Topic: Ethical Issues in Auditing

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AAA – May 2016 – L3 – Q5 – Ethical Issues in Auditing

Identify and discuss fraud and error in the audit of Badagry Yachting and Marina.

Question

Badagry Yachting and Marina (BYM) have a marina on the West Coast of Nigeria and a large sales operation dealing in yachts and speedboats. You are responsible for the audit of BYM and have found some potential causes of concern that could indicate fraudulent activity or financial misconduct within the company. In particular:

(i) 30% of the yachts on sale by BYM are supplied through one of the major international boating companies with a special finance arrangement deal. However, BYM have also obtained separate finance on these yachts, which are therefore in effect being ‘double financed’.
(ii) Ten yachts shown as assets by BYM cannot be located, with no explanation other than that they have not been sold. These yachts are worth approximately N50 million.
(iii) Long delays have occurred in performing reconciliations, with the last four months of reconciliations still not completed. At the time of the last reconciliation, material differences had been identified upon which no action appears to have been undertaken.
(iv) Sales have been overstated by N100 million in the current financial statements.
The finance director has been off sick with stress for the last five months and therefore has not been available to discuss any of the issues identified.

Required:

a. Explain the difference between fraud and error and how the issues shown here could be categorised as fraud or error. (6 Marks)
b. Discuss the role of management and the role of the auditor in the prevention and detection of fraud and error. (3 Marks)
c. Describe what steps you would take to further investigate and then report on the matters referred to above. (6 Marks)

Answer

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Tags: Audit Procedures, Error, Financial Misconduct, Fraud, Investigation
Level: Level 3

Topic: Ethical Issues in Auditing

AAA – May 2016 – L3 – Q2b – Ethical Issues in Auditing

Discuss the implications of a tax authority investigation into a client after an unmodified audit opinion.

Question

(b) You are a senior manager in Nnamdi & Co, a firm of Chartered Accountants in Nigeria. 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. Nnamdi & Co was appointed auditor and tax advisor to Unicorn Co last year and has recently issued an unmodified opinion on the financial statements for the year ended March 31, 2016. To your surprise, the tax authority has just launched an investigation into the affairs of Unicorn on suspicion of under-declaring income.
(7 Marks)

ii. The chief executive of Hassan 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 December 31, 2015. Hassan does not treat these payments as tax-deductible.
(4 Marks)

iii. Your firm has provided financial advice to the Adetunji family for many years and this has sometimes involved your firm in carrying out transactions on their behalf. The eldest son, Verni, 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, Nnamdi & Co should now take.

Answer

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Tags: Audit Review, Client Relations, Ethical Concerns, Professional Judgment, Tax Investigation
Level: Level 3

Topic: Ethical Issues in Auditing

AAA – May 2016 – L3 – Q2a – Ethical Issues in Auditing

Discuss the importance of ethical guidance for accountants in addressing money laundering concerns.

Question

(a) Comment on the need for ethical guidance for accountants on money laundering.
(5 Marks)

Answer

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Tags: Compliance, Ethics, ICAEW, IFAC, Money laundering, Professional Guidance
Level: Level 3

Topic: Ethical Issues in Auditing

AAA – May 2021 – L3 – Q1a – Ethical Issues in Auditing

Discussion of ethical issues and professional challenges in the audit of Blackmart Plc, and recommendations for addressing them.

Question

Blackmart Plc is one of your listed audit clients which offers property management, property financing, and mortgage services to its clients. During the audit of the company, the following matters came to your attention:

(i) Grace Sadiku, one of the audit team members, has provisionally agreed to take out a mortgage facility with a duration of 10 years using the facility of Blackmart Plc to finance her first residential property. In the area where the property is located, the first residential property gets a full tax waiver on the entire installments paid within the first 5 years, which is usually a significant tax incentive. The mortgage facility would be secured by the property and it has been defined as the best offer available in the market.

(ii) Also, during the period, the Human Resources (HR) Manager of Blackmart Plc resigned, and the company had reached out to your firm to provide a staff on secondment till a substantive HR Manager is appointed.

(iii) The management of Blackmart has also informed your audit team that the company maintains only two bank accounts and there will be no need to circularise the banks as the auditors can rely on the balances as generated from the bank’s portal as at the end of the year.

