Ethics

审题-requirement
【2020/03】Comment on the ethical and professional issues arising as a result of Beaufort
Co’s planned listing and the services which it has requested from Moritz & Co. (10 marks)
【2019/12】Using the notes from the audit committee phone call in Exhibit 5, discuss any
ethical issues relevant to the Group audit, and recommend appropriate actions to be taken by
our firm. (10 marks)
【2018/12】Comment on the ethical and professional issues arising from your review of the
audit working papers and recommend any actions which should now be taken by Thomasson &
Co. (15 marks)
【2018/09】Comment on the ethical and professional issues raised in respect of the audit of
Turner Co and recommend any actions to be taken by the audit firm. (8 marks)
2020/03 Q1 MJ's Answer
Required:
Comment on the ethical and professional issues arising as a result of Beaufort Co’s planned
listing and the services which it has requested from Moritz & Co. (10 marks)
Long association
Frances Stein’s eight-year tenure as audit engagement partner creates a familiarity threat,
as she may become too familiar and too trusting with the client resulting in less professional
scepticism being exercised.
The Code states that with listed audit clients key audit partners must be rotated after seven
years. In the case following the listing of the client next year, it would be appropriate for her
to be replaced by another audit partner.
Fee dependence
Over dependence on an audit client for fee income leads to a self-interest and
intimidation threat for the auditor as the firm will concern about the impact on its
business if it were to lose the client.
In the case of a listed client, the Code states that an audit firm’s independence is
threatened and should be reviewed if the total fees from a single client exceed
15% of its total fee income for two consecutive years.
In this case, the 15% limit has been exceeded in both 20X4 and 20X5 and following
the listing, independent quality control pre-issuance review should be performed
and full disclosure made toTCWG
Provision of bookkeeping and accounting services
The provision of bookkeeping and accounting services for Beaufort Co creates a
self-review threat because the auditor is generating figures in the financial
statements. The auditor may be less likely to highlight errors.
For a listed client, the Code states that a firm is not permitted to provide accounting
and bookkeeping services.
Following the listing, the firm will no longer be able to provide the payroll services
for Beaufort Co
Share prospectus
Preparation of the share prospectus document for Beaufort Co would create an advocacy
threat for the auditor because the auditor may promote their client’s position to the point
where the objectivity is compromised.
The Code prohibits an auditor from acting in this way for an audit client and Moritz & Co
should politely decline
Review of audit appointment
Beaufort Co is currently reviewing the audit appointment represents an intimidation threat
to the objectivity because Margaret Shelley is applying pressure on Moritz & Co to offer a
range of services which will result in breaches of the Code
Moritz & Co should explain its ethical duties to TCWG and and clearly identify services
it will not be able to provide following stock market listing
 2019/12 MJ’s Answer
• Using the notes from the audit committee phone call in Exhibit 5, discuss any ethical issues
relevant to the Group audit, and recommend appropriate actions to be taken by our firm. (10
marks)
• Partner to serve on audit committee
• Should a partner from Squire & Co take this appointment, a self-review threat to objectivity arises
because an audit committee member is in a position to exert influence over the financial
statements and the audit team would be less likely to challenge
• A self-interest threat also arises because the audit firm’s interests become closely aligned to the
interests of the Group, impacting on auditor objectivity.
• The Code states that a partner of the audit firm shall not serve as a director of an audit client.
Therefore, Squire & Co cannot provide partner to serve on audit committee
• Referral fee
• The self-interest threat arises from the income generated from the referral, and this may result
in the audit firm recommending another firm for the work without proper consideration of their
competence to perform the engagement.
• The Code does not prohibit referral fees as long as safeguards used to reduce the threats to an
acceptable level.
