Question

PMB Security Ltd has been an audit client of Maitland Partners for the past 15 years. PMB Security Ltd, an ASX listed company, is based in Roma where it manufactures high-tech security systems. PMB Security’s end of financial year is 30 June, and Maitland Partners is preparing to commence the 2019 audit.

Caryn Marks has been the engagement partner on the PMB Security Ltd’s audit for the past five years. Caryn is a specialist in the security/IT industry and intends to remain as review partner when the audit is rotated next year to a new audit partner (Scott Turner, who is to be promoted to partner to enable him to sign-off on the audit).

In September 2018, PMB Security Ltd installed a new off-the-shelf inventory costing system. This system replaced a system that had been developed in-house, as the old system could no longer keep up with the complex and detailed manufacturing costing process that provides tender costings. The old system also had difficulty with the company’s broader reporting requirements.

PMB Security Ltd’s information technology (IT) department, together with the consultants from the software company implemented the new manufacturing costing system. Key operational staff from PMB Security Ltd, together with consultants from the software supplier were significantly engaged in the selection, testing, training and implementation stages. Several customized modifications were made and therefore PMB Security has asked Maitland Partners to provide an estimate of the valuation of the software system.

PMB Security Ltd has a small internal audit department which reports to the Chief Financial Officer (CFO), Bruce Tegan, who is an ex-partner of Maitland Partners. Tegan took up the appointment as CFO for PMB Security Ltd in November 2018, after spending two years in early retirement. During his last year at Maitland Partners, Tegan had been the review partner on the 2016 PMB Security Ltd audit. Tegan does not hold any financial interest in Maitland Partners, having been paid out his capital on retirement. Further, Tegan has not remained in contact with any of the remaining partners since his departure from the audit firm, with the exception of Scott Turner, whom he had mentored in his early career.

Question:

You are required to identify and discuss any issues that could give rise to potential threats to independence for Maitland Partners in their audit of PMB Security Ltd. (Australia)

Answer 1

There are certain issues which appear to be frivolous but can have widespread repercussions:

1. The CFO (Bruce Tegan) has in the past been associated with Maitland Partners. Specifically, he was associated with the audit of PMB Security which does give rise to a Conflict of Interest.

2. The entire internal audit department reports directly to Bruce Tegan which is also a potential red flag since he is in a position to control the findings of the audit team. He may chose to disclose the information as per the circumstances.

3. Though the CFO does not have any vested interest with Maitland Partners, he is in touch with Scott Turner to who he was a mentor. Scott is also scheduled to be promoted as a partner for signing off the audit. This gives rise to Conflict of Interest since both individuals are in a powerful position to control the findings.

4. There is no mention of any other independent director/Chairman who would also be a participant in this activity.

5. The situation requires an External IT audit for this purpose which would have a specific set of requirements as per the specific country.

6. The respective Financial statements also have to be thoroughly vetted since the CFO would be ultimately signing off on those statements.

7. Caryn Marks is a specialist in the IT industry but should also have working knowledge of the financial statements and other operations associated with developing the inventory costing system. All aspects should be considered in the audit process.

8. A detailed analysis is required to be understood on how the new system is proving to be effective in tiding over the difficulties of the previous system. The expenses and cost savings have to be correctly determined.