Question Tag: Non-Audit Services

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AA – Nov 2023 – L2 – Q3 – Professional Ethics and Code of Conduct for Auditors (IESBA Code)

Evaluate ethical threats due to auditor relationships and actions, and recommend mitigations for compliance.

The following scenarios may threaten compliance with fundamental principles in auditing:

i. The audit supervisor is married to the daughter of the Managing Director of the client company;

ii. The audit firm’s Senior Partner holds shares in the client company;

iii. The assurance firm also provides valuation services, internal audit services, and taxation services to an assurance client;

iv. The assurance firm earns more than 50% of its annual revenue from one assurance client; and

v. The firm obtained motor vehicle financing from a client bank for its staff.

Required:

a. Explain why compliance with fundamental principles in auditing may be threatened in each of the above FIVE circumstances. (10 Marks)

b. Explain FIVE ethical requirements that would reduce or mitigate the threats to compliance with the fundamental principles in the above FIVE circumstances. (10 Marks)

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AA – Nov 2015 – L2 – Q7 – Professional Ethics and Code of Conduct for Auditors (IESBA Code)

Discussing ethical considerations in providing non-audit services to an audit client and fundamental principles of professional ethics.

Ade, Bala, Chris and Co. are the auditors to Victory Ventures Limited, a chemical manufacturing company. The firm has been carrying out statutory audits for this client for several years. Recently, the company asked the firm to carry out tax planning and compliance advisory services and also perform financial reporting valuation services for the company.

Required:
a. Discuss ethical issues the firm will need to take into consideration in accepting to carry out the new assignments for the client. (5 Marks)
b. Describe the FIVE fundamental ethical principles according to ICAN Professional Code of Conduct and Guide for Members and IFAC Code of Ethics. (5 Marks)
c. Describe the differences between rules-based and principles-based approaches to professional ethics. (5 Marks)

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AA – Nov 2015 – L2 – Q4 – Professional and Ethical Considerations, Regulatory Framework and Audit Responsibilities

Identifying threats to independence, resolving those threats, and determining whether to accept an audit appointment.

You work for a firm of accountants and auditors which has eight partners. The audit firm has been invited by the Managing Director (MD) and majority shareholder of Wellbeing Co. to accept appointment as statutory auditor of the company, replacing the current firm of auditors who will not be re-appointed.

The principal activity of Wellbeing Co. is the manufacture and distribution of healthcare products. Your firm has several companies operating in the healthcare sector in its client portfolio.

The MD of Wellbeing has requested that your firm assists with the preparation of the company’s tax computation and provides consultancy services on an ongoing basis in connection with his plans to grow the business.

The MD has also suggested that a partner in your firm joins the board of Wellbeing Co. as a non-executive director.

Required:

a) Identify and explain the threats to independence and objectivity which may arise from the provision of the services requested by the Wellbeing MD, and state how these threats should be resolved.
(8 marks)

b) Describe the matters, other than independence and objectivity, to be considered and the procedures to be performed in order to determine whether it is appropriate for your firm to accept appointment as statutory auditor of Wellbeing Co.
(7 marks)

c) Set out the benefits to audit firms and their clients of having audit and non-audit services provided by the same firm of accountants.
(5 marks)

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AA – Aug 2022 – L2 – Q1a – Regulatory Framework and Audit Responsibilities

This question discusses why the Companies Act, 2019 (Act 992) prohibits accounting firms from offering non-audit services to audit clients.

Accounting firms are in an excellent position to provide their clients with non-audit services such as consultancy, financial system design, review services, recruitment and valuation, among others, provided the necessary safeguards are in place. However, the Companies Act, 2019 (Act 992) prohibits the offering of such services to audit clients.

Required:
State FOUR (4) reasons for the prohibition of non-audit services to audit clients under the Companies Act, 2019 (Act 992).

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AAA – Dec 2023 – L3 – Q1b – Practice Management | The Audit Approach, Quality Control

Review the quality of the audit performed for Kaaklo Plc, identifying issues related to audit planning, performance, and ethical considerations.

You are the Audit Manager in Peptom Partners, a firm of Chartered Accountants. Your role includes performing post-issuance audit quality reviews. You have been tasked to review the audit work performed on Kaaklo Plc for the financial year ended 31 January 2021. The following information was gathered from your review of the audit file:

Audit team and fees
Kaaklo Plc is a listed company operating in the construction industry. The company complies with corporate governance regulations and has an audit committee. Kaaklo Plc has been an audit client of Peptom Partners for eight years, and Kofi Sika has been the Audit Engagement Partner during this time. Kaaklo Plc’s auditor’s report was signed by Kofi Sika and issued last week. The report contained an unmodified opinion.

Peptom Partners requires its staff to record each hour they spend working on each client in the firm’s time management system.

