SEMINAR.

ETHICS 1

Question 1
Listen to the video and answer the questions.
a. Explain the conflict of interest the MAC employee is facing? What is her ethical choice?
b. What conflict of interest doctors face?
c. What conflict of interest face the editor in the video?
d. What conflict of interest face professors in university?
e. What solutions do video participants offer?

Question 2
Match title of a fundamental principle with its definition.
A Integrity A Do not use the information for the personal advantage of
the professional accountant or third parties.
B Objectivity B To not allow bias, conflict of interest
C Professional competence and due C Straightforward and honest in all professional and
care business relationships
D Confidentiality D To comply with relevant laws and regulations
E Professional behavior E To maintain professional knowledge and skill at the
required level

 Integrity: Straightforward and honest in all professional and business relationships

 Objectivity: To not allow bias, conflict of interest
 Professional competence and due care: To maintain professional knowledge and skill at the
required level
 Confidentiality: Do not use the information for the personal advantage of the professional
accountant or third parties.
 Professional behavior: To comply with relevant laws and regulations

Question 3
Think of two types of possible conflicts of interest when possessing or using a client’s confidential
information?
 Use or disclosure of confidences and secrets of one client for the benefit of another
 Conflict created by possession of information from another client
Question 5
Describe three areas, when preparing financial statements, that the accountant could be considered to
have made a management decision.

 Investing Decisions: The accounting data reported on a company's financial statements, such
as the balance sheet, income statement, and cash flow statement, is crucial to fundamental
analysis. Investors and auditor use the information from financial statements to make
decisions about the valuation and creditworthiness of a company, allowing them to set price
targets and assess whether a stock's price is reasonably valued or not.
 Lending Decisions: Creditors, from banks to bondholders, rely on financial accounting.
Lenders can obtain a better understanding of a company's creditworthiness by looking at its
financial statements, which include all of its assets as well as short- and long-term debt.
 Corporate Governance: Accounting that is accurate serves a practical purpose not just for
outside investors and lenders, but also for the internal operations of businesses. The most
obvious benefit of referring to financial accounting for businesses is that it helps them
achieve their legal and regulatory requirements as (public) companies. Companies must be
open and honest about their financial activities, and the information provided must be
accurate and updated on a regular basis.
 SEMINAR. ETHICS 2

Question 6
You are a manager in the audit department of “Forever audit” (FA). A potential new client, LLC Wheels and
Wagons (WAW), a haulage company, has approached your firm to do the statutory audit in addition to some
other non-audit services for the financial year ended 31 December 2018. Your audit firm was recommended
to WAW by an existing client, O&GO, a shipping company who is also a major customer of WAW.
You have been chosen to lead the assignment as you have experience of auditing haulage companies and you
also manage the audit of O&GO. Whilst arranging the initial meeting with the directors of WAW you
discover that you studied accountancy with the finance director at university.
During the meeting, you establish that WAW has not made a profit for the last 2 years. The directors explain
that this is largely due to escalating costs in the industry including fuel price rises. They are confident they
have now controlled their costs for the current year to 31 December 2018. They have also been approached to
tender for a large profitable contract which would improve their financial performance going forward. They
would like you to assist them with the preparation of this tender and present with them on the day.
The current year’s financial statements and audit are being finalised with another audit firm. The finance
director tells you that the current auditors have identified material misstatements but the board of directors
are refusing to make these adjustments. If adjusted, it would turn the break even position into a loss. The
finance director told you this information informally whilst catching up on old times at the local pub.
The current auditors have replied to your professional clearance letter and have informed you that they are
still owed fees relating to the year ended 31 December 2017. This is under dispute with the client. Once back
from the meeting you calculate that the potential fees from WAW would amount to about 14% of your firm's
total fee income.
Required:
Identify and explain the threats to independence if FA accept WAW as a new audit client. For each
threat, recommend how the threat can be managed.

Question 7
A waste disposal company has breached tax regulations, environmental regulations and health and safety
regulations. The auditor has been approached by the tax authorities, the government body supervising the
award of licences to such companies and a trade union representative. All of them have asked the auditor to
provide them with information about the company. The auditor has also been approached by the police. They
are investigating a suspected fraud perpetrated by the managing director of the company and they wish to ask
the auditor certain questions about him.
Required:
Describe how the auditor should respond to these types of request.

 Various bodies frequently ask auditors for information “informally” since it relieves them of the burden
of obtaining the requisite legislative authorities, which can be time-consuming or complex.
 Auditors must not divulge information without the client's approval or unless the person(s) requesting
the information produce the relevant statutory paperwork.
 Unless the auditor has reason to believe that there is a legal obligation not to inform the client, the client
should be addressed first to determine whether consent can be gained and if the client is aware of the
investigations. The auditor should make the client aware that voluntary disclosure may benefit the client
in the long run, but if the client refuses, the auditor should advise the client whether the auditor has a
legal obligation to disclose.
 In all of the scenarios indicated, auditors should seek legal assistance.
 When auditors are informed of possible actions against a client that could affect the financial accounts,
they must examine the impact on the audit report. Auditors will be able to seek audit evidence to support
 any appropriate provisions or disclosures in the financial statements if the client is aware of the
investigation.
 The auditors should investigate if the suspected fraud involving the managing director is related to the
company and has an impact on the financial statements and their risk assessment.