(iv) The audit committee has asked your firm to work with the internal audit team to design internal controls over the part of the accounting system which deals with revenue, and also evaluate the operating effectiveness of the internal controls.

Required:
Prepare a memo to your Manager, commenting on the professional and ethical issues arising from the audit of Blackmart Plc and also suggest to him/her on how to manage the identified issues. (15 Marks)

Answer

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Tags: Auditor Behavior, Bank Circularisation, Independence, Internal Control, Professional Ethics
Level: Level 3

Topic: Ethical Issues in Auditing

AAA – Nov 2013 – L3 – SB – Q1 – Ethical Issues in Auditing

Evaluate whether to comply with a former executive’s request for audit services while addressing confidentiality in auditor-client relationships.

Question

Your firm acts as the auditors and advisers to Naija Seven Limited, and to its four directors. The company is owned 50% by Praise Caro, 25% by his wife Madame, and 10% by James Patrick. Braima is the Chief Executive, and Julius is the Finance Director. Julius’ sister, Mabel Mama, recently resigned from the executive board following a disagreement with Praise. Mabel Mama formed her own company, Nigeri Heaven, in competition with Naija Seven.

Currently, Mabel is negotiating with her former co-executives on the profit-related remuneration due to her and the sale of her 15% holding of shares in Naija Seven to one or all of them.

Mabel Mama has contacted you to find out Praise Caro’s current remuneration package since he refused to disclose it to her. She has also requested that your firm should continue to act as her personal adviser, financial adviser, and auditor to Nigeri Heaven.

Answer

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Tags: auditor-client relationship, Confidentiality, Conflict of Interest, Ethical considerations, Independence, Professional Behavior
Level: Level 3

Topic: Ethical Issues in Auditing
Series: NOV 2013

AAA – Nov 2013 – L3 – AII – Q20 – Ethical Issues in Auditing

Define the situation where an auditor's role as a rival to the client impairs objectivity.

Question

A situation which puts the auditor as opponent or rival of the client and which may impair his objectivity is termed…………………….

Answer

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Tags: Advocacy Threat, Auditor Independence, Objectivity
Level: Level 3

Topic: Ethical Issues in Auditing

AAA – Nov 2013 – L3 – AII – Q19 – Ethical Issues in Auditing

Identify the term for codified moral rules and regulations guiding professional behavior.

Question

The codified rules and regulations which are mainly based on moral duties and obligations on how professionals should carry out their duties and how to behave in the society are known as……………….

Answer

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Tags: Code of Conduct, Morals, Professional Ethics
Level: Level 3

Topic: Ethical Issues in Auditing
Series: NOV 2013

AAA – Nov 2013 – L3 – AII – Q12 – Ethical Issues in Auditing

Describe the tendency of an auditor not to believe management assertions without supporting evidence.

Question

The tendency of an auditor not to believe management assertions unless they provide evidence to support the assertions is described as professional……………………..

Answer

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Tags: Audit Standards, Ethics, Skepticism
Level: Level 3

Topic: Ethical Issues in Auditing
Series: NOV 2013

AAA – May 2022 – L3 – Q4 – Ethical Issues in Auditing

Discuss correspondence with previous auditors, reasons for change in appointments, and client identification under AML regulations.

Question

The idea to incorporate Peters & Shamsudeen Haulages Limited was mooted in London and it was incorporated on the return of Alhaji Shamsudeen to Nigeria. He met Peters during his stay in the UK. They had a good relationship which started in a coffee shop. As they met regularly in this shop, what to do on Alhaji Shamsudeen’s return to Nigeria became the subject of discussion. Based on their experiences, the idea of Peters & Shamsudeen Haulages Limited was birthed. Alhaji Shamsudeen subsequently returned to Nigeria, incorporated the company, obtained the appropriate expatriate quota, and Mr. Peters came in and started running the company.

On commencement, Sejumade Uzoma & Co was appointed the company’s external auditors. Whilst Mr. Peters was around, there was a good working relationship between the company and the audit firm.

