ACCA AAA ^INT Syllabus B. Professional and Ethical Considerations - Typical threats - Past Papers ^{4 / 9}

You are a manager in Monet & Co, a firm of accountants which has 12 offices and 30 partners, 10 of whom are members of ACCA. As an expert in ethics and professional conduct, you have been asked to advise the partners on the following issues, which were raised at a recent meeting.

(c) Your firm audits the publisher Homer Winslow Co. During its recent audit, the company’s finance director commented on growing competition in the digital publishing sector. One rapidly expanding competitor, Pissarro Co, was specifically referred to. You are aware that your firm recently acquired another accountancy firm, Maar Associates, and that Pissarro Co is one of their clients. It is hoped that the audit of Pissarro Co will be transferred to your department to take advantage of your specialism in media and publishing. (6 marks)

Required:
Evaluate each of the issues described above, commenting on the ethical and professional issues raised and recommend any actions necessary in response to the issues identified.

Note: The split of the mark allocation is shown against each of the issues above.

You are a manager in Foo & Co, responsible for the audit of Grohl Co, a company which produces circuit boards which are sold to manufacturers of electrical equipment such as computers and mobile phones. It is the first time that you have managed this audit client, taking over from the previous audit manager, Bob Halen, last month.

The audit planning for the year ended 30 November 2012 is about to commence, and you have just received an email from Mia Vai, the audit engagement partner.

To: Audit manager
From: Mia Vai, Audit partner, Foo & Co
Subject: Grohl Co – audit planning

Hello

I am meeting with the other audit partners tomorrow to discuss forthcoming audits and related issues. I understand that you recently had a meeting with Mo Satriani, the finance director of Grohl Co. Using the information from your meeting, I would like you to prepare briefing notes for my use in which you:

Discuss any ethical issues raised, and recommend the relevant actions to be taken by our firm.
(8 marks)

Thank you.

Comments made by Mo Satriani in your meeting

Business overview

Grohl Co’s principal business activity remains the production of circuit boards. One of the key materials used in production is copper wiring, all of which is imported. As a cost cutting measure, in April 2012 a contract with a new overseas supplier was signed, and all of the company’s copper wiring is now supplied under this contract. Purchases are denominated in a foreign currency, but the company does not use forward exchange contracts in relation to its imports of copper wiring.

Grohl Co has two production facilities, one of which produces goods for the export market, and the other produces goods for the domestic market. About half of its goods are exported, but the export market is suffering due to competition from cheaper producers overseas. Most domestic sales are made under contract with approximately 20 customers.

Recent developments

In early November 2012, production was halted for a week at the production facility which supplies the domestic market. A number of customers had returned goods, claiming faults in the circuit boards supplied. On inspection, it was found that the copper used in the circuit boards was corroded and therefore unsuitable for use.

The corrosion is difficult to spot as it cannot be identified by eye, and relies on electrical testing. All customers were contacted immediately and, where necessary, products recalled and replaced. The corroded copper remaining in inventory has been identified and separated from the rest of the copper.

Work has recently started on a new production line which will ensure that Grohl Co meets new regulatory requirements prohibiting the use of certain chemicals, which come into force in March 2013.

In July 2012, a loan of $30 million with an interest rate of 4% was negotiated with Grohl Co’s bank, the main purpose of the loan being to fund the capital expenditure necessary for the new production line. $2•5 million of the loan represents an overdraft which was converted into long-term finance.

Other matters

Several of Grohl Co’s executive directors and the financial controller left in October 2012, to set up a company specialising in the recycling of old electronic equipment. This new company is not considered to be in competition with Grohl Co’s operations. The directors left on good terms, and replacements for the directors have been recruited.

One of Foo & Co’s audit managers, Bob Halen, is being interviewed for the role of financial controller at Grohl Co. Bob is a good candidate for the position, as he developed good knowledge of Grohl Co’s business when he was managing the audit.

At Grohl Co’s most recent board meeting, the audit fee was discussed. The board members expressed concern over the size of the audit fee, given the company’s loss for the year. The board members would like to know whether the audit can be performed on a contingent fee basis.

Financial Information provided by Mo Satriani

Extract from draft statement of comprehensive income for the year ended 30 November 2012

The draft statement of financial position has not yet been prepared, but Mo states that the total assets of Grohl Co at 30 November 2012 are $180 million, and cash at bank is $130,000. Based on draft figures, the company’s current ratio is 1•1, and the quick ratio is 0•8.

