AUD610

Mr Goon is the senior manager in the audit department of Tan & Co. He is
currently reviewing the following situation which has arisen in respect of an
audit client:
Goodway Bhd is a significant audit client which develops software
packages. ts managing !irector" Mr #amesh" has contacted the partners
of Tan & Co regarding a potential $usiness opportunity. The proposal is
that Goodway and Tan & Co should %ointly develop accounting and ta&
calculations software. The revenue from the sales of the software would $e
e'ually split $etween the two firms. Mr #amesh thinks that Tan & Co(s
audit clients would $e a good customer $ase for the product.
Required
dentify and discuss the ethical and professional issues raised in respect of
Goodway Bhd
)* marks+
The ethical and professional issues raised in
respect of Goodway Bhd are as follows:
,The $usiness venture proposed $y
Goodway Bhd(s Managing !irector" while
potentially lucrative for the audit firm" would
create significant threats to o$%ectivity. -
financial interest in a %oint venture such as
the one $eing proposed is an e&ample of a
close $usiness arrangement given in .-C(s
Code of /thics for 0rofessional -ccountants.
, -ccording to the Code" a close $usiness
relationship $etween an audit firm and the
audit client or its management which arises
from a commercial relationship or common
financial interest" may create self,interest or
intimidation threats. The audit firm must
maintain independence" and the perception
of independence will $e affected where the
audit firm and client are seen to $e working
together for mutual financial gain.
, 1nless the financial interest is immaterial
and the $usiness relationship is insignificant
to the firm and the client or its management"
the threat created $y the 23 would $e so
significant that no safeguards could reduce
the threats to o$%ectivity to an accepta$le
level.
,There would also $e ethical issues raised if
Tan & Co were to sell the software
packages to audit clients. .irst there would
$e self interest threat" as the audit firm
would $enefit financially from the revenues
generated from such sales. .ull disclosure
would have to $e made to clients in order for
them to $e aware of the financial $enefit Tan
& Co would receive on the sale.
,There would $e a self review threat as
when performing the audit" the audit team
would $e evaluating the accounting software
which itself had sold to the audit client.
By recommending the software to audit
clients" it could $e perceived that the audit
firm is providing non audit services $y $eing
involved with ta& calculations and providing
T systems service. The provision of non
audit services creates several threats to
o$%ectivity" including a perception of taking
on management(s responsi$ilities.