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- 10 Marks
Question
You are the Audit Manager at Ndaa & Associates whose client portfolio includes ABC Credit Plc, a listed financial institution offering loans and credit facilities to both commercial and retail customers. You have received an email from the Audit Supervisor who is currently supervising interim testing on systems and controls in relation to the audit of ABC Credit Plc for the year ending 31 October 2022. The email gives the following details for your consideration:
- One of the audit team members, Obiba JK, has provisionally agreed to apply for a loan from ABC Credit Plc to finance the purchase of a domestic residence. The loan will be secured on a property, and the client’s business manager has promised Obiba JK that he will ensure that she gets ‘the very best deal which the bank can offer.’ (5 marks)
- The payroll manager at ABC Credit Plc has asked the audit supervisor if it would be possible for Ndaa & Associates to provide a member of staff on secondment to work in the payroll department. The payroll manager has struggled to recruit a new supervisor for the organisation’s main payroll system and wants to assign a qualified member of the audit firm’s staff for an initial period of six months. (5 marks)
Required:
Assess the ethical and professional implications of the issues raised in respect of the audit of ABC Credit Plc and recommend actions to be taken in each case by the audit firm.
Answer
- Loan to Member of the Audit Team:
According to the IESBA Code of Ethics for Professional Accountants (the Code), a loan to a member of the audit team may create a threat to the auditor’s independence. If the loan is not made under normal lending procedures, terms, and conditions, a self-interest threat arises due to Obiba JK’s financial interest in the audit client. This threat could lead to a significant risk where the auditor might not act objectively.
The key issue is whether the loan is offered under the bank’s normal lending procedures and terms. The bank’s standard lending terms should be obtained and reviewed alongside the documentation for Obiba JK’s loan. The audit engagement partner should ensure ethical principles are not breached by involving in the discussions and decision-making process.
If the loan terms deviate from standard procedures, the audit team member should decline the loan to maintain independence. Discussions should occur with JK and the client’s business manager to establish whether the loan follows normal procedures, and the outcome should be communicated to both parties.
Actions to be taken:
- Review the bank’s standard lending procedures.
- Discuss the matter with JK and the business manager.
- Ensure adherence to ethical guidelines by declining the loan if terms are not standard.
- Temporary Staff Assignment:
The Code states that lending staff to an audit client may create a self-review threat to auditor independence. If the audit firm’s staff is involved in the preparation of payroll figures that will be included in the financial statements, there is a risk of insufficient objectivity when auditing those figures. Additionally, assuming management responsibilities during the secondment is prohibited.
Given that ABC Credit Plc is a listed bank, and therefore a public interest entity, assigning a staff member as a payroll supervisor would likely be material to the financial statements and might involve management responsibilities. The audit manager should discuss the proposed role with the payroll manager and assess its significance and materiality.
Actions to be taken:
- Discuss the details of the proposed role with the payroll manager.
- Decline the assignment if the role is material and involves management responsibilities, to avoid self-review and management threats.
- Tags: Auditor Independence, Ethics, Loan Arrangements, Professional Conduct, Staff Assignments
- Level: Level 3
- Uploader: Joseph