You have been asked to advise on the following ethical concerns that have been referred to you, as manager of the Technical Department of GTSM, a large audit firm: 1. John and Ivy, a newly qualified Chartered Accountant, are working together on the audit of Gupta Ltd, one of GTSM's clients. John was overheard saying to a client staff member that: Yes, Ivy qualified last week - I don't know how she made it, as she is not too smart and would not have qualified a few years ago when I wrote. I guess they are dropping standards and letting just about anyone qualify these days." (2 marks) 2. Tyler has discovered that one of GTSM's clients has deferred recognition of some current year income until the following year, because this will reduce current year income tax and ease cash flow difficulties. The client claims this is just a timing thing' and has also threatened to find another auditor if Tyler raises it as an audit issue. (4 marks) 3. Roger Novak, the lead partner on the audit of FedExpress Ltd, a company listed on the New Zealand Stock Exchange (NZX) has been in charge of this audit since GTSM accepted this client in 2010. (3 marks) 4. GTSM has been asked to prepare a valuation of the factory owned by Twin Sisters Ltd, an audit client so that the company has updated figures for incorporation in its annual financial statements. The factory is used to manufacture all tennis goods produced by Twin Sisters Ltd. (2 marks) Required: a) Identify and explain which fundamental ethical principle(s) has/have been breached in each of the above scenarios. Include in your explanation what is expected in terms of the fundamental principle concerned. Where threats to independence exist, these should also be identified and explained. b) Briefly explain what an audit committee is, and why it is strange that the situation in Scenario 3 arose in the light of NZX Listing Rules. (4 marks) You have been asked to advise on the following ethical concerns that have been referred to you, as manager of the Technical Department of GTSM, a large audit firm: 1. John and Ivy, a newly qualified Chartered Accountant, are working together on the audit of Gupta Ltd, one of GTSM's clients. John was overheard saying to a client staff member that: Yes, Ivy qualified last week - I don't know how she made it, as she is not too smart and would not have qualified a few years ago when I wrote. I guess they are dropping standards and letting just about anyone qualify these days." (2 marks) 2. Tyler has discovered that one of GTSM's clients has deferred recognition of some current year income until the following year, because this will reduce current year income tax and ease cash flow difficulties. The client claims this is just a timing thing' and has also threatened to find another auditor if Tyler raises it as an audit issue. (4 marks) 3. Roger Novak, the lead partner on the audit of FedExpress Ltd, a company listed on the New Zealand Stock Exchange (NZX) has been in charge of this audit since GTSM accepted this client in 2010. (3 marks) 4. GTSM has been asked to prepare a valuation of the factory owned by Twin Sisters Ltd, an audit client so that the company has updated figures for incorporation in its annual financial statements. The factory is used to manufacture all tennis goods produced by Twin Sisters Ltd. (2 marks) Required: a) Identify and explain which fundamental ethical principle(s) has/have been breached in each of the above scenarios. Include in your explanation what is expected in terms of the fundamental principle concerned. Where threats to independence exist, these should also be identified and explained. b) Briefly explain what an audit committee is, and why it is strange that the situation in Scenario 3 arose in the light of NZX Listing Rules. (4 marks)
