Question

Below are three unrelated scenarios:

a) Jeremy Waru, an audit partner, provides inaccurate advice to a client on their reporting requirements because he is not up to date with recent changes to accounting standards.

b) Mike Tan, an audit analyst, tells a tennis club friend not to buy a new software package for her firm. Mike confides that Orex Ltd, one of his clients is developing a rival product that is far superior and will be launched in a few months at a much lower price.

c) Fiona Black, an audit partner, decides to accept the audit of Plankton Ltd, an FMC reporting entity. Although she has the knowledge and experience required, she is not a licenced auditor. She is also overheard unfairly criticising the work of the outgoing auditor while in discussions with Plankton Ltd staff about taking over the audit.

Required

1,: For each separate scenario a) to c) above identify and explain which one fundamental ethical principle is most likely to be compromised, as well as how it is likely to be compromised.

2. Briefly explain why independence is important in assurance engagements.

3. Identify and briefly explain one threat to independence and provide an example to illustrate your explanation. [

Answer 1

1.Scenario A: The ethical standard which is compromised in this case is Competency. Being Competent is to be updated to the recent changes in the environment and provide the client with best services possible.

Here competence principle is compromised because he is likely to give inaccurate advice without updating to recent changes.

Scenario B: The ethical standard which is compromised in this case is Confidentiality. Audit Analyst is bound to maintain the information received in his professional capacity as confidential unless it is required by law to do so.

Here he compromised on principle of confidentiality by advising his friend not to buy as his client is preparing it at low cost.

Scenario C: The principle of Technical Standards is being compromised as she is not licensed auditor and she also compromised on professional behaviour as she abused the outgoing auditor while in discussions with the management.

2. Independence is important in an assurance engagements because it may force the auditor to not comply with ethical principles of auditing and he should be more subjective rather than being objective.

This ultimately results in an opinion which otherwise would have been wrong and it affects the interest of shareholders which consequently affects the reputation and share price of the entity.

3. One of the threat to independence is Familiarity. Familiarity may induce an auditor to give an opinion which is favourable to the client because if his opinion is negative it might affect the relationship between the auditor and the client.

Familiarity also creates an obligation on auditor to give a positive opinion as he may feel insecure to give negative opinion on entity which is owned by a person who is familiar to him.