BAC 3624

Advanced Auditing

Tutorial 4

Question No. 1
Aristima Bhd, a listed company, manufactures and wholesales a wide variety of products
including fashion clothes and audio-video equipment.
The company is audited by Rahim & Chow, a firm of Chartered Accountants, and the audit
manager is Kingsley.
The following matters have arisen during the audit of the companys financial statements for
the year to 30 June 2013 which is nearing completion:
(i) During the annual physical count of fashion clothes at the company's principal warehouse,
the audit staff attending the count were invited to purchase any items of clothing or
equipment at 30% of their recommended retail prices.
(ii) The chief executive of Aristima Bhd, Zakariah, owns a private jet. Zakariah invoices the
company, on a monthly basis, for that proportion of the operating costs which reflects
business use. One of these invoices shows that Kingsley, the audit manager, was flown to
Sydney in September 2012 and flown back two weeks later. Neither Aristima nor Rahim &
Chow have any offices or associates in Sydney
(iii) Last week Zakariah announced his engagement to be married to his personal assistant,
Rosmah. Before joining Aristima in March 2013, Rosmah had been Rahim & Chows
accountant in charge of the audit of Aristima.
Required:
Discuss the ethical issues raised and the actions which might be taken by the auditor
in relation to these matters.
ANSWER
(i) Goods
If this was the first time that such an offer had been made to audit staff it should not have
been accepted during the physical count. Before accepting offers of goods, audit staff should
discuss with their superiors (e.g. audit manager) the propriety of doing so. Rahim & Chow
may have a policy not to accept any offer of goods or services on grounds of the threat to
objectivity impairment. Unless the value of any benefit is modest, accepting goods (also
services and undue hospitality) may threaten objectivity. 30% of MRP (manufacturers
recommended price) amounts to a 70% discount which may not be modest, especially as it
has been offered in respect ofany items.
The modesty, or otherwise, of the offer should have been compared against the staff discount
scheme (if any) which Aristima offers to its employees. If Aristima does not offer staff
discounts, the offer of discounted goods should have been declined.
Rahim & Chow could contemplate the audit staff accepting offers of goods on terms no more
beneficial than those offered to employees.

BAC 3624

Advanced Auditing

Tutorial 4

The offer should certainly not be taken up at the physical count as it would contribute to
movement (which should be minimised). Also, if it later transpired that there was a problem
with the count or the subsequent inventory valuation (e.g. if the audit team failed to identify
obsolete or slow-moving items) there would be the risks of claims of negligence (that the
audit team were not sufficiently diligent); objectivity impairment or even misconduct (the
goods might have the appearance of a bribe).
In summary, the offer might be taken up if no more beneficial than to employees; but only at a
time when it would not interfere with the conduct of the audit; and with the approval of the
audit partner
(ii) Services/Hospitality
Zakariah has invoiced Aristima for Kingsleys holiday flights (implied). Clearly this is not tax
allowable business expenditure in the accounts of Aristima (akin to entertainment expenses /
hospitality). The value of return flights is unlikely to be regarded as modest (e.g. by less
senior members of the audit team and the man in the street), especially if he took his family.
The audit manager should not have accepted the use of the jet without the express
permission of the audit engagement partner (and/or partner in the firm responsible for giving
guidance on ethical issues).
Kingsley may have paid for the use of the jet. As the jet is Zakariahs, Kingsley could have
paid Zakariah directly. Zakariah should not then have raised an invoice to Aristima for reimbursement as business usage.
Even if an amount paid by Kingsley represents a commercial rate for the chartering of a
private jet, the mere fact that Zakariah should make it available might suggest a close
(business or personal) relationship between them.
If Kingsley used the jet without the knowledge of Rahim & Chow and it has only come to light
during the current years audit that Kingsley used the jet (whether or not he paid for it) he
should be removed from the assignment immediately. In this event, it should also be noted
that the trip was timed before the audit of the prior year financial statements was completed.
All audit work on the financial statements for the year ended 30 June 2012 should be
reviewed by a newly assigned manager/ partner. Particular attention should be paid to all
matters of the Audit Managers judgement. Even if there is no evidence of the managers
work having been slack in respect of the current years audit, it would be appropriate to
review how he dealt with any final review points on the prior year audit.
Kingsley should be asked whether he has used the jet on other occasions (e.g. in September
2013) and this should be confirmed with Zakariah.
The integrity of Kingsley as a senior employee of the firm should also be questioned.
Kingsleys relationships with other clients and assignments should be investigated by Rahim
& Chow.

