Question

You are the audit partner of Integrity Chartered Accountants (“ICA”), working on the audit of Darwin Tourist Buses (“DTB”) for the 2019 financial year. DTB is a provider of luxury bus trips all around Australia, including both interstate capital city travel and conference and holiday packages. The net profit before tax of DTB for the 2019 financial year is $14.5M while net assets total $232M.
You are reviewing the 2019 audit working papers and note that the assurance services senior has documented a number of situations that may lead to a breach of independence for ICA.

Situation 1 It has been documented that the DTB Financial Controller has gifted the three audit team members with two free luxury holiday packages each. The audit manager has concluded that the key threat to independence in Situation 1 is ‘self-interest’.
Situation 2 The audit team has documented that DTB is intending to launch a new customer loyalty program. The CFO of DTB has guaranteed that if the audit team convince ICA and five of its biggest clients to sign an exclusive corporate travel arrangement with DTB, the audit team will receive immediate platinum status (normally requiring a customer to have accumulated one million points), giving them a host of benefits. The audit manager has concluded that the key threat to independence in Situation 2 is ‘familiarity’.
Situation 3 The audit team has noted that ICA has put forward a proposal to DTB to provide consulting services. The CFO of DTB has told the audit team that if they do not remove comments in the audit summary review memorandum to be provided to the audit committee about a weakness in the revenue and receivables process, he will not award ICA the consulting work. The audit manager has concluded that the key threat to independence in Situation 3 is ‘advocacy’.

REQUIRED:
(a) Explain whether the audit manager has correctly identified the key potential threat to independence for each of Situations 1, 2 and 3 above. Your answer should clearly identify what you believe is the key threat to independence in each situation.

(b) Identify the five fundamental principles of the Code of Ethics for Professional Accountants and explain why Ethics is very important to the Accounting Profession.

Answer 1

Answer :-

a )

Situation 1: Conflict of Interest/ Self-Interest Threat- the Financial controller has provided the audit team members free luxury holiday packages which could influence their independence. There is a possibility of conflicting interest between the performance of audit and pleasing the client.

Situation 2: Advocacy threat- the audit team was encouraged by the client to promote or "advocate" for its new customer loyalty program in exchange of a platinum status benefit. It may not be the intention of the audit team but if they followed this instruction, it will look like they are promoting or advocating the company's products or services which could tarnish their independence. If anything happens with the program, the audit firm or the audit team can be associated with it.

Situation 3: Intimidation Threat- the client "threatens" the auditors that they will not get the consulting engagement if they did not remove the comments on the revenue and receivable process. This is a threat to independence since the auditors are put into a position wherein they have to choose between following the client and winning the consulting engagement or doing the right thing and forfeiting the consulting opportunity.

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b)

five fundamental principles of the Code of Ethics for Professional Accountants

1- Integrity

2 - Objectivity

3 - Proffessional competence and Due care

4 - Confidentiality

5 - Proffessional Behaviour

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Importence of Ethics to the Accounting Profession

Ethics are very imprtent in many aspects of business, especially when it comes to the financial or accounting books of business, It is where the judgment of being professional belongs. It is whether the act of one accountant is right or wrong, ethical or unethical. Researchers know that the decision making of accountants, especially in the field of auditing, should not just be based on personal judgment. There is a standard that must be followed in performing an analysis of financial statements. Accounting profession is not easy in the world of corporate industry. Since auditors are continuously facing different challenges, their ethical decision will be tested. The guides in ethical decision making of accountants are the ethical principle and values where it provides direction to the right decision. As an example, an external auditor needs to present the financial reports of the company; the external auditor must ensure that their tasks are performed in an ethical standard. If the external auditor unethically performs his/her task, they will lose the confidence of their clients to their Service,and Due to the many range of accounting services and recent corporate collapses, attention has been drawn to ethical standards accepted within the accounting profession. These collapses have resulted in a widespread disregard for the reputation of the accounting profession. To combat the criticism and prevent fraudulent accounting, various accounting organizations and governments have developed regulations and remedies for improved ethics among the accounting profession.