Financial Auditing Case Study: Ethical Issues and Independence

This assignment analyzes five different scenarios related to auditing, assurance, and risk assessment, based on the conceptual framework of APES 110 on the Code of Ethics for Professional Accountants. The analysis identifies threats to auditor independence, such as advocacy, self-interest, intimidation, and familiarity threats, along with the corresponding safeguards to mitigate these threats. Each case provides an objective assessment of whether audit independence can be achieved, considering factors like non-audit services, share ownership, client revenue dependency, and relationships between auditors and client personnel. The assignment emphasizes the importance of professional competence, due care, objectivity, independence, and professional behavior in conducting audits. The solutions suggest safeguards like declarations of independence, reducing client dependency, seeking legal or professional advice, and ensuring that related parties are not involved in the audit process to maintain auditor independence and ethical standards.

XXXXX XXXXXXX
FINANCIAL STATEMENT – XYZ IMPORTS, Australia
AUDITING, ASSURANCE
AND RISK ASSESSMENT
ASSIGNMENT

1
Contents
Background and Introduction..................................................................................... 2
Discussion and analysis.............................................................................................. 2
References................................................................................................................. 4
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Background and Introduction
In the given assignment, 5 different situations have been given which needs to be assessed as per the
conceptual framework stated in APES 110 on Code of Ethics for Professional Accountants. The threats
along with the safeguards to be ensured have been highlighted for each of the case together with the
objective assessment of whether the audit independence can be achieved or not.
Discussion and analysis
Sl. No. Threats Safeguards Objective Assessment
1 There is a kind of
advocacy as well as self-
interest threat as per
APES 110.290.105 in
this case as Andrew’s
wife Michelle Ferguson
is planning to buy
significant number of
shares of the audit client,
Kaplan. Here Andrew is
the partner of the audit
firm and accountable for
all the non-audit services
rendered to the firm1.
As per APES 110.290.105,
The safeguard for this is
that the company should
take a declaration from the
auditors on their
independence and that the
non-audit services are not
compromising the
independence of the
auditor. The same should
then be shown in the audit
report of the entity and the
annual report as well.
At present the audit independence
is being compromised because of
the 2 factors, one for non-audit
services and another for buying the
shares of the company. The
independence can be ensured by
avoiding to buy the shares of the
company and getting the
declaration of independence from
the auditors such that their
professional scepticism is not
being compromised with.
2 Here in this case since
Duxton Motels Limited
(DML) forms one of the
significant clients of SCA
audit firm and DML
forms almost 20% of
total revenue fees from
the clients. Therefore as
per APES 110, para
290.221, it can give rise
to self-interest threat for
the audit firm because the
loss of this client may
significantly impact their
revenue.
The safeguards in this
regard is to follow the
principles laid down in
APES 110, para 290.221,
professional competence
and due care must be
ensured while audit
together with objectivity,
independence and
professional behaviour
while conducting audit2.
They should also try to
reduce dependency on this
client.
The independence can be achieved
by the auditors by following the
principles laid down in APES 110
on professional competence and
due care while audit and to ensure
objectivity, independence and
professional behaviour while
conducting audit.
Furthermore they can also discuss
with those charged in governance
for any undue pressure and try to
be less dependent on DML for
revenue by acquisition of other
clients.
3 As per the standards laid
down in APES 110, para
As a safeguard measure,
the firm should take
The independence of auditor can
be achieved if the payment of past
1 Boccia and Leonardi, Markets, Taxation and Appropriate Economic Model, 1.
2 Alexander, The Journal of Higher Education, 411.
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290.223, this is a kind of
perceived intimidation
threat as the client STL
may threat to default on
the old payments if
further work is not
carried out. Furthermore,
SCA also has a self-
interest threat
considering that STL is a
high profile client and
they do not want to lose
them.
professional advice from a
lawyer or any professional
organization on the matter
and can also seek legal
advice. Furthermore as per
APES 110.290.223, the
auditor should also talk and
discuss the issue with those
charged in governance for
payment of dues3.
dues is assured to the audit firm.
Legal or professional advice can be
taken on the issue. IN case of
conflict of interest or the
compromise in independence, the
matter can be highlighted to the
management and those charged
with governance to ensure
independence requirements.
4 As per APES 110, Para
290.128, the given case
highlights the familiarity
threat for Gregory Taylor
as his wife is directly
associated as an
employee with the client
company4.
The same can be
safeguarded by following
the disclosure provisions
and letting the client and
TCWG of the client
company with the issue.
Furthermore the
remuneration for the
auditor should be
determined by other
members of the
management not involving
Gregory and Christina.
The independence for the auditors
can be achieved in this case by not
involving both the members
Gregory as well as Christina in the
audit processes. This will help in
ensuring independence in audit and
avoiding any threats or conflicts.
Furthermore, the issue should be
communicated to those charged
with governance and the auditor’s
declaration on independence must
be taken5.
5 In the given case, there
are 2 threats namely self-
interest threat as well as
familiarity threat as
Robert Durand is the
audit partner of the firm
doing audit as his wife
Rebecca Durand works
as financial controller in
the client entity Yummy
Donuts Limited. This is
as per the standards laid
down in APES 110, Para
290.129 to 290.133.
One of the safeguards is
that Robert himself is not a
part of the audit team,
secondly, Rebecca should
also not be involved in
audit and the issue should
be discussed with those
charged in governance and
the management team of
the client entity6.
The independence of the auditors
can be ensured by not involving
any of the related parties in the
entity audit. Furthermore other
team members of audit team
should sign the declaration of
independence and the issue should
be highlighted to the management
of client entity.
3 Kangarluie and Aalizadeh, Accounting, 19-22.
4 Marques, Encyclopedia of Information Science and Technology, 820.
5 Belton, Competitive Strategy: Creating and Sustaining Superior Performance.
6 Knechel and Salterio, Auditing:Assurance and Risk.
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References
Alexander, F.K. 2016. “The Changing Face of Accountability.” The Journal of Higher
Education 71 (4): 411-431.
Belton, P. 2017. Competitive Strategy: Creating and Sustaining Superior
Performance. Vol. 2. London: Macat International ltd.
Boccia, F, and R Leonardi. 2016. “The Challenge of the Digital Economy.” Markets,
Taxation and Appropriate Economic Models 1-16.
Kangarluie, S, and A Aalizadeh. 2017. “'The expectation gap in auditing.”
Accounting 3 (1): 19-22.
Knechel, W.B, and S.E Salterio. 2016. Auditing:Assurance and Risk. fourth. New
York: Routledge.
Marques, R. P. F. 2018. “Continuous Assurance and the Use of Technology for
Business Compliance.” Encyclopedia of Information Science and Technology
(IGI Global) 820-830.
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