Understanding Ethical Issues in Auditing and Unethical Behavior

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York University *

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AUDITING

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Accounting

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Jun 9, 2024

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3-20 a) 1) Obtain the relevant facts and identify issues; & Identify the ethical issues ; Is it ethical for Tom signed off the procedure without completing the task? 2) Identify who is affected and how each is affected; Tom: pay and performance evaluations will be affected Partner: provide unreliable opinions based on Tom’s auditing, affect firm reputation Supervisor: affect the time budget and quality of the work Other Employees: Tom’s behavior affect other staff receive the reward the deserved and may follow his behavior. 3) Consider alternatives/course of actions including consequences of each; Alternatives: Tom will be penalized for his misconduct. Tom will be fired for his unethical behaviours. Consequence : If Tom is just be penalized, other staff would perceive that the problem is not serious. If Tom is fired, the firm’s reputation could be saved and other staff would realize the importance of professional behaviour. 4) Implement an appropriate course of action. The partner would be better to talk to Tom, and fire him. Since Tom will no longer maintain a good reputation, the quality of his auditing is hard to trust in the future. b) Rationalization : “Sample test is enough to found problem” “No one has found problem” Ethical Blind spots : Even I did not check, no problem has been found, which shows that the rest samples are correct. c) No, this will not be changed. His personal situation cannot be an excuse for his unethical professional behaviour. He could honest for his personal situation before he conducts the unethical behaviour.

3-23 a. It is not a violation. John is not auditing the firm that he owns stocks. There is no self-interest threat. b. It is a violation of independence. Phyllis should be independence for the information he reviews. He should have skepticism regarding the information that he audits. His audit is intimidated by his clients. c. It is a violation. Kim should not take advantage of the trust placed in them. Kim should not involve an audit of a client since he did not have knowledge both of that client’s business and industry, and of the technical aspects of the audit. The client’s information should be confidential, and Kim cannot audit without consent of the client. d. It is a violation of confidentiality. The firms should not disclose the confidential information without the client’s consent. e. It is a violation of false and misleading documents and oral representations. Roberta should not use the false information to audit. f. It is a violation. Bill should not disclose his client’s information without the consent of the client. Bill should not check his client’s insurance agency since there is a self-interest risk. g. It is not a violation. Michelle has asked for permission of conducting the service. There are no rules for a PA to not provide other accounting service to a company as long as he did not review his own work.

3-27. The president of Mountain Ltd told Frost that the ban of Trail was prepared to increase its loan, so Helmut &Co are not lack of privity. Moreover, since Frost realize the important user of the financial statement, and he still ask the junior to audit the most important receivable and inventory part. Frost is negligent. Additionally, Helmut & Co assigned Frost who is new to the firm and two juniors to audit Mountain. The firm did not have fully understanding of the auditors’ competency, and this could also be perceived as a negligent. Finally, since the Frost realize the time pressure, he still conducts the audit, which could be a violate of independence. Overall, Helmut & Co and Frost are both negligent. They could lose for this case.

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3-28 a) Threat 1. Marie would benefit from the discount and the financial interest may threat the independence of Marie’s audit. 2. Marie is also a form of benefit that Marie received from the client. It could threat the independence when Marie auditing the dealership. 3. The gift is a direct financial interest that the dealership provides to Marie. Marie may not maintain his independence during his auditing. b) Safeguard 1. The firm of Marie could set up procedures to review the transaction with clients. Any transaction should receive review and approval. 2. The firm of Marie could establish policy for the favourable service that provided the clients they could use. 3. The firm of Marie could have policies for the amount or gift that the PA could receive from the client. c) No Safeguards 1. The discount is open to the firms instead of Marie herself. There is no violation exist. 2. The lunchroom should not open to Marie but Marie could use it anytime. Only Marie herself benefit from the behavior. The violation exists. 3. The $200 is specific provide to Marie and could violate the rules since Marie is the only beneficiaries. d) Engagement 1.Marie should ask partner of her firm for approval before accepting the discount. 2. Marie should eat with her other colleagues or eat in her own firm instead of using the lunchroom. 3. Marie should refuse to accept the $200 since she is auditing the firm.

