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ACCA P1 Corporate, Risk and Ethics (INT)

June 2014

Mock exam Q+A paper

2

© Lesco Group Limited, April 2014

All rights reserved. No part of this publication may be reproduced, stored in a

retrieval system, or transmitted, in any form or by any means, electronic,

mechanical, photocopying, recording or otherwise, without the prior written

permission of Lesco Group Limited.

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Q1 The Mary Jane was a large passenger and vehicle ferry operating between the two

major ports of Eastport and Northport across a busy section of ocean known as the

‘Northport route’. Prior to this, the Mary Jane had operated for many years in the much

calmer waters of the ‘Southsea route’ but she had been transferred to the Northport route

because her large size meant that more profit could be made by carrying more passengers

and vehicles per journey.

She was capable of carrying up to 1,000 passengers, 300 cars and 100 lorries per trip. The

Mary Jane belonged to Sea Ships Company, a long established international company with

a fleet of five ships operating on routes in other parts of the world. The Mary Jane had large

doors at both the front and rear. Vehicles would drive in through the rear doors in Eastport

and when she arrived in Northport, the Mary Jane would dock the other way round so that

the vehicles could drive straight out using the forward doors. There were two doors at each

end, upper and lower, and it was important that all four doors were securely closed before

setting out to sea.

As with all marine operations, the safety procedures aboard the Mary Jane were subject to

regulation, but her design left one weakness which was eventually to prove a disaster.

From the main control bridge of the ship, it was not possible to see the front or rear doors,

which meant that it wasn’t possible to check from the main control bridge that they were

closed upon departure from a port. On the night of 7 November, the Mary Jane was leaving

Eastport in a storm for a crossing to Northport, a journey which should have taken five

hours. It was dark and the weather was very poor. When she was only a few kilometres out

from the Eastport harbour, water entered the car decks through the upper rear doors that

had been left open after the Mary Jane had left port. The stormy conditions meant that the

waves were very high and on this occasion, high enough so that when a large wave hit, the

water entered through the open rear doors. Once enough water had entered her car decks,

the Mary Jane began to lean to 30 degrees before completely falling over onto her side. The

speed of the event, less than two minutes, meant that escape via lifeboats wasn’t possible

and the Mary Jane sank with the loss of many lives.

Among the survivors was first officer Ned Prop. Mr Prop later told how a recent change to

staff reporting procedures had produced a situation in which the responsibility for checking

that the rear doors were closed before sailing had changed. He said that, under the new

system, two people were responsible for safety on the car deck but each person assumed

that the other had checked that the upper rear doors had been closed. A reporting system

in which each department head (car deck, navigation, etc.) on the ship separately reported

readiness for sea to the captain at the beginning of each journey had been abandoned

because it was too inconvenient to operate. Mr Prop said that the

normal procedure was that if they didn’t hear anything to the contrary by the departure

time, he and Captain Mullett assumed that all was well throughout the ship and they could

put to sea.

Mr Prop told how procedures on board ship often relied on ‘human teamwork’ rather than

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‘following paperwork systems’. It also emerged that, on the day of the disaster, a mistake

in loading vehicles onto the wrong decks had delayed the ship’s departure and created

pressure to leave as soon as possible after all the vehicles were loaded. Mr Prop said that

this too may have been a contributory factor to the confusion over who should have

checked that the rear doors were closed. Mr Prop’s superior officer, Captain Mullet, was

drowned in the disaster.

Sea Ships Company, the Mary Jane’s owner, was one of the longest established and most

respected companies listed on the stock exchange. Although best known for its ferry

operations, it had diversified into other activities in recent years. It was considered by

investment analysts to be a ‘steady and reliable’ investment and the company chief

executive, Wim Bock, had often said that Sea Ships Company employed ‘the highest

standards of corporate ethics’.

It also valued its reputation as a well-run company and believed that the company’s value

was primarily due to its reputation for ‘outstanding customer care’. The board often claimed

that Sea Ships was a socially responsible company.

