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) 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:

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

APES 110 Code of Ethics for Professional Accountants (Code) is issued by the Accounting Professional and Ethical Standards Board (APESB).

The conceptual framework of the code requires Members to use their professional judgement in order to:

• identify any threats to compliance with the fundamental principles;

• evaluate the significance of the identified threats

• apply safeguards to eliminate threats or reduce them to an acceptable level

If threats cannot be eliminated or reduced to an acceptable level because the threats are too significant or safeguards are not available or cannot be applied to address the threats, then the circumstance or relationship creating the threats must be avoided.

Based on the above, following are the threats to the AWC as prescribed in the code:

Self-review threat: It is probable here that new software system which shall be installed upon the place of client with the help of AWC would be reveiwed by AWC only. It would naturally create biasness as AWC would be able to modify their opinion to support their shortcoming in the installation and shall be rectifying themselves instead of reporting it.

Familiarity threat – the threat that due to a long or close relationship with a client or employer, a Member will be too sympathetic to their interests or too accepting of their work and the engagement will prolong the engagement.

Self-interest threat – the threat that a financial or other interest will inappropriately influence the Member‘s judgement or behaviour. Here, AWC may charge heft fees from the client for their advisory services and assurance services which they dont want to loose out.

As per my understanding of the code and the real life experiene, auditor should never be engaged in advisory services of the segment which they audit as it naturally created conflicts of interest and it is very far from basic reality that at some point there would be a case that conflict of interest arises. Advocating that having seperate team for audit and advisory service would suffice also not holds substance as the team members would be friends too or in future switch places or anything. It is not reasonable to expect complete objectivity in this case as far as audit independence is considered.

Thus, I dont see any safeguards for this arrangement and would recommend to not go with it.