Tag (SQ): Auditor Independence

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  • 20 Marks

AA – L2 – Q15 – Professional Ethics and Code of Conduct for Auditors

Identify threats to auditor independence from non-audit services and board appointment at HealthTrend Co, and suggest resolutions. Describe matters and procedures to consider before accepting appointment as statutory auditor of HealthTrend Co.

You work for a firm of accountants and auditors which has eight partners. The audit firm has been invited by the Managing Director (MD) and majority shareholder of HealthTrend Co, to accept appointment as statutory auditor of the company, replacing the current firm of auditors who will not be re-appointed.
The principal activity of HealthTrend Co is the manufacture and distribution of healthcare products. Your firm has several companies operating in the healthcare sector in its client portfolio.
The MD of HealthTrend has requested that your firm assists with the preparation of the company’s tax computation, and provides consultancy services on an ongoing basis in connection with his plans to grow the business.
The MD has also suggested that a partner in your firm joins the board of HealthTrend Co as a non-executive director.

Required:
(a) Identify and explain the threats to independence and objectivity which may arise from the provision of the services requested by the HealthTrend MD, and state how these threats should be resolved.

(b) Describe the matters, other than independence and objectivity, to be considered and the procedures to be performed in order to determine whether it is appropriate for your firm to accept appointment as statutory auditor of HealthTrend Co.

(c) Set out the benefits to audit firms and their clients of having audit and non-audit services provided by the same firm of accountants.

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  • 20 Marks

AA – L2 – Q14 – Professional Ethics and Code of Conduct for Auditors

Explain ethical threats to auditor independence for Vark Co and suggest safeguards to mitigate them. Discuss the benefits of establishing an internal audit function for Vark Co.

(a)  You are a manager in the audit firm of XYZ & Co; and this is your first time you have worked on one of the firm’s established clients, Vark Co. The main activity of Vark Co is providing investment advice to individuals regarding saving for retirement, purchase of shares and securities and investing in tax efficient savings schemes. Vark is regulated by the relevant financial services authority.
You have been asked to start the audit planning for Vark Co, by Mr. Lee, a partner in XYZ & Co. Mr. Lee has been the engagement partner for Vark Co, for the past nine years and so has excellent knowledge of the client. Mr. Lee informs you that Mr. Tan, the audit senior, received investment advice from Vark Co during the year and intends to do the same next year.
In an initial meeting with the finance director of Vark Co, you learnt that the audit team will not be entertained on Vark Co’s yacht this year as this could appear to be an attempt to influence the opinion of the audit. Instead, he has arranged a balloon flight costing less than one-tenth of the expenses of using the yacht and hopes this will be acceptable. The director also states that the fee for taxation services this year should be based on a percentage of tax saved and trust that your firm will accept a fixed fee for representing Vark Co in court in a dispute regarding the amount of sales tax payable to the taxation authorities. Sales tax payable is material to the current year financial statements.
Required:
(i) Explain the ethical threats which may affect the auditor of Vark Co.
(ii) For each ethical threat, discuss how the effect of the threat can be mitigated.
(b) Discuss the benefits of Vark Co establishing an internal audit function.

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  • 15 Marks

AAA – L3 – Q9 – Rules of professional conduct

Explain the importance of ethical principles, demonstrate independence, and outline when confidential client information can be disclosed.

ICAG has adopted IESBA’s ethical guidance, the International Code of Ethics for Professional Accountants. These rules are applicable to all members and students. If these rules are not complied with disciplinary action may result which could lead to reprimand, fine or exclusion.

Required
(a) Explain why you think fundamental principles of ethics are so fundamental to auditing.
(b) Explain how a member can demonstrate that they are truly independent in carrying out the work they perform, and why it is important that they should do so.
(c) Set out the circumstances in which it is permissible to disclose confidential client information.

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  • 10 Marks

AA – L2 – Q11 – Professional Ethics and Code of Conduct for Auditors

Explain why auditor independence is essential and discuss advantages/disadvantages of auditors providing consulting services.

Independence

The responsibilities of external auditors are not always well understood. When external auditors provide non-audit services to their audit clients, it is essential that the auditors make a clear distinction between their audit and non-audit responsibilities.

Required

(a) Explain why it is essential for external auditors to be independent of their clients.

 

(b) Explain the advantages and disadvantages of external auditors providing consulting services to their audit clients.

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  • 20 Marks

AA – L2 – Q10 – Auditor’s Liability

Discuss auditor rights on dismissal, draft a letter to nominee auditors, and evaluate ethical implications for Jenson plc.

Your firm has recently completed the audit of Jenson plc, and after extensive discussions with the directors of the company, the audit opinion has been qualified in respect of the auditors’ inability to agree with the directors on the appropriateness of a provision against obsolete inventories. The directors have informed you that they intend to dismiss your firm as auditors, and replace you with a small local firm of accountants. The directors have informed you verbally that the reason for your dismissal is the disagreement over the provision for inventory obsolescence, and, further, they intend to appoint the new auditors because they are more likely to accept the accounting policies of the directors. You have recently received a letter from the nominee auditors who ask if there are any professional reasons why they should not accept appointment as auditors of Jenson plc.

Required:
(a) Describe the rights which local legislation is likely to give to the auditor when the company proposes to dismiss him and has dismissed him.

