Audit Independence Threats and Safeguards

This assignment examines the concept of audit independence, focusing on five distinct situations where potential threats to auditor objectivity arise. For each scenario, it identifies the primary threat (e.g., self-interest, self-review) and proposes safeguards to mitigate the risk. Safeguards include rotation of audit personnel, pre-determined fees, and ethical discussions with those charged with governance.

AUDIT & ASSURANCE

Audit
Answer-1
Situation Threats Safeguards Objective Assessment
Provision of Book
keeping services to
the subsidiaries of the
company to which
audit services are
being provided since
3 years.
The main threat to
audit independence
the self-review threat.
The threat is that the
subsidiaries will be
provided book
keeping services by
APG audit firm to
SFL Limited and
there is a risk that the
auditors may
manipulate the books
in order to present a
good position in the
consolidated financial
statements of the
holding company SFL
Ltd. as the APG firm
has been auditing the
parent company since
last 3 years and is
aware of all the
loopholes of the
financial statements
and is hence its
reviewing own work
shall be biased.
The safeguards for
this threat can be :
i. The audit team
should not be
assigned book
keeping of the
subsidiaries1.
ii. Book keeping
should be assigned to
a third party.
In the case where both
for holding and its
subsidiaries there is
only one auditor
appointed there could
be a case where his
audit procedures
could not be
sufficient. Hence
outsider team should
be appointed for book
keeping. In such case,
auditor independence
is difficult2.
1 Christine Jubb, Auditing and Assurance: A Business Risk Approach (Deakin University, 2012)
2 Karla, Johnstone, Audrey, Gramling & Larry E. Rittenberg, Auditing: A Risk Based-Approach
to Conducting a Quality Audit (Cengage Learning, 2014)
2

Audit
Answer-2
Situation Threats Safeguards Objective Assessment
The senior auditor of
AFG, Billie has been
in the audit team of
competitor company
Alliance Ltd. for
many years and now
the company Alliance
Ltd. is providing help
to Billie in the form of
acting as guarantor of
her loan.
The main threat to
audit independence
the self-interest threat.
The threat is that
previous client is
providing Billie help
with regard to
guarantee for her
home loan. Billie may
expect such kind of
help from AFG Ltd.
also in the future.
Such expectations
shall lead to self-
interest threat3.
The safeguards for
this threat can be :
i. The senior audit
personnel should be
rotated from time to
time for every client4.
ii. Policies and
procedures shall be
set so that auditor
remuneration and fees
shall be pre-
determined
The auditor's opinion
may be affected
because his client has
obliged him by giving
him his guarantee for
his home loan. So he
may not correctly
report his findings in
the audit report. In
such case, auditor
independence is
difficult.
Answer-3
Situation Threats Safeguards Objective Assessment
The senior partner
auditor of AFG,
Sandy is in the audit
team of Sunbeam Ltd.
and has received a
high concession in his
personal trip.
The main threat to
audit independence
the self-interest threat.
The threat is that
client Sunbeam Ltd.
has provided Sandy
with 65% concession
in a personal trip of
Sandy and hence the
auditor shall change
her opinion after
getting such
nonfinancial benefits
from the client.
The safeguards for
this threat can be :
i. The senior audit
personnel should be
rotated from time to
time for every client.
ii. Policies and
procedures shall be
set so that auditor
remuneration and fees
shall be pre-
determined.
The auditor’s opinion
may be affected
because his client has
obliged him by giving
him concession in his
expenses for his
personal trip. So he
may not correctly
report his findings in
the audit report. In
such case, auditor
independence is
difficult.
3 Karla, Johnstone, Audrey, Gramling & Larry E. Rittenberg, Auditing: A Risk Based-Approach
to Conducting a Quality Audit (Cengage Learning, 2014)
4 Christine Jubb, Auditing and Assurance: A Business Risk Approach, 2012
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Audit
Answer-4
Situation Threats Safeguards Objective Assessment
The current senior
manager who is in
audit team of
Resources Techno
Ltd. has agreed to
provide the client with
advertising and
business promotion of
Resources Techno
Ltd. products.
The main threat to
audit independence
the self-interest threat.
The threat is that the
senior manager Aaron
has decided to be in
the potential
employment of his
audit client Resources
Techno Ltd. by
providing the
company with the
services of promoting
the product of
Resources5. In lieu of
this service, he shall
be provided with
financial benefits
from the client whom
shall lead to change in
auditor opinion.
The safeguards for
this threat can be :
i. The senior audit
personnel should be
changed for the client
company.
ii. Policies and
procedures shall be
set so that auditor
remuneration and fees
shall be pre-
determined.
The auditor’s opinion
may be affected
because his client will
provide him some
fees for the promotion
of the client’s
products. So he may
not correctly report
his findings in audit
report due to
monetary benefits. In
such case, auditor
independence is
difficult.
Answer-5
Situation Threats Safeguards Objective Assessment
The current senior
manager who is in
audit team of
Admiralty Ltd. was
one of the senior
accountants of the
client company three
years back.
The main threat to
audit independence
the self-review threat.
The threat is that the
senior manager of
audit now was
previously employed
with the client firm as
a senior accountant6.
Although he had left
in the year 2013 from
the client firm, he
The safeguards for
this threat can be :
i. Another Chartered
Account shall be
appointed for
reviewing the work of
Larry.
ii. The ethical issues
should be discussed
with those charged
with governance.
Although there is a
threat that there may
be a problem of self-
review of the client's
books, but it might be
possible that a gap of
3 years may be
sufficient enough for
unbiased opinions. In
such case, auditor
independence is
possible.
5 APESB. Compiled APES 110 Code of Ethics for Professional Accountants (APESB,2006), 72,
https://www.publicaccountants.org.au/media/711182/APES-110.pdf
6 APESB. Compiled APES 110 Code of Ethics for Professional Accountants (APESB,2006), 69.
https://www.publicaccountants.org.au/media/711182/APES-110.pdf
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Audit
may be knowing the
practices of
maintaining books of
accounts and also
manipulation of
accounts done by
client firm. It may be
possible that Larry
Miller may have self-
review threat with
regard to some
information in the
books which he had
maintained in the past.
5

Audit
References
APESB. Compiled APES 110 Code of Ethics for Professional Accountants, 2006.
https://www.publicaccountants.org.au/media/711182/APES-110.pdf
Christine Jubb, Auditing and Assurance: A Business Risk Approach (Deakin University, 2012)
Karla, Johnstone, Audrey, Gramling & Larry E. Rittenberg, Auditing: A Risk Based-Approach to
Conducting a Quality Audit (Cengage Learning, 2014)
6