When Sea Ships’ board met to discuss how to proceed after the disaster, Wim Bock said

that the company could expect to receive substantial claims from victims’ relatives. He also

reported that, because of a regrettable oversight in the company’s legal department, only

a proportion of that liability would be covered by the company’s insurance.

There would also be punitive fines from the courts, the size of which would, a legal advisor

said, reflect the scale of Sea Ship’s negligence in contributing to the disaster. The finance

director, Jill Wha, reported that if the company met the expected uninsured liabilities in full,

even if reduced on appeal, it would severely threaten future cash flows as it would most

likely have to sell non-current assets (most of its ships) to settle the claims. If large

punitive fines were also imposed after the legal process, Mr Bock said that the company

may not survive.

The government ordered an enquiry and a senior official was appointed to investigate the

disaster. In her conclusions, enquiry chairman Caroline Chan said that in addition to the

human error in not ensuring that the upper rear doors had been closed, it had also emerged

that the Mary Jane had been travelling above the local shipping speed limit out of Eastport

harbour. The excess speed had caused increased turbulence in the water and this was

made much worse by the storm on the night in question. The combination of these factors

meant that water gradually entered the open upper rear doors and this eventually caused

the ship to lean and then capsize. Mrs Chan said that contrary to the board’s perception of

itself as a well-run company, she had encountered a ‘culture of carelessness’ at Sea Ships

and that the internal control systems were inadequate for safely operating a fleet of ships.

She reserved particular criticism for the board of Sea Ships saying that it was unbalanced,

lacked independent scrutiny and, because none of the existing directors had ever served on

board a ship, lacked representation from technically qualified nautical officers.

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After the enquiry was concluded, but before the level of claims and punitive damages had

been set by the courts, a document emerged within the company confirming that certain

independent advice had been received from an external consultant. The advice was

received at the time of the Mary Jane’s transfer from the Southsea route to the Northport

route. Because the Northport route is a much rougher area of sea, the advice concerned

structural changes to the Mary Jane that would make her safer in rougher seas. Had the

advice been followed, the Mary Jane would have had additional doors inserted inside the car

deck to act as a second internal bulkhead to prevent water flooding the whole deck. Water

would still have entered through the open rear doors on the night of 7 November, but would

have been kept sealed in that rear section of the car deck and the Mary Jane would not have

sunk. The company had received the advice but had not acted upon it as it would have

required an expensive refit for the Mary Jane. This advice was then ‘lost’ in the company

and only emerged later on.

Required:

(a) The independent consultant’s advice was that the Mary Jane should have received

structural work to make her safe for operating in the rougher seas of the Northport route.

Sea Ships Company did not act on the advice.

Using the seven-step American Accounting Association (AAA) model for ethical

decision-making, examine the company’s dilemma on whether or not to disclose

this information publicly. (14 marks)

(b) Using information from the case, identify and analyse the internal control

failures at Sea Ships Company and on the Mary Jane. (12 marks)

(c) Assess the contribution that non-executive directors might have made in

improving the corporate governance at Sea Ships Company. (8 marks)

(d) Draft a memo from chief executive Wim Bock to the senior officers on the

other ships in the Sea Ships fleet informing them of vital internal control and risk

issues following the loss of the Mary Jane. The memo should include the following,

all placed in the context of the case.

(i) An assessment, based on information in the case, of the importance for the

board of Sea Ships to have all the information relating to key operational

internal controls and risks; (6 marks)

(ii) An explanation of the qualitative characteristics of information needed by the

Sea Ships’ board for the assessment of internal controls and risks. (6 marks)

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Professional marks will additionally be awarded in part (d) for drafting a memo that is clear,

has a logical flow, is persuasive and is appropriately structured. (4 marks)

(50 marks)

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Q2 TQ Company, a listed company, recently went into administration (it had become

insolvent and was being managed by a firm of insolvency practitioners). A group of

shareholders expressed the belief that it was the chairman, Miss Heike Hoiku, who was

primarily to blame. Although the company’s management had made a number of strategic

errors that brought about the company failure, the shareholders blamed the chairman for

failing to hold senior management to account. In particular, they were angry that Miss

Hoiku had not challenged chief executive Rupert Smith who was regarded by some as

arrogant and domineering. Some said that Miss Hoiku was scared of Mr Smith.

