Question Tag: Ethical considerations

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  • 5 Marks

AA – July 2023 – L2 – Q2b – Professional and Ethical Considerations

Safeguards to be applied by an auditor in various relationships with clients.

b) What are the safeguards to be applied by an auditor in relation to the following?
i) Financial interest in the client.
ii) Loans and Guarantees to or from the client.
iii) Business relationship with the client.
iv) Family and personal relationship with the client.
v) Employment with an Assurance Client. (5 marks)

b) Safeguards to be applied by an auditor:
i) Financial interest in the client:

  • Disposing of the financial interest.
  • Reviewing the work of an audit team member by another professional accountant.
  • Removing the individual with the interest from the audit team.

ii) Loans and Guarantees to or from the client:

  • Any loan taken by audit team members from the client must be on normal terms. If not, the individual should be excluded from the audit.
  • If the audit firm has taken a loan from the client, the loan must be immaterial to both the firm and the client. If material, a third-party assurance provider should perform an external review of the audit.

iii) Business relationship with the client:

  • Removing the individual involved from the audit team.
  • Structuring audit team responsibilities so that the individual does not deal with matters within their responsibility.

iv) Family and personal relationship with the client:

  • The individual should be removed from the audit team or assigned to unrelated audit matters.
  • The audit team must ensure the individual’s actions do not impact financial statements directly.

v) Employment with an Assurance Client:

  • Modifying the audit plan.
  • Assigning individuals with sufficient experience to the audit team.
  • Reviewing the work of a former audit team member by another professional accountant.

 

4o
  • 10 Marks

AA – Nov 2023 – L2 – Q2b – Professional and Ethical Considerations, Audit and Assurance Risk Environment

This question discusses five key factors to consider before accepting an audit engagement.

Afrak and Associates is an Audit Firm that has been providing audit and assurance services for over 20 years. The firm has recently received a request from a new client, XYZ Ltd., to provide audit services. The audit engagement will cover the financial statements for the year ended December 31, 2022.

Required:
Explain FIVE (5) factors Afrak and Associates must consider prior to accepting the audit engagement, paying attention to, risk areas that may give rise to liability, including fraud, error, and non-compliance.
(10 marks)

Factors to Consider:

  • Understanding the Client’s Business and Industry: Before accepting the engagement, the audit firm must have a good understanding of the client’s business and industry. This includes understanding the nature of the client’s operations, the industry in which it operates, and the risks associated with the industry.
  • Assessment of Fraud Risk: The audit firm must assess the risk of fraud in the client’s financial statements. This includes considering the risk of management override of controls, the presence of related party transactions, and the adequacy of the client’s internal controls.
  • Assessment of Error Risk: The audit firm must assess the risk of errors in the client’s financial statements. This includes considering the complexity of the client’s accounting policies, the level of judgment required in accounting estimates, and the adequacy of the client’s internal controls.
  • Assessment of Non-Compliance Risk: The audit firm must assess the risk of non-compliance with laws and regulations that could result in material misstatements in the financial statements. This includes considering the adequacy of the client’s internal controls over compliance and the client’s history of compliance with relevant laws and regulations.
  • Resource Allocation: The audit firm must ensure that it has the necessary resources and expertise to perform the audit engagement effectively. This includes having staff with the appropriate skills and experience, as well as adequate time and budget to complete the engagement.
  • Compliance with Professional Standards: The audit firm must ensure that it complies with the relevant professional standards, including auditing and assurance standards, ethical standards, and legal requirements.

Conclusion: Based on the above factors, ABC Audit Firm has decided to accept the audit engagement with XYZ Ltd. The firm has conducted a thorough assessment of XYZ Ltd.’s financial position, industry, and management team. The firm has also assessed the risk of fraud, error, and non-compliance, and has ensured that it has the necessary resources and expertise to perform the engagement effectively. Finally, the firm will comply with professional standards and provide high-quality audit services in compliance with legal, professional, and ethical requirements.

  • 5 Marks

AA – Mar 2023 – L2 – Q2a – Professional and Ethical Considerations

Identify factors to consider before accepting a client for an audit engagement.

M&G Chartered Accountants has been presented with two potential clients. They have written to the firm to appoint them as their external auditors.

Required:
State FIVE (5) factors you will take into consideration before making this client acceptance decision.

