- 10 Marks
Question
a) Asumasi Opoku has recently been appointed as a partner of Offei-Ansah & Co, a firm of Chartered Accountants. He has been a close friend of the Engagement Partner (EP), the firm’s managing partner for many years. Asumasi was previously the training manager in the firm and he has now been asked to act as training partner. This is the first time Offei-Ansah & Co have designated a particular partner as having responsibility for training.
One of the audit trainees, Ellen Danso, noted that she was disturbed by something that had happened on an audit of a company called Bremang Ltd, a medium-sized family-run business and longstanding client of Offei-Ansah & Co.
Ellen was auditing purchases of non-current assets when she noticed a transaction that she thought might be suspicious. There was a charge of GH¢125,000 (an individually material amount) for a Power Plant for an address in a rural area (no electricity) with no obvious link to the company. When she asked Bremang’s financial controller about the matter, she was told it referred to the installation of such a plant in a house owned by the Chief Executive Officer (CEO). This was to facilitate excellent communications and interaction with the CEO especially during the last quarter of the year when he liked to reside there with his family. She further explained that part of the cost was attributed to having to pay for a personal broadband connection since the house was in an isolated area where normal broadband connections were unavailable.
The financial controller appeared surprised and even irritated by the queries about the matter and said that auditors had not previously been concerned about the company being charged for non-current assets and operational expenses at properties owned by the CEO.
The engagement partner on the assignment happened to be the managing partner. Ellen told him what she had found and the Engagement Partner simply said that the charge could probably be ignored. He did, however, say that he would include a reference to the matter in the written representations letter required by ISA 580: Written Representations adding with a smile that “paper never refused ink”. About two months later, Ellen looked at the completed files and the letter of representation in which there was no reference to the matter.
When Asumasi Opoku heard about Ellen’s concerns, he realised that there was an ethical issue. At the very least the transaction should have been disclosed as a related party transaction under IAS 24: Related Party Disclosures but the situation was made more complicated by the fact that the Engagement Partner was (for all practical purposes) still Asumasi’s boss in Offei-Ansah & Co.
Required:
i) Explain TWO (2) reasons why integrity in professional relationships such as those described in the above scenario is vital. (2 marks)
ii) Evaluate FOUR (4) ethical and professional behavior issues relating to the stance of the Engagement Partner. (8 marks)
Answer
i)
- Integrity provides assurance to colleagues of good intentions and truthfulness. It goes beyond any codes of professional behavior and describes a set of character traits that mean a person of integrity can be trusted. In this particular case, it means that the Engagement Partner (EP) is obliged to do his best for his clients, his fellow partners, and his staff. Conflicts will inevitably arise but they should be dealt with in an honest and straightforward way. From the above scenario, there is evidence of EP not acting in this way and “fobbing off” Ellen when she raises important issues with him.
- Time and energy spent in monitoring can be reduced when integrity and openness can be assumed (the opposite of an audit situation where professional skepticism should be exercised). The Engagement Partner is the managing partner, and if he cannot be trusted, this undermines the control environment in the audit firm.
ii)
- The first point to be noted about the EP’s behavior in this case is that it gives the impression of unprofessionalism and possibly, even, of corruption. GH¢125,000 is an individually material amount but notwithstanding the amount, the allocation of company funds on what could be little more than an expensive plaything for the CEO’s children is something that should be challenged.
- The EP’s failure to act on the information strongly suggests that he has failed in his duty to other users of Bremang’s financial statements such as lenders and even the taxation authorities. EP may not feel a duty of care towards, for example, Revenue, but financial statements should not be signed off unless they show a “true and fair view”. The risk of, for example, the practice being censured in some way by the Revenue may be low but that does not reduce the imperative to act with integrity.
- The EP promised Ellen that he would, at least, get a written representation on the matter – albeit he seemed to downplay the significance of this – but in the end, he apparently failed to do even that and again was dismissive of Sarah when she challenged him on the matter.
- The EP, therefore, gave the appearance of a lack of objectivity in his actions, possibly as a result of the threats to independence. This shows a lack of respect for Ellen’s professionalism and could lead her to develop a “why bother?” attitude if a similar issue arises in the future. Ellen will therefore possibly be led into a poor professional attitude herself or, alternatively, become disillusioned with the firm and seek alternative employment as soon as she can.
- The EP is complicit in a probable breach of IAS 24 on Related Party Transactions. There is a disclosure requirement of all related party transactions regardless of value, and concealment of this is both unprofessional and technically irregular. Lack of disclosure should have led to a qualified opinion on the basis of material misstatement in the audit report.
- Tags: Audit Practice, Ethics, Integrity, Professional Behavior
- Level: Level 3
- Uploader: Dotse