QUESTION 1

(a) The Fundamental Principles set out the obligations placed on all members, whether or not
they are in practice.

Required:

explain the five (5) fundamental principles ethics contained in the MIA By-Law (On
Professional Conduct and Ethics).
Integrity – 2m
Maintaining the behavior of Straightforward, honest, fair dealing, truthfulness
EXAMPLE- does not associate with reports that contain material misstatement,
reckless in providing opinion and omitted disclosure of significant information.

Objectivity- 2m
Do not compromise (discredit/endanger) professional/business judgment because of
bias, conflict of interest, undue influence of others. EXAMPLE- avoid close relationship
with client.

Professional and due care- 2m

Maintain professional knowledge and skill. EXAMPLE – an auditor should acquire
competency through formal continuing professional development and always be
meticulous when engaging auditing work.

Confidentiality – 2m
Cannot disclose confidential info while acting in professional capacity, and also even in
a social environment. EXAMPLE – auditor should disclose information pertaining to
audit work to family and friends.

Professional behavior- 2m
Avoid any action that discredits the profession. EXAMPLE- Auditor must be always
obey the law and regulations not just during work but also in living daily life. – do not
exaggerate claims

10M
(a) Skitchers Sdn. Bhd. is a company that imports and distributes a wide variety of shoe brands in
Malaysia. The company is audited by Morgan & Associates, a firm of Chartered Certified
Accountants, and the audit manager is Jack Moo. The following matters have arisen during
the audit of the group’s financial statements for the year to 31 December 2016 which is
nearing completion:

(i) During the annual stock taking on shoes at the company’s principal warehouse, the audit
staff who attending the stock count were invited to purchase any items of shoes at 50%
of their recommended retail prices.
(ii) The managing director of Skitchers, Joe Fernandez, owns a private jet. Joe invoices the
company, on a monthly basis, for that proportion of the operating costs which reflects
business use. One of these invoices shows that Jack Moo was flown to Bangkok in
September 2016 and flown back two weeks later. Neither Skitchers nor Morgan &
Associates have any offices or associates in Bangkok.
(iii) On the annual dinner night, 12 November 2016, Jack Moo was called up on stage to
receive a token of appreciation by the company, a Nike Air shoe worth around RM600.
(iv) Just two weeks ago, Joe Fernandez announced his engagement to be married to his
Accountant, Sharon. Before joining Skitchers in March 2016, Sharon was an audit
manager at Morgan & Associates and she was the person in charge of the audit of
Skitchers.
(v) Before the year end, Skitchers Sdn. Bhd. was involved in litigation suit brought by its main
competitor for breaching the fair trade legislation. Joe has contacted you to be the witness
in the court to defend the charges.

i. auditor receive sale discounts may inflicted with conflict of 3m

interest/financial interest threat-

should check if the discount also can be made available to all the client’s staff,
otherwise (if not) auditors should reject the offer.
ii. Jack Moo travels with managing director implying that they were 3m
in close relationship which lead to familiarity and conflict of interest
threat-
Once Jack developed intimate bond (emotionally attached) with the managing
director, he would have desire to help the company even if it breaches the
laws and regulation. Safeguard would be reducing the magnitude of
relationship otherwise replaced by another independent auditor.
iii. Jack Moo received a token of appreciation of over RM250 may 3m
lead to conflict of interest –
Jack Moo received a gift that exceeded the acceptable threshold amount even
if it meant for appreciation purpose may trigger threat in such a way the he
may be indebted to the client and would do a return favor for the client.
Safeguard would be to reject the gift after the event
iv. Managing director marries to accountant who just moved from
assurance provider firm can cause familiarity and self review threat- 3m
Issue such as Sharon would know how to manipulate the accounts and to
outsmart the auditor from being caught of deceiving. Safeguard is to remove
Sharon from the office, hire a new experienced ad skillful accountant who
could not be easily outsmart by wife and auditor.
v. Agreeing to become a witness for client would become advocacy 3m
threat
Issue is that the auditor would be given rewards in return for helping the
client thus, conflict of interest also correlated with advocacy threat. Safeguard
is to hire a professional independent lawyer or forensic accountant to deal
with the investigation then make testimony to the court (not the auditor). The
external auditor may assist them in excavate evidence pertaining to fraud.
15 m

Required:

For each of the above situations, discuss:

1. the ethical issues raised, and
2. the actions which might be taken by the Morgan & Associates, the auditor to ensure
that independence is not compromised.

