Session 6

[Acid]

Q: (a) Explain the situations where an auditor may disclose confidential information about a client.

(b) You are an audit manager in Acid & Accountants Co. , a Firm of Chartered Certified Accountants. You are prepating the engagement letter for audit of Vivies , a public limited company , for the year ending 30 June 2006.

Vivies has frown rapidly over the past few years , and is now one of your firms most important client.

Vivies has been an audit client for eight years and Acid & Accountants Co. has provided audit , taxation and management consultancy advice during this time. The client has been satisfied with the services provided , although the taxation fee for the period to 31 December 2005 remains unpaid.

Audit personnel available for this year audit are most of the staff from the last year , including Miss Annie , an audit partner and Vanessa , an audit senior . You are aware that Snehal whos a close best friend of Annie , has recently been appointed as the financial directors in Vivies.

To celebrate her new appointment , Snehal has suggested taking all of the audit staff out to an expensive restaurant prior to the start of audit work for this year.

You are required to identify the risks to independence arising in carrying out your audit of Vivies for the year ending 30 June 2006 and suggest ways of mitigating each of the risks you identify.

Mark allocation - (a) 8marks (b) 12marks

Note : Another topic on ethics , Because we should master it! Try your best and bring some wonderful suggestions.

[Annie]

It is very important for an accountatn to consider before signing the engagement letter whether he would be able to carry out his ethical responsibilities. As an accountant I should not only act in the best interest of my client but also towards my profession and the general public simultaneously.

Therefore before signing the audit engagement letter I should look into the details where my ethical principles would be challenged and whether I would be able to cope up to it and make justice to my role.

I should see that going out for this party would may be affect my integrity during the entire audit process, then I should not include my self in that party or even if I go it shoudl not affect my integrity. I should also see that I can always be objective and independent in my work. As here Annie and Snehal are good friends and Vivie being a old client would make it a little difficult. So I may consider of refusing to carry out this assignment.

I should also see that in the process my professional behaviour does not get hampered and I may not get involved in any such activtiy that may bring disrepute to my profession.

Here professional competence and due care and confidentiality may not get affected.

Confidentiality may get affected as information may flow out from one end to other due to close relationships.

I hope this is right.

Annie

[Acid]

Hi Annie

You could have talked about the risks i.e. Independence risk and others and also about ur relationship with Vanessa an audit senior.. Because using these terminologies may make the answer more worthy of marks and more professional bcoz the examiner would look for the knowledge we have about the subject.

I know very well that u know the answer pretty good but we should also convey the same to Mr Examiner , as previously told to us by V.


Cheers

Acid

[Vivienne]

External auditors have a priviledge to have access to all the information about their client.they are however expected not to disclose such information which they come across during their course of work.however there are mandatory situations where an auditor may be allowed to disclose confidential information regardless of their clients wish.

1. if it is in the public interest
the client company could be acting against public good such as enviromental pollution.there are matters though to consider before disclosing such information such as,is the matter likely to be repeated and how serious the actions are to the public

2. where the auditor suspects his client is doing illegal activities such as money laundering or drug trafficking.this is a statutory duty that an auditor has as failure to do so may be a criminal offence.

3.where the court orders them to do so
in certain circumstances the auditor may be compelled by the court to disclose information about thier client if he is in breach of statutory obligations such as failure to pay taxes.


b)
risk to independence
1.acid and co has been auditing vivies for the past 8 years .this in itself brings farmiliarity.acid may fail to be objective in forming an opinion.

ways if mitigating

1a) the partners may be rotated at a predefined period eg not more than 5 years and should not return to the engagement until after a period of 5 years


2.unpaid taxation fees
vivies has delayed in paying the fee on tax consultancy

2a)discuss with the management of vivies of how and when the outstanding fees will be paid.in future reduce on the services being offered to this vivies as it seem the client is having difficulties in paying.acid may bring this issue up in the next agm when their appointemnt is being renewed.

