ACCT3006 – Auditing and Assurance

Module 2 (Week 2) – Tutorial Guide

You must complete the following questions and upload them via the link as per the LG.

Activity 1

Discussion of these portfolio Questions.

PAQ – 2.31 and 2.36 plus the following supplementary questions.

SQ.2.1
For each of the unrelated cases listed below:
(a) identify the most significant potential threat (s) to independence in the
circumstances, and explain why: and
The main threat to the independence of Clarke Partners is familiarity threat. This is
because there is an audit partner who is a longtime friend of Justin and Sarah Morris.
Because of this close relationship, there is a risk that the auditor will be biased and he
will no longer be objective. He may not question the management too much or be too
lenient with the audit findings, thus affecting the independence of the audit.
There is also a possible self-interest threat because Dolphin is a new client and there is
still the involvement of banks and investors. The audit firm may want to keep the client
so their judgment may be influenced. There is also a possible intimidation threat
because the auditor can be pressured by management or investors to give a good audit
opinion.
(b) Recommend a safeguard, if any that could be put in place to reduce the threat to an
acceptable level.
To reduce threats, Clarke Partners must create safeguards. First, the partner who has a
close relationship with the client should be removed from the audit engagement to
avoid bias.
Second, an independent partner should be assigned to review the audit work to ensure
that the audit process is objective and correct.
Third, the firm must follow their internal policies such as independence checks and
conflict of interest rules to manage risks. All threats and safeguards must also be
documented to be clear and compliant with standards.
If the threats are still not reduced to an acceptable level, the firm should decline the
audit engagement to maintain their professional integrity.

Case Most Significant potential Recommended safeguard

threat(s) to independence (if any)
 and reason(s) why
Kelly Brown is employed as Threat: Safeguard:
senior Auditor at Chales Self-Review Threat Remove Kelly from the audit
Auditing Firm. Now she is team to maintain
the new audit manager for Reason: independence.
Andrew’s Comfort Furniture It is possible that Kelly could
Pty Ltd, where Kelly was audit the financial
employed previously and statements that they made
Kelly has prepared the themselves, so it is difficult
financial reports for to be objective because
Andrew’s Comfort Furniture they are checking their own
for the period under review. work.
You are one of the audit Threats: Safeguard:
partners of Smooth Audit Self-interest threat and The team that will do the
Pty Ltd. Your client Open possible self-review threat. tax return should be
Road Pty Ltd is one of your different and they should
largest audit clients and Reason: not audit their own work.
they have requested your Since this is a large client,
firm to prepare the the audit firm can become
company’s tax return. financially dependent on
the client. There is also a
risk that they will audit what
they did themselves if they
also did the tax return.
Swanson and Associates Threats: Safeguards:
have recently been Self-review threat. The auditor should decline
appointed as the new the valuation service or use
auditor for Fosters Pty Ltd. Reason: an independent valuation
Fosters has a large If they do the valuation, expert.
investment and has they will also audit the
requested Swanson to valuation they did, so
provide an independent objectivity will be lost.
valuation of the investment.

SQ2.2
The following circumstances raise questions about an auditor’s ethical conduct.
1. An auditor accepts an engagement knowing that she does not have the
specialist knowledge required.
2. A public accounting firm states in a newspaper that it has had fewer lawsuits
than its main competitors have had.
3. An auditor discloses confidential information about a client to a successor
auditor.
4. A public accountant pays a commission to a solicitor to obtain a client.
5. A public accountant agrees to be the committee chairperson for a local
fundraising activity.
6. An auditor accepts a Christmas gift from a client.
7. An auditor accepts a commission from an insurance company for recommending
it to one of its audit clients.
8. An auditor has a bank loan with a bank that is an audit client.
9. An auditor retains a client’s records as a means of enforcing payment of an
overdue audit fee.
Required
a) Discuss the fundamental principles of the Code of Ethics for Professional
Accountants in relation to each of the circumstances.
1. Integrity – be honest and truthful
2. Objectivity – no bias or personal interest
3. Professional competence and due care – have sufficient knowledge and
skills
4. Confidentiality – keep client information private
5. Professional behaviour – obey laws and regulations

b) Indicate, in each of the above circumstances, whether the effect on professional

ethics is (i) a violation; (ii) not a violation or (iii) indeterminate, and explain.
1. Auditor accepted the engagement even though he did not have enough
knowledge

Effect: Violation
Explanation: This is a violation of professional competence and due care
because the auditor should only accept work that he can do properly.