Required:

Respond to the email from the audit partner

You are an audit manager in Weller & Co, an audit firm which operates as part of an international network of firms. Weller & Co is facing competition from other audit firms, and the partners have been considering how the firm’s revenue could be increased. Two suggestions have been made:

1. Audit partners and managers can be encouraged to sell non-audit services to audit clients by including in their remuneration package a bonus for successful sales.

2. All audit managers should suggest to their audit clients that as well as providing the external audit service, Weller & Co can provide the internal audit service as part of an ‘extended audit’ service.

Required:

Comment on the ethical and professional issues raised by the suggestions to increase the firm’s revenue. (8 marks)

You are a senior manager in the audit department of Raven & Co. You are reviewing two situations which have arisen in respect of audit clients, which were recently discussed at the monthly audit managers’ meeting:

Plover Co is a private hospital which provides elective medical services, such as laser eye surgery to improve eyesight. The audit of its financial statements for the year ended 31 March 2012 is currently taking place. The audit senior overheard one of the surgeons who performs laser surgery saying to his colleague that he is hoping to finish his medical qualification soon, and that he was glad that Plover Co did not check his references before employing him.

While completing the subsequent events audit procedures, the audit senior found a letter from a patient’s solicitor claiming compensation from Plover Co in relation to alleged medical negligence resulting in injury to the patient.

Required:

Identify and discuss the ethical, commercial and other professional issues raised, and recommend any actions that should be taken in respect of Plover Co. (7 marks)

You are a manager in the audit department of Carter & Co, and you are dealing with several ethical and professional matters raised at recent management meetings, all of which relate to audit clients of your firm.

1. Fernwood Co has a year ending 30 June 2010. During this year, the company established a pension plan for its employees, and this year end the company will be recognising for the first time a pension deficit on the statement of financial position, in accordance with IAS 19 Employee Benefits. The finance director of Fernwood Co has contacted the audit engagement partner, asking if your firm can provide a valuation service in respect of the amount recognised.

2. The finance director of Hall Co has requested that a certain audit senior, Kia Nelson, be assigned to the audit team. This senior has not previously been assigned to the audit of Hall Co. On further investigation it transpired that Kia Nelson is the sister of Hall Co’s financial controller.

3. Collier Co has until recently kept important documents such as title deeds and insurance certificates in a safe at its head office. However, following a number of thefts from the head office the directors have asked if the documents could be held securely at Carter & Co’s premises.

The partners of Carter & Co are considering offering a custodial service to all clients, some of whom may want to deposit tangible assets such as paintings purchased as investments for safekeeping. The fee charged for this service would depend on the value of item deposited as well as the length of the safekeeping arrangement.

4. Several audit clients have requested that Carter & Co provide technical training on financial reporting and tax issues. This is not a service that the firm wishes to provide, and it has referred the audit clients to a training firm, Gates Co, which is paying a referral fee to Carter & Co for each audit client which is referred.

Required:

Identify and evaluate the ethical and other professional issues raised, in respect of:

(a) Fernwood Co; (6 marks)

(b) Hall Co; (6 marks)

(c) Collier Co; (5 marks)

(d) Gates Co. (3 marks)

You are senior manager in Dedza & Co, a firm of Chartered Certified Accountants. Recently, you have been assigned specific responsibility for undertaking annual reviews of existing clients. The following situations have arisen in connection with three clients:

(i) Dedza was appointed auditor and tax advisor to Kora Co last year and has recently issued an unmodified opinion on the financial statements for the year ended 31 March 2006. To your surprise, the tax authority has just launched an investigation into the affairs of Kora on suspicion of underdeclaring income. (7 marks)

(ii) The chief executive of Xalam Co, an exporter of specialist equipment, has asked for advice on the accounting treatment and disclosure of payments being made for security consultancy services. The payments, which aim to ensure that consignments are not impounded in the destination country of a major customer, may be material to the financial statements for the year ending 31 December 2006. Xalam does not treat these payments as tax deductible. (4 marks)

(iii) Your firm has provided financial advice to the Pholey family for many years and this has sometimes involved your firm in carrying out transactions on their behalf. The eldest son, Esau, is to take up a position as a senior government official to a foreign country next month. (4 marks)

Required:

Identify and comment on the ethical and other professional issues raised by each of these matters and state what action, if any, Dedza & Co should now take. (15 marks)

Note: The mark allocation is shown against each of the three situations.