F8 SCENARIO QUESTION DISCUSSIONS – Q3 (a), Pilot Paper. Topic: Ethics.

This is a discussion relating to Q3 (a), on the Pilot Paper. I am working from the UK paper but both the UK and INT papers are similar. For a link to the international paper, go here:

https://www.accaglobal.com/pubs/students/acca/exams/f8/past_papers/int/f8int_2006_dec_ppq.pdf

SCENARIO: The scenario relates to NorthCee Co, one of your audit clients.

TOPIC: Ethics.

The whole of this part of the question, which will earn you half the total marks in Q3 if done correctly, focuses on ACCA’s Five Ethical Threats of Self-Interest, Self-Review, Advocacy, Familiarity and Intimidation.

Every part of the scenario, from the opening paragraph to the key information to the closing paragraph.

As we browse through the opening paragraph, we notice that the audit partner has remained unchanged for five years.

If NorthCee were a listed company, this would be a threat to their independence. Reason being that if the partner holds his position for more than five years, he runs the risk of becoming too close to the firm’s staff and directors. Thus his judgement on the Financial Statements is impaired.

But with NorthCee not yet being listed this requirement is not applicable.

However, if we go down to point (i), we see that Northcee are attempting to obtain a listing on the London Stock Exchange.

Hence the audit partner should be rotated this year to avoid any threat of familiarity.

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Next, we see that in point (ii), the audit firm – Dark – have been preparing NorthCee’s financial statements for years.

Again, the future listing of NorthCee intervenes here, in that audit firms CANNOT prepare financial statements for listed companies. This is a self-review threat.

The trick to managing this threat is simply to decline from preparing NorthCee’s financial statements in the future.

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Point (iii) reveals that Dark have been asked to attend an evening reception in a hotel. Attending any kind of social event indicates bias, familiarity and a threat to independence.

The way to manage this situation is to politely decline the invitation.

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Point (iv) brings up the point that NorthCee have yet to pay a long, outstanding fee for taxation services.

The outstanding fee is an independence threat, in that the fact that the fee is outstanding could indicate that Dark have been making a loan to the audit client. Sorting out the loan could be seen as more important than providing an appropriate audit opinion.

What to do? Dark should advise NorthCee in one of two ways:
(1) Make a payment on account, to ensure the whole fee will be paid;
(2) Delay additional audit work until the fee is paid.

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Finally, the final sentence shows that Dark have acquired inheritance capital.

This is illegal according to ACCA’s Code of Ethics and Conduct. Again, it is an independence issue.

The solution is to dispose the shares as soon as possible.

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TIPS:

Especially easy marks can be obtained here by mentioning the points in relation to the financial statements, the evening reception and the share capital.

The question can be done in tabular form. One column for threat (and explanation), the other for management of the threat.

0.5 for threat, 1 for explanation of threat, 1 for management of threat.

Four points will be enough to get you maximum marks, but up to five can be discussed.

Hope this helps.

Si80