SUGGESTED SOLUTION TO EXERCISE 3.

15
1. Inherited shares: Bondai Ltd
Rendal Millar has failed to recognize that his behaviour has seriously
threatened his compliance with the fundamental principles of:
1.1 Confidentiality – Subsection 114
• Confidentiality requires an accountant to respect the confidentiality
of information acquired as a result of professional and business
relationships.
• Rendal Miller has failed to comply with the fundamental principle of
confidentiality to his client by disclosing information relating to
Bondai Ltd to the guests (clients) at the dinner party.
• The Code states clearly that a registered accountant must be alert to
the possibility of breaching confidentiality in a social environment.
Rendal Miller has totally disregarded this.
1.2 Professional Behaviour – Subsection 115
• Gossiping about the directors private lives (and giving out
information about the company) casts Rendal Miller in a poor light
and brings discredit to the accounting profession.
• The other clients at the dinner party would be concerned about
whether gossip and other information about their companies is
discussed in public by Rendal Miller. They are entitled to expect far
better professional behaviour.
1.3 Independence – Section 400
• The shares which have been inherited by Rendal Miller’s wife may
pose a self-interest threat to his objectivity, because, by definition,
holding the shares amounts to a direct financial interest with the
client in terms of the Code.
• As the shares will be owned by an immediate family member,
independence may be threatened (self-interest threat).
• Rendal Miller would not be independent in mind or appearance
(section 400).
• While 60 000 shares out of 10 million is not a material holding, the
value of R1,2 million is more than likely to be material to Rendal
Miller, and may be enough to tempt him to make use of confidential
information about the company’s performance, or to apply biased
judgement in any matter relating to the value of the share.
• The most practical safeguard would be for Rendal Miller’s wife to
dispose of the shares. The immediate family of a member of the
audit team may not have a direct financial interest in an audit client.
• The fact that the shares were inherited (received unintentionally
section 510) and not purchased makes no difference – the threat
exists and the Code requires that the shares be disposed of
immediately.
Note: Rendal Millar could resign from the firm but that is unlikely and
impractical.
2. Fees: Dowd (Pty) Ltd
Martina Chest has contravened the Code’s requirements relating to fees for
professional services although, it would seem, without any intention to
overcharge. The registered accountant is entitled to be remunerated fairly but
must charge appropriate fees.
2.1 Code paragraph 330 implies that to avoid any suggestion of
inappropriate fee charging the client should be aware of the basis on
which fees are charged and the services that are included in the quote.
However, there should be a reasonable basis for charging a particular
fee. Fees should be based on relevant factors and circumstances,
rather than merely marking them up by the CPI each year. They should
 not be excessive and should be a fair reflection of the value of the work
performed, i.e. appropriate.
2.2 To achieve the above, it is practical to charge fees on the following
basis:
• skill and knowledge required;
• level of training and experience of personnel required;
• time spent on the work (i.e. time records need to be kept); and
• the degree of responsibility which the work entails.
As it stands, Martina Chest actually has little idea about the fairness of
the fee to the firm and the client which is ‘unprofessional’ on her part.
2.3 If the financial director’s contentions relating to the improvements in the
accounting department are correct, then a reduction in fees does seem
appropriate, but he cannot prescribe to our audit firm on the audit
strategy or plan. As the financial director is expecting a reduction, Phil
Kumalo should be alert to the fact that there is a potential intimidation
threat and it is even more important that the basis of the fee charged is
as indicated above so that it is defendable.
2.4 The basis of fee charging and the services which are covered by the
charge should be discussed with the client and fees invoiced should be
supported by time records kept by our firm.
3. Commission arrangements: Mike Raw
3.1 Rendal Miller has failed to comply with the fundamental principle of
integrity as he has been dishonest (or at least deceptive and not
straightforward) with regard to the commission arrangements with Mike
Raw.
• He states (indignantly) that he receives no commission, but in fact he
does, by virtue of the fact that he is a partner of the firm and the firm
receives commission.
3.2 The Code section 330, warns that referral commissions may pose a
self-interest threat to the registered accountant’s compliance with the
fundamental principle of objectivity as the commission, and not the
quality of the service or product, may be the motivating factor (or be
seen to be the motivating factor) for recommending (referencing) the
particular product or service.
3.3 The recommended safeguard is that the registered accountant informs
the client of the basis of referral and obtains acknowledgement thereof.
Rendal Miller has not done this – he has denied it in fact!
3.4 This is also a breach of professional behaviour. Deviousness on the
part of a registered accountant brings discredit to the profession.
4. Webcam (Pty) Ltd:
There are several breaches of the Code.
4.1 Second opinion – Section 321
• A second opinion on information on which another registered
accountant has already given an opinion can be given, but Rendal
Miller clearly did not consider the threats to his compliance with the
fundamental principles or consider any appropriate safeguards. E.g.,
he should have ensured that he would be giving an opinion under
the same conditions as the auditors opinion, i.e., same access, same
documents; failing to do this was a threat to his professional
competence and due care. He should have
– obtained a written explanation from Webcam (Pty) Ltd as to why
the second opinion is needed;
– obtained Webcam (Pty) Ltd’s permission to contact its auditors
and discuss the opinion, the circumstances under which it was
given etc.; and
– included a second member of Botha and Nquni in the
engagement team to review the opinion (quality control).
 • In failing to do any of the above (he simply held a discussion with the
financial director), Rendal Miller has breached the fundamental
principles of professional competence and due care, objectivity and
integrity (see 4.2 below).
4.2 Objectivity (independence) and integrity
• The underlying cause of Rendal Miller’s action appears to be that he
wants to win Webcam (Pty) Ltd’s audit.
• He has allowed this to override his objectivity (independence) by
giving an opinion ‘acceptable to the financial director’ without doing
the necessary work.
• Integrity implies fair dealing and truthfulness, neither of which is
reflected in Rendal Miller’s behaviour.
4.3 Fees – Section 330
• Again motivated by winning over the audit Rendal Miller has allowed
self-interest to compromise his compliance with the Code.
• Providing an independent opinion should be taken seriously and
treated as a formal engagement to render a service for which an
appropriate fee should be charged.
4.4 Professional appointments – Section 320
• As indicated in 4.3 above, providing a second opinion should be
regarded as a professional appointment and in this case an
appointment where there is already an existing professional
accountant in place.
• As indicated in 4.1 above, Rendal Miller has not acknowledged the
threats with this situation and basically out of self-interest has not
bothered to contact the existing accountant. This is both unwise and
unprofessional (see 4.1) and is not consistent with how members of
the profession should treat each other.
• Members of the profession should be loyal to their colleagues and
promote good relations.
• Rendal Miller, in not even alerting Webcam (Pty) Ltd’s auditors to the
fact that he was giving a second opinion, failed to protect his fellow
chartered accountant to the threat that Webcam (Pty) Ltd may have
been intent on discrediting their auditors opinion by using Rendal
Miller’s opinion.
4.5 Marketing professional services – Subsection 115
• While it is acceptable for a registered accountant to solicit new work,
it must be done in a manner which does not threaten the principle of
professional behaviour by bringing discredit to the profession.
Rendal Miller’s solicitation is underhand and devious.
4.6 Professional behaviour – Subsection 115
• The financial director of Webcam (Pty) Ltd is no doubt fully aware
that he is ‘using Rendal Miller to his advantage’ to get the
independent opinion he requires, and is likely to have a poor opinion
of Rendal Miller’s professionalism whatever his own motives are.
Rendal Miller’s actions impair the integrity, objectivity and good
reputation of the profession.