Some shareholders wrote a letter to Miss Hoiku last year demanding that she hold Mr Smith

to account for a number of previous strategic errors. They also asked her to explain why

she had not warned of the strategic problems in her chairman’s statement in the annual

report earlier in the year. In particular, they asked if she could remove Mr Smith from office

for incompetence. Miss Hoiku replied saying that whilst she understood their concerns, it

was difficult to remove a serving chief executive from office.

Some of the shareholders believed that Mr Smith may have performed better in his role had

his reward package been better designed in the first place. There was previously a

remuneration committee at TQ but when two of its four non-executive members left the

company, they were not replaced and so the committee effectively collapsed.

Mr Smith was then able to propose his own remuneration package and Miss Hoiku did not

feel able to refuse him. He massively increased the proportion of the package that was

basic salary and also awarded himself a new and much more expensive company car. Some

shareholders regarded the car as ‘excessively’ expensive. In addition, suspecting that the

company’s performance might deteriorate this year, he exercised all of his share options

last year and immediately sold all of his shares in TQ Company.

It was noted that Mr Smith spent long periods of time travelling away on company business

whilst less experienced directors struggled with implementing strategy at the company

headquarters. This meant that operational procedures were often uncoordinated and this

was one of the causes of the eventual strategic failure.

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(a) Miss Hoiku stated that it was difficult to remove a serving chief executive from office.

Required:

(i) Explain the ways in which a company director can leave the service of a board.

(4 marks)

(ii) Discuss Miss Hoiku’s statement that it is difficult to remove a serving chief

executive from a board.

(4 marks)

(b) Assess, in the context of the case, the importance of the chairman’s

statement to shareholders in TQ Company’s annual report. (5 marks)

(c) Criticise the structure of the reward package that Mr Smith awarded himself.

(4 marks)

(d) Criticise Miss Hoiku’s performance as chairman of TQ Company. (8 marks)

(25 marks)

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Q3 As part of a review of its internal control systems, the board of FF Co, a large textiles

company, has sought your advice as a senior accountant in the company.

FF’s stated objective has always been to adopt the highest standards of internal control

because it believes that by doing so it will not only provide shareholders with confidence in

its governance but also enhance its overall reputation with all stakeholders. In recent years,

however, FF’s reputation for internal control has been damaged somewhat by a qualified

audit statement last year (over issues of compliance with financial reporting standards) and

an unfortunate internal incident the year prior to that. This incident concerned an employee,

Miss Osula, expressing concern about the compliance of one of the company’s products

with an international standard on fire safety. She raised the issue with her immediate

manager but he said, according to Miss Osula, that it wasn’t his job to report her concerns

to senior management. When she failed to obtain a response herself from senior

management, she decided to report the lack of compliance to the press. This significantly

embarrassed the company and led to a substantial deterioration in FF’s reputation.

The specifics of the above case concerned a fabric produced by FF Co, which, in order to

comply with an international fire safety standard, was required to resist fire for ten minutes

when in contact with a direct flame. According to Miss Osula, who was a member of the

quality control staff, FF was allowing material rated at only five minutes fire resistance to be

sold labelled as ten minute rated. In her statement to the press, Miss Osula said that there

was a culture of carelessness in FF and that this was only one example of the way the

company approached issues such as international fire safety standards.

Required:

(a) Describe how the internal control systems at FF Co differ from a ‘sound’

system of internal control, such as that set out in the Turnbull guidance, for

example. (10 marks)

(b) Define ‘reputation risk’ and evaluate the potential effects of FF’s poor

reputation on its financial situation.

(8 marks)

(c) Explain, with reference to FF as appropriate, the ethical responsibilities of a

professional accountant both as an employee and as a professional. (7 marks)

(25 marks)

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Q4 In a major policy speech, Government finance minister Mrs Wei Yttria said that the audit

and assurance industry’s work should always be judged by the effect it has on public

confidence in business. She said that it was crucial that professional services such as audit

and assurance should always be performed in the public interest and that there should be

no material threats to the assurer’s independence. Enron and other corporate failures

happened, she said, because some accountants didn’t understand what it was to act in the

public interest. She stressed that it was important that firms should not provide more than

one service to individual clients. If a firm audited a client then, she said, it shouldn’t provide

any other services to that client.

