DISCUSSION QUESTIONS

ACC4301 AUDIT 2
SEPT 2014/2015

QUESTION ONE:
Katie is part of an audit team who have been sent to Eastern Europe to conduct an audit of one
of their clients subsidiary companies. During the audit Katie uncovers a series of bribes that
the company has paid to local authorities. Bribes are considered a normal part of business in
this particular city so the subsidiary company feels as though they have done nothing wrong.
It is likely that the bribes will not be uncovered but there is a chance that they will be, and that
the parent company, the audit firm, and Katie personally will all suffer negative consequences
if they are. If Katie does report the bribes then the subsidiary company will suffer and there
will be a scandal for the parent company. However, the impact of reporting the bribes is likely
to be less than if they are discovered at a later date by other authorities. Katie thinks of herself
as an honest person and is trying to decide what the ethically right thing to do is.

Required:
Try to determine what decision Katie will make regarding whether or not she will report the
bribes by applying the ethical theories of teleology, deontology, virtue ethics, and ethical
relativism.

QUESTION TWO:
ABC firm is the auditor of ChanteqSdnBhd and has been for 10 years. During this time, the
audit partner responsible has always been John. The other partner in the firm, Robert, has
been the review auditor for this assurance engagement. Robert has not been the lead audit
partner as his wifes father is the CEO of ChanteqSdn Bhd.
Every year ChanteqSdnBhdcelebrates the end of the audit by throwing an all expenses paid
weekend away for their staff that worked on the audit and for the audit firm. This has led to a
good relationship between the auditors and the company that makes the audit less formal. The
staff all know each other well and the company believes it is money well spent.
Recently John was approached by the board of ChanteqSdnBhdwith an offer of employment
as a director starting in two years time. The only condition was that the audit fees have to be
reduced for the current and next years audit.
Required:
Read the above scenario and identify any threats to compliance with the MIA by Law.

Familiarity
A possible threat due to the long tenure of ten years with no audit partner rotation
Threat due to the review partner being a family member of the CEO
Threat due to the weekend away as the value is probably not insignificant
Self-interest
Johns potential employment with the client is a threat
Intimidation
Pressure to reduce fees in exchange for future employment is a threat
QUESTION THREE:

You are a manager in the audit firm of Ali & Co; and this is your first time you have worked
on one of the firms established clients, Stark Co. The main activity of Stark Co is providing
investment advice to individuals regarding saving for retirement, purchase of shares and
securities and investing in tax efficient savings schemes. Stark is regulated by the relevant
financial services authority. You have been asked to start the audit planning for Stark Co, by
Mr Son, a partner in Ali & Co. Mr Son has been the engagement partner for Stark Co, for the
previous nine years and so has excellent knowledge of the client. Mr Son has informed you
that he would like his daughter Zoe to be part of the audit team this year; Zoe is currently
studying for her first set of fundamentals papers for her ACCA qualification. Mr Son also
informs you that Mr Far, the audit senior, received investment advice from Stark Co during
the year and intends to do the same next year.
In an initial meeting with the finance director of Stark Co, you learn that the audit team will
not be entertained on Stark Cos yacht this year as this could appear to be an attempt to
influence the opinion of the audit. Instead, he has arranged a balloon flight costing less than
one-tenth of the expense of using the yacht and hopes this will be acceptable. The director
also states that the fee for taxation services this year should be based on a percentage of tax
saved and trusts that your firm will accept a fixed fee for representing Stark Co in a dispute
regarding the amount of sales tax payable to the taxation authorities.
Required:
(a) Explain the ethical threats which may affect the auditor of Stark Co. (6 marks)
(ii) For each ethical threat, discuss how the effect of the threat can be mitigated. (6 marks)
(b) Discuss the benefits of Stark Co establishing an internal audit department. (8 marks)
(20 marks)