44 Jones PG55
Summary
I am a student accountant at Miller Dundas, a medium size firm of auditors and John Yang is
the training manager. I recently sent an email describing a situation on the audit of Jones Co
and I noticed an entry of $100,000 for a security system for an address in a well-known holiday
resort with no obvious link to the company.
On questioning this matter with Ellen Tan, the financial controller, I was told that the system was
for Mr Martin Jones’s holiday cottage and Martin Jones often takes confidential company
documents with him to his holiday home, and required the security system on the property to
protect them. Ellen Tan was surprised and said that previous year auditors have no concern on
the company being charged for non-current assets and operational expenses for Mr Jones’s
personal properties.
Then, I reported to the engagement partner, Potto Sinter, he said that this charge was not a
cause for concern. He did say that he would ask for a formal explanation from Martin Jones
before he signed off the audit. When I discussed the matter with Potto afterwards, he told me
that the matter was close.
After John Yang had read the email, he realised there is an ethical dilemma. Not only should
there be disclosure of Mr Jones’s transaction, but also Potto Sinter and Mr Jones are good
friends..
Required
Prepare extracts for a briefing paper which criticise Potto Sinter’s ethical and professional behavior in this
case.
​(8 marks)
Professional skills marks are available for demonstrating scepticism skills in challenging the behaviour of
Potto Sinter in respect of the audit of Jones Co.
​(2 marks)
Answer
Collusion
There is a possibility that Potto Sinter might be cooperating with the unusual transaction for Martin
Jones’s personal use. He agreed and accepted a weak explanation regarding this issue. ​(Involve the
issue of integrity and professional competence.)
Duty to shareholders
Potto Sinter and Martin Jones are good friends and thus allowing Martin to override his duty to the rest of
the shareholders. Potto Sinter should reassess the ​objectivity of Martin’s conduct but he has failed to do
so. ​(The financial statement must be true and fair due to duty to the shareholder.)
Duty to tax authority
Potto owes a duty to tax authorities who rely on reliability and truthfulness of information in the Financial
Statements. Potto could be charged by helping the client to evade tax. For example, the client can receive
capital allowances for the security system and reduce the taxable profit. ​(Did not show a good
example.)
Fail to apply relevant accounting standards
Potto has a breach of accounting standards by not disclosing related party transactions in the Financial
Statements regardless of its value. This leads to issuance of an unmodified audit report and jeopardises
the reputation of Miller Dundas.
Duty to professional colleague
Potto has let down his partner and staff in a number of ways.his act not only involved poor conduct of
professional relationships, it was setting a poor example.