Question

Question 1

You are the audit partner of Merit Chartered Accountants (“MCA”), working on the audit of Darwin Tourist Buses (“DTB”) for the 2017 financial year. DTB is a provider of luxury bus trips all around Australia, including both interstate capital city travel and conference and holiday packages. The net profit before tax of DTB for the 2017 financial year is $14.5M while net assets total $232M. You are reviewing the 2017 audit working papers and note that the assurance services senior has documented a number of situations that may lead to a breach of independence for MCA.

Situation 1 It has been documented that the DTB Financial Controller has gifted the three audit team members with two free luxury holiday packages each. The audit manager has concluded that the key threat to independence in Situation 1 is ‘self-interest’.

Situation 2 The audit team has documented that DTB is intending to launch a new customer loyalty program. The CFO of DTB has guaranteed that if the audit team convince MCA and five of its biggest clients to sign an exclusive corporate travel arrangement with DTB, the audit team will receive immediate platinum status (normally requiring a customer to have accumulated one million points), giving them a host of benefits. The audit manager has concluded that the key threat to independence in Situation 2 is ‘familiarity’.

Situation 3 The audit team has noted that MCA has put forward a proposal to DTB to provide consulting services. The CFO of DTB has told the audit team that if they do not remove comments in the audit summary review memorandum to be provided to the audit committee about a weakness in the revenue and receivables process, he will not award MCA the consulting work. The audit manager has concluded that the key threat to independence in Situation 3 is ‘advocacy’.

REQUIRED:

Explain whether the audit manager has correctly identified the key potential threat to independence for each of Situations 1, 2 and 3 above. Your answer should clearly identify what you believe is the key threat to independence in each situation.

Answer 1

Self Interest Threat:- It exist when the auditor holds a direct or indirect Financial interest in the company or depends on the client for a major fee outstanding.

Familiarity Threat:- When auditor is too familiar with employee officer and director or keep long relationship. For example acceptance of gift, Close family member etc.

Advocacy Threat: It exist when auditor is involved in promoting the client to the point in which their objective is potentially compromised.

In the Situation 1 DTB Financial Controller has given gift to audit team which arise a "Familiarity Threat" not a Self interest.

In the situation 2 The CFO of DTB is telling to  Auditor to promote the DTB and therefore it is not a familiarity situation but this is Advocacy Situation.

In the Situation 3 the CFO of DTB is intimidated to audit team which results a "Intimidation Threat" not a advocacy situation.

I hope this clear your doubt.

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