CAUB022
MODULE 3: ETHICS
HANDBOOKS: AUDITING FUNDAMENTALS IN A SOUTH AFRICAN
CONTEXT (CHAPTER 2)
CONTENT
1. Study objective
2. Importance of topic
3. Exam technique
4. Questions
a. Class question(s)
b. Self-assessment question(s)
5. Sources
6. Class slides
1. STUDY OBJECTIVES
On completion of this module, you should:
Explain what ethics are and why professions have codes of ethics.
Explain where in the audit process ethical requirements are considered.
Contrast the ‘principles-based’ approach to ethics with ‘rules- based’ approach.
Explain which ethical codes and rules are applicable to Registered Auditors in South
Africa and what constitutes prohibited actions.
Briefly outline the disciplinary processes of the IRBA and SAICA.
Describe and the conceptual approach to ethics adopted in the IFAC/SAICA/IRBA
Codes of Professional Conduct.
Describe the guidance contained in the Codes of Professional Conduct and apply this
to practical situations.
Describe what constitutes improper conduct in terms of the IRBA’s Rules Regarding
Improper Conduct and apply these Rules to practical situations.
2. IMPORTANCE OF THE TOPIC
This section of the work can be examined in the form of theoretical and application questions.
3. EXAM TECHNIQUES
THE BEST WAY TO PERPARE YOURSELF FOR TESTS AND EXAMS IS TO WORK
THROUGH AS MANY QUESTIONS UNDER EXAM CONDITIONS AS POSSIBLE.
The following methods should be used to improve your understanding of the topic:
– Study the underlying concepts and principles form the course notes and the relevant
chapters of Auditing Fundamentals in a South African Context, Latest Edition.
– Practice addressing the practical issues by working through the question bank and class
questions. You should attempt the class questions, compare your solutions to the
suggested solutions and analyse why differences exist.
4. QUESTIONS
No Description Topic Type
1. Scenarios Ethics Class Question1
2. Queries Ethics Class Question1
3. Ethics Tutorial question 12
4. Mr Bonanza Ethics Tutorial question 22
5. Auditing Fundamentals in a Ethics Self-assessment
South African Context – question3
Chapter 2, Question 5.
1 Class questions and discussion questions are questions that you have to attempt (as if under exam
conditions). The lecturer will announce in class when you should attempt it and during which class /
lecture the question will be discussed. Please remember to always bring your attempted question to
the class / class as it may be taken in for marking AND may be taken into account to determine your
semester mark.
2 Tutorialquestions and discussion questions are questions that you have to attempt (as if under exam
conditions). The lecturer will announce in class when you should attempt it and during which class /
lecture the question will be discussed. Please remember to always bring your attempted question to
the class / class as it may be taken in for marking AND may be taken into account to determine your
semester mark.
3Self-assessment questions is questions that you have to attempt (as if under exam conditions) on
your own. These questions will help you with exam technique (if attempted properly) and provide you
with examples of how questions may be asked in a test or exam.
CLASS DISCUSSION QUESTION 1
Consider the following independent scenarios:
Scenario 1:
Thabo Thabane, a Chartered Accountant (CA (SA)), a sole proprietor and a recently qualified
Registered Auditor. He does not have a large client base yet as he only recently started his
business. He was approached by a company called XYZ Limited with a request to act as its
external auditor. XYZ Limited operates throughout Southern Africa, with branches in
Johannesburg, Cape Town, Windhoek, Harare and Maputo. Thabo is not sure whether he
should accept the engagement or not.
Scenario 2:
Jan Malan CA (SA) RA acts as an agent for accounting software by the name of Kastel, the
same accounting software that he also uses himself in his own audit practice. In terms of an
agreement between Jan and Kastel, Jan receives a 20% commission based on the selling
price of all the Kastel accounting software that he (Jan) sells to his clients.
YOU ARE REQUIRED TO:
1.1 Discuss any threats and fundamental principles affected as evident from 8
information contained in “Scenario 1” and “Scenario 2” above.
