Professional Ethics-Scenario # 5

[KayPee]

An auditor( ACCA meber) and sole practitioner decides to buy a new car. The largest dealership in town has just retained his services for a review engagement, so he decides to start off the business relationship on the right foot by purchasing the car from that dealership. Would this violate the independence rules?

[limit_to_infinity]

Auditor can buy goods and services from his/her assurance client on arm,s length basis without affecting independence . However such transactions on a larger scale can constitute a threat .

From the scenario , "on the right foot" appears to impart the meaning of arm,s length trasaction

however , its also important to note that the interest is quite material [ from the point of view of auditor] . It might happen that auditor is given a substantial discount on car price in exchange for a mistatement. So this would affect the independence in my opinion

[Suze]

i agree with Limit

[Camille]

I believe a bit more information is required to adequately answer this question. There is no problem with the auditor purchasing the car from the client company, if the purchase price is the same for him as is for Joe Public. However, if the auditor is afforded a significant discount and/or other special features with the purchase, then this may be seen as a threat to his independence.

[Kelly]

I do not believe it is a bad idea that the auditor buys a car from his new clients.
As others have mentioned , as long as the purchase is made at an arms length basis. i.e.
-The dealer has not given any special discounts that are not available to his other customers.
-Or that the dealer expects any special treatment from the auditor in the outcome of the review engagement,

then the purchase would be fine.

If not then the purchase would qualify as a self interest threat, by accepting gifts / hospitality from clients in order to give a favourable report. The whole review engagement would be jeapordised, the integrity, independence, objectivity and ethics of the auditor would have to be questioned.

He would be putting his whole career at risk, and be liable to have disciplinary action taken against him by the ACCA.

[KayPee]

Answer: The act of purchasing a car from a client in the normal course of business does not appear, on the surface, to be an independence issue. However, if the dealer gives the member a discount of a few thousand dollars on the car, this may constitute a violation if the discount had not been given on an arm’s length basis, i.e., as with any other customer of the dealership.