Auditing Report: Ethical Issues and Auditor Independence - Peechee Ltd

This report provides an analysis of three potential threats to auditor independence in the audit of Peechee Ltd by Pines, Dent and Woods (PDW). The first issue concerns the long-standing relationship between the auditor and the client, which can create a self-interest threat. The second issue involves the auditor's financial interest in the client. The final issue addresses the provision of valuation-related non-audit services by PDW to Peechee Ltd. The report examines the ethical implications of each situation, referencing APES 110, and recommends safeguards such as rotating audit personnel, appointing independent reviewers, and ensuring regular quality reviews to mitigate the identified threats and maintain audit independence. The analysis highlights the importance of ethical conduct in auditing and the potential conflicts that can arise.

Running head: AUDIITING
Auditing
Name of the Student
Name of the University
Author’s Note

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Table of Contents
1) Executive Summary.......................................................................................................2
2) Analysis of Issues..........................................................................................................4
Potential Issue 1.............................................................................................................4
Potential Issue 2.............................................................................................................5
Potential Issue 3.............................................................................................................6
References.........................................................................................................................8

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1) Executive Summary
The main purpose of this report is the assessment of three individual situations in
the audit of Peechee Ltd by Pines, Dent and Woods (PDW) where there might be
possible threat to audit independence. The discussion shows the presence of three
different types of ethical issues in the provided situations. In the first case, the ethical
case is associated with the long relationship between the auditor and audit client. This
long relationship can create self-interest threat of audit independence as the PDW wight
work give audit judgment in the favor of Peechee Ltd for maintaining the long relation
with the client. The recommended steps include changing the roles of audit personnel in
the team, appointing a reviewer for review the audit work of the engagement and
ensuring reviewing the internal and external audit quality on regular basis. In the second
case, the issue is associated with the presence of financial interest of the auditor in the
audit client. This financial interest of the auditor in the audit client can create negative
influence on the behavior or judgment of the auditor and can create self-interest threat
to audit independence. The recommended actions to reduce this threat include
appointing an external reviewer for review the audit work of that particular individual and
ensuring regular review of the internal and external audit quality. In the third case, the
ethical issue related to the delivery of valuation related non-audit service to Peechee Ltd
by PDW which can lead to the development of self-review of advocacy threat of audit
independence. These threats to independence can be created due to the fact that this
valuation related non-audit service will create material impact on the financial
statements of Peechee Ltd. At the same time, continuing with the audit of Peechee Ltd
in the presence of this threat to independence can create threat to fundamental

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principles of auditing. The recommendations to reduce these threats include appointing
the audit members who were not the members of the audit team and appointing an
independent external reviewer for reviewing the audit work of the individual.

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2) Analysis of Issues
Potential Issue 1
a. The main consideration is that whether there is any threat of independence due
to the long auditor-client relation between PDW and Peechee Ltd.
b. Familiarity and self-interest threat to independence might be created due to the
involvement of an individual in the audit engagement of a particular client for long
time or due to the presence of the concern about losing a long-standing audit
client. This can affects the audit judgment and can impair audit independence.
c. As per APES 110, 540.1 A2, there might be the creation of self-interest threat of
audit independence due the outcome of an individual’s concern to lose a long-
standing audit client since this can influence individual’s audit judgment. In case
of PDW, in order to maintain long-standing relationship with Peechee Ltd, the
senior audit partner of PDW might compromise audit judgment for providing
favorable audit opinion to the client which creates self-interest threat of audit
independence.
d. Three safeguards are recommended to the senior audit partner of PDW. First,
she needs to change the roles of the individuals in the audit team on regular
basis. Second, she should appoint an independent reviewer having no
association with the audit team for reviewing the individual work. Third, she
should ensure performing regular independent external or internal quality reviews
of the engagement.

