Question

During your review of the audit field work completed by a new junior employee of the audit firm, John Smith, you have noted many areas which require additional review notes. John, who has just completed the interim audit of Taxon Ltd for the year ended 30 June 2019, has just performed testing of controls. When testing controls over payments made to related parties, there should be evidence of approval and sign-off by the chief financial officer (CFO). John selected a sample of payments made to related parties and vouched them back to the electronic funds transfer (EFT) forms to sight the CFO’s signature of approval. Based on a sample of ten payments, six had been approved by the CFO in writing. However, the remaining four EFT forms (for immaterial amounts) did not have the CFO’s signature, but John noted that the CFO had given verbal approval. John concluded that because all internal controls were working, the audit team could use analytical procedures alone to audit payments made to related parties. Required: Based on the results of the testing of controls outlined above, determine whether John has arrived at the appropriate conclusion? (1 mark) Justify your answer by addressing the following areas: the risks associated with related party transactions, and the reliability of controls at Taxon Ltd. (Word Limit: Minimum of 150 words. Maximum of 600 words)

Answer 1

 

(i) The clients internal audit department is headed by an ex-partner of texon.Ltd

(a) Threats:

Both APES 110 and the Corporations Act place restrictions on audits where a former audit

partner has a senior role within the client.

The Corporations Act restriction (CORPORATIONS ACT 2001 - SECT 324CK) is limited to a

period of 5 years between leaving the audit firm and the current audit (2 years if the person

retired rather than just left the firm s. 324CI). On this basis, there is no contravention of the

Act. In addition, the restriction applies to ex-auditors who become an officer of the company.

In the case of texon.Ltd it does not appear to be an officer of the company

(e.g. a director or senior manager) he is the head of the internal audit department.

APES 110.290.149 has restrictions on the time that a person can be a Key Audit Partner for

a Public Interest Entity, but it is less restrictive than the Act (7 years). However, the auditor

must still consider any threats from familiarity or self-interest.

(b) Safeguards:

Ensure that john smith is not regarded as able to exert direct and significant influence

over the subject matter of the external audit.

Ensure that there wasn’t a significant and personal relationship between john and

the other members of the audit team based on their previous association as colleagues (to

deal with the general familiarity threat).

APES 110.200.7 Examples of circumstances that may create familiarity threats include, but

are not limited .

(ii) john smith has been the partner for 5 years and will remain as review partner

when the junior auditor  is appointed as partner for the audit.

(a) Threats:

APES 110 and the Corporations Act require rotation of senior audit personnel. See the

section in APES 110 s 290 Audit firm's rotation obligation.

(b) Safeguards:

John smith should not participate in the audit for two years.