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Chapter 3 Ethics Exam Kit Q44 B Marr (MJ22 Question 2 B)

The document discusses ethical and professional issues related to Marr&Co's potential appointment as auditor for Brodie Co, highlighting significant self-review threats due to prior engagements. It emphasizes the need for safeguards, such as using a separate audit team, and advises against accepting the appointment if these threats cannot be mitigated. Additionally, it addresses concerns about the integrity of the audit process, including expectations for low fees and the refusal to provide necessary notes for consolidated financial statements.

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Zoi Zak
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24 views3 pages

Chapter 3 Ethics Exam Kit Q44 B Marr (MJ22 Question 2 B)

The document discusses ethical and professional issues related to Marr&Co's potential appointment as auditor for Brodie Co, highlighting significant self-review threats due to prior engagements. It emphasizes the need for safeguards, such as using a separate audit team, and advises against accepting the appointment if these threats cannot be mitigated. Additionally, it addresses concerns about the integrity of the audit process, including expectations for low fees and the refusal to provide necessary notes for consolidated financial statements.

Uploaded by

Zoi Zak
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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AAAMJ 2022

QUESTION 2B

(b) Ethical and professionalissues

Ethical issues

Appointment as Auditor

If Marr&Coacceptsthe appointmentasauditorthere is a significant self reviewthreat..


Thethreatarises becauseMarr&Co, has performedthedue diligence assignment on Brodie
Co,andcorporatefinanceworkthusinvolvedwith manyaspects ofthe individual and Group
financial statements.

Theaudit firm mayloseprofessional scepticism andnot properly evaluateprevious


judgements made,andover-relyingontheworkpreviouslyperformedbytheauditfirm.

Marr&Cowill needtoevaluatethe significance ofthis threat, based on matterssuch asthe


materiality ofthebalances andtransactions involved andthe level ofsubjectivity involved.

Marr&Co maysafeguard againstthethreat, byusingseparate team onthe auditwhohad


not previouslyworked onthe due diligence orcorporatefinance engagements.

Preparation ofconsolidated Financial Statements

Thefinance director's requestforMarr&Coto produce the Groupfinancial statements also


raises aself reviewthreat.

Thereisalsothe riskofassuming managementresponsibilities whenthefirm subsequently


audits thefinancial statements,thatis the risk of making decisions and responsibilities on
behalfofmanagement

Preparation ofthe Groupaccountswouldnotberoutineand mechanical -it would involve


theauditormakingjudgements and taking responsibility forthewholeofthe consolidated
financial statements.

Thus,duetothesignificanceofthethreatandsince nosafeguardstoreducethe threat


Marr&Coshould decline theservice.

Thereis also a possible self-interest threatarisingfromthe rangeofservices provided to


MorrisseyCothrough fee dependency,meaningthatthe auditfirm is reluctant toact
objectively,forfearof losing thefeeincome.

Thepotential level offee incomeshould beestimated and evaluated byMar.


Invitation toattendtheindustry conference in Hawaii

Theofferbythe clientto payforthe audit partner and managertoattendthis event


constitutes anoffer of gifts and hospitality, that maygive rise topotential familiarity,
self-interest andintimidationthreats to objectivity.

Thefamiliaritythreatmeansthatclose relationships between the clientandauditfirm lead


tothe auditorbeingtoo sympatheticoraccepting oftheclient'swork,resulting in a loss of
professional scepticism.

Theself-interestand intimidation threats arise duetothefinancial benefit ofthegifts and


hospitality,which couldbe seenas abribe. Theauditfirm is likely to act in awayto keeр
theclient happy,for example,overlookingaccounting errors suchasthose indicated in the
payrollsystem, in orderto secure thetrip toHawaii.

Theofferofthetrip to Hawaii should be declined as its value is likely to be morethan trivial


orinconsequentialand the problem raised byhis offer should beexplainedtotheclient.

Other professional issues

Integrity-Expectation oflowauditfeesandchangeof auditfirm

Thecommentmadebythefinance director regardingthe reasonfordismissalofButler


Associates could indicate thatMorrisseyCohas an expectation of lowfees,which can
impacton the quality oftheauditandcan increase detection risk if too fewresources are
allocated totheaudit in an attemptto reducetheauditfirm'scosts.

The removalofthe previous auditfirm could also indicatethat MorrisseyComaybe difficult


todealwith but it could bethattheirconcerns regardingthe previous auditfirm's invoice
mayalsobelegitimate.

Audit preconditions

Thefinancedirectorhasstated that hedoes not want to provide notesto theconsolidated


financial statements, onthegrounds thattheyarenotuseful.

Failing to disclose notes totheconsolidated financial statements would meanthat theyare


notprepared in accordance with IFRS®Standards,asIAS 1Presentation ofFinancial
Statements requires notes, tobepresented in orderforthefinancial statements tobe
complete.

This matter will needto bediscussed,and iftheauditfirm believes that management will
notaccept that they havearesponsibility to prepare consolidated financialstatements in
accordance with IFRS Standards,then theappointmentshould notbeaccepted.

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