Auditing Assurance Principles

Code of Ethics Caselets

CASE 5

The accounting firm involved in this case wants to know if their

independence will be questioned by the BOA. You have been asked to submit an
analysis and conclusion.

Concepcion Esperanza Orozco & Co., (CEO & Co.) loaned a senior
accountant to its audit client, United Furniture, Inc., for a six-week period ended June 15,
2013. United had converted its accounting system from manual to computerized
processing as of January 1, 2013, and had experienced great difficulty. The senior
accountant reviewed and analyzed the records and helped the new controller correct the
accounts as of March 31, 2013, and to get the computer processing straightened out. The
work involved collecting and summarizing data into machine-usable form and did not
involve any managerial decisions about the manner of classifying or recording
transactions. No one from CEO & Co.. was involved in the company’s accounting and
bookkeeping after June 15., and the firm does not intend to provide such services to
United in the future. The question of independence relate to the audit for the year ended
December 31, 2013.

In this case Concepcion Esperanza Orozco & Co., (CEO & Co.) was not
involved in the company’s accounting and bookkeeping after the engagement period and
does not have an intention to provide services to United Furniture in the future. Since
Concepcion Esperanza Orozco & Co., (CEO & Co.) has complied with the provision and
there are no threats to independence are created therefore the independence of
Concepcion Esperanza Orozco & Co., (CEO & Co.) will not be questioned by the BOA.

Under Section 400.5 independence is linked to the principles of objectivity and integrity.
(a) Independence of mind - the state of mind that permits the expression of a conclusion
without being affected by influence that compromise professional judgement, thereby
allowing an individual to act with integrity, and exercise objectivity and professional
skepticism.
CASE 9

The accounting firm of Lopez & Parilla, CPAs, is negotiating a fee with a
new audit client. They agree the client will pay P 75,000 if Lopez & Parilla issues a
clean, unqualified opinion, P 50,000 if a qualified opinion is issued, P 40,000 if an
adverse opinion is issued, and P 10,000 if a disclaimer of opinion is issued. Violation of
Code of Ethics? Yes or No? Explain.

The accounting firm of Lopez & Parilla, CPA violates the fundamental
principles by selling and depending their professional skills to the amount that the client
can reach. In this case there is a contingent fee agreement created and is prohibited under
Section 410. Contingent fee arrangement is not precluded when providing a non-
assurance service to an audit client, a self-interest threat might still be created and the
actions that might be safeguards to address such a self-interest threat like, obtaining an
advance agreement with the client on the basis of remuneration.. Since the accounting
firm of Lopez & Parilla represents that specific services will be performed for a stated
fee, there is a Violation of Code of Ethics.

Under Section 110.1 A1 (e) Professional Behavior – to comply with relevant laws and
regulations and avoid any conduct that the professional accountant knows or should
know might discredit the profession.
Section R110.2 a professional accountant shall comply with each of the
fundamental principles.
Section R410.10 a firm shall not charge directly or indirectly a contingent fee for
an audit engagement.
Section R410.11 a firm or network firm shall not charge directly or indirectly a
contingent fee for a non-assurance service provided to an audit client, if: (a) The fee is
charged by the firm expressing the opinion on the financial statements and the fee is
material or expected to be material to that firm.
Section 410.12 A1 Paragraphs R410.10 and R410.11 preclude a firm or a
network firm from entering into certain contingent fee arrangements with an audit client.
Even if a contingent fee arrangement is not precluded when providing a non-assurance
service to an audit client, a self-interest threat might still be created.