Ethics and Professional Issues

Gruber

Conflict of Interest

The request creates a conflict of interest, it arises when an audit firm provides a service in relation
to two or more clients whose interests are in conflict. The auditor should not compromise
professional judgement because of bias, conflict of interest or the undue influence of others. In this
case the interests of Gruber and Willis will be conflicting as Willis would want to purchase the
shares for the lowest whereas Gruber would want the highest amount. Therefore the auditor might
be seen as acting in the intereset of one party.

Audit firm may be privy to confidential information gained during their time as auditor of Gruber and
if they disclose this to Willis Co then it would give an unfair advantage over the other client and
would be a breach of confidentiality. In the cases of conflict of interest the firm should make full
disclosure to both parties and ask them both to confirm they give permission to the service eand if
even one denies then the service should not be provided.

Safeguards which should be implemented include having seperate engagement teams provided
with clear policies and agreements with regards to confidentiality. Appropriate reviewer who is not
involved in the service to review the work performed to assess whether key judgements and
conclusions are appropriate. Seperation of confidential information physically and electronically.

Advocacy Threat

Such service can also lead to advocacy threat meaning audit firm can be percieved to promoting
interests of the client impacting objectivity. Additionally it can lead to assuming management
responsibility as it could also be percieved as taking on management roles not appearing to be
objective enough, assuming management responsibility is prohibited.

Self-Review

Such service can also lead to a self review threat as during the audit of new group when
performing the valuation of shares the auditors would be auditing their own valuation work done
earlier and they would lack professional scepticism and may over rely on the work done by the
audit firm.

Pale

Self-Review

KPI's include alot of financial and non-financial information that will be one way or the other relate
to the financial statements and will be extracted or reconciled to the figures in the audited
statements. The KPI's will not be in the financial statements themselves but they will be in the
annual report which the auditor must read and identify any material inconsistencies. Therefore a
self-review threat to objectivity exists and the firm may be reluctant to raise queries and highlight
problems while reading the other information.

Contingent Fee

The fee proposed by Pale is also inappropriate, if the engagement is taken the its fee should be
seperate from the audit fee and the suggestion to simply increase the audit fee is to make it on a
contingent basis and only if the assurance is favorable which is inappropriate and it gives rise to a
self interest threat as it is in the financial interest of the audit firm to give a favourable opinion in
order to secure the income.
The code prohibits the use of contingent fees for audit services but they are allowed for other types
of work depending on factors such as nature of engagement. The best course of action is to
determine the fee on a non contingent basis seperate from the audit fee to remove the ethical
issues.

Competence & Resources

Chief must also consider that whether they have the competence to perform the work as KPI's are
a specialist area and could be that if appropriate experience is not available then the service might
not be up to the marks. Firm should also consider that whether it has resources in terms of staff
availability to complete the work to the desired deadline and to perform appropriate reviews.

Ryder Group
Self-Interest

Ranger associates was recommended for this work over which the firm would earn a referral fee,
the code states that this creates a self-interest threat to objectivity and to professional competence
and due care. The self interest threat arises from the income as this may result in audit firm
recomending another firm for the work without proper consideration of their competence to perform
the engagement. Referral fee are not prohibited although appropriate safeguards should be
implemecated such as disclosing the group in writting the arrangement for a referral fee to be
recieved, and obtaining advance agreement from the group that the arrangement is acceptable.

Management Responsibility Assumption

Further threat arises from the audit firm making decisions and using judgement which is properly
the responsibility of management. Audit firm should never assume management responsibility for
an audit client because the threat is so significant that no safeguards reduce the threats to an
acceptable level specially in the case of listed companies the firm shall not provide internal audit
services as it relates to the financial system and statements significantly. The request should
therefore be politely declined.

Redback sports

Payroll Service

Providing the payroll service gives rise to a self review threat because our firm has determined the
payroll figures that form part of financial statements which would be subject to audit or limited
assurance review resulting in over reliance on the figures. It should be considered if the amount is
material and whether safeguards can be implemented to reduce the threat to an acceptable level.

Assuming Management Responsibility

Providing this service can also result in assuming management responsibilities as the firm would
be acting on behalf of management further impairing the objectivity. The management
responisbilities can only be avoided if the management accepts responsibilities for the client
decisions and oversee the services, provides and evaluates the adequacy of the services provided
and accepts the responsibility of actions.

