Question

Regional insurance partners (RAP) is a three partner audit and assurance firm based in Sydney. The three partners are bob, Ralph and Shelly. RAP has been appointed as auditor of exquisite accessories limited(EAI) a metal processing firm. This is the first year that RAP is undertaking the EAL audit

A. The CEO of EAL is David Jones. David’s wife is a well know jewellery designer who frequently produces pieces for fashion shows and other high profile medial events. David has been vocal about his wife successful jewellery business and has offered to source some exclusive and limited editions piece for the audit firms

B. Owen Jackson, the CFO of EAL and bob have been friends for many years. Their families usually go on holiday together once a year and they frequently socialised with one another. Bob rates owns very highly as a CFO and he is confident that Owen will cooperate with the auditors

C. Elspeth o keefe a new audit manager at RAP was previously employed by EAL, and she prepared the EAL financial reports for the period under audit

Questions:

A. For the first scenario identify one threat to independence for RAP and state one action RAP needs to implement to eliminate or reduce the threat to acceptable level

B. For the second scenario identify one threat to independence for RAP and state one action RAP needs to implement to eliminate or reduce the threat to acceptable level

C. For the third scenario identify one threat to independence for RAP and state one action RAP needs to implement to eliminate or reduce the threat to acceptable level

Answer 1

A. One threat to independence for RAP is that the auditors of RAP may be made to make wrong statements in the financial reports of EAI as David is providing them with exclusive limited pieces of jewellery. This would affect the integrity of the auditors and their independence.

To eliminate this threat, auditors should be made to work independently without any indulgence if any one of any kind. This would contribute in making a fair financial report and thus would result in an ethical behaviour reflected by auditors.

Also there should be one in the firm who should be keeping track of all the activities done by auditors, so that they may not be able to make wrong reports for any firm.

B. As Bob and Owen are family friends for a long time, it's possible that Bob being an auditor can be manipulated by Owen to produce false reports for the company and that would lead to making misstatements and thus further lead to manipulate the stakeholders in return.

So, to reduce this threat to the RAP, the auditing firm should have a cross check on the workings of each auditor , so that if any false statements are made, it can be easily recognised. And also, the auditors should be made to work independently so that they could not come under any one's pressure or because ofcany close relation, to lose their integrity.

C. In this case, there is a great threat to RAP. As Elspeth was earlier employed by EAL, and she has only prepared the financial reports, it could be easy for her to know areas where flaws were made, or if she has done some manipulations, she could try to escape from those , if she gets a chance to audit the reports. This would help her previous company and also would help reports prepared by her to be passed which may conyain misstatements.

It may also be possible that any employee of EAL may contact her to do some changes in making reports that would be beneficial fir EAL , and being an ex employee, she may be convinced and work in accordance with that.

To avoid such situations, auditing firm should use best internal controls that could deal with such activities and eliminate them. Also, the internal controls should be able to detect as fast as it can , any wrong misstatements being made, so that it can be corrected at that moment.

Also, Elspeth should not be given the reports prepared by her to audit herself. Even if she has been given the task, her work must be reviewed by some ither person, who can judge her working, whether the reports are fairly prepared or not.

So, in this way one can reduce or eliminate the risks associated.