QUESTION l
Explanation of the term money laundering with examples of money laundering offences including those which could be committed by an accountant.
Money laundering is a process of criminal act of concealing the true identity of the source of money e.g. smuggling of goods, and terrorism activities.
Money laundering offences which could be committed by an accountant include:
- The concealment of processes e.g. tax evasion, bribery and corruption.
- Routing of transactions through countries which lack fiscal rules.
- Frequent use of wire transfers, or money transfers which don’t disclose details
- High value deposits/withdraws
- Movement of funds through deposit in one and withdrawal through another account.
The policies and procedures that a firm of Certified Public Accountants should establish in order to meet its responsibilities in relation to money laundering
- Determine identity of the company
- Identity of client, commercial purpose of transactions, sources of funds.
- Examine suspicious transactions
- Report the activity to police for further action.
QUESTION 3
Safeguards by audit firms to ensure that the information of one client is not disclosed to the others;-
- Maintain confidentiality;- the firm must ensure that the staff adhere to confidentiality requirements.
- Employ different audit staff to each audit, for example, create Chinese walls or consider resignation where necessary.
- Notify both clients of the audit assignments with the competitor company that is full and frank disclosures.
- Adopt procedures to prevent access of information for non-authorized staff for example separate teams on both assignments.
- Seek advice from an independent third party or decline to take one of the assignments
QUESTION 4
Forms of professional misconduct that a member of the institute of accountants could be guilty of;-
- Practicing as a partnership with a person who has no certificate.
- Accepting hospitality and gifts from clients. –
- Conceal or misappropriate clients property –
- Accepting contingent fees.
- Colluding with the client to perpetrate fraud,
- Soliciting for bribes or commission to obtain clients.
- Breaching confidentiality requirements,
QUESTION 5
- a) Additional audit procedures that the audit senior should have performed to exercise a proper degree of professional scepticism
Completeness
- Agree the balance from the individual sales ledger accounts to the aged receivables’ listing and vice versa.
- Match the total of the aged receivables’ listing to the sales ledger control account. Cast and cross cast the aged trial balance before selecting any samples to test. Trace a sample of shipping documentation to sales invoices and into the sales and receivables’ ledger.
- Complete the disclosure checklist to ensure that all the disclosures relevant to receivables have been made.
- Compare the gross profit percent by product line with the previous year and industry data. Compare the level of prepayments to the previous year to ensure the figure is materially correct and complete.
Existence
- Perform a receivables circularization on a sample of year-end trade receivables
- Perform alternative procedures for any exceptions and non-replies to the receivables’ confirmation, such as:
- Review after-date cash receipts by inspecting bank statements and cash receipts documentation.
- Examine the customer’s account and customer correspondence to assess whether the balance outstanding represents specific invoices and confirm their validity.
- Examine the underlying documentation (purchase order dispatch documentation, duplicate sales invoice etc)
Rights and obligations
- Review bank confirmation for any liens on receivables.
- Make inquiries of management, review loan agreements and review board minutes for any evidence of receivables being sold (e,g, to facts) Valuation and allocation
- Compare receivables’ turnover and receivables’ days to the previous year and/or to industry data.
- Compare the aged analysis of receivables from the aged trial balance
- Review the adequacy of the allowance for uncollectable accounts through discussion with management.
- Compare the bad debt expense as a percent of sales to the previously and/or to industry data
- Compare the allowance for uncollectable accounts as a percent of receivables or credit sales to the previous year and/or to industry
- Examine large customer accounts individually and compare to the previous year’s balances.
- For a sample of old debts on the aged trial balance, obtain further information regarding their recoverability by discussions with management and review of customer correspondence.
- For a sample of prepayments from the prepayments’ listing, recalculate the amount prepaid to ensure that it has been accrual calculated.
Cut off
- For a sample of sales invoices around the year-end, inspect the dates and compare with the dates of dispatch and the dates recorded in ledger for application of correct cut-off.
- For sales returns, select a sample of returns documentation around the year-end and trace to the related credit entries.
- Perform analytical procedures on sales returns, comparing the ratio of sales returns to sales.
- Review material after-date invoices, credit notes and adjustments’ ensure that they are recorded correctly in the relevant financial period
Classification
Take a sample of sales invoices and examine for proper classification into revenue accounts
Accuracy
- For a sample of sales invoices, compare the prices and terms to the authorised price list and terms of trade documentation
- Test whether discounts have been properly applied by recalculating them for a sample of invoices
- Test the correct calculation of tax on a sample of invoices
Occurrence
For a sample of sales transactions recorded in the ledger, vouch the sales invoice back to customer orders and dispatch documentation.