Factors to consider before accepting a client include:

  • Statutory conditions: whether you are qualified under the provisions of the Company Act 2019 (Act 992) and not disqualified under any provision of the Act.
  • Ethical requirements: the appointment should not conflict with the ethical requirements of independence and objectivity.
  • Competence: the firm should have the necessary skills and knowledge to perform the audit engagement effectively.
  • Resources: the firm should have adequate resources to complete the audit within the stipulated time.
  • Reputational risks: assess whether accepting the client will bring reputational risks to the firm.
  • 10 Marks

CSEG – Nov 2015 – L2 – Q2b – Business ethics

Compare and contrast the stakeholder and shareholder approaches to corporate governance.

There is an ongoing debate about the relative merits of the stakeholder approach versus the shareholder approach to corporate governance.

Required:

Compare and contrast the stakeholder approach and the shareholder approach to corporate governance. (10 marks)

Stakeholder Approach:

  1. Broad Focus:
    • The stakeholder approach to corporate governance considers a wide range of parties interested in the company’s activities, including employees, customers, suppliers, creditors, the community, and the environment, in addition to shareholders. This approach recognizes that the company’s actions impact various groups and aims to balance their interests.
  2. Ethical Considerations:
    • This approach emphasizes ethical responsibility and sustainable business practices. It encourages companies to act in a socially responsible manner, taking into account the welfare of all stakeholders rather than focusing solely on profit maximization for shareholders.
  3. Long-Term Perspective:
    • By considering the interests of a broader group of stakeholders, companies adopting the stakeholder approach are more likely to focus on long-term sustainability rather than short-term financial gains. This can lead to better risk management and enhanced corporate reputation.
  4. Potential for Conflict:
    • One of the challenges of the stakeholder approach is the potential for conflict among different stakeholder groups. Balancing the competing interests of various stakeholders can be complex and may require difficult trade-offs, which can complicate decision-making processes.

Shareholder Approach:

  1. Primary Focus on Shareholders:
    • The shareholder approach, also known as shareholder primacy, asserts that the primary responsibility of corporate governance is to maximize shareholder wealth. This approach views shareholders as the primary owners of the company, and the board of directors is expected to make decisions that enhance shareholder value.
  2. Profit Maximization:
    • This approach prioritizes profit maximization and increasing the company’s share price. The success of the company is measured primarily by financial performance, and decisions are often driven by the goal of achieving higher returns for shareholders.
  3. Short-Term Gains:
    • The shareholder approach can sometimes lead to a focus on short-term gains, as management may prioritize immediate financial results over long-term strategic goals. This can result in decisions that may not be sustainable or that could harm other stakeholders in the long run.
  4. Simplicity and Clarity:
    • One advantage of the shareholder approach is its simplicity and clarity. By focusing on a single objective—maximizing shareholder value—corporate governance decisions are more straightforward and aligned with the expectations of investors.

Comparison and Contrast:

  • Focus: The stakeholder approach takes a broader view by considering the interests of all parties affected by the company’s operations, whereas the shareholder approach focuses primarily on the interests of shareholders.
  • Decision-Making: The stakeholder approach requires balancing competing interests, which can complicate decision-making, while the shareholder approach simplifies decision-making by prioritizing shareholder returns.
  • Ethics and Sustainability: The stakeholder approach is more aligned with ethical considerations and long-term sustainability, while the shareholder approach may prioritize short-term profits at the expense of other considerations.
  • Risk Management: The stakeholder approach can lead to better risk management by considering the impact on all stakeholders, whereas the shareholder approach may expose the company to risks associated with focusing solely on financial performance.

Conclusion:

Both approaches have their merits, and the choice between them depends on the company’s values, goals, and the environment in which it operates. While the shareholder approach is traditionally dominant in many corporate governance models, the stakeholder approach is gaining recognition for its potential to create more sustainable and ethical business practices.

  • 10 Marks

AAA – March 2023 – L3 – Q1b – Professional responsibility and liability, The audit approach

Discuss the ethical issues and other matters to consider before accepting Kita Ltd as a client.

You are a Senior manager in Bintu & Associates, a firm of Chartered Accountants which offers a range of assurance services. You are responsible for the audit of Mmatan Ltd, a company which provides approximately 10% of your firm’s practice income each year. The Finance Director of Mmatan Ltd has recently contacted you to provide information about another company, Kita Ltd, which is looking to appoint a provider of assurance services.

