Homework SourseQuestion 1 8 marks The following cover various ethical situa
Question 1( 8 marks)
The following cover various ethical situations .For each you need to state whether there has been a
violation or no violation of a general ethical principle and if there is a violation which ethical principle
is violated.You need to also to briefly outline the reason for your answer in each situation .
( a) The Berowra Accountants are advertising a special in the local paper that they guarantee to provide their clients with a tax refund .
(b) Jamie Harvey ,Auditor,is an auditor for a chartered accounting firm during the day and has just been asked to be the treasurer of the local athletics club .The athletics club is a not for profit institution and Jamie’s firm only does audits of large public companies.
( c) The Pymble Accountants carried out the Audit of Monlec Ltd from July 7th to the 2nd September
2017 and Monlec have advised Pymble Accountants that the final payment is dependent upon receiving an “appropriate “ final report.
(d)The Winton Accountants have just completed their audit of the Motoring Services Company and have provided all the working papers to the staff of Chadwick Chartered Accountants who have been
asked by the Institute of Chartered Accountants to carry out a Quality Review of the Audit work carried out by Winton Accountants during a recent audit
Question 2 ( 6 marks)
The following are separate situations where the independence of the Auditor is subject to threat.You are asked to identify the name of the threat to the Auditor’s independence and briefly explain why it is a threat
(a) Leona Ng ,the Senior Accounts Manager ,from Jenkins Ltd has fallen ill and will need replacing
for the next four months.Your accounting firm,Thornleigh Accountants has been asked to supply
a staff member on secondment until Leona Ng returns. Your firm has supplied Jane Davis and
she finished up after four months in mid May .Your firm is going to do the audit of Jenkins Ltd
from mid July and intend to use Jane Davis as part of the audit team.
(b)John Darrow ,the Audit Manager of the Darrow Associates Accountants ,has just received the
accounts from Winmalee Ltd .This has taken an optimistic approach to the valuation of
development expenditure capitalised in intangible assets .The senior staff bonuses are all related
to the firm’s profit performance and Winmalee have provided paper copies of details taken from
various accounting standards,as well as computer files with reports which are sympathetic to
their approach to valuation of these assets .
( c) The Chocolate company has asked your firm to carry out the audit of its financial statements .
It also has invited your firm to visit its seconds chocolate shop where defective chocolates are
sold at a considerable discount prior to completing the audit .The Chocolate company has
invited members of your firm to join the Chocolate company’s social club.
Question 3 ( 6 marks)
The following independent situations cover different situations which Auditors may encounter.You are asked to state which Audit opinion should be given and briefly explain why.
(a)The Connor company has been having increasing difficulty paying its debts during the last financial year and has been relying on its bank overdraft to pay debts . It has just been advised that the bank want repayment of the bank overdraft within one month. All other efforts to obtain finance have been unsuccessful .You have found no material misstatements in the company’s financial statements.
(b)A local company has an American parent company and so it uses the same inventory valuation method of LIFO instead of FIFO. The difference between LIFO and FIFO has been calculated and its
effects calculated and while it has lead to a material misstatement the effects are limited to their effect on the Inventory and do not have a material effect on the rest of the financial statements.
(c)The Victorian Manufacturing company manufactures prefabricated concrete in its factories It includes its factories in the balance sheet at market value less accumulated depreciation.The Factory in Melbourne is included in the balance sheet based on a valuation carried out five years
ago .The directors have not asked for another valuation because they have believed that the market
values have remained fairly stable over the past five years
Solution
Question 1
( a) The Berowra Accountants are advertising a special in the local paper that they guarantee to provide their clients with a tax refund .
This situation is a clear voilation of general ethical principle. Two principles are voilated here as mentioned below:
Objectivity - Advertisement in local newspaper is an undue influence to get more client base.
Professional behaviour - Such advertisement discredits the profession.
(b) Jamie Harvey ,Auditor,is an auditor for a chartered accounting firm during the day and has just been asked to be the treasurer of the local athletics club .The athletics club is a not for profit institution and Jamie’s firm only does audits of large public companies.
This situation is a voilation of general ethical principle. Professional behaviour is voilated here as the accounting firm is saying no to Non profit organisation (NPO) as this disrespects the professional body.
( c) The Pymble Accountants carried out the Audit of Monlec Ltd from July 7th to the 2ndSeptember
2017 and Monlec have advised Pymble Accountants that the final payment is dependent upon receiving an “appropriate “ final report.
There is a violation of ethical principles from Monlec. The violated principle is Objectivity. as they are influencing the auditor to give an appropriate final report in order to get the full payment of the services provided.
There is no violation of ethical principles from the Pymble Accountants yet since they have not provided the report. In case the accountant gives an appropriate final report even though the financial statements do not give true and fair view, then there will be a violation of Integrity and Professional Behaviour.
(d)The Winton Accountants have just completed their audit of the Motoring Services Company and have provided all the working papers to the staff of Chadwick Chartered Accountants who have been
asked by the Institute of Chartered Accountants to carry out a Quality Review of the Audit work carried out by Winton Accountants during a recent audit
There is no voilation of any ethical principles. The principle at stake here is Confidentiality which gets violated only if the client information is disclosed to third party without proper and specific authority. But, here the information is given to the Institute of Chartered Accountants who have the relevant authority. But the only point to note is that the client (Motoring Services Company) should be aware that the audit work is passed to the Institute for quality review.
