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: (a) 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. (b) 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. (c) 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. (d) 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. (e) 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: 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 (Total 10 Marks)

Answer 1

	Situation	Answer	Threats	Safeguards
Situation 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.	As per the AICPA professional code "Independence Rule", member in public practice shall be independent in performance of professional services. Thus rules require that independence is required to be maintained by covered member. Covered member also includes spouse and dependents of the member. In the current situation, since Jessica Parker to be allocated audit of Fresh Foods Limited (FFL) and wherein her daughter, Sarah has already bought shares of FFL, this is sufficient to breach rule of independence as Sarah is dependent on Jessica and hence covered by Independence rule. Jessica must disclosed this to engagement team and disassociate from the engagement. Any kind of financial interest is prohibited	Investment by Sarah	Jessica should not be part of audit engagement of FFL
Situation 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.	As per the AICPA professional code "Independence Rule", member in public practice shall be independent in performance of professional services. Thus rules require that independence is required to be maintained by covered member. Covered member also includes spouse and dependents of the member. Further, independence can be impaired if close family member of member is holding in key position. In the present case, since Jenifer being daughter of audit partner Mr Brian Adams is acting as accountant, independence can be said to be impaired if Brian act as partner for this engagement	Position held by Jenifer as Accountant in MML	Partner should not work on this engagement and disclosure of Jenifer position should be disclosed to engagement team
Situation 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	As per AICPA professional code of conduct's independence rule, Independence is impaired if auditor are also engaged in preparation of accounting records and financial statements. Since, services rendered by AWC are not in the nature of non attest services, and auditor provides opinion on financial statements which are preapred by them only, rendering of such services in addition to undertaking audit is serious breach of independence rule.	Rendering of accounting services as well as undertaking audit	Should not provide preparation of accounting records and financial statements.
Situation 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.	While it is true that any type of financial intererest or relationship with audit client will impair auditor's independence, holding of shares by relative of partner who is not part of the engagement and does not have an ability to influence audit engagement will not impair independence of engagement team. Therefore, audit work can be started. However, such facts should be disclosed so that Partner does not influence audit work nor providing non attest services of more than 10 hours.	No threats but disclosure should be made
Situation 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	Rendering of implemention of new software system is additional service is requested by WML. In my view, since AWC is rendering additional services which is directly associated with performance of audit engagement and hence undertaking such additional services would impair independence rule.	Rendering of implementation services	Should not render implementation services or else remove from engagement