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. Liam Neeson has been appointed as a junior auditor of Brilliant Accounting Limited (BAL). One of his first tasks is to review the firm’s audit clients to ensure that the independence requirements of APES 110 (Code of Ethics for Professional Accountants) are being met. His review has revealed the following:

(a) BAL has recently been approached by Western Development Limited (WDL) to conduct its audit to which BAL has agreed. Ric Flair, one of the partners at BAL, is being considered to lead the audit of WDL. Ric’s wife Wendy Barlow has recently purchased significant amount of shares in Freo Minerals Limited (FML). WDL is also known to have a substantial investment in FML and influence FML’s key decisions.

(b) BAL has recently been approached by Bluecorp Group Limited (BGL) to conduct its audit to which BAL has agreed. The accountant at BGL, Paul Levesque is the son in law of Vincent McMahon CA, who is an audit partner at BAL. Vincent put in a request to lead the BGL audit. Vincent believes that he can get the BGL audit completed efficiently and effectively since he gets along really well with Paul. However, being aware of Vincent’s relationship with Paul, BAL will not be assigning Vincent to the audit team of BGL.

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

The conceptual framework requires Members to use their professional judgement in order to

Identify any threats to compliance with the fundamental principles

Evaluate the significance of the identified threats.

Apply safeguards to eliminate threats or reduce them to an acceptable level

If threats cannot be eliminated or reduced to an acceptable level because the threats are too significant or safeguards are not available or cannot be applied to address the threats, then the circumstance or relationship creating the threats must be avoided.

The Member in such circumstances is required to decline or discontinue the professional service and, when necessary, a Member in public practice is required to resign from the engagement and a Member in business is required to resign from the employing organisation.

Threats may be created by a broad range of relationships and circumstances. When a relationship or circumstance creates a threat, such a threat could compromise, or could be perceived to compromise, a Member’s compliance with the fundamental principles.

Threats fall into one or more of the following categories

a. Self-interest threat – the threat that a financial or other interest will inappropriately influence the Member‘s judgement or behaviour

b. Self-review threat – the threat that a Member will not appropriately evaluate the results of a previous judgement made or service performed by the Member, or by another individual within the Member‘s firm or employing organisation, on which the Member will rely when forming a judgement as part of providing a current service

c. Advocacy threat – the threat that a Member will promote a client’s or employer’s position to the point that the Member’s objectivity is compromised

d. Familiarity threat – the threat that due to a long or close relationship with a client or employer, a Member will be too sympathetic to their interests or too accepting of their work

e. Intimidation threat – the threat that a Member will be deterred from acting objectively because of actual or perceived pressures, including attempts to exercise undue influence over the Member.

Safeguards:

SAFEGUARDS is defined as actions or other measures that may eliminate threats or reduce them to an acceptable level. They fall into two broad categories:

a. safeguards created by the profession, legislation or regulation

b. safeguards in the work environment

Safeguards are necessary when the Member determines that the threats are not at an acceptable level. An acceptable level is the level at which a reasonable and informed third party would be likely to conclude, weighing all specific facts and circumstances available to the Member at that time, that compliance with the fundamental principles is not compromised. A Member may be required to resolve a conflict in complying with the fundamental principle.

Independence :

Independence of mind •

The state of mind that permits the expression of a conclusion without being affected by influences that compromise professional judgement, thereby allowing an individual to act with integrity and exercise objectivity and professional scepticism.

Independence in appearance • The avoidance of facts and circumstances that are so significant that a reasonable and informed third party would be likely to conclude, weighing all the specific facts and circumstances, that a firm’s, or a member of the audit team’s, integrity, objectivity or professional scepticism has been compromised. A Member in public practice who provides an assurance service shall be of independent mind and independent in appearance of the assurance client.

Objective Assessment:

The audit provides an independent and objective assessment of the management control framework established to ensure that the objectives are succeed. The control framework is composed of the guidance, procedures, and activities that management establishes to ensure that objectives are achieved. The audit focused on the key risks inherent in the project.

1. BAL has recently been approached by Western Development Limited (WDL) to conduct its audit to which BAL has agreed. Ric Flair, one of the partners at BAL, is being considered to lead the audit of WDL. Ric’s wife Wendy Barlow has recently purchased significant amount of shares in Freo Minerals Limited (FML). WDL is also known to have a substantial investment in FML and influence FML’s key decisions.

As relive of the auditor is holding substantial intrest , because of this the there would be no independence in audit, which is not acceptable as per principles.

2.BAL has recently been approached by Bluecorp Group Limited (BGL) to conduct its audit to which BAL has agreed. The accountant at BGL, Paul Levesque is the son in law of Vincent McMahon CA, who is an audit partner at BAL. Vincent put in a request to lead the BGL audit. Vincent believes that he can get the BGL audit completed efficiently and effectively since he gets along really well with Paul. However, being aware of Vincent’s relationship with Paul, BAL will not be assigning Vincent to the audit team of BGL.

As per the principles the auditor and co. becomes related parties accepting audit would amount to lack of independence.

Before commencing audit auditor shall look into integrity , objectivty and independence.