Case 2
Measures that the audit senior should have taken to obtain reasonable assurance in this case
- Reconcile the customers statements and the invoices
- Reconcile the totals of the customers balance and compare with the control accounts Check the history of the customers buying patterns, repayment patterns for consistency. –
- The audit senior should have required that the confirmation be sent.
- Review the correspondence between the customers and the client to see if there are disputed items.
- Since the financial controller indicated that the customer would have problems the financial controller should have given the audit senior the chance to determining which confirmation is to be sent.
- The audit senior should have also considered requesting the customer to call the auditor directly.
Case 3
The steps the auditor senior should have performed in this case
- The audit senior should have not only talked to the accounts payable clerk but also obtained invoices for consulting fees for the new computer system and legal fees for drafting the lease
- The audit senior should have also considered discussing legal fees with the financial controller who has more knowledge regarding law suites and other confidential matters.
- Check authorisation of payments from board of directors minutes
- Review the budgets with the amounts paid
- Review the consultancy agreement between the consultancy firm and the client — Obtain management representations on payment mode.
QUESTION 6
The following are the audit procedures used by an audit firm in the course of their audit of different companies.
Case I
The audit senior requires the audit assistant to confirm a material accounts receivable balance with the company’s major customers. The director of finance prepares and mails the confirmation at the auditor’s request and it is then returned directly to the company.
Case 2
XYZ Company exports flowers. The company normally requires irrevocable letters of credit prior to shipping any flowers. .
XYZ Company made a large sale to a new customer during the current year and the account remains outstanding as at 30 June 2012 (the company’s year-end). •
The auditor has not received replies to the confirmation requests sent to the customer and the foreign bank issuing the letter of credit.
The auditor asks the client for a copy of the invoice shipping documents and letter of credit. After inspecting the documents the auditor is satisfied as to the existence and valuation of the receivable.
Required:
For each case, advise whether the auditors performed their audit with due care.
Advice whether the auditors performed their audit with due care;
Case I
The auditor has not performed the audit procedure, with due care. This is because the auditor has no way of knowing whether the confirmation was sent to the customer or the reply came from the customer.
The auditor should control the mailing of confirmation of the request to ensure that the request is sent to or received by the customer. The confirmation reply should be sent directly to the auditor.
Case 2
No due case was exercised. The auditor would need to be satisfied that the customer existed and the bank issued the letter of credit and it was credit worth.
The auditor should have insisted on inspecting the original documents as he cannot rely on the authenticity of the copies (original documents considered reliable evidence compared to the photocopies)
QUESTION 7
The independence of the auditor might be strengthened and improved in the following ways:
- Provision of other services which could include accountancy, consultancy and taxation.
- Such services should be charged separately from audit work.
- The rotation of auditors on, say, a three-year cycle
- The compulsory peer review of the work of one audit firm by another audit firm,
- Compulsory audit committees for every company subject to audit
- Where the auditor provides other services their involvement must be advisory only. He must not perform executive functions or take executive decisions.
QUESTION 8
You have been appointed the auditor of Chapa Kazi Ltd., a limited liability company. The company has 150 employees and deals in the manufacture of household goods including glasses.
The glassware is sold predominantly to a large distributor and retail store in an affluent market. The glassware sold to the distributor and retail store in the affluent market are designed to the store’s specification and cannot be sold to anyone else.
Chapa Kazi Ltd.. also sells household goods to a number of retailers operating in the low income market segment. The accounting function of Chapa Kazi Ltd. consists of the chief Accountant, Mr.Mhasibu, who reports directly to the managing director who is also the major shareholder Mr. Egeza and an accounts assistant Mr.Karani.
There is a simple personal computer (PC) based accounting system. Mr.Karani enters invoices into the computer and maintains the manual cash book Mr.Mhasibu is in charge of preparing the management accounts on a monthly basis and the payroll which is approved monthly by Mr.Egeza.Mr,Mhasibu also manages the tax affairs of the company and the tax affairs of Mr. Egeza.
Mr.Egeza controls purchasing and sales, although he has an assistant who produces the paperwork and liaises with Mr.Karani the accounts assistant from time to time on matters relating to accounts payable.
Arising from disputes between the previous auditors and Mr.Egeza, the auditors did not offer themselves for re-election .Mr.Egeza has requested your firm of auditors 10 undertake the audit of Chapa Kazi Ltd. for the current financial year ending 31 December 2009.
