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- 10 Marks
Question
Your firm, Osei and Associates, has been appointed as the auditors of Dadeka Limited for the first time to perform the audit of the company for the year ended 31 December 2015. The company is in the agro-processing industry, and it sells most of its products to overseas customers. The following are two issues:
i) Tax consultancy services:
The directors appointed a tax consultant to perform certain corporate taxation services for the tax year ended 31 December 2014. On the start of the audit of the financial statements for the year ended 31 December 2015, and a review of the Income tax paid, your firm discovered that the Company did not take advantage of the special tax rate of 8% available for companies in the “export of Non-Traditional goods” in section 1.2(1) of the then Internal Revenue Act 2000 (Act 592). On discussion of this with management of the company, your firm accepted an engagement to act on behalf of the company to negotiate with Ghana Revenue Authority (GRA) and re-open the tax assessment for 2014 and submit a new Tax Assessment. One of the provisions in the engagement letter was that your firm would be paid a fee of 20% of any tax savings the company enjoys as a result of the engagement.
ii) Suspected Illegal Act:
During the observation of the inventory count at the company’s warehouse on 31 December 2015, the representative of your firm discovered that certain items on the premises were sealed and had inscriptions “Do not tamper with seal,” and these were not counted as part of the company’s inventory. On enquiry, the staff member was advised to ‘pretend she has not seen that’. It is suspected that the items contain either illegal drugs or ammunitions. This cannot be confirmed.
Required:
Identify and discuss the ethical and other professional issues raised by items (i) and (ii) above, and recommend what action, if any, your firm should take.
Answer
i) Tax Consultancy Services
- The ethical issues here are that the Auditor has to report to the management of the company about the unsatisfactory service provided by another professional, who may also be a member of the Institute of Chartered Accountants – Ghana (ICAG).
- The Code of Ethics for Professional Accountants does not prohibit this but cautions that the other professional accountant involved (if he/she can be identified) must be contacted with the permission of the mutual client and be told of the need to discuss the issue with the client, due to, in this case, the financial implications to the client.
- This will ensure that the other professional accountant (if indeed he/she is a member of ICAG) will not think that we are deliberately destroying his reputation since this will also put our profession in general into disrepute and must be done only if absolutely essential, as in this case, the amount involved could be substantial.
- The second ethical issue is that the auditor is accepting an engagement to provide a professional service on the basis of a contingent fee. The code does not frown on this except if the engagement is an assurance one in which the auditor is required to give an opinion for management to rely on. This is a tax consulting assignment and as such, the professional accountant can accept it on a contingent fee basis.
- The professional accountant needs to be aware of two issues in this case:
- Accepting this engagement (and on a contingent fee basis) so early in your relationship with the new audit client could compromise the independence of the auditor.
- The auditor, if new in practice, would need to be cautious as this fee in addition to the normal audit fee, could take him/her beyond the 15% threshold for fees from one client as this could lead to an intimidation threat.
ii) Suspected Illegal Act
- The ethical issue here is that it appears that a crime is suspected but the professional accountant has no evidence to confirm the suspicion. Therefore, the need to override the confidentiality requirement due to public interest is a consideration. Any of the suspected cases—storing of illegal narcotic drugs or storing of ammunitions—are both issues of public and national security interest.
- The code of ethics requires that under such circumstances, the professional accountant would need to seek legal advice as well as professional advice from the technical department of ICAG but not disclose the identity of the client to any person consulted.
- Topic: Practice management, Professional responsibility and liability
- Series: MAY 2017
- Uploader: Joseph