- 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.
Question
(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.
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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