Question

Case study

M/S Peter & Co is a well-known professional audit organization for the last two decades. Mr. Peter is a senior partner and has appointed four other partners subsequently. Perter & Co has three audit managers, five supervisors and twenty-five audit staff to handle audits of various business organizations.

Whenever audit engagements are accepted, Mr. Peter is much concerned about the fundamental principles that should be followed by the audit firm. He always insists that the audit managers and other audit staff adopt appropriate supervision during the audit process, and to ensure that the fundamental audit principles are fulfilled throughout the audit engagement.

Mr. George is one of the partners of Peter & Co has been assigned to oversee the audit of Abdullah LLC. The audit has been started under his guidance with an audit team of seven auditors including one manager and a supervisor.

While carrying out the audit process with Abdullah LLC, the audit manager has been informed by the supervisor that Mr. George is one of the major shareholders of Abdullah LLC and therefore receives a good amount of dividend every year. This fact was not brought to the notice of Mr. Peter before accepting the audit engagement. Mr. George’s investment value is significant and moreover, the audit fee that was agreed by Peter & Co is also very lucrative.

Ms. Nancy is another audit partner of Peter & Co and worked for many years and handled many audit engagements of Peter & Co. A new Bank which was formed five year ago approached Peter & Co to take care of auditing their statements for the year ended 31.03.2020. The client operations are huge and have 22 branches in Oman. Peter & Co have no past experiences of managing or conducting “bank audits”. Ms. Nancy was in favor of accepting the audit as it will give additional revenue and experience to the audit firm.

Based on the given scenario above, answer the questions given below.

NOTE: Your answers should be supported with proper justification in line with the principles and theories of auditing and should be reflective of adequate literature review. You can also include diagrams, charts and tables of information to support your arguments and justification (wherever applicable).

Task 3

Discuss the conduct of Mr. George in his profession as an auditor. and explain what are the appropriate actions that the audit firm can take to safeguard and implement ethical conduct.       

Answer 1

3) As we have read above, the company assigned to Mr George is the one in which he is also a shareholder. Earlier at the time of assigning it was not known to Mr Peter.

Now that it has been assigned to him, there are several code of conducts to which Mr George should adhere to as an auditor. They are :

i) An auditor has to stick to the standards set for their work and should honestly perform his duty and should have a positive and right attitude towards his organization so that he would be proved to be trustworthy for the organization. Mr George should take the audit process in a fair manner without any wrong indulgence. As he is the shareholder of that company, thinking to make manipulations that may profit him otherwise would be a wrong conduct shown by him as an auditor.

ii) Mr George should show an independent and impartial attitude towards the audited firm. It should not be affected by his personal concerns that is being a shareholder of the firm being audited.

iii) All the informations brought forward regarding the company should be properly and fairly used and all the report should be prepared without any manipulations and partiality.

iv) It is also the duty of the auditor to not leak the important informations obtained about the firm without the permission of the firm and also he should not circulate any wrong information that could lead to manipulation in auditing further. This would be considered as unethical. Mr George being a shareholder should make sure he is not going personal by circulating wrong informations that would ultimately help him gain profits by unusual means.

In short, being an auditor it should be the duty of Mr George to be independent of all concerns and perform his duty with full honesty and dedication towards the organization doing the auditing.

It is also the duty of the firm to take preventive measures to be in a safe position once its known to the management that one of the auditor is a shareholder in an entity being audited. To save the company and their ethical conducts following actions should be taken :

i) There should be a check on the working of Mr George as to confirm he is performing his duties irrespective of his connections to the audited firm. This way the company can help maintain its ethical conducts.

ii) Various internal controls have to be well developed to perform activities in a proper way that could help recognise if any disturbance is caused by any human wrong indulgence in the system that would be causing manipulations in preparing reports.

iii) Mr George should not be allowed to handle his area of work alone. Instead the work should be distributed and delegated properly so that any manipulations if made could be easily recognized.

iv) There should be supervisor above Mr George so as to confirm that his activities are in accordance with the system and that he should not be planning for making changes in reports thinking of his own profit.

As we know Mr George being a shareholder and at the same time auditor of that firm, it is the duty of the organization to make sure and check his activities to prevent any unethical happening. When Mr George will realise that the system are quite strict regarding ethics being followed and a follow up is conducted on every activity of the auditors, he will himself not think of making any wrong indulgence or breaking any ethical conduct.

Thus this way company can successfully safeguard their ethical conducts and can insure their proper implementation.