Conflict of Interest

Our firm audits Redback Sports which is a competitor of EMU Gyms which can create a conflict of
interest. It should be disclosed to both EMU Gyms and Redback Sports that the firm acts for both
companies and obtain consent from both companies. The firm should also use seperate teams to
carry out work for the two companies, physically seperate the information, and establish
appropriate review procedures by an independent member of the firm.
Laurel Group

Conflict of Interests

Laurel and Oleander will be having conflicting interests as Laurel would want to purcahse the
shares for the lowes amount possible whereas Oleander Co would want to sell them for the highest
amount possible which creates a significant threat to objectivity who may be seen to be acting in
the interest of one party. The threat is hightened by the nature as Holly would have access to
private information which if disclosed to Laurel would give them an unfair advantage over the other
client and would be a breach of confidentiality.

Self-Review Threat

Performing the valuation service would also create a self-review threat as Holly would have a
significant influence over the valuation of Oleander Co which would consequently be used to
consolidate their accounts into the new and enlarged group which Holly would be auditing in the
future.

Safeguards

It is possible to reduce both threats by using different teams to conduct various services. IESBA
Code of ethics states a firm shall not provide valuation services for a listed company if the valuation
has material impact on the financial statement which are subject to audit therefore before accepting
it should be considered what are the impacts of transactions on the fianncail statements and if they
are material then they should politely decline the engagement.

Dali Co

Self-Review Threat

Reviewing the internal controls of an audit client which are relavant to the financial reporting
system would create a self review threat as the auditor would be consequently assessing the
effectiveness of the control system during the audit.

Assuming Management Responsibility

The engagement may also be considered as assuming management responsibilities which creates
self interest threat along familarity threat as the firm wouuld be aligning their views to those of
management. Threats caused by management responisbilities are so significant that there are no
safeguards to reduce the threats to an acceptable level. Only measures to tackle it involve
management accepting responsibility for reviewing internal control reports for determining which of
the recommendations from the report are to be implemented.

Dali is also a listed company which means the firm should not provide services that relate to the
fianncail reporting and statements significantly. If the firm is to provide these services the firm
should consider if they have the professional competence to complete the engagement to the
necessary required standard.

Connolly

Self-Interest Threat

Provision of such guarantee represents a financial interest in an audit client and creates a self-
interest threat because the firm has an interest in the financial position of the client and the firm
may be relucant to request adjustments to the financial statements that would result in firm having
to honour the guarantee. If the firm guarantees a loan the self interest then created would be so
significant that no safeguards can reduce the threat to an acceptable level unless the loan or
guarantee is immaterial to both the audit firm and client.
Self-Review Threat

The advice given could represent a self review threat because when auditing the financial
statements the auditor would assess the systems which they had recommended and may be
reluctant to criticise them if they are ineffective. There is also a risk of assuming the responsibility of
management in addition to that client is a listed entity which means the firm should not provide
such services which form significant part of the financial reporting process.

Conclusion

The firm shall not provide such service to give advice on the accounting systems and these ethical
issues should be discussed with those charged with governance of Connolly Co with an
explanation provided to why the audit firm cannot guarantee the loan or provide the non-audit
service to the company.

Adams group
Self-Review Threat

Providing advice over the new accounting and management information system would consitute a
provision of a non-assurance service to an audit client and this would create a self-review threat
because when auditing the financial statements the auditor would assess the systems which they
had recommended and an objective assessment would be difficult to achieve as the auditor would
be reluctant to find errors or shortcomings in the recommendations and work perfromed by their
firm. In addition there is a risk of assuming management responsibilities especially as the group
has little experience in this area so would rely on the auditor's suggestions and be less inclined to
make their own decisions. The audit firm should not provide service to give advice as this is
prohibited by the code to not provide such services to listed entities that form part significantly of
the financial reporting system.

Advocacy Threat

An advocacy threat is present when attending the meeting with bank as the audit partner will be
supporting the client in the renegotiation with the bank and may be percieved as supporting or
confirming group's position. If the partner were to attend the meeting there could be legal
implications and it could be percieved as firm is guaranteeing the loan and the partner should not
attend the meeting as a result.

Reporting

These issues should be reported and discussed with those charged with governance of the group
with an explanation as to why the audit firm cannot attend the meeting with the bank.

Eagle Group

Self-Review Threat

The integrated report is not part of financial statements but the report will contain financial key
performance indicators (KPI's) therefore there is a potential self review threat to objectivity in that
audit firm has asked to provide assurance on these KPI's which are related to figures which have
been subject to external audit by the firm. The team would be reluctant to raise queries or highlight
errors made during the external audit when assessing the reconciliations of KPI's to audited
financial information.

