ACCT3101 Tutorial 3 Solutions

ACCT3101 Tutorial 3 Solutions

Arens Ch 4: 4.12; 4.18; 4.21; 4.24

4-12 An
an audit:
1.
2.
3.
4.

audit firm has several options when it recognises that it is not competent to perform
Withdraw from the engagement.
Obtain the expertise through education and training.
Employ someone who has the expertise.
Work on a consulting basis with another audit firm.

4-18

a.

(1) b.

(2) c. (3)

4-21

a.
Violation. APES110 s130 Professional competence and due care S330
Acting with sufficient expertise A member who accepts a professional engagement
implies that he or she has the necessary competence to complete the engagement
according to professional standards. Bacon has violated the rule since he does not have
the expertise to review the work of the consultant hired by Bacon. Bacon should have
suggested that the company hire the consultant directly.
b. No violation.
c. No violation.
d. In most states, this will be a misdemeanour and would not likely be a violation.
e.
Violation. APES110 s110 Integrity S120.1 Objectivity - conflict of interest
APES110 S290.1 Independence S290.8 Appearance of independence has been
impaired by Bill Wendal's agency's financial dealing with his audit clients and
participation in a business which impairs his objectivity. It is also a conflict of duties to
recommend his own firm to review the adequacy of the existing insurance coverage of
existing clients.
f.
No violation if not a reporting entity. If a reporting entity then Violation S120
Objectivity S290.158 provision of non-assurance services S290.166 self review threat

4-24

a.

b.

Independence is essential for an auditor because users of financial statements expect

an unbiased viewpoint in the auditors attestation to the truth and fairness of the
financial statements. If users believe that auditors are not independent, the value of
the audit function is eliminated.
Most other professions (solicitors, medical practitioners, etc.) represent their clients
and perform services intended primarily to assist their clients. For this reason no
assumption of independence is required. The importance of independence for
auditors is similar to that for judges. For both, a non-advocacy position is essential.

ACCT3101 Tutorial 3 Solutions

c.

d.

Independence in appearance is how independent the auditor appears to outsiders

such as users of financial statements. Independence in fact refers to whether the
auditor has maintained an attitude of independence throughout the engagement. For
example an auditor could possibly maintain an attitude of independence in fact even
though he or she held shares in a company and performed the audit. However, the
auditor would not likely be independent in appearance in such a situation. Both
independence in appearance and fact are essential and the Code of Ethics for
Professional Accountants concerns both.
1. He has not violated the Code of Ethics for Professional Accountants because
the shareholding is unlikely to be considered material.
2. Such a small ownership is unlikely to have any impact on a partner's objectivity
in evaluating the financial statements. It is unlikely to affect the partner's
independence in fact.
3. Ownership of material shareholdings could affect the appearance of
independence and therefore impact the reputation and credibility of auditors. It
also shows outsiders the importance of independence to auditors and therefore
hopefully improves the reputation of the profession.

e.

INDEPENDENCE IN

INDEPENDENCE

FACT

1.

May cause the auditor to

permit misstatements to
enhance personal wealth.

2.

The auditor is auditing

their own work and it is
very unlikely that they
can approach this task
objectively with a
willingness to detect and
expose misstatements.

3.

There may be an absence

of a careful independent
check of the entries or
preparation of the

IN APPEARANCE

Users may perceive

that auditors would
permit misstatements
to enhance personal
wealth.
Users may perceive
that the auditor may
not independently
audit his or her own
work.

Users may believe

that the auditor may
not independently
audit his or her own

CONSEQUENCES

Minor, if any for non material

shareholding.
Violation under APES 110 s340
for material shareholding
Prohibited under Act s324CH
Some clients find it less
expensive to have bookkeeping
services performed by an outside
service. It is often less expensive
to have this done by the auditor
because the auditor will already
be knowledgeable about the
business.
Violation APES110 s290.166
except in emergency situations
Act non-audit services to be
disclosed.
Many clients lack technical
expertise in auditing. Having
services performed by the auditor
is sometimes the least costly

ACCT3101 Tutorial 3 Solutions

INDEPENDENCE IN

INDEPENDENCE

FACT

IN APPEARANCE

CONSEQUENCES

statements because they

were originally prepared
by the auditor.

4.

5.

6.

work or that of a staff alternative.

person from his or her Violation APES110 s290.158
firm.
Provision of non-assurance
services to assurance clients.
Act non-audit services to be
disclosed.
The auditor may be
Users may perceive
An accounting firm gains
reluctant to criticise or not either of the two
considerable knowledge about a
rely on an accounting
client and its business during the
concerns discussed
system that was originally under independence
audit. Due to this knowledge,
recommended by the
management services can often
in fact.
accounting firm.
be provided by the same
Additionally, if the
accounting firm at a lower cost
accounting firm obtains
than alternative sources such as
considerable revenue from
other accounting firms or
management advisory
management consultants.
services, the accounting
Permitted with safeguards
firm may fear the loss of
APES110 s290.158
the client and therefore be
controlled by management.
The audit team may
Users may perceive
Knowledge gained by the audit
team about a client's business is
become complacent due to the possibility of
essential to evaluate when
familiarity and not
complacency.
misstatements in the financial
carefully evaluate potential
statements are likely and to plan
misstatements.
the audit. It is costly for a new
audit team to obtain that
knowledge.
Act s324DA requires lead
auditor rotation every 5 years
The accounting firm may Users may perceive
The same conclusion reached in 5
about the audit team is applicable
become complacent due to the possibility of
to accounting firms. The cost of a
familiarity and not
complacency.
new accounting firm of obtaining
carefully evaluate potential
the knowledge is even greater
misstatements.
because of confidentiality
requirements and communication
difficulties between accounting
firms.
Act s324DA requires lead
auditor rotation every 5 years

ACCT3101 Tutorial 3 Solutions

INDEPENDENCE IN

INDEPENDENCE

FACT

7.

The auditor may be

unwilling to disagree with
management for fear of
being terminated.

IN APPEARANCE

Users may perceive

that the auditor is unwilling to disagree
with management.

CONSEQUENCES

Someone has to select the auditor.

Management is usually in the best
position to evaluate the
effectiveness and cost of
alternative auditors.
Act members pass the
resolution to appoint the auditor

f.

The Code of Ethics for Professional Accountants prohibits e(1) for material
shareholdings, e(2) except in emergency situations, and e(4) for particular services.