Question

You are an accounting student and have just completed your second year. You are asked by your uncle to do his books. You agree to do so. Your uncle tells you he wants to pay as little tax as possible and has asked you to include accounts for his personal spending in his business accounts to increase expenses, so that he appears to make a smaller profit. Your uncle does not keep clear records of certain transactions. Payments are often made in cash and insufficient details are recorded for you to determine who was paid, or for what they were paid. Do you agree to do his accounts and do you inflate his expenses? Do you seek answers to any questions that arise from his accounts?

Apply the AAA 7 step process and the code of ethics (5 principles) to structure your answer. Identify any threats that may exist to an ethically sound audit.

Answer 1

AAA seven step process include :

• Discuss the facts related with the case : The facts of the above mentioned case are that the uncle asked to prepare his books of accounting. On the other hand those books of accounting were asked to be prepared such that uncle should be eligible to pay less tax.
• Discuss the ethical issues associated with the case: Reducing the profit and show increased expenses is a step to manipulate the financial statements which is not correct and ethical. Hence this will be wrong against all the stakeholders. So, this is the ethical issue associated with the case.
• Discussing the Norms and value related to the case :It should have been done that all the procedures should be conducted with integrity. And there should be partiality. Even if uncle would have said to make statements such that tax needed to be paid less, it us the duty of auditor to kKe the owner understand and do the work accordingly as it should be done following all the rules and principles.
• Discussing the alternative course of action : The alternative course of action associated with this are - auditor should make uncle understand the importance of ethics and who should they be followed. If still he is forcing to do the statements according to him, the cpaint should be made to a responsive authority regarding this. But one should never agree to do so unethical activity.
• Discuss the most consistent course of action related to some norms or principles : one should be doing or performing all the duties of a responsible auditors well in such a way that the ways are not hampered. All the course of action must be ethically done on principles.
• Discuss the consequences with all the course of actions : the consequences of these course of actions will be that there will be a proper accounting of all financial statements and that reporting of these statements will not be manipulated.
• The last step includes the decision that is being taken. The decision taken should be that the auditor should not be listening to his uncle and do as he thinks as it is right to do and us also ethical. That is he should not indulge in manipulations of financial statements. This is the final decision.

Three threats that may exist to an ethically sound audit is :

• Manipulations being done on account of financial statements by auditors or in pressure arrised by the owners.
• Stakeholders of the company may be musleaded by showing thw manipulated amount of profit or loss for one's own profit.
• Company may be coming into danger or pat penalty if the higher authorities come to know about the happenings in the company.