be overly familiar with the approach to be adopted.
(Any 4 points @ 1 mark each = 4 marks)
- Uploader: Sarah