Question

PMB Security Ltd has been an audit client of Maitland Partners for the past 15 years. PMB Security Ltd, an ASX listed company, is based in Roma where it manufactures high-tech security systems. PMB Security’s end of financial year is 30 June, and Maitland Partners is preparing to commence the 2019 audit.

Caryn Marks has been the engagement partner on the PMB Security Ltd’s audit for the past five years. Caryn is a specialist in the security/IT industry and intends to remain as review partner when the audit is rotated next year to a new audit partner (Scott Turner, who is to be promoted to partner to enable him to sign-off on the audit).

In September 2018, PMB Security Ltd installed a new off-the-shelf inventory costing system. This system replaced a system that had been developed in-house, as the old system could no longer keep up with the complex and detailed manufacturing costing process that provides tender costings. The old system also had difficulty with the company’s broader reporting requirements.

PMB Security Ltd’s information technology (IT) department, together with the consultants from the software company implemented the new manufacturing costing system. Key operational staff from PMB Security Ltd, together with consultants from the software supplier were significantly engaged in the selection, testing, training and implementation stages. Several customized modifications were made and therefore PMB Security has asked Maitland Partners to provide an estimate of the valuation of the software system.

PMB Security Ltd has a small internal audit department which reports to the Chief Financial Officer (CFO), Bruce Tegan, who is an ex-partner of Maitland Partners. Tegan took up the appointment as CFO for PMB Security Ltd in November 2018, after spending two years in early retirement. During his last year at Maitland Partners, Tegan had been the review partner on the 2016 PMB Security Ltd audit. Tegan does not hold any financial interest in Maitland Partners, having been paid out his capital on retirement. Further, Tegan has not remained in contact with any of the remaining partners since his departure from the audit firm, with the exception of Scott Turner, whom he had mentored in his early career.

Question:

Auditing Homework:

You are required to identify and discuss any issues that could give rise to potential threats to independence for Maitland Partners in their audit of PMB Security Ltd. (Australia)

Answer 1

It is understood from the facts given ,that this off-the shelf inventory costing system is going to cost the manufacturing process so as to provide costs for quoting in tenders--believing which , the buyer companies will accept/reject PMB's offers.So there needs to be transparency & accuracy ,in the cost figures , without any hidden items.

PMB Security has asked Maitland Partners to provide an estimate of the valuation of the above-mentioned software system.

Maitland Partners had been auditing PMB for the last 15 years & Scott Turner whom they are going to depute next year as the engagement partner , had his early-years training under Bruce Tegan,current Chief Financial Officer (CFO) heading the internal audit department in PMB.Tregan is alos an ex-partner of Maitland Partners.

Though Tregan does not have any more day-to-day contact with Maitland partners and its people, as a ex- senior person of the firm & also as was his mentor, Scott, in all likelihood ask for the former's opinions on matters concerning cost-fixation --that too, Tregan heading the internal audit, which is not too big--must be having all the details in his finger-tips.

There is a good possibility for both Tregan interfering ,ie. Speaking his mind as also Scott looking up to him for explanations or advice on, atleast complicated and significant matters.

There definitely exists multiple threats to Scott's independent reporting about costs of the system ,which will ultimately affect the mark-up & final tender quote.

To elaborate further,

There is the threat of Tregan interfering with details , with a view to assert whatever he had approved/disapproved so far--has turned out correct ultimately.It is a sort of asserting oneself with facts & figures---Tregan had also been the review partner for PMB in 2016.

Being in the internal audit department , Tregan can influence /advocate high costs , so as to escalate price or low costs to win bids.

There exists the threat of Scott being familiar with Tregan --this may work bothways--Scott might not be able to contradict/lock-horns with Tregan --or simply obey because he was his guru/mentor in early days--in a sense of gratitude to the teacher.

As Tregan quit only recently and the time-lag is small,there certainly exist potential threats to independence for Maitland Partners in their audit of PMB Security Ltd--to the extent to affect their ultimate report.