Question

You are an audit manager in Tiphany & Co, a firm of Chartered Certified Accountants. You have recently been assigned to the audit of Clown Co for the year ended 30 September 20X8. Clown Co is an unlisted company and has been an audit client of your firm for a number of years.
Clown Co is a national distributor of cleaning products. The company buys the cleaning products from wholesalers and employs a team of approximately 750 sales staff around the country who sell the company’s products to both domestic households and small to medium-sized businesses. Around 75% of Clown Co’s sales transactions are cash-based and each of the company’s sales staff prepares a cash sales report on a monthly basis. According to Clown Co’s chief executive, Simon Becket, and in order to foster ‘an entrepreneurial spirit’ amongst his staff, each staff member (including the senior management team) is encouraged to make cash sales and is paid on a commission basis to sell the company’s products to friends and family. Mr Becket leads the way with this scheme and recently sold cleaning products with a value of $33,000 to a business associate of his. He has transferred these funds directly into an off-shore bank account in the company’s name on which he is the sole signatory.
Review of audit working papers
Your review of the audit working papers and an initial meeting with Mr Becket have identified the following potential issues:
Following your review of the audit engagement letter and the working papers of the taxation section of the audit file, you have established that Tiphany & Co performed the taxation computation for Clown Co and completed the tax returns for both the company and Mr Becket personally. All of the taxation services have been invoiced to Clown Co as part of the total fee for the audit and professional services. Mr Becket’s personal tax return includes a significant number of transactions involving the purchase and sale of properties in various international locations. The taxation working papers include a detailed review of a number of off-shore bank accounts in Mr Becket’s name which identified the property transactions.
During your initial meeting with Mr Beckets, he informed you that Clown Co is planning to develop a new website in order to offer online sales to its customers. He has asked Tiphany
& Co to provide assistance with the design and implementation of the website and online sales system.
As a result of your audit review visit at the client’s premises, you have learned that the audit team was invited to and subsequently attended Clown Co’s annual office party. The client provided each member of the audit team with a free voucher worth $30 which could be redeemed at the venue during the party. The audit senior, Paula Abdoul, who has worked on the audit for the last three years has informed you that the audit team has always been encouraged to attend the party in order to develop good client relations.
Required:
(a) Evaluate whether there are any indicators of money laundering activities by either Clown Co or its staff. (10 marks)
(b) Comment on the ethical and professional issues arising from your review of the audit working papers and recommend any actions which should now be taken by Tiphany & Co. (15 marks)

Answer 1

Money Laundering refers to converting illegal earned money into legitimate money. The government does not get any tax on the money because there is no accounting of the black money.So Money Laundering is a way to hide the illegally acquired money.

a) Indicators of Money Laudering

Possible indicators include:

• cash deposits in different bank branches within a short time frame • suspect appearance notes (old, covered in powder) • lack of economic explanation • transfers to accounts on which there are no other transactions • transfers followed by cash withdrawals • more concern about speed than costs • unusual character compared to transactions usually performed by subject • activity was inconsistent with the customer’s profile • associations with multiple accounts under multiple names • bank drafts cashed in for foreign currency • cash deposited domestically with the funds subsequently withdrawn from ATMs offshore • cheques issued to a family member of the person

In the Given Question there are few activities Which Indicates the Money laundering by the Clown & Co

1.Receiving Sales Collections Directly into the off-shore bank account of the Company

2.And Mis use of power by Clown & Co Chief Excutive.

3.And the Purchse of property aslo leads to Doubt.

Here I am Quoting Few Examples of Money Laundering

Examples of Money Laundering:

There can be several ways to do money laundering, but the most popular is the establishment of the fake companies which is also known as the "shell companies". ‘Shell Company’ acts like a real company but in reality this company does not exist in the real world and no production take place in such companies. Actually these shell companies exist only on paper, not in the real world.

But the launderer shows large transactions in these Shell Company’s balance sheets. He takes loan in the name of these companies, gets tax exemption from the government, does not fill income tax returns and through all these fake activities, he accumulates a lot of black money.

If investigating agencies or regulatory bodies want to check financial records, false documents are shown to confuse them.

Other methods of Money Laundering include;

Buying a large house, shop, or mall but showing less value on paper, while the actual market value of these purchased properties is much higher. This is done so that they can reduce their tax burden. Thus, black money is collected through tax evasion.

(b) Ethical and professional issues
Taxation services

Company tax computation
The performance of the company tax computation creates a self-review threat. A self-review threat arises when an auditor reviews work which they themselves have previously performed – for example, if the external auditor is involved in the process of preparing the financial statements and then audits them.

As a result, there is a risk that the auditor will not be sufficiently objective in performing the audit and may fail to identify any shortcomings in their own work. In this case therefore, a self-review threat to auditor independence arises because the tax calculation forms the basis of the tax payable and the tax charge in the financial statements and as such the audit team may be more likely to accept the tax calculations without adequate testing.

