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- 10 Marks
Question
You are an audit manager at Abdulai Afriyie & Co., a firm of Chartered Accountants. You are currently preparing the audit of Adoma Mining & Jewelleries Ltd for the year ended 28 February 2019. Adoma Mining & Jewelleries Ltd is a small Mining and Minerals Company which offers an extensive range of services that covers exploration, jewellery production, industrial applications, decommissioning and closure. You reviewed the previous years’ files for this client and noted the following:
i) The previous financial statements were prepared by the Consulting Division of Abdulai Afriyie & Co. and there is nothing in any of the files to suggest any particular difficulty with the assignment.
ii) In the course of the review of the files, it was observed there is a note explaining that on the completion of the assignment, each member of the consulting team with whom the client had come into contact, was given a gift of “presentation box” of the client’s Jewelleries. These presentation boxes contain samples of each of the different jewelleries produced by the client. These boxes are not available for sale but are sometimes given as gifts (for example, at Christmas) to loyal customers and others such as school principals who are seen to bring business to the client. Since this was a non-assurance assignment, the gifts were automatically and gratefully accepted.
iii) In early January 2019, the company received correspondence from the Ghana Revenue Authority (GRA) claiming that the company has failed to pay certain mineral royalties which are usually charged on the jewellery manufactured. Normally, these levies are automatically deducted when miners or mining companies sell minerals to dealers. In this case, all of the minerals extracted were used to make jewels and ornaments by the company itself; and so the company never considered the possibility that such royalties might apply to it. The Chief Executive Officer (CEO) of Adoma Mining & Jewelleries Ltd tells you that he has done some research into the issue. It is his view that an argument can be made that the royalties do not apply in this case. However, should they apply, the amounts outstanding could be material since a number of years of non-payment might be involved. The CEO is aware that Abdulai Afriyie & Co. has a lot of Jewelleries based clients and has asked if Abdulai Afriyie & Co. would handle this matter as a separate assignment in addition to the audit.
Required:
Discuss FIVE (5) ethical issues that may arise for Abdulai Afriyie & Co. in relation to the audit of Adoma Mining & Jewelleries Ltd. (10 marks)
Answer
The following may give rise to ethical issues for Abdulai Afriyie and Co:
- The preparation of accounts as well as auditing them.
- The request to deal with the failure to pay royalties and
- The offer of a gift from the client to members of the audit team.
These issues are addressed below: Accountants producing and then auditing the financial statements of companies is a near-universal practice in the case of private, unlisted entities. Similarly, conducting specific extra assignments on behalf of the client would not be unusual. However, these situations are not without ethical difficulties. In particular, the following threats arise:
| Threat | Discussion of threat in this case |
|---|---|
| Self-Interest threat | Probably not excessively severe in this case but both points of the question will, if they are accepted, mean that extra revenue will be received from the client and thus we will need to be aware of any consequent impairment of our independence. |
| Self-Review threat | In either of these cases we will inevitably (as a practice) be reviewing our own work and so there is a danger that we will not bring to bear on such a review the same degree of professional scepticism as we would in the case of the work of an outsider. In the case of the potential charge to royalties we may leave ourselves in the invidious position of feeling the need to insist on an accrual for a charge the existence or quantum of which we are, simultaneously, rigorously denying. |
| Familiarity threat | Doing a lot of work for the client and having very frequent contact with them could lead us to lose or dilute our professional scepticism in relation to the client. In simple terms, we might become too trusting of the client because we know them very well. The use of different teams for different assignments would be an important safeguard. |
| Advocacy threat | The assignment in point ii) of the question will, almost by definition, require us to “take the side of the client” and argue the client’s case. We are, therefore, advocating for the client and, for an auditor, that is fundamentally dangerous. The decision on whether to accept will depend on issues such as the materiality of the amounts potentially involved; the degree of disputatiousness likely to arise (in as much as that can be measured); and our ability, as a practice, to put safeguards in place. |
| Management threat | In the case of both points i) and ii) there is a danger that we, as auditors, will take decisions that should properly be made by the client. For example, decisions about accounting policies should be made by the client. In the second case, the decision on how far to pursue action against the Ghana Revenue Authority on the levies issue should purely be one for the client. The difficulty arises because, if we accept the assignment, we will be advising the client, but we must ensure that the client comes to their own decision. |
(5 points well explained @ 2 marks each = 10 marks)
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