Ethical Issues | Assignment

Running head: ETHICS
Ethics
Name of the Student
Name of the University
Author’s Note

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Table of Contents
Answer to Task 1.......................................................................................................................2
Requirement (a)......................................................................................................................2
Requirement (b).....................................................................................................................3
Answer to Task 2.......................................................................................................................4
Requirement (b).....................................................................................................................4
(i) Statutory Audit of Gulf Travel......................................................................................4
(ii) The Provision of Other Services to Gulf Travel..........................................................5
References..................................................................................................................................6

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Answer to Task 1
Requirement (a)
In the presence of growing number of financial scandals, ethics has become a crucial
factor in the audit profession where the auditors are needed to comply with the required
auditing standards and principles. The same is applicable in case of the audit of ABC Mart.
The presence of certain ethical issues can be seen in the audit of ABC Mart and they are
discussed below:
1. It can be seen from the provided information that the audit firm has been providing
auditing services to ABC Mart for 20 years. In addition, apart from the statutory audit,
the audit firm provides certain non-audit services that includes tax planning for both
the company and the individual directors and consultancy work regarding the
acquisition policy of the firm. Now, it needs to mention that providing non-audit
services may lead to the threat of audit indepdence of the audit firm. The main reason
behind providing non-audit services by the audit firms is to earn additional fees apart
from the statutory audit fees; and this can lead to the development of conflict of
interest which may create threat to the compliance with the fundamental principles of
auditing like objectivity, integrity and others (Tepalagul and Lin 2015). In addition, it
is needed for the auditors to comply with the ethical principles of auditing at the time
of providing non-audit services to the client such as integrity, objectivity, professional
competence and due care, confidentiality and professional behaviour. In the provided
scenario, due to providing non-audit services to ABC Mart, conflict of interest can
arise that can compromise the ethical principles like integrity, objectivity, professional
behaviour, confidentiality, professional behaviour and professional competence and

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due care (Svanström 2013). Therefore, providing non-audit services is a key ethical
issue in the audit of ABC Mart.
2. It can also be seen from the provided case that a former member of the audit form
joined as the finance director of ABC Mart who had managed the audit of the same
company for four years after the retirement of its finance director. In case a former
member of an audit team of the firm joined the audit client in such a position and a
major connection remains between the firm and the individual, there would be the
development of major threat that no safeguard could lead to the reduction of that
threat to an acceptable level. The same aspect can be seen in case of the audit of ABC
Mart since the former member of the audit firm had served the audit of ABC Mart for
four years (Svanberg and Öhman 2016). Therefore, this is a major ethical issue in the
audit of ABC Mart which can compromise audit objectivity.
Requirement (b)
1. For the first threat, the main safeguard is to determine whether providing non-audit
services create a threat to indepdence before accepting an engagement of providing
non-audit services to the audit client. Moreover, the audit firm is needed to consider
the possibly of reducing the threat to indepdence to an acceptable level. No non-audit
services would be provided in case it is not possible to reduce the threat to acceptable
level (Koh, Rajgopal and Srinivasan 2013).
2. In order to mitigate the second threat, the first safeguard for the firm is the
modification of the audit plan. After that, the audit firm is needed to assign the
individuals to the audit team of ABC Mart who have adequate experience in relation
to the individual who has joined the audit client. At the same time, the audit firm
should need to ensure the presence of a member in the audit team who would review
the work of the former audit member of the audit team. Most importantly, both the