BAC 3624

Advanced Auditing

Tutorial 4

(3) Ex-audit staff employed by client

As Rosmah was only the accountant in charge (not the audit manager or partner) it is unlikely
that a significant lack of objectivity could have impaired the audit opinion for the year ended
30 June 2013. The audit files and financial statements should have been reviewed by the
manager and partner in the knowledge that Rosmah was about to leave (if she had not
already left).
However the objectivity of the prior year audit may have been impaired if Rosmah already
had a personal relationship with Zakariah before she joined Aristima and while she was still
employed by Rahim & Chow.
On being made aware of the relationship (even if it was only last week) the engagement
partner of Rahim & Chow should have arranged for a second partner review of the audit
working papers for the prior year. If there is any possible lack of evidence in respect of a
material area, the audit program for the current year should be reviewed and amended (as
necessary).
As the former accountant, Rosmah may have close relationships with the audit team
conducting the current years audit. However, the audit team should have been adequately
briefed and be alert to the possibility that she could influence them, however unwittingly (e.g.
in simply explaining how she did things previously). The extent to which reliance (if any) has
been placed on any representations by Rosmah should be reviewed in the light of the
announcement.
The audit engagement partner should review the audit strategy (e.g. in terms of its
predictability) to ensure that Rosmahs previous knowledge of it (presumably passed on to
Zakariah) will not impair its effectiveness.

BAC 3624

Advanced Auditing

Tutorial 4

Question 2
Each of the following situations involves a possible violation of the MIA By- Laws (On
Professional Conduct and Ethics). Indicate whether each situation violates the Bylaws. If it violates the By-laws, indicate which By-law is violated and explain why.
Situation 1
Mariam, a sole practitioner, signs a set of financial statements as auditor of the company.
The financial statements were examined by Mariams ex-associate, Lam, who is now not
employed and is no longer a member of MIA.
ANSWER
This situation violates the by-law. Under the by-law relating to Method of Practice, MIA
members in public practice are not allowed to express an opinion on financial statements
examined by other persons who are not employees of the firm or members in public practice.
Mariams ex associate is not currently a member of MIA and as such Mariam should not sign
the accounts examined by a non member of MIA.
Situation 2
Rohani, a sole practitioner, promotes a long time employee, Asmara, to be a partner of her
public accounting firm. Asmara, is an accounting graduate from a local university, and has
applied to join MIA as a member.
ANSWER
This situation violates the by-law. The by-law on Method of Practice prohibits its members in
public practice to take in a non MIA member to practise in partnership with her or let a nonmember practise in the member's name as a chartered accountant.
Situation 3
Jakie Chin, a chartered accountant, forms a partnership with Razali (also a member of MIA)
to provide public accounting services. The new firm is named "Brilliant Professional
Accountants".
ANSWER
This situation violates the by-law. The by-law on Method of Practice prohibits its members in
public practice to use trade or association name or any other impersonal or fictitious names
in the practice of public accounting,
Situation 4
Nancy, an accounting graduate residing in Tangkak, was hired by Chandran & Co, a public
accounting firm in Melaka, to be the manager of its branch in Tangkak. Nancy is very
competent in her work and intends to apply to be a member of MIA when she acquires the
necessary working experience.
ANSWER
This situation violates the by-law. Based on the by-law on Method of Practice a professional
accountant in public practice must ensure that his firm and any branches of his firm are
under the management and control of a MIA member. Nancy is not a member of MIA.

BAC 3624

Advanced Auditing

Tutorial 4

Question 3
(a) State the FIVE threats contained within MIA By Laws (On Professional Conduct and
Ethics). For each threat list ONE example of a circumstance that may create the threat.
ANSWER
(a) Compliance with MIA By Laws (On Professional Conduct and Ethics) fundamental
principles can be threatened by a number of areas. The five categories of threats, which may
impact on ethical risk, are:
Self-interest
Self-review
Advocacy
Familiarity
Intimidation.
Examples for each category (Only one example required per threat):
Self-interest
Undue dependence on fee income from one client
Close personal or business relationships
Financial interest in a client
Self-review
Member of audit team being or recently having been employed by the client in a position to
influence the subject matter being reviewed
Involvement in implementation of financial system and subsequently reporting on the
operation of said system
Same persons reviewing decisions or data that were prepared by them.
Advocacy
Acting as an advocate on behalf of a client in litigation or disputes
Promoting shares in a listed audit client
Familiarity
Long association with a client
Acceptance of gifts or preferential treatment (significant value)
Over familiarity with management
Intimidation
Threat of litigation
Threat of removal as audit firm
Dominant personality of client director attempting to influence decisions
Pressure to reduce inappropriately the extent of work performed in order to reduce fees.