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In: Accounting

Matthew Damon has been appointed as a junior auditor of AwesomewaterhouseCoopers (AwC). One of his first...

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

Solutions

Expert Solution

Assertion-based Assurance Engagements In an assertion-based Assurance Engagement, the evaluation or measurement of the subject matter is performed by the responsible party, and the subject matter information is in the form of an assertion by the responsible party that is made available to the intended users. In an assertion-based Assurance Engagement Independence is required from the responsible party, which is responsible for the subject matter information and may be responsible for the subject matter. In those assertion-based Assurance Engagements where the responsible party is responsible for the subject matter information but not the subject matter, Independence is required from the responsible party. In addition, an evaluation shall be made of any threats the Firm has reason to believe are created by interests and relationships between a member of the Assurance Team, the Firm, a Network Firm and the party responsible for the subject matter.

The significance of any threat created shall be evaluated and safeguards applied when necessary to eliminate the threat or reduce it to an Acceptable Level. Examples of such safeguards include:

Using professionals who are not members of the Audit Team to perform the service; Having a tax professional, who was not involved in providing the tax service, advise the Audit Team on the services and review the Financial Statement treatment; or Obtaining advice on the service from an external tax professional.

In the case of Audit Engagements, it is in the public interest and, therefore, required by this Code of Ethics, that members of Audit Teams, Firms and, Network Firms shall be independent of Audit Clients. 290.5 The objective of this section is to assist Firms and members of Audit Teams in applying the conceptual framework approach described below to achieving and maintaining Independence. 290.6 Independence comprises: 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. 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 Team‘s, integrity, objectivity or professional scepticism has been compromised.


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