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:

(a) 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.

(b) 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.

Answer 1

A. In this case, as per the law , there doesn't exist any potential threats to independence because though one of the partners i.e, Pauls wife had a share holding in the company , but since Paul is not involved in the BML audit, therefore it is an exception given by law which allows BML to undertake the audit and also there is very less or no scope for potential threats to audit independence.

As per the above given explanation, Audit independence can be definitely achieved.

B. The present scenario is related to the other professional services which an audit firm can provide besides auditing.

By doing or providing the desired services of WML, AWC can.also make its auditing easier and here it charges a special fee for providing such services and will not be treated as an employee to WML.

Hence, even here there doesn't arise any chance or circumstance that gives raise to potential threats to I independence of audit.

Yes, audit Independence can also be achieved unless the AWC becomes an internal auditor of the firm or prepares the accounts for WMK.

Therefore, in both the situations, there is no point or situation, which can cause a threat to audit independence and also it can.be achieved as per law.