QUESTION 1

The following situations involve potential violation of the general ethical principles as outlined in APES 110 .You are asked to advise whether they involve a violation or not of the ethical principles and if there is a violation explain which ethical principle has been violated and the reason(s)why it is or isn't a violation.

a) PeterSung is the Senior Auditor on the audit of The Musical Company Pty Ltd , a large music business which publishes music,sells musical instruments and runs promotions where entertainers come to Australia .Dave Thompson,theCFO asks PeterSung if he wants tickets to the next two concerts at a 25% discount due to his long term relationship with the Musical Company having been the Auditor for the past six years.

b) Jana Went is the auditor on the audit of Gerroa Company .Jana is auditing the company for the first time but has been auditing other companies in the same industry for the past three years.

c) A client requests the assistance of Jack Dack ,a chartered accountant ,in the installation of a new computerised inventory system for maintaining production and inventory records .As Dack has no experience in this type of work he engages a computer inventory consultant who he has confidence in to carry out the review.Due to the highly technical nature of the work and other time pressures Dack is not able to review the computer consultant's work and once the client has agreed Dack gives the go ahead for the installation of the inventory system.

d) Four chartered accounting firms have been taking part in a quality assurance working paper review program.Under this review each firm reviews the working papers of another firm and the reviewer discusses the strengths and weaknesses of the audit with the auditor from the other firm.

e) JohanGeldens, a chartered accountant ,also runs an insurance agency which complements his auditing ,tax and superannuation services .He doesn't use his own name on anything relating to insurance agency and has a highly competent manager,JanineBorg, who runs it .Geldensoften requests that Borg review the adequacy of the client's insurance with management if the client seems underinsured.

f) EdithBailey , a public accountant in a small country town,runs a small partnership accounting firm which provides tax services,management advisory services ,bookkeeping services and conducts audits for the same client .Since the firm has only two partners and there are only two accounting firms in this town frequently the same person carries out these services over the last ten years.

QUESTION 2

The following situations refers to threats to the Auditor's independence.You are asked to state what the different threats to the Auditor's independence are and explain how these threats impact on the Auditor's independence and any other implications for yourself and your firm.

SITUATION 1

Keith Barnes has been working as an auditor for the AndrewCapizzi Chartered Accounting firm for the past five years and has just started an audit on the Maitland Coal company, a local listed public company .Thecompany has been producing coal for the past fifteen years and uses the cheapest legally permissible method to dispose of its waste and has not adopted the new anti pollution proposals by the government which must be adopted by the end of the year.You know that this company has previously had unfavourable articles about it in the local press.

Your Audit Manager ,David Mann , has stated that it is your responsibility just to provide an opinion on the financial statements with the emphasis being on providing an opinion on whether the financial statements are true and fair and whether there are any material misstatements.The Andrew Capizzi firm has been the Auditor for the Maitland Coal company past eight years and the audit comprises 25% of its total fees revenue currently.

SITUATION 2

Ken Smith,Senior Auditor of Artarmon Accountants ,has just started to do the audit on the latest financial statements of Moonies and has just made the following notes from the opening interview with Kirk Wilson,CEO of Moonies.

Kirk has apologised for not making the final payment of 20% of the prior years audit fee but has explained that he will ensure the cheque is written once his monthly fees come in.Kirk has thanked

your firm for providing the services of Emma Feeney one of your firms Accountants as Assistant Accountant at the firm for the past four months while the previous person was on leave.

Kirk has advised that the firm will be able to start deliberationsabout the selection of Auditor for the following year.The audit at Moonies comprises thirty percent of the annual audit fees for the firm.

This is the sixth year Ken Smith has done the audit at Moonies .This year he is joined by Dave Dunne who has been on the audit of the company for the past nine years and Teena Dean who has just finished her Accounting degree the previous week and is the daughter of the Managing Partner of the Managing Partner of Artarmon Accountants and has done no previous Accounting or Auditing work.

Ken Smith is concerned with several aspects of the current audit as Moonies do not appear to be following the accounting standards in their valuation of inventory and their treatment of the research carriedabout by the firm. Kirk wants to discuss this with Ken the day before the Board considers the selection of Auditor.