You have met the previous auditors who have provided YOLI with some background information on their audit of Chapa Kazi Ltd. The auditors also provided you with their working papers and inform you that they are not aware of any ethical reason which may prevent your firm from accepting the audit appointment
However, the previous auditors have disclosed that they have always assessed the internal control systems of Chapa Kazi Ltd. as ineffective to be relied upon in their previous audits.
Required:
Explain the term professional scepticism and comment on its role in the detection of fraud
- Professional skepticism recognizes the possibility that circumstances may exist that cause the financial statements to be materially misstated. It is an aspect of rigor’ that information and explanations obtained are assessed and additional evidence sought as necessary.
- Due to the characteristics of fraud, the auditor’s attitude of professional skepticism is particularly important when considering the risk of material misstatement. Professional
skepticism is an attitude that includes a questioning mind and a critical assessment of audit evidence.
- The auditor must be prepared to consider that a material misstatement due to fraud could exist, notwithstanding the auditor’s past experience with the entity and the auditor’s belief about the honesty and integrity of management and those charged with governance of the entity
- When making inquiries and obtaining other audit evidence, the auditor exercises professional skepticism so as not to be satisfied with less-than-persuasive audit evidence based on a belief that management and those charged with governance are honest and have integrity.
- An audit of financial statements rarely involves the authentication of documentation, nor is the auditor trained as (or expected to be) an expert in such authentication. However, the auditor considers the reliability of the information to be used as audit evidence including consideration of controls over its preparation and maintenance where relevant. Unless the audit reveals audit evidence to the contrary, the auditor ordinarily accepts records and documents as being genuine.
- An aspect of observing professional level of due care and skill in the planning controlling and documenting the audit work. (ISA 240 The auditor’s responsibilities relating to fraud in an audit of financial statements, paragraph 24).
QUESTION 9
You have recently been appointed auditor of Leisure Hotels limited a company which owns several hotels. The company has an established internal audit department; which operates at the head office and visits the hotels for audit on regular basis. Each hotel has a computer which records the booking of rooms for overnight accommodation and produces the billing account for each guest.
Required:
Explain the factors you would consider and the work you perform to enable you to assess the extent to which you could rely on the work of the internal audit staff.
Independence of the internal auditor
The internal auditor will be independent in a situation where he is to reporting directly to the audit committee or director
Qualification and experience
The external auditors should consider the professional qualifications of the internal auditor
Quality of their work
The report made by the internal auditor can be assessed by the external auditor to evaluate their quality. Where reports portray high quality then external auditor can place reliance on the work of the internal auditors.
Training program
If the organization remind the internal auditor for training courses such as those organized by ICPA K. then their work is likely to be more reliable than if they are not trained.
Scope of the internal audit function together with their objective
The scope of work refer to the nature and extend of the work and testimony done by the internal auditor if the extend of work and testing differs from that that would otherwise be done then the external auditor will be less on the
Level of business risk
If the overall and it risk is assessed to one higher than the audit will place less reliance or the work of the internal auditor
Resources available in the internal audit function
The level of resource will relate to staffing, finance, equipment etc.
Professional due care.
In assessing professional the cars check whether the internal auditor have property planned reviewed and document their work.
QUESTION 10
Rural and Urban Housing Ltd. is a large company whose main activities relate to the house building market. Your firm has audited Rural and Urban Housing Ltd. for several years. During the audit for the year ended 30 September 2000, the audit manager has come across two items that he feels require discussing with the audit engagement partner. Details of the relevant items are:
During statistical testing of delivery notes, an observant audit assistant had noticed that the delivery address of several items of purchase materials was that of the managing director. Using the costing records, these materials were traced to job spoo-1 which was the construction of a swimming pool. No sales invoice had been raised for this job. On investigation the audit manager discovered that the job as the construction of a ‘demonstration’ swimming pool which prospective purchasers could view- It has been included in Rural and Urban Housing Ltd.’s balance sheet as a fixed asset. The maintenance and running costs of the pool have been charged to the profit and loss account as promotion and selling costs.
Several large payments have been made to unidentified agents and described as commissions in respect of obtaining building contracts. Most of these payments have been made in cash, some of which were in foreign currencies, however, some payments have been made by cheque. Enquiries relating to the payee of the cheques have revealed that they are in the name of a nominee and the beneficiary cannot be identified. There is no supporting documentation for any of the payments. The finance director of Rural and Urban Housing Ltd. Has said that such commissions are common practice and the agents represent valuable contracts whose identity must be kept confidential as otherwise Rural and Urban Housing Ltd.’s competitors would be able to ‘poach’ work from them.