An extract from an email received from the Finance Director of Mmatan Ltd to you is stated below:

“One of my friends, Mr. Preprah, is the Managing Director of Kita Ltd, a small company which is seeking to expand in the next few years. I know that Mr. Preprah has approached the company’s bankers for GH¢6 million to finance the expansion. To support this loan application, Mr. Preprah will need to present its audited Financial Statements, hence the need for an Auditor immediately. Mr. Preprah is also in need of a firm to provide tax planning advice and also to prepare both the company’s and his personal tax computations for submission to the tax authorities. In this regard, I have asked Mr. Preprah to contact you, and I hope that Bintu & Associates will be able to provide these services to Kita Ltd for a low fee. If the fee you suggest is too high, and unacceptable to Mr. Preprah, then I will recommend that Mr. Preprah approaches Kwateng & Associates instead. Should the arrangement with Kita Ltd not go through, then Mmatan Ltd would also advise itself.”

Kwateng & Associates is a firm of Chartered Accountants which has an office in the same town as Bintu & Associates. The company is owner-managed, with Mr. Preprah’s family owning 90% of the share capital. Mr. Preprah is a director and majority shareholder of three other companies. An article in a newspaper from several years ago about Mr. Preprah indicated that one of his companies was once fined for a breach of employment law and that he had used money from one of the company’s pension funds to set up a business abroad, appointing his son as the Managing Director of that business.

Required:
Discuss the ethical issues and other matters which should be considered in relation to Bintu & Associates’s potential acceptance of Kita Ltd as its client. (10 marks)

Ethical and other matters to be considered before accepting Kita Ltd as a client of the firm:

  1. Competence and Resources:
    • Bintu & Associates must assess whether it has the competence to perform the engagement, which involves the audit of historical financial statements and providing tax planning advice.
    • The pressure to perform the audit for a low fee may impact the firm’s ability to perform a high-quality audit, potentially affecting the resources allocated to the engagement.
  2. Ethical Issues:
    • Intimidation Threat: Mmatan Ltd is pressuring Bintu & Associates by suggesting that if the firm does not accept the engagement for Kita Ltd at a low fee, Mmatan Ltd may seek another audit firm. This presents an intimidation threat as Mmatan Ltd contributes 10% of the firm’s income.
    • Self-interest Threat: Accepting Kita Ltd as a client may also create a self-interest threat as the firm has a financial incentive to maintain a good relationship with Mmatan Ltd.
    • Self-review Threat: Providing both audit and tax planning services to Kita Ltd may create a self-review threat, as Bintu & Associates could be involved in preparing the financial figures that are later audited.
  3. Client Integrity:
    • Reputation and Past Conduct: The integrity of Mr. Preprah, the Managing Director of Kita Ltd, should be carefully evaluated. Past incidents, such as a breach of employment law and the misuse of pension funds, raise concerns about the ethical standing of the client.
    • Legal and Ethical Compliance: There are concerns regarding Mr. Preprah’s previous business practices, which could indicate potential ethical issues or even illegal activities. These concerns must be thoroughly investigated before deciding to accept Kita Ltd as a client.

  4. Safeguards:

    • If Bintu & Associates decides to accept Kita Ltd as a client, safeguards should be implemented to address the identified ethical threats, such as using separate teams for audit and tax services or having an independent second partner review the work performed.
    • If adequate safeguards cannot be implemented to reduce the threats to an acceptable level, Bintu & Associates should consider declining the engagement. (10 marks)
  • 5 Marks

AAA – May 2019 – L3 – Q2b Practice Management, Rules of Professional Conduct

Recommend safeguards necessary to eliminate or reduce threats associated with accepting new engagements.

A Chartered Accountant in practice should agree to provide only those services that they are competent to perform. Before accepting a specific client engagement, they should consider whether acceptance would create any threats to compliance with the fundamental principles. A Chartered Accountant in practice should evaluate the significance of identified threats associated with an engagement; if they are other than clearly insignificant, safeguards should be applied as necessary to eliminate them or reduce them to an acceptable level.

Required:

Recommend FIVE (5) safeguards necessary to eliminate or reduce threats associated with accepting new engagements.

(5 marks)

Safeguards necessary to eliminate or reduce threats associated with accepting new engagements may include:

  1. Acquiring an appropriate understanding of the nature of the client’s business:
    Understanding the complexity of its operations, specific requirements of the engagement, and the purpose, nature, and scope of the work to be performed.
  2. Acquiring knowledge of relevant industries or subject matters:
    This ensures that the accountant has the necessary expertise to handle the specific needs of the client.
  3. Possessing or obtaining experience with relevant regulatory or reporting requirements:
    Ensuring familiarity with all the necessary regulations and reporting standards applicable to the client.
  4. Assigning sufficient staff with the necessary competencies:
    Ensuring that the engagement team has the appropriate skills and experience to carry out the work effectively.
  5. Using experts where necessary:
    Engaging specialists or experts to provide additional knowledge and support where the accountant’s own expertise may be lacking.
  6. Agreeing on a realistic time frame for the performance of the engagement:
    Ensuring that there is adequate time to perform the engagement thoroughly without compromising quality.
  7. Complying with quality control policies and procedures:
    Implementing policies and procedures designed to provide reasonable assurance that specific engagements are accepted only when they can be performed competently.

