45 Jones Co

P1
You are a student accountant at Miller Dundas, a medium-sized firm of auditors. John Yang is
your training manager, overseeing the progress of the firm’s student accountants.

P2
You recently sent John an email describing a situation on the audit of Jones Co, a medium-sized,
family-run business and long-standing client of Miller Dundas. You were checking non-current
asset purchases when you noticed an entry of $100,000 for a security system for an address in a
well-known holiday resort with no obvious link to the company. On questioning this with Ellen
Tan, the financial controller, you were told that the system was for Mr Martin Jones’s holiday
cottage (Martin Jones is Managing Director and a minority shareholder in Jones Co. You were
told that Martin Jones often takes confidential company documents with him to his holiday
home, and so needs the security system on the property to protect them. It is because of this,
Ellen said, that it is reasonable to charge the security system to the company.

P3
Ellen Tan expressed surprise at your concerns, and said that auditors had not previously been
concerned about the company being charged for non-current assets and operational expenses for
Mr Jones’s personal properties.

P4
You told the engagement partner, Potto Sinter, what you had found and Potto simply said that the
charge was not a cause for concern. He did say that he would ask for a formal explanation from
Martin Jones before he signed off the audit. You were not at the final clearance meeting but later
read the following in the meeting notes: ‘discussed other matter with client, happy with
explanation’. When you discussed matter with Potto afterwards you were told that the matter was
closed.

P5
John Yang has now read your email about what happened, and spoken to you. He realises that
there is an ethical dilemma. Not only should there be disclosure of Mr Jones’s transaction, but
the situation is complicated by the fact that Potto Sinter is senior to John Yang in Miller Dundas
and also by the fact that Potto Sinter and Mr Jones are good friends. He is thinking about what to
do next, and has asked for your thoughts.
Required

Prepare extracts for a briefing paper which criticize Potto Sinter’s ethical and professional
behaviour in the case. ( 8 marks )

Professional skills marks are available for demonstrating scepticism skills in challenging the
behaviour of Potto Sinter in respect of the audit of Jones Co. ( 2 marks )

Marking scheme

(a) Mark
1 mark for each criticism identified in the context of the case Max 5
1 marks for the development of the criticism with reference to practice or application Max 5
Up to a maximum of 8 marks for technical skills
8

How well has the No marks Half marks Full marks

candidate
demonstrated
professional skills as
follows:

Scepticism skills in The candidate has Although the The candidate has
challenging the failed to demonstrate candidate has demonstrated an
behaviour of Potto any scepticism displayed some excellent level of
Sinter in respect of regarding the scepticsm and scepticism regarding
the audit of Jones Co. behaviour of Potto knowledge of ethical Potto Sinter’s
Sinter, and has issues, there is a behaviour,
therefore failed to failure to strcuture the challenging it in all
identify any ethical or answer properly or to relevant aspects and
professional issues. provide enough detail making appropriate
related to the commentary on the
scenario, suggesting a specific situation in
limited ability to the scenario.
apply knowledge and
challenge behaviour
against business and
professional ethical
codes.
 0 1 2
Answer

Agreeing to corruption
It's possible that Potto Sinter is involving himself in the unusual deal for Martin Jones'
own benefit. He might even have acknowledged and accepted a poor explanation for this
problem. This will give negative impacts on their reputation, integrity and legitimacy to
operate. Companies also have to bear the costs associated with investigation and remedial
action.

Duty to shareholders
Since Potto Sinter and Martin Jones are good friends, Potto turned a blind eye to Martin's
behaviour (P5 L4-5). Potto makes the shareholders believe that the financial statements
are true and fair. He should ignore the relationship between him and Martin and show
professionalism in dealing with the entry of $100,000 for the security system of the
holiday house. Besides, the financial statement must be true and fair due to duty to the
shareholder.

Duty to tax authorities

Potto owes a duty to tax authorities who rely on reliability and truthfulness of information
in the Financial Statements. As Potto might help Martin to evade tax, he could be charged
in many regimes. For example, the client can receive capital allowances for the security
system and reduce the taxable profit.

Duty to professional colleagues

As Potto claims that the charge of $100,000 was not a cause for concern, he is confusing
the professional colleagues and causing them to be disappointed with Potto (P2 L3-5, P4
L1-2). Furthermore, due to Potto trying to smother up the fact of corruption, colleagues'
trust in the company will be greatly diminished. This will cause decreased employee
morale, reduced productivity, loss of shareholder and investor confidence, and damaged
reputation and business relations.

Failure to fulfill accounting and auditing standards

By permitting an unmodified report to be released on accounts that breached accounting
standards, Potto breached auditing standards. This leads to issuance of an unmodified
audit report and jeopardises the reputation of Miller Dundas. Besides, Potto might also be
imposed monetary penalty and prohibited from auditing financial statements for a period
due to the breach of auditing standards.