Required:
As the engagement partner for the audit of Rural and Urban Housing Ltd., discuss the matters you would consider including any further inquiries you would make, in determining the appropriate treatment of:
job spoo-1;
The first matter for the auditor to quantify the total costs of this type of expenditure. This would, be done by examining the costing records of job SPOO I and checking the accuracy of the attributed costs to underlying ‘documentation. This will involve the cost of the materials, used labor, time and appropriate rates and testing the accuracy and reasonableness of the overhead allocation to the job. Similar work would be required to determine the running costs that have been incurred since the building of the pool.
A further issue raised by this situation is whether there are any other transactions of a similar nature, which need similar consideration. For example, have any of the directors had any building work or house improvements made that have in effect been paid for by the company? Managements written assurances should be sought on this matter and the locations at which Rural Urban Housing work has been carried out during the year should..be checked to see if they correspond to the addresses of any of the directors or known related parties.
Assuming the swimming pool is the only example of this type of transaction, the real issue is how it should he treated in the financial statements. The company (presumable through the directors) claims it is used for promotional purposes and the claim must be investigated. The auditor should physically inspect the pool for its existence.
For example:
Does the pool have ‘board” displaying rural and urban housing as the builder, and there is promotional literature at the pool?
is there evidence of prospective clients visiting the pool?
Does Rural Urban Housing promotional literature mention that a pool is available for viewing? Have any orders for further swimming pools have been obtained from other customers?
Where the answers to these questions support the claims of management then the company’s accounting treatment may be correct. The auditor would however have further issues to consider:
Who is the legal owner of the pool? it is claimed to be a company asset, however, if it is on land owned by the managing director (which presumably it is) then in law he would (probably) own the pool and it would be difficult to recognize it as a company asset: and
Whether the managing director could be assessed as having a personal benefit that should be disclosed as part of his remuneration (with possible taxation implications).
Where there is little or no evidence that the pool is being used for promotional purposes, the company’s treatment of the pool is incorrect. Neither the capital cost of the pool nor the running costs should appear (as such) in the financial statements. These costs should be treated either as remuneration of the managing director (which would have implications) or they should be reimbursed immediately. Treating them, as a loan would be unacceptable as this would probably be in contravention of the Companies Act.
the payments of the commissions
- The issues raised by these payments could be summarized as:
- They may be genuine payments of commission that are unusual in the method of payment
- They may he a form of bribery, which are unlikely to be common practice, and are both unethical and illegal.
- They may not be payments to third, parties at all and represent defalcations of cash by directors.
Given the information in the question, the auditor’s suspicions must have been aroused and the matter should be probed to the bottom. The appendix of ISA 240 The Auditors duty to consider Fraud in an audit of financial statements contains examples of ‘unusual transactions’ and ‘problems in obtaining sufficient and appropriate audit evidence. Reference is made to inadequate supporting documentation and authorization of transactions and evasive responses by management. These examples appear to describe the commission payments and the existence of these factors increases the likelihood of fraud. The question implies that the management of Rural Urban Housing is reluctant to identify the recipients on the basis that doing so would increase the risk that these valuable contacts may be disclosed to competitors. This is an inadequate response. The auditor has a duty of confidentiality to the client and would not reveal commercially sensitive information of any kind. The auditor should seek written representations from management as to the nature of these of payments. However ISA 580 management representations say such representations cannot be a substitute for other audit evidence where the auditor could reasonably expect it. It seems unlikely that the auditor will be able to discover the true nature of these transactions. In these circumstances the auditor should express a qualified opinion or a disclaimer in his report on the basis of the limitation of scope of the audit. If the auditor is able to conclude that there is a fraud and its effect is material and has not been properly reflected in the financial statements this could lead to an ‘adverse’ audit report.
Where fraud involves senior management including members of the board, the auditor should consider reporting to an audit committee, if one exists, or taking legal advice. As the last resort the auditors should consider withdrawing from the audit, as there could be no reliance on management’s representations.
QUESTION 11
Explain the situations where an auditor may disclose confidential information about a client
Auditors have a professional duty of confidentiality and this is an implied term of the agreement made between the auditor and the client.
However there may be a legal tight or duty to disclose confidential information or it may be in the public .interest to disclose details of clients’ affairs to third parties. .