• Safeguards may include Disclosing the referral fee to the Group in writing and Obtaining
advance agreement
• Internal audit
• The audit committee’s request for Squire & Co to work with the Group internal audit team
to design and evaluate internal controls create a self-review threat to objectivity, because
in subsequent audits the audit team may use the internal audit work performed in their audit
of revenue. They may over-rely on the internal controls designed and evaluated by the
audit firm
• In addition, a threat of management responsibility arises, whereby the audit firm is
making decisions and using judgement which is properly the responsibility of
management.
• The code states that the threat to independence of undertaking management responsibilities
for an audit client is so significant that there are no safeguards which could reduce the
threat to an acceptable level.
• As this client is listed, the firm are prohibited from undertaking internal audit services
which relate to a significant part of the controls over financial reporting.
• As such the firm must decline the additional work.
2021/06 Q1
Exhibit 5: Notes from phone call
Notes from a phone call yesterday between Harvey Rebus, audt engagement partner
and Mark York.

Request from Mark York

Pale Co publishes a wide range of non-financial social and ervironmental Key
Performance Indicators (KPIs) as part of the Annual Report, including the three
shown as part of Exhibit 4. Mark has asked if our firm can provide assurance on
these KPls as part of performing the annual audit, Mark has suggested that in order to
pay for this extra work, the agreed audit fee will be increased by 20%, assuming that
the assurance provided on the KPIs is favourable.
News report

Mark informed us that a news report has emerged in Farland, alleging that
Pale Co paid a government official a sum of $15,000 in order to secure the
purchase ot tropical rainforest which is taking place next month. Mark wanted
to make us aware of the story, which is spreading quickly on social media,
and to inform us that these incentive payments are routine business practice in
Farland, He also strongly urged us not to investigate the payment as part of
our audit procedures, saying that the amount is insignficant. He suggested
that making enquiries regarding the payment might mean more media
attention is focussed on the issue, which he is keen to avoid given the
company's plans to obtain a stock market listing within the next two years.
(d) Using Exhibit 5.explain the ethical issues and other audit planning
implications which arise in relation to the phone call from the company's
chief finance officer, Mark York.
(10 marks)
Answer
Assurance on key performance indicators (KPIs)
While the KPIs will be published in the annual report and therefore form part of the ‘other
information’. The auditor has responsibilities to read the other information in order to
identify any material inconsistencies between the financial statements and the other
information.
There is therefore a potential self-review threat to objectivity as the team would be reluctant
to raise queries or highlight errors which may have been made by the colleagues.
Assurance can be provided on the KPIs if safeguards can reduce threat to an acceptable
level.
For example, a partner who is independent should be involved in reviewing the audit work
performed.
Answer
The suggestion to simply amend and increase the audit fee and to determine it on a
contingent basis, as in the fee is only payable if the assurance is favourable, is not
appropriate. The Code prohibits the use of contingent fees for audit services
It should be treated as an engagement separate from the audit and with a separate fee
charged for the work
Fee for assurance work can be on a contingent basis but the most prudent course of
action would be to charge the fee on a non-contingent basis
Answer
Chief & Co must also consider whether they have the competence to perform the work.
Providing assurance on non-financial KPIs is quite a specialist area
The firm should also consider whether it has resources in terms of staff availability to
complete the work to the desired deadline and to perform appropriate reviews of the
work which has been completed.
Answer
Incentive payment
The incentive payment could be a bribe and an illegal payment. If so, this indicates a
lack of integrity of management, as clearly Mark York is aware of the payment and
seems to be justifying it.
• Auditor to obtain understanding of relevant law and regulations, e.g. anti-bribery
legislation
• Audit procedures to be planned to obtain evidence relating to the payment
• Discuss with management team of the company and consider external reporting
obligations
• Intimidation from CFO/limitation on the scope of the audit
• Lack of integrity – should assess other representations/apply professional scepticism
2021/12 Q2
Requirement (a)
Using the information in Exhibit 1- Flynn co
(a) Evaluate the matters to be considered by Kelly co in deciding whether to
accept Flynn co as a client of the firm and whether to perform the
review engagement to report on the business plan.
