Bill Green is a senior auditor who is currently working on the audit of Advanced Engineering Ltd (Advanced), an engineering company. When reviewing additions to property plant and equipment, Bill learned that Advanced recently purchased new laptop computers for each of its five hundred employees. The laptops were purchased from Hardware Plus Pty Ltd (Hardware), the company for which Bill’s wife, Jean, works as the secretary to the CEO.

One night at dinner, Bill told Jean of this purchase and jokingly suggested to her that she should ask for a pay increase because business must be “booming” at Hardware Plus. Jean agreed, stating that, only last week, Hardware made a sale of the same type of laptops to another engineering company, SA Engineering. Jean added that she was surprised at the prices charged by Hardware in each of the two sales contracts. Although the sale to SA Engineering was for only one hundred laptops, the price for each laptop was 20% cheaper than that paid by Advanced. After dinner, while reading the local newspaper, Bill’s attention was drawn to a photograph taken at the opening of Hardware’s new showroom. The photograph showed one of the owners of Hardware, Frank Grey standing with the CEO of Advanced, John Grey, who, according to the newspaper, is Frank Grey’s brother,

Later in the audit, Bill discovered that the purchase of the laptops by Advanced was initiated and authorised by John Grey without going through the company’s usual tendering processes. Bill was concerned that John Grey may not have acted in the best interest of Advanced’s shareholders. Consequently, he raised his suspicions with the audit partner. While the partner said that he could see Bill’s point, he also said that there was not much that could be done about it. “In any event”, he added, “we are already behind schedule and ahead of budget on this audit, and we cannot afford further delays. Our concern is only about whether or not the financial statements provide a true and fair view”.

REQUIRED:

On the basis of the facts provided above, and your understanding of the Code of Ethics for Professional Accountants:

(i) Identify three ethical issues that may impact the audit of Harper’s financial Statements.

(ii) Explain why each of the issues identified above is of concern. 

(iii) For each issue you identified, state the paragraph reference in APES 110 that provides guidance on the matter.