Question 1 Auditing case study

The audit of WWW Ltd. by Hongs CPA firm is almost complete. Hong has a meeting scheduled with the client to discuss a proposed audit adjustment of $75,000 to a receivable from AAA Inc. At the meeting, managements position is that no adjustment is necessary as AAA is controlled by the same company that controls WWW. Essentially, the parent company has adjusted the prices for transactions between its subsidiaries in previous years, and WWWs management feels that if this receivable is not paid in full, then the lost amount will be recovered from another transaction with AAA next year. The auditors position is that the $75,000 adjustment is required or an unqualified opinion cannot be issued. After the meeting, in a spirit of compromise and team work, the client agreed to make an adjustment of reducing the receivable by $37,500.

i) Assume that as part of the compromise in reaching the $37,500 adjustment, Hong agreed to issue an unqualified opinion. Has Hong maintained his independence? Briefly explain why.

ii) Assume that the client tried to restrict Hong from communicating with AAA, and instead insisted that Hong deal only with the parent company, since the parent company controls AAA. Does this affect Hongs independence? Briefly explain your answer

What are the moral/ethical issues, if any? What should Jenny do? Use the following steps of case analysis approach.

1. Case Analysis Approach

2.Identify problems and issues

3.Generate alternatives4.Select the decision criteria5.Analyze and evaluate the alternatives6.Recommend an action for Jenny