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Chapter 6
Case Study
What are the ethical implications for Tickitt & Run?
There are several different scenarios to consider in this case.
Preparation of accounts
Consider
xTickitt & Run cannot prepare the accounts – they can assist with
Selecting and designing a new computerised Management information
system
Consider:
xTickitt & Run cannot audit their own system – they can thus only
Assist in finding a new financial director
If Tickitt & Ryun operate a specialised recruitment arm then they may assist
with drawing up a job specification and the selection of appropriate
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candidates for interview. They should not, however take part in the interview
and selection process as this might be deemed to be a management function
Discuss at a board meeting the dividend to be paid
Takeover bid
xTickitt & Run can act for their client but they should obtain specific
instructions in respect of the new assignment
Safety guidelines
The auditors have to firstly inform the management of their concerns and
request management action. They may, if the breaches continue, have to
Bank transactions
xThis may constitute money laundering. If so the auditors may have
to make a suspicious transaction report to the authorities.
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Examination questions
1External auditor objectivity
(a) Why external auditor objectivity may be, or appear to be, threatened
(i) Undue dependence
If the auditor depends, or relies on a particular client or group of connected
clients because the firm takes a large part of its fee income from the client,
(ii) Financial interest
Where a partner or member of staff in a firm (or the firm itself) holds shares
in a client, they have an interest in the client’s performance. If the client
performs well, the value of the shares may rise. A qualified audit report is not
(iii) Family or other close personal or business relationships
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Where there are family or other close personal or business relationships
between client and audit firm, the individuals concerned may try to influence
the firm in its dealings with the client in order to protect the family or
personal relationship, or the mutual business interest.
(iv) Other services
Many audit firms provide their audit clients with services other than audit
services. It is very common for auditors in the UK to provide their very small
audit clients with accountancy services, for example.
Other services that can be provided include tax, management consulting, IT
and human resources advice. Some firms not only provide consulting advice,
(b) Requirements
Most of the following are requirements of ACCA’s Rules of Professional
Conduct.
(i) Undue dependence
1. A firm should put in place additional safeguards where the recurring fee
income from one client or group exceeds 15% of the gross practice income
(10% for clients listed on a stock exchange or where the public interest is
involved). Additional safeguards include supplementary reviews and the
rotation of the engagement partner and senior staff.
(ii) Financial interest
1. No partner in a firm, or any member of staff working on a particular audit,
or any person closely connected with them, should hold any shares in an
audit client.
2. There are exceptions where collective investments are held by third
parties, where the individual concerned has no control over the composition
of investments.
(iii) Family or other close personal or business relationships
1. An officer (such as a director) or employee of an audit client, or a partner
or employee of such a person, is prohibited from accepting appointment as
© Cengage Learning 2012
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auditor of that client. Problems can also arise if an officer or senior employee
of an audit client is closely connected with a partner or senior staff member
responsible for the conduct of the audit (or anyone closely connected with
them).
(iv) Other services
1. A firm should not participate in the preparation of the accounting records
of a company listed on a stock exchange or a public interest company except
in relation to the finalisation of the statutory accounts (assistance of a
mechanical nature) or in an emergency situation.
2. Where a firm does provide such assistance to a smaller firm, care should
be taken not to take on management functions, to ensure that the client
accepts responsibility for the accounting records, and to ensure that
adequate audit tests are performed and properly recorded.
(ACCA)
2Response to requests
(i) It is not unusual in practice for various bodies to request information from
auditors ‘informally’ because it relieves them of the obligation to obtain the
necessary statutory authorities which may be time consuming or difficult.
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(ii) Auditors must not disclose information without the consent of the client or
unless the necessary statutory documentation is provided by the person(s)
requesting the information.
(iv) Auditors should consider taking legal advice in all of the cases described.
(v) Where auditors are made aware of potential actions against the client
that may have an effect on the financial statements, they must consider the
effect on the audit report. If the client is aware of the investigation, auditors
will be able to seek audit evidence to support any necessary provisions or
disclosures in the financial statements.
(viii) Tax authorities normally have powers to ask clients to disclose
information voluntarily. Such voluntary disclosure is often looked on
favourably by the tax authorities and the courts. Tax authorities normally
also have statutory powers to demand information from both clients and
auditors. The same is generally true of environmental and health and safety
inspectors.
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(ACCA)