Write answers to each of the five (5) situations described below addressing the required criteria (i.e. 1 & 2) in each independent case. You may use a tabulated format if helpful having “Threats”, “Safeguards” and “Objective Assessment” as column headings.
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ACCT3000 Auditing Assurance And Risk Assessment
: Solution Essays
Stephen Taylor has been appointed as a junior auditor of Simnett Chartered Accountants (SCA). One of his first tasks is to review the firm’s audit clients to ensure that independence requirements of APES 110 (Code of Ethics for Professional Accountants) are being met. His review has revealed the following:
SCA has been providing its audit client Kaplan Limited (Kaplan) with non-audit services for a number of years. Andrew Ferguson is SCA’s partner in charge for providing non-audit services to Kaplan. While having a conversation with Andrew, Stephen becomes aware that Andrew’s wife Michelle Ferguson is planning to purchase a significant number of shares in Kaplan.
Duxton Motels Limited (DML) is a chain of ten motels operating in Western Australia and is one of the oldest companies listed on the Australian Securities Exchange. SCA performs audit work for DML. This is the second year that SCA’s total fee from DML will comprise of around 20% of SCA’s total fee revenue from all clients.
Super Tech Limited (STL), an Australian IT company, has not paid any of its audit fees for the last three years to SCA, citing cash flow problems. This has resulted in a significant amount of overdue audit fees for SCA. The audit partner in charge, Grant Richardson has been reluctant to push the issue further, as STL is a high profile client who he wishes to retain.
Gregory Taylor, an audit senior with SCA is very excited to be a part of the audit team of Jumbo Metals Limited (JML). Gregory feels that he will be a valuable asset to the audit team as his wife, Christina Taylor, is JML’s financial controller who is responsible for the preparation of JML’s financial report.
SCA has recently accepted an engagement to provide audit services to Yummy Donuts Limited. Robert Durand is an audit partner at SCA. Robert’s wife Rebecca Durand currently works as a financial accountant at Yummy Donuts. Robert is not on the audit team of Yummy Donuts.
For each of the independent situations above, and using the conceptual framework in APES 110 (Code of Ethics for Professional Accountants), answer the following questions:
Identify potential threat(s) to independence & recommend safeguards (if any) to reduce the independence threat(s) identified.
Provide an objective assessment of whether audit independence can be achieved
Background and Introduction
In the given assignment, 5 different situations have been given which needs to be assessed as per the conceptual framework stated in APES 110 on Code of Ethics for Professional Accountants. The threats along with the safeguards to be ensured have been highlighted for each of the case together with the objective assessment of whether the audit independence can be achieved or not.
Discussion and analysis
There is a kind of advocacy as well as self-interest threat as per APES 110.290.105 in this case as Andrew’s wife Michelle Ferguson is planning to buy significant number of shares of the audit client, Kaplan. Here Andrew is the partner of the audit firm and accountable for all the non-audit services rendered to the firm.
As per APES 110.290.105, The safeguard for this is that the company should take a declaration from the auditors on their independence and that the non-audit services are not compromising the independence of the auditor. The same should then be shown in the audit report of the entity and the annual report as well.
At present the audit independence is being compromised because of the 2 factors, one for non-audit services and another for buying the shares of the company. The independence can be ensured by avoiding to buy the shares of the company and getting the declaration of independence from the auditors such that their professional scepticism is not being compromised with.
Here in this case since Duxton Motels Limited (DML) forms one of the significant clients of SCA audit firm and DML forms almost 20% of total revenue fees from the clients. Therefore as per APES 110, para 290.221, it can give rise to self-interest threat for the audit firm because the loss of this client may significantly impact their revenue.
The safeguards in this regard is to follow the principles laid down in APES 110, para 290.221, professional competence and due care must be ensured while audit together with objectivity, independence and professional behaviour while conducting audit. They should also try to reduce dependency on this client.
The independence can be achieved by the auditors by following the principles laid down in APES 110 on professional competence and due care while audit and to ensure objectivity, independence and professional behaviour while conducting audit.
Furthermore they can also discuss with those charged in governance for any undue pressure and try to be less dependent on DML for revenue by acquisition of other clients.
As per the standards laid down in APES 110, para 290.223, this is a kind of perceived intimidation threat as the client STL may threat to default on the old payments if further work is not carried out. Furthermore, SCA also has a self-interest threat considering that STL is a high profile client and they do not want to lose them.
As a safeguard measure, the firm should take professional advice from a lawyer or any professional organization on the matter and can also seek legal advice. Furthermore as per APES 110.290.223, the auditor should also talk and discuss the issue with those charged in governance for payment of dues.
The independence of auditor can be achieved if the payment of past dues is assured to the audit firm. Legal or professional advice can be taken on the issue. IN case of conflict of interest or the compromise in independence, the matter can be highlighted to the management and those charged with governance to ensure independence requirements.
As per APES 110, Para 290.128, the given case highlights the familiarity threat for Gregory Taylor as his wife is directly associated as an employee with the client company.
The same can be safeguarded by following the disclosure provisions and letting the client and TCWG of the client company with the issue. Furthermore the remuneration for the auditor should be determined by other members of the management not involving Gregory and Christina.
The independence for the auditors can be achieved in this case by not involving both the members Gregory as well as Christina in the audit processes. This will help in ensuring independence in audit and avoiding any threats or conflicts. Furthermore, the issue should be communicated to those charged with governance and the auditor’s declaration on independence must be taken.
In the given case, there are 2 threats namely self-interest threat as well as familiarity threat as Robert Durand is the audit partner of the firm doing audit as his wife Rebecca Durand works as financial controller in the client entity Yummy Donuts Limited. This is as per the standards laid down in APES 110, Para 290.129 to 290.133.
One of the safeguards is that Robert himself is not a part of the audit team, secondly, Rebecca should also not be involved in audit and the issue should be discussed with those charged in governance and the management team of the client entity.
The independence of the auditors can be ensured by not involving any of the related parties in the entity audit. Furthermore other team members of audit team should sign the declaration of independence and the issue should be highlighted to the management of client entity.
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