Question

My Question is a case study in Auditing

Q1-5 You are an audit manager of Erdal & Co. You have been assigned, for the first time, to one of the firm’s established clients. Hediyem Co. This company provides investment advice to individuals on retirement planning and tax-efficient savings schemes. Hediyem is regulated by a relevant authority and considered a public interest entity.

Mr Tanem has been the audit partner for Hediyem for the last eight years. He has told you that his son, Deniz, is currently studying for his first exam for audit qualificiation and he would like him to be part of the audit team this year. Mr Tanem also tells you that Mr Fraser, an audit junior, receives tax-efficient savings advice as a regular client of Hediyem and intends to continue to do so.

In an initial meeting with Contrat’s finance director, you are told that the audit team will not be entertained in the company’s executive hospitality box at an international stadium this year. Instead, he has arranged tickets for a cup final. Although this costs considerably less than usual VIP treatement, he hopes this will be acceptable. The director also stated that the fee for corporate finance advice services in this year should be based on a percentage of reported profit.

1. In relation to Mr Tanem having held the role of audit partner for eight years and his request that his son be part of the audit team, which following safeguards should be implemented in order to comly with Code of Ethics and Conduct?

1. Mr Tanem should be removed from the audit team
2. Mr Tanem should be removed if his son is part of the team
3. An independent review partner should be appointed
4. Erdal & Co. Should resign from the audit

2. What safeguards, if any, are required in relation to the basis for the fees for corporate finance advice services and the external audit assignment?

1. Hediyem Co should be informed that Erdal & Co cannot enter into the percentage basis fee arragement for corporate finance services
2. As long as the audit fee is based on time spent and expericence of staff involved,no safeguards are required
3. As long as the total fee received from Hediyem Co is less than 15% of Erdal & Co’s total fee income, no safegoards are required
4. Corporate finance advice services cannot be accepted as there are no safeguards to reduce the threat to objectivity in the conduct of the external audit

  

3.In line with Code of Ethics and Conduct, which TWO of the following factors must be considered by Erdal & Co before accepting an engagement to provide corporate finance advice services?

1. The level of corporate finance expertise in the audit engagement team
2. Whether the services involve promoting or dealing in client’s shares
3. The extend to which the advice will directly affect amounts reported in the financial statements
4. The period of time over which the advice is expected to be provided

4.In line with Code of Ethics and Conduct, which TWO of the following factors must be considered by Erdal & Co in relation to the offer of tickets for the audit team to a cup final match?

1. The naturevalue and intend of the offer
2. The audit engagement partner cannot accept a ticket
3. Offers of gifts and hospitality cannot be accepted in any circumstances
4. An intimidation threat may arise from the possibility of the offer being made public

5.Match each of the categories of threat if any, that are presented by each of the following facts from the scenario:

-The audit team has been offered tickets for a cup final

-Audit partner has been in the position for eight years

-The audit junior receives tax-efficient savings advice

-The fee for corporate finance services will be based on percentage of reported profit

Self-interest / Familiarity/ None/ Self-review

Answer 1

1

The act of Mr. Tanem to ask for his son to be the part of the audit team is contradictory to the Code of Ethics and Conduct under the auditing procedures.

Such an act dismisses the Objectivity principle of Auditing and undermines the independence of an auditor in the presentation of a true and fair view of the financial statements of the client.

Thus, the answer to this question is (c) An independent review partner should be appointed.

2

Any auditing firm which is responsible for conducting an external audit for a company is not allowed to undertake any other kind of consultancy or administrative services which will hinder the objectivity of the external audit.

Because, the audit firm may present misstatements for its personal gains, which by far is against the Code of Ethics and Conduct.

Thus, the answer is (d) Corporate finance advice services cannot be accepted as there are no safeguards to reduce the threat to objectivity in the conduct of the external audit.

3

Though, an audit firm can’t provide other services, still, if certain conditions worked-out, the firm may be eligible to provide those services. The basic conditions must be that, that service should not affect the fairness of the audit assignment and the service must not involve any other such conduct which is not in accordance with the code of ethics and conduct.

Thus, the two factors to be considered are:

• Whether the services involve promoting or dealing in client’s shares
• The extent to which the advice will directly affect amounts reported in the financial statements

4

Any offer or gift put forward by the Auditee (client) other than the audit fees must not hinder the independence of the audit engagement team and the process of external audit on a whole.

Thus, the factors to be considered are:

• The nature, value and intend of the offer
• An intimidation threat may arise from the possibility of the offer being made public.

5

The audit team has been offered tickets for a cup final	None
Audit partner has been in the position for eight years	Familiarity
The audit junior receives tax-efficient savings advice	Self-review
The fee for corporate finance services will be based on a percentage of reported profit	Self-interest