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Case Studies On Threats To Audit Independence

The case study presents three situations that could pose threats to an audit firm's independence: 1. An audit partner being invited by a client to celebrate the client's 20th anniversary could create a self-interest threat due to over-familiarity. The firm should consider if the partner's objectivity could be impaired. 2. An audit manager having a family relationship with the directors and shareholders of an audit client could create a self-review threat. The firm should consider if the manager could audit their own family's work. 3. A client requesting certain staff, including a long-time accountant, and no trainees on the audit team could create an intimidation threat if it limits the audit firm's

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409 views3 pages

Case Studies On Threats To Audit Independence

The case study presents three situations that could pose threats to an audit firm's independence: 1. An audit partner being invited by a client to celebrate the client's 20th anniversary could create a self-interest threat due to over-familiarity. The firm should consider if the partner's objectivity could be impaired. 2. An audit manager having a family relationship with the directors and shareholders of an audit client could create a self-review threat. The firm should consider if the manager could audit their own family's work. 3. A client requesting certain staff, including a long-time accountant, and no trainees on the audit team could create an intimidation threat if it limits the audit firm's

Uploaded by

demolaojaomo
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Financial interests:

A financial interest in a client might constitute a self-interest threat, although the role of the
individual holding the interest, the materiality of the interest and the degree of control the
accountant has over it will affect the level of the risk. The guidance recommends that a member
of the assurance team or an immediate family member of that team shall not hold a direct
financial interest or an indirect material interest in a client. The interest should either be disposed
of, or the team member removed from the engagement.

CASE STUDY: Financial interest

Pear Company is developing a new product which is expected to be very profitable, but it needs
additional finance to complete the product development work and for the market launch. It has
invited its audit firm, Push & Pull, to make an investment in the product. The financing
arrangement would take the form of either convertible debentures in Pear Company or a separate
joint venture company. If a joint venture company is established, Pear Company and Push& Pull
would share control of the business. The joint venture company would develop, manufacture and
market the new product.

Required:

Discuss are the ethical issues to consider in this situation?

Commercial Transaction with an Audit Team Member

Commercial transactions between an audit client and a member of the audit team The Code does
not prohibit commercial transactions between an audit client and a member of the audit team,
provided that:

a. They are made in the normal course of the client’s business,


b. They are at an arm’s length (in other words, they are made on normal commercial terms),
and
c. The value of the transaction is not material to either party.

Case Study:

An audit firm has a client company, Zoomco, which operates a motor racing circuit. The audit
firm has discovered that the audit manager for the Zoomco audit keeps a racing car at Zoomco’s
circuit and uses the race track regularly. Because he is the audit manager, Zoomco allow him
50% off normal charges for garaging the car and for use of the race track.
Required:

What is the ethical position and what measures should the audit firm take to deal with this
situation?

Case Study: Non-Audit Work and Safeguards

An audit firm has completed the annual audit for a client company and the audit team has
identified a number of weaknesses in internal controls that have been notified to the client’s
management. As a result, the client has asked the firm to carry out are view of its financial IT
systems.

Required:

What are the ethical issues to consider in this situation and how might the problems be dealt
with?

Assignment.

CASE STUDY: Threats to independence

A Nigerian audit firm, William and Sleep, is faced with the following situations:

Situation1: Mr William is one of the audit firm’s partners. He and his wife have been invited by
the managing director of Entity X to a weekend of celebrations in Cape Town to mark the 20th
anniversary of the incorporation of Entity X. Mr William has been the engagement partner
throughout this time

Situation 2: The firm has been approached by the directors of Entity Y, with a view to being
appointed as auditors. One of the firm’s audit managers, Mr Knapp, is company secretary of
Entity Y, although, he takes no part in its management. His parents are the sole directors and
shareholders of Entity Y.

Situation 3: The finance director of Entity Z, a private limited company, has requested that only
certain staff are to be included on the audit team to prevent unnecessary interruption to the
entity’s accounting department during the audit. In particular, he has requested that David, who
has been the accountant in charge of the audit for the last two years, be assigned to the audit and
that the team contains no new trainees.

Required: What threats to objectivity are present in each of these situations and how should the
audit firm deal with them?

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