3.acid company seems to be providing a lot of services to vivies. this may lead to them getting more than 10% from thier client .vivies will in the end have undue influence on acid

3a) reduce on the services to vivies so that they do not become dependant on one client


4.same audit staff as the ones that audited vivies last year.this will create familiarity with the client staff.

4a)rotation of staff with others that were not on the audit team of vivies last year


5.close friendship of annie an audit partner with snehal the newly appointed financial director.this will impair the decision making of annie in forming an opinion as she wil tend to be sympathetic towards her friend.

5a)remove annie from the audit team that is auditing vivies.structuring the audit so that annie does not deal with matters relating to snehal.

6.taking of audit staff to an expensive restaurant.the auditor may accept gifts and hospitality from the client provided the value is insignificant.

6a)vivies auditors should decline to go for this lunch unless where it is agreed that they are going to sponsor themselves.instead they can agree to go to a modest restaurant.

the end

[sash_lar]

Q a)
Confidentiality is an implied term in a contract between a client and an auditor. Therefore an auditor should under no circumstance disclose any default unless specifically required to do so by law, which is usually to protect the public interest.
Therefore information acquired during the course of professional work should not be disclosed to third party, for instance a going concern in one company should not be used to assess another debt unless this information is publicly known or permission is given by the client.

To every rule there are exceptions, and the following exceptions applied to the disclosure of information acquired during the course of professional work to third party.
1) If there is a statutory obligation, for example money laundering to the regulatory body
2) For review of assignment by regulatory body such as ACCA. This must be stated in the audit engagement.
3) To comply with legal requirement, for example a warrant
4) To respond to enquires or investigation by ACCA. This must also be stated in the audit engagement.

For disclosure to comply with legal obligation, legal advice should always be sought as a breach of contract due to confidentiality may become costly to the firm and may also ruin the reputation of the firm. Therefore due care must be taken to ensure that the justification is valid for the disclosure.



b)
In accepting an audit assignment, it is always best to consider the likely impact on the reputation of the firm. Therefore stringent measures must be put in place to protect and prevent any likely significant conflict of interest between the firm and the client.

Risk to independence and the possible solution to be considered before continuing assurance service with Vivies are as follows:

Risk (1)
Overdue fee for taxation services
This maybe considered as a loan to the client which gives rise to conflict of interest. However, it was not stated whether a deadline was given or has been past for the payment of the fee.

Solution
Further taxation services should be given a deadline for payment of fees. If a deadline was given but Vivies has constantly been late with the payment, then a meeting should be requested of the management to ascertain reason for constant late payment of fee. In the meeting the firm should advice management that late payment of fees jeopardizes the integrity of the firm and necessary action will be taken to safeguard the reputation of the firm.
If the late payment was this once, then a letter should be sent to the Vivies advising of the overdue fee. Also include in the memo deadline of services fee for the upcoming year.

Risk (2)
Close relationship with auditee
It was known to the Audit firm at the start of the engagement that a conflict has arise due to the close relationship between the new finance director and one of the audit partner assigned to Vivies. The relationship brings in question the objectivity of the audit partner to extent the assurance service being provided by the firm.
An audit firm should not give reason for the assurance service provided to be questioned and if there is a lack of independence then the assurance given or not given will be called to question.

Solutions
It was known to the firm at the start of the audit assignment that a conflict of interest has arises therefore it would be prudent and easier for transition to take place at this point. Therefore, a transfer is one of the options that should be considered. However a problem arises if there is no other available auditor.
Another consideration is to allow the auditor to provide other services such as taxation service. This also have limitation has the auditor may not be rounded enough.
Although it might be argued that sufficient control will be put in place to ensure that the integrity of the assurance assignment is not jeopardize, this may not be enough to convince the public. Therefore the firm may have to consider not renewing the assurance assignment base on conflict of interest. However this may also pose another problem in that Vivies may withdraw the other service being performed by the firm.
Another option is to hire another auditor if the service of the firm more beneficial financially.

