Question

Kerry is a senior auditor and a member of the team auditing a long-standing client, the listed public company Darcy Industries Ltd. Darcy Industries has just announced a takeover bid for Blacklight Ltd. Kerry has a substantial shareholding in Blacklight through his self-managed superannuation fund. Kerry did not know about the takeover bid until he read it in the paper over breakfast one morning. Kerry’s wife is very worried because she knows that Kerry must abide by strict rules laid down by his audit firm about holding shares in client companies. She asks him if he will be dismissed because of this.
Required
(a)        Explain what the threat to compliance with the fundamental principles is, and why.
(b)        Explain whether any safeguards could be put in place to reduce the threat to an acceptable level.

Answer 1

If a member of the Assurance Team, or their Immediate Family member receives, by way of,for example, an inheritance, gift or, as a result of a merger, a Direct Financial Interest or a materialIndirect Financial Interest in the Assurance Client, a self-interest threat would be created. Thefollowing safeguards should be applied to eliminate the threat or reduce it to an acceptable level:

a)Disposing of the Financial Interest at the earliest practical date

b)Removing the member of the Assurance Team from the Assurance Engagement.

During the period prior to disposal of the Financial Interest or the removal of the individual from theAssurance Team, consideration should be given to whether additional safeguards are necessary toreduce the threat to an acceptable level. Such safeguards might include:

Discussing the matter with those charged with governance, such as the audit committee; or

Involving an additional professional accountant to review the work done, or otherwiseadvise as necessary.

Kerry was not a shareholder in his client Darcy Industries Ltd, but is at risk of becoming ashareholder in a member of the group if Darcy's takeover of Blacklight is successful. Kerry wouldnormally be regarded as an indirect shareholder rather than a direct shareholder because the sharesare held by his self-managed superannuation fund (SMSF). A SMSF is a trust arrangement whereKerry cannot directly deal with the shares and will only benefit on his retirement (or his estate willbenefit on his death). However, APES deems the financial interest to be direct if thebeneficial owner has control over the investment vehicle. Kerry is aware of the investment of hisSMSF in Blacklight if he is a director of the fund (which he would almost certainly be as it is 'his' fundaccording to the question). There is a potential for Kerry's decision making to be affected because