Question

You are one of the three partners in RSM, an auditing firm. This year, RSM was engaged to audit year-end accounts and tax returns of a new and fast-growing engineering consulting company, CPEC. The business had started operations with only a few staff but now it has employees of over 100, still remaining below the size of a company which will require a compulsory audit by the government. During the course of the audit, you have discovered a significant increase in revenue this year compared to last year. Accordingly, your team investigated the increase and discovered a practice which your team believes is not in accordance with the financial reporting framework. Your team found out that one of the owners, who is also the managing director of CPEC, was doing consultancy services to some of his close friends. In effect, consultancy fees for these close friends were recorded as income of the company but not collected. They remain as collectibles of the company in the last five years and the company seem not to have any intention of collecting them. The accountant also have not written them off from the list of bad debts. This practice is also known to the other directors of the company. You have suspicions that this is done to increase the amount of revenue reported in the financial statements. 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. Is the practice dishonest? Explain your opinion. 3. Explain the impact of this scenario to your firm. 4. What could be the possible course of action?

Answer 1