ETHICS: CASE ANALYSIS for accountants

SCENARIO

You are a partner in a three-partner firm of accountants. The firm generates fees of approximately P1.4 million per annum. Within your portfolio of clients is Company A, which has been very successful since it first came to your firm five years ago. It now has an annual turnover in excess of P15 million. Company A generates annually recurring fees for the practice of approximately P50,000, of which approximately P35,000 is in respect of audit work and P15,000 relates to routine tax calculations and preparation of the corporation tax return.

Your firm has a separate tax department, which performs the tax compliance work in respect of Company A. The company's financial year end is December. Last year the audit work commenced in June, and the audit report was finally signed in August. By the end of August, the tax return had been submitted to the taxation authority, and the firm's invoice had been issued to Company A.

In September a significant customer of Company A went into receivership, and Company A suffered a large bad debt. The directors approached you immediately, and were very open about the company's short-term cash flow problem. Therefore, you agreed that payment of the firm's invoice of P50,000 could be spread over ten months, commencing in October.

Company A also needs the support of its bank and, in December, it was negotiating a modest increase in its overdraft facility. It is now early March, and the bank has requested audited financial statements by the end of the month. The audit is well underway, and you have promised the directors of Company A that the bank will have the audited accounts on time.

The planning of the audit was performed by the audit senior and reviewed by the audit manager for the assignment (in whom you have a great deal of confidence). Due to pressure of work, you did not review the audit plan in detail before the audit team commenced the year end audit work, and so you decide to review and sign off that section of the audit file now.

You note that the audit manager has correctly identified going concern as the area of the audit attracting greatest risk. However, at the time of planning the audit, the manager was unaware of the credit agreement reached with regard to the payment of last year's fees. You check your firm's records, and determine that Company A still owes the firm P25,000.

Your analysis should include the following:

1. Brief background

2. Affected fundamental principles with explanation.

3. Threats identified with explanation.

4. Safeguards or possible courses of action to address the threat with explanation.

5. Conclusion and Recommendation.