Galati and Brambila formed a corporation

called Financial Fitness Systems, each woman taking 50 percent of the authorized common stock. Galati is a Dottore Commercialista (CONSOB), a public accountant, and Brambila is an insurance underwriter. The corporation provides auditing and tax services

under Galati’s direction and insurance services under Branbila’s direction. The opening of

the corporation’s office was announced by a 15 cm, two-column announcement in the local newspaper.

One of the corporation’s first audit clients was the Galore Company. Galore had total assets of i923,820 and total liabilities of i415,719. In the course of her examination,

Galati found that Galore’s building with a book value of i369,528 was pledged as security for a ten-year term note in the amount of i307,940. Galore’s statements did not mention that the building was pledged as security for the ten-year term note. However, as the failure to disclose the lien did not affect either the value of the assets or the amount of the liabilities and her examination was satisfactory in all other respects, Galati rendered anunqualified opinion on Galore’s financial statements. About two months after the date of her opinion, Galati learned that an insurance company was planning to loan Galore i230,955 in the form of a first mortgage note on the building. Galati had Brambila notify the insurance company of the fact that Galore’s building was pledged as security for the term note. Shortly after the events described above, Galati was charged with a violation of professional ethics.

Required:

Identify and explain the ethical implications of those acts by Galati that were in violation of IFAC’s Code of Ethics for Professional Accountants.

The following situation involves Kevin Smith, staff accountant with the local CPA firm of Hobb, Mary, and Khang (HM&K). The bookkeeper of Mirage Manufacturing

Company resigned three months ago and has not yet been replaced. As a result, Mirage’s transactions have not been recorded and the books are not up to date. Mirage must

prepare interim financial statements to comply with terms of a loan agreement, but cannot do so until the books are posted. To help them with this matter, Mirage turns to HM&K, their independent auditors. Mirage wants Kevin Smith to update their books because Kevin had audited them last year.

Required:

A. Identify the ethical issues that are involved.

B. Explain whether there has or has not been any violation of ethical conduct.