Question

QUESTION 4 ( 10 Marks)
please provide me a genuine answer.
The following identifies issues that can have an impact for auditors when carrying out their audits:

(i)
You are Adrina Strong , one of the partners in the Accounting firm Barder,Strong ,Fleece and Co.You have a large client ,Launch Ltd , for which your firm has carried out a range of tax,consultancy, audit and other services .The firm now obtains significant fee income, above 25% of its total for the past three years ,from Launch Ltd . An amount of $45,000 has still to be paid for work carried out earlier in the year for consultancy advice
to Launch about internal controls around its new purchasing system introduced earlier in the year.

The planning work for the year end audit is about to commence and it will be the eighth year
you have carried out the audit . The relationship between Launch and the audit team is excellent and the same audit staff have been happy to carry out the audit for the last six years , which has been welcomed by Launch’s accounting staff who feels this allows the audit to be done quickly and efficiently .

Launch is very happy with the quality of the audit staff and in fact has recently offered the role of Financial Controller to the audit team senior ,Sue Driver . Sue has accepted and will be starting the new role before the year end audit visit. Sue has decided to take the audit team out for dinner to say goodbye and thank them for their hard work over the last seven years.
Required:
Identify the risks and threats to independence from the above and suggest how these threats may be mitigated   

(ii) Nora Peak has been working at Dave Young and Associates for the past three years .Nora and her husband ,Tom , are both very interested in environmental issues and follow closely environmental issues in the media . During an audit of a pharmaceutical company
Pharma Ltd for the year ended 30 June 2019 ,Nora notices that it has changed its contractor for waste management to Big Dumper Ltd .Nora has read on the internet that Big Dumper is being investigated by the local council for the level of toxic waste at one of its sites .

The waste management contract between the Big Dumper and Pharma Ltd does not specify damages and has not been signed by the Big Dumper ,who are the cheapest waste removalist for chemicals and other materials . The contract is for three years and is for a substantial amount    and Nora is concerned about the implications .The local council is very
strict in its inspections for toxic waste dumping and imposes heavy fines if any of the waste is found to be improperly dumped .

Nora raises the issue with Dave Young , the partner in charge of the audit .”This is
the reality Nora “ Dave says.”As far as I am concerned we are responsible for the
correctness of the financial report, nothing else . Besides you do not have the qualifications
to judge whether a company is being a good corporate citizen or not . We are not concerned with the business management “ Nora is told to mind her audit without raising any fuss .

Required:
Explain the ethical issues here and a course of action for Nora .

Answer 1

(i) Threats to Independence:-

1. Self- Interest Threat:- A self interest threat exists if the auditor holds a direct or indirect financial interests in the company or depends on the client for a major fee that is outstanding.In above case,the audit team is preparing to conduct the audit of Launch Ltd

Threats:- Here the threat might be tempted to issue a favourable report on the affairs of the company. However, the audit team has not received its audit fees from Launch Ltd. for work carried out earlier. The firm may feel pressure in asking for adjustments necessary in Financial Statements as client has retained their fees.

Safeguards/How these Threats can be Mitigated:-

(i) Firm shall chase the outstanding fees.

(ii) Discuss with those charged with governance the reasons for non-payments.

(iii) Agree a payment schedule.

(iv) Fees to be settled before completion of current year audit.

2. Self Review Threat:- A self review threat exists if the auditor is auditing his own work or work that is done by others in the same firm.

Threats:- The threat that an auditor will not appropriately evaluates the results of a previous judgement made or service performed by him. In above case, firm has carried out a range of services such as tax, consultancy, audit and other services. In other services several work performed can be included which are audited by auditors themselves.

Safeguards/How these Threats can be Mitigated:-

Provision of other services to client are not to be allowed.

3.Familarity Threat:- This threat is due to long and close relationship with a client or employer. This threat arises when an audit firm is providing services through a very long period.

Threats:-The main threat is that the employees or officers of organisations will be well known to each other and this will impact the independent decisions of the the auditors. In above case, the Launch Ltd. staff and auditors have been happy to carry out audit and they are performing audit since past 6 years. The Launch Ltd. staff and audit firm's staff are very known to each other due to such a long period.

Safeguards/How these Threats can be Mitigated:-

1. Remove from the team if the relationship is with a senior person at the client with influence over the financial statements .

2. Modifying the audit plan - any work already undertaken by one individual should be independently reviewed.

4.Intimidation Threat:- The threat that an auditor will be deterred from acting objectively because of actual or perceived pressures, including attempt to exercise undue influence over the auditor.

Threat:- In such case, company has offered the role of financial controller to audit team senior, Mr.Sue which he has been accepted. Bow the possible threat may arise - the threat if dismissal or replacement of auditor. Sometimes this threat also arises due to fees dependence.

Safeguards/How these Threats can be Mitigated:-

1.Tell clients ' TCWG(Those charged with Governance)- ensure that all audit engagements are conducted in accordance with International standards on Auditing.

2. Ensure that you gather sufficient and appropriate evience.

(ii)

All types of auditors mustfollow guidelines promoting ethical conduct. For financial statements auditors also there are established a Code of Professional Conduct, commonly called its code of ethics. These codes are made of two sections- principles and the rules. Some principles of the code are:-

1. Responsibilities:- In carrying out their professional duties, auditors should exercise professional and moral judgements in all their activities.

2. The Public Interest:-The auditors should act in a way that will serve the public interest, honor the public interest, and demonstrate commitment to professionalism.

3. Integrity:-To maintain and braoden public confidence, auditors should perform their professional duties with the highest sense of integrity.

4.Objectivity & Independence:-Auditors should maintain objectivity and be free of conflicts of interests in the performance of their professional duties. Auditors in public interest should be independentin fact and appearance when providing auditing and other attestation services

5. Due Care:- Auditors should observe the profession's technical and ethical standards , strive continuouslyto improve competence and the quality of services and discharge professional responsibility to the best of their ability.

In above case, this is the ethical responsibilities of auditors to disclose the fact also that there is no contract between the Big Dumper & Pharma Ltd. And also to disclose that there was an investigation carried out upon the Big Dumper. If any irregularity happens, the company will have to pay high penalities and fines also which will ultimately affect the company's financial performance also.

Thus, this is the moral responsibility of audit partners to disclose this fact even though it is a non- financial factor because it is a material fact.