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.  
Bret Hart has been appointed as a junior auditor of Black & White (BW). 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:

(c) BW has recently been approached by Pixcom Limited (PL) to conduct its audit. The accountant at PL, Charlotte Flair, is the daughter of Ric Flair, who is one of the audit partners at BW. Being aware of Ric’s relationship with Charlotte, BW will not be assigning Ric to the audit team of PL.

(d) Jack, the current senior manager on the audit of Burj Steel (BS) Limited which specializes in the production of mining equipment, has just entered into a business venture (ZZ Motors) with the CFO of BS Ltd, whereby they are both equal partners in a business retailing motor vehicles. Jack has informed you that this is not a problem since the 2 entities (BS Ltd and ZZ Motors) are in different non-competing industries.   

(e) Awesome Machineries Limited (AML) has been an audit client of BW since the past two years. BW has recently completed a review of internal controls for AML. BW has been requested by AML to take responsibility to implement a new software system that will form a significant part of internal controls over AML’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

ANSWERS:

SITUATION "C" :

BW has recently been approached by Pixcom Limited (PL) to conduct its audit. The accountant at PL, Charlotte Flair, is the daughter of Ric Flair, who is one of the audit partners at BW. Being aware of Ric’s relationship with Charlotte, BW will not be assigning Ric to the audit team of PL.

Answer:

As per the AICPA professional code “indepence rule “ member in public practices 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 team Brian Adams is acting as accountant, independence can be said to be impaired if Brian act as partner for this engagement.

THREATS:Position held by Jenifer as Accountant particle MML

SAFEGUARDS :Accomplice ought not to deal with this commitment and exposure of Jenifer position ought to be unveiled to commitment group.

SITUATION "E" :

Awesome Machineries Limited (AML) has been an audit client of BW since the past two years. BW has recently completed a review of internal controls for AML. BW has been requested by AML to take responsibility to implement a new software system that will form a significant part of internal controls over AML’s financial reporting process and run a three hour training session for its accounting staff.

Answer:

Rendering of implementation 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.

THREATS : Rendering of implementation services.

SAFEGUARDS : Should not render implementation services or else remove from engagement.

THERE FORE