Question

You’ve been working as a staff auditor for E&Y for the past couple of years. Your firm decides to put you on the audit of Blizzard Entertainment Inc. While Blizzard is new to you, your firm has been auditing them for a number of years. Before you start working on the audit you learn that your recent romantic partner works for Blizzard in their accounting department (up until that point you had been so hot and heavy you had never asked where they worked).

A – (3 points) What important concept from our discussion on fundamental principles in Chapter 2 applies to this situation? Define the two components of this concept and explain why they’re important.

B – (3 points) Is it still appropriate for you to work on this audit? What could you do? Explain your answer.

Answer 1

a.

Auditors report to their clients’ shareholders. These are the owners who rely on the audited

financial statements when evaluating the performance of their company. The board of directors

represents the shareholders and oversees the activities of the company and its management.

It is the directors’ responsibility to ensure that the financial statements being audited are fairly

presented. The audit committee is responsible for liaising between the external auditor, the

internal auditor, and those charged with governance to aid the board of directors in ensuring

that the financial statements are fairly presented and that the external auditor has access to all

records and other evidence required to form their opinion. The external auditor may use the

work performed by the internal auditors after considering the function’s objectivity, technical

competence, and due professional care, and the effectiveness of communication between

internal and external auditors

The fundamental principles of professional ethics include professional behaviour (upholding the

reputation of the profession); integrity (being straightforward and honest) and due care

(acting diligently and complying with both technical and professional standards); professional

competence (maintaining knowledge and skill at an appropriate level); confidentiality

(not sharing information that is learned at work); and objectivity (not allowing personal feelings

or prejudices to influence professional judgement). There are also specific rules that incorporate

the guiding ethical principles and that are enforceable. Some of these rules concern fees

and pricing, advertising, contact with predecessor auditors, firm names, and professional

contact. Despite principles and rules to guide professional conduct, professional accountants

can expect to face ethical dilemmas over their careers. A framework for solving ethical

dilemmas includes identifying the ethical issues, determining who is affected by the outcome

of the dilemma and how each individual or group is affected, identifying the likely alternatives

available to the person who must resolve the dilemma, and deciding on the appropriate action.

b.No,  it is not  appropriate for you to work on this audit because

Contributory negligence is where a client is found to be negligent and to have contributed to the

loss suffered by the plaintiff. To successfully sue an auditor, a plaintiff must prove that a duty of

care was owed by the auditor, there was a breach of that duty, and a loss was suffered as a

result of that breach. Several cases are discussed in the chapter in relation to an auditor’s

liability to third parties. To establish that an auditor owes them a duty of care, a third party must

now establish that the auditor was aware that the third party was going to use the financial

statements and that the users relied on the financial statements for the purpose for which they

were prepared

Factors to consider include the integrity of a client, such as the client’s reputation and attitude to

risk, accounting policies, and internal controls. An auditor will gain an understanding of the client

through communication with the client’s previous auditor (in the case of a client acceptance

decision), staff, management, and other relevant parties. The final stage in the client

acceptance or continuance decision process involves preparing an engagement letter, which

sets out the terms of the audit engagement to avoid any misunderstandings between the auditor

and their client