This study deals with some issues related to the audit team member, family member, audit fees and gift and hospitality with respective section. In general audit service is defined as the evaluation of the person, system, organization, process, enterprise or project. Before engaging in the audit arrangement the significant of the threat must be evaluated and applicable safeguard should be applied to eradicate the threat or to reduce the threat at an accepted level. If the member cannot eradicate or reduce the threat by applying safeguards, such an offer should not be accepted by the Member in Public Practice.
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Ha3032 auditing and assurance services
1.
2. Abstract
This study deals with some issues related to the audit team member, family member, audit fees
and gift and hospitality with respective section. In general audit service is defined as the
evaluation of the person, system, organization, process, enterprise or project. Before engaging in
the audit arrangement the significant of the threat must be evaluated and applicable safeguard
should be applied to eradicate the threat or to reduce the threat at an accepted level. If the
member cannot eradicate or reduce the threat by applying safeguards, such an offer should not be
accepted by the Member in Public Practice.
3. Contents
Abstract2
Introduction4
Answer to Question 15
Issue5
Rules5
Analysis6
Answer to Question No. 27
Issue7
Rules7
Safeguards7
Analysis8
Answer to Question no. 39
Issue9
Rules9
Safeguards9
Analysis10
Answer to Question no. 411
Issue11
Rules11
Safeguards11
Rule of Gifts and Hospitality12
Analysis12
References13
4. Introduction
In general audit service is defined as the evaluation of the person, system, organization, process,
enterprise or project (Arenes, 2003). But the term audit is most used in accounting as an
independent and systematic procedure of collecting and examining data, records, performance,
statements and operations of an organization for a specified purpose (Colbert, 1996). Basically
audit service is done to ensure the investors that the information provided by the entity is
authentic and the investor can take decision on the basis of the provided information (Dănescu,
2007). This study deals with some issues related to the audit team member, family member, audit
fees and gift and hospitality with respective section.
5. Answer to Question 1
Issue
Rodney Brick is working now as a auditing assistant with an audit firm and he is appointed to
assist, as his first work, the auditing of the books of the Daffey Jones Ltd, a major retailer.
Rodney copies some information that he believes assist him to complete an audit assignment and
for the confidentiality of the client Rodney remove all the references.
Rules
As per section 140 of Compiled APES 110 Code of Ethics for Professional Accountants
describes about the confidentiality of the audit client (APESB, 2011).
Under section 140.1 the principle of confidentiality refrain the members not to:
Disclose the confidential information of the firm or the employing organization outside,
which is acquired by business and professional relationships without the proper
authority or unless there is any legal duty or right to disclose the information, and
Use the confidential information which is acquired by business and professional
relationships for the personal advantage or for any third party benefit (Dobroţeanu &
Dobroţeanu, 2002).
Under section 140.2 a member of the audit team must maintain confidentiality and be alert about
the possibility of intentional or unintentional disclosure to close family members or to the close
business associates.
Under section 140.3 & section 140.4 a member must maintain confidentiality disclosed by the
prospective client and must maintain confidentiality within the firm and employing organization.
Under section 140.7 the circumstances under which the confidential information of the client
may be disclosed or required to be disclosed or where such disclosure is treated as appropriate is
discussed below:
Such type of disclosure is permitted by law and which is authorized by the employer
Such type of disclosure is required by law, say for example, any evidence in the course
of legal proceedings and disclosure seems appropriate to the public authorities.
6. When disclosure is the professional duty or right which is not prohibited by the law, say
for example,
i. to comply with the quality review of a member
ii. to respond to an investigation or inquiry
iii. to prohibit the professional interest of the member in legal proceedings
iv. to be complied with the ethics requirements and technical standard.
As per section 140.8 of Compiled APES 110 Code of Ethics for Professional Accountants
relevant factors needed to be considered whether to disclose the confidential information are
discussed below:
Whether the interest of the third party could be harmed if the client consents to disclose
the information
Whether all the relevant information is known and here professional judgments should
be made in determining what type of disclosure to be made
Analysis
Under section 140 of Compiled APES 110 the member of the audit team breaches the
confidentiality factor. The information which is acquired by the client as business relationship is
disclosed by the member of the audit team which is not his right or duty. Under this section it is
strictly prohibited not to use the confidential information which is acquired by the client as
business relationship for the personal benefit. So under section 140.1 the principle of
confidentiality is breaches by the member of the audit team.
