F8 Study Group # 1-Scenario on Professional Ethics!

[KayPee]

Hi everyone,

We have about four days to go to begin our next discussion on Section B of the F8 syllabus.

Looking through the thread(for our 1 Session) I could see we talked very little about Professional Ethics.

I believe strongly that this is the way forward to excel in F8...Discussing Scenarios.

Yes we can always discuss knowledge based questions but the bulk of the marks in this paper will come from your ability apply the knowledge you have acquired to scenarios.

So I would entreat you all to try your hands at this one that I got from a friend yesterday.

1. Kwame just qualified as a member of ACCA and has decided to go into practice alone.
He has a small private portfolio of $200,000 gross fee income but has now been approached by his uncle (Kofi) to take over the audit of his company, the last audit fee for which was $170,000.


Let's discuss the questions/issues of professional ethics that can be raised in the scenario above.
Thanks

[Suze]

Kwame should not accept kofi as his client because of the following reasons:

1. Kofi is a relation - Objectivity would be hampered in this case because there may be conflicts of interest and this may result in his professional or business judgement being bias.

2. Fee of $170,000. which would be equal to 45% of Kwame's gross income - Kwame will then be dependent upon Kofi's business as the fee % of any one client should not be more than 10% - 15% of the gross income.

[ManOo]

Kwame should not accept uncle kofi as his client because of the following reasons:

1. Diminishing Independence/ Intimidation...being an uncle , there may be conflict of interest, impair objectivity, biased judgment ...

2. Fee structure... as suze stated...
3. Services to be provided should be considered whether existing employees have such training or they should be trained.. as the amount of fee explains the setup cost.
4. Expected level of service... number of employees, time required to carry out, internal procedure of the audit firm.. availability of the audit partner...

All of the above issues must be considered before accepting any client to provided the perceived level of service.

[Kelly]

If Kwame is going to accept his uncle's offer to audit his company, he has to be aware that;
1) This will deffinately affect his objectivity e.g. Kwame may find it difficult to approach his uncle Kofi for sensitive information such as disclosure of loans or other transactions which benefit him directly.
2) Kwame's independence will also be affected. How can Kwame be, and be seen to be independent from his uncle. The way around this would be for Kwame to have the audit reviewed by an independent auditor.
3) The fee structure is as Suze explained, should not be more than 10-15% of Gross income. This would put Kwame's integrity at stake.

In my opinion Kwame should kindly decline his uncle's offer.:mask:

Dear F8 Moderator,

Your feedback would be very much appreciated.

Regards,
Kelly

[ptty_noel]

Audits should be performed by persons who are competent, independent and objective.

Competent:In the case stated we see that Kwame is a qualified member of ACCA so he is competent enough to perform the audit for Kofi.

Independent:An auditor should be independent in that he must not have a personal interest in the company. This is because if he does it will affect his opinion and cause him to develop a report based on his own personal interest and not those of the shareholders.

Objective: The auditor must be honest and not biased. Lets say for example that Kofi has committed a fraud in the company. Seeing that this is a family relationship it may be difficult for Kwame be able to keep that fraud hidden.:wub:

[dragoon_alex]

Kwame should not to be an audit for this client for the following reason:

Prefessional competence
Kwame just become a member of ACCA and he has actual authory to become an auditor, however, did he also got experience for that kind of work?
If he don't have any experience for this kind of business, them he should not accept the offer.

Undue dependence on audit client
According to the case the company total income for a year only have 200,000, and the fee for this client is significant amount, therefore it's make people think audit firm will rely on the income from the client.
According to the ethic code recurring fee from one client ( non-list company) should not higher than 15% of gross fee income, and for listed company this is restricted to 10%. Therefore Kwame should resign as an auditor or transfer the business to another partner in branch office if they are not under limited.

Family relationship
In the case the client's director is Kwame's uncle, so they have too close relationship, and breach of independence.
Kwame should resign as an auditor and send another audit partner to take this business if possible.

[Suze]

hi KayPee

Lets have your answer. I guess you have the model answer.

[KayPee]

Hi guys I don't have a model answer to this question.I guess we've all done our bit in F8 there's nothing like a wrong answer.It is how well/how logical your answer is.

The first ethical issue(THREAT TO INDEPENDENCE) this scenario raises is the one that has to do with undue dependence on client the gross practice income not being allowed to exceed 15%(10% for public interest companies)...everyone saw that.

FAMILIARITY THREAT-cos of close relationship(family ties) was also identified.
This threat in the above scenario would result in Kofi being too sympathetic to the interest of his uncle so much so his professional skepticism will be absent as such in a situation where he has to qualify his report he will be unwilling to do it.

I like the issue raised by Dragon on PROFESSIONAL COMPETENCE.
ACCA's Principles of Professional ethics enjoins members to ensure that they are professionally competent to offer the services required by clients.
Kwame's professional competence could be questioned.On paper he's qualified to perform audits as he is a member of Recognized supervisory body(RSB) but we can't vouch for his competence to perform audits (he sure hasn't got the EXPERIENCE because he just qualified).


APPOINTMENT ETHICS
Before a new client is accepted,the auditors must ensure that there are no independence or other ethical problems likely to conflict with principles set out in the ethical code.

Based on the threats to independence and objectivity listed above Kwame should politely decline the nomination.

Another view suggested by Kelly:
If Kwame could be and appear to be independent so that he would be seen to express a conclusion without bias,conflict of interest and undue influence from Kofi then he can accept the offer.

A way around it is to put in place quality control measures like having the audit reviewed by an independent auditor(as suggested by Kelly is a way out)
With such a measure the said threats could be reduced to acceptable levels so Kwame can accept the offer.