Biasura, Jhazreel Mae N.

BSA 3A
Principles of Auditing and Assurance Services

1. The situation between Lakers Company and BSA & Associates is under the discussion on
audit clients that are public interest entities.

Paragraph 290.154 states that in case an audit client becomes a public interest entity, with
regards in determining the rotation time, emphasis and consideration is given to the length of
time the individual has served the audit client as a key audit partner before the client becomes a
public interest entity. Assessing this situation, there is no violation yet, as base from the code, if
the individual has served the audit client as a key audit partner for five years or less when the
client becomes a public interest entity, the number of years the individual may continue to serve
the client in that capacity before rotating off the engagement is seven years less the number of
years already served. In the given situation, BSA & Associates has been serving Lakers
Company for 5 years. With that, there are 2 years left to continue serve the client.

The ratio behind this ruling is the fact that a partner's longstanding relationship with audit clients
that are public interest firms creates threats in familiarity and self interest.

2. What happened to Miami Company and BSA & Associates is an example of a situation about
employment with audit client which is closely related to paragraph 290.135. Having Ms. Palma
as the temporary controller of the audit client is like having a dual employment relationship
which makes it improper. Another applicable provision is found in paragraph 290.142 as there is
a lending of staff by the firm to the audit client.

In the situation between Miami and BSA & Associates, Ms. Palma was a former member of the
audit team. She was replaced by Mr. Santos due to her temporary assignment as a controller in
Miami Company. According to the rule, the threat that may arise in this kind of situation would
be so significant that no safeguards could reduce the threat to an acceptable Level. The former
member of the Audit Team which is Ms. Palma, an audit senior, has joined the audit client in a
temporary position which means that a significant connection remains between the firm and the
former audit senior. With that, independence and objective approach would be deemed to be
compromised if the former member joins the Audit Client in a position to exert significant
influence over the preparation of the client‘s accounting records or the Financial Statements on
which the Firm will express an opinion.

3. The situation is a violation of the contingent fees rule. Under the paragraph 290.213, a
contingent fee is calculated on a predetermined basis related to the outcome or result of a
transaction or the result of the work performed. It is clear in the given facts that there is an
additional fee of P50,000 to BSA & Associates if the given task by Boston Corp. to reduce the
income tax payable by atleast 30% is successful.

There is emphasis in the code that a firm should not enter into a contingent fee arrangement in
respect of an audit or other assurance engagement since this creates unacceptable self-interest
and advocacy threats. The risk is because of the fact that one does not get paid unless the
result is favorable.

In order to avoid any appearance of contingency, the basis for the calculation of the audit fees
must be agreed each year in advance. This should include scope for variation so as to take
account of unexpected factors in the work. Topping it all, one must perform services with
integrity and due care to sustain professional competence in all functions in which the member
practices.

4. We cannot deny the fact that there are really times that an accountant may receive gifts. The
accountant must first assess the gift as it could violate the independence of an professional
accountant.

Base from section 260 which is about gifts and hospitality, acceptance of gifts may create
threats. Unless the value is insignificant, the resulting threat will be significant that no
preventive action can reduce the threat to an acceptable level. The provision makes it clear that
maintaining your independence or objectivity is essential to acting in accordance with your
professional duties.

For the given situation, no violation yet is committed. The employees may have accepted snack
and movie tickets but these were all considered as trivial and inconsequential. With regards to
the laptop, it is not yet accepted so it is safe to say that there was no violation yet. In this case,
refusing the gift is the best ethical stand. We cannot deny that there are even times that the gifts
were actually meant for inducement. Therefore, it is really harmful to accept such. Also, it is
expressly stated that the company has a policy of not accepting gifts. When there are
circumstances when one is unsure on whether to accept a gift, one should first consult firm’s
policy and professional standards as it’s far better to act with caution than to later have integrity
called into question.