Mr Oggon Mordue, a financial journalist who had worked in audit and assurance for many

years, was in the audience.

He suggested that the normal advice on threats to independence was wrong. On the

contrary in fact, the more services that a professional services firm can provide to a client

the better, as it enables the firm to better understand the client and its commercial and

accounting needs. Mrs Yttria disagreed, saying that his views were a good example of

professional services firms not acting in the public interest.

Mr Mordue said that when he was a partner at a major professional services firm, he got to

know his clients very well through the multiple links that his firm had with them. He said

that he knew all about their finances from providing audit and assurance services, all about

their tax affairs through tax consulting and was always in a good position to provide any

other advice as he had acted as a consultant on other matters for many years including

advising on mergers, acquisitions, compliance and legal issues. He became very good

friends with the directors of client companies, he said. The clients, he explained, also found

the relationship very helpful and the accounting firms did well financially out of it.

Another reporter in the audience argued with Mr Mordue. Ivor Nahum said that Mr Mordue

represented the ‘very worst’ of the accounting profession. He said that accounting was a

‘biased and value laden’ profession that served minority interests, was complicit in

environmental degradation and could not serve the public interest as long as it primarily

served the interests of unfettered capitalism. He said that the public interest was badly

served by accounting, as it did not address poverty, animal rights or other social injustices.

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Required:

(a) Explain, using accounting as an example, what ‘the public interest’ means as

used by Mrs Yttria in her speech.

(5 marks)

(b) This requirement concerns ethical threats. It is very important for professional

accountants to be aware of ethical threats and to avoid these where possible.

Required:

(i) With reference to the case as appropriate, describe five types of ethical threat.

(5 marks)

(ii) Assess the ethical threats implied by Mr Mordue’s beliefs.

(8 marks)

(c) Assess Ivor Nahum’s remarks about the accounting profession in the light of

Gray, Owen & Adams’ deep green (or deep ecologist) position on social

responsibility. (7 marks)

(25 marks)

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ACCA P1 Corporate, Risk and Ethics (INT)

June2014

Mock exam Answer

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© Lesco Group Limited, April 2014

All rights reserved. No part of this publication may be reproduced, stored in a

retrieval system, or transmitted, in any form or by any means, electronic,

mechanical, photocopying, recording or otherwise, without the prior written

permission of Lesco Group Limited.

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Q1

(a)AAA model: (mnemonic: FINONCC)

1, facts of option(case)

If company spent money into making the repairmen for ships then it would not sunk.

But it turned out that company hasn't invested money into this and so it sunk and many

people lost their lives.

2, Ethical issues

The company can disclose information to the public and tell their family members why

and how their loved ones lost their lives.

The company can conceal information in order to limit value of punitive damages and

protecting shareholder value in the short term.

3, norms

The company values he highest standards of corporate ethics and outstanding

customer care.

So it implies that company has a duty of care to customer and shareholders and also

implies that company should not lie to them.

4, options

Option 1 would be to disclose advice provided by consultant not being followed by the

company.

Option 2 would be to conceal the information within the company.

5, Norms again

If option1 is chosen then it complies with its stated corporate ethics, ie, not to lie to

shareholders and also related stakeholders.

If option2 is chosen then it doesn't comply with its stated corporate ethics, ie, lie to

shareholders and also related statekholders.

6, consequence of option

If the company discloses the information then company will suffer a large amount of

penalty from the government and hence decrease in the share price as well.

If the company conceals information then maybe it will not be leaked to public and

hence protect the company but maybe it will be leaked from the company and hence

carries a risk of future liability and also damage in the reputation.

7, choice

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The best choice for company would be to disclose information to the public although it’s

costly but it is consistent with its stated corporate governance ethics.

