Question

Chris Pine is the audit partner in the Chartered Accounting firm of Pine & Associates, (PA). Chris has a substantial investment in Space Ltd, which has just put its audit for the year ended 30 June 2019 out to tender. On 31 October 2018 Chris has submitted a tender bid for the audit of Space.

REQUIRED:

1. Identify and explain the threat to independence.
2. Determine whether Chris would be able to accept the audit if he won the tender.
3. Explain whether your answer to (a) (ii) would change if it was Chris’s spouse who held the shares. b.Explain whether the situation would be any different if, prior to submitting the tender, Chris placed the shares into a blind investment trust where he had no influence over the trust’s investments.   

c. Explain whether the situation would be any different if after winning the tender, Chris disposed of his shares prior to commencing the audit.

Answer 1

As per Section 141 of the Comapnies Act,2013 and Second schedule Part-1 clause 4 of the professional ethics:

• A CA should refrain on expressing an opinion on Financial Statements of any business in which he.his firm or a partner in his firm has a substantial interest.
• A CA sould not accept an engaement which compromises or jeopardises his independence.

In the given case,

• a)(i) Chris is audit partner at Pine Associates as well as has sustantial share in Space Ltd.
• Therefore, it is clear that independence of Chris will be hampered if he undertakes the audit of Space Ltd.

(ii) No, Chris would not be able to accept the audit if he won the tender.

(iii) No, Chris still not be able to accept the tender even if his wife held those shares as his wife is covered under the definition of "relatives" under section 2(77) of the Companies Act,2013.

b) Yes,Chris would be able to accept the tender if he tansfers share to a Blind Trust due to following reasons:

• A blind trust is a trust established by the owner (or trustor) giving another party (the trustee) full control of the trust.
• The trustee has control over the assets and investments while managing the assets and any income generated in the trust.
• Blind trusts are often established when individuals want to avoid conflicts of interest between their employment and investments.

c) No, Chris cannot conduct the audit if he disposses off the shares after winning the tender.