2. Accounting firms advertise that they have fewer lawsuits than

competitors

Effect: Indeterminate
Explanation: If the statement is true and not misleading, it may be
acceptable. But if it is used to discredit competitors, it can damage the
reputation of the profession.

3. Auditor gave confidential information to the successor auditor

Effect: Violation without the client's consent

Explanation: Client information is confidential. This can only be given
with the client's permission as part of the professional clearance.

4. Accountant paid a commission to the solicitor to get a client

Effect: Violation
Explanation: Paying a commission to get a client can be unethical and can
damage professional behavior.

5. Accountant turned chairperson of local fundraising activity

Effect: Not a violation

 Explanation: This is only a community activity and does not affect the
accountant's professional ethics.

6. Auditor received a Christmas gift from the client

Effect: Not a violation if the gift is small

Explanation: A small gift is normal courtesy, but if it is expensive or large,
it can affect independence.

7. Auditor received a commission from the insurance company he

recommended to the client

Effect: Not a violation if disclosed

Explanation: The commission must be disclosed and make sure that the
recommendation is in the best interest of the client.

8. Auditor with a loan from the audit client bank

Effect: Not a violation

Explanation: A normal bank loan is allowed if it is on normal commercial
terms.

9. Auditor does not return client records until audit fee is paid

Effect: Not a violation

Explanation: The auditor has a legal right of lien to hold the records until
the fees are paid.

SQ2.3
Donald Trump the owner of a large manufacturing company, asked Joe Biden, a partner in a
small audit firm (J&B Ltd), to audit the company’s records. Donald told Joe that the audit
was to be completed in time to submit an audited financial report to a bank as a part of a
loan application. Joe accepted the engagement immediately and agreed to provide an
auditor’s report within 2 weeks.
Joe hired three accounting students to conduct the audit and spent several hours telling the
exactly what to do. Joe told the students not to spend time reviewing the controls or the
business environment but instead to concentrate on proving the mathematical accuracy of
the ledger accounts and summarising the data in the accounting records that supported
Donald’s financial report. After three weeks, the students followed Joe’s instructions and
gave Joe the financial report, which did not include footnotes. Joe reviewed the financial
reports and prepared an unmodified report indicating that, in his opinion, the financial
report gave true and fair view. The working papers did not refer to acceptable accounting
policies or compliance with relevant regulations and statutory requirements.
Required:
Explain whether you consider that Joe Biden (J&B) exercised “reasonable care and skill” and
was negligent. Justify your answer by citing relevant case law.
In this situation, Joe Biden did not show reasonable care and skill and can be considered
negligent.
Reasons
In this situation, Joe Biden did not exercise reasonable care and skill and can be
considered negligent. A reasonable auditor is expected to plan properly, supervise staff, and
obtain sufficient and correct audit evidence.
However, Joe accepted the audit engagement with an unrealistic deadline of two
weeks, which was not enough to do a proper audit. He also hired accounting students who
did not have enough experience and did not supervise them properly. Moreover, he
instructed them to focus only on checking mathematical accuracy and not to check internal
controls and business environment, which are important parts of the audit.
In addition, the financial report had no footnotes or disclosures, but Joe still gave an
unmodified audit opinion despite the lack of evidence. The working papers also do not have
sufficient evidence that the accounting standards and regulations were followed.
Based on the principles of case law in auditing, such as Pacific Acceptance (1970), the
auditor must demonstrate proper supervision, professional scepticism, and obtain sufficient
evidence. Since Joe did not comply, he clearly did not meet the standard of a reasonable
auditor and could be considered negligent.
Plus - Please read the two articles I've attached for discussion in class. These articles are
also available in module 15, and this will assist you in completing your assessment of – the
case study.