Reference no: EM133939826

Auditing

Question 1
The following are situations that may violate the Code of Professional Conduct. Assume, in each case, that the CPA is a partner. Discuss whether the facts in any of the situations indicate violations of the Code of Professional Conduct. If so, identify the nature of the violation(s).

Contel, CPA, advertises in the local paper that his firm does the audit of 14 of the 36 largest community banks in the state. The advertisement also states that the average audit fee, as a percentage of total assets for the banks he audits, is lower than any other CPA firms in the state.

Davis, CPA, sets up a small loan company specializing in loans to business executives and small companies. Davis does not spend much time in the business because he spends full time with his CPA practice. No employees of Davis's CPA firm are involved in the small loan company.

Elbert, CPA, owns a material amount of stock in a mutual fund investment company, which in turn owns stock in Elbert's largest audit client. Reading the investment company's most recent financial report, Elbert is surprised to learn that the company's ownership in his client has increased dramatically. Get instant assignment help from top tutors.

Able, CPA, owns a substantial limited partnership interest in an apartment building. Frederick Marshall is a 100% owner in Marshall Marine Co. Marshall also owns a substantial interest in the same limited partnership as Able. Able does the audit of Marshall Marine Co.

Baker, CPA, approaches a new audit client and tells the president that he has an idea that could result in a substantial tax refund in the prior year's tax return by application of a technical provision in the tax law that the client had overlooked. Baker adds that the fee will be 50% of the tax refund after it has been resolved by the Internal Revenue Service. The client agrees to the proposal.

Question 2

You are an audit senior at Branche & Co and have been allocated to the audit of Mello Vibes Co (Mello), a listed company which has been an audit client for eight years and specializes in manufacturing musical instruments.

Beverly Oak was the audit engagement partner for Mello and as she had completed seven years as the audit engagement partner, she has recently been rotated off the audit engagement. The current audit partner, Sandeep Pine, has suggested that to maintain a close relationship with Mello, Beverly should undertake the role of independent review partner this year. In addition, Mello has requested that Beverly assist them by attending their audit committee meetings, as a non-executive director has recently left the company. Mello has also asked Sandeep and the other partners at Branche & Co to help them in recruiting a new non-executive director.

The total fees received by Branche & Co for last year equated to 16% of the firm's total fee income. The current year's audit fee has not yet been confirmed, but along with taxation and other possible non-audit fees the total income from Mello this year could be greater than for last year. Last year's audit fee was being paid monthly by Mello, but no payments have been made for the last three months. The audit manager for Mello has just announced that he is leaving Branche & Co to join Mello as the financial controller.

Required:

Using the information above:

(i) Identify and explain FIVE ethical threats which may affect the independence of Branche & Co's audit of Mello Vibes Co; and
(ii) For each threat explain how it might be reduced to an acceptable level.