QUESTION 2: ETHICS, INDEPENDENCE & GOVERNANCE

You have been asked by Tian, a friend of yours, to help clarify a few matters relating to his new job. He has recently joined Zipit Ltd, a company listed on the New Zealand Stock Exchange, as an assistant accountant. He explains that GKPM, the companys auditors arrived the previous week. As this is his first experience of being audited, there are a few things he does not understand. Knowing that you are studying auditing this year, he hopes you may be able to explain these matters to him:

i) Tian has had to spend a number of hours with Maya, one of the audit staff, explaining how their internal controls work. He has grown to really enjoy her company and is sure she feels the same, so he asked if she would like to go out to dinner with him. He was surprised when she replied that she had better not, as it may raise ethical issues.

ii) Tian has noticed a huge difference between Maya and John, another member of the audit team. Maya is polite and professional to those she deals with and is really knowledgeable and conscientious in her work. John however, is rude, inconsiderate and demanding; he also seems clueless about what he is auditing despite claiming to be an expert and is really careless and sloppy about how he does his work. He was also overheard at a party, discussing the amount of the salary paid to the Zipit Ltd managing director. Tian remarks that if anyone has ethical issues, it is John.

iii) Finally, Tian tells you that he attended a meeting yesterday, between Zipit Ltds accounting staff and the GKPM audit partner and manager. Zipit Ltds Chief Financial Officer, Ning is very keen for GKPM to assist with the implementation of a new accounting information system. Ning had already received quotes from two computer consulting firms for this work and informed the meeting that these quotes were equal to approximately double the annual audit fee. She has suggested that GKPM are better able to provide the necessary assistance their audit knowledge and understanding of Zipit Ltd should mean greater efficiencies, lower costs and a better outcome, as the two computer consulting firms have no prior knowledge of Zipit Ltd. Tian was therefore surprised when James, the audit partner seemed hesitant about accepting this additional engagement. Tian is also puzzled as to why James insisted that the matter would have to be cleared by the Audit Committee before proceeding any further (Tian thought that the GKPM audit partner and manager were the audit committee).

Required: a) For each of the three matters described above, identify and explain which fundamental ethical principle(s) may be compromised. Your explanation should clearly identify the nature of any threats to ethical requirements. (8 marks)

b) Explain to Tian:

What an Audit Committee is; (2 marks)

Why Jamess insistence on Audit Committee approval in (iii) above, is important for compliance with two particular ISA 220 Quality Control elements.