Freedom Rock Accounting
An audit is governed by professionalism, which we should always consider before accepting to enter into any audit engagement with the client. As the audit firm, we have to adhere to high ethical behavior standards that are honest, trustworthy, transparent, Integrity, Objectivity Professional competence. Confidentiality, Professional behavior.
The auditors should always be above suspicion and reproach, in the view of our company being able to provide financial and audit services to pure grain milling (PGM).
There exist three legal issues and three ethical conflicts in the engagement with PGM.
Potential Legal Issues concerning FRA’s Ability to Audit PGM
In practice, audit committees should be constituted in a way that members are independent of the entity. Members should not have provided any service to the client in question. In PGM, the audit committee is not legally constituted because Mr. Ed is a shareholder and owns 10% of PGM; he is also interested in earning dividends. Mrs. Mooney is a banker who has provided finances to the management of the company. Moreover, Mr. Bill CPA offers tax advisory to PGM. Audit committees are required to be impartial, independent and should not be in any direct or indirect relationship with the client. The legal issue will, therefore, arise on the independence and impartiality of this committee.
The current relationship between FRA and PGM and their close associates FRFS and FAO should be considered. PGM being a public company, therefore, should adhere to the regulations for the procedures to be followed in auditing financial statements. SEC regulations prohibit auditors from auditing or providing accounting services to a client who has a close association with it. In this case, FAO stopped offering financial service to PGM one year ago. It implies that its merger with FRA may not stop FRA from auditing PGM.
For a firm to effectively carry out its audit, it is required that it understands the client’s operation. Notably, this will help auditors to come up with proper audit plans. These procedures can help them to come up with a qualified opinion. Therefore, FRA is required to understand PGM processes starting from the source of materials until the products reach the customer. Potential legal issues in FRA’s ability to audit the client’s 401(k) plan.
A company that provides other services to the client is not allowed to carry out an audit on behalf of that client. FRFS subsidiary to FRA and it participated in brokering 410k plan for PMG, and it also continues to manage the same in the stock exchange market. It will be illegal, therefore, for FRA to audit PGM.
OFA merged with FRA, but currently, they still provide tax advice to PGM. Therefore, FRA is legally prohibited from any audit service to PGM because of its affiliation to the client through a merger with FAO.
The chief finance officer of our client was an employee of FRFS close associate of FRA, has also participated in audit for the last year. Therefore, legal issues may arise on the independence of the findings because there may be conflicting interests.FRA is not, therefore, obliged to audit the company.
Three Potential ethical conflicts in FRA engagement with PGM
Any audit company is not obligated to audit another company that they provide, like investment advice, banking services, or any other dealings. From background information, FRA is a subsidiary of FRA, but it provided brokerage service to PGM for theri410k plan. It will be unethical for FRA to audit PGM because of the conflict of interest due to their close association.
FAO offers tax advice services to PGM; any firm is not allowed to audit another firm that provides any other service or which is affiliated to it. It will cause a conflict of interest. It will, therefore, be unethical for FRA to audit PGM because of the close association.
It will be ethical for FRA to understand the operations of PGM fully. It will help them to develop proper audit plans, which will be sufficient to audit the client. Quality audit plans reduce negligence and litigations that may result from not having proper knowledge of the client’s functioning.
Three potential ethical issues or conflicts associated with FRA’s ability to audit PGM’s 401(k) plan
FRFS a subsidiary of FRA; therefore, it is unethical for a parent company to audit a client who has a close association with it.FRFS participated in the acquisition of PGM’s 401K to PGM. It still manages its operations in the stock exchange; therefore, there will be no independence in the findings of audit work.FRA auditing PGM will be against the professional code of conduct where independence should always be adhered to.
FRA may also alter the audit results because of conflicting interests, thereby hindering the provision of independent reports and free of conflict of interest(AICPA,2014). It will be unethical for FRA to audit financial statements that were sold by its subsidiary
From the background information, ethical issues arise when there are many familiarities between FRA and PGM.FAO provides tax advice to PMG also the chief finance officer of PGM who understands 410 k plan better was a close associate of FRA. It will amount to self-review threat hence conflicting the provision of independence.
Identify two potential fraud risks within PGM or with PGM’s 401(k) plan.
From the report, the family member to the chief administrative officer owns the pest Control Company which provides services to the company. That itself amounts to fraud because, from the financial statements, pest control expenses have been increasing steadily for the last five years. From the low of $ 27,000 to $36,000 for the year 5 to year 6, it also increased further to $78000 in year 7. There is no evidence to determine whether the figures presented are actual or not. Due to conflict interest between the supplier and the management, a proper internal control system should be put in place to probe any inflation of costs, leading to misappropriation of funds.
Another fraud is evident from sales revenues where the cost of goods for sale decreases while sales revenues are increasing. In practice, the increase in sales will result from an increase in the cost of sales. For example, in year seven, sales $10,814,000, but the cost of sales was $3,101,000, but in year six, sales were $9978000. Still, the cost of sales was $ 3,573,000. Precisely, this shows financial impropriety in the management of inventories. According to supporting documents, it is indicated that the difference was caused by time because local farmers were unable to meet demands and compromise in quality. Nevertheless, that cannot cancel the fact that sales were decreasing and sales were increasing. Therefore .proper accounts payable procedures and purchases should be put in place to ascertain the disparity between the cost of sales and the sales values.