You are a partner in a three-partner firm of accountants. The firm generates fees of approximately $1.4 million per annum. Within your portfolio of clients is Company A (a Unionized Company), which has been very successful since it first came to your firm five years ago. It now has an annual turnover in excess of $15 million. Company A generates annually recurring fees for the practice of approximately $50,000, of which approximately $35,000 is in respect of audit work and $15,000 relates to routine tax calculations and preparation of the corporation tax return. Your firm has a separate tax department, which performs the tax compliance work in respect of Company A. 

The company’s fiscal year-end is December. Last year the audit work commenced in June, and the audit report was finally signed in August. By the end of August, the tax return had been submitted to the taxation authority, and the firm’s invoice had been issued to Company A. In September a significant customer of Company A went into receivership, and Company A suffered a large bad debt. The directors approached you immediately and were very open about the company’s short-term cash flow problem. Therefore, you agreed that payment of the firm’s invoice of $50,000 could be spread over ten months, commencing in October. Company A also needs the support of its bank and, in December, it was negotiating a modest increase in its overdraft facility. It is now early March, and the bank has requested audited financial statements by the end of the month. The audit is well underway, and you have promised the directors of Company A that the bank will have the audited accounts on time. The planning of the audit was performed by the audit senior and reviewed by the audit manager for the assignment (in whom you have a great deal of confidence). Due to pressure 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. You note that the audit manager has correctly identified going concern as the area of the audit attracting greatest risk. However, at the time of planning the audit, the manager was unaware of the credit agreement reached with regard to the payment of last year’s fees. You check your firm’s records and determine that Company A still owes the firm $25,000.

Key fundamental principles

Integrity: There was a flaw in the planning of the audit, which was not noticed by the audit manager before the audit work commenced. Is it possible to ignore the flaw and yet act with integrity, given that the flaw was unintentional?

Objectivity: Can you reach an objective audit conclusion in view of your wish for Company A to continue trading and settle its outstanding fees to your firm?

Professional competence: You need to bear in mind any ethical standards for auditors relevant to the country in which you practice.

Professional behavior: Regardless of the actual impact of the outstanding debt on your objectivity, if the bank (or a hypothetical, objective, well-informed third party) knew of the outstanding fees, what impact would it have on your firm’s reputation?

Identify relevant facts: 

Identify relevant employment issues: 

Identify affected parties: 

Who should be involved in the resolution:

Answer rating: 100% (QA)

Considerations Identify relevant facts Your company is under pressure from a variety of circumstance... View the full answer