CASE STUDY: Carla’s Coffee – Ethics and Legal Issues

a) Consider potential conflicts of interest (threats to integrity / objectivity / confidentiality)

Carla’s brother is an audit director in the Sydney office and has been since the beginning of
February 2017 (prior to this he was audit manager in the Melbourne office)
 Threat: Objectivity
o Potential conflict of interest due to Carla’s brother’s role in the audit firm as
he might have influence in Melbourne audit office
 Safeguard
o Establish Chinese walls
o Ensure that Carla’s brother has no role to play in the audit. Ensure that all
staff assigned to the audit have no/minimal relationship with Carla’s brother

b) Consider threats to independence

 Threat: Independence
o In mind: auditors may indirectly want Carla’s business to look good to please
Carla’s brother who is the director at the Sydney office
o Appearance: still looks bad as there is specific threats of close family
relationship
 Safeguards: as above

c) Assess firm’s competence to perform audit

 Concerns:
o Carla’s coffee is highly vertically integrated
 More compelx when measuring inventories
 Therefore, need more experience stadd in measuring and valuing
inventory
o hard to measure recent purchase of non-current asset
o no paper work
o tight timing: may not have enough competent and experience senior level
auditors to properly complete th aduit engagement in time

d) Determine firm’s ability to use to use care

 multiple locations around Melbounre must be attended
 Audit will happen at the busiest time of the year – do we have available staff with
relevant skill set to undertake the work required
 Significant time pressure
o Investor would like FS ASAP
o Gives us 20 days to complete the bulk of the audit
 First year audit
o Everything has to be done from scratch – need to learn systems and controls
and document all this accurately
o Need to design test of controls and substantive procedures from scratch
o Not familiar with the client
o Audit likely to take longer and will require more senior staff
CASE STUDY: Carla’s Coffee – Client Evaluation

Integrity of Management

a) Consider Relevant Facts:

Carla:
 Founder of significant shareholder
 Her personal contacts have been instrumental in the business growth
 She has decided to sell her shares and leave the business
 Has never participated in an audit before
 Bad publicity regarding child labour
 Seems willing to provide good access to files and facilities to auditors

Wendy:
 CFO prepares the FS
 Gets a bonus which is tied ip to the performance in the business
 Has prepared statement for audit before> competent

Other senior management

 Also want to sell their shares

b) Communicate with outgoing auditor

 Carla’s coffee never been audited before, therefore no outgoing auditor

c) Make inquires of other relevant 3rd parties

 Northpac: communicate regarding repayment or lack thereof
 Solicitors: regarding any ongoing legal matters
 Suppliers: if it is making the payment when they fall due
 Certification body
o Enquire about the outcome of bad publicity and if any firther matters have
come to light
o Communicate with relevant ethical supply certification body to see if any
disciplinary action maybe in proceedings

Special Circumstances

a) Identify intended users of financial statements

 Small proprietary company, statutory audit is not required
 Users are dozen of potential investors and possibly Nortpac Bank
 Will general purpose FS meet the needs of all intended users?
 Will special purpose reports be required?
 In these circumstances investors sometimes request a due diligence report which is
more extensive than a normal audit
 Additional reporting requirements may mean additional competency requirements,
which will add to cost and time required and broaden auditor’s legal liability

b) Assess client’s legal and financial stability

  Bad publicity> what has been the impact to date. Will need to consider
communicating with relevant 3rd parties
 Is there anything that would make us question this client’s financial stability
 What are all senior management wanting to sell out of the company
 Any issue around going concern?

c) Analytical review of balances

 Review prior year’s financial statements
 Obtain most recent financial information
 Identify any significant movements and other obvious issues

d) Evaluate client’s auditability

 Has never been audited before
 Wendy has prepared FS for audit so has some experience
 There are systems in place to enable production of full reports from current
accounting system

Everything done in audit process aims to:

 Increase audit quality
 Ensure efficient/effective audit

a) What to consider?
 Accepting/continuing engagement
o First step
o Every client increases audit risk i.e. giving wrong audit opinion
 Planning the audit
o Understanding the client
o Identify the risk
o Analytical procedures
 Client acceptance has 2 sides
o Client assessment
o Firm’s ability assessment
Carla’s brother audit director in Sydney office since 2017 and prior was an audit manager in
Melbourne office
a. Ethical: Objectivity and independence
b. Threats: familiarity

b) Concerns (ethical/legal)? Can they be dealt with?

a. Brother: Carla’s brother audit director in Sydney office since 2017 and prior
was an audit manager in Melbourne office
i. Ethical: objectivity and independence
ii. Threats: familiarity
iii. Safeguards: make sure he is not involved in audit in Melbourne
b. Timing: investors indicated if FS not available by 30 Sept then don’t bother
i. Ethical: professional competence and due care as they will be working
under time pressure
 ii. Legal: risk of breaching due care under tort negligence
iii. Threats: Staff available to do the audit, negotiate with investors, plan
so we can be more efficient
c. Carla:
i. has never been involved in audit before, expectation gap
ii. but Wendy has involvement in other audit
iii. plan what we are going to do/ discuss with Wendy
iv. Auditability: whether co has audit trail
d. First Year
i. Start from scratch; not knowing what we are doing i.e. not knowing
the accounting record of the firm
ii. We need to exercise due care
iii. Talk to Wendy: understanding the client
iv. Plan spend more time first year we do the audit
v. Send more experienced audit staff
vi. Given risk identified previously regarding growth in asset and possible
earning management – must be vigilant to ensure audit risk can be
minimised
c) Other information/work before decision
a. Perform an analytical review
i. Review prior year financial report > how the co was going in prior year
ii. Obtain most recent financial information
b. Integrity of management
i. Wendy/Carla
c. Reason for the audit
i. Obtain further details of potential sale
ii. These are the issues that your firm should consider before accepting
the appointment as auditor
d) Appropriate to accept?