An auditor shall not accept a loan on favorable commercial terms from an audit client because of the threat to his or her independence. The threat would be a:
A Self-interest threat
B Self-review threat
C Advocacy threat
D Familiarity threat
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TWO CASES
Case 1
Kofi Mensah has been on a two-year study sabbatical in Canada and this is his first job on returning to work. Kofi Mensah qualified as an ICAG chartered accountant just before his sabbatical. He worked in a medium-sized practice with wide experience of clients in the mining, manufacturing, and agricultural sectors.
Volta Assurance Limited is a subsidiary of a listed group involved in financial services. The financial controller of Volta Assurance Limited has been on long-term sick leave. Kofi Mensah has been offered an appointment as temporary financial controller three months before the 31 December 20X9 year-end.
Kofi Mensah would be responsible for preparing the financial statements for the year ended 31 December 20X9. Key areas of the financial statements include lessor accounting, financial instruments, and insurance contracts.
During his interview for the post, the group finance director told Kofi Mensah that the group is looking for a strong financial position and performance from the subsidiary and that if Kofi Mensah helps deliver it, he is sure to obtain a permanent post in the group.
Case 2
Kwame Osei is an ICAG Chartered Accountant and works as a financial accountant working for Kumasi Builders plc.
Kumasi Builders plc is about to finalise its financial statements for the year ended 31 December 20X9 and will release its results in two days’ time.
One of Kwame Osei’s tasks during the frantic year-end work was to perform an impairment review on certain assets owned by the company. There were indications of impairment, but Kwame Osei’s calculation of recoverable amount showed that no assets were impaired.
Kwame Osei has just read an article on spreadsheet error. This led him to review the spreadsheets that he built to perform the recoverable amount calculations, and he has found an error in the logic. This error, if corrected, would have led to the company recognising a material impairment loss.
The loss, if recognised, would lead to the profit figure falling below the level at which Kwame Osei’s bonus is triggered. He is also concerned that his mistake will compromise his future promotion prospects.
Required
Identify and explain the ethical issues arising in the above cases.
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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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