From reviewing the time records relating to the audit of Kaaklo Plc, you identified that Kofi Sika and the other audit team members recorded the following hours on the audit:

  • Kofi Sika – Audit Engagement Partner: 2 hours
  • Coffie – Senior Audit Manager: 6 hours
  • Mabel – Audit Manager: 35 hours
  • Six Audit Assistants: 130 hours

Total time spent on audit: 173 hours

It is apparent from your review that almost all the detailed review of the audit working papers was completed by Mabel, who has evidenced her review by stating ‘final review’ on each page of the audit file. She has recently been promoted to the position of Audit Manager.

You are also aware that Kofi Sika booked a total of 40 hours to Kaaklo Plc in respect of non-audit work performed. The only information you can find in the file is that the non-audit work related to a ‘special investigation,’ and that Kofi Sika confirms that it does not create a threat to auditor objectivity. The total fee charged for the audit was GH¢250,000 and the fee for the ‘special investigation’ was GH¢890,000.

Going concern
From reviewing the audit working papers, you are aware that Kaaklo Plc’s ability to continue operating into the foreseeable future was identified as a significant audit risk at the planning stage of the audit due to low profit margins or losses being made on many of the company’s construction contracts and increasing economic uncertainty. The company typically has 20 contracts ongoing at any time.

Most of the audit work on going concern was performed by Mary Lamptey, an audit assistant who has just written her last professional exam and is not yet qualified. The majority of the audit work performed on the going concern focused on a review of five major contracts to determine their profitability. The management of Kaaklo Plc identified the major contracts for review and provided Mary with forecasts indicating that the contracts would have little impact on profit. Mary confirmed that the assumptions used in the forecasts agreed to assumptions used in previous years and concluded that the contracts which she had reviewed support the going concern status of the company. Having reviewed these major contracts, Mary concluded that there is no significant uncertainty over Kaaklo Plc operating into the foreseeable future.

Required:
Comment on the quality of the planning and performance of the audit of Kaaklo Plc. (10 marks)

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AAA – April 2022 – L3 – Q5a – Professional responsibility and liability

Discuss non-audit services that could lead to a conflict of interest or impair the independence of an auditor.

Companies Act, 2019 (Act 992) section 143 (2) states among others that a company, person, or firm that carries out duties of an auditor should ensure that the personal judgment of the auditor is not impaired by reason of any relationship with a client that will result in a conflict of interest.

Some governance experts consider the provision of non-audit services to audit clients as an example of conflict of interest and could impair the firm’s independence.

Required: In reference to the above concern, discuss FOUR (4) non-audit services that could lead to conflict of interest or impair the independence of an Auditor. (10 marks)

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AA – Nov 2023 – L2 – Q3 – Professional Ethics and Code of Conduct for Auditors (IESBA Code)

Evaluate ethical threats due to auditor relationships and actions, and recommend mitigations for compliance.

The following scenarios may threaten compliance with fundamental principles in auditing:

i. The audit supervisor is married to the daughter of the Managing Director of the client company;

ii. The audit firm’s Senior Partner holds shares in the client company;

iii. The assurance firm also provides valuation services, internal audit services, and taxation services to an assurance client;

iv. The assurance firm earns more than 50% of its annual revenue from one assurance client; and

v. The firm obtained motor vehicle financing from a client bank for its staff.

Required:

a. Explain why compliance with fundamental principles in auditing may be threatened in each of the above FIVE circumstances. (10 Marks)

b. Explain FIVE ethical requirements that would reduce or mitigate the threats to compliance with the fundamental principles in the above FIVE circumstances. (10 Marks)

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AA – Nov 2015 – L2 – Q7 – Professional Ethics and Code of Conduct for Auditors (IESBA Code)

Discussing ethical considerations in providing non-audit services to an audit client and fundamental principles of professional ethics.

Ade, Bala, Chris and Co. are the auditors to Victory Ventures Limited, a chemical manufacturing company. The firm has been carrying out statutory audits for this client for several years. Recently, the company asked the firm to carry out tax planning and compliance advisory services and also perform financial reporting valuation services for the company.

Required:
a. Discuss ethical issues the firm will need to take into consideration in accepting to carry out the new assignments for the client. (5 Marks)
b. Describe the FIVE fundamental ethical principles according to ICAN Professional Code of Conduct and Guide for Members and IFAC Code of Ethics. (5 Marks)
c. Describe the differences between rules-based and principles-based approaches to professional ethics. (5 Marks)

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AA – Nov 2015 – L2 – Q4 – Professional and Ethical Considerations, Regulatory Framework and Audit Responsibilities

Identifying threats to independence, resolving those threats, and determining whether to accept an audit appointment.

You work for a firm of accountants and auditors which has eight partners. The audit firm has been invited by the Managing Director (MD) and majority shareholder of Wellbeing Co. to accept appointment as statutory auditor of the company, replacing the current firm of auditors who will not be re-appointed.

The principal activity of Wellbeing Co. is the manufacture and distribution of healthcare products. Your firm has several companies operating in the healthcare sector in its client portfolio.

