Auditing Ethics: Addressing Conflict of Interest

What actions should an auditor take when faced with a potential conflict of interest?

Final answer:

Rebecca Lane

, as an auditor, should carefully consider the potential conflict of interest arising from her previous role as a director of Beachside Ltd and her spouse's ownership of shares in the company. She should assess the significance of these factors, consult professional auditing standards, disclose the conflict of interest, and take necessary actions to mitigate it. By doing so, she can maintain independence and ensure the integrity of the audit process.

Explanation:

As an auditor, Rebecca Lane should carefully consider the potential conflict of interest arising from her previous role as a director of Beachside Ltd and her spouse's ownership of shares in the company. Auditors are required to maintain independence in both appearance and fact to ensure the integrity and objectivity of their work.

Given that Rebecca Lane served as a director of Beachside Ltd until 30 June 2020 and her spouse currently owns 1000 of the 10,000 outstanding shares of Beachside Ltd, she should take the following actions:

1. Step 1: Assess the significance of her previous role as a director and her spouse's ownership of shares in Beachside Ltd. This involves considering the potential impact on her objectivity and independence as an auditor.
2. Step 2: Consult professional auditing standards and regulations to determine the appropriate course of action. These standards provide guidance on addressing conflicts of interest and maintaining independence.
3. Step 3: Disclose the potential conflict of interest to the appropriate parties, such as the audit firm and Beachside Ltd. Transparency is essential in maintaining the trust and credibility of the audit process.
4. Step 4: Take necessary actions to mitigate the conflict of interest. This may involve recusing herself from auditing specific areas or seeking an alternative auditor to ensure independence is maintained.