ACC568: Auditing & Assurance Services - Bletchington Case Study Report

This case study analyzes the audit of Bletchington Limited, an innovative defense industry manufacturer, focusing on the auditor's independence and potential threats. The memo addresses the audit expectation gap, identifying key users of Bletchington's financial statements and the information they require, considering the sensitive nature of the company's products and clients. It examines major threats to auditor independence, including William Albanese's tenure as engagement partner, the provision of non-audit services (specifically the implementation of a new costing system), and the significance of Bletchington's fees to the audit firm, SBF. The study highlights relevant ethical standards like APES 110 and ASA 220. The memo proposes safeguards to mitigate these threats, such as limiting William Albanese's role as review partner, addressing the internal auditors' involvement in the costing system, and implementing quality control measures. The case study concludes by summarizing the identified threats and recommended safeguards, offering a comprehensive overview of the auditor's responsibilities and challenges in maintaining independence and providing assurance.

Running head: AUDITING & ASSURANCE SERVICES IN AUSTRALIA
Auditing & assurance services in Australia
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Memorandum
To: William Albanese, Engagement Partner, Bletchington
From: John Hestings, Audit manager
Subject: Audit advice
SBF (Samway Baker Fitzgerald) provides accounting services that has its offices at various
places of NSW and Victoria including Port Macqarie, Albury, Wagga Wagga, Orange,
Ballarat, Queens land and Toowoomba. This memo is regarding providing audit advice in
relation to one of the client of SBF named as Bletchington which is engaged in innovative
defence manufacturing industry and is one of the largest client in respect of revenues. This
memo will focus on the threats o the auditor’s independence and applicable safeguards
against them that can be suggested to William Albanese, the engagement partner of
Bletchington.
Question 1
Audit expectation gap is the difference between what general public feels that the auditors do
and what general public expects the auditors to do. It measures the concern of the public
regarding audit. generally the expectation gap is differentiated into – (i) liability gap that
signifies the misperception regarding auditor’s legal liability and (ii) performance gap that
signifies the difference between auditor’s work level required in accordance with the auditing
standards and public’s perception regarding what the auditor’s are required to do.
Users of the accounting statements include various people like investors, owners,
competitors, creditors, suppliers, customers, government and general public. Special users
Bletchington’s financial statements may be as follows –

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 State government of NSW as well as Local government of Orange where the main
office of Bletchington is situated. They are interested in solvency of the organization
as it may have impact on the local employment and economic activities.
 Government agencies including the Foreign Affairs and Trade department that may
be interested in purchasing by self and purchasing by foreign governments and
individuals for the goods manufactured by the organization.
 Government and Bletchington’s competitors those are interested in sensitive
information related to manufacturing of the company’s product and the recognition of
purchase like who is purchasing, quantity of purchase and purpose of purchase.
 It is observed from the given information that the company’s main product that is a
light armoured vehicle is highly special by its nature and called as Bash-Basher.
Owing to its nature the company maintains high level of security as the design of the
product and its customers are sensitive. Further, the product is made with special
order and has inadequate numbers of alternative customers. In addition to that the
suppliers need to invest large amount to manufacture the special component. Hence,
the supplier will require its financial information to analyse whether the company
will be able to make timely payments.
 Company’s other prospective customers.
It shall therefore be considered how well Bletchington is providing required information to
the users through the financial statements taken into account the specialised, sensitive and
confidential nature of Bash-Basher and the manufacture process used by the organisation.
Further, though the managements preparers the financial reports, auditors are evaluated for
providing assurance that the information provided are true. Apart from that audit procedures
performed for satisfying the user’s needs shall also be taken into consideration.
Question 2

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Major threats to the independence of auditors
1. Independence is accounted as crucial attributes for the external as well as the internal
auditors. The auditors are required to apply integrity and objectivity while carrying
out the audit. APES 110 on code of ethics for professional accountants forbid a person
to participate in audit engagement for not less than 2 years after end of financial year
that represents end of 5 year’s service as the review partner. Further, the period of 2
years are increasing to 3 years for the financial year starting from 1st January 2019. As
per the given information, William Albanese is the engagement partner of
Bletchington for the past 5 years. He intends to remain as the review partner from the
next year when the audit will be allocated to Skye Larke. ASA 220 states that any
person who has been in engagement as the engagement partner for the period of any 1
out of 2 preceding year’s audit is not permissible to be engaged as the review partner
of same organization. Reason for the same is that engagement partner is responsible
for audit engagement and performance and review partner is responsible to provide
objective evaluation for the judgments made by auditors and conclusion reached
thereof.
2. Arguments on whether audit firm shall provide non-audit services or not is focussed
on the debate that providing these services will impair the independence of auditors.
Major concern regarding provision of non-audit service is that when an auditor
provides non-audit services in addition to audit services he provides 2 sets of client –
(i) management for non-audit services and (ii) stakeholders for audit services. In the
given information Bletchington installed new system of costing as the old system was
not able to cope-up with the detailed and complex process of manufacturing costing.
However, the internal audit team of the company were highly involved in selection,
training, testing and implementation of new software. These services will be

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considered as non-audit services that will create self-interest threat and will impair the
auditor’s independence.
3. Bletchington is one of the largest clients for SBF in respect of the fees revenues. Self-
interest or intimidation threat can be created if the fee revenue generated from any
client represents large proportion of the entire revenue received by any individual
office of the audit firm. Significance of this threat is dependent upon 2 factors – (i)
level to which the partner’s remuneration is dependent on fees generated from the
client and (ii) qualitative or quantitative significance of the client to any partner or
office.
Safeguard against threat
For achieving greater assurance with regard to auditor’s independence, conceptual framework
has provided multiple frameworks those are focussed on the threats towards independence as
well as safeguards for assuring independence. Safeguards that can be applicable for the above
mentioned threats towards independence are as follows –
1. William Albanese shall restrain himself from becoming the review partner of
Bletchington for the next 2 years as tenure of 5 years as the engagement partner of the
company is completing in 2019. Hence, for next 2 years he is not eligible for
engaging himself as review partner as it will create self review threat and self interest
threat.
2. As the internal auditors were highly involved in selection, training, testing and
implementation of new costing system software implemented by Bletchington,
providing audit services along with the same will create self interest threat and hence
they shall vacate their post as internal auditor of the company.

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3. To reduce the threats arising from auditing of a client that can be considered as one of
the largest with respect to fee revenues is (i) regular quality review by the independent
internal or external member regarding the engagement (ii) reducing the dependency
on the particular audit client and (iii) reviewing the work by member or providing
advice otherwise as per requirement.
From the above discussion it can be stated that various threats are there regarding the
auditor’s independence those are needed to be safeguarded. These threats are (i) engagement
of William Albanese as review partner of Bletchington after being the engagement partner of
the company for 5 years (ii) Bletchington being one of the largest client of SBF with regard
to fee revenue and (iii) involvement of internal auditor in selection, training, testing and
implementation of new costing system software. These threats shall be safeguarded through
the approaches suggested above.
Sincerely,
John Hestings, Audit Manager,
Samway Baker Fitzgerald

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