After about nine years, Mr. Peters returned to the UK, leaving the company in the hands of Alhaji Shamsudeen. Subsequently, Sejumade Uzoma & Co started receiving complaints from Alhaji Shamsudeen and his key accounting staff. These complaints were rife even before the ninth month of the current year that Sejumade Uzoma & Co. decided not to continue with the engagement. The audit fee for the previous year had about thirty percent outstanding at this stage.

This was the position when Alhaji Shamsudeen approached your partner at Musa, Edewo & Co. (Chartered Accountants). Their discussion was fruitful for your firm, hence it was agreed by the partners that full professional procedures would be applied as normal. Part of the information available on interaction is that the year is almost ending, and there was uncertainty about the firm that will do the audit before the engagement of your firm. You have the responsibility of assisting your partner in ensuring that proper documentations would be done without any compromise.

Required:

a. According to professional requirements, discuss the issues your firm is expected to address in her correspondence with Sejumade Uzoma & Co. (10 Marks)

b. Evaluate the various circumstances that would lead to change in professional appointment. (5 Marks)

c. In consideration of the client, analyze the procedures necessary for proper client identification in accordance with anti-money laundering requirements. (5 Marks)

Answer

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Tags: Anti-Money Laundering, Client Identification, Ethical Issues, Professional Appointment
Level: Level 3

Topic: Ethical Issues in Auditing

AAA – Nov 2016 – L3 – Q2 – Ethical Issues in Auditing

Discuss ethical and legal obligations of auditors regarding independence, confidentiality, money laundering, and client competition safeguards.

Question

As an Audit Manager in a big audit firm in Nigeria, you were opportuned to attend a conference on Professional Ethics and Anti-Money Laundering in New York. On your return, one of the audit seniors went through the presentations and asked questions on some of the statements she noted in the presentations.

You are required to explain the following statements to her:

a. A good Auditor is an independent auditor. (5 Marks)
b. The Accountant’s normal professional duty of confidentiality to clients is not an adequate defence where money laundering is involved. (5 Marks)
c. Specific obligations for detecting and reporting suspicions of money laundering are placed on professional firms. (5 Marks)
d. A firm might act for two clients that are in direct competition with each other where there are acceptable safeguards. (5 Marks)

Answer

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Tags: Auditor Independence, Confidentiality, Conflict of Interest, Money Laundering Detection
Level: Level 3

Topic: Ethical Issues in Auditing

AAA – Nov 2011 – L3 – SA – Q6 – Ethical Issues in Auditing

Identifies a service inappropriate for an audit firm to provide due to independence and ethical concerns.

Question

Which ONE of these services may not be appropriate for an audit firm?

A. Advising clients on corporate structures, recruitment, and other human capital needs
B. Giving necessary legal advice on tax returns including negotiation with the tax authorities
C. Acting as a receiver of the company’s operations on behalf of debenture holders and creditors of the company
D. Making detailed enquiries and gathering all necessary information to meet the clients’ specific needs
E. Advising clients on how best the business can be run and controlled including issues of accountability and management

Answer

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Tags: Audit Services, Auditor Independence, Conflict of Interest, Ethical Boundaries
Level: Level 3

Topic: Ethical Issues in Auditing
Series: NOV 2011

AAA – Nov 2011 – L3 – SA – Q5 – Ethical Issues in Auditing

Identifies exceptions where auditors may not disclose a client's confidential information.

Question

Auditors can disclose the client’s confidential information for the following reasons EXCEPT:

A. Auditors know client has committed terrorist offence
B. Information is required by the auditor for another client
C. Auditors suspect client has committed treason
D. There is public duty to disclose
E. Disclosure is needed to protect auditor’s own interest

Answer

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Tags: Auditor Disclosure, Client Information, Confidentiality, Ethics, Legal Requirements
Level: Level 3

Topic: Ethical Issues in Auditing
Series: NOV 2011

AAA – Nov 2011 – L3 – SA – Q4 – Ethical Issues in Auditing

Identifies exceptions to threats that compromise auditor objectivity.

