BBFD2013 FUNDAMENTALS OF AUDITING
Tutorial 2 (Answers) (PYP Adapted)
Question 1 (PYP Sept’17 )
(i) Identify and explain any FIVE (5) ethical threat which may affect the independence of
the audit of Data World Bhd.
(ii) For each ethical threat, provide a recommendation on how the threat may be mitigated.
marks)
ETHICAL THREAT
 Ravi will be the audit engagement
partner of the client for the seventh
consecutive year.
 The long association of an audit
partner with the same client can give
rise to familiarity threat.
 Ravi, the audit engagement partner
will be standing in as the Financial
Controller, in the absence of Terry.
 This may create self-review threat as
Ravi might be reviewing his own
work.
 Data World is one of the audit firm's
most important client.
 Over reliance on a particular client
may lead to self interest threat or even
intimidation threat.
 Each audit team member has been
offered a 40% discount on any of the
latest computer devices and gadgets
sold by the client.
 These high value gifts could lead to
familiarity or even self interest threat.
 One of the director's daughter will be
joining the audit team in auditing the
client.
 This personal relationship between a
senior official of the client and a
member of the audit team may give
rise to familiarity threat.
Any other relevant points/explanations may also be accepted
(10 marks)
(5
RECOMMENDATION TO MITIGATE
 A different staff member of the audit
member should be made the engagement
partner
i.e. Ravi should be rotated off the
audit.
 Ravi should not be allowed to also act as
the Financial Controller, unless he will
be involved in areas unrelated to the
financial statements being audited.
Otherwise, a different staff member
from the audit firm could be assigned to
take over from Terry.
 The audit firm should consider declining
offers of further work from the client
that will cause them to exceed the 15%
limit on total fees payable by the client
to the audit firm.
 Gifts and offers of hospitality should
only be accepted when the value is
trivial and inconsequential. The offers of
discounts would most probably translate
into high value and should be rightfully
declined.
 The director's daughter should not be
assigned any work relating to the audit
of the client. She should not be part of
the audit team.
= 1 mark (Total: 15 marks)
BBFD2013 FUNDAMENTALS OF AUDITING

Tutorial 2 (Answers) (PYP Adapted)

Question 2 (PYP Jan’17 )

The ACCA Code of Ethics and Conduct sets out five fundamental principles of professional
ethics and provide a conceptual framework for applying them.

List and explain each of the FIVE (5) fundamentals principles of ACCA's Code of Ethics and
Conduct. (10 marks)

Fundamental Principle Explanation

 Integrity  Auditor should be straightforward and honest in all business
and professional relationships.

 Objectivity  Auditor should not allow any bias, conflict of interest or

undue influence of others to override professional or
business judgments.

Professional competence  Auditor should maintain professional knowledge and skill at

and due care a level required to ensure that the client or employer
receives competent professionals services. Auditor should
also act diligently in accordance with applicable technical
and professional standards.

 Confidentiality  Auditor should respect the confidentiality of information

received obtained throughout the audit. Auditor should not
disclose any such information to third parties without proper
and specific authority.

 Professional behaviour  Auditor should comply with relevant laws and regulations
and should avoid any action that discredits the profession.

=1 mark (Total: 10 marks)

Any other relevant points may also be accepted
BBFD2013 FUNDAMENTALS OF AUDITING

Tutorial 2 (Answers) (PYP Adapted)

Question 3 (PYP Jan’16)

Discuss how each of the following issues may affect an auditor's independence towards
his/her client.
(i) The setting up of audit committees by large companies around the world.
 Audit committees allow the non-executive directors of a company to review the
company's position from an impartial view.
 Audit committees also serve as the liaison between the board of directors and the external
auditor. BODAudit committeeExternal auditor
 Therefore, the setting up of audit committees would be able to help enhance the external
auditor's independence, thus instilling greater confidence among the external users of the
financial information.
=1 mark
(Total: 3 marks)
Any other relevant points may also be accepted

(ii) The growing involvement of auditors in providing management consulting services

to their clients.
 It is generally argued that an auditor's independence would be reduced if the same auditor
and/or audit firm is also involved in providing management consulting services to the
client.
 This is because, the auditor would be seen to be reviewing his/her own work and might
not be able to remain 'independent in appearance' as well as 'independent in mind'.

 However, the lack of independence may be mitigated by having separate divisions within
an accounting firm to handle auditing services as well as management consulting services
respectively.
=1 mark
(Total: 3 marks)
Any other relevant points may also be accepted
BBFD2013 FUNDAMENTALS OF AUDITING

Tutorial 2 (Answers) (PYP Adapted)

Question 4 (PYP Aug’15)

"It is the auditor's responsibility to detect all possible frauds, misstatements and
irregularities".

Do you agree with the comment made by the shareholder? Support your answer with
reference to the relevant auditing standard(s).

 Generally, auditor does not have a responsibility to plan and conduct the audit
with the expectation of detecting all possible frauds, misstatements and
irregularities (ISA200, 220, 230, 240, 250, 300, 320 and 720).

 It is the auditor's duty to investigate and report frauds, misstatements and

irregularities only when concerns are raised by evidence, obtained in the normal
course of the audit (ISA315, 330, 500,520 and 610).

 This is due to the many inherent limitations faced by auditors when conducting an
audit.

 Due to these inherent limitations, there is always a possibility that a properly

planned audit may not detect frauds, misstatements and irregularities.

 However, auditors should always approach an audit with professional scepticism.

 Therefore, the audit report does not constitute a guarantee of the accuracy of the
financial statements, rather it provides a reasonable assurance.

1 mark
(Total: 6 marks)
Any other relevant points may also be accepted