- 10 Marks
Question
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)
Answer
(i) In relation to Good Life Insurance Ltd., there is a threat of self-interest arising, as a member of the audit team has an indirect financial interest in the client.
The relevant factors are:
- The interest is unlikely to be material to the client or Sally, as the investment is recent and Sally’s interest is in a pool of general investments made by the pension scheme on her behalf.
- Sally is the audit junior and does not have a significant role on the audit in terms of drawing audit conclusions or identifying audit risk areas.
- The risk that arises to the independence of the audit here is not significant. It would be inappropriate to require Sally to divest her interest in the audit client. If all the elements of risk in this situation are to be eliminated, then the junior assigned to the team could be simply changed. However, such a step is not vital in this situation.
(Any 2 points for 2 marks)
(ii) In relation to Solar Electricals, two issues arise. The first is that the firm appears to be providing multiple services to Solar Electricals, which could raise self-interest threat. The second is that the manager assigned to the due diligence assignment wants to engage in a personal relationship with a person connected to the subject of the assignment, which could create familiarity or intimidation threat. (2 marks)
With regard to the issue of multiple services:
- Insufficient information is given to draw a conclusion as to the significance of the threat. Relevant factors would be matters such as the nature of the services, the fee income, and the team members assigned to each. Safeguards could include using different staff for the two assignments. The risk is likely to be significant only if one of the services provided is audit, which is not indicated in the scenario.
In relation to the second issue, the relevant factors are these:
- The assurance team member, David, has a significant role on the team as second in command.
- The other party is closely connected to a key staff member at the company being reviewed.
- Timing: In this situation, the firm is carrying out a one-off review of the company, and timing is a key issue. Presently David does not have a personal relationship which would significantly threaten the independence of the assignment. Therefore, the safeguard is to request that David does not take any action in that direction until the assignment is completed. If he refuses, then his removal from the team should be considered.
(3 points for 3 marks)
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