Also the client may have given the auditor consent to disclose, confidential information. These are general principles only and there is more specific guidance which is discussed below,
Obligatory disclosure
If the auditor knows or suspects that his client has committed money-laundering, treason, drug- trafficking or terrorist offences then he is obliged to disclose all the information he has to a competent authority.
Under ISA 250 Consideration of laws and regulations in an audit of financial statements auditors must also consider whether non-compliance with laws and regulations may affect the accounts. They might have to include in the audit report a statement that non-compliance with laws and regulations has led to significant uncertainties (in an emphasis of matter paragraph), or may consider modifying the audit opinion if there is a disagreement over the way specific items have been treated in the accounts.
Voluntary Disclosure Voluntary disclosure may be applicable in the following situations:
- Disclosure is reasonably necessary to protect the auditor’s interests, for example to enable him to sue for fees or defend an action for, say, negligence
- Disclosure is authorized by statute
- Where it is in the public interest to disclose, say where an offence has been committed which is contrary to the public interest.
- Disclosure is to non-governmental bodies which have statutory powers to compel disclosure.
If an auditor is requested to assist the police, the taxation or other authorities by providing information about a client’s affairs in connection with enquiries being made, he should first enquire under what statutory authority the information is demanded.
Unless the auditor is satisfied that such statutory authority exists he should decline to give any information until he has obtained his client’s authority. If the client’s authority is not forthcoming and the demand for information is pressed, the auditor should not accede unless advised to do so by his legal advisor.
If an auditor knows or suspects that a client has committed a wrongful act he must give careful thought to his own position. The auditor must ensure that he has not prejudiced himself by, for example, relying on information given by the client -which subsequently proves to be incorrect or unreliable.
However, it would be a criminal offence for a member to act positively, without lawful authority or reasonable excuse, in such a manner as to impede with intent the arrest or prosecution of a client whom he knows or believes to have committed an `arrestable offence.’
- You are an audit manager in McKay & Co, a firm of Chartered Certified Accountants. You are preparing the engagement letter for the audit of Ancients, a public limited liability company, for the year ending 30 June 20×6.
Ancient has grown rapidly over the past few years, and is now one of your firm’s most important clients.
Ancient has been an audit client for eight years and McKay & Co has provided audit, taxation and management consultancy advice during this time. The client has been satisfied with the services provided, although the taxation fee for the period to 31 December 20×5 remains unpaid.
Audit personnel available for this year’s audit are most of the staff from last year, including Mr. Grace, an audit partner and Mr. Jones, an audit senior. Mr. Grace has been the audit.
partner since Ancients became an audit client. You are aware that Allyson Grace, the daughter of Mr. Grace, has recently been appointed the financial director at Ancients.
To celebrate her new appointment, Allyson has suggested taking all of the audit staff out to an expensive restaurant prior to the start of the audit work for this year.
Required
Identify and explain the risks to independence arising in carrying out your audit of Ancients for the year ending 30 June 20X6, and suggest ways of mitigating each of the risks you identify.
Audit Partner
Mr. Grace has been the audit partner on the audit of Ancients for the last eight years, His independence and ; objectivity are likely to be impaired as a result of this close relationship with a key client and its senior management. The ACCA Code of ethics and conduct requires key audit partners to be rotated after seven years and Mr. Grace’s involvement for eight years already contravenes this rule.
This threat could (and should),be addressed by appointing another audit partner to the audit of Ancients and rotating partners at suitable intervals thereafter.
Tax Fees Outstanding
‘Mere are taxation -fees outstanding from Ancients for work that was done six months previously. In effect, McKay Co are providing an interest-free loan to Ancients. This can threaten independence and objectivity of the audit firm as it may not want to modify the audit opinion in case the outstanding fees arc not paid.
This can be addressed by discussing the issue with the directors of Ancients and finding out why the fees have not been paid. If the fee is still not paid the firm should consider delaying the start of the audit work or even the possibility of resigning.
Fee Dependence
Ancients is one of McKay & Co’s most important clients and the firm provides other services to this client as well as audit, including taxation services. Also the company is growing rapidly.
Objectivity and independence are considered to be threatened to the degree that an independent engagement review is needed by an (external firm or regulator (and disclosure to those charged with governance) if the fees for audit and recurring work exceed 15% of the firm’s total fees for a listed client such as Ancient
This threat could be mitigated by reviewing the total of the audit and recurring fee income from Ancients as a % of McKay & Co’s total fee income on a regular basis and possibly limiting the provision of the other services if deemed necessary to maintain independence,
Relationship to financial Director of Ancients PLC
Allyson Grace, the daughter of Mr. Grace, has recently been appointed the Financial Director of
Ancients; The independence of Mr. Grace-could be threatened because of their close family relationship. The extent of the threat depends on the position the immediate family member holds with the client and the role of the professional on the assurance team.
