ETHICS

QUESTION 1- ETHICS & INDEPENDENCE
It is important that the auditor is seen to be both independent and to behave in an
ethical manner.
In light of the above statement consider the following scenarios:
1. John Moore-Smith is an audit manager with Marsh & Associates LLP
Chartered Certified Accountants and registered auditors. The audit firm has a
number of listed companies including General Health Plc. John’s father died
recently leaving him £50,000 worth of shares. As executor to his father’s will,
John has had the shares transferred into his children’s name so that they can
benefit from an upcoming likely take-over of General Health Plc by a multi-
national US company. John is not involved with the audit of General Health
Plc but overheard a conversation between the engagement partner and the
audit manager about the take-over being successful.
2. Jane Williams has a mortgage with Mid Sussex Bank Plc. She has had the
mortgage for the last 5 years and is paying a commercial variable rate of 3%.
Jane has just been appointed as audit manager for Mid Sussex Bank Plc.
3. Simon Edwards is the audit manager in charge of the audit of Easy Travel Plc.
His wife has recently moved from another travel company to take on a
directorship at Easy Travel Plc. Simon does not believe that he has to declare
this because his wife has kept her maiden's name (her surname before her
marriage).
4. Your audit firm has been asked to advise Ernest Smith Jewellers Plc in their
targeted take-over of Ravenstone Budget Gems Ltd. However, Ravenstone
Budget Gems Ltd are also clients of yours and would like your firm to
represent their interests in the takeover. You would like to act for both as
between them, they account for 40% of your fee income (Ernest Smith
Jewellers Plc 18% and Ravenstone Budget Gems Ltd. 22%) and you do not
want to lose either of the contracts.
REQUIRED:
i. Explain why independence is an important aspect of auditing. 4 marks
ii. For each of the above scenario’s (1-4) state with relevant reasons, the
ethical dilemma and what action should be taken to either eliminate or
reduce the ethical threat (Note: you may expand upon each scenario
in order to fully illustrate the point you are making) – mark allocation
– 2 marks for each ethical dilemma identified and 2 marks for
elimination or mitigation of the ethical threat = Total = 16 marks
Total = 20 marks

QUESTION 2 – EVIDENCE
You are the audit senior and are involved in the audit of Tallis Motor
components Ltd that is a company that manufactures motor components for
the motor industry. During the audit for the financial year ended 30 April 2020,
you come across the following items that may have relevance as far as your
audit is concerned. These items are:
1. A newspaper report suggesting that Tallis Motor Components Ltd are
being investigated by government regulator because the company are
accused of being involved in a ‘price fixing’ exercise. The report
mentions that if found guilty, the regulator is likely to issue a fine to the
company in the region of £400,000.
2. A letter from the company’s bankers confirming their willingness to
extend the overdraft facility for a further year to 30 April 2021, subject
to the company adhering(sticking) to the covenants (agreement)
contained in the overdraft agreement.
3. A comment that was made by a director of the company to you over
lunch suggesting that the machinery used by Tallis Motor Components
only lasted three years.
4. The sample of inventory that were physically counted by the member of
the audit team when they attended the company’s physical inventory
count held on 15 March 2020.
REQUIRED
1. Why is the gathering of evidence an important aspect of auditing? (4
marks).
2. In respect of each of the matters (1-4) relating to Tallis Motor
Components Ltd, state their relevance to the overall audit of forming an
opinion on the financial statements. (8 marks)
State one form of corroborative evidence that you would attempt to obtain for each of the
above matters.