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 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.  

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 APES 110 the

Independence is:

(a) Independence of mind – the state of mind that permits the expression of a conclusion without being affected by influences that compromise professional judgment, thereby allowing an individual to act with integrity, and exercise objectivity and professional scepticism.

(b) Independence in appearance – the avoidance of facts and circumstances that are so significant that a reasonable and informed third party would be likely to conclude, weighing all the specific facts and circumstances, that a Firm‘s, or a member of the Audit or Assurance Team‘s, integrity, objectivity or professional scepticism has been compromised

In simle words we can say that there should be a maker checker to validate the genuineness of the transaction.There should be no benefit either direct or indirect to Auditor.

Preparing Accounting Records and Financial Statements :- Potential threat(s)

As per general auditing standards Management is responsible for the preparation and fair presentation of the Financial Statements in accordance with the applicable financial reporting framework.

Providing an Audit Client with accounting and bookkeeping services, such as preparing accounting records or Financial Statements, creates a self-review threat when the Firm subsequently audits the Financial Statements.

In general Control Practice we obtain Maker-checker to avoide Mistakes or fraud; this rule also apply here to avoide threat to independence. bookes of account should be prepared by Management and checked by Auditor.

There are summay of some other threat(s)

1. Self-review threat

These occur when the auditor has also prepared some of the accounting for the fund..

2. Self-interest threat

This threat emerges when, for example, an auditor has only one client or one client represents a significant proportion of their business. Nobody want to loss their Business.

3. Multiple referrals threat

This arises when an auditor receives a large number of referrals from the one client, which can also be characterised as a self-interest threat.

4. Ex-staff and partners threat

This happens when a staff member or partner leaves to start their own business and performs audits for their former employer.

5. Advising threat

This threat occurs when an independent auditor also provides financial advice for the client.

6. Relationships threat

Relationship threats are broad and generally cover anything that involves the auditor knowing the trustees, members, or accountant on a personal level.

Recommend safeguards :-

1. Internal / External checkes :- There can be review by internal team that whether we are independent or not. this exercise can be done by external also.

2. Educational, training and experience requirements for entry into the profession.

3. Continuing professional development requirements.

3. Corporate governance regulations.

4. Professional standards.

5. Professional or regulatory monitoring and disciplinary procedures.