Question

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.  
Bret Hart has been appointed as a junior auditor of Black & White (BW). 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:

(c) BW has recently been approached by Pixcom Limited (PL) to conduct its audit. The accountant at PL, Charlotte Flair, is the daughter of Ric Flair, who is one of the audit partners at BW. Being aware of Ric’s relationship with Charlotte, BW will not be assigning Ric to the audit team of PL.

(d) Jack, the current senior manager on the audit of Burj Steel (BS) Limited which specializes in the production of mining equipment, has just entered into a business venture (ZZ Motors) with the CFO of BS Ltd, whereby they are both equal partners in a business retailing motor vehicles. Jack has informed you that this is not a problem since the 2 entities (BS Ltd and ZZ Motors) are in different non-competing industries.   

(e) Awesome Machineries Limited (AML) has been an audit client of BW since the past two years. BW has recently completed a review of internal controls for AML. BW has been requested by AML to take responsibility to implement a new software system that will form a significant part of internal controls over AML’s financial reporting process and run a three hour training session for its accounting staff.

Required:

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:

1. Identify potential threat(s) to independence & recommend safeguards (if any) to reduce the independence threat(s) identified.

2. Provide an objective assessment of whether audit independence can be achieved  

Answer 1

Threats	Safeguards	Objective assessment
c..There is the threat of familiarity wherby, the audit firm may be inclined to accept Charlotte Flair's versions ,precluding just & adequate professional judgement.	Safeguard against these threats, is the application of highest professionsal integrity and sceptisism , as they would apply to all other clients, without being influenced by the above fact.	Applying objectivity , giving importance to professional ethics & judgement ,without getting unduly influenced,the decision of BW not assigning Ric to PL seems to be the right decision.Absolute audit independence is really doubtful , as Ric is a partner & most probable to have access to data.
Also the threat of self-interest & review by Charlotte, being in an accountant's position, to prove her work right , influencing the members .
All the above affect the independence of the auditors , in making conclusions about the financial affairs of the company.
d..There is the threat of conflict of interest, occupying senior position in both the firms ,with respect to time spent & also may be utilising one's resources for the other , by virtue of being a related party to both.Very difficult to maintain distinction.	Safeguards applied by the auditor is to ensure proper documentation in the work environment , so that expenses & income of the other company , do not percolate into BS's books	There needs to be established constant monitoring & well defined & self-detecting & self-correcting internal control mechanisms--such as from the voucher stage. This is an absolute necessity. There can be no slack , just because the two are unconnected industries.Again, absolute audit independence ,may be encroached.
e..There is the threat of advocating things that are convenient for the conduct of its audit without much bothering about , the firm's needs.	Safeguards applied in this regard , by the auditor would be to follow the ethics os professional behaviour, that upholds the integrity of the profession.	As the audit firm is associated with the company as its internal auditors only,it is entirely possible to achieve ,audit independence, as the exercise is going to help the organisation , in the long-run.