Question

Jane Smith is an auditor with APMG, a national audit firm. She is currently working on the annualaudit of the fnancial report of Orange Pty Ltd (Orange), a transport company. While undertaking thepreliminary assessment of internal controls, Jane became aware that Orange was using an

information system that had been purchased from her previous employer, Add Right Pty Ltd (AddRight).

When Jane gave her evaluation of Orange's internal controls to her manager, Derek White, Derekstated that he was surprised at how quickly Jane had completed the task. He said, "we did well to hireyou, in all my years as a registered company auditor, I have never seen an evaluation of internal

controls completed so quickly." Jane replied that the reason she was able to undertake the evaluationso quickly was that she was very familiar with Orange's information system because she had played aleading role in designing it at Add Right. Derek responded to Jane's statement by saying that it wasabout time he had a bit of luck because the audit was behind schedule and Orange's CEO had

expressed displeasure at the prospect of a late audit report. He added that the Managing Partner ofAPMG had told him that because Orange was such a large client, APMG could experience financialdifficulties if Orange decided to use a different auditor.

Required:

On the basis of the facts provided above, and your understanding of the Code of Ethics forProfessional Accountants, answer the following questions:

(а) Identify three ethical issues that may impact the audit of Orange

(b) Explain why each of the issues identifed in (а) above is of concern.

Answer 1

a.

Following are the 3 ethical issue in the current situation that may affect the audit of Orange-

1.Issue regarding Self Review threats

2.Issue regarding Self Interest Threats

3.Issue regarding Intimidation Threats

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b.

1.Self review threats Issue-

- Self review threats occurs whne a previous judgement need to be re - evaluated by the professional accountant or auditor who was responsibe for that judgement.

- Here Jane , the auditor is reviewing and assessing the internal controls of the Information systems, and he himself has played a significant role in designing the system. Hence he is reassessing and reviewing the information systm that were designed by him.

- Hence there may be biaseness in providing the opinion on the Internal control because in case any defects in the Information system there may be doubt on his capabilities.

- "NO ONE WANT TO BE GUILTY FOR HIS OWN WORK"

-Or there may be case where there actually exists an defect in the internal control , but the auditor will not be able to find the defect due to-

i.over confidence on his own work.

ii. or due to over generialisation

2.Seif interest Threats-

Seil interest threats may occur as a result of the financial and other interest of a professtonal accountant or his relatives or his partners.

-Circumstances that may create self interest threats are-

i. Financial interest in a client

ii. undue independence on the total fees from a client

iii. Having close business relationship with client

iv.concern about losing the client etc.

In the given case Orange is the biggest client of the audit firm APMG and the firm may ended up in financial difficulties if they loose the client.

- Hence there exists a self interest threats because the Audit firm APMG is financially dependend on the client .

-Such interest may affect the Independence, integrity and Objectivity of the auditor.

3.Intimidation Threats

- It may occur when a professional accountant or auditor may be deterred from acting objectivity by threats , actual or preceived.

- in the current situation the CEO has depleased due to late audit report and the Audit firm is financially dependent on the client which may result into providing the audit report in short time without proper checking the financial statement.

- The management may pressure to reduce the extent of work which may lead to inappropriate opinion.