Ethics
Q38 - Earthstor:
Corporate governance issues: Identify from Greg file note - identify any ethical issues for audit firm recommend actions firm take
FD resigns on 1 Jan 20x6 - in resignation letter to board - FD states can no longer work with Dominic - who is dominating the board and allowing close friendship with Henry to compromise judgement
Dominic is both chair and CEO and cancelled board meetings,
HR director presents report on process recruit new FD - Dominic negotiate purchase an office building in Singapore for E which will be rented to 3rd parties. Asks the board to approve this transaction in advance. But details of purchase not available - Dominic considers that is a good investment opportunity for E.
After Singapore office bought - TraynerCo relocate admin function on 1 Aug 20x6 to Singapore for tax and agreed to accupy floow of this Singapore office. Dominicc states no rent charged to traynerCo as recently agreed a very low price for E’s purchases of footwear in traynerCo
Dominic is dominating over the board which is a goverance issue.
there is no separation between the chair of the board and the CEO -
operating without a FD present a governance issue as board not operating manage co effecitively.
Deal made charging no rent to TraynerCo in exchange for lower cost of goods sold - is an ethical issue as company could be enter into transaction which assist the supplier to evade tax (more detais need obtained and taxation of profits need to be obtained so need to consult tax expert in Sinapore) - making sure company is paying the correct UK taxes.
Intimidation threat - Dominica intimidate audit staff - firm should ensure briedged, assigned experienced staff for audit.
no FD - firm has management threat if it acts in FD role
Actions firm to take
AIM listed co are not required to make disclosure of compliance with the provisions of UK corporate governenace code. ut from Sep 2018 comply with or explian thier non compliance
Requires matters of concern raised with those charged with governance - audit committee
Information published in financial statements should be reviewed for consistency and approprirate professional scepticism
COuld be potential tax evasion - further information needed and matter report to MLRO - need to engage with expert tax advice
Increase audit risk - means momre audit procedures
Audit risks
Risk of wrong exchange rates: - verify the exchange rates
Risk Hard to support valuation because shares are not traded.
Obtain 3rd party evidence of valuation, Compare valuation with TraynerCo’s accounts, cash flows, forecasts.
Risk: : Investment terms may be tied to discounts on goods or rent deals (not arm’s length).
Examine contract for acquitionsion of shares ensure not related agreement of cost of goods, prep analytical procedures on history of cost of goods
Risks - management not include the fall in price of shares and overstatement investment.
Review and assess valuation made by directors
Agree cost of acquition of shares to legal documents, share certificates and payment
Adjustments are over £120k - so needs to be reported to audit committee
Audit risk: increased capex during year - risk that there both external and internally generated expenditure relating to web that incorrecltly capitlised instead of written off to P&L
Risk useful life of 7 years excessive given nature of expenditure
Audit procedures: Obtain details of internal software development costs and agree to invoices from 3rd parties/staff costs agree to time records
Ensure costs are capitalised are relating to project and not time spent on management
Consider appropriateness of useful life enquire management and past history of similar projects