Question

Consider the following independent situations: 1. You are the auditor of Hail Pty Ltd a medium sized furniture manufacturer. Your audit firm has finalised the financial statements after the client has substantially prepared the accounting records. However, the client admits to having limited knowledge of identifying and calculating impairment and has asked for your assistance. You have proposed a number of adjustments to account for the impairment of assets. 2. You are the auditor of Travel Time Ltd, a large travel agent that also handles all your audit firms travel arrangements on normal commercial rates and provides excellent service. The managing director of Travel Time has indicated that the company is having a tough time of it due to the lack of consumer confidence in the economy at the moment and has asked if you could help by recommending their services to your other audit clients. He has said that he will understand if you are not able to do so. You happily agree to provide the recommendation, as you have always been satisfied with their service. 3. Your audit firm has been approached by a new client, Civil Constructions Ltd, to conduct the audit for the coming year. As part of your client acceptance procedures, you identify that the wife of one of the audit firm’s partners has a substantial shareholding in Civil Constructions Ltd. 4. Your audit client, Pleasure Cruises Ltd, is having cash flow problems and has not paid any of the current year’s fee by the time the auditor’s report is due to be issued. They expect business to pick up in the coming year and have requested an additional time to pay the bill.

REQUIRED: For each of the independent situations above: a) Identify the type of potential threat to independence. Justify your answer. b) Describe a safeguard, if any, which could be implemented to reduce each of the independence threats.

Answer 1

A)

1) The treat to independence in this situation is "SELF REVIEW THREAT".

Self review threat occurs when the auditor is reviewing his own work. Here, since auditors has themselves proposed number of adjustments to the client regarding the impairment of assets. So, by doing audit, he will review his own work.

2) The treat to independence in this situation is "ADVOCACY THREAT".

Advocacy threat occurs the auditor is involved in promoting the client. Here the auditor is promoting the clients's business and recommending its business to other audit clients.

3) The treat to independence in this situation is "FAMILIARITY THREAT".

Familiarity threat occurs when auditor or any other auditor/partner in his audit firm is in relation with or familier with the directors, CEO, CFO or any other person of such position of the client. Here, wife of one of the audit firm’s partners has a substantial shareholding in the client.

4) The treat to independence in this situation is "SELF INTEREST THREAT".

Self Interest threat occur when the auditor has financial or other interest in organization. Here the audit client has not paid his past due fees. So, auditor is having financial interest in the organization.

b) Following safeguard can be implemented to reduce each:-

1) Ensuring that the accounting service is not performed by a member of the audit team.

2) Ensuring that he does the audit with professional skepticism.

3) Ensuring that the partner who is related with the company does not perform the services.

4) Disclosure of the relevent interest to those charged with governance.