(5 points for 5 marks)

  • 10 Marks

AAA – May 2018 – L3 – Q2b – Practice management, Professional responsibility and liability

Discusses quality control standards for audit firms and the importance of procedures before accepting audit appointments.

i) The quality control standard for firms, ISQC 1: Quality control for firms that perform audits and reviews of financial statements and other assurance services engagements sets out standards and guidance that helps firms to comply with ethical, professional and legal requirements in the performance of audit and other professional assignments for the public.
Required:
At the firm level, recommend the elements that should be included in an audit firm’s system of Quality Control. (5 marks)

ii) You are a partner in Nii and Nana Associates, a firm of Chartered Accountants. You have just been nominated for the audit of Wine and Dine Ltd., a catering company in the twin-city. The company and its officers are not known to the firm. The company has just been incorporated and has not previously had an audit. You are about ready to accept the nomination.
Required:
Discuss why it is important for auditors to carry out procedures before accepting nomination for appointments. (5 marks)

The elements that should be included in an audit firm’s system of quality control at firm level as required by ISQC1 are as follows:

  • Firm and leadership responsibilities for quality within the firm:
    Personnel within the firm responsible for establishing and maintaining the firm’s system of quality control shall have an understanding of the entire text of the ISQC, including the application and other explanatory material, to understand its objectives and to apply the requirements properly. Firms are required to ensure that appropriate training is provided to ensure there is complete understanding of the objectives and procedures under ISQC1.
  • Human Resources:
    The firm’s overriding desire for quality will necessitate policies and procedures on ensuring excellence in its staff, to provide the firm with reasonable assurance that it has sufficient personnel with capabilities, competence, and commitment to ethical principles to perform engagements in accordance with professional standards and regulatory and legal requirements, and to enable the firm or engagement partners to issue reports that are appropriate in the circumstances.
  • Assignment of Engagement teams:
    The assignment of engagement teams is an important matter in ensuring the quality of individual assignments. This responsibility is given to the engagement partner.
  • Engagement Performance:
    The firm should take steps to ensure that engagements are performed correctly, that is, in accordance with standards and guidance. Firms often produce a manual of standard engagement procedures to give to staff so that they know the standards they are working towards. Ensuring good engagement performance involves:

    • Direction
    • Supervision
    • Review
    • Consultation
    • Resolution of disputes.
  • Monitoring:
    The standard states that firms should have policies in place to ensure that their quality control procedures are relevant, adequate, operating effectively, and complied with. In other words, they must monitor their system of quality control. Monitoring activity should be reported to the management of the firm on an annual basis for corrective action to be taken.

(5 points for 5 marks)

ii) The code of ethics for professional accountants requires that professional accountants or auditors accept only engagements which they are competent and capable of performing. In addition, they must ensure that they comply with the relevant statutory and legal requirements. It is therefore necessary for them to carry out procedures and consider the following factors:

  • They must consider whether they are professionally and legally qualified to accept the engagement.
  • They must consider whether there are any ethical issues that may confront them if they accept the nomination. Example: threats to the objectivity and independence.
  • They must consider whether they have the time and resources, including expert knowledge and skills, to serve the client.
  • They must consider whether they have been properly nominated and any outgoing auditor has properly parted with his client.
  • They must also fulfill the professional etiquette requirement of communication with the outgoing auditor, if any, as a sign of courtesy and to require information as to whether there are professional reasons for not accepting the nomination.
  • The procedures should also enable the auditors to determine whether the prospective client has integrity and falls within the risk appetite of the firm.
  • Therefore, on the whole, the procedures are carried out to enable the auditor to make an informed decision whether to accept or reject the nomination.

(Any 5 points for 5 marks)

  • 20 Marks

AAA – Nov 2015 – L3 – Q3 – Assurance services

This question addresses the considerations before accepting an engagement to review prospective financial information and the reporting requirements thereafter.