Risk (3)
Acceptance of gift
Acceptance of the expensive meal offered by the new financial manager may be regarded as gift. There should be no acceptance of gift from a client as this may pose a threat to independence. However small gift at special time for example, a moderately cost wine at Christmas is acceptable.

Solution
Politely refuse invitation with reason so as not cause any tension. The relationship between an auditee and the auditor should be good but it must not overstep the boundary so that independence may not become blurred or thought to be blurred from the closeness.


Risk (4)
Too much dependence on client
The audit firm should assess whether the dependence on Vivies, which has grown over the years, is significant. This gives rise to self-interest threat and may jeopardize objectively.

Solution
Assess the revenue being generated from Vivies to the revenue being generated from other clients to establish the level of dependence. If the revenue is in excess of an acceptable amount then the firm must consider its options. It may not be possible to cease doing business with Vivies therefore expansion of the firm should be considered. Or diversifying the firm’s operation by providing other services on a wider scale to companies that are not on their list of audit assurance.

[Lightwarrior]

very good answer shah_lar!

[Acid]

(a) Circumstances in which auditor may provide clients confidential information:


To Tax authorities if its a legal obligation to provide them with tax related information e.g. clients income and expenses.
To Police , If investigation is going on . Auditor must be cautious , it may be requirement of police that client shouldn't be informed of the ongoing investigation.
The auditor should disclose the info when he feels that no doing so may have an adverse impact on financial statements e.g. discovery of fraud should be reported to appropriate authorities like SOCC (Seriously organised crime committee) .
When the information is about public interest or national interest e.g. If client is involved in terrorism or criminal activities which may damage the public or national image then the information should be disclosed to appropriate authorities
The Auditor should also disclose where the professional bodies like ACCA code state they should. For example voluntary disclosure where the auditor think it would protect the client , say , in a court case !
(b) From the given information it is suggested that Vivies is a big company which is also an important client for the Vivies and the firm may be dependent on Vivie for much of thier income so they may become biased in giving the opinion.

There is also a threat the in independence , Self Review Threat , as auditor may not like to disclose his own mistakes while reviewing his own work of taxation and other consultancy services.

Firm should place a safeguard by making sure that they arent much depenedent on Vivies and hence should decline the assigment if they recieve 10% of the fee from Vivie out of the total practice income

They should also limitise the other services provided so that they dont become biased in giving opinions

As staff is mostly from previous year , they may have deveopled friends in the client and which can impair the objectivity as they may not want to annoy their friends by giving an adverse opinion about their work. So different audit partners should be used instead of these . These partners will also not rely upon thier past experiences of client which is ideal .

As Annies best friend Snehal is finance direcotor of Vivies which can again impair objectivity and also as Snehal is throwing a patry which may be to develop friendly relations with audit staff.. Either Snehal should give party on her own expenses of the audit staff shouldnt accept the party if its not moderate!


Acid

[Vivienne]

nice try by everyone. Acid you said our work will be marked on mondays , we are still waiting for that. the issue is we should be building our case now by working on our weaknesses that are being highligted by the mentors as it is we dont know whether we are answering correctly or not. meanwhile i should be putting up my answer for session 7 tomorrow.i hope annie is ready to put up session 8 on thursday.

chau

[Acid]

Hi Vivie,

You are right , I was told that our work would be marked this Monday , But no sign of any marks yet.

Let's wait till tomorrow and see what goes on.

Acid

[Pixiefeet]

Sash Lar ...good answer, but do you think in a real exam you would have time to write all of that?? or are you a really fast writer??

[sash_lar]

Pixie, I try to do my research now in answering the questions and writing as much. This I think will help me as I will have the knowledge for the exam and so it will just be the interpretation of the question. Also my answer is based on my perpective. It may not be correct although it is so wordy.