- 15 Marks
Question
You have just been appointed the Auditor of Sheerahmog Manufacturing Company Limited, which manufactures 2.0 ml syringes specifically used by veterinary doctors. Recently, it was discovered that the 2.0 ml syringes are used on human beings due to the shortage of syringes for human use.
The Federal Government has decided to phase out the 2.0ml syringe in the next three years. In order to diversify into production of carbonated water, the Finance Director suggested that the company approach a bank for a complementary N1.26 billion required to finance the diversification program.
In spite of their proposal and cashflow to Bank of Akowonjo Plc, which was described as being fantastic, their loan application was not granted. As a result, the company is likely to go into liquidation with its numerous staff disengaged, if viable alternative is not provided to raise the required fund.
In carrying out the analysis of the sources of funds at the end of the year under review, you found that the company made much money from human trafficking to enable it accomplish the proposed plan of diversification.
At the next meeting with management of the company, you brought your findings to their knowledge and threatened to disclose it as an extraordinary item in the income schedule. Management frowned at it and were considering reviewing your appointment including fee which is currently 52% of your annual income.
Required:
a. Identify the ethical issues involved as they relate to the auditor. (2 Marks)
b. What are the THREE elements of fraudulent practices presented in this case? (6 Marks)
c. What are the safeguards for the ethical issues identified? (4 Marks)
d. List the issues that should be brought to the attention of the company by the auditors as regards the disclosure of the illegal act. (3 Marks)
(Total 15 Marks)
Answer
a. Ethical Issues Involved:
- Integrity: The auditor is faced with the dilemma of whether to disclose findings related to human trafficking, which involves an illegal act and can have serious implications for the company’s reputation.
- Independence: The auditor is under pressure from management to not disclose the illegal activities, potentially compromising their independence.
- Professional Behavior: The auditor must also consider the threat of losing their appointment and income, which could influence their professional behavior and decision-making.
b. Three Elements of Fraudulent Practices:
- Misrepresentation of Information: The company is involved in human trafficking, which was not disclosed in their financial statements, leading to misrepresentation of the true nature of their business activities.
- Concealment of Information: The company is deliberately hiding the illegal source of funds used to finance the diversification plan, thus concealing critical financial information from stakeholders.
- Intentional Deception: There is an intentional attempt by management to prevent the auditor from disclosing the illegal activities, which may be an effort to deceive both auditors and stakeholders for financial gain.
c. Safeguards for Ethical Issues Identified:
- Consulting with Legal Advisors: The auditor should seek legal advice to understand the implications of disclosing the illegal activities and to ensure they are complying with relevant laws and regulations.
- Reviewing the Code of Ethics: The auditor should refer to the professional code of ethics (e.g., ICAN’s ethical guidelines) to uphold integrity, objectivity, and independence in their work.
- Escalating the Issue: If the management persists in resisting disclosure, the auditor may need to escalate the issue to higher authorities or regulators to protect public interest and comply with professional standards.
- Independence: The auditor should ensure that their judgment is not influenced by threats from the management regarding their appointment or fees.
d. Issues to be Brought to the Company’s Attention Regarding Disclosure of Illegal Act:
- Violation of Legal and Ethical Standards: The auditor should highlight that the company is involved in illegal activities, such as human trafficking, which must be disclosed as per legal and ethical standards.
- Impact on Financial Statements: The auditor must emphasize the need to reflect the illegal activities in the financial statements, including proper disclosure as an extraordinary item.
- Regulatory and Legal Consequences: The auditor should inform the company of the potential legal and reputational consequences of failing to disclose the illegal activities.
- Tags: Auditing, Disclosure, Ethical Issues, Fraud, Legal Issues
- Level: Level 3
- Topic: Ethical Issues in Auditing
- Series: NOV 2012
- Uploader: Dotse