You are a manager in BS Cipax, a medium-sized firm which offers a range of services to audit and non-audit clients. You have been asked to consider a potential engagement to review and provide a report on the prospective financial information of Filtane Limited, a company which has been an audit client of BS Cipax for six years. The audit of the financial statements for the year ended 31 August 2015 has been completed and your firm issued an unmodified report. Filtane Limited operates a chain of fashion stores across the country.

Currently its merchandise are out of date and it sells clothing which do not reflect the latest and in mode fashion labels which are becoming more popular especially with the youth. Management is planning to revamp its image and stock the latest fashion in Africa and across the other continents. It also intends to invest in the latest technologies to include online real time trading on the internet order to attract more customers, especially the up-and-coming youth, trendy middle-aged persons and even those far from its shops by attracting them to shop over the internet. The company has sufficient cash to fund half of the necessary capital expenditure, and has approached its bank, Boafo Bank Limited, with a loan application of GHS32 million for the remainder of the funds required. Most of the cash will be used to invest in acquiring inventory and the technology for ensuring secure and safe online trading. The remaining cash will be used for refurbishment of the shops. Management had informed the Audit team, in the invitation to start the audit, of its intention to use the audited financial statements as the basis for preparing the prospective financial information to be used to seek for the loan from Boafo Bank Limited. The draft forecast statements of profit or loss for the years ending 31 August 2016 and 2017 are shown below, along with the key assumptions which have been used in their preparation. The audited statement of profit or loss for the year ended 31 August 2015 is also shown below.

The forecast has been prepared for use by the bank in making its lending decision, and was to be accompanied by other prospective financial information including a forecast statement of cash flows. Note 1: The forecast increase in revenue is based on the following assumptions:
(i) All shops will be stocked with new modern and in mode fashion to attract new customers to the shops and many persons who don’t live in the vicinity of the shops will also be attracted through online shopping by December, 2015.
(ii) Prices will increase by an average of 25% in December 2015.
Note 2: Operating expenses include mainly staff costs, depreciation of property and fittings, and repairs and maintenance to the shop fittings and equipment as well as ensuring continuous safe and secure on-line shopping.

Required:

a) i) Explain the matters to be considered by BS Cipax before accepting the engagement to review and report on the prospective financial information of Filtane Limited. (5 marks)

ii) Assuming the engagement is accepted, and the results of the examination procedures show that the prospective financial information have been prepared in accordance with the assumptions and appear reasonable, discuss the issues that will be in the report your firm will issue in respect of the forecast statement of profit or loss. (8 marks)

b) Boafo Bank Limited gave the loan to Filtane Limited on 15 October 2015, and a review of the first six months of operation in May 2016 of the new shops revealed that the company was not doing well and could not pay the first installment for the loan from Boafo Bank Limited. Further investigation revealed that the audited financial statements signed by BS Cipax, which showed a profit of GHS20.2M, should have been of a loss of GHS4.3M.

Boafo Bank Limited has indicated its intention to sue your firm for negligence on the basis that it placed reliance on the financial statements audited by your firm.

Required:

Comment on the matters that you should consider in deciding whether your firm will contest the matter in court or seek an out-of-court settlement with the bank. (7 marks)

i) Before accepting the engagement to review the company’s prospective financial information, there are several matters to be considered. A significant matter is whether it is ethically acceptable to perform the review. The review would constitute a non-assurance service provided to an audited entity, and IESBA’s Code of Ethics for Professional Accountants states that this may create self-interest, self-review, and advocacy threats to independence. In this case, the advocacy threat may be deemed particularly significant as BS Cipax could be perceived as promoting the client’s position to the bank. The review engagement should only be provided if safeguards can be used to reduce the threat to an acceptable level, which may include:

  • Having a professional accountant who was not involved with the non-assurance service review the non-assurance work performed or otherwise advise as necessary.
  • Discussing ethical issues with those charged with governance of the client.
  • Using separate teams to work on the audit and on the review engagement.

As well as ethical matters, ISAE 3400 “The Examination of Prospective Information” requires that certain matters are considered before a review engagement is accepted. The firm must also consider the specific terms of the engagement. For example, the firm will need to clarify whether the bank has requested a review report to be issued, and what exact information will be included in the application to the bank. It is likely that more than just a forecast statement of profit or loss is required, for example, a forecast statement of cash flows and accompanying narrative, including key assumptions, is likely to be required for a lending decision to be made.

ISAE 3400 also requires that consideration should be given to the intended use of the information and whether it is for general or limited distribution. It seems in this case the review engagement and its report will be used solely in connection with raising bank finance, but this should be confirmed before accepting the engagement.

