Ethical concerns, considerations, further actions

Question 1

CG3 Ethical Concerns, Considerations and Actions

The structure ? (6)

Answer 1

1. Describe why it is illegal/unethical
2. What risk does it present to the FS?
3. What procedures am I going to do to gather sufficient evidence to:
   • To determine effect on the FS
   • To justify the RI
4. Report RI
   • Definition
   • Actions to report
5. Fraud risk implications on the FS
6. Ethical obligation to report

Question 2

1. Describe the issue:

Answer 2

• Explain why it is illegal/unethical e.g. they payment appears to be a bribe
• Intention to defraud e.g. the classification of the expenditure shows an intention to defraud
• Tax consideration e.g. it is likely that they are claiming a tax deduction for this expenditure which is contrary to the Income Tax Act
• Name relevant laws being contravened e.g. this is contrary to regulations for customs duties
• This is not acting in the best interest of the company (contravention to S76 of the Companies Act)
o They may be liable in terms of S77

Question 3

2. What are the risks (ito the FS)

Answer 3

• [The illegal behaviour] could lead to material misstatement e.g. misclassification of expenditure
• There are potential legal fines or penalties and no provision has been raised.
• The payments of the potential fines may reduce the company’s ability to operate as a going concern.
• ISA 250 states that it is the responsibility of the auditor to detect fraud as far as it results in material misstatement AND to report it if it appears during the audit.

Question 4

3. Audit it

Answer 4

[Put audit procedures you would do here]
• Enquire with management as to the reason, and assess the reasonability of their response.
• Inspect the Tax return for tax deductions relating to payments and assess whether it is in the scope of S11(a).
• Agree by inspection to source document
• Obtain relevant regulations/laws
• Consult with expert (for specific laws)
• Recalculate e.g. the customs duties and compare to the actual customs duties charged
• With managements permission, enquire with 3rd parties e.g. with the customs duties officers

Question 5

4. Reportable Irregularity (Straight out of the APA)

Answer 5

• Definition:
o Unlawful act or omission
o Committed by management
o Has caused /likely to cause material financial loss; or
o Is fraudulent/amounts to theft; or
o Represents a material breach of any fiduciary duty
• Conclude  likely to be a RI

Actions (3/4 marks cap)
o Send a written report to the Regulatory Board
o Within 3 days notify management of sending report to Regulatory Board with copy of report
o Within 30 days of sending report:
 Take reasonable measures to discuss with management
 Give opportunity to make representations in respect of report
 Send another report to Regulatory Board confirming or retracting the reportable irregularity

Question 6

5. Fraud Risk implication:

Answer 6

“Because this represents management fraud, we should increase our assessed risk of fraud, which has the following implications for the audit:”
• ISA 240 – consider revising risk assessment as management may intend to misstate other items in the financial statements.
• May need to perform additional procedures.
• Materiality may need to be adjusted.
• Increase unpredictability of testing.
• Additional scrutiny on manual journal entries.
• Place less reliance on management representations.
• There is a higher risk of management override of controls – this has implications for the audit approach (more substantive approach, more experienced staff)

Question 7

6. Ethical Obligation to report NOCLAR ito:

Answer 7

6. We have an ethical obligation to report non-compliance of laws and regulations in terms of S45 of the APA, NOCLAR CPC and ISA 250
   • Principle of confidentiality does not override legal and professional obligation to report non-compliance with laws