Question

Matthew Damon has been appointed as a junior auditor of AwesomewaterhouseCoopers (AwC). 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:

1. (a) AwC has recently been approached by Jamaican Metals Pty Limited (JM) to conduct its audit to which AwC has agreed. Rich Brian, one of the partners at AwC, is being considered to lead the audit of JM. Rich’s wife Monica Stacie has recently purchased significant amount of shares in Fresh Foods Limited (FFL). JM is also known to have a substantial investment in FFL and influence FFL’s key decisions.

2. (b) AwC has recently been approached by Metal Mining Limited (MML) to conduct its audit to which AwC has agreed. The accountant at MML, Steve Mike is the son in law of Jacob, who is an audit partner at AwC. Jacob put in a request to lead the AwC audit. Jacob believes that he can get the MML audit completed efficiently and effectively since he gets along really well with Steve. However, being aware of Steve’s relationship with Jacob, AwC will not be assigning Steve to the audit team of MML.

3. (c) Wendy Machineries Limited (WML) has been a long standing audit client of AwC. WML was listed on the Australian Securities Exchange (ASX) ten years ago. Since the previous two years WML has accounted towards 40% of total fees received by AwC. Prior to this the total fees from WML only comprised of around 15% of AwC’s total fee revenue from all clients. The increase in fee from WML in the recent period is attributable to its expansion and diversification. WML has not paid AwC any of its fees for the previous period. WML audit for the current year is now due.

4. (d) Yummy Food Services Limited (YFSL). been a long standing audit client of AwC and is one of the oldest companies listed on the ASX. YFSL audit has just been completed for the current year. The engagement partner on the audit, Justin steven CPA, has been the key audit partner on the YFSL audit engagement for previous four years. Jonny FCPA is one of the three managing partners at AwC. Directors at YFSL have always admired Jonny's skill and expertise. Jonny is planning to retire from AwC. On hearing this, the directors at YFSL approach Jonny with a very lucrative compensation package to join the YFSL team as a financial controller.

5. (e) AwC has performed the audit of Delicious Foods Limited (DFL), a large proprietary company (NOT public interest entity) for the last two years. AwC has also been preparing DFL’s tax calculations and providing services related to the preparation of accounting records and financial statements to DFL.

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

Answer 1. Potential threat(s) and safeguards are listed below.

1)  Self-Interest Threat:

1.   A self-interest threat exists if the auditor holds a direct or indirect financial interest in the company or depends on the client for a major fee that is outstanding.

In our Scenario, We can clearly see that Wendy Machineries Limited (WML) has not paid AwC any of its fees for the previous period. The audit team might be tempted to issue a favorable report so that the company is able to secure a loan to settle the fees outstanding for their previous years audit.

Safeguard:

If gross recurring fee from one client greater than 15% of the firm's revenue for two consecutive years Tell client's Board of Directors about that thing.

2. A self-interest threat also exists if member of the audit team entering into employment negotiations with the audit client.

In our Scenario, We can see that  Directors at YFSL have always admired Jonny's skill and expertise. Jonny is planning to retire from AwC. On hearing this, the directors at YFSL approach Jonny with a very lucrative compensation package to join the YFSL team as a financial controller.

Safeguard:

You have to remove the individual from the audit team.

2) Self-Review Threat:

A self-review threat exists if the auditor is auditing his own work or work that is done by others in the same firm. We can say that the auditor prepares the financial statements for X Company while also serving as the auditor for X Company.

In our Scenario, We can see that AwC has performed the audit of Delicious Foods Limited (DFL) and also been preparing DFL’s tax calculations and providing services related to the preparation of accounting records and financial statements to DFL.

Answer 2.

The primary purpose of an audit is to provide company shareholders with an expert, independent opinion as to whether the annual accounts of the company reflect a true and fair view of the financial position of the company and whether they can be relied on. Independence is the main means by which an auditor demonstrates that he can perform his task in an objective manner.

The auditor should be independent from the client company, so that the audit opinion will not be influenced by any relationship between them. The auditors are expected to give an unbiased and honest professional opinion on the financial statements to the shareholders.

So Audit Independence is very important for any country's economy.

According to me Audit independence can be achieved and it relies on several factors, such as

1) Promoter's Integrity and vision.

2) Government's strict norms for auditing.

3) Company's policy for unethical things.