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.

Christopher Brown has been appointed as a junior auditor of Apex Chartered Accountants (ACA). One of his first tasks is to review the firm’s audit clients (all public interest entities) to ensure that independence requirements of APES 110 (Code of Ethics for Professional Accountants) are being met. His review has revealed the following:

(c) Johnny, FCPA, is the engagement partner on the audit of Yummy Food Services Limited (YFSL). Johnny’s sister Rebecca owns a large number of shares in a mutual fund investment company, XYZ, which in turn owns shares in YFSL. Rebecca’s investment in XYZ is material to both her and her partner Jack. Reading the investment company’s most recent financial report, Johnny is surprised to learn that the XYZ’s ownership in YFSL hasincreased dramatically.

(d) ACA has recently been appointed the auditor of Delicious Foods Limited (DFL).The senior-in-charge, Andrew Reynolds, and an assistant observed the inventory stocktake. On completion of the inventory observation, Karla White, Delicious Foods’ accountant, informed Andrew that the shipping supervisor had a small gift for him and the assistant. Andrew asked Karla what the gift was for, and Karla responded that they had always given small gifts of food items to their previous auditors on completion of the inventory observation. Andrew estimates that the value of the food is less than $100

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. (7.5 marks)

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

Answer 1

conceptual framework for all professional accountants to ensure compliance with the five fundamental principles of ethics:

• Integrity.
• Objectivity.
• Professional Competence and Due Care.
• Confidentiality.
• Professional Behavior.

Threats	Safeguards	Objective Assessment
Personal Relationship	A Member in public practice must evaluate the significance of any threats and apply safeguards when necessary to eliminate them or reduce them to an acceptable level.	When a conflict of interest creates a threat that cannot be eliminated or reduced to an acceptable level, the Member must not accept, or must resign from, the conflicting engagement.
Economic Interest	A Member in public practice must evaluate the significance of any threats and apply safeguards when necessary to eliminate them or reduce them to an acceptable level.	Members in public practice or their families may be offered gifts or hospitality from clients that may create threats to compliance with the fundamental principles. A selfinterest threat may be created for example when a gift from a client is accepted. The nature, value and intent of the offer will affect the existence and significance of the threat. If a reasonable and informed third party, weighing all the specific facts and circumstances, would consider the offer trivial and inconsequential, then it can be concluded that any threat to compliance with the fundamental principles is at an acceptable level