Question

Threats to objectivity include the following EXCEPT:

A. Familiarity threat
B. Self-regulatory threat
C. Intimidation threat
D. Advocacy threat
E. Self-interest threat

Answer

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Tags: Ethics, Objectivity, Professional Standards, Threats to Independence
Level: Level 3

Topic: Ethical Issues in Auditing
Series: NOV 2011

AAA – Nov 2018 – L3 – Q5 – Ethical Issues in Auditing

Examining professional skepticism, its necessity across audit stages, and its application in audits.

Question

As a result of recent global financial crises, audit inspection reports in various jurisdictions have noted areas requiring professional judgment. Such areas include fair value, related party transactions, and going concern assessments, where regulators and oversight bodies believe that auditors should clearly demonstrate professional scepticism.

Required:

a. Explain the term “Professional Scepticism.” (3 Marks)

b. Identify the stages in the audit process where professional scepticism is necessary. (3 Marks)

c. Discuss three ways in which the application of professional scepticism can be demonstrated by the auditor. (9 Marks)

Answer

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Tags: Audit Judgment, Audit Process, Fair Value, Going Concern, Professional scepticism, Related Party Transactions
Level: Level 3

Topic: Ethical Issues in Auditing

AAA – May 2018 – L3 – SB – Q4 – Ethical Issues in Auditing

Educate staff on IFAC’s Code of Ethics principles, types of independence, and general sources of ethical threats in accounting.

Question

You are the HR partner in Ekemode & Company (Chartered Accountants). As part of the continuous training program of your firm, you are to organize an in-house seminar to educate the staff of your firm on Rules of Professional Conduct. You have decided to emphasize the IFAC’s Code of Ethics for Professional Accountants published by the International Ethics Standard Board for Accountants (IESBA), which was recently adopted by ICAN into their localized code called “The Professional Code of Conduct and Guide for Members.”

Required:

a. Explain briefly the FIVE fundamental principles of the IFAC’s Code of Ethics for Professional Accountants. (7½ Marks)

b. Explain independence of mind and independence of appearance to the staff. (5 Marks)

c. Explain briefly THREE general sources of threat to the fundamental principles of the IFAC’s Code of Ethics for Professional Accountants. (7½ Marks)

(Total 20 Marks)

Answer

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Tags: Ethical Threats, Fundamental Principles, ICAN Code, IESBA, IFAC Code of Ethics, Independence, Professional Conduct, Professional Ethics
Level: Level 3

Topic: Ethical Issues in Auditing
Series: MAY 2018

AA – May 2016 – L2 – Q3 – Ethical Issues in Auditing

Examination of ethical issues in client engagement, fundamental ethical principles, and lawful disclosure obligations for auditors.

Question

You have recently been appointed the auditors of Spicer Plc, a company whose shares are traded on a stock exchange. The directors of Spicer Plc have recommended that you perform the following services:

The statutory audit of the annual accounts
Taxation services
Consultancy services in respect of the implementation of a new information technology system

Your firm has not acted for Spicer Plc before but does act as auditors to one of its major competitors.

Required:
a. Identify and explain the professional and ethical issues that should have been identified by your firm in relation to the provision of the services outlined above to Spicer Plc and describe the safeguards that should be in place in order to address these issues. (11 marks)

b. What are the five fundamental principles of ethics? Briefly explain their meaning. (5 marks)

c. A client’s affairs should not be disclosed to third parties. However, where a client has been guilty of an unlawful act, to whom should the auditor disclose this information, and in what order? (4 marks)

Answer

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Tags: Client Engagement, Confidentiality, Disclosure, Ethics, Professional Standards
Level: Level 2

Topic: Ethical Issues in Auditing
Series: MAY 2016

AA – May 2023 – L2 – SA – Q4 – Ethical Issues in Auditing

Identify threats to auditor independence, assess circumstances affecting independence, and suggest safeguards.

Question

Cringe Professional Services has been auditing Kogberegbe Limited for about 20 years. Being a limited liability company, no regulation imposed restriction on the tenure of the auditors.

The firm also provides taxation and valuation services for the company. The company has just adopted International Financial Reporting Standards and has employed the services of Cringe Professional Services for conversion services from local GAAP. The firm experienced a high staff turnover in the year and has no choice but to include the daughter of the Managing Director of the company as part of the engagement team, although as a support staff.

