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) 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.

Required:

Using the conceptual framework in APES 110 (Code of Ethics for Professional Accountants), identify potential threat(s) to independence & recommend safeguards (if any) to reduce the independence threat(s) identified. Also, provide an objective assessment of whether audit independence can be achieved.

Answer 1

As per Section 220 of APES 110, Conflicts of interest create threats to compliance with a number of fundamental principles, such as objectivity, confidentiality and professional behaviour. Conflicts of interest may arise by business interests or relationships with clients or third parties. If conflicts of interest are identified, Members in public practice are required to apply appropriate safeguards 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.

Potential Threats:

(a) Self-interest; (b) Self-review; (c) Advocacy; (d) Familiarity; and (e) Intimidation.

Safeguards:

(a) Safeguards created by the profession, legislation or regulation; and (b) Safeguards in the work environment.

Safeguards may include:

• Involving an additional professional accountant to review the work done or otherwise advise as necessary.

• Consulting an independent third party, such as a committee of independent directors, a professional regulatory body or another professional accountant.

• Discussing ethical issues with those charged with governance of the client.

• Disclosing to those charged with governance of the client the nature of services provided and extent of fees charged.

• Involving another firm to perform or re-perform part of the engagement.

• Rotating senior assurance team personnel.