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APES 110 Code of Ethics for Professional Accountants Assessment Answer

Question 1

You are Mark Ouse, an audit senior with the firm Pull, Lift, Tug & Co. You are planning the financial report audit of Nestree Ltd, a manufacturer of confectionery. The following issues have arisen: L Arthur Stick, the Finance Manager of Nestree, was ill for three months of the year and Eloise Lift, the engagement partner, received a request from Nestree to supply a member of staff on secondment until Arthur was well. Eloise was only too happy to help and Daisy Flute, a member of Pull, Lift, Tug & Co's audit staff was seconded to Nestree for three months. Nestree was happy with this arrangement and Eloise enjoyed the additional fees this created for the firm. As a result of Daisy's secondment and the knowledge she now has about Nestree, Eloise is suggesting that she will be a valuable member of the audit team for the current financial year's audit. 2. From the review of the draft financials that Mark has received, Nestree appears to take an optimistic approach to its valuation of development expenditure capitalized in intangible assets. Executive remuneration includes a profit-related bonus. 3. Staff of Nestree are entitled to visit the company shop where defective confectionery products or 'seconds' that do not make it past the company's quality control processes are available for purchase at a significant discount to normal retail prices. Nestree has in the past invited the audit team to enjoy this benefit while it is attending the company during its audit visit. 4. You are aware that Nestree's Finance Director, Barbara Polo, plays on the same softball team as Eloise Lift and recently spent a week with the team on a tour of Vanuatu.

Required Explain the ethical threats above and identify how they might be avoided.


APES 110 Code of Ethics for Professional


Ethical threats and procedure to avoid them:

Ethical threats refer to the threats that may affect the opinion and conclusion of the member in practice related to the audit client. The ethical threats need to identify at the time of engagement in the professional services as the member in practice is required to free from any undue influence and there should not be a conflict of interest. The APES 110 code of ethics has described various threats that may change the opinion of auditors. The major threats are described here and also explain the procedure for avoiding the threat while performing professional services (Ayadi, 2019).

1. Threat of conflict of interest and self-interest threat –

Conflict of interest is a situation where the audit party has an interest in the business operations of the client party and apart from this also there are some other benefits associated with the client's operations. In the current case nester requires additional staff for managing the accounts of the company, it will create additional fees for the audit firm Poll, lift, Tug & co. Eloise lift who was the audit partner appoints daisy flute to the company for managing the accounts of the company. Later miss daisy flute is also a part of the audit assignment it will create a theft for the audit engagement. There are both threats associated with the current situation the first threat is the conflict of interest because there is additional remuneration in terms of fees of Miss Daisy flute and apart from this threat of professional misbehavior is also there in the audit engagement (Majeed., & Mazhar, 2019).

This assignment includes a self-interest threat also according to section 240 of the APES 110 code of ethics. There are contingent fees associated with the current engagement and the confinement fees can create a threat to the objectivity of the audit engagement, the threats associated with the contingent fees can be identified based on the nature of the contingent engagement, range of the possible fees, and the duration of the other engagement. For the available threat, we can check the safeguards that can be used, such as disclosure of the fact to the intended users, review by any independent party, a second opinion on assumptions and standards, quality control, and checking (Borio, Drehmann, & Xia, 2018).

In the current case since the confinement engagement is for a shorter time then the audit is accepted and relevant safeguards to be followed in this regard to protect the objectivity of the audit assignment.

2. Threat of professional incompetency and second opinions   

According to section 130 of the APSE 110 code of ethics, oblige all the members in practice to maintain professional knowledge and required skill set to conduct an audit engagement, and also the said section makes it mandatory to use the technical and auditing standards and the due diligence in the audit engagement. Diligence encompasses the responsibility to act thoroughly, carefully, and on a timely basis. In the review of the draft financial statement that is received by marks the approach while the valuation of the intangible assets is optimistic and they include the development expense in the intangible assets (Shkolnyk, I., Kozmenko, S., Polach, J., & Wolanin, E. (2020). According to the generally accepted accounting principles, the internally developed intangible assets should not be capitalized thus the development expense capitalized in the intangible assets is not right and it should be removed from the draft financial statement it creates a threat of overstatement of assets and overestimation of profits in the draft financial statements so auditor should make required adjustments and required disclosures. As per the corporation act, executive remuneration can be a combination of the fixed pay and variable pay. Variable pay can be linked with the profits so executives pay linked with the profits can be possible but because of this payment linked with profits while preparing the financial statements director can capitalize the expense and not charging them to profit and loss statement it will increase the profits of the company for the said financial year and it will increase the remuneration of the directors (Shkolnyk, et al. 2020). The auditor should be cautious about this profit and ensure that the correct profit is shown in the financial statements and the pay of the executives is calculated based on correct profits. If the adjustments are not done in the financial statements then the auditor should report the fact to the intended users (Galariotis, Germain, & Zopounidis, 2018).

3. Gifts and hospitality threats

Gifts and hospitality create a major threat to the audit assignment and audit engagement. It can be seen severally that the member in public practice and the close relatives of the member in public practice offered some gifts and the services from the client. According to section 260 such types of gifts can create threats to the audit engagement as a fundamental threat. This type of gift and hospitality can create a self-interest threat if such gifts are accepted and if such types of gifts and hospitality declare in public then it will create the intimidation threat. The auditor can decide based on the value of the gifts and nature of the transaction that whether the gifts and hospitality are offered in the normal course of business or it is offered to influence the decision of the auditor. A member should consider the nature and materiality of the gifts in the professional judgment and try to reduce the risk of the audit engagement up to a minimum acceptable level (Eren, et al. 2019)

In the current case, the company offered the audit team to purchases the stuff at the shop where defectives confectionery products or 'seconds' that do not qualify the quality control process are sold at a discounted price. These shops are only available for the employees of the company in the current case it can be seen that the gifts or discounts are not that severe and it contains only a small amount involved and the discount offers are in the general business course of the company. Thus according to the auditor, the risk is not severe and it is managed within the acceptable risk of audit and thus it can be ignored by the auditor (Song,  Wang,  & Zhu, 2018).

4. Threat of objectivity-

According to section 280, a member in public practice has to identify the threat of objectivity while determining the professional services rendered to the client. The member of public practice should not be concerning the client or its directors, officers, and employees. There is a threat of familiarity that may affect the object of members in practice to present an unbiased opinion on the financial position of the client. 

The member in practice who is engaged in the service of providing assurance should be independent of the assurance client. The member in practice must be independent as it changes the mind and appearance of the member for expressing opinion and conclusion as the member has no conflict of interest and undue influence from the client (Daniel, Neves, & Horta, N2017).

It is the responsibility of the auditor to evaluate the threat of objectivity while providing professional services. The existence of a threat of objectivity is depending on particular circumstances and the nature of work performed by the member in practice at the time of engagement. The member in practice should take necessary actions for evaluating the significant threats and also apply the safeguard procedures for eliminating or reducing the threats to an acceptable level. The safeguards those can apply by a member in practices are: the member in practice should withdraw the engagement from other professional services which is a threat, he should adopt the procedure of supervisory, the member in practice should terminate all financial and business relationships with the client, he should discuss the matter with high-level management within the audit firm or discuss with those charged with governance of the client (Caplinska, & Ohotina, 2019).

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