Management has indicated in confidence that the audit fee for the year will not be increased, except the firm can guarantee them that no adverse management letter will be issued and no loss will be made by the company as they are planning to go to the capital market to raise capital for expansion. With poor management letter and loss position, they believe that it will be difficult to achieve this.

At the end of the audit exercise, the company made a huge profit even with unfavorable economic climate, thanks to challenges associated with COVID-19. There was public outcry because it was believed that the financial statements of the company were misstated, and the auditor was accused of negligence. This necessitated the Financial Reporting Council to conduct an investigation on the company. It was found that the company restructured its debt portfolio, which was denominated in foreign currency with attendant foreign exchange risks to Naira.

The company restructured a huge intercompany loan to a 7-year principal payment holiday with principal repayment commencing September 30, 2025. The interest on the loan for the period was not brought into the books of account.

The company accrued for a NGN70.60m benefit from a transaction in 2019 from operating fees. This has been treated as income in the financial statements.

There were identified defaults by the company in relation to the payment of interests and principal on its outstanding loans and borrowings.

There were adverse ratios in the company’s financial performance ratios in the year due to interest on borrowings from financial institutions and related parties.

A revisit of the operating performance for the year revealed the following:

The entity made an operating loss of N1.22 billion.
It generated negative operating cashflows of N2.15 billion.
There was positive working capital as the current assets exceeded the current liabilities by N1.2 billion in the year.
The net assets position of the company was in the negative as the total liabilities exceeded the total assets by N9.8 billion.

The Financial Reporting Council concluded that there were threats to the auditors’ independence, hence the professional firm was penalized for that.

A concerned staff of the company asks you of the implications of the issues raised by the Financial Reporting Council.

Required:

a. Identify and explain the threats to independence of the auditor in the above scenario. (7 Marks)

b. Discuss circumstances that could give rise to threats to independence. (7 Marks)

c. Suggest appropriate safeguards which could be put in place to mitigate the identified threats. (6 Marks)

Answer

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Tags: Auditor Independence, CAMA, Conflict of Interest, Ethical Safeguards, FRC, ISA Compliance
Level: Level 2

Topic: Ethical Issues in Auditing
Series: MAY 2023

AA – Nov 2016 – L2 – Q2d – Ethical Issues in Auditing

This question explains the technique of "low-balling" used by audit firms when tendering for audit engagements and its potential ethical implications.

Question

Explain briefly the technique used by an audit firm known as “low-balling” when it tenders for audit work.

Answer

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Tags: Audit Fees, Competition in Auditing, Ethical Issues, Low-balling, Tendering
Level: Level 2

Topic: Ethical Issues in Auditing
Series: NOV 2016

AA – Nov 2019 – L2 – Q6 – Ethical Issues in Auditing

Explain the concepts of acting in the public interest, professional scepticism, and fundamental ethical principles for accountants.

Question

A whistleblower reported to a regulator a misstatement in the financial statements of Koko Limited on overstated expenses and overvaluation of inventory.

An informed shareholder at the Annual General Meeting, while commenting on the company’s financial statements, stated that the company directors should always act in the public interest.

Required:
Explain:
a. “Acting in the public interest” (6 Marks)
b. Professional scepticism (4 Marks)
c. The fundamental principles a professional accountant should comply with (10 Marks)

Answer

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Tags: Ethical Principles, Professional scepticism, Public Interest
Level: Level 2

Topic: Ethical Issues in Auditing
Series: NOV 2019

AA – Nov 2019 – L2 – Q2 – Ethical Issues in Auditing

Discuss the concept of expectation gap in auditing and the reasons an auditor may not detect fraud.

Question

The Financial Reporting Council of Kalagi, when performing a review of the financial statements of Yakoyo Plc., detected some errors and disclosure deficiencies which were brought to the attention of the management of the company. The management put the blame on the company’s auditors and accused them of negligence.

You are a chartered accountant and an informed shareholder of the company. You are required to explain:

a. “Expectation gap” in audit (5 Marks)

b. How the expectation gap can be bridged (7½ Marks)

c. Why an auditor may not detect fraud (7½ Marks)

Answer

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Tags: Audit, Auditor Responsibilities, Expectation Gap, Fraud Detection
Level: Level 2