You are an auditor in BDO Australia, a mid-tier audit firm. One of your responsibilities is toreview ethical matters which have occurred in different audit engagements. Currently, you arereviewing the following audit engagement. Vivid Solution Pharmacy Ltd (VSP) is a discount beauty and health care product provider. Itis also one of the largest clients for BDO. BDO provides a range of services: taxation,consultancy, and financial statement audit to VSP. The total audit fee and other non-auditservice fees from VSP represent around 12% of BDO’s total revenue.

The engagement audit team for VSP consists of 4 people. The audit partner is Brian. He hasbeen involved in the VSP audit for over 20 years and has partnered on the engagement for the last 15years. The audit manager is Alice. This is Alice’s first time on the VSP audit. She has noaccounting knowledge in the pharmaceutical industry and has never been involved with therecording or processing of accounting transactions in the pharmaceutical industry. Jack is the auditsenior and is responsible for the initial audit planning. Jack has recently completed the GraduateDiploma of Chartered Accounting. The junior auditor is Mike. Mike’s friend is the receptionistat VSP. However, the receptionist has no accounting knowledge and is not involved in therecording or processing of accounting transactions.

The audit team commenced planning the audit on VSP in the middle of April 2021. Inpreparation for the audit, Brian telephoned VSP’s CFO Simon to set up a planning meeting andto remind him that fees relating to the audit engagement from the previous year were stilloutstanding. Simon raised concerns about the conduct of the previous audit, stating numerousexamples of when he and his staff had been interrupted when they were busy. He stated that hewanted guarantees that this year's audit will be more efficient, less intrusive and cheaper,otherwise he will seek an alternative audit firm in future. When reviewing the audit documents, you also find the following issue. VSP has a long-term
loan from the Commonwealth Bank. The loan covenant stipulates that the commonwealth bankhas the right to withdraw all funding if VSP’s current ratio is less than 1.5:1 (i.e., The currentratio is a widely used measure for evaluating an entity’s liquidity and short-term debt-payingability. The ratio is calculated by dividing current assets by current liabilities). However, VSP’scurrent asset ratio is currently at 1:1. Simon believes that VSP is a financially healthy companyand asks Brian to ignore this temporary breach of the loan covenant. In addition, Simon requested not to disclose this information in the audit report. Otherwise, VSP’s would not consider BDO for future engagements.
Required
1. Identify and discuss the ethical and other professional issues found in the above case.
2. Recommend the actions that should be taken in relation to each of the issues identified inthe question 1.

Answer rating: 100% (QA)

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