Question

Write answers to each of the five (5) situations described below addressing the required criteria (i.e. 1 & 2) in each independent case. You may use a tabulated format if helpful having “Threats”, “Safeguards” and “Objective Assessment” as column headings.

Bret Hart has been appointed as a junior auditor of Black & White (BW). One of his first tasks is to review the firm’s audit clients to ensure that independence requirements of APES 110 (Code of Ethics for Professional Accountants) are being met. His review has revealed the following:

a- Neptune Limited is one of BW’s audit clients. Mark is a partner in BW and practices in the same office as Bruce, who is the lead engagement partner for the Neptune Limited audit. Mark is not involved in the Neptune Limited audit himself. Mark’s wife Michelle owns shares in Neptune Limited.

b- Mariah Parker is an assurance manager with BW and it has just been decided to allocate her to the audit of Organic Foods Limited (OFL). Mariah’s financially independent daughter, Juliette, has recently purchased a very large parcel of shares of significant value in OFL

c- BW has recently been approached by Pixcom Limited (PL) to conduct its audit. The accountant at PL, Charlotte Flair, is the daughter of Ric Flair, who is one of the audit partners at BW. Being aware of Ric’s relationship with Charlotte, BW will not be assigning Ric to the audit team of PL.

Required: For each of the independent situations above, and using the conceptual framework in APES 110 (Code of Ethics for Professional Accountants), answer the following questions:

1. Identify potential threat(s) to independence & recommend safeguards (if any) to reduce the independence threat(s) identified

2. Provide an objective assessment of whether audit independence can be achieved

Answer 1

Threats	Safeguards	Objective assessment
a. There seems to be no threat at all to audit independence --as Michelle is only a shareholder in Neptune ltd.& her husband Mark is not,in anyway, involved with Neptune.	So, no safeguard seems to be necessary.	There is absolutely no risk of any sort of inteferences that might endanger auditor-independence.
b. There exists very much ,a relationship threat , as the auditor's daughter is bound to have significant influence ,in the financial affairs of OFL.	Best safeguard is for Mariah to decline the appointment , citing the true reason.	Both the independence of the auditor & consequently, her audit opinion ,are bound to get affected , as her daughter may influence the final financial results ,to boost OFL's share prices in the stock market.
c..There is the threat of familiarity wherby, the audit firm may be inclined to accept Charlotte Flair's versions ,precluding just & adequate professional judgement.	Safeguard against these threats, is the application of highest professionsal integrity and sceptisism , as they would apply to all other clients, without being influenced by the above fact.	Applying objectivity , giving importance to professional ethics & judgement ,without getting unduly influenced,the decision of BW not assigning Ric to PL seems to be the right decision.Absolute audit independence is really doubtful , as Ric is a partner & most probable to have access to the data of PL--& will b ein aposition to know the status of audit from both the audit firm & the client PL.