(b) Draft a suitable letter in reply to the request from the nominee firm of audit asking if there are any professional reasons why they should not accept appointment as auditors.
(Marks will be given for the style and content of the letter.)

(c) In view of the attitude of the directors towards the present auditors, discuss factors which the nominee auditors need to consider before accepting appointment.

(d) Describe the ethical implications for the nominee auditor, if he decides to accept the appointment as auditor.

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  • 20 Marks

AA – L2 – Q8 – Regulatory Framework for Auditing

Explain how legislation and IESBA Code ensure auditor independence at Apex Ventures. Discuss threats to auditor independence in three scenarios at Pinnacle Partners and suggest safeguards

(a) State how legislation and the IESBA International Code of Ethics for Professional Accountants each seek to ensure the independence and objectivity of auditors at Apex Ventures.

(b) The following three situations have arisen in the audit firm of Pinnacle Partners:
(i) One of the partners, Mr. Thompson, and his wife, have been invited by the managing director of Summit Tiles, an audit client, to celebrate the company’s 20th anniversary with management over a long weekend at a beach resort. Mr. Thompson has been the engagement partner since incorporation of the company.
(ii) The firm has been approached and asked to accept appointment as auditors of Ridge Paints. One of the firm’s audit managers is company secretary of the company, although he takes no part in the management of the company. His parents are the directors and shareholders of Ridge Paints.
(iii) The directors of Crest Floors are unhappy with the level of fees charged by the firm. They are still refusing to agree an outstanding bill for taxation and advisory work and are demanding a reduction in the audit fee this year to match a quote they have received from another firm.

Required
Comment on the situations described above, recognising any threats to independence or objectivity, and suggesting what safeguards the firm should put in place to deal with such threats.

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  • 15 Marks

AAA-L3 – Q6- Rules of Professional Conduct

Evaluate impact of business relationship, auditor parting, and conflict of interest on accepting Vega Investigations as an audit client.

         (a) Impact of the three pieces of information

  • Major service provider to your firm
  • Acrimonious parting with the previous auditors
  • The firm already represents the Tarkwa Investigations Group (TIG), a company involved in a hostile take-over of Vega.              (b) Other factors to consider in making a decision as to whether to accept Vega as a client                                                                   (c) Steps to take in accepting nomination

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  • 20 Marks

AA – L2 – Q4 – Ethical Issues in Auditing

Explain situations where auditors may disclose confidential client information.

You are an audit manager in Apex & Co, a firm of Chartered Accountants. You are preparing the engagement letter for the audit of TechTrend, a listed company, for the year ended 31 December 20X8.

TechTrend has grown rapidly over the past few years, and is now one of your firm’s most important clients.

TechTrend has been an audit client for eight years and Apex & Co has provided audit, taxation, and management consultancy advice during this time. The client has been satisfied with the services provided, although the taxation fee for the period to 30 June 20X8 remains unpaid.

Audit personnel available for this year’s audit are most of the staff from last year, including Mr. Thompson, an audit partner, and Mr. Lee, an audit senior. Mr. Thompson has been the audit partner since TechTrend became an audit client. You are aware that Sarah Thompson, the daughter of Mr. Thompson, has recently been appointed the financial director at TechTrend.

To celebrate her new appointment, Sarah has suggested taking all of the audit staff out to an expensive restaurant prior to the start of the audit work for this year.

Required:

(a) Explain the situations where an auditor may disclose confidential information about a client.

(b) Identify and explain the risks to independence arising in carrying out your audit of TechTrend for the year ending 31 December 20X8, and suggest ways of mitigating each of the risks you identify.

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  • 10 Marks

AAA – L3 – Q1 – Regulatory Environment

Assess integrity and independence issues for accepting Farrow Pharmaceuticals as an audit client.

Farrow Pharmaceuticals

(a) Discuss the factors to consider regarding the integrity of the client when deciding whether to accept the nomination as auditors of Farrow Pharmaceuticals.

(b) Evaluate the considerations related to auditor independence that should be addressed before accepting the nomination as auditors of Farrow Pharmaceuticals.

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  • 15 Marks

AA – L2 – Q1 – Professional Ethics and Code of Conduct for Auditors

Discuss the independence threat from an audit manager holding shares in Sycamore and required safeguards.

It has been suggested that the most important matter affecting the credibility of the auditor is that of ‘independence’.

Required

Comment on the following situations in the context of the independence of the auditor, showing clearly the threats involved and the safeguards required by the IESBA International Code of Ethics for Professional Accountants:

(a) The audit manager in charge of the audit assignment of Scott holds 1,000 $1 ordinary shares in the company (total shares in issue – 100,000). The audit partner holds no shares.

(b) An audit partner of a firm of Chartered Accountants is a personal friend of the chief accountant of Peters Ltd. The chief accountant is not a director of the company and the partner is not responsible for the audit of Peters Ltd.

(c) The audit fee for Freya, a listed company, is $175,000. The total fee income of the audit firm is $700,000.

(d) The audit senior in charge of the audit of Green, a bank, has a personal loan from the Green Bank of $2,000 on which he is currently paying a market rate of interest.

(e) An audit partner is responsible for two audit assignments: Pepper and Tomato. Pepper has recently tendered for a contract with Tomato for a supply of material quantities of goods over a number of years. Tomato has asked the audit partner to advise on the matter

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