Note: You do not need to include matters relating specifically to client due
diligence ( Know Your Client) procedures (10 marks)
1 Flynn Co
Flynn Co s an unlisted company whose main activity inolves processing frozen
food. The company has several processing plants in its home country and one
located in a foreign country, Neartand. In order to expand its product range, the
company is planning to build a new facility and begin processing in another foreign
country, Farland. Flynn Co has approached its provider of finance, Morton's Bank,
to provide a $15 million loan which will cover the necessary capital expenditure.
Nearland and Farland both have a different currency than that used by Flynn Co.
Mortons Bank has asked Flynn Co to provide a business plan for the next three
years in support of the loan application. The business plan includes forecast
statements of profit or loss and cashflow. The bank has requested that the forecast
be subject to an independent review and that a review report should be included
with the loan application.
Flynn Co is expecting to submit the business plan and review report to the bank on
5 August 20X5.
Flynn Co is audited by Roxie Associates. A new audit manager, Mary Sunshine has
recently been recruited to your firm from Flynn Co where she worked in the internal audit
department and she told you the following:
“I know that Flynn Co's auditor Roxie Associates, has performed review engagements for
the company in the past. I am aware that the latest external auditor’s report, for the year
ended 31 March 20X5, included a Material Uncertainty Related to Going Concern section
due to the company’s liquidity problems”
In his communication with Kelly & Co, the managing director of Flynn Co has suggested
that should Kelly & Co provide the report to the bank, and assuming that the finance is
provided to the company, he will be willing to remove Roxie Associates as the company’s
auditor and appoint Kelly Co to provide the audit service. The managing director has also
requested that Mary Sunshine s part of the review team and the audit team, given her past
experience with the company.
Answer
The fundamental requirements are that a firm must consider:
– Whether the relevant ethical requirements can be complied with;
– The integrity of the client; and
– Whether the firm has the appropriate competence and resources.
Ethical issues
First, offering the audit appointment as a ‘reward’, assuming that the outcome of the loan
application is successful, creates a self-interest threat as Kelly & Co has a financial interest in
accepting the review engagement.
An advocacy threat is also created because Kelly & Co has an incentive to promote Flynn Co to the
bank to ensure that the loan will be provided, and this may impact the quality of the review
engagement.
Kelly & Co should consider any safeguards to reduce any ethical threats to an acceptable level, for
example, using an independent second partner to review the work performed for the review
engagement.
Finally, threats could arise should Mary Sunshine be part of the audit team, as suggested by Flynn
Co’s managing director. Given that Mary Sunshine had previously worked in internal audit at Flynn
Co, the self-review threat could arise, as she may lack the necessary professional scepticism to
challenge.
The threat to objectivity may appear significant. Mary should not be included in the review team.
Client integrity
One issue relating to client integrity is the incentive which has been offered for Kelly
& Co to become audit provider should the loan application be successful.
The latest auditor’s report contained a Material Uncertainty Related to Going Concern
section due to liquidity issues. Kelly & Co should carefully consider the going concern
issue, as it creates a higher risk for the review engagement.
For this reason, it could be that the existing audit firm has been approached to provide
the review engagement but has declined the assignment.
Competence and resources
Being a firm of Chartered Certified Accountants and performing a range of assurance services,
there seems no reason why Kelly & Co would not have the competence to review the cash flow
forecast.
However, Resourcing could be a problem given that Flynn Co expects the loan application to be
submitted on 5 August 20X5, which is just over a month from now. The tight deadline could
impact the quality of the work performed.
Kelly & Co should discuss with Flynn Co whether there is any flexibility regarding the
deadline, with the objective of having longer to plan and carry out the work required.
Matters specific to an engagement to examine prospective financial information
– The intended use of the information;
– The elements to be included in the information; and
– The period covered by the information.
– Level of assurance to be provided and expected users of the report