As Financial Director, Allyson has direct influence over the financial statements and as engagement partner, Mr. Grace has ultimate responsibility for the audit opinion, so there is a clear threat to objectivity and independence.
This threat to independence could (and should) be mitigated by the appointment of another audit partner to this client,
Meal
The fact that Allyson Grace wants to take the audit team out for an expensive meal before the audit commences could be considered a threat to independence as it might influence the audit team’s decisions once they start the audit of the financial statements. The ethics rules state that gifts or hospitality from the client should not be accepted unless the value is trivial and inconsequential.
This threat could be mitigated by declining the invitation.
QUESTION 12
You are the audit manager in the audit firm of Dark & Co. One of your audit clients is NorthCee Co, a company specializing in the manufacture and supply of sporting equipment. NorthCee have been an audit client for seven years and you have been audit manager for the past three years while the audit partner has remained unchanged.
You are now planning the audit for the year ending 31 December 20×7. Following an initial meeting with the directors’ of-NorthCee, you have obtained the following information.
- NorthCee is attempting to obtain a listing on a recognized stock exchange. The directors have established an audit committee, as required by corporate governance regulations, although no further action has been taken in this respect. Information on the listing is not yet public knowledge.
- You have been asked to continue to prepare the company’s financial statements as in previous years.
- As the company’s auditors, NorthCee would like you and the audit partner to attend an evening reception in a hotel, where NorthCee will present their listing arrangements to banks and existing major shareholders.
- NorthCee has indicated that the fee for tax return preparation services rendered in the year to 31 December 1 20×5 will be paid as soon as the taxation authorities have agreed the company’s taxation liability. The delay in the tax authority agreeing the terms is due to a dispute in relation to whether an immaterial amount is allowable for taxation. Finally, yon have just acquired about 5% of NorthCee’s share capital as an inheritance on the death of a distant relative.
Required
Identify, and explain the relevance of, any factors which may threaten the independence of Dark & Co’s audit of NorthCee Co’s financial statements for the year ending 31 December 20X7.
Briefly explain how each threat should be managed.
Same audit partner and long-standing audit client
NorthCee has been a client of Dark for seven years, during which time the audit partner has remained the same. This gives rise to a familiarity threat.
The threat can be mitigated by rotating the audit partner. ACCA’s Code of ethics and conduct states that for listed companies, the engagement partner (or any key audit partner) should be rotated after no more than seven years and should not return until a period of two years has passed. Therefore, although NorthCee is not yet listed, the firm could consider this. It could also ensure that an independent internal or external quality review of the audit work is undertaken.
Preparation of financial statements
The firm has been asked to continue to prepare the financial statements for the company, as well as carry out the audit. This gives rise to a self-review threat, as there could be a perception that the firm will not apply sufficient professional scepticism to its own work.
NorthCee is attempting to obtain a listing. Firms should not prepare accounts or financial statements for listed or public interest clients, unless an emergency arises. Therefore Dark should decline the engagement to prepare the financial statements.
Attendance at evening reception
The audit partner and audit manager have been asked to attend an evening reception where
NorthCee will present its listing arrangements to banks and existing shareholders. This gives rise to a familiarity threat, as the acceptance of the hospitality could lead to a closer relationship with client management and a risk of placing too much trust in their representations.
This threat can be reduced by the firm declining the invitation to attend the reception.
Overdue taxation lees
Dark has provided taxation return preparation services to NorthCee which is generally considered not to pose a self-review threat. However, there are significantly overdue fees which, can be considered, as a loan to the client and therefore poses a self-interest threat. There could be a perception that the firm would be reluctant to modify its audit opinion in the face of the risk of not receiving the overdue fees
This threat can be mitigated by firstly discussing the overdue fees with the senior management of NorthCee and, as a last resort, considering resigning if they are not paid.
Inheritance of share capital
The audit manager has inherited 5% of NorthCee’s share capital as a result of a death in the family. This poses a self-interest threat and ACCA guidance states that a member of the assurance team should not hold direct financial interests in a client
This threat would therefore be mitigated by the.audit manager declaring the interest to the firm and then disposing of the shares-straightaway. An alternative would be to move the audit manager to another client,
