(ii) The audit senior should report the situation in an internal report to Lark & Co’s Money Laundering Reporting Officer
(MLRO). The MLRO is a nominated officer who is responsible for receiving and evaluating reports of suspected money
laundering from colleagues within the firm, and making a decision as to whether further enquiries are required and if
necessary making reports to the appropriate external body.
Lark & Co will probably have a standard form that should be used to report suspicions of money laundering to the MLRO.
Tutorial note: According to ACCA’s Technical Factsheet 145 Anti-Money Laundering Guidance for the Accountancy
Sector, there are no external requirements for the format of an internal report and the report can be made verbally or
in writing.
The typical content of an internal report on suspected money laundering may include the name of the suspect, the
amounts potentially involved, and the reasons for the suspicions with supporting evidence if possible, and the
whereabouts of the laundered cash.
The report must be done as soon as possible, as failure to report suspicions of money laundering to the MLRO as soon
as practicable can itself be an offence under the money laundering regulations.
The audit senior may wish to discuss their concerns with the audit manager in more detail before making the report,
especially if the senior is relatively inexperienced and wants to hear a more senior auditor’s view on the matter. However,
the senior is responsible for reporting the suspicious circumstances at Heron Co to the MLRO.
Tutorial note: ACCA’s Technical Factsheet 145 states that: ‘An individual may discuss his suspicion with managers or
other colleagues to assure himself of the reasonableness of his conclusions but, other than in group reporting
circumstances, the responsibility for reporting to the MLRO remains with him. It cannot be transferred to anyone else,
however junior or senior they are.’21
(b) The term professional skepticism is defined in HKSA 200 Overall Objectives of the Independent Auditor and the Conduct of
an Audit in Accordance with HKSAs as follows: ‘An attitude that includes a questioning mind, being alert to conditions which
may indicate possible misstatement due to error or fraud, and a critical assessment of audit evidence’.
Professional skepticism means for example, being alert to contradictory or unreliable audit evidence, and conditions that may
indicate the existence of fraud. If professional skepticism is not maintained, the auditor may overlook unusual circumstances,
use unsuitable audit procedures, or reach inappropriate conclusions when evaluating the results of audit work. In summary,
maintaining an attitude of professional skepticism is important in reducing audit risk.
IFAC’s Code of Ethics for Professional Accountants also refers to professional skepticism when discussing the importance of
the auditor’s independence of mind. It can therefore be seen as an ethical as well as a professional issue.
In the case of the audit of Coot Co, the audit junior has not exercised a sufficient degree of professional skepticism when
obtaining audit evidence. Firstly, the reliability of the payroll supervisor’s response to the junior’s enquiry should be
questioned. Additional and corroborating evidence should be sought for the assertion that the new employees are indeed
temporary.
The absence of authorisation should also be further investigated. Authorisation is a control that should be in place for any
additions to payroll, so it seems unusual that the control would not be in place even for temporary members of staff.
If it is proved correct that no authorisation is required for temporary employees the audit junior should have identified this as
a control deficiency and made a management letter point to be reported to those charged with governance.
The contradictory evidence from comments made by management also should be explored further. HKSA 500 Audit Evidence
states that ‘if audit evidence obtained from one source is inconsistent with that obtained from another... the auditor shall
determine what modifications or additions to audit procedures are necessary to resolve the matter’.
Additional procedures should therefore be carried out to determine which source of evidence is reliable. Further discussions
should be held with management to clarify whether any additional employees have been recruited during the year.
The amendment of payroll could indicate that a fraud (‘ghost employee’) is being carried out by the payroll supervisor.
Additional procedures should be conducted to determine whether the supervisor has made any other amendments to payroll
to determine the possible scope of any fraud. Verification should be sought as to the existence of the new employees. The
bank accounts into which their salaries are being paid should also be examined, to see if the payments are being made into
the same account.
Finally, the audit junior should be made aware that it is not acceptable to just put a note on the file when matters such as
the lack of authorisation come to light during the course of the audit. The audit junior should have discussed their findings
with the audit senior or manager to seek guidance and proper supervision on whether further testing should be carried out.
4 (a) The business venture proposed by Grouse Co’s managing director, while potentially lucrative for the audit firm, would create
significant threats to objectivity. A financial interest in a joint venture such as the one being proposed is an example of a close
business arrangement given in IFAC’s Code of Ethics for Professional Accountants.
According to the Code, a close business relationship between an audit firm and the audit client or its management, which
arises from a commercial relationship or common financial interest, may create self-interest or intimidation threats. The audit
firm must maintain independence, and the perception of independence will be affected where the audit firm and client are
seen to be working together for mutual financial gain.
Unless the financial interest is immaterial and the business relationship is insignificant to the firm and the client or its
management, the threat created by the joint venture would be so significant that no safeguards could reduce the threat to
objectivity to an acceptable level. Therefore, unless the financial interest is immaterial and the business relationship is
insignificant, the business relationship should not be entered into.
There would also be ethical issues raised if Raven & Co were to sell the software packages to audit clients. First, there would
be a self-interest threat, as the audit firm would benefit financially from the revenues generated from such sales. Full
disclosure would have to be made to clients in order for them to be made aware of the financial benefit that Raven & Co
would receive on the sale.
Second, there would be a self-review threat, as when performing the audit, the audit team would be evaluating the accounting
software which itself had sold to the audit client, and auditing tax figures generated by the software. It is difficult to see how
this threat could be reduced to an acceptable level as the accounting and tax software would be fundamental to the
preparation of the financial statements.
Third, by recommending the software to audit clients, it could be perceived that the audit firm is providing a non-audit service
by being involved with tax calculations, and providing IT systems services. The provision of non-audit services creates several
threats to objectivity, including a perception of taking on management’s responsibilities. Risks are heightened for audit clients
that are public interest entities, for example, the audit firm should not be involved with tax calculations for such clients
according to IFAC’s Code.
If having considered the ethical threats discussed above, Raven & Co still wishes to pursue the business arrangement, they
must cease to act as Grouse Co’s auditors with immediate effect. The lost income from the audit fee of Grouse Co should also
be taken into account, as it is a ‘significant’ client of the firm.22
The potential commercial benefits of the business venture should be considered carefully, as there may be little demand for
the suggested product, especially as many software packages of this type are already on the market. Also, the quality of the
software developed should be looked into, as if Raven & Co recommends inferior products they will lose customers and could
face bad publicity.
Finally, if Raven & Co decides to go ahead with the joint venture, the partners would need to consider if such a diversification
away from the firm’s core activity would be advisable. The partners may have little experience in such a business, and it may
be better for the firm to concentrate on providing audit and assurance services.
