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QUESTION 1 (IFAC CODE OF CONDUCT) (30) Registered auditors are frequently tasked with situations with ethical...

QUESTION 1 (IFAC CODE OF CONDUCT) (30)
Registered auditors are frequently tasked with situations with ethical implications in the course of offering their services. The Code of Professional Conduct provides a conceptual framework to assist registered auditors in addressing ethical issues. The following situations have arisen:

1. Abbott and Company, a large firm has been the auditor of Circle (Pty) Ltd for a number of years. Circle (Pty) Ltd intends to issue fifty $100 000 convertible debentures. Dave Abbott and Joe Peterson, the two partners of Abbott and Company, will be offered the opportunity to each take up one of the debentures. Neither Abbott nor Peterson is in charge of Circle (Pty) Ltd audit. (5)
2. Fred Romano a former trainee at Abbott and Company, has recently been appointed the financial manager of Buildfast Ltd, a large supplier of building materials. Buildfast Ltd is an audit client of Abbott and Company and before his resignation from the firm, Fred Romano had been the audit manager for this client. From Romano, Fred’s twin sister will be appointed as the audit manager to replace Fred, due to her experience in the building sector. (7)
3. Two of the younger partners at Abbott and Company want to be more aggressive in marketing the services of Abbott and Company. They wish to run a radio and television advertising campaign based around a new slogan which they have proposed “Abbott and Company – bigger, better, in fact, brilliant!” (3)

YOU ARE REQUIRED TO:
a. Identify and explain the fundamental principles on which the Code of Professional Conduct is based and with which professional accountants must comply. (15)
b. Explain the conceptual framework. (5)
c. Discuss each of the situations described above in terms of the Code of Professional Conduct. Where you believe a threat or potential threat to compliance with the fundamental principles exists, you should identify the nature (category) of the threat. (15)

Solutions

Expert Solution

Part a:

The fundamental principles of code of professional conducts of auditors are based on are explained below:

The auditors must be independent in order to express proper opinion on the financial statements of the company. Apart from independence the auditors must not have any financial interests attached with the company whose financial statements they are going to audit. The auditors must have the necessary knowledge of accounting and taxation in order to conduct an audit effectively. The auditor shall conduct the audit in accordance with applicable auditing standards to express an appropriate opinion on the financial statements of an audit. The audit must collect all necessary evidence to assess whether the financial statements reflect the true and correct picture of an organization. The professional accountant must use necessary skills and professional knowledge to conduct an audit efficiently and effectively. The professional accountant must be independent and must not have any financial interest associated with the enterprise in order to adhere with the professional code of conduct of an auditor.                   

Part b:

Conceptual framework is the overall guideline that guides the financial reporting process. The financial statements must be prepared in accordance with the conceptual framework to ensure that the financial statements reflect the financial performance and position correctly. Conceptual framework provides that the books of accounts must be prepared in accordance with the double entry system of accounting and using accrual system.

Part c:

Case 1:

Subsequent to the issuance of $100000 debentures to the partners of Abbott and company the firm will be hit by the provisions of the professional code of conduct of the auditors. Thus, accepting the debentures of Circle Pty will create potential threat for the Abbott and Company to conduct audit of Circle Pty without violating the professional code of conduct of the auditors.

Case 2:

Fred Romano has resigned from Abbott and Company thus, the appointment of his in any of the position in the client of Abbott and Company would not violate the provisions of professional code of conduct.

Case 3:

Soliciting clients by using advertisements is against the professional code of conduct for auditors and audit firms. Thus, the proposal of younger partners of Abbott and Company to run radio and television advertisement campaigns is against the professional code of conduct.


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