To conceal information may benefit the company in the short term but it will be risky

that this information will be leaked somehow and hence damage the future reputation

of the company.

(b) Internal control failures. (12points=12marks)

Reporting to captain about the readiness for sea is abandoned and this creates

reporting by exception and this is a deficiency.

They should not be abandoned even though they are not convenient because it

reflects that this is important to the company.

A mistake happened in loading vehicles onto the wrong decks and this is an internal

control deficiency and it can be improved by staff trading in this issue.

It has led to the subsequent excess speed after leaving port.

No one has checked whether rear doors were closed and this is an internal control

deficiency because there seemed to be the duplication of duties of employees.

It has led to water coming into the ship and hence the ship sunk subsequently.

An oversight in the company’s legal department about some of the liabilities not

being insured.

It has led to company ending up paying more expenses.

Mary Jane travelled above the local shipping speed limit and this is an internal

control deficiency because the department fails to comply with regulatory

requirement for speed.

It has led to Mary Jane to be sunk into the sea later.

Consultant advice is ignored about changes in structures of Mary Jane and this is in

internal control deficiency because there seems to be a missing of procedure to

proceed the advice.

It has led to Mary Jane to be sunk into the sea without taking his advice.

(c) 1.5marks per point

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Expertise

Having a qualified technical officer as a non-executive director would solve the internal

control deficiency that company faces.

Independence

Having non-executive directors who will challenge strategy made by the directors as

well as risk management procedures would certainly improve the company position.

Internal control system

Having non-executive directors formed into audit committee who will oversee the

internal control systems of the company would help company address internal control

deficiencies identified in the case.

Risk management

Having non-executive directors formed into risk/audit committee would help company

identify any risks during the operation, eg, risks that certain internal control

procedures are not followed such as failure to check rear doors were closed.

Compliance

Having non-executive directors would help company to fully comply with certain rules

and regulations, eg, ensure the ship complies with regulatory requirement for speed

and hence reduce the risk that the ship sunk later.

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(d)

Memo

To: All Sea Ships senior officers

From: CEO

Date: 22 December 2009

Subject: Information on internal control and risks

Introduction: hello in this memo we would provide the assessment for the board of the

importance to have all information regarding to internal controls and risks as well as

characteristics of information needed after facing such a tragedy in Mary Jane.

(i) Importance

Strategy setting

Reliable information about the business environment in which Sea Ships operates

would certainly help strategy setting by directors.

This allows the board to establish what changes in working practices or design of the

ships will be necessary if the company is to operate new routes.

Monitor activities

By obtaining information relating to operational controls and risks the board can better

monitor the internal control systems deficiencies and risks that company is facing.

For example, failure to check whether rear doors have been closed by employees.

Transparency

Transparency is within good corporate governance code and having disclosed risks and

controls of the company fully to the users this will reduce the agency problem between

directors and shareholders.

Users will rely on the disclosures to make their economic decisions, ie, buy or sell a

share and in the following paragraph we will be discussing the qualitative

characteristics of the information.

(ii) Qualitative characteristics: (mnemonics: TCRR) 3points are required.

Timely

Information should be available when it is needed. This means submitting routine

reports on control and safety on time.

If there is any problem during the operation it should be reported to the management

on time as well.

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Complete

Information should be complete to be submitted to the board in order for them to take

appropriate actions.

Ie, all necessary details of risks, systems weaknesses should be submitted in full.

Reliable

Information should be accurate and reliable.

Ie, when reporting bad news in Mary Jane information about those should be accurate

such as the speed it exceeds and also the accurate number of people died in the sea.

Relevant

Not only reports should be complete and delivered promptly, but also that anything

that you feel should be brought to the board’s attention as well such as potential

problems that might happen.

Ie, there were technical issues with the fit of the ship at Eastport that were important

and directors should be made aware of such problems as soon as possible.

Conclusion: From the above analysis we should notice that good qualitative

information about key operational internal controls and risks will help us prevent

further failure into the future.

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Q2 answer:

(a)

(i)

They can leave the board if they resign by notice in writing.

They can leave the board if they become disqualified by law.

