Background

You are currently studying a number of corporate failures happened in the World that caused a major creditability crisis in the accounting and auditing profession. The collapse of Bearings Bank has drawn your attention.

Barings Bank was one the world's oldest merchant bank. Barings decided to open a Future and Options office in Singapore. The bank appointed Nick Leeson as a general manager, who was sent over to head both front office and back office operations. Leeson was able to settle his own trades, bypassing the bank's own internal controls.

After moving to Singapore to execute and clear transactions on the Singapore Exchange, Leeson began making unauthorised trades, which initially made large profits: 10 million in one week for Barings. This humongous profit accounted for 10% of Barings' annual profit, which caught the attention of other staff members in the bank. In particular, Mike Killian, the head of Global Equity Futures and Options Sales, knew that Barings was making about 200 million for the whole year. Killian was cynical that if Leeson carried on making such profit throughout the year, it would be a 1billion a year profit. According to some sources, Killian claimed that if Leeson is doing the amount of business for the amount of profit, then they should shut down the rest of the bank because they were just overheads.

Due to Leeson's rogue trading, Barings declared bankruptcy in February 1995. The report of the collapse of Barings Bank is available on Moodle. For further information, please refer to the below source link:

https://www.gov.uk/government/publications/report-into-the-collapse-of-barings-bank

Required:

1. Mike Killian was cynical that one person alone was making more money than all the rest of Bearings Bank staff. Questioning the reliability of information and being alert to conditions that may indicate possible fraud is an attitude expected from auditors. In your view, what is the name of the professional attitude for auditors and explain the concept of this professional attitude.

2. Using your knowledge of APES 110 Code of Ethics for Professional Accountants to identify and explain the potential type(s) of threats to Nick Leeson's independence. Suggest what safeguard(s) should be instituted to reduce the threats to independence.

3. Before going insolvency in 1995, Barings Bank had received an unmodified audit report. In your view, what does this mean regarding the audit expectation gap? How does an unmodified audit report relate to the collapse of Barings?