Question

Assume that you are an independent auditor who runs your own auditing firm. Salma Company was
your client last year who engage another independent auditor this year because of some issues on
auditing fees. You know that Salma Company is having less profit now because of competition with
Khalsa Company. Because of this reason, Salma Company wants to buy Khalsa Company. Just two
months ago, Hajir Company became your new client. Hajir Company’s previous auditor suddenly
had a heart attack, so the company came to you for audit services and you accepted them. Today,
Hajir Company’s director came to you to discuss that they also intend to buy Khalsa Company. The
director knows that there is another company who wants to buy Khalsa Company too, but they are
not aware that it is Salma Company and they also don’t know that you were Salma Company’s
previous auditor. When the meeting is over, you start to feel uncomfortable. Since Hajir Company is
your new client, you want to help them and provide good service to them. But you realise that you
also possess confidential information concerning the plans of your previous client, Salma Company.
You are aware of Salma Company’s problems and you know it will help Salma Company to recover
profits if they will acquire Khalsa Company.
Required: Explain your answer to the following questions:
1. Which fundamental ethical principles in ISA 200 will be affected in this scenario? You can
explain more than one ethical principle, if applicable.
2. Can you disclose confidential information in this scenario? Explain your opinion.
3. How will you protect your reputation as an independent auditor?
4. What could be the possible course of action?

Answer 1

Question 1:

Confidentiality ethical principle will be affected in this scenario as an auditor you should not disclose confidential information to others unless mandated by law.

Disclosing Information about salma company to the new client will be breach of confidentiality.

Confidentiality to be maintained for existing & past clients too.

Integrity Principle will also be violated in this case.

Question 2:

No, the auditor can not disclose confidential information in this case, even though such information is related to past clients.

Question 3:

By following fundamental ethical principals like confidentiality,integrity & independence, the independendent auditor can protect the his reputation.

Question 4:

Possible course of action can be not disclosing the confidential information. But, disclosing publicly available information about Salma company to Hajir Company without disclosing that it is the past client & without disclosing it is going to acquire the khalsa company and without disclosing confidential information about salma company that the auditor have in his possesion.