3-31 Fee quotations and billings: Members must obtain adequate information before providing a fee quotation. Chris offered Robert a discount and promised to perform the audit for 15 percent less than any other accounting firm. The fee Chris charged violate the fee quotation. Advertising, solicitation, and endorsements: A profession’s reputation is not enhanced if the members openly solicit one another’s clients or engage in advertising that is overly aggressive, self-laudatory, or critical of other members of the profession or that makes claims that cannot be substantiated. Chris told Robert that it should not be a problem as he recently wrote the Certified Fraud Examiner exam, and because of that his work would be superior to that of other “older” auditors who may not be as up-to-date on the most recent auditing and accounting standard. Chris establishes his reputation by aggressive his professionals and critic other firm’s professionals.

Communication with predecessor : The CPA Code of Conduct requires that a (potential) successor auditor, prior to accepting an appointment as auditor. communicate with the incumbent auditor to inquire if the incumbent is aware of any circumstances that might preclude the successor from accepting the appointment. Chris trusted Robert he did not bother to communicate with the previous auditor of iEat. Chris accepts the task without acquire sufficient information from predecessor. Integrity, due care, and objectivity: Clients, employers, and the public expect that an auditor or firm will bring the qualities of objectivity, integrity, and due care to all professional services. Chris was so busy with other audits and he hired Adam and Ewa, two recent university accounting graduates to do the work. Chris told Adam and Ewa to quickly review their university audit textbook and begin the iEat audit immediately. With the time pressure, the quality of the work is not guaranteed. Moreover, Chris instructed Adam and Ewa to delete whatever was not relevant, but not to add anything, as that would only make things more complicated and could delay the completion of the audit. They are not following the standards and application a professional of skills and care. Professional competence: An auditor should not undertake an audit of a client unless that auditor has knowledge both of that client’s business and industry, and of the technical aspects of the audit. Chris came to iEat only once over the course of the three-week audit to discuss iEat’s corporate tax return with Chris and Alexandra. Chris told Robert that it should not be a problem as he recently wrote the Certified Fraud Examiner exam. Adam and Ewa, two recent university accounting graduates to do the work. While their competency is not enough for the audit. False and misleading documents and oral representations: Adam found out that Ewa failed to show up and observe the year-end count at two warehouses that were assigned to her. The use of false and misleading warehouse information violate the rule. Independence :  Robert hired his friend Chris Persson to perform the company’s annual financial statement. Their relations are too close, which cause familiarity threat.  Chris instructed Adam and Ewa to first draft a clean audit opinion and email it to him and in three weeks return back with an audit file that would support the drafted clean opinion. This behavior would cause a self-review threat.  To appease the private lender, Robert told Chris that iEat must have a clean audit opinion. Chris is intimidated by Roberts, and face an intimidation threat.  Chris also felt obligated to help his friend, as two years ago Robert co-signed on a mortgage for Chris’s condo. Their financial interest are related, and the independence of Chris was threatened by self-interest  Since Adam was related to the controller of iEat. Alexandra, the controller, was Adam’s aunt and he lived with her when he attended his last year of university. Their familiarity threats the independence of Adam as well.  Alexandra had also promised to hire Adam once he received his CPA designation. The conflict of Adam would benefit from Alexander and the independence of Adam was threatened by self-interest.

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3-35. a. yes, I agree. An auditor should not undertake an audit of a client unless that auditor has knowledge both of that client’s business and industry, and of the technical aspects of the audit . The auditor should have the competency to verify the existence and ownership of the timber asset. b. The OSC accept the agreement, and received penalty. Ernst & Young pay for their wrongdoing, and protect their reputation. Overall, the both sides is satisfied, and it would be a fair settlement. 4-23 a. 1) The function of independent auditor is the auditor provide qualified audit opinion based on the financial statements. 2) The responsibility of independent auditor include the auditor provide reasonable assurance about whether the financial statements is free from material misstatement, whether due to fraud or error, thereby enabling the auditor to express an opinion on whether the financial statements are prepared, in all material respects. It also includes the auditor provide auditing report based on the findings. During the examination, the auditor should follow the standard and should have the competency to audit and make professional judgement. b. Although it is difficult to detect fraud, the difficulty of detection does not change the auditor’s responsibility to properly plan and perform the audit to detect material misstatements, whether caused by error or fraud. First, the auditor must obtain reasonable assurance about whether the statements are free of material misstatements. Additionally, the auditor should have professional skepticism of the existence of the fraud. Management or the employees are both able to conduct fraud and attempt to conceal the fraud. The auditor should consider the effect of fraud, identify the factor may cause fraud, and examine the circumstance that could cause fraud.

c. When an independent auditor has suspicion to the existence of fraud or irregularities. The auditor should first examine whether the fraud or irregularities material enough to detect. Moreover, the auditor should examine the effect of the fraud or irregularities.