You are the auditor of Gaspar Ltd (Gaspar). Gaspar is involved in the manufacturing of office furniture. Until recently, Gaspar had been very profitable, but a general economic downturn has reduced demand for its furniture. You have just had a meeting with the CEO of Gaspar, Darren, where you discussed the main audit findings and the adjustments which will need to be made to the financial statements. You tell Darren that one of the lingering concerns about Gaspar relates to whether it satisfies the criteria of a going concern, in particular Gaspar has a major loan contract which requires Gaspar maintain a debt/equity ratio of 50%. This issue has caused you concern, as Gaspar is run by likable people, and the failure of Gaspar would lead to negative consequences for its employees and other creditors. Gaspar is also an important client for your firm.

It is now July, Gaspar’s year-end was 30 June and your firm carried out most of its work during February. At that time all of the projections looked fine, however recently you found out that one of Gaspar’s major customers, Newman Ltd has been placed into administration. At year-end Newman owed Gaspar $1.7 million. If this amount were to be written off Gaspar would definitely be breaching its loan contracts. You asked Darren whether any provision had been created in relation to the amount due from Newman or whether any updates to the projections originally audited in February had been made. Darren said that he didn’t think that was necessary and justified this by saying that the administrator of Newman believed that it would be able to meet all of its outstanding debts. You said to Darren that that was all good and fine, but you still needed to obtain representations from the administrator yourself. Darren reacted to this badly, and started asking why that would be necessary as he was happy to provide a letter certifying the administrator's statements. You advised Darren that you have to do your job properly, but he shouted “this is the first bit of trouble for our business and you are willing to help the bank shut us down. This will be terrible for our customers, suppliers and our workers!” At the end of the meeting Darren said that he was simply asking to be given a chance to trade out of the situation and that as far as he was concerned, the accounts would not be altered. Darren also said that if Gaspar were to collapse, he would let all their stakeholders know that the auditors were to blame.

Required:

With reference to the Code of Ethics for Professional Accountants, what should you do in response to the information provided regarding the audit of Gaspar Ltd? Use the following American Accounting Association (AAA) Model template to guide your response.

American Accounting Association Model	Decision-making process
1. Determine the facts	The facts are ...
2. Define the ethical issues
3. Identify the major principles, rules, and values
4. Specify the alternatives
5. Compare values and alternatives
6. Assess the consequences
7. Make your decision

Answer rating: 100% (QA)

With reference to the Code of Ethics for Professional Accountants the response to the information provided regarding the audit of Gaspar Ltd using the given American Accounting Association AAA Model t... View the full answer