ACCT3101 Tutorial 3 Solutions

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ACCT3101 Tutorial 3 Solutions Arens Ch 4: 4.12; 4.18; 4.21; 4.24 4-12 An audit firm has several options when it recognises that it is not competent to perform an audit:

1. Withdraw from the engagement. 2. Obtain the expertise through education and training. 3. Employ someone who has the expertise. 4. Work on a consulting basis with another audit firm.

4-18 a. (1) b. (2) c. (3)

4-21 a. Violation. APES110 s130 Professional competence and due care S330

Acting with sufficient expertise A member who accepts a professional engagement implies that he or she has the necessary competence to complete the engagement according to professional standards. Bacon has violated the rule since he does not have the expertise to review the work of the consultant hired by Bacon. Bacon should have suggested that the company hire the consultant directly. b. No violation. c. No violation. d. In most states, this will be a misdemeanour and would not likely be a violation. e. Violation. APES110 s110 Integrity S120.1 Objectivity - conflict of interest APES110 S290.1 Independence S290.8 Appearance of independence has been impaired by Bill Wendal's agency's financial dealing with his audit clients and participation in a business which impairs his objectivity. It is also a conflict of duties to recommend his own firm to review the adequacy of the existing insurance coverage of existing clients. f. No violation if not a reporting entity. If a reporting entity then Violation S120 Objectivity S290.158 provision of non-assurance services S290.166 self review threat

4-24 a. Independence is essential for an auditor because users of financial statements expect an unbiased viewpoint in the auditors attestation to the truth and fairness of the financial statements. If users believe that auditors are not independent, the value of the audit function is eliminated. b. Most other professions (solicitors, medical practitioners, etc.) represent their clients and perform services intended primarily to assist their clients. For this reason no assumption of independence is required. The importance of independence for

auditors is similar to that for judges. For both, a non-advocacy position is essential.

ACCT3101 Tutorial 3 Solutions

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c. Independence in appearance is how independent the auditor appears to outsiders such as users of financial statements. Independence in fact refers to whether the auditor has maintained an attitude of independence throughout the engagement. For example an auditor could possibly maintain an attitude of independence in fact even though he or she held shares in a company and performed the audit. However, the auditor would not likely be independent in appearance in such a situation. Both independence in appearance and fact are essential and the Code of Ethics for Professional Accountants concerns both.

d. 1. He has not violated the Code of Ethics for Professional Accountants because the shareholding is unlikely to be considered material.

2. Such a small ownership is unlikely to have any impact on a partner's objectivity in evaluating the financial statements. It is unlikely to affect the partner's independence in fact.

3. Ownership of material shareholdings could affect the appearance of independence and therefore impact the reputation and credibility of auditors. It also shows outsiders the importance of independence to auditors and therefore hopefully improves the reputation of the profession.

e.

INDEPENDENCE IN

FACT

INDEPENDENCE

IN APPEARANCE

CONSEQUENCES

1. May cause the auditor to permit misstatements to enhance personal wealth.

Users may perceive that auditors would permit misstatements to enhance personal wealth.

Minor, if any for non material shareholding. Violation under APES 110 s340 for material shareholding Prohibited under Act s324CH

2. The auditor is auditing their own work and it is very unlikely that they can approach this task objectively with a willingness to detect and expose misstatements.

Users may perceivethat the auditor may not independently audit his or her own work.

Some clients find it less expensive to have bookkeeping services performed by an outside service. It is often less expensive to have this done by the auditor because the auditor will already be knowledgeable about the business. Violation APES110 s290.166 except in emergency situations Act non-audit services to be disclosed.

3. There may be an absence of a careful independent check of the entries or preparation of the

Users may believethat the auditor may not independently audit his or her own

Many clients lack technical expertise in auditing. Having services performed by the auditor is sometimes the least costly

ACCT3101 Tutorial 3 Solutions

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INDEPENDENCE IN

FACT

INDEPENDENCE

IN APPEARANCE

CONSEQUENCES

statements because they were originally prepared by the auditor.

work or that of a staff person from his or her firm.

alternative. Violation APES110 s290.158 Provision of non-assurance services to assurance clients. Act non-audit services to be disclosed.

4. The auditor may be reluctant to criticise or not rely on an accounting system that was originally recommended by the accounting firm. Additionally, if the accounting firm obtains considerable revenue from management advisory services, the accounting firm may fear the loss of the client and therefore be controlled by management.

Users may perceiveeither of the two concerns discussed under independence in fact.

An accounting firm gains considerable knowledge about a client and its business during the audit. Due to this knowledge, management services can often be provided by the same accounting firm at a lower cost than alternative sources such as other accounting firms or management consultants. Permitted with safeguards APES110 s290.158

5. The audit team may become complacent due to familiarity and not carefully evaluate potential misstatements.

Users may perceivethe possibility of complacency.

Knowledge gained by the auditteam about a client's business is essential to evaluate when misstatements in the financial statements are likely and to plan the audit. It is costly for a new audit team to obtain that knowledge. Act s324DA requires lead auditor rotation every 5 years

6. The accounting firm may become complacent due to familiarity and not carefully evaluate potential misstatements.

Users may perceive the possibility of complacency.

The same conclusion reached in 5about the audit team is applicable to accounting firms. The cost of a new accounting firm of obtaining the knowledge is even greater because of confidentiality requirements and communication difficulties between accounting firms. Act s324DA requires lead auditor rotation every 5 years

ACCT3101 Tutorial 3 Solutions

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INDEPENDENCE IN

FACT

INDEPENDENCE

IN APPEARANCE

CONSEQUENCES

7. The auditor may be unwilling to disagree with management for fear of being terminated.

Users may perceive that the auditor is un- willing to disagree with management.

Someone has to select the auditor. Management is usually in the best position to evaluate the effectiveness and cost of alternative auditors. Act members pass the resolution to appoint the auditor

f. The Code of Ethics for Professional Accountants prohibits e(1) for material

shareholdings, e(2) except in emergency situations, and e(4) for particular services.