You are a partner in a three-partner firm of accountants. The firm generates fees of approximately$1.4millionperannum.WithinyourportfolioofclientsisCompanyA (a Unionized Company),which hasbeenverysuccessfulsinceitfirstcametoyourfirmfiveyearsago.Itnowhasanannual turnover in excess of $15million.
CompanyAgeneratesannuallyrecurringfeesforthepracticeofapproximately$50,000,of whichapproximately$35,000isinrespectofauditworkand$15,000relatestoroutinetax calculations and preparation of the corporation tax return. Your firm has a separate tax department,whichperformsthetaxcomplianceworkinrespectofCompanyA.
The company’s financial year end is December. Last year the audit work commenced in June,andtheauditreportwasfinallysignedinAugust.BytheendofAugust,thetaxreturn had been submitted to the taxation authority, and the firm’s invoice had been issued to CompanyA.
InSeptemberasignificantcustomerofCompanyAwentintoreceivership,andCompanyA sufferedalargebaddebt.Thedirectorsapproachedyouimmediately,andwereveryopen aboutthecompany’sshort-termcashflowproblem.Therefore,youagreedthatpaymentof thefirm’sinvoiceof$50,000couldbespreadovertenmonths,commencinginOctober.
Company A also needs the support of its bank and, in December, it was negotiating a modestincreaseinitsoverdraftfacility.ItisnowearlyMarch,andthebankhasrequested auditedfinancialstatementsbytheendofthemonth.Theauditiswellunderway,andyou havepromisedthedirectorsofCompanyAthatthebankwillhavetheauditedaccountson time.
The planning of the audit was performed by the audit senior and reviewed by the audit managerfortheassignment(inwhomyouhaveagreatdealofconfidence).Duetopressure of work, you did not review the audit plan in detail before the audit team commenced the year end audit work, and so you decide to review and sign off that section of the audit file now.
Younotethattheauditmanagerhascorrectlyidentifiedgoingconcernastheareaofthe auditattractinggreatestrisk.However,atthetimeofplanningtheaudit,themanagerwas unawareofthecreditagreementreachedwithregardtothepaymentoflastyear’sfees. Youcheckyourfirm’srecords,anddeterminethatCompanyAstillowesthefirm$25,000.
Key fundamental principles
Integrity:Therewasaflawintheplanningoftheaudit,whichwasnotnoticedbytheaudit manager before the audit work commenced. Is it possible to ignore the flaw and yet act with integrity, given that the flaw wasunintentional?
Objectivity:CanyoureachanobjectiveauditconclusioninviewofyourwishforCompanyA tocontinuetradingandsettleitsoutstandingfees toyourfirm?
Professionalcompetence:Youneedtobearinmindanyethicalstandardsforauditors relevant to the country in which youpractice.
Professional behavior:Regardless of the actual impact of the outstanding debt on your
objectivity,ifthebank(orahypothetical,objective,well-informedthirdparty)knewofthe outstandingfees,whatimpactwouldithaveonyourfirm’sreputation?
Identify relevant facts:
Identifyrelevantemploymentissues:
Identify affected parties:
Who should be involved in the resolution: