Question

Simon is recently qualified as a professional accountant after completing

the practical requirements with Lau, Ho & Co. Certified Public Accountants (Lau). Soon afterwards, Simon applied for and secured a position with a Lau audit client, which is called Chan Cheung Kee Construction and Investment Co. (CCK). CCK is a Hong Kong based company listed on the Stock Exchange of Hong Kong. Simon has never worked on the audit of CCK before. During his first month at his new job, Simon becomes aware of the fact that a Lau's recommendation was partially or entirely responsible for him having been chosen for his job. Lau's advice is often sought by CCK's senior management. CCK requested Lau to provide some audit working papers relating to CCK's systems and operating procedures so that Simon can use these documents to speed up his training on CCK's system and operating procedures. Lau agreed and subsequently asked a junior audit staff to duplicate extracts from last year's audit working papers. One of the working papers extracts, which probably should not have been photocopied, indicates that Lau charges CCK its audit fee based on a formula that is calculated as a varying percentage, depending on how successful CCK is in its public offerings during the year. Simon does not immediately react by asking any potentially embarrassing questions. However, Simon is concerned with the apparent ethical violation. Simon is also uncertain about the ethical responsibilities that he has to both past and present employers, and to the professional bodies.

Discussion

a. Describe the apparent ethical violation.

b. Describe the ethical responsibilities Simon has.

c. Discuss the course of action that Simon should take

Answer 1

Audit fees normally charged on the basis of certain percentage of turnover, In some cases we can also see that certain big audit firms charge their audit fees on the basis of successfull IPO (initial public offerings) or FPO (further public offerings) as their fees. For example: LAU charges its fees on the basis of successfull issues to the Public.

Main Reasons for charging on the Basis of public offers

There is a direct relation between fees charged and IPO, As many of shares are subscribed by the public-The more fees the audit firm gets, Even Sometimes we can say its lucarative (high). But when we start to think from the point of auditors, The fees charged involves the professional services rendered by them and involves a premium for litigation (as there is per-IPO and post-IPO activities, financial statements including prospectus, Audit committee to be arranged) the investors mainly rely on the statements contained in the prospectus and auditors point of view as regards to IPO.

When we examine the facts of above case,

A)

Voilation 1) We can see that CCK requests Lau, for providing audit working papers to help simon is not the actual procedure to be taken But the proffessional auditor should get the workings from the previous auditors or he should seek any mis-management by the company during the course of the previous auditor. As handling of audit workings directly in the hands of the client may lead the client to become aware of the wrong doings and it involves confidential information that the previous auditor to communicate with the current auditor.

Voilation 2) The working of audit fee of the previous auditor shouldn't be handeled to the current auditor, As the charging of fees is independent opinion of the auditors or audit firm.

  B) The ethical responsibilties Simon have are as follows:

1) The audit working relating to fees and other un-neccessary audit workings which is not required to him must be returned to the previous auditor or if he is employee of the audit firm then he should return to his firm.

2) The audit workings and other statements obtained during the course of his audit should be properly maintained.

3) The confidential information relating to the financial condition of the firm should not be disclosed anywhere outside unless its being asked by the statutory laws concerned or order from the tribunal has be made to him

4) He should obtain NOC(no-objection certificate) from the previous auditor that if any matters reagarding audit of the client need not or need to carried out with reasons or with proper due care respectively.

5) Should charge his fees in-accordance with the notification issued by the professional body.

C) Course of action need to be taken.

1) Simon has to conduct the audit as per the obligations accepted by him as mentioned in the acceptance letter whether partial or full scope of audit as mentioned by the firm,

2) If there is any material mis-statements found during the course of audit, then he should report to the professional body or statutory law as concerned.

3) He should maintain Audit evidence for the work performed by him.

4) Perform his Duties in the best interest of the ethical conducts issued or followed generally.

I hope this information is usefull, kindly provide your valuable feedback and like.

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