Case Data: Samuel and Company
You are an audit manager at Samuel &Co. Chartered Accountants (Samuel).As part of monitoring your firm’s credit control procedures, you have recently conducted reviewsof invoices that the firm raised to audit clients. You have identified the following matters for further investigation:
(a) Brian and Company (Brian), a large retailer has not paid an invoice dated 5 October 2016, from Samuel for the financial statement audit of the year ended 30 June 2016. A note dated 30 March 2017 states that Brian is suffering poor cash flows and is unable to pay the balance due on audit fee. This is the only information you found in the file when reviewing. You are aware that the final audit work for the year ended 30 June 2017 has not been invoiced yet. 2017 audit is almost completed and the audit report is due to be issued soon.
(b) Carter Ltd (Carter) is a private company, a manufacturer of industrial machinery. Carter has paid all invoices relating to recently completed audit work for the year ended 30 June 2017. However, in the invoice file you found an invoice received by your firm (Samuel) from Carter. The invoice is addressed to Ryder Robinson, the manager responsible for the audit of Carter. The invoice related to the rental of an area in Carter’s empty warehouse with the following handwritten comment in the invoice: “rental space being used for storage of Mr. Robinson’s speedboat for six months – He is our auditor, only charge a nominal fee- $250”. When you ask about the invoice from Ryder, he said the invoice should have been sent to his private address.
You are aware that the Carter sometimes uses the empty warehouse for rental income, though this is not the main trading income.
(c) In the ‘miscellaneous invoices raised’ file, you found an invoice raised to “Infomatics360 Software Suppliers”(Infomatics360). Infomatics360 is not an audit client of Samuel. The comment section of the invoice contains the note: “referral fee for recommending Infomatics360 to several audit clients regarding the supply of MYO360 accounting software”.
1. Identify and discuss the ethical and other professional issues found in reviewing invoicesin above three cases.
2. Recommend the actions that should be taken in relation to each of the issues identified in the above three cases.
a) In the first case, Brain & Co. has not paid for the invoice raised by Samuel for last year’s audit and current year audit is on a completion stage. Audit outcome of current year’s audit also shows that Brain is suffering from poor cash flows. Non-payment of fees and continuation of audit work will question the independence of the Auditors and may lead to professional issues.
b) In the second case, audit manager of Samuel’s firm has been using the property of Carter Ltd, which is the audit client of Samuel. He is having the property on a rent of USD 250. In addition, invoice is in the name of Audit Manger only. Still it will affect the independence of the firm because it will cause self-interest threats, which occur when an auditing firm, its partner or associate could benefit from a financial interest in an audit client.
c) In the third case, Samuel is referring Infomatics360 to its audit clients and in exchange of that charging the referral fees from Infomatics360. However, Informatics 360 is not the audit client of Samuel but referring it to its audit client is also not professional and against to the ethics of the Chartered Accountants. It will create the self-interest threat in which Audit firm, its partners or its managers are getting some financial benefit from the audit client.
a) In the first case, auditor should not sign the Balance Sheet of current year until they receive the payment for previous year audit. If they do not sign the financial statement then Auditors will not be considered as guilt. Auditor can conclude that there was a threat to their independence due to the outstanding professional fees pertaining to last year. If auditor is able to arrange to receive the professional fees, auditor firm can be considered as independent and could proceed to sign off the balance sheet for current year. In the absence of such arrangement, it would not be appropriate for the auditor to sign the report. Since in the present case, Brian is suffering from short cash flows then it is suggested that it would be unprofessional to sign off the Balance sheet for current year.
b) In Second case, where audit firm receives the invoice in the name of its manager from one of its audit client risks the independence of the firm. It is recommended that an auditing firm will be disqualified from being appointed as the statutory external auditor if the audit firm, its partners or members of the engagement team as well as their ’direct relatives’ had any
(i) financial interest in the audit client,
(ii) received any loans and guarantees from the audit client
(iii) had any business relationship with the audit client and
(iv) had any personal relationships with the key officers of the audit client, i.e. any whole time director, CEO, CFO, Company Secretary, senior management belonging to the top two managerial levels and the officer who is in default.In this particular case, if the invoice amount is less than the limit of credit defined in the Act then there is no issue otherwise ask Robinsons to make the payment of Carter Ltd and ask him to find out some other place for the storage of his speed boat. In addition, what Carter is charging is only the nominal fee, which creates the self-interest for the audit firm and its partners and its managers. Thus, to avoid that scenario, either ask Robinsons to change the storage place or ask Carter Ltd to charge actual market rent that is prevailing in the market.
c) In the third scenario, Samuel’s firm is acting as an agent for Infomatics 360 and in exchange of which is charging the referral fees from Infomatics. Being the agent of Infomatics, it is referring the accounting software to its audit client itself, which creates the threat of self-interest. In addition, auditor is prohibited to provide some of the services, which will affect the independence of the auditors and will be disqualified to di the audit. To safeguard its independence, Samuel has to stop referring accounting software of Infomatics to its audit client. If he is referring than stop billing to the Informatics as referral fees.
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1. McLennan, G., &Dhillon, C. (2016, October 25). Auditor Independence and Unpaid Fees. Retrieved April 11, 2018, from https://www.lexology.com/library/detail.aspx?g=0dc429bf-1f16-4982-9125-8a98a55759fd
2. Code of Ethics B section 290. (n.d.). Retrieved April 11, 2018, from https://www.icaew.com/membership/regulations-standards-and-guidance/ethics/code-of-ethics-b/part-b-290