The MD of Wellbeing has requested that your firm assists with the preparation of the company’s tax computation and provides consultancy services on an ongoing basis in connection with his plans to grow the business.

The MD has also suggested that a partner in your firm joins the board of Wellbeing Co. as a non-executive director.

Required:

a) Identify and explain the threats to independence and objectivity which may arise from the provision of the services requested by the Wellbeing MD, and state how these threats should be resolved.
(8 marks)

b) Describe the matters, other than independence and objectivity, to be considered and the procedures to be performed in order to determine whether it is appropriate for your firm to accept appointment as statutory auditor of Wellbeing Co.
(7 marks)

c) Set out the benefits to audit firms and their clients of having audit and non-audit services provided by the same firm of accountants.
(5 marks)

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AA – Aug 2022 – L2 – Q1a – Regulatory Framework and Audit Responsibilities

This question discusses why the Companies Act, 2019 (Act 992) prohibits accounting firms from offering non-audit services to audit clients.

Accounting firms are in an excellent position to provide their clients with non-audit services such as consultancy, financial system design, review services, recruitment and valuation, among others, provided the necessary safeguards are in place. However, the Companies Act, 2019 (Act 992) prohibits the offering of such services to audit clients.

Required:
State FOUR (4) reasons for the prohibition of non-audit services to audit clients under the Companies Act, 2019 (Act 992).

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AAA – Dec 2023 – L3 – Q1b – Practice Management | The Audit Approach, Quality Control

Review the quality of the audit performed for Kaaklo Plc, identifying issues related to audit planning, performance, and ethical considerations.

You are the Audit Manager in Peptom Partners, a firm of Chartered Accountants. Your role includes performing post-issuance audit quality reviews. You have been tasked to review the audit work performed on Kaaklo Plc for the financial year ended 31 January 2021. The following information was gathered from your review of the audit file:

Audit team and fees
Kaaklo Plc is a listed company operating in the construction industry. The company complies with corporate governance regulations and has an audit committee. Kaaklo Plc has been an audit client of Peptom Partners for eight years, and Kofi Sika has been the Audit Engagement Partner during this time. Kaaklo Plc’s auditor’s report was signed by Kofi Sika and issued last week. The report contained an unmodified opinion.

Peptom Partners requires its staff to record each hour they spend working on each client in the firm’s time management system.

From reviewing the time records relating to the audit of Kaaklo Plc, you identified that Kofi Sika and the other audit team members recorded the following hours on the audit:

  • Kofi Sika – Audit Engagement Partner: 2 hours
  • Coffie – Senior Audit Manager: 6 hours
  • Mabel – Audit Manager: 35 hours
  • Six Audit Assistants: 130 hours

Total time spent on audit: 173 hours

It is apparent from your review that almost all the detailed review of the audit working papers was completed by Mabel, who has evidenced her review by stating ‘final review’ on each page of the audit file. She has recently been promoted to the position of Audit Manager.

You are also aware that Kofi Sika booked a total of 40 hours to Kaaklo Plc in respect of non-audit work performed. The only information you can find in the file is that the non-audit work related to a ‘special investigation,’ and that Kofi Sika confirms that it does not create a threat to auditor objectivity. The total fee charged for the audit was GH¢250,000 and the fee for the ‘special investigation’ was GH¢890,000.

Going concern
From reviewing the audit working papers, you are aware that Kaaklo Plc’s ability to continue operating into the foreseeable future was identified as a significant audit risk at the planning stage of the audit due to low profit margins or losses being made on many of the company’s construction contracts and increasing economic uncertainty. The company typically has 20 contracts ongoing at any time.

Most of the audit work on going concern was performed by Mary Lamptey, an audit assistant who has just written her last professional exam and is not yet qualified. The majority of the audit work performed on the going concern focused on a review of five major contracts to determine their profitability. The management of Kaaklo Plc identified the major contracts for review and provided Mary with forecasts indicating that the contracts would have little impact on profit. Mary confirmed that the assumptions used in the forecasts agreed to assumptions used in previous years and concluded that the contracts which she had reviewed support the going concern status of the company. Having reviewed these major contracts, Mary concluded that there is no significant uncertainty over Kaaklo Plc operating into the foreseeable future.

Required:
Comment on the quality of the planning and performance of the audit of Kaaklo Plc. (10 marks)

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AAA – April 2022 – L3 – Q5a – Professional responsibility and liability

Discuss non-audit services that could lead to a conflict of interest or impair the independence of an auditor.

Companies Act, 2019 (Act 992) section 143 (2) states among others that a company, person, or firm that carries out duties of an auditor should ensure that the personal judgment of the auditor is not impaired by reason of any relationship with a client that will result in a conflict of interest.

Some governance experts consider the provision of non-audit services to audit clients as an example of conflict of interest and could impair the firm’s independence.

Required: In reference to the above concern, discuss FOUR (4) non-audit services that could lead to conflict of interest or impair the independence of an Auditor. (10 marks)

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