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.

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: Jessica Parker is an assurance manager with AwC and it has just been decided to allocate her to the audit of Fresh Foods Limited (FFL). Jessica’s financially dependent daughter, Sarah, who is still in high school has recently used all her inheritance from her grandfather to buy a small parcel of shares in FFL.

2: AwC has recently been approached by Metal Mining Limited (MML) to conduct its audit. The accountant at MML, Jennifer Lawrence is the daughter of one of AwC’s audit partner Brian Adams. Being aware of Brian’s relationship with Jennifer, AwC will not be assigning Brian to the audit team of MML.

3: AwC has performed the audit of Jamaican Metals Pty Limited (JM), a large proprietary company (NOT public interest entity) for the last two years. AwC has also been providing services related to the preparation of accounting records and financial statements to JM.

4: AwC is soon planning to commence its audit work for Blue Metals Limited (BML). James Grage will be the engagement partner for the BML audit. Paul Levesque is also a partner at AwC and sits in the same office as James. Paul’s wife Stephanie has recently purchased shares in BML. Paul is not involved in the BML audit.

5: Wendy Machineries Limited (WML) has been an audit client of AwC since the past two years. AwC has recently completed a review of internal controls for WML. AwC has been requested by WML to take responsibility to implement a new software system that will form a significant part of internal controls over WML’s financial reporting process and run a three hour training session for its accounting staff. 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:

Question: a) Identify potential threat(s) to independence & recommend safeguards (if any) to reduce the independence threat(s) identified. b) Provide an objective assessment of whether audit independence can be achieved

Answer 1

• 1.A.Since Jessica's daughter is financially dependent and also have bought parcel of shares in FFL, there exists a potential threat to independence since her dependent daughter has interest in the company.

  1.B.Audit independence can be achieved as per the law if Jessica is not involved in the audit of FFL and if the audit is done by member's other than her, there arises a scope of achieving audit independence.

  2.Since AWC will not be assigning Brain to the audit team of MML, there is very less chance of potential threats to independence and audit independence can be almost surely achieved.

  3.In the given situation it would be better recommended that AWC should continue to be the accountant and also the internal auditor of JM and withdraw its duties as external auditor because it is not generally accepted that the same person or firm acting as both internal and external auditor since I challenges the law and also, a threat to independence since in an other way it is having an interest in the clients firm and also in another way it is working under the client.

  It should therefore withdraw from either duty of being external auditor or internal auditor I.e, it should either audit the accounts of the firm or prepare its accounts but not both the services, which brings down the independence of audit.

  4.Though Paul us a partner of the audit firm and his wife has substantial interest in.the clients firm, since he was not engaged or involved in the audit of BML, the chances of threats are very less or negligible and AWC can do the audit if BML and also audit independence can be achieved. The answer would be vice versa if Paul is engaged in the audit of BML.

  5.WML can ask AWC to provide such services to it and also AWC can act so because in these type of cases, there are say less or no potential threats to independence of the auditor and can be clarified to the law by providing the above said requested services in the form of special professional services rendered by charging special fees, and in such a case, audit independence can be achieved with no doubt.