Reference no: EM133043512

MAA303 Audit and Assurance - Deakin University

Part A - Case study

Learning Outcome 1: Use professional and ethical judgement in applying relevant legal and professional pronouncements to all stages of a given assurance engagement.

GLO1: Discipline-specific knowledge and capabilities
GLO4: Critical thinking
GLO5: Problem solving

Case Information

You are an auditor in BDO Australia, a mid-tier audit firm. One of your responsibilities is to review ethical matters which have occurred in different audit engagements. Currently, you are reviewing the following audit engagement.

Vivid Solution Pharmacy Ltd (VSP) is a discount beauty and health care product provider. It is also one of the largest clients for BDO. BDO provides a range of services: taxation, consultancy, and financial statement audit to VSP. The total audit fee and other non-audit service fees from VSP represent around 12% of BDO's total revenue.

The engagement audit team for VSP consists of 4 people. The audit partner is Brian. He has been involved in the VSP audit for over 20 years and partner on the engagement for the last 15 years. The audit manager is Alice. This is Alice's first time on the VSP audit. She has no accounting knowledge in pharmaceutical industry and has never been involved with the recording or processing of accounting transactions in pharmaceutical industry. Jack is the audit senior and is responsible for the initial audit planning. Jack has recently completed the Graduate Diploma of Chartered Accounting. The junior auditor is Mike. Mike's friend is the receptionist at VSP. However, the receptionist has no accounting knowledge and is not involved in the recording or processing of accounting transactions.

The audit team commenced planning the audit on VSP in the middle of April 2021. In preparation for the audit, Brian telephoned VSP's CFO Simon to set up a planning meeting and to remind him that fees relating to the audit engagement from the previous year were still outstanding. Simon raised concerns about the conduct of the previous audit, stating numerous examples of when he and his staff had been interrupted when they were busy. He stated that he wanted guarantees that this year's audit will be more efficient, less intrusive and cheaper, otherwise he will seek an alternative audit firm in future.

When reviewing the audit documents, you also find the following issue. VSP has a long-term loan from the Commonwealth Bank. The loan covenant stipulates that the commonwealth bank has the right to withdraw all funding if VSP's current ratio is less than 1.5:1 (i.e., The current ratio is a widely used measure for evaluating an entity's liquidity and short-term debt-paying ability. The ratio is calculated by dividing current assets by current liabilities). However, VSP's current asset ratio is currently at 1:1. Simon believes that VSP is a financially healthy company and asks Brian to ignore this temporary breach of the loan covenant. In addition, Simon requested not to disclose this information in the audit report. Otherwise, VSP's would not consider BDO for future engagements.

Required

1. Identify and discuss the ethical and other professional issues found in the above case.

2. Recommend the actions that should be taken in relation to each of the issues identified in the question 1.

Attachment:- Audit and Assurance.rar