They can leave the board if they decide not to offer them re-election.

They can leave the board by ordinary resolution at a general meeting by shareholders.

(ii)

If Mr Smith is removed during his service contract then TQ would have to pay a

large amount of fees to him and also faced with legal action taken by Mr Smith.

Also it would be difficult to satisfy the court that Mr Smith is not competent given his

strategies taken because those relate to long term maybe not obvious in the short

term.

Mr Smith can be voted to leave the board by an EGM(extraordinary general meeting)

but there might not be enough number of directors to vote for such a meeting. (in

some jurisdictions shareholder with more than 10% shareholding can call for such

a meeting.)

Mr Smith can be removed by a “loss confidence” voted by shareholders but this may

involve an extra financial benefit package offered to Mr Smith as well.

(b)

Importance

Chairman statement would include information that chairman believes it’s important to

convey to shareholders.

Accountability

Chairman statement would show accountability of the chairman to the company, ie,

Miss Hoiku can explain that she is acting in the best interest of the shareholders.

Chairman performance

Chairman statement would show how chairman is exercising her role, ie, Miss Hoiku

can explain how she is exercising her role alongside with the relevant and reliable

information to enable other shareholders to make their decision.

Corporate governance

Chairman statement would show how company complies with corporate governance

advice,ie,how Mr Smith would have exercised his role.

Future strategy

Chairman statement would include future strategy of the company, ie, Miss Hoiku

would include future strategy of the company and enable shareholders to make better

decisions rather than just focus on the historical information.

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(C) Criticism about reward package

Mr Smith reward himself a large amount of basic salary which is not related to

performance of company and if subsequently company’s performance suffers then

his reward package is not affected too much.

An expensive company car would not result in benefit for the company and not

relating to performance target so it doesn't appear to be necessary.

Share options were exercised last year and the period for this is too short resulting

in a situation where Mr Smith will not care about the long term position of the

company rather than just focus on short term.

Share options were exercised immediately and hence Mr Smith doesn't have any

motivation to increase the share price of the company any more.

(d)

Miss Hoiku failed to challenge strategies made by Mr Smith which has led to failure

but a good chairman should scrutinize and challenge strategies made by CEO.

Mr smith is arrogant and domineering and chairman fails to challenge him but for a

good chairman she should have a willingness to challenge him if necessary.

NEDs left the company and are not replaced and a good chairman should ensure

appropriate number of directors on the board.

Committee collapsed but a good chairman should ensure such a committee to exist.

Miss Hoiku hasn't refused Mr Smith’s proposal to increase his remuneration

package but this means chairman is acting against shareholders’ interest.

Miss Hoiku hasn't assess in detail of Mr Smith performance against the target but a

good chairman should have done this.

Mr Smith spent long periods of travelling and it seems that chairman allows him to

do so and let strategy fail but a good chairman should ensure appropriate risk

management process is taking place.

Miss Hoiku hasn't communicated to shareholders of why the strategy fail but a good

chairman should ensure effective commutations between shareholders.

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Q3 answer:

(a)

System should be responsive quickly to the potential risk but given reputation has

been damaged following a qualified statement and this means that internal control

system of FF is not sound.

System should be highly integrated but in FF:

It does not comply with financial reporting standards and hence this is an internal

control weakness.

An internal incident happened prior to the year and this was not detected.

International standard on fire safety is not complied with by FF Co.

Any deficiencies identified by Miss Osula were not reported to senior management

timely.

So the above shows that the internal control systems are not highly integrated.

A failure for the timely report would mean that there would be a poor monitoring

process within company.

There was a careless culture in FF and so the embedded culture is poor, ie, poor

control environment.

(b)

Definition (3marks)

Reputation risk is the risk that company will lose its reputation.

Eg, company will lose its reputation by not complying with certain laws and regulations.

So reputation risk will also depend on other risks such as an increase in compliance risk

will result in an increase in reputation risk.

Evaluation (5 points)

Shareholders

Shareholders will sell of FF co shares if they lose confidence of FF co which will lead to

a decrease in share prices.