25 MARKS
QUESTION 2

(a) Marisol & Co, chartered accountants is delighted about the prospect of being appointed as the
auditor for Petrochem Sdn. Bhd., a leading provider of technology for reservoir
characterization, drilling, production, and processing to the oil and gas industry in Malaysia. Commented [U1]: tender appointment?
The company supplies the industry's most comprehensive range of products and services,
from exploration through production and integrated pore-to-pipeline solutions for hydrocarbon
recovery that optimize integrated performance thus, would require the auditor to understand Commented [U2]: competency?
its business operation and the important financial reporting standards in preparing financial Commented [U3]: understand the business operation?
statements. The audit fee generated from this arrangement is more than 20 percent of the Commented [U4]: understand reporting standards?
total annual audit fee of the audit firm. Although the audit partner and his team have never Commented [U5]: high fee
involved in this line of industry, they still keen to provide audit service to the giant petroleum
Commented [U6]: never involved in the industry assisting
company. Marrisol & Associates has just been given the permission by the client management networking?
to contact the existing auditor for more information. Commented [U7]: to replace the existing audit firm, any
disputes?
Required:

(i) explain five (5) issues arising from the above situation and provide the best safeguard for
each of the identified issue using the format below.

Threat
There was no tender process to appoint
prospective auditor. Big company usually
would appoint through formal tendering
process. This to avoid bias in the selection.
Lack of competency may impair the
professional and due care – auditor is
dealing with new industry
Lack of knowledge on how business
operation and reporting standards may
jeopardize the professional behavior which
would discredit the audit firm.
High fee can lead to conflict of interest.
Auditor would want to stick with the
company for as long as possible to indulge
the lucrative fees which in long run would
impair independence.
Replacing a new audit firm give rise to
multiple questions that must be managed
wisely by prospective firm. Must
understand threats rather than just focus
on the fees.
Safeguard
Since this involves giant company with
mega project, the employment of tendering
process should be encouraged. Not just
fairness in selection but also to identify
suitable fir that has merit to perform.
Need to check if competency can be
attained within firm. If none, need to look
out for expert help.
Need to look out for any expert and
networking that is willing to help.
Warrant for only TWO years then withdraw.
Moreover, need to disclose all the
arrangements with audit committee.
Must inquire the existing auditor. Questions
must be insightful and valid (real).
(10 marks)
 (ii) explain three (3) key information in which Marissol should obtain from the existing auditor.
To find out whether fee has been served promptly because auditors do not 2
want to experience such situation.
To find out whether there was any disagreement exists between the existing 2
auditors and management. If such situation exists, successor must study the
matter and if there was no safeguard, then need to reject.
Find out the business’s background, its state of internal control, and the risks 2
surrounding the business.
Total 6 marks

(b) Auditor liability is increasingly concerning, both in terms of audit quality and the reputation of
the profession but also in terms of the cost to the industry and the barriers this creates to
competition within the audit market.

Required:

(i) distinguish the concept of ‘Privity’ and ‘Proximity’ under the legal context of auditors’
liability.
Privity means relationship developed through engagement letter. Any parties 2
that violates the agreement can dragged to court once legal action brought by
the suffered party (plaintiff)
Proximity means relationship that exist not through engagement letter but by 2
the awareness of your opinion or judgment that being used by third party for
their decision making. Should the auditor issues wrong opinion, causing injury
in terms of losses to the third party, the auditor can be sued by the suffered
third party.

(4 marks)

(ii) briefly explain five (5) circumstances in which auditor could be held liable for negligence.
Breaching the contract (engagement letter) 1
Auditor failed to comply with standards in the process of forming reasonable 1
opinion.
Auditor help client to conceal fraud. 1
Auditor being blunder by just accepting management assertion without testing 1
it.
Auditor leaks confidential information of client. 1

(5 marks)

25 MARKS

TOTAL 50 MARKS