Contents

Question one(a)...........................................................................................................................................1
Threats to auditor’s independent................................................................................................................1
Intimidation threat:.................................................................................................................................1
Advocacy threat.......................................................................................................................................2
Self-interest threat..................................................................................................................................2
Question one (b)..........................................................................................................................................2
The American accounting association model..............................................................................................2
Step one: establishing the facts of the case.............................................................................................2
Step two: is to identify the ethical issues in the case..............................................................................2
Step three: is an identification of the norms, principles, and values related to the case........................2
Step four: what are the alternative courses action?................................................................................3
Step five: What is the best course of action that is consistent with the norms, principles, and values
identified in Step 3?.................................................................................................................................3
Step six: the consequences of the outcomes;.........................................................................................3
Step seven: the decision is taken.............................................................................................................3

Question one(a)
Threats to auditor’s independent
The threats to auditor’s independence can be grouped into five self-interests, self-reviews, familiarity
threat advocacy threat and intimidations threat.

In relation to the trust entity the three threats to auditors are

Intimidation threat:
Intimidation threat arises when an auditor is deterred from performing his services by threats which
could be actual or perceived.

The director of finance indication that if the auditor does not accept it, they will ensure that the trust
appoints different auditors next year. The director of finance also threatens to tell the local newspaper
that your firm is determined to make the trust’s financial position look worse than it is. This amounts to
intimidation threat

Advocacy threat
This arises where the auditor promotes the position of the management. If the auditor accepts the
management position that the trust would break even for the year. The auditor supporting the
accounting adjustments in order to ensure that the trust would meet its financial responsibilities,
including the requirement to break even each and every year would also amount to advocacy.

Self-interest threat
This arises when an auditor has direct or indirect financial or other interest in the client entity. Where
the auditor has potential employment opportunities, like in the case of the trust where the auditor is
looking forward for audit for the following year, this is likely to create self-interest threat

Question one (b)

The American accounting association model
Using the American accounting association model of resolving the ethical dilemmas, the dilemma in the
case of trust could be resolved as follows

Step one: establishing the facts of the case.

The auditor has detected what he believes to be material misstatement in the financial statements
including

- Changing the accounting policy in respect of stock

- Capitalization of salaries to understate expenses and overstate assets/capital expenditure

- Failure to provide and recognize contingent liabilities arising out of partnership agreement with
the local authority

Step two: is to identify the ethical issues in the case

The ethical issues are the auditor promoting the position of the management that the accounts are
correct and the financial statement are not misstated. This would include allowing the director of
finance to change the accounting policy in respect of stock, capitalize the salaries, aand to conceal the
liabilities arising from partnership agreement with the local authority

Step three: is an identification of the norms, principles, and values related to the case
The norms, principles, and values are that auditors have an obligation to act with integrity and to assure
that the company is providing a ‘true and fair view’ of its financial situation at the time of the audit. The
should not be associated with misleading financial reports and statement. Auditors are entrusted with
the task of assuring a company’s financial accounts and anything that prevents this or interferes with an
auditor’s objectivity is a failure of the auditor’s duty to shareholders.

Step four: what are the alternative courses action?

Option one; the auditors should stick with their decision, that if the accounts are not amended the
auditor should qualify the audit opinion

Option two: accepts the director of finance position that his view of the accounts represents a legitimate
interpretation of accounting policy, to secure his position as the auditor of the trust in the coming years

Step five: What is the best course of action that is consistent with the norms, principles,
and values identified in Step 3?
The best course of action that is consistent with the norm principles and values is to qualify the auditor’s
report if the director of finance and the chief executive do not amend the financial statement to report
the correct position of the financial statement

Step six: the consequences of the outcomes;

Under option one: the auditor would lose this engagement and his future income. It would, however,
maintain and enhance the reputation and social standing of auditors, maintain public confidence in
audit, and serve the best interests of the shareholders.

Under the option two: the auditor will secure his future income and client. He would have to live in fear
knowing that he had taken a breached and would be in debt to the client, knowing that the client could
expose him at any time.

Step seven: the decision is taken

the ethical decision is Option 1. The auditor should request the C.E.O director of finance to revise he
financial statement and if they refuse, the auditor should qualify the auditor’s report