Question

In: Accounting

You are an audit supervisor of Samyantwi & Associate and you are planning the audit of...

You are an audit supervisor of Samyantwi & Associate and you are planning the audit of Franko
Company, a listed company, for the year ending 31st March 2017. The company manufactures
computer components and forecast profit before tax is GHS33.6m and total assets are GHS79.3m.
Franko Company distributes its products through wholesalers as well as via its own website. The
website was upgraded during the year at a cost of GHS1.1m. Additionally, the company entered
into a transaction in February to purchase a new warehouse which will cost GHS3.2m. Franko
Company’s legal advisers are working to ensure that the legal process will be completed by the
year end. The company issued GHS5m of irredeemable preference shares to finance the warehouse
purchase.
The company has launched several new products this year and all but one of these new launches
have been successful. Feedback on product Luge, launched four months ago, has been mixed, and
the company has just received notice from one of their customers, Adanko Company, of intended
legal action. They are alleging the product sold to them was faulty, resulting in a significant loss
of information and an ongoing detrimental impact on profits. As a precaution, sales of the Luge
product have been halted and a product recall has been initiated for any Luge products sold in the
last four months.
The finance director is keen to announce the company’s financial results to the stock market earlier
than the previous year and in order to facilitate this, he has asked if the audit could be completed
in a shorter timescale. In addition, the company intends to propose a final dividend once the
financial statements are finalized.
Franko Company’s finance director has informed the audit engagement partner that one of the
company’s non-executive directors (NEDs) has just resigned, and he has enquired if the partners
at Samyantwi & Associates can help Franko Company in recruiting a new NED. Specifically he
has requested the Engagement Quality Control Reviewer, who was until last year the Audit
Engagement Partner of Franko Company, to assist the company in this recruitment. Samyantwi &
Associates also provides taxation services for Franko Company in the form of tax return
preparation along with some tax planning advice. The Finance Director has recommended to the
audit committee of Franko Company that this year’s audit fee should be based on the company’s
profit before tax. At today’s date, 20% of last year’s audit fee is still outstanding and was due to
be paid three months ago.
Required:
i. Identify and explain TEN ethical threats which may affect the independence of
Samyantwi & Associates audit of Franko Company; and
ii. For each threat, suggest a safeguard to reduce the risk to an acceptable level.

Solutions

Expert Solution

1. A self-interest threat exists if the auditor holds a direct or indirect financial interest in the company or depends on the client for a major fee that is outstanding. As it is big company so there might be possibilities that samyantvi & Assoiciates is public company and it is big company so majority of fees is from this company.

2. A self-review threat exists if the auditor is auditing his own work or work that is done by others in the same firm. Here auditor is preparing its financial statement and also preparing tax return so the result might be biased.

3. An advocacy threat exists if the auditor is involved in promoting the client, to the point where their objectivity is potentially compromised. As company is facing problem in product because of that they are forcing auditor to issue report earlier which lead to exclude future impact of return of faulty product.

4. A familiarity threat exists if the auditor is too personally close to or familiar with employees, officers, or directors of the client company. As auditor is engaged with company since many time. And company also have good relation with auditor because of that they ask auditor to help appoint NED. This affect independency of auditor.

5. An intimidation threat exists if the auditor is intimidated by management or its directors to the point that they are deterred from acting objectively. There might be possibilities that company may threat auditor to switch auditor if clean report has not been issue. This also impact auditor independency.

6. As audit fees is depend on profit earn before tax of company which also affect independent of auditor.

7. If auditor firm help in appoint in appointing in NED then there will be good relationship between auditor and NED which affect auditor in performing independent audit.

8. As company has also connection with the old auditor which is right now in engagement quality control reviewer so it might give mental stress to auditor to not appointed again as auditor.

9. There is pending of audit fees of last year which might threat auditor.

B) safeguard to such threat.

i). It is to be ensure that quality of audit should not be decided based on fees of client . rather it should be done professionally.

ii) there should be segregation of work which mean if a person is doing work then it should not be review by same person.

iii) Auditor should not issue report earlier rather it should issue report after taking its own time. And don’t be hurry because of pressure from management.

Iv. There should be proper control our audit team and it should be ensure that person in audit team should not have familiar relation with client.

V) Auditor should not be afraid of loose of client because after quality always matters a lot in this profession once it is compromised which is against professionalism.

Vi) Auditor fees should not be depend on profit of company rather it should be fixed.

Vii) Auditor should not provide service like appointing NED

viii) Auditor should not have afraid even though company has good relation with old professional.

ix) Audit should be started once pending is cleared.

if you are satisfied with answer then rate my answer and if not please raise query.


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