Question

In: Accounting

Sue, Liean and Ray have been good friends since their college years. They were partners in...

Sue, Liean and Ray have been good friends since their college years. They were partners in a public accounting firm, Sue, Liean & Co (SLC) since 2005. Hakim Enterprise Sdn Bhd (HESB) is one of SLC's clients. SLC has been HESB's external auditors for the past three years. Recently, HESB is facing dificulties in collecting overdue debts from their customers. As a result, SLC's last year audit fees have been outstanding for the last 6 months. HESB has given an intention to continue appointing SLC as the extenal auditor for the current year audit. Ray is the senior in charge of the audit of the financial statements of Aidil Maju Berhad (AMB) for the year ending 31 December 2013. AMB's CEO, Mr. Ikhwan, has just sent Sue an email to advise Sue that Ray has been shortlisted for the position of Finance Director. Sue were not previously aware that Ray had applied for the position. In addition, Sue was also being informed by one of the managers who reviewed AMB's audit that Ray and his family has been given a free world tour trip by Mr. Ikhwan. Kerry Enterprise Sdn Bhd (KESB) an audit client, is threatening to sue SLC in respect of audit fees charged for the year ended 31 December 2012. KESB is alleging that SLC billed the full rate on air fares for audit staff even after obtaining substantial discounts for the fares.

Question:

a)Identify and discuss the ethical and other professional issues relating to the above mentioned matter.

b) Provide appropriate safeguards for the ethical issues.

Solutions

Expert Solution

The auditor is subject to relevant ethical requirement, including those pertaining to independence, relating to the financial statment audit engagements. The International Ethics Standards Board for Accountants’ Code of Ethics for Professional Accountants (IESBA Code) states the ethical requirements related to an audit of financial statements.

In the given question, below mentioned issues have been observed:

  1. Fees overdue:
  • Fact of the case: SLC has been the external auditor of HESB for three years. The client is facing financial difficulties and thus, fees of last year's audit have been outstanding for the last 6 months.
  • Issue involved: A self-interest threat may be created if fees due from an assurance client for professional services remain unpaid for a long time, especially if a significant part of fees is not paid before the issue of the assurance report for the following year.
  • Safeguard: Discussing the issue of outstanding fees with the audit committee, or others charged with governance and it is further advised to involve an additional professional accountant who did not take part in the assurance engagement to provide advice or review the work performed.   

2.  Employment with Assurance Client:

  • Fact of the case: Ray, the senior incharge of audit of the financial statement of AMB has been shortlisted for the position of Financial Director of the company. Also, Mr. Ray has been given a free world tour trip by the CEO of AMB.
  • Issue involved: A firm or a member of the assurance team’s independence may be threatened if an individual who is participating in the assurance engagement knowing, or having reason to believe, that he or she is to, or may, join the assurance client some time in the future. Such circumstances may create self-interest, familiarity and intimidation threats particularly when significant connections remain between the client and the assurance engagement team. Further, a professional accountant in public practice, or an immediate or close family member, may be offered gifts and hospitality from a client. Such an offer ordinarily gives rise to threats to compliance with the fundamental principles.
  • Safeguard: Considering the appropriateness or necessity of modifying the assurance plan for the assurance engagement; Involving an additional professional accountant who was not a member of the assurance team to review the work done or otherwise advise as necessary and initiate quality control review of the assurance engagement.

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