Question

You are an audit manager at Hall & Associates, who have been approached to conduct the audit of Computer Games Ltd (CGL), a manufacturer of interactive computer games, for the year ended 30 June 2013.

Hall & Associates has not previously audited CGL’s financial report, although it has undertaken other types of engagements for CGL. Last year CGL hired Hall & Associates to assist in the redesign of CGL’s accounting software to ensure that internal controls over internet sales were adequate to ensure the confidentiality of customer data and accuracy of recording. The new software was implemented at the beginning of the current year and appears to be working satisfactorily. As part of this year’s audit, you expect to review the internal controls at CGL, including the controls within the IT systems.

As part of CGL’s financing arrangements with its bank, Easymoney Ltd, it has a loan covenant that stipulates that the quick asset ratio cannot be less than 1:1 or Easymoney Ltd has the right to withdraw all funding. The board has advised you that CGL’s quick asset ratio is currently at 0.9:1 due to industrial action holding up the sale of goods imported from overseas. The board has asked you to ignore this temporary breach of the loan covenant, explaining that CGL is a stable and financially sound company, and that the ratio will return to a positive level on resolution of the industrial dispute. The board has indicated that unnecessarily disclosing this within the audit report would force it to reconsider its plans to use your audit firm for other engagements.

As a result of CGL’s current cash flow difficulties, the board has requested that Hall & Associate’s audit fee for 2013 be paid in CGL shares. The board has indicated that the market value of the shares will equate to the value of the audit fee charged by Hall & Associates.

The management of CGL is currently reviewing the structure of its audit committee to ensure that it complies with the requirements of the ASX Corporate Governance Principles and Recommendations. However, the board is confused by the reference in the ASX Corporate Governance Principles and Recommendations to both independent directors and non-executive directors, as they thought that they were the same thing. As a result, they have sought your advice concerning the structure of their audit committee.

Required: a) Identify and explain three separate key threats to Hall & Associates’ independence that may arise under APES 110. (3 marks, maximum 100 words)

b) For each independence threat identified in a) above, describe the course of action Hall & Associates needs to take to ensure compliance with APES 110. (7 marks, maximum 250 words)

this is all the info i have

Answer 1

Part a) According to APES 110 Code of Ethics for Professional Accountants standard, there can be 5 following threats that may arise to threaten an auditor's independence:

1.Self-interest threats, or conflicts of interest

2. Self-review threats

3. Advocacy threats

4. Familiarity threats

5. Intimidation threats.

According to your question three threats associated to the case are-

1. Self-review threats: This type of threat occurs when a professional accountant is responsible for reviewing some work or a judgment that he was responsible for originally. An extreme example would be a situation where a professional accountant prepares the annual financial statements for a corporate client and then is appointed to do the audit.

2. Intimidation threats: A professional accountant might find that his objectivity and independence is threatened by intimidation, either real or imagined.

3. Advocacy threats: This type of threat can occur when an accountant promotes the point of view of a client, for example by acting as a professional witness in a legal dispute. Acting as an advocate for the client can reach the point where the objectivity of the accountant is compromised.

Part b) Three key threats that the auditor faces are as follows:

1. Self-review threat-Since Hall & Associates have only designed the internal control system pertaining to the accounting software to ensure that the data is safe and secure. And now they have to audit the same internal control system and which include the Internal controls which they designed in the previous year. The threat of self-review can arise as they would be evaluating their own work of a past service offered to the client.

Course of action to compliance is to use a sound system of internal control, with strong internal controls incuding the application of appropriate policies and procedur es for monitoring the quality of work done for company

2.Intimidation threat- Board has asked the auditor to ignore the temporary breach of loan covenant or else they would reconsider employing the audit firm for other engagements, this might find that his objectivity and independence is threatened by intimidation.

Course of action to compliance is Involve an additional chartered accountant who was not a member of the auditor team to review the work or advise as necessary to ensure that they maintain a suitable level of competence as well.

3. Advocacy threat -The board is, explaining that CGL is a stable and financially sound company, and that the ratio will return to a positive level on resolution of the industrial dispute. Such advocacy for the client can reach the point where the objectivity of the accountant is compromised.

Course of action to compliance is that the auditor should Consider the appropriateness or necessity of modifying the audit plan for the engagement-Quality control review of the company. Discussion about ethical issues can be made with those people in the company who are responsible for negative consequences like industrial disputes.

Thanks & all the best.......