Question

Bling-Bling Jewellery Company Limited (“BB”) has been engaging in selling jewellery. It keeps a substantial amount of gem stones as inventory. The gem stones are recognized as raw material in the financial statements, and the amount of the gem stones is considered as material for the financial statements. Lee, Wong & Partners (“Lee Wong”) is the auditor of BB for its financial statements for the year ended 31 December 2020. Michael Lau, the CFO of BB, understands that Lee Wong also provides valuation services. He proposes to the audit partner to invite Lee Wong to provide an independent valuation report of the gem stones and the valuation fee would be around 30% of the proposed audit fee for the year ended 31 December 2020. Meanwhile, the proposed audit fee for the year ended 31 December 2020 would be reduced by 20%. If the audit fee is not reduced, BB may engage another audit firm to be the auditor of the company instead.

Required:

(a) Identify the ethical issues faced by Lee Wong and propose appropriate safeguards to respond to each ethical issue.

After Lee Wong finishes the audit for BB’s financial statements for the year ended 31 December 2019, Michael invites the audit team for dinner as a token of appreciation. A box of six red wines is served during the dinner and two bottles are consumed. Michael gives the remaining four bottles to the audit team after the dinner.

Required:

(b) Explain whether the audit team can accept the wine left over at the dinner.

Subsequent to the financial year ended 31 December 2020, BB has opened an online shop to attract more customers. However, there have been many news reports that customers receive fake gem stones when they purchase from the online shop. They feel cheated and would take legal action against BB. Before the case has been put to the court, the CEO has transferred all the assets of BB to a company controlled by his relative.

Required:

(c) Determine the areas that Lee Wong would consider in assessing whether to continue the existing audit engagement with BB.

[Total for Question: 24 marks]

Answer 1

Answer:

1.
The ethics problem resulting from the situation in question is about the director offering to provide the auditor with extra effort to minimize the audit fees paid by the auditor or to employ other auditors. Also, there are laws and regulations set in place to ensure that the auditor may not undertake any commitment apart from that clearly allowed by the law, in order to make sure that the integrity stays unchanged.
Explanations of precautions against such an ethical problem-
a. Absolute Prohibition-for instance, to preclude auditors from making any significant monetary involvement for any auditee.
b. Allowing the operation or partnership, however minimizing its reach or form-for example, a requirement that auditors can not have material-specific financial interests in the auditors.
c. Allowing an action or engagement while needing some regulations or practices which remove or minimize the risk-for example, the obligatory substitution of an engagement partner just after partner has invested some time on a particular audit engagement to mitigate the impacts of familiarity threat as such, and
d. Allowing an operation or partnership while forcing the auditor to disclose information about it with the audited client's manager, audit committee, board as well as others-for example, reporting to the audit committee of its existence of any and all services rendered by the auditor to the auditee as well as the fees charged for those services.

2.
Acceptance of wine from dinner could be a private affair of the auditor as an offer to dinner was made in such a private capacity and will be accepted if the auditor does not allow such a situation to have an effect on his or her integrity.

3.
Some circumstances that can cause the auditor to question whether he or she can continue to participate are as follows-

(a) The auditee is entitled to a restriction mostly on the nature of the audit
(b) the auditor accuses of fraudulent management behavior or deceptive administration motives;
(c) The absence of competence of the auditor to carry out the duty as decided upon
d) The auditor thinks that there is a lack of independence in the undertaking.

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