There is also a potential advocacy threat. An advocacy threat arises when the auditor is asked to promote or represent their client in some way. In this situation, there is a risk of the auditor being seen to promote the interests of Clean Co with a third party such as the tax authorities and therefore that the auditor will be biased in favour of the client and cannot be fully objective.

According to the IESBA Code of Ethics for Professional Accountants (the Code), however, completing tax returns does not generally create a threat to independence provided management takes responsibility for the returns including any judgements which have been made.

Where tax calculations have been prepared by the auditor for the purpose of preparing accounting entries, the Code states that this may be acceptable for an unlisted audit client and that the firm should consider implementing safeguards in order to reduce the self-review threat to an acceptable level.

In this case, these safeguards might have included, for example, using professionals who are not members of the audit team to prepare the tax computations together with independent senior or partner review of the work.

Therefore, given that Clean Co is an unlisted client, Thomasson & Co should ascertain which members of staff performed the taxation services and should review whether the threat to independence has been adequately assessed before the taxation services were performed and whether adequate safeguards have been applied.

Mr Blackers’ personal tax computation
From an ethical perspective, there is no prohibition in the Code on the preparation of personal tax returns for the directors of an audit client such as Clean Co.

However, in this case the auditor should consider whether the preparation of Mr Blackers’ personal tax return may result in the auditor being associated with criminal activities if the suspicions of money laundering activities noted above prove to be well founded.

The auditor should also consider the appropriateness of personal taxation services being billed to the company. Indeed, the preparation of Mr Blackers’ personal tax return may be a taxable benefit which should be included in his tax return and the fee for this service may need to be reflected in his director’s loan account with the company.

Website and online sales system
According to the Code, providing services to an audit client involving the design or implementation of IT systems which form a significant part of the internal control over financial reporting or generate information which is significant to the accounting records or financial statements on which the firm will express an opinion constitutes a self-review threat.

A self-review threat arises when an auditor reviews work which they themselves have previously performed – for example, if the external auditor is involved in the process of preparing the financial statements and then audits them. As a result, there is a risk that the auditor will not be sufficiently objective in performing the audit and may fail to identify any shortcomings in their own work.

In this case, the self-review threat arises as the new systems will produce data which will be used directly in the preparation of the financial statements. The audit process will therefore include reviewing and testing of financial data and systems which Thomasson & Co has helped to design and implement. As a result, there is a clear risk that the audit team may too readily place reliance on these systems.

With reference to Clean Co therefore, it is clear that providing assistance with the design and implementation of the website and online sales system will constitute a self-review threat as the auditor will audit sales figures which are generated by the system and there is also a risk that the firm may assume a management responsibility if they become involved in making management decisions.

In the case of revenue, this self-review threat may be heightened further by the auditor’s reliance on controls testing and on analytical review of the data summaries generated by the new system. It also seems clear that the new online sales system will be significant to the client’s financial statements and records.

The Code states that such a self-review threat may be too significant even for an unlisted client such as Clean Co unless appropriate safeguards are put in place. Examples of possible safeguards which might assist in managing the self-review threat include the following:

– The client should acknowledge its responsibility for establishing and monitoring the system of internal controls and for the operating system and data it generates;

– The respective responsibilities of the audit firm and the client should be clearly defined in a separate engagement letter in order to ensure that the client makes all management decisions in relation to the design and implementation process;

– Thomasson & Co should use a separate team made up of non-audit staff to perform the systems design and implementation assignment and the work performed by this team should be subject to independent professional review.

If the self-review threat cannot be reduced to an acceptable level, or the engagement will result in the firm assuming a management responsibility, the service should not be provided.

Office party
The Code states that client hospitality (in this case the attendance at the office party by the audit team) may create a familiarity threat. A familiarity threat occurs when the auditor is too sympathetic or trusting of the client because of a close relationship with them.

There is a risk therefore that as a result of attending the client office party, the audit staff may be getting too close to the client staff especially given that according to the audit senior, this practice has occurred every year. This close relationship may result in the audit team becoming less objective and less able to challenge explanations provided by the client.

The Code also states that gifts from a client to a member of the audit team may create a self-interest threat. A self-interest threat arises when the auditor derives a potential personal benefit from an audit client which may motivate them to behave in a manner which aims to protect that benefit.

With reference to the office party therefore, the audit staff are receiving a direct financial benefit from the client (in this case in the form of vouchers). Unless the value of such gifts is trivial and inconsequential, the self-interest threat would be too significant to mitigate with safeguards and the gifts should not be accepted.

The audit firm should consider introducing internal authorisation procedures in order to ensure transparency and to establish whether the value is trivial and inconsequential. In this case, the value of $30 per head does appear to be trivial but the auditor might still consider declining the gifts in order to maintain a visible professional distance from a client which may be involved in criminal activities.