Samuel And Company Case Study Assessment Answer

Answer 1

a)    In the first case, Brain & Co. has not paid for the invoice raised by Samuel for last year’s audit and current year audit is on a completion stage. Audit outcome of current year’s audit also shows that Brain is suffering from poor cash flows. Non-payment of fees and continuation of audit work will question the independence of the Auditors and may lead to professional issues. 

b)    In the second case, audit manager of Samuel’s firm has been using the property of Carter Ltd, which is the audit client of Samuel. He is having the property on a rent of USD 250. In addition, invoice is in the name of Audit Manger only. Still it will affect the independence of the firm because it will cause self-interest threats, which occur when an auditing firm, its partner or associate could benefit from a financial interest in an audit client.

c)    In the third case, Samuel is referring Infomatics360 to its audit clients and in exchange of that charging the referral fees from Infomatics360. However, Informatics 360 is not the audit client of Samuel but referring it to its audit client is also not professional and against to the ethics of the Chartered Accountants. It will create the self-interest threat in which Audit firm, its partners or its managers are getting some financial benefit from the audit client.

Answer 2

a)    In the first case, auditor should not sign the Balance Sheet of current year until they receive the payment for previous year audit. If they do not sign the financial statement then Auditors will not be considered as guilt. Auditor can conclude that there was a threat to their independence due to the outstanding professional fees pertaining to last year. If auditor is able to arrange to receive the professional fees, auditor firm can be considered as independent and could proceed to sign off the balance sheet for current year. In the absence of such arrangement, it would not be appropriate for the auditor to sign the report. Since in the present case, Brian is suffering from short cash flows then it is suggested that it would be unprofessional to sign off the Balance sheet for current year.

b)    In Second case, where audit firm receives the invoice in the name of its manager from one of its audit client risks the independence of the firm. It is recommended that an auditing firm will be disqualified from being appointed as the statutory external auditor if the audit firm, its partners or members of the engagement team as well as their ’direct relatives’ had any

(i) financial interest in the audit client,
(ii) received any loans and guarantees from the audit client
(iii) had any business relationship with the audit client and
(iv) had any personal relationships with the key officers of the audit client, i.e. any whole time director, CEO, CFO, Company Secretary, senior management belonging to the top two managerial levels and the officer who is in default.In this particular case, if the invoice amount is less than the limit of credit defined in the Act then there is no issue otherwise ask Robinsons to make the payment of Carter Ltd and ask him to find out some other place for the storage of his speed boat. In addition, what Carter is charging is only the nominal fee, which creates the self-interest for the audit firm and its partners and its managers. Thus, to avoid that scenario, either ask Robinsons to change the storage place or ask Carter Ltd to charge actual market rent that is prevailing in the market.

c)    In the third scenario, Samuel’s firm is acting as an agent for Infomatics 360 and in exchange of which is charging the referral fees from Infomatics. Being the agent of Infomatics, it is referring the accounting software to its audit client itself, which creates the threat of self-interest. In addition, auditor is prohibited to provide some of the services, which will affect the independence of the auditors and will be disqualified to di the audit. To safeguard its independence, Samuel has to stop referring accounting software of Infomatics to its audit client. If he is referring than stop billing to the Informatics as referral fees. 

Reference

1.    McLennan, G., &Dhillon, C. (2016, October 25). Auditor Independence and Unpaid Fees. Retrieved April 11, 2018, from https://www.lexology.com/library/detail.aspx?g=0dc429bf-1f16-4982-9125-8a98a55759fd
2.    Code of Ethics B section 290. (n.d.). Retrieved April 11, 2018, from https://www.icaew.com/membership/regulations-standards-and-guidance/ethics/code-of-ethics-b/part-b-290