Question

Linesh & Co is the auditor for Sendayan Bhd, an automotive manufacturing company. The firm is also the auditor for Aplha Sdn Bhd that had a contract with Sendayan Bhd to supply automotive parts. The following are the ethical issues that arise during the annual audit: i. Gita, who is the audit partner for Sendayan Bhd is also acting as the audit partner for Aplha Sdn Bhd. Sendayan Bhd has just initiate a proposal to renew its procument contract with Aplha Sdn Bhd for the next five years. Aplha Sdn Bhd has asked Gita to provide advice on the matter. ii. Anan who is the son of Gita had just graduated in Bachelor of Mechanical Engineering and is offered a position as an engineer at Sendayan Bhd. Anan is considering the offer, as Sendayan Bhd offerred a starting salary which is higher than the industry average. iii. An audit manager who is responsible for the audit engagement for Sendayan Bhd holds1,000 units ordinary shares in the company which amounted to less than 1% of the total shares issued. Gita just get to know about this matter after the engagement has started. However, she emphasised that she herself does not hold any shares in Sendayan Bhd. iv. Due to financial difficulties, Aplha Sdn Bhd had not paid their audit fees for the past three (3) years. In order to, overcome the unpaid audit fees, Aplha Sdn Bhd offered to supply Linesh & Co with new office furniture. The partner had accepted this offer in full consideration of the outstanding fees, even though the furniture was only worth 70% of the outstanding fees.

Required: Comment on each of the ethical issues above in the context of independence requirement as stated in the MIA’s By-Laws (On Professional Ethics, Conduct and Practice). (10 marks)

B. Explain the following terms in respect of financial statements audit: i.

Independent assurance. (4 marks) ii. True and fair view. (6 marks)

C. Critically discuss five categories of threats to auditor independence under the By laws on Professional Ethics. (10 Marks)

Answer 1

B)INDEPENDENT ASSURANCE

The fundamental purpose of the audit is to provide independent assurance that management has ,in its financial statement ,presented a true and fair view of the companies financial performance and position. It underpins the trust and obligation of stewardship between those who manage a company and those who own it or otherwise have a need for a clear and objective view .And that list of stakeholders is wide -from the audit committee ,stakeholders,employees and suppliers ,to customers ,banks ,regulatory bodies and analysis.

A rigorous audit process will also ,almost invariably ,identify ares where management may improve their controls or processes ,further adding value to the company by enhancing the quality of its business process.Given the critically important role the audit plays ,PwC has prepared this useful overview of the financial statement audit -from appointment of the auditors ,through the five phases of the audit process ,to the final report and audit opinion.

TRUE AND FAIR VIEW

True and fair view in auditing means that the financial statementa are free from material misstatements and faithfully represent the financial performance and position of the entity.Although the expression of true and fair view is not strictly defined in the accounting lecture,we may derive the following general conclutions as to its meaning:

True suggests that the financial statementa are factually correct and have been prepared according to applicable reporting framework such as the IFRS and they do not contain any material misstatements that may mislead the users.Misstatements may result from material errors or ommissions of transactions and balances in the financial statements .

Fair implies that the financial statements present the information faithfully without any element of bias and they reflect the economic substance of transactions rather than just their legal form..Preperation of true and fair financialstatements has been expressly recognized as one of the responsibilities of the directors of companies in the corporate law of several countries such as in the Companies Act 2006 in UK.Auditors must therefore consider whether directors have fulfilled their responsibility for the preperation of true and fair financial statements when providing an audit opinion .

C)FIVE CATEGORIES OF THREAT TO AUDITOR INDEPENDENCE

Threat to independence have evolved over time .They are as follows:

1)SELF INTEREST THREAT

A self interest threat exist if the auditor holds a direct or indirect financial interest in the company or depends on the client for a major fee that is ourstanding Example .THe audit team is prepairing to conduct its 2020 audit for ABC company .however, the audit team hasnot received its audit fees from ABC company for its 2019 audit.

2)SELF REVIEW THREAT

A self review threat exist if the auditor is auditing his own work or work that is done by others in the same firm.Example,the auditor prepairs the financial statements for ABC company while also serving as the auditor for ABC company.

3)ADVOCACY THREAT

An advocacy threat exist if the auditor is involved in promoting the client ,to the point where their objectivity is potentially compromised .Example ,the auditor is assisting in selling ABC company while also serving as the auditor of the company.

4)FAMILIARITY THREAT

A familiarity threat exists if the auditor is too personally close to or familiar with employees ,officers ,or the directors of the client company.Example, ABC company has been audited by the same auditor for over ten tears and the auditor regularly plays golf with the CEO and CFO of ABC company.

5)INTIMIDATION THREAT

An intimidation threat exists if the auditor is intimidated by management or its directors to the point that they are deterred from acting objectively.Example,ABC company is unhappy with the conclution of the audit report and threatens to switch auditors next year ABC company is the biggest client of the auditor.