You are the audit engagement partner at A Ltd, a small firm of public accountants. You were recently appointed as auditor to a local company named B Ltd. The previous auditors, Z & Co, had resigned due to having so few audit clients that it was no longer commercially viable for the firm to retain its registered public accounting firm status. This had provided the opportunity for your firm to take on the client and you and your fellow partners were delighted to be gaining an audit client in what was proving to be a difficult business environment. Times were certainly tough and you were well aware that redundancies were not out of the question if more work was not picked up quickly. You had met Mr X, B Ltd.’s Managing Director (MD), at various local events and had a good personal relationship with him. Mr X was someone with a very good reputation in the local business community and was involved in a lot of charitable fundraising activities. You believed that this was a good client to win and, with Mr X’s considerable business connections, this might not be the only audit client that you would pick up in the coming months. Mr X had assured you that a good working pack ( Audit Fee) would be prepared by his newly installed finance director (FD) to support the figures in the draft financial statements. Additionally, the client would arrange for the final publication of the accounts.

Six months down the line, you are sitting at your desk reviewing the audit working papers of B Ltd. As you had imagined, the fieldwork had been done within budget and the files appeared to show that, as Mr X had earlier advised, the company had maintained a good set of records and produced appropriate documentation to support the draft figures. Some minor errors had been noted and added to the summary of unadjusted errors, but nothing of any significance, and you had all but finished your review. You looked at your watch, another 20 minutes would see you complete your task – the client was now keen to sign off in seven days’ time, three weeks earlier than had originally been envisaged. This had just allowed you time to review the files in advance of a meeting with Mr X and his FD later that week to discuss any major issues prior to signing.

You continued with the task at hand and opened the creditors section of the file and reviewed the lead schedule. Everything this year appeared in line with that of the previous year. There were no major variations and, to be honest, you had not expected any. There was, however, a note from the audit senior stating that a large accrual had been included for taxes – and indeed an accrual of $163,937 was included in the accounts. This appeared to consist of a charge of $15,000 for the year in question and the backlog of the amount which had been accrued in previous years. It was clear that the company had not made a payment of taxes for a period of 8 years. It had, however, ensured that the expense had been properly reflected in the accounts. You made a note of this and added it to your list of points to be discussed at the client meeting. You remembered that no mention was made of this fact in the consent letter which you had received from the predecessor auditor. You had not been given access to their working papers for the previous year.

Whilst the accounts appear to be correctly stated, on the premise that taxes are due to be paid, you are concerned that it would appear as though the company had never tried to resolve this issue with the tax authorities. You also have concerns about how this item will be treated in the corporate tax computation.

Analyse the scenario and answer the following:

1. Who are the key parties who can influence, or will be affected by, your decision? Justify your answer

2. What fundamental ethical principles for accountants are most applicable and is there an apparent conflict between them?

3. Discuss the major issue as traced out from the audit proceedings

4. State the charge for the current year and the accrual for the accounts in RO.