Customer

Customers will not buy products from FF co if FF co has a bad reputation and hence this

will decrease FF Co sales revenue.

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Government

A failure to comply with laws will increase the reputation risk and hence FF Co will have

to pay penalty which will decrease its profit.

Supplier

If FF co reputation is bad then supplier will not supply goods to FF co because by doing

so it will damage their reputation as well and hence affects the production volume of FF

Co as well.

Auditor

If there’s an increase in FF Co reputation risk then it would also increase the future

audit fee charged by auditor as well because by providing audit services to FF Co audit

firm will run a risk of damaging their own reputation as well.

(c) mnemonics: Mr PICCO +public interest

Professional behavior

Accountant shouldn't do anything which will damage ACCA’s reputation, ie, they should

follow standards to do their work.

Integrity

Accountants should act honestly and not lie to their employers, eg, they shouldn't

window dress the financial statement.

Competence and due care

Accountants should be qualified by having appropriate skills and experience to do the

work.

Confidentiality

Accountants should not disclose client’s confidential information to 3rd party without

their approval.

Objectivity

Accountants should be objective when preparing the financial statement, ie, they

should focus on the financial reporting standard rather than personal interest when do

the work.

Public interest

Accountant should act in accordance with public interest as well, eg, by disclosing

potential problems of FF Co product to the public in case they are doing harm to the

public.

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Q4 answer

(a)

Public interest

This is a group of stakeholders who will rely on the results conducted by professional

accountants.

What they do

Professional accountants will provided their opinion on the true and fairness of the financial

statements.

They are seen to safeguard assets within the company.

How to do it?

Board of directors

Professional accountant will support board of directors to improve internal control system

of client’s company and hence reduce risks of failure and by doing so it will increase profit

and attract investment.

Shareholders

Professional accountant will support shareholders by providing infroamtion to them and

hence increase their confidence about the company and attract further investment.

Market

Professional accountant supports market by creating statbility and fewer disasters through

audits.

It will certainly support society by creating jobs and substain economic growth within the

society.

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(b)

(i)

Self interest threat

Self interest threat to objectivity means that the audit firm benefit financially from the

client and hence give audit opinion which is not trustable by the public.

Self review threat

Self review threat means professional accountant designs the internal control system and

then audit them and hence give an audit opinion which is professional accountant haven’t

spent enough time to check they are right or wrong.

Advocacy threat

This is the threat to objectivity because of the promotion of client’s company status which

makes the audit opinion later not trustable.

Familiarity threat

This is the threat to objectivity because of the good relationship with client coopany then

professional accountant will give whatever audit opinion that client wants and hence make

this not trustable.

Intimidation threat

This is a threat to objectivity because of the influence to other party, eg, the client company

will threaten to withdraw non audit service from your firm if you are giving the audit opinion

that the client wants and hence this opinion is not trustable.

(ii)

By doing lots of other non-audit assurance service would create self-interest threat

because in order to keep those expensive non-audit services audit firm may issue

whatever audit opinion that clients wants and hence it’s not objective.

Also this creates intimidation threat because client may threaten the audit firm to

withdraw the expense non-audit service if audit firm doesn't satisfy client with the audit

opinion and hence makes it not objective.

Audit firm knows client very well and this creates familiarity threat because when

checking its internal control system they may lose professional skepticism and hence

some mistakes are ignored and overall audit opinion may not be objective.

Advising on legal issue may create an advocacy threat claiming Client Company has

complied with all of the laws and regulation and this would be seen to promote status of

client company and hence any audit opinion given may not be objective.

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(c)

Deep ecologist says that any position that doesn't place the social and environmental

affairs to the first then it is considered to be unethical.

Environmental degradation

His highlight of the environmental degradation is linked through to deep ecologist that

business must not threaten the habitats of other species or worsen the living condition of

humans affected by their activities.

Animal rights

The emphasis on the need for accountants to address the animals rights is an important

distinction between deep ecologist and other positions because it palaces animal rights on

an equal place with human beings.

Poverty

The stress on poverty is in line with deep ecologist. Business needs to consider the needs

of all stakeholders rather than just focus on the shareholders.