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.                                                       

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2. Determine whether Chris would be able to accept the audit if he won the tender.     

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3. Explain whether your answer to (a) (ii) would change if it was Chris’s spouse who held the shares.                                                                                                                                    

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2. 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.                                                                                                                                   

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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

Answer:

1. The threat to independence here is "self interest threat" since Chris has a direct financial interest with the client. His independence is threatened since he will less likely want to issue an unqualified opinion because he is afraid of losing his investments. If that's the case, auditor's integrity will be impaired.
2. If Chris would be able to win the bid, he can't still accept the audit engagement since it will be identified that he has substantial investment to the client. Independence is very important prior to starting an audit engagement. If the audit firm will identify that his independence is impaired regarding that specific client, then more likely he will be re assigned to another audit engagement where there is no conflict with his independence.
3. Even if Chris's spouse is entitled with the investment in the audit client, still Chris cannot be able to be part of the audit engagement who will be auditing the said client since since spouse is considered a direct family member. And having a family member who have financial interest in the said client would technically mean that you are also having a financial interest with that client, thus impairing independence.
4. If the shares will be placed to a blind investment trust and Chris does not hold any influence to that shares, then it can be possible that Chris will be part of the audit team. As long as Chris does not have any substantial investment to the client he is auditing then would not cause threat to independence.
5. Yes, Chris could be part of the audit team who will be auditing the client if prior to the audit engagement, he disposed ALL his shares. This would mean that he no longer have any financial interest with that client and will not affect the opinion he will be providing the client after all the audit procedures have been performed.