Mwanza CPA Review Class

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For

NBAA EXAMINATIONS

January-May 2013 Training Session Audit and Assurance Services (P.18) Professional and Ethical Considerations

1 | Auditing & Assurance Service-Proffesional & Ethical Considerations- Questions

Mwanza CPA Review

Question 1-Indipendence Nov 2008 a) Following the collapse of giant companies such as Enron and WorldCom in the United States of America, Parmalat in Italy and others, both the accounting profession and other regulatory bodies, have taken some remedial measures to enhance auditors independence. REQUlRED: Explain the measures that have been taken by the accounting profess ion and other regulatory bodies to enhance auditors' independence (I5 marks) b) Auditor's ethics and independence are key concepts in relation to auditing and hence, there is a broad array of guidance and regulations to which an auditor must adhere to in order to fulfill his/ her responsibilities as an auditor. REQUIRED: i. Define what ethics is.(1 mark) ii. Describe what independence is in relation to an auditor(2 marks) iii. Explain why is Indipendence is so important to an auditor.(2 marks) (Total = 20 marks) Question 2-Confidentiality May 2008 Discuss the principle of confidentiality as provided in the Code of Ethics for professional accountants issued by the National Board of Accountants and Auditors (NBAA) In your discussion explain why professional accountants should refrain from, the circumstance where professional accountants are or may be required to disclose on confidential information of when such disclosure may be appropriate and what professional accountant s would consider whether to disclose confidential information. (Total = 20 marks) Question 3-Threats to Independence May 2008 Your firm is the external auditor of Hennes Ltd (Hennes), acompany which specializes in the building of new houses with selling prices ranging from TAS 0.75 million to TAS I million. The company normally builds between 20 and 25 houses a year. The shares in the company are owned by two brothers, who are actively involved in running of the company. Your firm has been external auditor of Hennes since its incorporation 12 years ago. In addition to the external audit, your firm provides non-audit services of tax planning and computation of the corporation tax liability. The total fees from Hermes are normally below I % of the annual fee income of your firm. You are planning the work to be undertaken in checking the inventory and revenue in the financial statements for the year ending 31st December 2007. Inventory comprises work in progress which represents houses at various stages of completion at the balance sheet date and building materials. The company does not maintain detailed costing records for each property being built, so the work in progress is valued by an independent surveyor at the year end. The surveyor provides a report which values the work in progress on a house by house basis. The building materials are stored at the company's head office yard and on the building site. The company does not maintain continuous inventory records for building materials so the inventory figure is ascertained by a physical count undertaken by the manager at the building site and one of the brothers at the head office yard. The quantities are recorded on inventory sheets and are subsequently costed by the company accountant. The company recognizes the sale of a house only when notified by its lawyers that contracts with the buyers have been exchanged. REQUIRED: (a) Explain the principal threats to independence which may arise out of acting for Hermes since its incorporation and the provision of the non-audit services; and state the safeguards that should be in place to mitigate those threats. (8 marks)

2 | Auditing & Assurance Service-Proffesional & Ethical Considerations- Questions

Mwanza CPA Review

Question 4-IFACs Code of Ethics May 2007 a) In marketing and promoting themselves and their work, individual professional accountants are required by IFAC's Code of Ethics to ,avoid three main aspects. REQUIRED: Briefly explain these three main aspects. (6 marks) b) Publicity by individual professional accountants in public practice in a non-advel1ising environment is acceptable under certain conditions as provided for under the lFAC's code of Ethics. REQUIRED: Briefly illustrate any six circumstances in which publicity is acceptable and the matters to be considered therein. (6 marks) Question 5- Threats to Independence and Solutions Nov 2006 Bambata International is a company listed at the City Stock Exchange. It manufactures and wholesales a wide variety of products including fashion clothes and audio-video equipnient. Vashti, a firm of Chartered Certified Accountants, audits the company and the audit manager is Ms Damarius Haika. The following matters have arisen during the audit of the group's Financial Statements for the year to 30 June 2005, which is nearing completion:

1. During the annual physical count of fashion clothes at the company's principal warehouse, the audit staff attending count were invited to purchase any items of clothing or equipment at 30% of their recommended retail prices. 2. The chief executive of Bambat International,Armando Sonyo, owns a private jet. Armando invoices the company on a monthly basis, for that proportion of the operating costs which reflects business use. One of these invoices shows that Ms Damarius Haika was flown to Kampala, Uganda in September 2004 and flown back two weeks later. Neither Barnbata International nor Vashti have any offices or associates in Kampala. 3. Last week, Armando announced his engagement to be married to his personal assistant, Kisiga Fortune. Before joining Bambata International in March 2005, Kisiga had been Vashti's accountant in charge of the audit of Bam bat a International. REQUIRED: Discuss the ethical issues raised and the actions which might be taken by the auditor in relation to these matters. [20 Marks]
Question 6- NBAA Code of Ethics May 2004

Part III of the Professional Accountants' (Code of Conduct and Ethics) By-laws , 1999 issued by the National Board of Accountants and Auditors - deals with professional accountants in Public Practice (CPA-PP)

REQUIRED:

In relation to Professional Accountants in Public Practice: (i) Explain what constitutes Financial Involvement. (ii) Summarize the provisions of clause 25 of the by-Law dealing with incompatible activities. (iii) When is publicity by an individual CPA-PP acceptable? (iv) Describe the circumstances in which publicity is generally allowed. 3 | Auditing & Assurance Service-Proffesional & Ethical Considerations- Questions

Mwanza CPA Review

Question 7-Ethical Issues ACCA P7.Dec 2013 You are an audit manager in Chester & Co, and you are reviewing three situations which have recently arisen with respect to potential and existing audit clients of your firm. Tetbury Cos managing director, Juan Stanton, has approached Chester & Co to invite the firm to tender for its audit. Tetbury Co is a small, owner-managed company providing financial services such as arranging mortgages and advising on pension plans. The companys previous auditors recently resigned. Juan Stanton states that this was due to a disagreement on the accounting treatment of commission earned, and because they thought our controls were not very good. You are aware that Tetbury Co has been investigated by the financial services aut hority for alleged non- compliance with its regulations. As well as performing the audit, Juan would like Chester & Co to give business development advice. The audit of Stratford Cos financial statements for the year ended 30 November 2013 will commence s hortly. You are aware that the company is in financial difficulties. Stratford Cos managing director, Colin Charlecote, has requested that the audit engagement partner accompanies him to a meeting with the bank where a new loan will be discussed, and the draft financial statements reviewed. Colin has hinted that if the partner does not accompany him to the meeting, he will put the audit out to tender. In addition, an invoice relating to interim audit work performed in August 2013 has not yet been paid. Banbury Co is a listed entity, and its audit committee has asked Chester & Co to perform an actuarial valuation on the companys defined benefit pension plan. One of the audit partners is a qualified actuary and has the necessary skills and expertise to perform the service. Banbury Co has a year ending 28 February 2014, and the audit planning is due to commence next week. Its financial statements for the year ended 28 February 2013, in respect of which the audit report was unmodified, included total assets of $35 million and a pension liability of $105,000. REQUIRED: Identify and discuss the ethical and other professional issues raised, and recommend any actions that should be taken in respect of: (a) Tetbury Co; (8 marks) (b) Stratford Co; (6 marks) and (c) Banbury Co. (6 marks) (20 marks)

4 | Auditing & Assurance Service-Proffesional & Ethical Considerations- Questions

Mwanza CPA Review