ACCT4231_Kutalova_Assignment 1_15Nov2023

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British Columbia Institute of Technology *

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6310

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Accounting

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Feb 20, 2024

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docx

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Question 1 Violations of the Rules of Conduct The scenario described presents several violations of the rules of conduct for public accountants. Below are five key violations: 1. Lack of Independence Violation : Paul's personal relationship with Tom could impair his independence, both in fact and in appearance. Independence is a cornerstone of the auditing profession, and any close relationship with a client can lead to a conflict of interest or bias. 2. Professional Competence and Due Care Violation : Sending junior staff who are experienced in review engagements, but not necessarily in full audits, may indicate a lack of professional competence. The staff should have the necessary training and experience to conduct an audit, especially given the urgency and importance of the audit for the client. 3. Confidentiality Violation : One of the junior staff members discussed potential future business events of Big Gig Ltd. with their family. This is a breach of confidentiality as it involves sharing client information without proper authorization. 4. Objectivity Violation : The acceptance of $250 gift certificates by the junior staff from the client could compromise their objectivity. Accepting gifts can create a sense of obligation and may influence the auditor's judgment. 5. Professional Behavior Violation : The junior staff engaging in non-audit work, such as providing sales quotes, is not appropriate behavior for audit staff. This could be seen as assisting in the operations of the client, which is beyond the scope of an audit and could impair the auditor's objectivity and independence. Additional Concerns While not directly asked, there are additional concerns that should be noted:  Audit Evidence : The junior staff only had a "quick look around the office," which suggests that they may not be collecting sufficient appropriate audit evidence to form a basis for the audit opinion.

 Audit Fee Arrangement : The audit fee was set informally at a local pub, which may not reflect a proper business arrangement or understanding of the audit scope and complexity.  Communication with Client : Paul's comment about most audits ending with an unqualified opinion could be misconstrued as a guarantee of the audit outcome, which is inappropriate and misleading. In conclusion, the actions described in the scenario raise serious ethical and professional concerns that need to be addressed to ensure the integrity of the audit and the profession.

Question 2 Situation 1: Brian, CPA's Audit Approach Yes, there is a violation. Brian's decision to not establish an understanding of internal controls nor test the effectiveness of controls during the audit of PPE Inc. could be a violation of the auditing standards. According to the generally accepted auditing standards (GAAS), an auditor is required to obtain an understanding of the entity's internal control relevant to the audit. This understanding is used to assess the risks of material misstatement and to design the nature, timing, and extent of further audit procedures. While it is true that for some small entities, substantive procedures alone may be sufficient, the auditor must still obtain a sufficient understanding of internal controls to plan the audit. By not doing so, Brian may not be able to identify areas of higher risk of material misstatement, which could affect the quality and thoroughness of the audit. Situation 2: John, CPA's Adverse Opinion No, there is not a violation. John, CPA, issued an adverse opinion on the financial statements due to his inability to obtain sufficiently appropriate evidence concerning the collectability of a material portion of the company’s accounts receivable balances. An adverse opinion is issued when the auditor concludes that the financial statements are materially misstated and do not present fairly in accordance with the applicable financial reporting framework. Given that John was unable to obtain the necessary evidence, issuing an adverse opinion is in line with the professional standards. It reflects that he has complied with the auditing standards which require auditors to express an opinion based on the evidence obtained. Therefore, there is no violation in this situation. Situation 3: Irene, CPA's Dual Role Yes, there is a violation. Irene, CPA, providing both audit and tax services to Simply Fashion Inc. and assigning the same team for both engagements, raises significant independence concerns. The Rules of Professional Conduct often require that auditors maintain independence in both fact and appearance when conducting an audit. By performing both the audit and tax services, Irene may face a self-review threat because the team that prepares the tax work might not evaluate their own work objectively if they are also responsible for auditing it. This could impair the auditor's independence and potentially violate the ethical requirements set by the provincial institutes' Rules of Professional Conduct .

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