7. Answer to Question No. 2
Issue
For a number of years Bertha Bigga is working as the audit partner of the Wait Alert Limited
(“WA”). As the company secretary is resigned and the company looks for a new secretary for
almost nine months, Bertha performed the role during this period at the request of the WA.
Rules
Under section 290.134 of Compiled APES 110 intimidation or familiarity threats can be raised if
an officer or a director of the audit client or any of the employees in a position may have
significant influence on the preparation of the accounting record of the client. This type of thread
occurs when an officer or director is simultaneously an officer of the audit client and also has
been a member of the audit team or partner of the firm (APESB, 2011).
Under section 290.138 there is probability of arising self interest threat when any member of the
audit team joins the client engagement of audit by knowing that the member in future may join
the client. The policies and procedure of the firm is required to give notification to the firm in
time of entering into the negotiations with the client. After getting such notification, evaluation
should be made about the significance of the threat and safeguards should be applied to eliminate
the threat or to reduce it when necessary (Ivan, 2009).
Safeguards
To remove the person from the audit engagement team
A review should be made on any major judgment made by that individual when in the
team.
Under section 290.139 Intimidation or familiarity threat occur when in the audit client a audit
partner join as:
An officer or a director of that entity
An employee of that entity in such a position from where significant influence can be
made over the financial statement preparation on which the audit firm will express their
opinion.
8. Independence of the auditor deemed to be compromised unless and until, the subsequent partner
ceasing to be a major audit partner and in case of auditing the Financial Statements of the client
the partner would not be a member of the Audit team.
Analysis
Here the independence of the auditor is deemed to be compromised and the independence of the
auditor is breached. Under section 290.138 there is probability of arising self interest threat when
any member of the audit team joins the client engagement of audit by knowing that the member
in future may join the client. Bertha Bigga is partner of the firm, as a result he can never be
appointed as the officer of the client and if so he must be eliminated from the team member of
the audit team that will audit the respective firm.
9. Answer to Question no. 3
Issue
John is the son of a factory manager of one of your audit clients John Worst Foods Limited.
After joining to the firm John is assigned to audit the John Worst Foods Limited especially with
the task of testing the internal control of cash receipt and cash payment.
Rules
Under section 290.127 Intimidation, familiarity or self interest threat can be created if there is a
personal or family relationship in between the member of an audit team and the officer, director
or employee of the Audit client and the level of threat depends on the role of the respective
person (APESB, 2011). Basically the significance and existence of the threat depends on a
various number of factors such as the responsibility of the audit member, the role of the client
officer and also on the attachment of the relationship (Oprean, et al., 2007).
Under section 290.128 when a member of the audit team of the immediate family member is a:
Officer or director of the client, or
An employee in such a position who has a significant influence over the preparation of
the accounting record of the client or the preparation of the financial statement of the
client on which the auditor will express the opinion
At this time the threats to independence can be raised and the threat can only be reduced by
removing the individual from the audit engagement team.
Safeguards
To remove the individual from the Audit engagement team
To structure the responsibility of the audit engagement team so that the member of the
audit team does not deal with the works which are the responsibility of the Immediate
family members.
10. Analysis
So here the factory manager of John Worst Foods Limited is the father of the John and he got the
responsibility of testing the internal control of cash receipt and cash payment. In this case chance
of occurring familiarity or self interest threat. Because as per section 290.127 Intimidation,
familiarity or self interest threat can be created if there is a personal or family relationship in
between the member of an audit team and the officer, director or employee of the Audit client.
Two types of safeguards are applicable for this situation. One is to remove John from the audit
engagement team or to change the responsibility of John so that he will not responsible to check
the task done by his father.
11. Answer to Question no. 4
Issue
Ocean Adventures Limited is a large business organization of wholesaler of the cruise boat and
in present time it is facing financial difficulties. PVC is their audit firm and the fee of the firm is
due for last three years. PVC threatened to resign from the audit if the fees due were not paid. As
the fee Ocean Adventures Limited offer the auditors with a nine-metre cruise boat but this boat
was only worth 75% of the balance and the auditor accepted this. Ocean Adventures Limited also
give a 15% shareholding in an unrelated company which worth $21,500 as a gift.