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Potential Issue 2
a. In case Ryan Wyatt (Ryan) is accepted by Peechee Ltd as the Engagement
Partner, he will be involved in the audit of the same client for consecutive three
years. As per APES 110, 540.5, an individual shall not act in the role of audit
engagement partner or any other key audit partner role for a period of more than
seven cumulative years. After this time-on period, a ‘cooling-off’ period needs to
be served by the audit individual. Therefore, Ryan’s involvement in the audit of
Peechee Ltd for three years will not create threat to independence. Ryan Watt
(Ryan) holds 100 shares in the audit client that is Peechee Ltd and the value is
not material to his personal wealth; but this creates personal financial interest of
Ryan in his audit client which is a key consideration for assessing threat to audit
independence.
b. There can be development of self-interest threat of audit independence in case
an individual has financial or other types of interest in the audit client. This is a
crucial aspect for assessing threat to audit independence as this interest
inappropriately influences the behavior or judgment of the auditors.
c. As per APES 110, 100.12 (a), self-interest threat to audit independence is a
threat that a financial interest or other interest will create inappropriate influence
on the behavior or judgment of the behavior. APES 110, 290.102 also states that
holding financial interest in the audit client may create self-interest threat to audit
independence. As per the provided case, Ryan holds 100 shares in Peechee Ltd
that is the audit client. It implies that Ryan holds financial interest in his client’s

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business which may lead to the development of self-interest threat to audit
independence.
d. As per APES 110, 290.104, the presence of financial interest in the audit client
can develop self-interest threat so significant that no safeguard can reduce it.
Since, the value of the shares is not material to the wealth of Ryan there are two
safeguards available for the Senior Audit Partner of ODW. First, the Senior Audit
Partner should have a member responsible for reviewing the work of Ryan; and
second, the Senior Audit Partner can also remove Ryan from the role of
Engagement Partner in Peechee Ltd.
Potential Issue 3
a. PDW has been asked by the CFO of Peechee Ltd for providing an estimation of
the value of the new IT system for including the same in the asset register. Since
this is a non-audit service, this is crucial for assessing audit independence. This
is also associated with the decision to continue the audit of Peechee Ltd.
b. There might be the creation of self-review or advocacy threat of audit
independence in case an auditor provides valuation services to the audit client.
This valuation includes the use of accounting assumptions associated with the
future development and methodologies and techniques for the computation of
certain values. Moreover, in the presence of this threat to independence,
decision to continue the audit of Peechee Ltd can create threat to compliance
with the fundamental principles.
c. As per APES 110, 603.3 A3, there will be the creation of self-review or advocacy
threat in case the valuation has a material impact on the financial statements of

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the company. As per the same section, the valuation services include the
valuation report’s use and purpose, whether the client will make the valuation
report public, whether the valuation will create material impact on the financial
statement of the client and others. It can be seen from the provided case that the
value of the new IT system obtained from the PDW will be included in the asset
register of Peechee Ltd which will create a material impact on the company’s
financial statements; at the same time, this asset register will be made public by
Peechee Ltd. Therefore, providing this non-audit service will lead to the
development of self-review or advocacy threat of audit independence. Moreover,
as per APES 110, 210.1, continuing the audit of Peechee Ltd even after knowing
the potential of this self-review or advisory threat can create the threat of
compliance with the integrity or professional behavior fundamental principles.
d. Two safeguards are available to the Senior Audit Partner of PDW for reducing
the threat. First, she should use professional who are not members of the audit
team for performing the service for addressing the self-review or advocacy threat.
Second, she needs to have an appropriate reviewer not involved in reviewing the
services performed for reducing the self-review and advocacy threat.

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References
Apesb.org.au. (2020). APES 110 Code of Ethics for Professional Accountants
[Supersedes APES 110 Code of Ethics for Professional Accountants (Issued in
June 2006 and subsequently amended in February 2008)] ISSUED: December
2010. Retrieved 26 March 2020, from
https://www.apesb.org.au/uploads/standards/apesb_standards/23072019055710
_APES_110_Code_of_Ethics_for_Professional_Accountants_December_2010_-
_Final.pdf
Apesb.org.au. (2020). APES 110 Code of Ethics for Professional Accountants
(including Independence Standards) [Supersedes APES 110 Code of Ethics for
Professional Accountants (Issued in December 2010 and amended in December
2011, May 2013, November 2013, May 2017 and April 2018)] ISSUED:
November 2018. Retrieved 26 March 2020, from
https://www.apesb.org.au/uploads/home/02112018000152_APES_110_Restruct
ured_Code_Nov_2018.pdf