The period covered by the prospective financial information and the key assumptions used should also be considered. ISAE 3400 states that the auditor should not accept an engagement when the assumptions used are clearly unrealistic or when the auditor believes that the prospective financial information will be inappropriate for its intended use. For example, the assumption that the necessary capital expenditure can take place by September 2014 may be overly optimistic.

The firm should also consider whether there are staff available with appropriate skills and experience to perform the review engagement and the deadline by which the work needs to be completed. If the work on the shops is scheduled to be completed by September 2014, presumably the cash will have to be provided very soon, meaning a tight deadline for the review engagement to be performed. (5 marks)

ii) The report by an auditor on an examination of prospective financial information should contain the following:

  • Title;
  • Addressee;
  • Identification of the prospective financial information;
  • A reference to the ISAE or relevant national standards or practices applicable to the examination of prospective financial information;
  • A statement that management is responsible for the prospective financial information, including the assumptions on which it is based;
  • When applicable, a reference to the purpose and/or restricted distribution of the prospective financial information;
  • A statement of negative assurance as to whether the assumptions provide a reasonable basis for the prospective financial information;
  • An opinion as to whether the prospective financial information is properly prepared on the basis of the assumptions and is presented in accordance with the relevant financial reporting framework;
  • Appropriate caveats concerning the achievability of the results indicated by the prospective financial information;
  • Date of the report, which should be the date procedures have been completed;
  • Auditor’s address; and
  • Signature.

Such a report would:

  • State whether, based on the examination of the evidence supporting the assumptions, anything has come to the auditor’s attention which causes the auditor to believe that the assumptions do not provide a reasonable basis for the forecast. E.g.:
    • Based on our examination of the evidence supporting the assumptions, nothing has come to our attention which causes us to believe that these assumptions do not provide a reasonable basis for the forecast.
  • Express an opinion as to whether the prospective financial information is properly prepared on the basis of the assumptions and is presented in accordance with the relevant financial reporting framework. E.g.:
    • Further, in our opinion, the forecast is properly prepared on the basis of the assumptions and is presented in accordance with International Financial Reporting Standards (IFRS).
  • State that actual results are likely to be different from the prospective financial information since anticipated events frequently do not occur as expected, and the variation could be material. (8 marks)

An injured party must prove ALL of the following three things in order to succeed in a claim for financial loss against an auditor for negligence:

  • That the auditor owes a duty of care;
  • That the duty of care has been breached;
  • That financial loss has been suffered that was caused by the negligence.

 

bi) Looking at the strict interpretation of the first requirement, the auditor owes a duty of care only to the shareholders as a body and not to Boafo Bank Limited as an outsider. The courts, however, have accepted that if the Auditor, at the time of signing the report, knew that someone other than the shareholders as a body would rely on the report, then the duty of care extends to that person. The facts of this case show that at the time the auditor signed the Audit Report, he was aware that it was Financial Statements going to form the basis for preparing the projected financial information to be used to seek the bank facility from Boafo Bank Limited. This means it is probable that a court will rule that requirement 1 above has been proved. (2 marks)

ii) A breach of duty of care must be proved for a negligence claim against the audit firm to be successful. Duty of care generally means that the audit firm must perform the audit work to the required standard and that relevant legal and professional requirements and principles have been followed. For an audit firm, it is important to be able to demonstrate that ISAs have been adhered to. There is no evidence in the facts as given to enable us to reach the conclusion that the duty of care has been breached or not. Looking at the fact that a loss of GHS4.3M was stated as a profit of GHS20.2M, a difference of GHS24.5M, if this error in the Income Statement is confirmed, it is likely to be interpreted by a court to mean that the auditor did not perform the duties expected of him/her with all the skill, care, and caution which a reasonably competent, careful, and cautious auditor would use. What is reasonable skill, care, and caution will depend on the particular circumstances of each case. In this case, however, an error is material by all standards and will be proof that the auditor has acted negligently unless he can prove that the circumstance that caused this material error was beyond his/her control. Requirement 2 appears to be likely to be proved. (2 marks)

iii) Requirement 3 is easy to prove since the loan was given on the basis of the projected financial information based on the audited financial statements, it is likely that a court will not need any serious persuasion to agree with the Bank that its financial loss was caused by the negligence of the auditor. From this discussion, the Auditors must seek an out-of-court settlement to avoid the bad publicity and likely litigation costs since it is probable that they would be found to be professionally liable to the Bank and the Bank is likely to succeed in the court. (1 mark)

Total: 7 marks

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