Question 1

a. Your firm is the independent auditor to two companies. One is a hotel, Jollan; the other is a food wholesaler, Tuxco that supplies the hotel. Both companies have the same year-end. Just before that year-end, a large number of guests became ill at a wedding reception at the hotel, possibly as a result of food poisoning. The guests have taken legal action against the hotel and the hotel has taken action against the food wholesaler. Neither the hotel nor the food wholesaler has admitted liability. The hotel is negotiating out-of-court settlements with the affected guests. The food wholesaler is negotiating an out-of-court settlement with the hotel. At the reporting date, the public health authorities have not completed their investigations. Lawyers for both the hotel and the food wholesaler say informally that negotiations are 'going well' but refuse to confirm this in writing. The amounts involved are material to the financial statements of both companies.

Required: Describe how IFACs Rules of Professional Conduct apply to this situation and explain how the external auditors should manage this conflict of interest. (12 marks)

b. James has directly telephoned the CFO of an organization and asked to be their auditor. During the course of the conversation, James has also stated that their current auditor is too expensive and that he would do a better job at a cheaper price. Does this constitute an ethical breach of conduct? Explain. (8 marks)