Rules
As per section 240.1 under section 240 when an audit firm and a client entering into a
negotiations regarding services a public member in practice may quote the appropriate fee
(APESB, 2011). The fact is that a member in public practice may quote lower than other which
is not unethical but the problem is that there may be the threats to the compliance with the
fundamental principle which may arises from the amount of fees. Say for example at a lower fee
self-interest threat to professional competence and due care can be occurred, as the fee may not
be appropriate for performing the engagement with applicable professional and technical
standards.
As per section 240.2 under section 240 the significance and the existence of a threat basically
depends on the factors like the amount of fees quoted and the services for which this is
applicable. Before engaging in the audit arrangement the significant of the threat must be
evaluated and applicable safeguard should be applied to eradicate the threat or to reduce the
threat at an accepted level.
Safeguards
To make the client aware about the basis of the fees and the terms of the audit
engagement on which the fees are charged and the area of covering the services
To assign qualified staff and proper time to complete the task.
12. Rule of Gifts and Hospitality
As per section 260.1 any member in public practice or any member of the audit team may be
offered gifts from a client. This kind of offer may incur threats to the fundamental principle. Self
interest threat is an example of such offer (APESB, 2011).
As per section 260.2 the significance and existence of any threat depends on the value, intent and
nature of the offer. Gift and hospitality may offer as informed and reasonable third party and a
member with public practice may conclude that this type of offer is not made with the intention
to influence the decision making of the audit team. In this type of cases member with public
practice may conclude that any threat to compliance with the fundamental principle is at an
acceptable level.
As per section 260.3 a member in public practice must evaluate the importance of any threat and
safeguard should be applied to eradicate the threat or to reduce it. If the member cannot eradicate
or reduce the threat by applying safeguards, such an offer should not be accepted by the Member
in Public Practice.
Analysis
PVC took a boat which worth 75% of the negotiated fee. As per section 240.1 under section 240
when an audit firm and a client entering into a negotiations regarding services a public member
in practice may quote the appropriate fee. Appropriate fee is quoted in the negotiation but, after
the financial crisis Ocean Adventures Limited give them a boat which may create self interest
threat. As per section 260.1 any member in public practice or any member of the audit team may
be offered gifts from a client. This kind of offer may incur threats to the fundamental principle.
So, PVC breaches the code of conduct by accepting the gift from the client.
13. References
APESB, 2011. Compiled APES 110 Code of Ethics for Professional Accountants. December, pp.
20-22.
APESB, 2011. Compiled APES 110 Code of Ethics for Professional Accountants. Supersedes
APES 110 Code of Ethics for Professional Accountants, December, pp. 41-93.
APESB, 2011. Compiled APES 110 Code of Ethics for Professional Accountants. Supersedes
APES 110 Code of Ethics for Professional Accountants, December, p. 60.
APESB, 2011. Compiled APES 110 Code of Ethics for Professional Accountants. Supersedes
APES 110 Code of Ethics for Professional Accountants, December, pp. 34-45.
APESB, 2011. Compiled APES 110 Code of Ethics for Professional Accountants. Supersedes
APES 110 Code of Ethics for Professional Accountants, December, p. 37.
Arenes, L., 2003. Audit. An Integrated Approach. Eight Edition, ed. Chişinău: ARC Publishing, .
Colbert, J., 1996. International and US Standards - audit risk and materiality,. Managerial
Auditing Journal, , 11(8), pp. 31-35.
Dănescu, T., 2007. Financial Audit. Convergence between Theory and Practice,. Bucharest:
Irecson.
Dobroţeanu, L. & Dobroţeanu, C., 2002. Audit. Concepts and Practices. National and
International Approach,. Bucharest: Economică Publishing.
Ivan, R., 2009. Standardization of Audit,. Annals of the University of Petroşani,, pp. 4-9.
Oprean, I., Popa, I. & Lenghel, R., 2007. Audit and Financial Control Procedures,. Cluj Napoca:
Risoprint Publishing, .