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Professional ethics Question and solution

The document outlines ethical threats faced by auditors at Stark Co, including familiarity due to long-term engagement, potential conflicts of interest with family members on the audit team, and acceptance of gifts and contingent fees. It suggests mitigations such as rotating the engagement partner, excluding family members from the audit, declining gifts, and ensuring fees are based on time and experience rather than contingent outcomes. The document emphasizes the importance of maintaining independence and objectivity in the audit process.

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10 views

Professional ethics Question and solution

The document outlines ethical threats faced by auditors at Stark Co, including familiarity due to long-term engagement, potential conflicts of interest with family members on the audit team, and acceptance of gifts and contingent fees. It suggests mitigations such as rotating the engagement partner, excluding family members from the audit, declining gifts, and ensuring fees are based on time and experience rather than contingent outcomes. The document emphasizes the importance of maintaining independence and objectivity in the audit process.

Uploaded by

sibusisokahblessed
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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Professional ethics - Practice question and suggested solution

You are a manager in the audit firm of Ali & Co; and this is your first time you have worked on one
of the firm’s established clients, Stark Co. The main activity of Stark Co is providing investment
advice to individuals regarding saving for retirement, purchase of shares and securities and
investing in tax efficient savings schemes. Stark is regulated by the relevant financial services
authority.

You have been asked to start the audit planning for Stark Co, by Mr Son, a partner in Ali & Co. Mr
Son has been the engagement partner for Stark Co, for the previous nine years and so has
excellent knowledge of the client.

Mr Son has informed you that he would like his daughter Zoe to be part of the audit team this
year; Zoe is currently studying for her first set of board examinations for Chartered Accountant
qualification. Mr Son also informs you that Mr Far, the audit senior, received investment advice
from Stark Co during the year and intends to do the same next year.

In an initial meeting with the finance director of Stark Co, you learn that the audit team will not be
entertained on Stark Co’s yacht this year as this could appear to be an attempt to influence the
opinion of the audit. Instead, he has arranged a balloon flight costing less than one-tenth of the
expense of using the yacht and hopes this will be acceptable. The director also states that the fee
for taxation services this year should be based on a percentage of tax saved and trusts that your
firm will accept a fixed fee for representing Stark Co in a dispute regarding the amount of sales
tax payable to the taxation authorities.

Required:
(i) Explain the ethical threats which may affect the auditor of Stark Co. (6 marks)
(ii) For each ethical threat, discuss how the effect of the threat can be mitigated. (6 marks)
Ethical threats Mitigations for ethical threat
Solution
Ethical threats Mitigations for ethical threat
Mr son, the engagement partner has been Mr Son should be rotated from being
involved with the client for the last nine years. engagement partner. He can still contact the
client but should not be in the position of
signing the audit report
This means he may be too familiar with the
client to be able to make objective decisions
due to this long association.

There is no ethical rule that stops Mr son from To show complete independence, Zoe should
recommending Zoe for the audit or letting Zoe not be part of the audit team. however, if Mr.
take part in the audit. Son is no longer the engagement partner then
this removes the ethical threat and Zoe could
be included in the audit team.
However, there may be the impression of a
lack of independence as Zoe is related to the
engagement partner.
Zoe could be tempted not to identify errors in
case this prejudiced her father’s relationship
with the client.

As long as Mr far paid a full fee to Stark Co for To show independence from the client, Mr Far
the investment advice, then there is no ethical could be asked not to use the services of Stark
threat. This would be a normal commercial co again unless this is first agreed with the
transaction and Mr. Far would not gain any engagement partner.
benefit.

However, continued use of client services


could imply a lack of independence especially
if Mr. Far is not paying full fee and therefore
receiving a benefit from the client.

The audit team has been offered a balloon The balloon flight should not be accepted.
flight at the end of the audit. investigation would also be needed to find out
why hospitality was accepted in previous
Acceptance of gifts from a client, unless of an years.
insignificant amount, is not allowed. the fact
that the flight costs less than the yacht
expense is irrelevant, independence could still
be impaired.

Agreeing to accept taxation work on the The audit firm must confirm that assistance
percentage of the tax saved is essentially with taxation
accepting a contingent fee.
Ethical threats Mitigations for ethical threat
work is acceptable, although the fee must be
based on time and experience for the job, not
There will be pressure to gain the highest tax
the contingent fee.
refund for the client and this could tempt the
audit firm to suggest illegal tax avoidance
schemes.

Representing stark co in court could be seen To remain independent, the audit firm should
as an advocacy threat – that is the audit firm is decline to represent the client in court.
promoting the position of the client.

Objectivity could be compromised because


the audit firm is seen to take the position that
the client is correct, affecting judgment on the
tax issue.

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