You are an audit manager with AA & Co. Chartered Accountants and Business Consultants. You have been assigned to the audit of Western Decors Ltd (WD), a long-established firm of event planning service in the city where your practice is located. The audit of the financial statements for the year ended 31 March 2019 is due to commence shortly. The audit firm is aware that the client has received a loan from the bank in April 2018 and that the bank will rely on the audited financial statements as part of the terms and conditions in the loan agreement.
The partner in charge of AA & Co. has just visited the client and made the following notes during his trip:
- The firm has a number of individual and corporate clients outside Accra and has invested heavily in recording and broadcasting equipment to allow some events to be broadcasted over the internet. This facility is now available at all events conducted in WD’s premises and is proving to be very popular. To date, no specific extra charge has been levied for this service but the Chief Executive Officer (CEO) of WD has asked us to prepare a report for him advising on whether it would be practical to charge separately for it; and, if so, the level at which the charge should be set.
- Unfortunately, WD’s main supplier of chairs went into liquidation during the year. The Partner said that they were fortunate to be able to find an alternative supplier with whom they entered into a three-year contract for the supply of chairs. At the time of signing the contract, WD considered the contract to be on very favourable terms. However, the supplier is based in Nigeria and the contract was denominated in Naira. Movements in the exchange rate now make the contract look far less attractive and the CEO has requested that we examine the contract to see if there is any way he can legally set it aside.
Required:
i) Critically evaluate any possible ethical issues arising from the client’s requests. (4 marks)
View Solution
- The provision of any other services to an audit client has the potential to create threats such as those identified by the International Ethics Standards Board for Accountants (IESBA). On the other hand the provision of such services is nearly universal in practices from the very smallest to the largest.
- In terms of threats identified by IESBA the ones that nearly always have some relevance are self-interest and familiarity. So we should always consider our level of dependence on fees from the client and be aware that if more than 15% of the gross recurring fee income of our practice comes from any one client (or group of closely related clients) then there is a presumption that our independence is impaired. Also, heavy involvement with a client can impair our objectivity and so lead to a familiarity threat.
- There is nothing in the scenario to suggest that either of these situations are especially applicable in this case. The most relevant threat in relation to the advice on the price to charge for certain extra services is a threat recognised by IESBA as an Advocacy threat. Advocacy threat exists when “the audit firm undertakes work that involves making judgements and taking decisions that are properly the responsibility of management”. The important point here is that the audit firm may provide advice but that any decisions are left entirely to management.
- That would also apply to advice about the possibility of setting aside the contract with the Nigeria based chairs supplier. On top of the other issues mentioned this would also raise the question of competence. This would appear to be more in the nature of a legal issue so we may not be competent to advise on it. Obviously, if we do advise any decision must be unambiguously left to the client. (Any 2 points @ 2 marks = 4 marks)