CLASS DISCUSSION QUESTION 2
You are a consultant working for the South African Institute of Chartered Accountants
(SAICA) and you are responsible for answering any queries received from members.
You have the following queries that need your attention:
Query 1:
Mildred Moloko CA(SA) is a professional accountant working as a financial manager
at Halfway Farming (Pty) Ltd. One of her responsibilities is to select suitable suppliers
of packing material to the company. A major supplier of packing material offered her
an all-expenses paid trip to the Austrian Grand Prix scheduled to take place in
October. The specific supplier’s contract is up for renewal at the end of the year. She
is not sure how to deal with this situation in order to comply with the fundamental
principles.
Query 2:
Tony Kiriakis CA(SA) is the senior accountant for Steelworks Limited, a steel
manufacturer. Tony is responsible for compiling the annual financial statements. He
receives an incentive bonus based on the profit after tax. Tony requested your input
as to whether he might be in breach of the fundamental principles of the SAICA CPC
if he receives the bonus.
Query 3:
Sandile Gumede recently qualified as a chartered accountant and was offered the
position of financial manager at the Mokgalakwena Municipality in Mokopane. She
has never worked in any sphere of government before and does not have any
knowledge of the relevant laws and by-laws relating to the public sector. Sandile sent
an email to you requesting your guidance regarding her accepting the position of
financial manager at Mokgalakwena Municipality.
YOU ARE REQUIRED TO:
1 Discuss the acceptability of each of the above issues by making
reference to the SAICA Code of Professional Conduct.
Structure your answer as follows:
Query 1: 7
Query 2: 4
Query 3: 6
CAUB 022– COURSE NOTES
TUTORIAL QUESTION 1
PART A
1.1 YOU ARE REQUIRED TO MATCH COLUMN A WITH COLUMN B: 10
# Column A # Column B
1. An auditor must not believe everything he is told and must find suitable A. Internal auditor.
evidence to support a fact presented to him by the preparers of financial
statements.
2. Professional accountants may not compromise their professional or B. Intimidation threat.
business judgement because of bias, conflict of interest or undue
influences.
3. The type of threat created in terms of the SAICA Code of Professional C. Integrity.
Conduct when a firm has undue dependence on total fees from a client.
4. An employee who provides independent, objective assurance and D. Advocacy threat.
consulting services to the employer designed to add value to and improve
the employer’s operations.
5. The type of threat created in terms of the SAICA Code of Professional E. Familiarity threat.
Conduct when a firm has prepared the original data used to generate
records that are the subject matter of the assurance engagement.
6. The type of threat created in terms of the SAICA Code of Professional F. Objectivity.
Conduct when a professional accountant in business has the opportunity
to manipulate information in a prospectus in order to obtain favourable
financing.
7. Information gathered by an auditor which is sufficient and appropriate to G. Self-review threat.
support his opinion provided on the fair presentation of the financial
statements.
8. The type of threat created in terms of the SAICA Code of Professional H. Professional
Conduct when a firm is threatened with litigation by a client. scepticism.
9. The type of threat created in terms of the SAICA Code of Professional I. Self-interest threat.
Conduct when a member of the engagement team has a close or
immediate family member who is a director of the client.
10. The fundamental principle in the SAICA Code of Professional Conduct that J. Audit evidence.
has to do with honesty and truthfulness.
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CAUB 022– COURSE NOTES
PART B
Springfield (Pty) Ltd (hereafter referred to as “Springfield”), is a profitable owner
managed business. Springfield specialises in the manufacturing and the distribution
of custom-made jewellery, both locally and internationally. The company was
incorporated during the 2013 financial year. Sello Makhado is the Chief Executive
Officer (CEO) of Springfield. His wife, Rachel Makhado, handles all the accounting
and the financial matters of the company since she joined Springfield on 1 January
2019. Together Sello and Rachel own 35% of the shares of Springfield, while the
remainder of the shares are owned by Zonnebloem (Pty) Ltd, (hereafter referred to
as “Zonnebloem”). Sello and Rachel also owns 25% of the shares of Zonnebloem.
Rachel registered with SAICA as a Chartered Accountant (SA) in January 2016 after
she completed her training contract at BAP Inc. Registered Accountants and
Auditors, (hereafter referred to as “BAP”), a medium-sized auditing practice. BAP
was appointed as the external auditor of Springfield and Zonnebloem when the
companies were incorporated. Rachel was part of the audit team conducting the
2017 year end audit of Springfield. She resigned from BAP on 1 December 2018
after which she joined her husband at Springfield.
You are employed by BAP as a senior trainee accountant. You are responsible for
both of the audit engagements of Springfield and Zonnebloem for the financial year
ended 28 February 2021. The audit engagement partner responsible for both of
these audit engagements, Bill White, is a personal friend of Sello and Rachel and
handles their personal and company tax matters. Rachel insists that both audit and
advisory services for Springfield are to be provided by BAP.
Monthly management meetings are held by Sello and Rachel to review management
accounts and to adjust the budget if needed. Bill White often attends these monthly
meetings as financial advisor to Springfield. During one of the meetings, Bill White
was asked to sign a budget forecast prepared by Rachel for submission to ABC
Bank in order to get a loan. Bill White signed it without hesitation as he trusts Rachel
implicitly.
While busy conducting the audit, you came across an entry in the minutes of
meetings for one of the management meetings that was held. The entry mentioned a
payment of R20,000 made by Rachel to a SARS official for “services rendered”.
When you asked Rachel about the payment, she explained that they paid it to the
official to make sure that they do not encounter any problems when exporting their
jewellery. You referred the matter to Bill White who told you that it is common
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CAUB 022– COURSE NOTES
practice in the business world and that no further audit procedures are deemed
necessary.
YOU ARE REQUIRED TO:
1.2 Apply the SAICA conceptual framework approach and identify any ethical concerns 19
from the scenario in terms of the SAICA Code of Processional Conduct.
For each ethical concern identified, structure your answer as follows:
- State the ethical concern
- State and discuss the threats that arise
- State and discuss the fundamental principles affected
- State and discuss possible safeguards
Communication skills: clarity of expression. 1
TUTORIAL QUESTION 2
Mr Bonanza is a chartered accountant employed as the most senior financial
accountant of a significant division of Medium Limited (Medium), a company listed on
the JSE Limited. Among other incidents, the following happened to Mr Bonanza in
20X9:
1. February 20X9: Mr Bonanza spend most of February compiling the division’s
financial information, which will feed into Medium’s financial statements for the
financial year ended 28 February 20X9. Medium’s management awarded Mr
Bonanza 300 000 share options in 20X1, which will vest on 30 April 20X9. In
February, the share options are ‘in the money’, as they were awarded when
Medium’s share price was R7,20 per share, and the share price is now over R11
per share. Mr Bonanza is glad about the amount of money that he is likely to
receive when the share options vest, because he was divorced late in 20X3, and
needs the money to maintain his standard of living.
2. September 20X9: In September, the chairperson of the board of directors of
Large Ltd (Large), a competitor of Medium, calls Mr Bonanza and offers him the
position of financial director of Large. Mr Bonanza views this as a once-in-a-
lifetime opportunity. However, there is a condition attached to the offer: he must
supply Large with a list of Medium’s clients, showing the amounts that Medium
charged each client for services over the last 12 months.
Required:
Discuss each of the above situations in the light of the relevant guidance in the
SAICA Code of Professional Conduct.
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CAUB 022– COURSE NOTES
NOTE: THE SOLUTION TO THE TUTORIAL QUESTION WILL BE LOADED ON
BLACKBOARD.
5. SOURCES
These course notes and lecture slides have been compiled from the following
sources:
Auditing Fundamentals in a South African Context (Latest Edition).
6. LECTURE SLIDES
Lecture slides will be made available on black board.
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