Assumption of Management Responsibilities

It can also be percieved that Bison is taking on management responsibility by helping to determine
content to be included in the integrated report which is a threat to objectivity. The assumption of
management reponsibility is prohibited by the code as the threats are so significant that no
safeguards can reduce them to an acceptable level.

Familarity Threat

Working with management could also create familarity threat to objectivity whereby close working
relationships are formed and the auditor becomes closely aligned with the views of management
and is unable to approach the work with an appropriate degree of professional scepticism.

Competence and Resources

Aside from ethical issues it should also be considered whether the firm has the competence to
perform the work as integrated report is quite a specialist area and could be that the audit firm does
not have the appropriate levels of expertise and experience to provide a quality service to the
group. Aside from competence the firm should also consider whether it has resources in terms of
staff availability to complete the work to the desired deadline and to perform appropriate reviews of
the work which has been completed.

Thomasson & Co
Company Tax Computation

The performance of company tax computation creates self-review threat which arises when an
auditor reviews work which they have themselves previously performed as there is a risk that
auditor will not be objective enough and may fail to identify any shortcomings in their own work. Tax
calculation forms part basis of the tax payable and the tax charge in the financial statements and
as such the audit team may be more likley to accept tax calculations without adequate testing.

An advocacy threat is also a possibility as there is a risk of auditor being seen as promoting the
interests of client in some way with a third party such as the tax authorities and therefore the
auditor will be biased in favour of the client and cannot be fully objective.

Tax returns does not generally create a threat to management responsibility as auditor is not
involved in making alot of judgements. Provided management takes responsibility for the returns
including any judgements which have been made the threat to objectivity is not likely to be
significant.

For an unlisted client it is acceptable by the IESBA Code of Ethics but the applicable safeguards
should be implemented to reduce the threat to an acceptable level such as using professionals who
are not involved in audit team to perform tax calculations and the tax services should be reviewed
by an independent tax partner. Since Clean Co is an unlisted client, Thomasson & Co should
ascertain which members of staff performed the taxation services and should review the threat to
independence.

Personal Tax Computation

There is no prohibition over preparation of personal tax returns of an audit client however in this
case the auditor should consider whether the preparation of personal tax may result in the auditor
being associated with criminal activities. The auditor should also consider appropriateness of
personal taxation services being billed to the company and the preparation of the personal tax
return may be a taxable benefit which should be included in the tax return and the fee for this
service may need to be reflected in director's loan account with the company.

Website and Online Sales System

According to the code providing services to an audit client involving systems which form significant
part of the internal control over financial reporting will lead to a potential self review threat. In this
case the self-review arises as the new systems produce data which will be directly used in the
preparation of financial statements and the audit process would therefore require review and
testing of financial data and systems which Thomasson helped to design and implement. As a
result there a clear risk audit team may rely over these systems and would be reluctant to highlight
errors from them.

There is also a risk that firm may assume management responsibility if they become involved in
making management decisions. The possible safeguards which assist in managing the threats
include client acknowledging its responsibility for establishing and monitoring the system of internal
control, the responsibilities of client and firm should be clearly defined in the engagement letter so
client makes all the decisions, seperate teams are used by Thomasson to complete the seperate
engagements.

If the threats cannot be reduced to an acceptable level then the service should be politely declined
and should not be performed.

Weston & Co
Lack of Professional Scepticism

If a senior auditor acts for an audit client for a long period several ethical problems arise, first the
professional scepticism of the auditor can be compromised as the auditor would become too
accepting of the client's methods and explanations so stops approaching the audit with a
questioning mind required by the auditor.

Familarity and Self-Interest

Familarity and Self-Interest threat are created by using the same senior personnel on an audit
engagement over the long period of time, the familarity is linked with issues relating to the loss of
professional scepticism which is due to the senior auditor forming a close relationship with the
client's personnel over a long period of time.

These threats should be evaluated and safeguards should be considered which reduce the threat
to an acceptable level such as, rotating the senior personnel off the audit team, having a
professional accountant who was not a member of the audit team review the work of the senior
personnel, and regular independent reviews of the engagement.

Bobby Wellington

Since Ordway Co is a listed company the firm must remove Bobby from the audit team and not
allow further contact with the client and audit process. Bobby must not have any involvement with
the audit of Ordway for the next five years as the cooldown period.

Performing quality reviews forms part of participating in the audit engagement therefore, Bobby
cannot act as an engagement quality reviewer for the audit of Ordway Plc, having stepped down as
audit engagement partner untill the cooling period has been served.