There are several ethical and professional issues identified in the case. In the first place, it is observed that Sam Kerr, the former audit senior at B&D carried out an audit at Mulgrave Electrical Appliances (MEA) without an audit team. In addition, after handing over the audit file to the manager, he left the office to take over his new job as the CFO at Jacob International. The actions by Sam Kerr brings potential ethical and professional gaps in his audit practice. According to Felix K, (2015), all members in an audit team are expected to comply with the fundamental principles of objectivity, integrity, professional competence and due care, professional behaviour and confidentiality. In the case, there is a breach of objectivity in Sam Kerr’s actions as he possess a self-review threat of not adequately evaluating the outcomes of his audit at MEA. The ethical issue is evident through the review made by James which found out that some of the audit procedures taken by Sam do not hold for documents maintained by MEA. Besides this, there is breach of integrity as some of the explanations do not reflect the information gathered concerning MEA.
On the second part, the management of Myar is requesting B&D to perform non-audit services of providing advice in tender preparation. Generally, it is believed based on regulations that non-audit services offered by an auditing firm to its clients may compromise the independence of audit as well as the quality of audit (Kang, Hwang, and Hur, 2018). B&D may be subject to conflict of interest due to the fact that the advice concerns Myar in relation to its business dealings with DyZons, who are both audit clients to B&D.
In the third part, the issue of audit independence arises as Michael; an engagement partner is of the opinion that B&D may invest in a statewide program for auditors and accountants with Elite Organizers (EO), its audit client. The existence of financial relationships between an audit client and audit firm can create an impression of lack of independence to the client, regardless of the situation at hand (Kang, Hwang, and Hur, 2018). The existence of such relationships may result in a number of circumstances where B&D may not be in a position to implement an unbiased method to the audit engagement with EO. It may lead to favours in the audit report as compared to what the circumstances or facts may justify.
There are three established categories that seek to reduce or eliminate safeguards, and they include individual, professional, and workplace approaches (García-Marzá, 2017). In relation to the provision of non-audit services to Myar, B&D should avoid providing management advice on preparing the tender as well as taking into consideration the responsibility of such decisions in the immediate operations of the companies.
In the short run, the company should implement regulatory safeguards that emerge from professional and legal requirements such as ethical guidelines, auditing standards, disclosure requirements, enforcement and oversight, and prohibitions among others (SCORTESCU, 2017). Michael should immediately consider disclosing his discussion with the CEO of EO to the governance body at B&D. Also, he should consider consulting superiors at B&D as well as relevant professional bodies concerning his opinion. The company may also consider safeguards which can be specific to audit engagement or across the company such as documentation and quality control, threat identification, ethical standards, availability of procedures for consultation, division of various audit responsibilities, staff development, and training among others (García-Marzá, 2017). The company should also consider the safeguard of governance procedures within the company, more so within the audit committee in the long-run operations of the company.
In the case of Kerr conducting an audit engagement individually, it is recommended that the audit company should establish ethical rules that will require an audit engagement to be carried out by an audit team rather than by an individual. B&D should also establish.
It is also recommended that the company should establish ethical principles that audit members should follow and be aware of the principles to eliminate or reduce the threats (García-Marzá, 2017). The principles should highlight the role of trust in the framework of auditing. The company should also design codes of ethics to encourage the audit members to perform their duties in an ethical manner. In addition, B&D should not allow its auditors to practice non-audit services to its clients. Lastly, the company focus on maintaining safeguarding ethical and professional issues among its auditors (Felix K, 2015).
Felix K, A. (2015). AUDITOR INDEPENDENCE AND THE PROVISION OF NON-AUDIT SERVICES– INVESTORS’ PERSPECTIVE IN NIGERIA. European Journal of Accounting Auditing and Finance Research, [online] 3(5), pp.108- 119. Available at: http://www.eajournals.org/wp-content/uploads/Auditor-Independence-and-the-Provision-of-Non-Audit-Services—Investors—-Perspective-in-Nigeria.pdf [Accessed 8 Mar. 2019].
García-Marzá, D. (2017). From ethical codes to ethical auditing: An ethical infrastructure for social responsibility communication. El Profesional de la Información, 26(2), p.268.
Kang, S., Hwang, I. and Hur, K. (2018). Non-audit Services and Auditor Independence Depending on Client Performance. Australian Accounting Review.
SCORTESCU, F. (2017). Threats to Auditor Independence. Anuarul Universitatii Petre Andrei din Iasi Fascicula: Drept, Stiinte Economice, Stiinte Politice, pp.150-166.