Question

Drew Sneeze is not yet a CPA, but has passed two sections of the exam. He is a second year staff auditor at Deloitte and is working on the audit of public client Home Depot. This week during the audit, Drew told the controller that he was excited about a "dream deal" he'd found on an old house with a ton of character on a good sized lot on the outskirts of town a few months back, and they swapped "war stories" on how rewarding and challenging remodeling old homes can be. The controller really likes Drew, so he delivered a load of much needed remodeling materials to the house for $500, which was an 80% discount from Home Depot's standard pricing for normal customers. Drew was extremely excited and quickly paid the bill since he would not have otherwise been able to afford the materials.

Required:

Analyze the scenario above and explain in memo form whether the scenario above is a violation of the AICPA Code of Professional Conduct, and your justification for your position. You are required to quote and cite a specific paragraph/section of the AICPA Code of Conduct as the authoritative source in your response. Your memo must be drafted using the corporate memo format as contained in the General information module of the course. Please submit in Canvas before the due date/time indicated.

Answer 1

To,

The audit file,

Home Depot.

From,

Mr. Anonymous,

Audit Senior, Deloitte audit team,

Subject:- Violation of Ethics and Auditor Independence

This memo is with respect to the transaction entered into by Mr.Drew Sneeze , a year two working staff at Deloitte & Touche, LLP and the audit client, Home Depot. Mr.Drew , based on his relationship with the controller had purchased few remodelling materials for his house at a price which included a 20% discount from the original sales price to the customers. The transaction was paid and settled immediately , thereby leading to a valid purchase between the purchasor and the seller.

The above transaction can be seen as a violation to the AICPA Rule of ethics and Independence. Refer the following rulings :-

* Ethics Ruling No.113, Under rule 102 - Integrity and Objectivity

* Ethics Ruling No. 114, Under rule 101 - Independence

The transaction in question is clearly against the rules and regulations framed by the AICPA as it affects the following key areas of an auditor involved in the audit of the firm :-

Objectivity & Integrity - Auditors Integrity and objectivity are fundamental ethical principles and requires that the auditor's judgement not be affected by conflict of interests. It is expected that during the performance of the audit, the auditor exercise professional skepticism along with maintaining the objectivity and integrity, thoughout the performance of the audit. We see that even though Mr. Drew and controller have developed a jovial relationship, this has ultimately resulted in the discount being offered to Mr.Drew, who is part of the Deloitte audit team. This might affect the integrity and objectivity with which the audit is being performed. Had this transaction occured at Arms length, i.e- sold at the same price at which this had been offered to a customer, this might have been a valid transaction and would not be in violation of ethics.

Independence - Auditor's independence is an important factor in establishing credibility of the audit opinion that is issued. The term independence refers to the auditors independence from the audit clients, related parties, etc. There are two sides to Independence, while the first one refers to Independence in fact , the other refers to Independence in appearance. Independence is the ability through which the auditor would have the perspective of an outsider in the business and then take appropriate decisions. One key aspect of independence would include prohibiting audit team , staff and members from receving any benefits from client organizations, other than receiving audit fees. This includes and is not limited to :-

i.) Borrowing money from the audit client.

ii.) Accepting commissions for new business referred by the audit firm to the audit client; and

iii.) Accepting discounts given to audit staff members which normally not provided to other customers.

iv.) Prohibiting audit team members from holding any financial interest in that of the client organization.

As can be seen above, the transaction entered into by Mr.Drew is clearly against the Integrity and Objectivity and Independence ethics related framework put forward by the American Institute of Certified Public Accountantcs(AICPA).

Any impact on the transaction will be discussed and any penalties, as required, would be held upon Mr.Drew in line with the Code of Ethics.