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audit firm and the audit client needs to work towards the development of Chinese wall
that would be used for the prevention of exchanges and communication of
information that could lead to conflict of interest (Coddington 2015).
Answer to Task 2
Requirement (b)
(i) Statutory Audit of Gulf Travel
Ethical Matter – According to the provided case, Midway LLC, a medium-sized audit firm
has been asked to tender for the provision of the statutory audit of Gulf Travel which operates
in the travel sector. It is also mentioned in the case that the audit firm does not have any
experience in the travel sector. This is a crucial ethical matter. As per the fundamental
principle of professional competence and due care, it is the obligation on the auditors to
provide only those services that the audit members of the firm is competent to perform.
Therefore, before the acceptance of a specific client engagement, an audit member is required
to determine whether the acceptance of the audit engagement would develop any threat to
compliance with the fundamental principles (Samsonova-Taddei and Siddiqui 2016).
Moreover, there would be the development of self-interest threat to professional competence
and due care in case the engagement team does not possesses the competencies and
experience required for properly carrying out the audit engagement. The same aspect can be
seen in case of the audit of Gulf Travel as Midway LLC does not have the required
competencies and experience carry out the audit of the firm (Knechel and Salterio 2016).
Therefore, this is a major ethical matte which can lead to self-interest threat to professional
competence and due care.
Possible Safeguards – There are certain possible safeguards that Midway LLC can use to
minimize the threat. First, the audit firm needs to acquire an appropriate understanding on the

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nature of the client’s business, complexities in business operation, specific requirements of
engagement and others. Second, the audit firm is also needed to acquire adequate knowledge
of the travel industry. Third, it can assign adequate staffs with the necessary competencies.
Fourth, experts can be used where necessary. Lastly, it must comply with the policies and
procedures for quality control in order to provide reasonable assurance that specific
engagements are accepted only when they can be completely performed (Evetts 2014).
(ii) The Provision of Other Services to Gulf Travel
Ethical Matter – It can also be seen from the provided information that the finance director
also asks for certain non-audit services to Midway LLC such as assistance for the preparation
of financial statements. This is an ethical matter that needs to be considered. Audit firms
provide non-audit services in order to earn additional fees besides the statutory audit fees.
However, providing non-audit services can lead to the development of the threat to audit
indepdence such as self-review, self-interest and advocacy threat. Providing certain non-audit
services can lead to the development of such threat that cannot be reduced to accepted level.
In case of Gulf Travel, the finance director is asking to the audit firm for providing assistance
in the development of financial statements which is a major aspect (Zhang, Hay and Holm
2016). Therefore, this needs to be considered as an ethical issue.
Possible Safeguards – For this issue, the main safeguard is the determination of the fact that
whether providing the demanded non-audit services to the audit client would lead to the
development of threat to audit independence. In the evaluation of the importance of such
threat created by providing non-audit services, it is needed to consider that the audit team has
reason to believe is created by providing non-audit services. In case the threat created cannot
be reduces to accepted level through the application of safeguards, it is needed for the audit
firm to stop providing non-audit services to the audit client (Causholli, Chambers and Payne
2014).

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References
Causholli, M., Chambers, D.J. and Payne, J.L., 2014. Future nonaudit service fees and audit
quality. Contemporary Accounting Research, 31(3), pp.681-712.
Coddington, M., 2015. The wall becomes a curtain: Revisiting journalism’s news–business
boundary. In Boundaries of journalism (pp. 67-82). Routledge.
Evetts, J., 2014. The concept of professionalism: Professional work, professional practice and
learning. In International handbook of research in professional and practice-based
learning (pp. 29-56). Springer, Dordrecht.
Knechel, W.R. and Salterio, S.E., 2016. Auditing: Assurance and risk. Routledge.
Koh, K., Rajgopal, S. and Srinivasan, S., 2013. Non-audit services and financial reporting
quality: evidence from 1978 to 1980. Review of Accounting Studies, 18(1), pp.1-33.
Samsonova-Taddei, A. and Siddiqui, J., 2016. Regulation and the promotion of audit ethics:
Analysis of the content of the EU’s policy. Journal of Business Ethics, 139(1), pp.183-195.
Svanberg, J. and Öhman, P., 2016. Does ethical culture in audit firms support auditor
objectivity?. Accounting in Europe, 13(1), pp.65-79.
Svanström, T., 2013. Non-audit services and audit quality: evidence from private
firms. European Accounting Review, 22(2), pp.337-366.
Tepalagul, N. and Lin, L., 2015. Auditor independence and audit quality: A literature
review. Journal of Accounting, Auditing & Finance, 30(1), pp.101-121.
Zhang, Y., Hay, D. and Holm, C., 2016. Non-audit services and auditor independence:
Norwegian evidence. Cogent Business & Management, 3(1), p.1215223.