Question

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)

Answer 1

a) Fundamental principles on which the code of professional conduct is based:

• integrity: a professional accountant should be honest and straightforward in all professional and business relationships.
• objectivity:a professional accountant should not allow bias,conflict of interest or undue influence of others to override professional judgements.
• confidentiality: a professional accountant should respect the confidentiality of information acquired as a result of professional and business relationships and should not disclose any such information to third parties without proper and specific authority.
• professional behavior: a professional accountant should comply with relevant laws and regulations and shoul avoid any action that discredits the profession.

b) Conceptual Framework: The circumstances in which professional accountants operate may give rise to specific threats to compliance with the fundamental principles.It is impossible to define every situation that creates such threats and specify the approximate mitigating qction.in addition,the nature of engegemnets and work assignments may differ and consequently different threats may exist,requiring the application of different safeguard.A conceptual framework that requires a professional accountant to identify,evaluate and adress threats to compliance with the fundamental principles,rather than merely comply with a set of rules which may be arbitary in public interest.

c)1)in this case, the 2 partners of a firm are indebted in the client for an amount above the prescribed limit and shall be liable threat to the fundamental principles on which the code of conduct is based on.

2)any person or emplooyee of any audit firm who has any substantail interest or is an employee of any client office then such an action is considered to be a threat to compliance with fundamental principles.,the twin sister comes under the definition of related party and shall not be allowed be part of the clent business as it is against the code of conduct as relatives come under the scope of substantail interest.

3)no audit firm can advertises or solicits it clients to gain more income , or client structure. so this is a potential threat to compliance with fundamental principles.